UNIVERSAL LIFE v USA, 9615122o
U.S. 9th Circuit Court of Appeals
UNIVERSAL LIFE v USA
9615122o
In re:UNIVERSAL LIFE CHURCH, INC., aCalifornia non-profit corporation,Nos. 96-15122Debtor.96-15123D.C. No.UNIVERSAL LIFE CHURCH, INC., a CV-93-05893-OWWCalifornia non-profit corporation,ORDER ANDAppellant,AMENDEDv. OPINIONUNITED STATES OF AMERICA,Appellee.
Appeals from the United States District Courtfor the Eastern District of CaliforniaOliver W. Wanger, District Judge, PresidingArgued and SubmittedAugust 14, 1997--San Francisco, CaliforniaFiled October 6, 1997Amended December 30, 1997Before: A. Wallace Tashima and Sidney R. Thomas,Circuit Judges, and John W. Sedwick,* U.S. District Judge.Opinion by Judge ThomasSUMMARY
______________________COUNSEL Edward O.C. Ord, Ord & Norman, San Francisco, California,for the appellant.G. Patrick Jennings and Gary D. Gray, United States Depart-ment of Justice, Washington, D.C., for the appellee.
_____________________________ORDER The United States has moved the Court to modify its opin-ion. Neither the Federal Rules of Appellate Procedure, nor theNinth Circuit Rules provide for such a motion. Accordingly,we construe it as a petition for rehearing. Thus construed, themotion is denied.However, the Court sua sponte amends the opinion as fol-lows: (1) Deleting the first paragraph of section II, including footnote 1, and inserting the following in lieu thereof: "The Church makes a persuasive argu- ment that under Delpit v. Commissioner, 18 F.3d 768 (9th Cir. 1994), the IRS's 1991 revocation of the Church's tax exempt status violated the automatic stay provided by 11 U.S.C. S 362(a). However, we need not reach this issue because the IRS's revoca- tion of the Church's tax exempt status clearly falls within an exception to section 362(a). We thus begin our analysis by assuming, without deciding, that the IRS violated the automatic stay in this case." (2) Sequentially renumbering the remaining foot- notes in the opinion. (3) Substituting "362(b)(4)" for "362(a)(4)" in paragraph 12 of section II. (4) Substituting "the district court's affirmation of the bankruptcy court" for "the district court's grant of summary judgment" in the last paragraph of sec- tion II.With these amendments, the opinion dated October 6, 1997is amended.
_____________________________OPINION THOMAS, Circuit Judge:A religious organization seeks to have an Internal RevenueService ("IRS") revocation of its tax-exempt status declaredvoid as violative of bankruptcy's automatic stay. We hold thatthe IRS's administrative actions were permissible under thepolice and regulatory power exception to the automatic stayand affirm.I.Universal Life Church, Inc. ("Church"), is a Californianonprofit corporation. The IRS denied the Church's applica-tion for tax exempt status in 1969 and again in 1970 on theground that the Church had engaged in activities outside thereligious activities contemplated by I.R.C. S 501(c)(3). Afterpaying the taxes and interest due for fiscal year ending April30, 1969, the Church brought a suit for refund and prevailed.Universal Life Church, Inc. v. United States, 372 F. Supp. 770(E.D. Cal. 1974). The district court found that the contestedactivities (ordination of ministers, granting of church charters,and issuance of honorary doctorates) were not a substantialenough part of the Church's activities to justify denying theexemption. Id. at 775-76.In 1984, the IRS revoked the Church's tax exempt statusfor the fiscal years ending April 30, 1978 through April 30,1981. The Church brought a declaratory judgment action inthe Court of Federal Claims with respect to its tax-exempt sta-tus for these years. The Court of Federal Claims upheld therevocation on the ground that the Church had not been oper-ated solely for tax-exempt purposes as required by I.R.C.S 501(c)(3); it gave tax advice to its ministers and failed tocontrol the non-exempt activities of its congregations.Universal Life Church, Inc. v. United States, 13 Cl. Ct. 567(1987), aff'd, 862 F.2d 321 (Fed. Cir. 1988).The Church then commenced an action in the Tax Court fora redetermination of the deficiencies asserted by the Commis-sioner of Internal Revenue ("Commissioner") for these years.Universal Life Church, Inc. v. Commissioner, Tax Ct. dkt. no.8288-85. The parties reached a settlement, and the Tax Courtentered a judgment based on the settlement determining thedeficiencies against the Church for fiscal years 1978-1980.The IRS began investigating the Church's tax exempt statusfor fiscal years ending April 30, 1982 through April 30, 1985.The Church filed a voluntary petition for bankruptcy underChapter 11 of the Bankruptcy Code on November 30, 1989.The Church then commenced an adversary proceeding under11 U.S.C. S 505 to determine its federal and state liabilitiesfor certain taxable periods between 1978 and 1990. In itscomplaint, the Church maintained that it was exempt fromfederal income taxes for the fiscal years ending April 30,1978 through April 30, 1990.The IRS revoked the Church's tax exempt status on Janu-ary 8, 1991 for fiscal years ending April 30, 1982 throughApril 30, 1985. The revocation letter further stated that theChurch was required to file federal income tax returns forthese years, pursuant to I.R.C. S 6012. The total amount oftaxes, with interest, is estimated by the Church to be in excessof six million dollars.On July 20, 1993, the Church filed a motion in the adver-sary proceeding seeking a declaratory judgment that the IRS'srevocation of the Church's tax exempt status was void as aviolation of the automatic stay provided by 11 U.S.C.S 362(a). The Church also sought damages pursuant to 11U.S.C. S 362(h).The bankruptcy court denied the motion, holding that evenif the revocation was an act that normally would have beenstayed, it came within the exception under section 362(b)(4)for acts to enforce police or regulatory powers. The bank-ruptcy court also ordered the Church to file tax returns for thedisputed tax years. The district court affirmed. The districtcourt concluded that although revocation violated the auto-matic stay provision of section 362(a)(1), it fell within theexception provided by section 362(b)(4).On appeal, a motions panel denied the IRS's motion to dis-miss the appeal for lack of finality, and denied the Church'smotion for stay of the returns order. We consolidated allpending issues for consideration on the merits.II.The Church makes a persuasive argument that under Delpitv. Commissioner, 18 F.3d 768 (9th Cir. 1994), the IRS's 1991revocation of the Church's tax exempt status violated theautomatic stay provided by 11 U.S.C. S 362(a). However, weneed not reach this issue because the IRS's revocation of theChurch's tax exempt status clearly falls within an exceptionto section 362(a). We thus begin our analysis by assuming,without deciding, that the IRS violated the automatic stay inthis case.[1] Assuming a stay violation, our first inquiry must bewhether the IRS's administrative actions fall within an excep-tion to the automatic stay. The exception at issue in this case,section 362(b)(4), provides an automatic stay exception for"the commencement or continuation of an action or proceed-ing by a governmental unit to enforce such governmentalunit's police or regulatory power." This section permits gov-ernment to initiate or continue an action under its police orregulatory powers free of the restrictions of the automaticstay. 3 Collier on Bankruptcy P 362.05[5][b], at 362-58 (15thed. 1996). The theory of this exception is because bankruptcyshould not be "a haven for wrongdoers," the automatic stayshould not prevent governmental regulatory, police and crimi-nal actions from proceeding. 3 Collier on BankruptcyP 362.05[5][a], at 362-54 (15th ed. 1996).[2] The phrase "police or regulatory power" refers to theenforcement of laws affecting health, welfare, morals andsafety, but not regulatory laws that directly conflict with thecontrol of the res or property by the bankruptcy court. HillisMotors, Inc. v. Hawaii Auto. Dealers' Ass'n, 997 F.2d 581,591 (9th Cir. 1993). The section 362(b)(4) exception has beenapplied in a variety of contexts, including labor law enforce-ment, NLRB v. Twin Cities Electric, 907 F.2d 108 (9th Cir.1990), state bar disciplinary proceedings, Wade v. State Barof Arizona, 948 F.2d 1122, 1123-24 (9th Cir. 1990) andemployment discrimination actions brought by the EqualEmployment Opportunity Commission, EEOC v. Hall'sMotor Transit Co., 789 F.2d 1011, 1014 (3d Cir. 1986).[3] There are two tests for determining whether agencyactions fit within the section 362(b)(4) exception: (1) the"pecuniary purpose" test and (2) the "public policy" test.NLRB v. Continental Hagen Corp., 932 F.2d 828, 833 (9thCir. 1991). Under the pecuniary purpose test, the court deter-mines whether the government action relates primarily to theprotection of the government's pecuniary interest in the debt-or's property or to matters of public safety and welfare. Id. Ifthe government action is pursued solely to advance a pecuni-ary interest of the governmental unit, the stay will beimposed. Thomassen v. Division of Med. Quality Assurance(In re Thomassen), 15 B.R. 907, 909 (9th Cir. BAP 1981).[4] The public policy test "distinguishes between govern-ment actions that effectuate public policy and those that adju-dicate private rights." Continental Hagen, 932 F.2d at 833(quoting NLRB v. Edward Cooper Painting, Inc., 804 F.2d934, 942 (6th Cir. 1996)).[5] The question in this case is whether an IRS letter revok-ing the tax exempt status of a religious corporation meetseither test. We hold it meets both. The district court found,and we agree, that the revocation was an exercise of the IRS'spolice or regulatory power because revocation promotes pub-lic welfare by assuring the public and potential donors thatcontributions will be used for legitimate charitable purposes.Indeed, "[c]haritable exemptions are justified on the basis thatthe exempt entity confers a public benefit -- a benefit whichthe society or the community may not itself choose or be ableto provide . . . ." Bob Jones Univ. v. United States, 461 U.S.574, 591 (1983). "When the Government grants exemptionsor allows deductions all taxpayers are affected; the very factof the exemption or deduction for the donor means that othertaxpayers can be said to be indirect and vicarious`donors'."Id.[6] Thus, determination that an organization may not meetthe standards for tax exempt status in itself serves a generalpublic welfare purpose beyond any pecuniary application ina particular case. As the district court noted in this case,"[t]his activity may be characterized as a type of fraud detec-tion, assuring potential donors that the organization will notuse their contributions for personal profit, but for the charita-ble purposes encouraged by law." Fraud detection is consis-tent with the purpose of the exception. Detection of fraud hadbeen sustained as a valid basis for invoking the exceptioneven when there is an additional pecuniary interest at stake.For example, a civil suit brought pursuant to the Federal FalseClaims Act is sufficient to satisfy the section 362(b)(4) excep-tion. United States v. Commonwealth Cos. (In Re Common-wealth Cos.), 913 F.2d 518 (8th Cir. 1990).The legislative history is similarly in accord with this view: Paragraph (4) excepts commencement or continua- tion of actions and proceedings by governmental units to enforce police or regulatory powers. Thus, where a governmental unit is suing a debtor to pre- vent or stop violation of fraud, environmental protec- tion, consumer protection, safety, or similar police or regulatory laws, or attempting to fix damages for violation of such a law, the action or proceeding is not stayed under the automatic stay.S. Rep. No. 95-989 at 52 (1977), reprinted in 1978U.S.C.C.A.N. 5787, 5838; H.R. Rep. No. 95-595 at 343(1977), reprinted in 1978 U.S.C.C.A.N. 5963, 6299.1[7] This conclusion is consistent with our previouslyexpressed view that revocation serves a law enforcementfunction. As we noted in Church of Scientology Int'l v. IRS,995 F.2d 916, 919 (9th Cir. 1993): "[W]e are convinced thatthe EO [Exempt Organizations branch of the IRS ] performsa law enforcement function by enforcing the provision of thefederal tax code that relate to qualification for tax exemptstatus." See Lewis v. IRS, 823 F.2d 375, 379 (9th Cir. 1987)("The IRS has the requisite law enforcement mandate and theaffidavits presented in this case establish a rational nexusbetween enforcement of a federal law and the document forwhich the Freedom of Information Act exemption is claimed.").2As the district court correctly observed, "[r]evocation of tax-exempt status implements a public policy function regulatingthe government's interest in advancing the policies underlyingthe charitable purposes exemptions provided by Congress."[8] We reject the Church's position that the IRS must haveno pecuniary motive at all to fall within section 362(b)(4).There is nothing in the statute that requires the IRS's actionto serve only welfare purposes before it qualifies for theexception. Other circuits have found to the contrary of theChurch's position as well. "In accordance with the clearlyexpressed congressional intent, those circuits addressing thequestion have concluded that S 362(b)(4) does not exclude agovernmental action to obtain the entry of a money judgmentfor a past violation of the law simply because money damagesare the only relief sought in the action." Commonwealth Cos.,913 F.2d at 522-23 (citing United States v. Nicolet, Inc., 857F.2d 202, 207-09 (3d Cir. 1988); EEOC v. McLean TruckingCo., 834 F.2d 398, 400-02 (4th Cir. 1987)). Indeed, most gov-ernment actions which fall under this exemption have somepecuniary component, particularly those associated with frauddetection. This does not abrogate their police power function.Only if the action is pursued "solely to advance a pecuniaryinterest of the governmental unit" will the automatic stay barit. Thomassen, 15 B.R. at 909.[9] Our holding in Delpit is not to the contrary. As wenoted earlier, Delpit involved the application of section362(a), not exceptions to the section. If we were to considerDelpit in the exception context, it would provide an exampleof the application of the exception. In Delpit, we held that anappeal constituted a continuation of the entire tax assessmentand collection proceeding and was stayed. Thus, Delpitinvolved an attempt by the government to advance a purelypecuniary interest without any additional public policy pur-pose. By contrast, the tax exempt status revocation letter herehas a public policy purpose and, by itself has no pecuniaryeffect. The estate will not be affected and the Church has aspeedy and adequate remedy by which to challenge the IRSaction in the section 505 adversary proceeding.The Church argues that section 362(b)(4) is limited by itslanguage to the first part of section 362(a)(1) and does notexcept the second part of section 362(a)(1) which prohibitsactions "to recover a claim against the debtor that arose beforethe commencement of the case." The Church then argues thatthe second branch of section 362(a)(1) describes the IRS'sactions against it, and therefore a provision of the stay existsfor which no exception is provided. However, a proper con-struction of section 362(a)(1) does not support this position.The second branch of section 362(a)(1) uses as its subject"action or proceeding against the debtor" from the firstbranch. In other words, section 362(a)(1) prohibits actionsagainst the debtor that were or could have been commencedbefore the petition for bankruptcy was filed, and section362(a)(1) prohibits actions to recover a claim against thedebtor that arose before the petition for bankruptcy was filed.Thus, the section 362(b)(4) exemption includes both, becauseit is targeted at actions or proceedings against the debtor.3Because the issuance of a letter revoking tax exempt statusfalls within the section 362(b)(4) exception, the districtcourt's affirmation of the bankruptcy court on this issue wasappropriate.III.The Church argues that the IRS's position in this case is intension with the position it took in IRS v. Sulmeyer (In reGrand Chevrolet), 153 B.R. (C.D. Cal. 1993), and thus theIRS should be judicially estopped from arguing the inconsis-tent position.We reject the Church's argument. The jurisdictional issuesin Sulmeyer are different from the ones here, such that noinconsistency exists.4 The Church also argues that because afederal district court determined that it was entitled to taxexempt status for the fiscal year ending April 30, 1969, theIRS is collaterally estopped from arguing that the Church isnot entitled to tax exempt status for the years in question inthis suit.[10] The applicability of collateral estoppel is determinedby: (1) whether the issues presented are in substance thesame in the present and prior litigation; (2) whether control-ling facts or legal principles have changed significantly sincethe prior judgment; and (3) whether other special circum-stances warrant an exception to the normal rules of preclu-sion. Richey v. IRS, 9 F.3d 1407, 1410 (9th Cir. 1993). As thedistrict court correctly determined, the issues presented hereare not in substance the same as those presented in the priorlitigation in question5, and a controlling fact has changed sig-nificantly since the prior judgment.6 Thus, collateral estoppeldoes not apply.IV.[11] We also find no error in the transfer of one of the dis-trict court appeals to another judge for consolidation. The dis-trict judges correctly determined that the two cases weresufficiently related to permit consolidation. The Churchasserts that by this process the government impermissibly"selected" the district judge who would hear the appeals inviolation of due process. This claim is meritless because thegovernment did not "select" the district judge who heard theappeals. The assignment was made pursuant to local rule bythe court, not the government. The district court's action wasappropriate: the two appeals originated out of the same bank-ruptcy matter and involved the same parties.V.[12] The Church challenges the bankruptcy court's ordercompelling it to file tax returns. However, the district courtdid not rule on this issue. In assessing whether we have appel-late jurisdiction over a bankruptcy appeal, we must examinefinality at two levels: (1) whether the bankruptcy court deci-sion was final and (2) whether the decision of the districtcourt or the Bankruptcy Appellate Panel decision was final.King v. Stanton (In Re Stanton), 766 F.2d 1283, 1285 (9th Cir.1985). Absent a final order from the district court, we have nojurisdiction to consider this appeal and therefore must dismissit.7 28 U.S.C. S 158(d). Dismissal of this portion of the appealmakes it unnecessary to consider whether the order should bestayed pending appeal, as argued by the Church.CONCLUSIONThe district court correctly determined that 11 U.S.C.S 362(b) provided an exception to the automatic stay in thisinstance, allowing the IRS to issue a letter revoking theChurch's tax-exempt status. Because the district court did notdecide whether the bankruptcy court had the power under 11U.S.C. S 105 to order the Church to file a federal income taxreturn, we have no jurisdiction to consider that issue onappeal. None of the Church's remaining issues on appeal havemerit.AFFIRMED IN PART AND DISMISSED IN PART.
___________________________FOOTNOTES *The Honorable John W. Sedwick, United States District Judge for theDistrict of Alaska, sitting by designation.1 We note that the parties disagree about the extent to which this revoca-tion letter has informed the public about the Church's tax exempt status.The record is unclear and we conclude we need not determine the specificimpact in this case. In examining qualification for a 11 U.S.C. S 362(b)(4)exception, the critical inquiry is the policy underlying issuance of a revo-cation letter; that is, whether charitable status revocation in itself servespurely pecuniary purposes or not. Thus, the question of whether the infor-mational function has been served in this particular case is not relevant.We conclude as a general matter that when the IRS revokes the tax exemptstatus of organizations which do not meet the 501(c)(3) requirements, itserves a public trust function in assuring the public that 501(c)(3) taxexempt status is conferred and retained only by organizations engaged inappropriately charitable functions.2 We decline the Church's invitation to limit the import of these observa-tions to FOIA cases. As noted by the Church of Scientology court, theinquiry was directed broadly to " `an examination of the agency itself todetermine whether the agency may exercise a law enforcementfunction.' " 995 F.2d at 919 (quoting Church of Scientology v. UnitedStates Dep't of the Army, 611 F.2d 738, 748 (9th Cir. 1979)).3 Neither Pizza of Hawaii, Inc. v. Department of Taxation (In re Pizzaof Hawaii, Inc.), 12 B.R. 796 (Bankr.D. Haw. 1981), nor Coben v. Lebrun(In re Golden Plan of California, Inc.), 37 B.R. 167 (Bankr.E.D. Cal.1984), cases cited by the Church, is contrary to our decision in this case.Pizza of Hawaii, involved the state Liquor Commission's refusal to renewa debtor's liquor license without payment of taxes, interest, and penaltiesowed. Pizza held that the state's action did not qualify for the section362(b)(4) exception because it "does not in any way deal with the preser-vation of the health, safety or welfare of the public." 12 B.R. at 799. InCoben, the state Franchise Tax Board suspended the corporate powers ofthe debtor entity for nonpayment of taxes. Coben held that the section362(b)(4) exception was unavailable because "the primary purpose ofCal.Rev. & Tax Code S 23301 is the protection of a pecuniary interest. . . and not the protection of the public health or safety . . . ." 37 B.R.at 170 (quotation omitted). In the instant appeal, by contrast, the IRS'saction protects a public trust in the 501(c)(3) certification; no such publictrust was at stake in either Pizza of Hawaii or Coben.4 In Sulmeyer, the IRS argued that an actual controversy must be at issuebefore the bankruptcy court has jurisdiction to consider a section 505motion. Here, it is undisputed that an actual controversy exists.5 The district court's determination in Universal Life Church, Inc. v.United States, 372 F. Supp. 770 (E.D. Cal. 1974) was based on its findingthat the Church's ordination of ministers, its granting of church charters,and its issuance of Honorary Doctor of Divinity titles were not substantialactivities which did not further any religious purpose. Id. at 775-76. TheIRS's decision to revoke the tax-exempt status was based on the follow-ing, different grounds: the net earnings of the Church inured to the benefitof private individuals; the Church provided advice to individuals on thepurported tax benefits available to ministers of the Church; and the Churchfurthered a substantial nonexempt purpose in administering and operatingthe receipts and disbursements program to its members and congregations.6 "In 1984, the Internal Revenue Service (IRS) revoked [the Church's]tax exempt status as a corporation organized and operated exclusively forreligious purposes, for the fiscal years ending April 30, 1978, throughApril 30, 1981. That revocation has been upheld in the federal courts."Carter v. United States, 973 F.2d 1479, 1483 (9th Cir. 1992).7 A motions panel denied the IRS's motion to dismiss for lack of final-ity. "While we give deference to motions panel decisions made in thecourse of the same appeal, we have an independent duty to decide whetherwe have jurisdiction." Fuller v. M.G. Jewelry, 950 F.2d 1437, 1441 (9thCir. 1991). the end