[00:00:01] Speaker 00:
Case number 23-5122, Ayahuasca Church of Healing, at balance, versus Daniel I. Wardville, in his official capacity as Commissioner, Infernal Revenue Service, and United States of America.

[00:00:14] Speaker 00:
Mr. Steele, for the at balance, Ms.

[00:00:15] Speaker 00:
Lyon, for the evidence.

[00:00:18] Speaker 02:
Mr. Steele, good morning.

[00:00:20] Speaker 04:
Good morning.

[00:00:22] Speaker 04:
May I please the court?

[00:00:23] Speaker 04:
Simon Steele, for the Ayahuasca Church of Healing, which I'll refer to as the church.

[00:00:30] Speaker 04:
The district court made two separate errors in this case.

[00:00:35] Speaker 04:
First, it got the tax code question wrong because it misunderstood the interaction of the three statutes in this case, the tax code, the Controlled Substances Act, and REFRA.

[00:00:49] Speaker 04:
It misunderstood those statutes because it believed

[00:00:54] Speaker 04:
was what amounts to an exhaustion of administrative remedies requirement.

[00:01:00] Speaker 04:
And my client had to go to the DEA or go around the DEA.

[00:01:05] Speaker 02:
Mr. Steele, I don't mean to interrupt.

[00:01:07] Speaker 02:
I don't know about my colleagues, but I'm very hard of hearing.

[00:01:10] Speaker 02:
Can you get closer to the microphone?

[00:01:12] Speaker 02:
Sure.

[00:01:13] Speaker 03:
Is this better?

[00:01:14] Speaker 03:
No, you can lift it up.

[00:01:17] Speaker 03:
I think you can.

[00:01:18] Speaker 03:
You can't lift it up?

[00:01:22] Speaker 04:
I think it's as high as it goes.

[00:01:26] Speaker 04:
Please do interrupt me if I'm hard to hear again.

[00:01:31] Speaker 04:
On the tax code question, the district court misinterpreted the interaction of the three statutes here, RFRA, the Controlled Substances Act, and the tax code.

[00:01:44] Speaker 04:
It misinterpreted them as effectively

[00:01:48] Speaker 04:
requiring exhaustion of administrative remedies as requiring my client to get permission to exercise its religion for the DEA or possibly in a lawsuit against the DEA before it could lawfully exercise its religion.

[00:02:09] Speaker 04:
In doing so, it also misinterpreted the key precedent on which the IRS relied from day one

[00:02:18] Speaker 04:
Jones case.

[00:02:21] Speaker 04:
Separately, on the refer count, the district court got standing role.

[00:02:28] Speaker 04:
We articulated multiple theories of standing below, but one of them suffices.

[00:02:34] Speaker 04:
It's a straightforward economic injury.

[00:02:38] Speaker 04:
The thing we're complaining about in this case has always been half a piece of paper.

[00:02:44] Speaker 04:
The top half of page 355, the joint appendix, is the key part of the IRS final decision letter.

[00:02:53] Speaker 04:
There's never been any question that that's what we're complaining about.

[00:02:58] Speaker 04:
What that half a page does is it says we are denied a 501c3 exemption.

[00:03:04] Speaker 04:
The remedy we sought was to get a 501c3 exemption.

[00:03:11] Speaker 04:
The case law is clear.

[00:03:13] Speaker 04:
Frankly, economic common sense is clear.

[00:03:18] Speaker 04:
A party denied a 501c3 exemption has suffered an injury which should be sufficient for the minimum constitutional standing that's required under RFRA.

[00:03:30] Speaker 04:
I'd like to focus my remarks on the tax code claim primarily.

[00:03:37] Speaker 04:
There are three key points that are undisputed.

[00:03:41] Speaker 04:
should be beyond reasonable dispute in the record.

[00:03:45] Speaker 04:
First, the church's purposes are religious and charitable.

[00:03:52] Speaker 04:
It serves multiple purposes, both the exercise of religion through its ayahuasca sacrament and various other medical healing and charitable purposes.

[00:04:07] Speaker 04:
In addition, the church is expressly committed, in its articles of incorporation, to complying with the law and 501c3 requirements.

[00:04:16] Speaker 04:
Second, the one controversial purpose here, the ayahuasca tea sacrament, is a sincere exercise of religion protected by RFRA.

[00:04:27] Speaker 04:
The IRS has never disputed that in this case.

[00:04:31] Speaker 04:
That may not be true of others who've claimed

[00:04:36] Speaker 04:
were from protection, from using various controlled substances.

[00:04:41] Speaker 04:
It is true in this case.

[00:04:43] Speaker 04:
Third, the Church has consistently acted as a law-abiding entity.

[00:04:48] Speaker 04:
It modeled itself on the Ocentro Church.

[00:04:54] Speaker 04:
Indeed, the IRS said in one of its determinations that

[00:04:59] Speaker 04:
the church is strikingly similar to the Ocentro Church.

[00:05:03] Speaker 04:
They modeled this off on the Ocentro Church because the Ocentro Church won its case in the Supreme Court and because in 1994, without any exhaustion of administrative remedies and any contact with the DEA prior to that, the IRS had approved- Excuse me, you say that the Ocentro Church won their case in the Supreme Court.

[00:05:28] Speaker 01:
The Supreme Court affirmed the entry of a preliminary injunction, but that wasn't a decision on the merits.

[00:05:37] Speaker 01:
And the Supreme Court was careful to say that in these refer cases, they depend particularly on the application to the person involved.

[00:05:54] Speaker 01:
So I don't see how you can

[00:05:57] Speaker 01:
kind of transmute, even if it was a victory, or that church on to any other entity.

[00:06:05] Speaker 01:
And that seems contrary to the Supreme Court's analysis.

[00:06:11] Speaker 04:
Absolutely agreed, Your Honor.

[00:06:13] Speaker 04:
This isn't a case where we can just cite Ocentro and you can say, fine, we go home.

[00:06:19] Speaker 04:
We've won the case.

[00:06:21] Speaker 04:
However, the analysis in Ocentro is a very clear indication of how cases like this should be analyzed consistent with the strict scrutiny that RUFRA requires.

[00:06:36] Speaker 04:
This church has been known to be strikingly similar to the Ocentro church.

[00:06:42] Speaker 04:
And while the Ocentro case was, and I'll concede this point to the government, decided before

[00:06:53] Speaker 04:
The DEA created its exemption process under the CSA.

[00:06:59] Speaker 04:
There are subsequent cases, including particularly the Okhlof Weyha case in the Ninth Circuit, which were decided since that and are similar to our case on the facts.

[00:07:12] Speaker 04:
And the Okhlof Weyha case in the Ninth Circuit expressly rejects

[00:07:18] Speaker 04:
the government's notion in this case that there has to be an exhaustion of administrative remedies before an ayahuasca church can practice this religion.

[00:07:32] Speaker 03:
What does IRS say there has to be an exhaustion of administrative remedies as opposed to saying they don't have the authority to give an exemption from the CSA?

[00:07:42] Speaker 03:
That's the law of the land.

[00:07:45] Speaker 04:
The IRS doesn't administer the CSA.

[00:07:48] Speaker 04:
Does what?

[00:07:49] Speaker 04:
Does not administer the CSA.

[00:07:51] Speaker 03:
That's exactly right.

[00:07:53] Speaker 03:
But if the activity we're talking about here is inconsistent, it violates public policy.

[00:08:03] Speaker 03:
And there's no question so far that is public policy.

[00:08:08] Speaker 03:
And the IRS has no authority to give an exemption for that.

[00:08:12] Speaker 03:
That has to happen somewhere else.

[00:08:14] Speaker 03:
so exhaust or not, that's not what IRS is saying.

[00:08:18] Speaker 03:
They're saying that under their mandate, this violates public policy and therefore they're not giving an exemption.

[00:08:26] Speaker 03:
Your honor, I think it amounts to the same thing.

[00:08:29] Speaker 03:
It may amount to it, but it really is not what they have said.

[00:08:33] Speaker 03:
They are simply saying that under the authority that we have to exercise, we can't grant an exemption.

[00:08:40] Speaker 03:
It is the law of the land, whether you think it should or should not be the law of the land.

[00:08:46] Speaker 03:
The Supreme Court's decision doesn't seem inconsistent with that.

[00:08:50] Speaker 03:
They're not saying that that CSA notion is wrong.

[00:08:55] Speaker 03:
So I don't know how you can challenge what the IRS has done.

[00:08:58] Speaker 03:
They've done what they are mandated to do.

[00:09:01] Speaker 03:
They've looked at public policy.

[00:09:02] Speaker 03:
This violates public policy.

[00:09:04] Speaker 03:
And so that's that.

[00:09:06] Speaker 03:
If something changes later, then they might be in a different position.

[00:09:10] Speaker 03:
And then one of the things that might change later is that the drug administration may change its ruling or some court may do something, but they haven't done anything that's inconsistent with the law and they're following the law.

[00:09:27] Speaker 04:
Two points, Your Honor.

[00:09:29] Speaker 04:
First, we do not concede that the sacrament violates public policy.

[00:09:35] Speaker 04:
Public policy for purposes of IRS law is what Congress says public policy is.

[00:09:44] Speaker 04:
Congress has legislated two different overlapping public policies that are relevant to the Alaska sacrament here.

[00:09:54] Speaker 04:
One is that the use of DMT is generally prohibited, although there can be exceptions to it.

[00:10:04] Speaker 04:
The other is that religious sacraments, which the Supreme Court clearly indicated in Ocentro include, or potentially include the sacrament here, are protected by RFRA, and the government can only take adverse action to them, such as treating them as illegal, if the government satisfies strict scrutiny.

[00:10:33] Speaker 04:
My second point, quickly, is the Bob Jones case.

[00:10:37] Speaker 04:
As you said, the IRS has to do its job and not the DEA's job.

[00:10:45] Speaker 04:
What is its job?

[00:10:46] Speaker 04:
Its job here was to apply the Bob Jones case.

[00:10:49] Speaker 04:
The IRS said, that's what I'm doing.

[00:10:51] Speaker 04:
I'm applying the Bob Jones case.

[00:10:53] Speaker 04:
The Bob Jones case says you can only deny 501c3 status if there is, quote, unquote, no doubt that this is against public policy.

[00:11:04] Speaker 04:
Plus Auchentro, plus Ockland Weyha, at a minimum, create very substantial doubt that the sacrament here is against public policy.

[00:11:14] Speaker 04:
If there are no further questions, I'll reserve the remaining.

[00:11:17] Speaker 02:
We'll give you some time to reply.

[00:11:20] Speaker 02:
Thank you.

[00:11:21] Speaker 02:
Ms.

[00:11:21] Speaker 02:
Lyon.

[00:11:32] Speaker 05:
Thank you, Your Honor, and may it please the Court.

[00:11:34] Speaker 05:
My name is Kathleen Lyon, and I represent Commissioner Werfel and the United States.

[00:11:39] Speaker 05:
Tax-exempt status under Section 501C3 of the Code is a privilege conferred by Congress on organizations that qualify for it by carrying their burden of showing that they are organized and operated exclusively for one or more exempt purposes.

[00:11:55] Speaker 05:
Congress has also, in the Controlled Substances Act, prohibited the distribution of dimethyltryptamine, the Schedule I drug,

[00:12:02] Speaker 05:
that the taxpayer here uses to make the ayahuasca tea distributed in its ceremonies.

[00:12:08] Speaker 05:
Unless ayahuasca can show that the prohibitions in the Controlled Substances Act do not apply to it, it cannot carry its burden of showing that it is entitled to tax exempt purpose.

[00:12:20] Speaker 05:
And it can't make that showing here because it has not obtained an exemption from the CSA, either from the DEA or through judicial relief under RFRA.

[00:12:30] Speaker 05:
I'll try to focus my comments in reaction to what Mr. Steele has argued.

[00:12:38] Speaker 05:
Number one, he says the IRS must determine whether the church is exempt from the Controlled Substances Act under RFRA using a strict scrutiny standard that applies in RFRA cases.

[00:12:50] Speaker 05:
This gets the burden of proof backwards.

[00:12:53] Speaker 05:
The burden is on the church to prove that it's entitled to tax exempt status.

[00:12:58] Speaker 05:
They agree that the IRS lacks authority to determine whether an exemption applies here under the Controlled Substances Act.

[00:13:07] Speaker 05:
With respect to Ocentro, they've made the argument that the IRS has to grant tax exempt status even without the exemption in hand because there's a presumption of legality.

[00:13:22] Speaker 05:
I think it's fairly clear from Ocentro and from the earlier discussion that Ocentro didn't hold that the use of ayahuasca is presumptively legal.

[00:13:30] Speaker 05:
It is a particularized case by case determination and the context matters.

[00:13:36] Speaker 05:
And so that would have to be determined.

[00:13:37] Speaker 05:
They have asked DEA to make that determination and it is currently considering it.

[00:13:43] Speaker 05:
With respect to Bob Jones, they've argued that the

[00:13:49] Speaker 05:
that they're entitled to a benefit of the doubt or that the IRS can only deny the tax exemption if there's no doubt that the distribution is illegal.

[00:14:02] Speaker 05:
And the fact is, there is no doubt on that.

[00:14:05] Speaker 05:
But on a broader level, the no-doubt standard isn't quite

[00:14:09] Speaker 05:
Under Bob Jones, it isn't quite the right fit here for them, I don't think.

[00:14:13] Speaker 05:
In Bob Jones, the question was whether the conduct there was against public policy in the first instance.

[00:14:20] Speaker 05:
We don't have that issue here.

[00:14:21] Speaker 05:
Congress has spoken very clearly.

[00:14:24] Speaker 05:
And the question is whether Iowa is exempt from the application of the Controlled Substances Act that bars its conduct.

[00:14:34] Speaker 05:
So the IRS doesn't determine it, doesn't determine that, shouldn't determine that, because it doesn't have authority to determine that.

[00:14:42] Speaker 05:
And ayahuasca agrees with that.

[00:14:46] Speaker 05:
The administrative exhaustion point, I'll just point out, as has been said by Judge Edwards,

[00:14:58] Speaker 05:
What is happening?

[00:15:00] Speaker 05:
Ayahuasca's problem here is not an administrative exhaustion problem.

[00:15:03] Speaker 05:
It is an authority problem.

[00:15:06] Speaker 05:
And the IRS simply doesn't have the authority to make the determination that they want it to make.

[00:15:12] Speaker 05:
They're seeking the wrong remedy here against the wrong agency.

[00:15:21] Speaker 05:
If the court has no further questions.

[00:15:25] Speaker 02:
Would you like to answer?

[00:15:32] Speaker 02:
Thank you.

[00:15:34] Speaker 02:
Thank you.

[00:15:35] Speaker 02:
Okay, why don't you take two minutes, Mr. Steele.

[00:15:45] Speaker 04:
Thank you, Your Honor.

[00:15:45] Speaker 04:
I can be very brief.

[00:15:48] Speaker 04:
The IRS does not have the final authority to determine legality under the CSA.

[00:15:55] Speaker 04:
That's agreed.

[00:15:57] Speaker 04:
The IRS, however, has the authority and has the obligation to make the determination that it attempted to make applying the Bob Jones test.

[00:16:07] Speaker 04:
That determination is one of public policy and law.

[00:16:12] Speaker 04:
I heard my friend, Ms.

[00:16:14] Speaker 04:
Lyon, talking about the burden of proof.

[00:16:17] Speaker 04:
There's a lot of discussion of the burden of proof in the IRS's brief.

[00:16:22] Speaker 04:
I haven't heard the IRS identify a single disputed factual question in this case.

[00:16:30] Speaker 04:
The issue here isn't who has the burden of proof.

[00:16:34] Speaker 04:
The issue here is when there is a genuinely and substantially disputed question of what public policy as determined by Congress in both the CSA and RUFRA requires,

[00:16:51] Speaker 04:
How is the IRS to resolve that question?

[00:16:55] Speaker 04:
And Bob Jones provides the answer to that.

[00:16:58] Speaker 04:
It says that only if there is no doubt that the purpose is against public policy should the IRS reject 501c3 application.

[00:17:10] Speaker 03:
But you agree if I think, as a judge, if I think there is no doubt that this violates CSA public policy, you lose?

[00:17:19] Speaker 03:
Correct.

[00:17:20] Speaker 03:
I agree.

[00:17:23] Speaker 03:
Anything else?

[00:17:24] Speaker 03:
Thank you.