The Internal Revenue Service has told a prominent Pasadena church that it has ended its lengthy investigation into a 2004 antiwar sermon, church leaders said Sunday.
But the agency wrote in its letter to All Saints Episcopal Church that officials still considered the sermon to have been illegal, prompting the church to seek clarification, a corrected record and an apology from the IRS, the church's rector told standing-room-only crowds of parishioners at Sunday's services.
The church also has asked the Treasury Department, which oversees the IRS, to investigate allegations that officials from the Justice Department had become involved in the matter, raising concerns that the investigation was politically motivated.
"To be sure, we are pleased that the IRS exam is over," the Rev. J. Edwin Bacon Jr. said in his 9 a.m. sermon, which was interrupted several times by applause. "However, the main issue of protecting the freedom of this church and other religious communities to worship according to the dictates of their conscience and core values is far from accomplished."
Bacon predicted that the vague, mixed message from the IRS after its nearly two-year investigation of the All Saints case would have a continued "chilling effect" on the freedom of clerics from all faiths to preach about moral values and significant social issues such as war and poverty.
Although the church no longer faces the imminent loss of its tax-exempt status, All Saints has "no more guidance about the IRS rules now than when we started this process," the rector said. He said the church would continue its struggle with the IRS, which he said so far had cost the 3,500-member congregation about $200,000.
One of Southern California's largest and most liberal congregations, All Saints came under IRS scrutiny after a sermon two days before the 2004 presidential election by a guest speaker, the Rev. George F. Regas. In his sermon, Regas, the church's former rector, imagined Jesus participating in a political debate with then-presidential candidates George W. Bush and John F. Kerry.
Regas did not endorse either candidate, saying that "good people of profound faith" could support either one. But he strongly criticized the war in Iraq and said that Jesus would have told Bush that his preemptive war strategy in Iraq "has led to disaster."
A letter from the IRS arrived in June 2005 stating that the church's tax-exempt status was in jeopardy. Federal law prohibits tax-exempt organizations, including churches, from intervening in political campaigns and elections.
The letter said the agency's concerns were based on a Nov. 1, 2004, article in the Los Angeles Times, which included three paragraphs about Regas' sermon in a lengthy national roundup of rhetoric from the pulpit on the Sunday before the election.
In its latest letter to All Saints, dated Sept. 10, the IRS said the church continues to qualify for tax-exempt status, but said that Regas' sermon did amount to intervention in the 2004 presidential race. The letter offered no details or explanation for either conclusion.
An IRS spokesman said Sunday that in keeping with the law, the agency could not comment on specific investigations. However, a top IRS official later issued a statement in response to questions about the All Saints case.
"The IRS is committed to ensuring that tax-exempt organizations understand and comply with the law," said Steven T. Miller, commissioner of the agency's Tax Exempt and Government Entities Division. "We will continue to work with charities and churches during the 2008 political season about the federal law's guidelines on political activity. Our goal is to ensure that charities meet their responsibilities under the law and avoid becoming involved in campaign activity."
Along with its requests to the IRS, All Saints has asked a top Treasury Department official to investigate what the church called a series of procedural and substantive errors in the case, including allegedly inappropriate conversations between IRS and Justice Department officials about the investigation.
Those conversations, documented in e-mails obtained by the church through Freedom of Information Act requests, appear to show that Justice Department officials were involved in the All Saints case before the IRS made any formal referral of it for possible prosecution, an attorney for the church said. The discussions raise concerns that the IRS' investigation was politically motivated, church officials said. One e-mail, for example, appears to show coordination between IRS and Justice Department officials about a request to the church for documents. Others discuss the timing of the request and news coverage about the case.
"In view of the fact that recent congressional inquiries have revealed extensive politicization of [the Department of Justice], my client is very concerned that the close coordination undertaken by the IRS allowed partisan political concerns to direct the course of the All Saints examination," attorney Marcus S. Owens wrote in a letter Friday requesting an investigation.
Owens, a former director of the IRS division that handles tax-exempt organizations, said that although liberal and conservative congregations and other nonprofits had been investigated by the IRS in recent years, its examination of All Saints was "highly unusual" in a number of ways, not only in its seemingly contradictory conclusions.
Among other things, he said the agency had never allowed the church the chance that all taxpayers are typically granted when audited to explain and discuss the issues of concern. "There's always an opportunity to do that, to sort of push back," Owens said.
Ellen Aprill, a law professor at Loyola Law School and a tax law specialist, also called the unclear outcome of the case "puzzling" and said it underlined the need for the IRS to explain which activities violate the rules against intervening in a political campaign.
Meanwhile, at the church Sunday, parishioners expressed overwhelming support for the decision to pursue an apology and clarification from the IRS, and an explanation from the Justice Department. But some also expressed concerns about possible costs to All Saints, both financial and otherwise.
"It's so important for this church to be speaking truth to power, and I applaud that," said Sharon Fane of Burbank, who said she had joined All Saints largely because of its IRS battle. "But I have some fear for us too. What will this cost?"
The church's top lay leader, senior warden Rich Llewellyn, said the decision to push for answers from the IRS was clear, given the significance of the issues and the church's long history of social activism. "We really need clarity from the IRS," he said. "Otherwise, it's a very scary prospect to think that these agencies are looking over our shoulders at what our pastors can preach in church."
Support for the church also came Sunday from leaders of other faiths and Christian denominations, many of whom attended the day's services and a news conference afterward.
"The nature of the pulpit is about freedom, freedom to express belief," said Maher Hathout, a leader at the Islamic Center of Southern California and a partner of Bacon's in interfaith efforts. "We need to work together to prevent intimidation."
Rep. Adam B. Schiff (D-Burbank) also expressed support. Schiff, who in 2005 unsuccessfully sought a Government Accountability Office investigation into the IRS' scrutiny of churches and other nonprofits, including All Saints, said he still would like to know whether the probes were politically motivated.
"The real message from today is that the IRS picked on the wrong church," said Schiff, whose district includes Pasadena. "They thought that All Saints would fold up the tent and admit it was wrong . . . but instead they found a church that would stand up for itself."
Times staff writer Tony Barboza contributed to this report.