Hernandez v. Commissioner of Internal Revenue

RESPONDENT:Commissioner of Internal Revenue
LOCATION:Sable Communications of California

DOCKET NO.: 87-963
DECIDED BY: Rehnquist Court (1988-1990)
LOWER COURT: United States Court of Appeals for the First Circuit

CITATION: 490 US 680 (1989)
ARGUED: Nov 28, 1988
DECIDED: Jun 05, 1989

Michael J. Graetz – on behalf of the Petitioners
Thomas W. Merrill – on behalf of the Respondents

Facts of the case


Audio Transcription for Oral Argument – November 28, 1988 in Hernandez v. Commissioner of Internal Revenue

William H. Rehnquist:

We’ll near argument next in No. 87-963, Robert Hernandez v. the Commissioner of Internal Revenue, and 87-1616, Graham v. Commissioner of Internal Revenue.

Mr. Graetz, you may proceed whenever you are ready.

Michael J. Graetz:

Chief Justice Rehnquist, may it please the Court:

Although I appear here today on behalf of taxpayers in these cases, my position is quite unusual.

My purpose is to convince you to endorse the interpretation of Section 170 of the Internal Revenue Code first announced by the IRS in 1919 and, with the exception of this litigation, maintained consistently by the IRS since that time, at least through September 22nd of this year, when IRS Assistant Commissioner Brower restated what he described as the cumulative IRS position in these terms.

And I quote,

“Religious observances generally are not regarded as yielding private benefits when attending the observances. “

“The primary beneficiaries are viewed as being the general public and members of the faith. “

“Thus, payments for saying masses, pew rents, tithes, and other payments involving fixed donations for similar religious services are fully deductible contributions. “

This case, Your honor, involves fixed donations for religious services.

And under the position of the IRS for the last 70 years, the payments should be fully deductible contributions.

Antonin Scalia:

He did say “generally” in that quote that you read, didn’t he, in that first sentence?

Michael J. Graetz:

He did say generally, Your Honor.

But in the case of making distinctions among religions for disallowing deductions by the participants and members of that faith to participate in religious observances, I think that the IRS and this Court should await guidance from Congress about what it means to distinguish among religions on these grounds.

Sandra Day O’Connor:

Well, Mr. Graetz, what flexibility does the IRS have to change its view in its regulations from time to time?

And doesn’t it do so in other instances?

And has this Court ever taken the view that it can’t change its mind?

Michael J. Graetz:

Justice O’Connor, this Court has in numerous opinions expressed that in the tax law there is a need for clarity, particularity, predictability, and special deference to the IRS.

There are only two cases in the last decade that this Court has endorsed a change in administrative position by the IRS.

The first is the Bob Jones University case, and in that instance the majority of the Court found considerable evidence in the legislature that the change in IRS position was one that Congress intended the IRS to make.

The other instance was a case involving interest-free loans under the Gift Tax, and the treatment of interest-free loans under the Gift Tax.

And there you had a dramatic change in economic circumstances… it’s the Dicksan case, Your Honor.

You had a dramatic change in economic circumstances that made Gift Tax avoidance possible through the use of interest-free loans where no such avoidance had been possible in prior years until the change in circumstances.

Those are the only two instances that I’m aware of in the last decade that this Court has endorsed such a position.

Here the IRS has not expressed a change in position through regulation, it has not withdrawn rulings to the contrary, it has not announced a general principle for churches and synagogues, and their members to follow.

It in fact doesn’t seem to have changed its administrative position, if, if Commissioner Brower is stating the position correctly.

Sandra Day O’Connor:

Well, Mr. Graetz, even if we accent your approach to the deductibility for auditing, what about training?

And why isn’t that like tuition and non-deductible?

Michael J. Graetz:

Well, Your Honor, I… let me, let me respond in two ways.

One is, I think that the case law and the precedents clearly distinguish tuition at religious schools, which involve a secular–

Sandra Day O’Connor:

And tuition isn’t deductible, is it?

Michael J. Graetz:

–It’s not deductible.

Sandra Day O’Connor:

Why should it be, why should payments be deductible for training?

Michael J. Graetz:

Well, the Court below did not distinguish auditing and training.

The stipulations indicate that training involves an educational component that is not involved in auditing.

However, the testimony, the uncontradicted testimony below, was that training Is similar to the study of sacred texts, in various other religions.

And the court, the tax court, which made the factual findings, found that these were payments for religious services without distinguishing the payments for training and the payments for auditing, although I think that there may be some–

Sandra Day O’Connor:

But you concede there may be a basis for making that distinction?

Michael J. Graetz:

–Well, I think, Your Honor, that the only basis that I, that I can see in the record for making that distinction is where the training is undertaken for the purpose of, of becoming a minister, that is of employment.

And the taxpayers in the cases below did not undertake the training for that purpose.

They only undertook the training for religious purposes.

And in that case I think it’s like Sunday School that’s normally included in the dues of a church–

William H. Rehnquist:

Would the deductibility of tuition at a theology school be dependent on whether you want to be a minister when you get through?

Michael J. Graetz:

–No, Your Honor.

I think that here the test is one that needs to be limited to the conduct of religious worship, and in limited cases perhaps, religious instruction.

But I would not go beyond that, and it is really the fact that the tax court below did not make any factual findings that are different about the two services, that it clearly regarded training in these cases as a form of religious worship, and not a form of religious education, or a form of secular education with religious components.

The crucial issue, I think, below was that the payments here are fixed and mandatory.

And I think that is the basis of the appellate court’s decisions that affirmed the tax court decision.

And I think that that issue is one that has been terribly confused in, in the courts and in which some clarification is necessary.

Antonin Scalia:

Excuse me.

Before you move on, just something you said.

Is it conceded that this was religious worship as opposed to religious instruction?

Is that part of the stipulation?

Michael J. Graetz:

The finding of fact and the stipulations are that with respect to auditing, there is no educational component.

With respect to training there is an educational component.

And the tax court found that the taxpayers had made their payments to participate in religious services, so that the tax court, did not distinguish the educational component of training.

And these taxpayers, the taxpayers who undertook training in this case, all testified that they did so as a study of sacred text and the expert witness who testified testified the same things.

So it seems to me that the tax court’s finding of fact in this case is a reasonable finding of fact.

Antonin Scalia:

One can study a sacred text without, without worshiping.

I mean, one could go to, you know, theology school and study sacred text, and that’s not necessarily an act of worship, as are many of the other examples that you, that you raise in your brief, such as high holy day services and so forth.

Michael J. Graetz:

No, Your Honor, and all, all that we are asking is that, that religious observances, the conduct of religious worship, which is a phrase that appears In the Internal Revenue Code regulations numerous times, is not the sort of quo… to use the government’s repetitive phrase of quid pro quo… is not the sort of quo that will disqualify charitable contribution deductions.

And we do not take the position that education is deductible.

There are cases, there’s a long line of authority that says that payments to a parochial school, or a religious school, are non-deductible, and I think that would apply to a divinity school as well.

It is here that the, that the act of studying the sacred text is in fact an act of worship, and it can be an act of worship, and the tax court seems to have so found, although its opinion here does not, is not a model of clarity on this point, because it did not distinguish the auditing from the training in, in these cases.

It is… it is also important to note, however, that in all of the cases that the government relies upon, that deductions have been disallowed in whole or in part, and they almost always are in part, for payments In order to participate in religious education.

That… those cases, and here I’m talking about Oppewal and DeJong and Haak and the cases the government cites, those cases involve voluntary payments, not fixed payments, and not mandatory payments.

In fact, the Oppewal case, which the IRS addresses in a revenue ruling that the government relies upon, in a 1983 revenue ruling, is described in a, in a situation in that ruling, as situation four, and in that situation the, the person in charge of the school came and sat down with each parent and discussed what would be an appropriate contribution.

And that’s very similar to the kind of fundraising that occurs in many churches throughout this country.

And in that case the court said, the deduction is allowed only to the extent that it exceeds the cost of the education.

Now the reason for that in the Internal Revenue Cone is clear.

There you had secular education that had a religious component.

The reason for that is that there are regulations under Section 262 that limit the ability of people to deduct their educational expenses.

And the court was very concerned, and the courts have been concerned in the religious education context with not permitting people to obtain deductible education when offered by a church and not be allowed to deduct it when offered elsewhere.

And this Court itself, in the Bob Jones case, distinguished religious education from religious services.

And we have no, we have no quarrel–

Byron R. White:

Well, the arrangement, the arrangement here was for a fixed sum to be paid, wasn’t it?

Michael J. Graetz:

–The arrangement in this case was for a fixed sum to be paid, yes.

Byron R. White:

How does that come about?

Is it… do they enter into, does the church enter into an agreement?

Or is it just a piecework basis that any rise you come for a training session you pay some money?

Or is there some agreement in advance?

Michael J. Graetz:

There is a schedule, a schedule based on the hours of worship, where the payment is set by the church and the people who participate make that payment.

And it is a fixed payment.

Byron R. White:

So the–

–Don’t we have to distinguish between auditing and training though, when you talk about this?

Michael J. Graetz:

Well again, Your Honor, I… the payments are set on an hourly basis, and the payments are fixed.

It is our position that the fact that the payments are fixed and required really cannot be, cannot be crucial to this case.

It can’t make a difference.

And I think the distinction is, between auditing and training is the one that we’ve just discussed, educational–

Byron R. White:

So for all practical purposes, worshiping in this church is not permitted except upon paying a certain sum every time you worship?

Michael J. Graetz:

–Well, Your Honor, there are a number of free services that are given by this church.

The participation in this religious service is attended by a fixed price.

Byron R. White:

And you say that that’s… if you want to worship you have to pay, and therefore you certainly should be able to deduct it.

I gather that’s your argument.

Michael J. Graetz:

My argument is that, that the fixed and mandatory nature of the payment has never before been held to be crucial in determining whether or not a charitable deduction is or is not allowable, that in a case of secular education it doesn’t matter whether the payment is voluntary or set by the, set in accordance with discussions.

All that matters is the value of the benefit on the other side.

And, in each of the cases that has been cited before this case today, the critical question, and it was the question in the American Bar Endowment case, is always, does the amount of the payment exceed the value of what is received in return?

And if it does, then it is deductible.

And no court has ever held that the value of religious worship is one that can be ascertained by the IRS or by the courts.

Byron R. White:

So if a church says, well, we’ll let you become a member of our church if you promise every year from now on to contribute $10,000.

That’s the only, that’s the only way you can come and worship in our church.

Now, I would think you would say that that wouldn’t prove that it was part of the worship, part of worship.

Michael J. Graetz:


All I would say is that those kinds of fixed payments have been used by churches throughout the ages, churches and synagogues.

There are annual dues that are required that are for the year.

Mass stipends have been, have been permitted for private masses on an amount fixed by the church.

Jewish synagogues charge a fixed fee for tickets to enter the synagogue on High Holy Day services.

William H. Rehnquist:

Well, what’s the record of the IRS in that?

Have they uniformly allowed those deductions?

Have they never been challenged?

Or what is it?

Michael J. Graetz:

Well, Chief Justice, the record of the IRS is in dispute.

The government claims that, that none of these payments had ever been passed upon by the IRS.

That’s their position, although–

Byron R. White:

But they certainly have been deducted.

Michael J. Graetz:

–They certainly have been deducted and it is very hard to imagine that, that the participants of that religion would nave never challenged in court the disallowance of those, of those deductions.

And the administrative record here, I think, contrary to the Solicitor General’s brief, is really quite clear.

Religion has been distinguished in the law of charitable trusts, which this Court has recognized to be the origin of the charitable deduction provisions.

It was, it was made clear in a 1919 ruling that the form of contribution, even fixed in amount, made no difference.

It was reaffirmed in 1970, immediately after the IRS had issued two rulings of significance in the secular area, particularly Involving annual dues, where it said that annual dues to a secular membership organization are deductible only to the excess of value, but then two years later issued a ruling that said, annual dues to a Church are deductible, period.

William H. Rehnquist:

Annual clues to a church?

Michael J. Graetz:

That’s what the ruling says, Your Honor.

William H. Rehnquist:

And it didn’t go into any further detail?

Well, one doesn’t or ordinarily think of dues–

Michael J. Graetz:

Well, it, it describes both of those rulings, the 1919 ruling and the 1970 ruling that reaffirmed that ruling, describes certain fundraising practices.

They describe pew rents.

Well, by 1970, pew rents had not been a practice in the Protestant churches, but must refer to the Jewish High Holy Day ticket.

William H. Rehnquist:

–But, there were pew rents in Roman Catholic churches, and in some other churches.

Michael J. Graetz:

Well, it had declined in significance.

But, but it was not a significant form of fundraising in 1970.

It was in 1919.

John Paul Stevens:

May I ask you to comment on the government’s response to, say, the, your analogy to the tags stipends that, in that case and in some of the others that you’ve mentioned, the quo, what is received in exchange is not merely received by the person who donates the money or contributes the money but is received by the congregation at large.

Whereas in your situation, as I understand it, the entire benefit from the contribution is by the person making the contribution.

Is that a valid distinction?

Michael J. Graetz:

Well, it’s, it’s not a valid distinction, Justice Stevens, because in this religion, like all religions, it is, and it is clearly in the record, that this religion believes that, that the proselytization and conversion of people to this religion will serve mankind, in much the same way that other religions do.

The only distinction is that these religious… this form of religious worship in this religion is individual rather than congregational.

John Paul Stevens:

Well, that’s the point.

That’s the difference.

Michael J. Graetz:

Well, but Your Honor, the Internal Revenue code does not distinguish payments made to religions based on whether they worship individually or whether they worship congregationally.

John Paul Stevens:

Well, no, but there is a difference between making a donation that benefits a large group of people on the one hand, if you benefit an entire congregation, and making a donation that just… you get the sole immediate benefit.

Michael J. Graetz:

Well, but, let me give you two other examples–

John Paul Stevens:

Let me follow up with one other question I’m unclear about.

Does this church have physical buildings at which congregations attend church in large groups?

Michael J. Graetz:

–They have, they have physical buildings at which there are meetings of, of the members of the faith, yes.

But they don’t… the congregational services are not their core religious practice.

Their core religious practices are individual, individual ritualized religious practices.

John Paul Stevens:

Are the group meetings attended by just the general members of the church, or the executives, or the hierarchy, or what are the nature of the group meetings?

Michael J. Graetz:

Well, there’s not… in the record, since these payments in this case were for the individualized, individual services, the record doesn’t get into detail about the nature at group meetings.

John Paul Stevens:

Does it tell us whether they have any church buildings?

Michael J. Graetz:

Yes, there are church buildings.

John Paul Stevens:

And they call them churches?

Michael J. Graetz:

Yes, they do call them churches.

And I guess… I really do want to follow up your first points because I do think it’s crucial that, that we not get into the question of whether a particular form of religious worship is of relatively greater benefit to an individual or to the congregation.

The IRS, for example, has approved tax deductions for an organization that studies one family’s genealogy for religious purposes.

Now, the religion is not Identified, but apparently the practice described is a common Mormon practice, where family genealogy is very important to the baptism of the living and dead of that family.

And mass stipends are often, are often said… masses are often said for a purpose that is specified by the payor of the mass stipend.

And I don’t… there’s nothing in the Internal Revenue Code–

Among others, among others.

That’s not the purpose of–

Michael J. Graetz:

–Well, but in this case it’s not the exclusive purpose either, Justice Scalia.

The record is replete with, with facts that suggest that as the individuals traverse the spiritual path of this religion, mankind is made better off.

–All these other services that you’ve mentioned, I think it’s the case, all these other worships would have occurred whether the individual had paid or not.

The High Holy service would have gone ahead whether, whether a particular individual bought a ticket for it, the mass would have been said whether or not somebody paid to have a particular person remembered at the mass.

It seems to me this is different In the sense that, the only equivalent I can think of in, in my religion at least is, is charging a fixed fee for confession.

There, there is something that would not happen but for the fact that you paid the money to get it.

And I think that, that is different from–

–How about Mormon tithing to enter the Mormon temple?

Michael J. Graetz:

Mormon tithing… Mormons must tithe in order to enter the Mormon temple.

It’s a requirement; it’s a fixed requirement.

And I, I have to say, Your Honor, the government–

But the temple service happens anyway, whether a particular individual tithes–

Michael J. Graetz:

–Well, the government suggests that the mass occurs anyway.

I inquired of this, of Catholic priests, because I couldn’t find it in, in the doctrine.

A Catholic priest told me that sometimes masses are said for special purposes that would not otherwise be said, and that are said in private, for the benefit of a family in connection with, with a funeral.

Now, it is true that when that mass is said it is said for the benefit of, of other members of the faith and all mankind.

But that’s true in this case.

And I really don’t think that, I don’t think the Internal Revenue Code permits that kind of inquiry about whether this religious service would be performed or would not be performed.

I don’t think the Constitution suggests–

–Well, why don’t you think the Internal Revenue Code permits it?

Certainly a lot of very intricate factual inquiries are made under the code, not always with statutory support.

Michael J. Graetz:

–Well, Your Honor, there’s… the legislative history doesn’t suggest that this is appropriate.

The legislative history speaks of financial or monetary benefits, of monetary value received in return.

The language contribution was, had the meaning of a levy or a tax by ecclesiastical authority so that there’s nothing in the language of the statute that suggests it.

There’s no case that has ever suggested it, and we’ve got 70 years of administrative history to the contrary.

And it seems to me that if the IRS wants to start distinguishing among religions at this late date in the administration of this provision of the Internal Revenue Code, Congress ought to tell them to do that, Congress ought to make it known that that’s what they want to do, and not just the IRS deciding which, which churches to litigate against.

The problem with the IRS position in this case is, there is… they argue for a fact-bound determination without ever describing what facts, what rule of law is to apply.

They distinguish mass stipends, as Justice Scalia suggests, on the grounds that it would be paid anyway.

They distinguish Mormon tithes on the grounds that alcohol is, is prohibited.

Well, alcohol in this record is prohibited by the Scientologists as well.

They distinguish High Holy Day tickets on the grounds that indigents are admitted, but you don’t get to deduct your payment to a parochial school because it allows other people who can’t afford it to come in free, so that there is no coherent basis in the government’s position for informing religions of, of under what circumstances their payments will be allowed and when they will not be allowed.

I’d like to reserve the–

Mr. Graetz, straighten me out on one thing.

You have a stipulation to most of the facts in this case, do you not?

Michael J. Graetz:

–Yes, Your Honor.

Is there an independent proceeding having to do with the qualification of the church under 501(c)(3)?

Michael J. Graetz:

Yes, there is, Your Honor.

And what is the status of that?

Michael J. Graetz:

Well, there is an opinion that has denied the status of, of the Church of Scientology of California as a tax-exempt organization.

Those… if the church is not tax-exempt, there is no question that there are no payments deductible under Section 170.

Is that a tax court opinion?

Michael J. Graetz:

That’s, that’s a tax court… it’s a tax court opinion.

It was affirmed by the 9th Circuit on grounds of private inurement, and it was, cert was denied in that case, so that that, that particular church’s tax exemption has been repealed.

Now in this case the petitioners made payments to other churches who are recognized as tax-exempt organizations in the current Internal Revenue Code.

To other Scientology churches?

Michael J. Graetz:

Yes, Your Honor.

So you’re distinguishing among them?

Michael J. Graetz:

The, the Section 501(c)(3) currently distinguishes among them.

I’d like to reserve the balance of my time.

William H. Rehnquist:

Thank you, Mr. Graetz, Mr. Merrill, we’ll hear now from you.

Thomas W. Merrill:

Thank you, Mr. Chief Justice… excuse me.

Thomas W. Merrill:

Thank you, Mr. Chief Justice, and may it please the Court:

The question before the Court today is whether payments made by Petitioners in order to participate in auditing and training sessions sponsored by the Church of Scientology are deductible from gross income as charitable contributions under Section 170 of the Internal Revenue Code.

The tax court, relying on the same definition of charitable contribution that this Court subsequently endorsed in the American Bar… American Bar Endowment case, concluded that the payments made by the Petitioners were not charitable contributions but rather were purchases of auditing and training services.

We’ve heard a great deal from Mr. Graetz about the facts that involve other religious denominations in their fundraising practices, but I think it’s appropriate to begin by stressing very briefly some of the facts that the tax court found in reaching that particular conclusion.

I take these from pages 33(a) to 35(a) of the petition appendix in the Hernandez case.

First, the tax court found that the Church of Scientology charges a fixed fee for participation in auditing and training sessions.

Next, it found that the payment of these fees is a prerequisite of participation in auditing and training sessions, and that with few exceptions these services are never given for free.

In addition, the tax court found that the church had a practice of offering discounts both for advance payment of fees and for purchases of fees in large quantities.

And in addition the tax court went on to find that the church has an, an explicit policy of refunding fees paid in advance where a request for a refund is made before the services are rendered.

The court went on to review the extensive advertising, marketing, and promotional activities of the church and concluded that it operates in a commercial manner in providing its religious services.

Specifically, the court concluded that, and this is from page 35(a) of the petition appendix, the goal of making money permeates virtually all of the Church of Scientology’s activities, its services, its pricing policies, its dissemination policies, and its management decisions.

Mr. Merrill, this has a little bit of an other-worldly quality about, it, this case, in light of the 9th Circuit’s holding, that the church in California is not a tax-exempt organization.

Whey then does the government stipulate here that it is?

Thomas W. Merrill:

The reason for the stipulation–

Is the government not challenging the tax-exempt status of the church in other states?

Thomas W. Merrill:

–I’m not familiar directly with the status of the tax-exempt condition of other Churches of Scientology right now.

I think they’re probably under administrative review by the Revenue Service.

The reason for the stipulation was an attempt to resolve these cases involving the deductibility in a more expeditious manner.

The case that counsel for Petitioners alluded to involving the Church of Scientology of California was, was a massive undertaking involving literally millions of documents.

The trial life, I’ve been told, lasted for upwards at 50 days.

The tax court’s opinion in that case is 144 pages long, and it took from 1984 to 1987 for review to be completed in the 9th Circuit.

Well, did it turn essentially on these same things, the marketing and advertising and fixed fees and so forth?

Thomas W. Merrill:

One of the issues in that litigation was whether or not the Church of Scientology operates for commercial as opposed to religious purposes.

In order to be a qualified religious organization, under Section 170(c), and under Section 501(c)(3), the organization has to operate exclusively for religious purposes.

And one of the contentions that the government race and the tax court accepted was that the Churcn of Scientology operated for commercial as opposed to exclusively religious purposes.

The Ninth Circuit affirmed that decision on a different ground that the church was operated for the profit or benefit of specific individuals.

But you’re stuck with the stipulation here.

Thomas W. Merrill:

That’s correct, Justice Blackmun.

We stipulated in this case that the Church of Scientology is a church under Section 501(c)(3)… excuse me, is a religious organization under Section 501(c)(3), is a church under Section 170(b) and is a qualified organization under Section 170(c).

The only purpose of those stipulations, however, was to remove a potential legal ground for denying these particular tax… these payments, tax-deductible treatment.

Thomas W. Merrill:

Those stipulations do not go beyond that to negate any of the other stipulations in the case or any of the findings of the tax court.

Mr. Merril, do you–

–But all of your troubles would have been gone had you been able to follow the California case.

Thomas W. Merrill:


if, if, the Service had a way of resolving the tax-deductible status of an organization quickly, simply, and expeditiously, our troubles would have been gone.

But because that process is, at least with respect to this church, is so time-consuming and burdensome, it seemed, at least at the time the stipulations were made, that it would be quicker to stipulate to that particular–

But are these churches so different?

After all, there are various Lutherans synods, too.


Thomas W. Merrill:

–They’re not really that different.

In fact, I think there’s testimony in the joint appendix to the effect that they all operate essentially the same.

The problem is, I understand, that in determining the tax-exempt status of an organization for 170(c) purposes or 501(c)(3) purposes, the Service has to proceed organization by organization and year by year, and it can’t render a, a broad-scale prospective determination that would apply to different, technically-distinct organizations in future years and resolve whether or not they are eligible for tax-exempt treatment because these organizations obviously could change.

–Do you also agree that the synagogue sell their seats on High Holy Days and the Catholic churches sell their seats at a fixed price?

I emphasize fixed price.

Thomas W. Merrill:

Justice Marshall–

Do you admit that?

Thomas W. Merrill:

–Justice Marshall, we don’t admit anything about the practices of churches that are not involved in this particular case.

Why not?

You don’t know?

Thomas W. Merrill:

Because there’s nothing in the record about the actual–

You don’t know?

Is that the reason?

Or are you refusing to admit something that you know?

Thomas W. Merrill:


No, Justice Marshall, we’re not refusing to admit something that we know.

What has happened here is that the Petitioners have made a kind of administrative consistency argument which is based not on anything that the Internal Revenue Service has decided, or any reported decisions, but is based on treatises, articles, and secondary sources that describe the practices of these other religions.

Well, let me put it specifically.

Does IRS grant relief to the people that buy seats in the synagogues and the Catholic churches?

Thomas W. Merrill:

I do not know the answer to that question, Justice Marshall.


Thomas W. Merrill:

I do not know the answer to that question.

There is nothing in the record, and I know nothing about the practice of the Revenue Service, to know what happens if somebody submits a claim that a purchase of a high holy seat is–

You know, It’s really possible that some of us do know.

Mr. Merrill, would you at least agree that if your position is correct, that some deductions for other religious practices and payments might be called into question?

Thomas W. Merrill:

–I would agree–

Such as Mormon tithing and some of the other things that go on.

Thomas W. Merrill:


I mean, would you at least concede that those practices then would be open to question for their deductibility?

Thomas W. Merrill:


Justice O’Connor, I think the important point is this, and it’s been obscured considerably by the Petitioners’ presentation.

The Revenue Service in this case, the tax court in this case, the Ninth Circuit and the First Circuit, applied a well-established standard for determining whether or not a payment is tax-deductible that applies to all types of charitable organizations.

That standard is basically the quid pro quo inquiry asking whether or not payment was made without any expectation of a commensurate benefit or return consideration.

That is the standard that the Service will apply to any other church’s fundraising practices in determining whether or not they are tax-deductible.

If some religion comes across… comes forward that in fact charges admission, as a condition for attendance at its religious services, then there would be a significant risk that that religion would also be treated as not eligible for tax-deductible contributions.

At this point in time that has not happened.

It is difficult, isn’t it, to place a value on religious worship–

Thomas W. Merrill:

Not, in this case.

–In the quid pro quo context?

Thomas W. Merrill:

Not in this case.

Because the Petitioners themselves have placed a value.

They have charged fixed prices as a prerequisite for attendance at these services.

Well, but you can say that also in response to a 10 percent tithing requirement or membership requirement of any kind.

You can say the parties have placed a value on it.

Thomas W. Merrill:

That’s true, although with respect to something like mandatory tithing what is being offered there is membership in a church, not participation in discrete religious services.

And I think that would be an important distinction that the Service would take into account in deciding whether something like a mandatory tithing requirement was eligible for tax-deductible treatment.

I think that a, a mandatory fee or tithing requirement for membership in a church doesn’t have the same kind of close, one-on-one connection, causal connection, between the payment of the fee and the provision of the services that you have in this particular case.

Membership in the church might entail the right to, to participate in all types of different services, some of which would be exercise, some of which would not be.

It also would entail, I presume, significant obligations.

But Mr. Merrill, it has the very precise quid pro quo.

For the tithe you get to be a member of the church.

Why isn’t that precisely the kind of quid pro quo that would make it non-deductible under your reasoning?

Thomas W. Merrill:

Well, the quid pro quo that the Service is focusing on here is, is the provision of, of specific services that inure to the benefit, primary benefit, of the individual making, making the particular payment.

Whatever, whatever appertains to membership in the church is precisely what you get for your tithe.

You don’t get anything else.

I don’t understand your argument.

It seems to me you made a rather extreme concession.

Thomas W. Merrill:

I, I don’t think so, Justice Stevens, because again membership in an organization does not necessarily involve some kind of discrete package of benefits or services.

It could.

And if it did perhaps you would have a situation quite analogous to this case.

But the Service has–

I just simply don’t understand that.

I think a member of whatever the organization is, a member has certain privileges as a result of being a member.

He’s eligible for certain offices, he can do certain things that he cannot do if he’s not a member.

What… otherwise why would anyone want to be a member?

If you have to… you can be a member of the Catholic church or most churches without paying anything.

You just walk in the front door and start attending services.

Thomas W. Merrill:

–Well, in looking at membership dues and fees in general, for all types of charitable organizations, as well as religious organizations, the Service has tended to ask whether or not membership entails discernible concrete benefits, privileges of admission, for example, to certain types of activities that would have a value.

And the Service has also said that it membership simply has, simply confers a status on an individual, a certain honorific-type status for example, that… in that situation the benefit, although I will admit that there technically is a benefit there, is considered to be incidental.

That’s a legal conclusion.

And when there’s an incidental benefit it’s been determined that that doesn’t disqualify the person from deducting the membership dues as a charitable contribution.

Well, if you can’t get in the temple without paying the Mormon tithing, then that would be enough certainly, and I’m sure that that’s the condition, to be a Mormon in good standing, and therefore to be able to gain admittance to the temple.

Thomas W. Merrill:

I’m not… I didn’t follow the question.

You’re saying that–

I mean, there is at least one, one thing other than just honorific membership, other than just status that comes from a Mormon tithe, and that is admission… being able to get admitted to the temple.

Thomas W. Merrill:

–If, as has been suggested, in the sources the petition has referred to, there is mandatory requirement of payment of tithes as a condition to entry into the services, that distinguishes that case somewhat from the ordinary case of church dues.

So tithes, tithes may well be out.

It’s too bad, they’ve been around a long time.

Thomas W. Merrill:

Well, tithing–

Longer than pew rents even.

Thomas W. Merrill:

–Again, tithing practices vary quite widely among religions.

Thomas W. Merrill:

And even in the Mormon Church we have a situation that’s considerably different, I think, from the one presented by this particular case.

What is the controlling principle that, that means these particular contributions or payments are not deductible but others on the other side are?

It isn’t just the fixed amount, is it?

Thomas W. Merrill:


It’s not just the fixed amounts although that’s a very critical element in the determination.

The controlling principle which was cited by all the lower courts, and is no great mystery is that the Service asks whether or not the payment is made voluntarily with the expectation of not receiving a commensurate benefit or consideration in return.

And in deciding that question–

An earthly consideration, I take it.

Thomas W. Merrill:

–Well, something which is, which is observable and measurable, yes.

Something like the right to attend auditing sessions and training sessions.

And in answering that question the Service looks at a variety of facts.

The tax court enumerated a number of the facts that it thought were particularly critical in reacting the conclusion that in fact that type of quid pro quo arrangement was present here, rather than, rather than the intention of making a gift.

Excuse me, it has to be observable and measurable.

So you could still sell indulgences then, right, if you get an indulgence at–

Thomas W. Merrill:

I think indulgences–

–a hundred dollars a shot, it’s not observable or measurable; that would not be a quid pro quo.

Thomas W. Merrill:

–I think we won’t have to face that since indulgences were abolished in 1567, according to the Petitioners’ brief.

But I think indulgences would present a slightly different question in this respect.

The quid pro quo analysis, I take it, looks at payments made to a Section 170(c) organization and some benefit that is conferred in return by the Section 173(c) organization.

In this particular case the fixed payments that are paid to the Church of Scientology, and in return the opportunity to attend auditing sessions with the auditor and the emir and so forth or training sessions.

In the case of indulgences, the return consideration is not coming so much from the church as it’s coming from a non-temporal realm, and in that particular… in that type of situation we think that you might not have the same type of quid pro quo analysis.

Don’t you feel uncomfortable drawing these lines in the supernatural area?

Thomas W. Merrill:

I do, I do, Justice Scalia.

And I don’t think it’s necessary to decide all these issues in this particular case.

Certainly none of the lower courts have felt compelled to.

And I think that it’s important that, that the particular practices of other religions that have not been examined by either the Service or the tax court not be determined to be either deductible or non-deductible based on “evidence” from secondary sources, some of which is quite obscure and quite outdated.

I know, but the say well be controlled by the kind of test we apply, and I’m not sure your test doesn’t clearly apply to the practice of the selling tickets for High Holy Days, if that’s… in the temple, as described at least in the other brief.

Maybe it should, I don’t know.

But it’s–

Thomas W. Merrill:

We’re not saying that it would or would not apply to practice for High Holy Days.

Thomas W. Merrill:

I mean, I think that’s an excellent example of why it’s important not to prejudge the nature of religious practices without having an actual record which shows what they are.

It would be relevant, I think… the Service would want to know whether or not the purchase of High Holy Day tickets is a prerequisite of admission to the service or whether there is simply determined seating within the service, whether or not everyone has to have a ticket to get in or whether or not exceptions or made for persons of reduced means.

–Well, would any of those facts make any difference under your view of the law?

Thomas W. Merrill:


They might.

They might or they would?

I mean, what difference does it make if you get a particular seat or just get in the temple?

Thomas W. Merrill:


In either event you had to pay to get the particular–

Thomas W. Merrill:

–There is a quid pro quo involved in the payment to obtain a particular seat.

–Technically speaking there is.

I think–

–Isn’t there also a quid pro quo, a payment to get inside the temple, if they won’t let you in otherwise?

Thomas W. Merrill:

In the 1919 revenue ruling, in fact, the Treasury stated, is very cryptic, only two short paragraphs long.

But it stated very cryptically that, that from a technical angle one could distinguish per rents.

And I think what was meant by that was that there was this quid pro quo element that you were paying for a particular seat.

But then they went on to say that they thought that this benefit was conjectural, that it was, that whether or not there was personal accommodation here was conjectural, noted that frequently the same type of accommodations made in an informal basis to people that give basket contributions, and decided that therefore that ordinarily and customarily the intent was probably… the real intent, was probably to make a contribution rather than to purchase that particular element.

I think it’s important before getting drawn too far into these discussions of other practices not to lose the big picture here.

And I think the big picture is that the petitioners are arguing for a special rule, a special exemption that would apply only to one type of purchase of services, religious services, and that would in effect make any purchase of religious services per se deductible.

We think that there are a number of very serious problems with this approach to interpretation of Section 17C, and let me try to list those just briefly for the Court’s consideration.

First, there’s no way to reconcile the Petitioners’ proposed special rule with the language of Section 17C.

Section 170 establishes one standard, and only one standard, for determining when a deductible charitable contribution has been made to any type of qualifying charitable organization, whether it’s engaged in religious, charitable, scientific, literary, or educational activities.

The standard requires that in order to be deductible, a payment must be a contribution or gift.

And what Petitioners are proposing, in effect, is to read the gift requirement out of the statute with respect to one type of services, religious services.

Second, the fact that religious activities provide a subjective and intangible benefit that can’t be directly valued doesn’t differentiate religious services from other types of activities that are offered by charities.

Poetry readings, concerts, private exhibitions of art, all have a very highly subjective and tangible value to the participant, and there may be no equivalent service in the marketplace that can be used to fix a value of these particular services.

Nevertheless, it’s well-established in the Service’s revenue rulings that when a charity sets a fixed admissions charge for something like a poetry reading or a private exhibition, and makes payment of that charge a prerequisite of attendance, the price of the fee is presumed to be equal to the value of the services received and hence is non-deductible.

Third, the special rule that Petitioners urge would in our view aggravate rather than alleviate potential First Amendment concerns.

Under the gift or contribution standard reflected in Section 170, the deductibility of a payment to a church is determined by a secular standard, whether there was an intention to make a gift rather than a purchase of services.

But under the special rule that the petitioners are arguing in favor of, the only possible inquiry that could be made by the Service is whether or not the church is providing bonafide religious services.

Thomas W. Merrill:

The intrusion and entanglement that would be involved in conducting that inquiry would tar exceed anything that would be presented by looking at the external form or structure of the transaction to see it the payment is a quid pro quo for the provision of services.

Well, Mr. Merrill, I think they’re really just arguing that the IRS has interpreted it that way for religious services all these years.

Thomas W. Merrill:

That is their primary argument.

And they’re saying, why don’t… why should we follow a different rule here?

And I think you have to concede that certainly the IRS ruling back in 1919 and subsequent practice lends some credence to that argument.

Thomas W. Merrill:

I’m afraid we don’t concede that, Justice O’Connor.

It’s a very curious argument.

If you look at these revenue rulings that are, that are cited by the Petitioners, you will not see any reference to the proposition that any payment for the provision of religious services is deductible automatically, or any equivalent language.

You will not see any reference to a distinction between secular services and non-secular services.

You will not see any comment to the effect that any provision of religious services is always incidental in the legal sense.

In fact, if you look at something like the 1919 revenue ruling, what you will see is that the Service was applying the same standard that was applied in this particular case.

What the Service asked in that particular case was whether the real intent was to contribute to the church or to hire a seat or a pew for personal accommodation.

That’s the same distinction that we’re being, asking the Court to apply here, the distinction between a gift or contribution and a purchase.

The 1970 revenue ruling was simply an attempt to update the 1919 revenue ruling.

There had been a change in statutory provisions and so forth.

There’s no analysis in that whatsoever.

The other revenue ruling, which is more or less or point, has to do with mass stipends, and that was a 1978 revenue ruling, which made quite clear that the facts that were presented in that case involved a mass that would have been said in any event and a mass that was open to the general public.

And the conclusion it reached was that in most circumstances the payment of the mass stipend was incidental and was not something that would not be deductible.

I guess we’d feel more comfortable if you had gone after some churches and synagogues.

Thomas W. Merrill:

Well, it may simply be, Justice Scalia, that… I mean, there may be, there may be several reasons why there aren’t more reported cases directly involving religious services.

It’s difficult to pick up these things on audit.

All you’ve got is, is the listing of a gift to a church and cancelled check payable to the church.

In addition, I don’t think It’s quite true, it’s certainly not true in the sense that the petitioners argue that there is no analogous precedent that supports the proposition that payments for religious services are not deductible.

And I think that the religious education cases are particularly instructive here, and much more instructive than the Petitioner lets on.

Mr. Merrill–

Thomas W. Merrill:


–When was this point first raised in this particular area?

Thomas W. Merrill:

which point, Justice–

About these synagogues and Roman Catholic churches selling seats.

That was raised in the beginning of this case, wasn’t it?

Thomas W. Merrill:

–I’m not sure when the reference to other religious practices crept into the litigation–

Well, about how many years ago was it?

Thomas W. Merrill:

–In this particular… there is some reference to this argument in the First Circuit’s opinion in this case.

I don’t recall any reference to it–

How long ago was that?

Because my second answer’s going to be, what have you done about it?

Thomas W. Merrill:

–The First Circuit’s opinion–

Outside of this case?

Thomas W. Merrill:

–I believe, is 1987.

Well, what has the Internal Revenue done about it, the Service?

Thomas W. Merrill:

I have… I don’t know that the Internal Revenue has done anything, Justice Marshall, because we don’t think that, as I’ve been explaining to Justice O’Connor, we don’t interpret our regulations as being inconsistent with the position that was taken in this particular case.

They are simply applications of the same position that we’re taking here.

I think it’s important to realize the argumentative strategy that the Petitioners adopted here.

The tax court relied upon a whole list of factors, factual findings, that were strongly indicative of an intention to purchase services rather than to make a gift.

And what Petitioners have Gone is they’ve gone town each particular one of those factors and said, oh, but wait, we can point to another religion that has a practice somewhat analogous to that particular element.

And then they say, as to the next factor, well, but wait, there’s yet another religion that has another factor like that.

But what they haven’t done is point to anyone who has all of the features, or anything even close to the features, that are presented by the Church of Scientology in this case.

They haven’t pointed to a case where a church is selling admission tickets at the door in order to attend religious services.

If such a case did exist, and, and had beer decided differently, then there might be a problem of administrative consistency–

Let me go pack just quickly to the point about religious education, because I think it’s important.

It’s well-established that tuition payments for education are not deductible, it’s established that that applies to a completely sectarian as well as non-sectarian church school.

No distinction is made as to whether or not the educational instruction serves as a substitute for ordinary schooling or whether it takes place in the Church.

And finally, and I think this is the truly critical point, although virtually all the parochial school cases that are cited by Petitioners have involved the provision of purely religious services, as well as educational services, there has never been a suggestion made that there should be some apportionment between the component that reflects the education and the component that reflects the religious services.

There has been apportionment in those cases, but it’s apportionment between the amounts of contributions and the costs, without any differentiation between the costs of the education and the costs of the religious services.

And the fact that deductions have been disallowed for the religious service component of those cases, I think, does offer substantial support for the proposition that there’s nothing radical or untoward about the position that the commissions take in this, in this case, positions taken in this case that religious services should be subject to the same general standard, the same quid pro quo analysis that all types of payments are made under Section 170 of the Code.

If the Court has no further questions, thank you.

William H. Rehnquist:

Mr. Graetz, you have four minutes remaining.

Michael J. Graetz:

May it please the Court.

I… I’d just like to make three points, If I could.

One is, Your Honor, that the comparison to other religions’ fundraising practices appears in the tax court testimony of the expert witness ant was uncontradicted, and I refer you to page 84 of the joint appendix for that testimony.

Michael J. Graetz:

So it was not something that was not in the record below, and each of the appellate courts that has decided a case here has recognized that there is a threat to the practices of other religions.

Secondly, in response to the question, what is the controlling principle here that the Chief Justice asked, what the government is doing is denying the existence of the controlling principle in all other contexts.

The controlling principle in all other contexts is the relationship of the amount of the payment to the value of what is received in return, and the government concedes, apparently, that you can’t value religious services.

And that was the point that was made by the Second Circuit, the Sixth Circuit, and the Eighth Circuit in finding for the taxpayers here, and without the ability to value then there is no standard here, there is just a, a, a selection of facts.

And the government’s argument makes that absolutely clear, and the prices that are set here, the tax court found, are based on average family income, and they’re not in any way a measure of the value of the services.

There’s a footnote in the tax court opinion that points cut that these auditing fees are based on the average family income in the district.

Third, Your Honor, it seems to me that the government has now made it clear that their problem here is that it’s just too cumbersome under the Internal Revenue Code to litigate the tax exemption of organizations.

And, and if that’s the problem, if that’s why they’ve made this dramatic change in their position, then they should be at Congress.

If there’s a problem in enforcing the provisions of Section 501(c)(3), then Congress is the appropriate body to, to address that problem.

Commercialism, and the role of commercialism, As an extremely complicated question under Section 501(c)(3).

The tax court finding here in the court below, on the tax exemption easier is a unique finding.

It was not affirmed on appeal.

The court did not reach that issue in the Ninth Circuit appeal.

And as Judge Jones said in the Sixth Circuit, the fact that the government has stipulated that this is a tax-exempt church means under the regulations that only an insubstantial amount of its function can be devoted to a non-exempt purpose.

So that there is, the stipulation itself means that commercialism is irrelevant here, it’s insubstantial by definition, by stipulation And that’s why Judge Jones said that the finding of the tax court that this court operates in a commercial fashion is irrelevant and not controlling.

There is no instance, there is no instance–

Neither at these cases came tram the Sixth Circuit, did it?

Michael J. Graetz:

–The cases that are before this Court today are appeals tram the First and, and Ninth Circuit.

So why are you quoting a judge in the Sixth?

Michael J. Graetz:

Well, there were identical cases in the Sixth Circuit, cases exactly like Hernandez there’s a split in the circuits.

The First and Ninth Circuit, along with the Fourth Circuit and the Tenth Circuit, have found for the government.

The Second, Sixth, and Eighth Circuits, on records identical to the Hernandez case here, nave found for the taxpayer.

Well, then you are saying that all the Scientology Churches are alike.

Michael J. Graetz:

Your Honor, I’m not saying that.

In fact, there is, there is an exemption certificate, and it’s in the list at cumulative organizations that are exempt, for certain Scientology Churches.

The Church of Scientology of Hawaii, which is the church to which Ms. Graham made her payments, is tax-exempt.

There are other churches in Scientology that have held not to be tax-exempt.

That’s the way the government should proceed with this issue.

William H. Rehnquist:

Thank you, Mr. Graetz.

The case is submitted.

The honorable court is now adjourned until tomorrow at ten o’clock