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Michael F. v. Commissioner of Internal Revenue

decided: April 19, 1988.


Appeal from a Decision of the United States Tax Court (Sterrett, C.J.), disallowing income tax deduction for payments to Church of Scientology and assessing deficiency.

Newman, Winter and Miner, Circuit Judges.*fn* Jon O. Newman, Circuit Judge, dissenting.

Author: Miner

MINER, Circuit Judge:


This is an appeal from a decision of the United States Tax Court (Sterrett, C.J.) disallowing an income tax deduction of $5,881.83 paid by appellants to the Church of Scientology, Mission of Burbank, now the Mission of Los Angeles, California, in 1976 and assessing a deficiency in the sum of $975.92. The payments were made in connection with the appellants' participation in religious practices known as "auditing" and "training" in the Church of Scientology. No trial was conducted in this case, the parties having stipulated to be bound by the findings of fact and conclusions of law made in three "test" cases then pending in the tax court. The parties also stipulated "that to the extent relevant the records in said [three test cases] shall be deemed part of the record herein for purposes of any . . . appeal." App. at 12. The test cases concluded in the tax court with a decision in favor of the Commissioner, Graham v. Commissioner, 83 T.C. 575 (1984), and the tax court entered its decision assessing a deficiency in the case at bar accordingly. The Graham case was affirmed on appeal to the Ninth Circuit Court of Appeals, which held that the fixed donations required to participate in the religious practices in question do not qualify for the deduction for religious contributions authorized by § 170 of the Internal Revenue Code of 1954. Graham v. Commissioner, 822 F.2d 844 (9th Cir. 1987). Faced with the same issues, the First Circuit Court of Appeals also held in favor of the Commissioner. Hernandez v. Commissioner, 819 F.2d 1212 (1st Cir. 1987). The Eighth Circuit Court of Appeals, however, has held that "payments to the Church of Scientology for participation in strictly religious practices were contributions within the meaning of section 170." Staples v. Commissioner, 821 F.2d 1324 (8th Cir. 1987). We agree with the Eighth Circuit and reverse.


The Church of Scientology is a religious organization exempt from tax under the provisions of the Internal Revenue Code, 26 U.S.C. § 501(c)(3).*fn1 Those who adhere to the tenets of the Church participate in the rituals of auditing and training, the central religious experiences of Scientology. The practice of auditing involves a one-to-one encounter between the participant and a church staff member designated as the "auditor." The purpose of these encounters is to raise the spiritual awareness of the participant to the highest level through a series of progressive steps. Scientologists believe that the enhancement of civilization is linked to the spiritual goals to which they aspire. They undertake the experience of training for the purposes of studying church doctrine and scripture and of attaining the background needed to qualify as auditors. Training is intended to enlighten participants and to enable them to help others.

A schedule of payments for auditing and training sessions has been established by the Church. These payments are referred to as "fixed donations" or "fixed contributions." Participation in the sessions generally is conditioned on such payments, which are the major sources of funding for church operations and activities. The mandatory fee schedule is based on a religious tenet of Scientology known as the Doctrine of Exchange. According to this Doctrine, every person must give something for what he or she receives in order to maintain "inflow and outflow" and avoid spiritual decline. The fees established by the Church vary with the length and level of sophistication of the sessions. Advance payments are encouraged, and refunds for unused payments are given. It appears that the bulk of the contributions made by appellants related to the auditing sessions in which they participated. Whether the appellants are entitled to deduct as charitable contributions on their federal income tax returns the sums paid over to the Church of Scientology in connection with their participation in the Church practices of training and auditing is the issue presented by this appeal.


The Internal Revenue Code provides that charitable contributions may be deducted from taxable income, 26 U.S.C. § 170(a), and defines such donations as contributions or gifts made to or for the benefit of certain specified entities, including those organized and operated exclusively for religious purposes, 26 U.S.C. § 170(c)(2)(B). "A payment of money generally cannot constitute a charitable contribution if the contributor expects a substantial benefit in return," United States v. American Bar Endowment, 477 U.S. 105, 106 S. Ct. 2426, 2433, 91 L. Ed. 2d 89 (1986) (emphasis supplied), since "the sine qua non of a charitable contribution is a transfer of money or property without adequate consideration," id. at 2433.

In the context of religious contributions, we have affirmed the disallowance of deductions for parochial school tuition payments, which clearly are made with the expectation of a definite economic benefit. Winters v. Commissioner, 468 F.2d 778, 780 (2d Cir. 1972). Donations related to participation in religious observances, however, have not been regarded as yielding specific private benefits to the donor, who is considered only an incidental beneficiary, the primary beneficiaries of the observances being the members of the faith and the general public. Rev. Rul. 71-580, 1971-2 C.B. 235. Accordingly, the Commissioner has allowed deductions for the saying of masses, Rev. Rul. 78-366, 1978-2 C.B. 241, and for pew rents, building fund assessments and periodic dues, Rev. Rul. 70-47, 1970-1 C.B. 49, all involving fixed donations for participation in religious services. Presumably, specified payments for attendance at High Holy Day services, for tithes, for torah readings and for memorial plaques would fall into the same category.

Conceding the religious character of auditing and training in the Church of Scientology, the Commissioner argues that the appellants received quid pro quo or "commensurate benefits" in return for the payment of the fees specified for participation in the practices of the Church. According to the Commissioner, those benefits were substantial in nature and therefore fail to qualify as charitable contributions. Referring to testimony in the stipulated record regarding improvements in the lives of those who participate in Scientology observances, the Commissioner contends that the payments made by church members are exchanged for the fulfillment of their personal expectations. He therefore concludes that "their payments were not for services or programs designed for collective participation by the church membership as a whole," since "they purchased, by the hour, tailormade benefits for their private use." Appellee's Brief at 22-23. In advancing his "value received" theory, the Commissioner contends that "value" need not be of an economic or financial type.

The individual benefits gained by appellants through participation in their religious rituals, and the payment of fixed fees for that participation, cannot be considered so equivalent as to pass the donation/purchase line. Appellants were fully aware that the principal support of their church was derived from the payments received for auditing and training. As in the case of the deductible donation described previously, it must be presumed that the primary purpose of the donations was a charitable expectation that the religious causes of the Church would be furthered, Murphy v. Commissioner, 54 T.C. 249 (1970), and that only incidental benefits accrued to the individual donors. In any event, there is no way of measuring spiritual or religious benefits in such a way as to conclude that they are "commensurate" with the fees paid for participation in the religious activities giving rise to those benefits. The better rule is to avoid any attempted measurement and to hold "that regardless of the timing of the payments or details of the church's method of soliciting contributions from its members, an amount remitted to a qualified church with no return other than participation in strictly spiritual and doctrinal religious practices is a contribution within the meaning of section 170." Staples, 821 F.2d at 1327.

Finally, auditing and training are the religious practices of the Church of Scientology. Appellants are entitled to participate in those practices by making donations in accordance with a prescribed schedule. Their donations did not yield them any substantial economic benefit, because they received in return nothing of material value to themselves or to anyone else. Contrary to the Commissioner's argument, Appellee's Brief at 19-20, economic value can be identified where payments are made to an adoption agency to secure an adopted child, Arceneaux v. Commissioner, 1977 T.C. Memo 363, 36 T.C.M. 1461 (1977), to a charitable organization for admission to a concert, Rev. Rul. 67-246, 1967-2 C.B. 104, and to a museum for membership, Rev. Rul. 68-432, 1968-2 C.B. 104. Payments for religious services stand on a different footing. They constitute the ...

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