Sklar v. Commissioner of Internal Revenue/Opinion of the Court

by Stephen Reinhardt

REINHARDT, Circuit Judge.

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1. The taxpayer-petitioners in this action, Michael and Marla Sklar, challenge the Internal Revenue Service's ("IRS") disallowance of their deductions, as charitable contributions, of part of the tuition payments made to their children's religious schools. In the notice of deficiency sent to the Sklars, the IRS explained that "[s]ince these costs are personal tuition expenses, they are not deductible." Specifically, the Sklars sought to deduct 55% of the tuition, on the basis that this represented the proportion of the school day allocated to religious education. The Sklars contend that these costs are deductible under section 170 of the Internal Revenue Code, as payments for which they have received "solely intangible religious benefits." They also argue that they should receive this deduction because the IRS permits similar deductions to the Church of Scientology, and it is a violation of administrative consistency and of the Establishment Clause to deny them, as Orthodox Jews, the same deduction. The Tax Court found that under De Jong v. Commissioner, 309 F.2d 373, 376 (9th Cir. 1962), tuition paid for the education of a taxpayer's children is a personal expense which is non-deductible under § 170. The Tax Court also rejected the administrative inconsistency argument and the Establishment Clause claim, and ruled inadmissible several documents supporting the Sklars' contentions with respect to the Church of Scientology on the ground that the Sklars are not similarly situated to the members of the Church of Scientology. The Sklars filed this timely appeal.
2. We review the Tax Court's conclusions of law and its construction of the tax code de novo, and no deference is owed that court on its application of the law. Schachter v. Commissioner, 255 F.3d 1031, 1033 (9th Cir. 2001); Custom Chrome, Inc. v. Commissioner, 217 F.3d 1117, 1121 (9th Cir. 2000); Leslie v. Commissioner, 146 F.3d 643, 650 (9th Cir. 1998).
3. I. The Provisions of the Tax Code Governing Charitable Contribution Deductions Do Not Appear to Permit the Deduction Claimed by the Sklars
4. The Sklars assert that the deduction they claimed is allowable under section 170 of the Internal Revenue Code which permits taxpayers to deduct, as a charitable contribution, a "contribution or gift" to certain tax-exempt organizations. Not only has the Supreme Court held that, generally, a payment for which one receives consideration does not constitute a "contribution or gift" for purposes of § 170, see United States v. American Bar Endowment, 477 U.S. 105, 118, 106 S.Ct. 2426, 91 L.Ed.2d 89 (1986) (stressing that "[t]he sine qua non of a charitable contribution is a transfer of money or property without adequate consideration"), but it has explicitly rejected the contention made here by the Sklars: that there is an exception in the Code for payments for which one receives only religious benefits in return. Hernandez v. Commissioner, 490 U.S. 680, 109 S.Ct. 2136, 104 L.Ed.2d 766 (1989). The taxpayers in Hernandez, members of the Church of Scientology, sought to deduct, as charitable contributions under § 170(c), payments made by them to the Church of Scientology in exchange for the religious exercises of "auditing" and "training."1 The Court affirmed the Tax Court's reading of the statute disallowing the deductions on the following three grounds: (1) Congress had shown no preference in the Internal Revenue Code for payments made in exchange for religious benefits as opposed to other benefits, 490 U.S. at 692-93, 109 S.Ct. 2136; (2) to permit the deductions the taxpayers demanded would begin a slippery slope of expansion of the charitable contribution deduction beyond what Congress intended, 490 U.S. at 693, 109 S.Ct. 2136; and (3) to permit these deductions could entangle the IRS and the government in the affairs and beliefs of various religious faiths and organizations in violation of the constitutional principle of the separation of church and state, 490 U.S. at 694, 109 S.Ct. 2136. Specifically, the Supreme Court stated that to permit these deductions might force the IRS to engage in a searching inquiry of whether a particular benefit received was "religious" or "secular" in order to determine its deductibility, a process which, the Court said, might violate the Establishment Clause. Hernandez, 490 U.S. at 694, 109 S.Ct. 2136.
5. Internal Revenue Code have clarified Congressional intent with respect to the deductibility of these payments. We seriously doubt the validity of this argument. The amendments to the Code appear not to have changed the substantive definition of a deductible charitable contribution, but only to have enacted additional documentation requirements for claimed deductions. Omnibus Budget Reconciliation Act of 1993 ("OBRA'93"), P.L. No. 103-66, 107 Stat. 312 (codified as amended in scattered sections of 26 U.S.C.). Section 170(f) of the Code adds a new requirement that taxpayers claiming a charitable contribution deduction obtain from the donee an estimate of the value of any goods and services received in return for the donation, and exempts from that new estimate requirement contributions for which solely intangible religious benefits are received.2 I.R.C. § 170(f)(8)(A) & (B)(ii). Similarly, § 6115 requires that tax-exempt organizations inform taxpayer-donors that they will receive a tax deduction only for the amount of their donation above the value of any goods or services received in return for the donation and requires donee organizations to give donors an estimate of this value, exempting from this estimate requirement contributions for which solely intangible religious benefits are received.
6. Given the clear holding of Hernandez and the absence of any direct evidence of Congressional intent to overrule the Supreme Court on this issue, we would be extremely reluctant to read an additional and significant substantive deduction into the statute based on what are clearly procedural provisions regarding the documentation of tax return information, particularly where the deduction would be of doubtful constitutional validity. Hernandez, 490 U.S. at 694, 109 S.Ct. 2136; see Lemon v. Kurtzman, 403 U.S. 602, 612-13, 91 S.Ct. 2105, 29 L.Ed.2d 745 (1971) (holding that a statute is unconstitutional under the Establishment Clause if it fosters "an excessive government entanglement with religion"). We need not, however, decide this issue definitively in this case.
7. II. The IRS Policy Regarding the Church of Scientology May Not Be Withheld from Public Scrutiny and Appears to Violate the Establishment Clause; Further, It Appears That the Sklars Have Not Made Out a Claim of Administrative Inconsistency