Graham v. C.I.R.

Decision Date17 July 1987
Docket NumberNos. 84-7794,84-7798 and 84-7799,s. 84-7794
Parties-5294, 56 USLW 2064, 87-2 USTC P 9431 Katherine Jean GRAHAM, Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE SERVICE, Respondent-Appellee. Richard M. HERMANN, Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE SERVICE, Respondent-Appellee. David Forbes MAYNARD, Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE SERVICE, Respondent-Appellee.
CourtU.S. Court of Appeals — Ninth Circuit

Eric M. Lieberman & Nicholas E. Poser, New York City; Christopher Cobb, Pasadena Cal.; Meade Emory, Seattle, Wash.; Lee Boothby, Barrien Springs, Mich., & Roger H. Zirprick, San Bernardino, Cal., for petitioners-appellants.

John F. Murray, Robert S. Pomerance and Robert A. Berstein, Washington, D.C., for the respondents-appellees.

Appeal from a Decision of the Tax Court of the United States.

Before WRIGHT, KENNEDY and BEEZER, Circuit Judges.

KENNEDY, Circuit Judge:

Taxpayers Katherine Jean Graham, Richard M. Hermann, and David Forbes Maynard appeal the Tax Court's decision upholding the determination of the Commissioner of Internal Revenue that they were not entitled to deduct certain payments made to the Church of Scientology, 83 T.C. 575. Appellants contend that they were entitled to the deductions under I.R.C. Sec. 170 (1987), that denial of the deductions violates their rights under the free exercise and establishment clauses of the first amendment, U.S. Const. amend. I, and that the Commissioner has selectively enforced the tax laws against them in violation of their rights under the first and fifth amendments. U.S. Const. amends. I, V.

It has been conceded by the government, for purposes of this case, that the Church of Scientology is a religion entitled to receive deductible charitable contributions, and that its adherents are entitled to first amendment protections for the practice of Scientology. Some of the facts were stipulated to the Tax Court, along with numerous exhibits. The parties also stipulated to the entire record in a related case, Church of Scientology of California v. Comm'r, 83 T.C. 381 (1984). The historical or background facts are essentially uncontroverted on appeal, except for the relevance of certain matters. The Tax Court found that the payments in question were not charitable donations because of the motives and intent of the payors, and this ultimate factual finding is much contested on the appeal.

The First Circuit has issued an opinion in a case in which it considered the issues present in this case on a record identical to the one we review here. Hernandez v. Comm'r, 819 F.2d 1212 (1st Cir.1987). Judge Coffin's opinion is thorough and insightful, and we reach the same conclusions as the First Circuit does, with some differences in emphasis and analytic approach. We affirm the Tax Court's decision.

The appellants are Scientologists and were so during the tax years in question. Scientology teaches that the individual is a spiritual being having a mind and a body. Part of the mind, called the reactive mind, is unconscious. It is filled with mental images that are frequently the source of irrational behavior. Through the administration of a Scientology process known as auditing, an individual, called a preclear, is helped to erase his reactive mind and gain spiritual competence. Auditing is also referred to as processing, counseling, and pastoral counseling. Training, a Scientology discipline distinct from auditing, involves courses of instruction in the tenets of Scientology.

Scientologists believe that they can attain benefits from auditing and training, but only in degrees or steps. These include levels called Grades and higher levels called OT sections. The various steps or degrees of accomplishment are set forth in a chart entitled Classification Gradation and Awareness Chart of Levels and Certificates.

A trained Scientologist, known as an auditor, administers the auditing. He is aided by an electronic device called an E-meter. This device helps the auditor identify the preclear's areas of spiritual difficulty by measuring skin responses during a question and answer session. These auditing sessions are offered in fixed blocks of time called Intensives.

Training is also delivered to Scientologists by a trained Scientologist. Course offerings range from basic courses which introduce the doctrines and texts of Scientology through advanced courses which train and qualify auditors to deliver auditing at the highest level.

One of the tenets of Scientology is that any time a person receives something, he must pay something back. This is called the doctrine of exchange. The Church of Scientology applies this doctrine by charging a fixed donation for training and auditing. With few exceptions, these services are never given for free. Thus, fixed donations are generally a prerequisite to a person's receiving auditing and training. These fixed donation payments constitute the majority of the Church of Scientology's funds and are used to pay the costs of Church operations and activities.

Over the period at issue, the general rates for the fixed donations for auditing varied with the amount of auditing time involved. The Church's price lists disclose that fees for auditing services ranged from $625 for a 12 1/2 hour intensive to $4,250 for a 100-hour intensive, with additional fees for specialized types of auditing. Members of the Church of Scientology are encouraged to make advance payments for Scientology courses. If payment is made well in advance of the services to be rendered, a discount of 5 percent can be obtained by the member. When a Scientologist makes an advance payment, the Church credits his account. Once the individual begins receiving a service, his account is debited. It is the Church of Scientology's policy to refund advance payments upon request at any time before services are received.

The Church of Scientology promotes its services through free lectures, congresses, free personality tests, and handouts. Advertisements are placed in newspapers, magazines, and on the radio. These promotional activities are geared to be responsive to community concerns, which are determined from surveys.

The Tax Court found that the Church of Scientology operates in a commercial manner in providing these religious services. By internal policy memoranda, the Church sets the goal of making money, and it is an idea which permeates virtually all of the Church of Scientology's activities, its services, its pricing policies, its dissemination practices, and its management decisions.

In 1972 Graham made payments totaling $1,682 to the Church of Scientology, Hawaii, and to the Scientology and Dianetic Center of Hawaii. Of this amount, approximately $400 went toward training, and the balance went for auditing. Some of the payments toward courses were for Graham's daughters, Karen and Laurel. When Graham made those payments, she expected to receive, and did receive, the benefit of those services. On her 1972 income tax return, Graham deducted $1,682 as a charitable contribution.

In 1975 Hermann paid the Church of Scientology, American Saint Hill Organization, $4,875. At the time Hermann made these transfers, he expected to receive Class 0 to 9 training. Although Hermann did not take these courses, he did take other Scientology courses and has received auditing between 1974 and the present. On his 1975 income tax return, Hermann deducted $3,922 as a charitable contribution.

In 1977 Maynard paid the Church of Scientology, Mission of Riverside, $4,698.91 as advance payments for services. Although Maynard did not receive any services in 1977, he made those remittances with the expectation of taking Interiorization Processing, Expanded Dianetics, and auditing. On his 1977 income tax return, Maynard claimed a $5,000 charitable contribution deduction.

The Commissioner disallowed these claimed charitable contribution deductions, and the Tax Court upheld the Commissioner's decision. It held that the remittances to the Church of Scientology were not contributions or gifts within the requirements of section 170 because they "were not voluntary transfers without consideration, but were made with the expectation of receiving a commensurate benefit in return." Graham v. Comm'r, 83 T.C. 575, 581 (1984). The Tax Court rejected appellants' challenge under the free exercise clause, holding that "there is no constitutional right to a tax deduction," id., and that any burden on religion was justified by the "broad public interest in maintaining a sound tax system." Id. at 582 (quoting United States v. Lee, 455 U.S. 252, 260, 102 S.Ct. 1051, 1056, 71 L.Ed.2d 127 (1982)). The Tax Court also rejected appellants' claim under the establishment clause because the tests for determining deductibility under section 170 were based on secular criteria. See id., 83 T.C. at 583. The Tax Court held that appellants' claim of selective discrimination was not supported by evidence of discriminatory action by the Commissioner or any of his agents.

We must determine first whether appellants' fixed donations qualify for the deduction granted by I.R.C. Sec. 170. Section 170 grants a deduction for "charitable contributions" made within the taxable year. Section 170(c) defines "charitable contribution" as "a contribution or gift to or for the use of" a variety of entities, among which are bodies that are "organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes ... or for the prevention of cruelty to children or animals," provided that they meet certain other requirements. I.R.C. Sec. 170(c)(2).

It has been stipulated for the purposes of this case that the Church of Scientology is a religion and an organization to which charitable contributions may be made under section 170. The statutory issue is whether or not appellant...

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