Hernandez v. C.I.R., No. 86-1276

CourtUnited States Courts of Appeals. United States Court of Appeals (1st Circuit)
Writing for the CourtBefore COFFIN and SELYA; COFFIN
Citation819 F.2d 1212
Decision Date01 June 1987
Docket NumberNo. 86-1276
Parties-5067, 87-1 USTC P 9343 Robert L. HERNANDEZ, Petitioner, Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent, Appellee.

Page 1212

819 F.2d 1212
60 A.F.T.R.2d 87-5067, 87-1 USTC P 9343
Robert L. HERNANDEZ, Petitioner, Appellant,
v.
COMMISSIONER OF INTERNAL REVENUE, Respondent, Appellee.
No. 86-1276.
United States Court of Appeals,
First Circuit.
Argued Jan. 8, 1987.
Decided June 1, 1987.

Page 1214

Eric M. Lieberman, New York City, with whom Nicholas E. Posner and Rabinowitz, Boudin, Standard, Krinsky & Lieberman, P.C., were on brief, for petitioner, appellant.

Lee Boothby, Washington, D.C., was on brief, for Americans United for Separation of Church and State, amicus curiae.

David M. Moore, Dept. of Justice, Washington, D.C., with whom Michael L. Paup and Robert S. Pomerance, Dept. of Justice, and Roger M. Olsen, Asst. Atty. Gen., were on brief, for respondent, appellee.

Page 1215

Before COFFIN and SELYA, Circuit Judges, and GIGNOUX, * Senior District Judge.

COFFIN, Circuit Judge.

This appeal presents the question whether a taxpayer who paid the price set by his church in exchange for specified services provided by the church is entitled to deduct the payment from his taxable income as a charitable contribution.

Robert L. Hernandez is a member of the Church of Scientology. In 1981, he paid $7,338 to the Church in exchange for Scientology services called "auditing" 1 and "training." 2 The services were offered to him at fixed prices set by the Church. 3 Hernandez deducted the $7,338 as a charitable contribution on his 1981 federal income tax return, but the Commissioner of Internal Revenue disallowed the deduction and assessed a $2,245 tax deficiency against him. The Tax Court affirmed the disallowance and deficiency assessment, and this appeal ensued.

Hernandez argues that disallowance of his deduction violates his statutory rights under section 170 of the Internal Revenue Code (Code), 26 U.S.C. Sec. 170(c) (1987), and his constitutional rights under the Establishment and Free Exercise clauses of the First Amendment. 4 He also claims that the Internal Revenue Service (IRS) has selectively prosecuted him because of his religion in violation of the Establishment clause and the Fifth Amendment right to equal protection of the laws. After describing the somewhat unusual procedural status of this case, we shall consider each of appellant's arguments in turn.

I. Procedural History

The parties in this case agreed to be bound, subject to the right of appeal, by the relevant factual and legal findings of the Tax Court in Graham v. Commissioner, 83 T.C. 575 (1984), appeals pending, Nos. 84-7794, 84-7798, 84-7799 (9th Cir. argued December 10, 1985), a set of three similar cases pending before the Tax Court at the time of their stipulation. The stipulation excludes "findings of fact and conclusions of law relating to any petitioner's subjective intent." The parties in Graham had stipulated to the record and relevant rulings in Church of Scientology of California v. Commissioner, 83 T.C. 381 (1984), appeal pending, No. 85-7324 (9th Cir. argued August 8, 1985). The Graham court ruled in favor of the Commissioner, and it is on the authority of that decision that the Tax Court entered its judgment of deficiency in this case. Because neither party has objected to this procedure, we adopt the records and opinions in Church of Scientology of California and Graham

Page 1216

as part of the record before us in this case. 5

We will not repeat here the detailed description of Scientology and its practices recorded in the Tax Court's opinions in those cases, but will refer to the relevant findings throughout our opinion. One set of findings requires preliminary clarification. Following a fifty-one day trial, the Tax Court in Church of Scientology of California v. Commissioner upheld the Commissioner's revocation of the tax exemption of the Church's central branch, finding, inter alia, that the Church operated for a substantial commercial purpose, that its net earnings inured to the benefit of its officials, and that the Church violated public policy by conspiring, through burglaries of IRS offices and other unlawful means, to prevent the collection of taxes. In the Graham case and in this case, however, the Commissioner did not contest the taxpayers' assertions (1) that Scientology is a religion; and (2) that the Church of Scientology is a church within the meaning of section 170(b)(1)(A)(i) and a tax exempt religious organization under sections 170(c)(2), 501(a), and 501(c)(3) of the Code. Stipulation # 1, nos. 52-53, I Stipulated Record at 25. 6 Although preliminary resolution of these questions might have avoided some of the constitutional questions presented in this case, it might also have involved other serious constitutional issues, and so we accept the parties' stipulations for the purposes of this appeal.

II. Statutory Claim

Section 170 of the Internal Revenue Code allows a taxpayer to deduct from taxable income, any "contribution or gift to or for the use of ... [a] corporation, trust, or community chest, fund, or foundation ... organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, or to foster national or international amateur sports competition ..., or for the prevention of cruelty to children or animals." 26 U.S.C. Sec. 170(c). Since the Commissioner has not challenged the Church's status as a tax-exempt religious organization under the Code, the only statutory question before us is whether payments for auditing and training services are "contribution[s] or gift[s]" within the meaning of the Code. Our analysis of this question is framed by the Supreme Court's recent interpretation of the scope of the charitable contribution deduction:

The sine qua non of a charitable contribution is a transfer of money or property without adequate consideration. The taxpayer, therefore, must at a minimum demonstrate that he purposely contributed money or property in excess of any benefit he received in return.

United States v. American Bar Endowment, --- U.S. ----, 106 S.Ct. 2426, 2434, 91 L.Ed.2d 89 (1986). In other words, a payment to a charitable organization is tax deductible "only if and to the extent it exceeds the market value of the benefit received" and "only if the excess payment [was] 'made with the intention of making a gift.' " Id. 106 S.Ct at 2434.

The Tax Court in Graham found that because the taxpayers' payments to the Church of Scientology were made with the expectation of receiving a commensurate return benefit, namely, auditing and training services, and because such a benefit was actually received, the payments were not charitable contributions, but rather, quid pro quos. Hernandez does not allege that his intentions were any different from those of the Graham taxpayers. Nor does he claim that he contributed money in excess of the benefit he received in return. Rather, he argues that, as a matter

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of law, the return of a commensurate religious benefit, as opposed to an economic or financial benefit, cannot result in the denial of a section 170 deduction. Thus, he claims that all payments to churches for religious services--whether gifts or not--should be tax deductible under section 170.

Hernandez's position is contrary to the plain language and legislative history of section 170. Section 170 explicitly provides that payments to churches and other qualified organizations are deductible only if they are "contribution[s] or gift[s]." Though the Senate report indicates that Congress intended the phrase "contribution or gift" to include only "those contributions which are made with no expectation of a financial return commensurate with the amount of the gift," the report uses medical care as an illustration of a "financial" return. S.Rep. No. 1622, 83d Cong.2d Sess. 196, reprinted in 1954 U.S.Code Cong. & Admin.News 4621, 4830-31. We find no indication that Congress intended to distinguish the religious benefits sought by Hernandez from the medical, educational, scientific, literary, or other benefits that could likewise provide the quid for the quo of a nondeductible payment to a charitable organization.

Hernandez claims that while the government may assign economic value to secular benefits, it is impossible for the government to determine the economic value of religious benefits. As a practical matter, we note that the government has recognized the economic value assigned to secular services such as adoption services, symphony performances, and museum admission even though the benefits flowing from those services are, in theory, as difficult to monetarize as religious ones. See Murphy v. Commissioner, 54 T.C. 249 (1970) (mandatory fee paid to adoption agency is not tax deductible); Rev.Rul. 67-246, 1967-2 C.B. 104 (price of ticket to charity concert is deductible only to the extent it exceeds the value of admission); Rev.Rul. 68-432, 1968-2 C.B. 104 (cost of museum membership is nondeductible where taxpayer enjoys free admission to poetry readings and the like). In such cases the courts and the IRS look not to the intrinsic value of the benefits, but instead either to (1) the price set by the service providers, (2) the prices set by providers of similar services, or (3) the costs of providing the service.

We find precedent for the proposition that the government may similarly recognize the economic cost of religiously-oriented services that religious organizations provide to taxpayers. In Oppewal v. Commissioner, 468 F.2d 1000 (1st Cir.1972), we held that a payment to a parochial school was nondeductible to the extent that it was offset by the cost of providing a "religiously-oriented" education to the taxpayers' children. 7 See also Winters v. Commissioner, 468 F.2d 778 (2d Cir.1972); De Jong v. Commissioner, 309 F.2d 373 (9th Cir.1962). In these cases, the courts did not attempt to evaluate the secular or ecclesiastical value of a religious education; rather, they simply recognized the economic cost to the religious organization of...

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22 practice notes
  • Willhauck v. Halpin, No. 91-1328
    • United States
    • United States Courts of Appeals. United States Court of Appeals (1st Circuit)
    • October 11, 1991
    ...of discrimination against the defendant. See United States v. Michaud, 860 F.2d 495, 499-500 (1st Cir.1988); Hernandez v. Commissioner, 819 F.2d 1212, 1225-27 (1st Cir.1987), aff'd, 490 U.S. 680, 109 S.Ct. 2136, 104 L.Ed.2d 766 (1989). It must be shown that others similarly situated have no......
  • E.E.O.C. v. Townley Engineering & Mfg. Co., No. 87-2272
    • United States
    • United States Courts of Appeals. United States Court of Appeals (9th Circuit)
    • September 19, 1988
    ...Violated The Free Exercise Clause United States v. 848 F.2d 113 (8th federal marshal's no Slabaugh Cir.1988) regulation Hernandez v. 819 F.2d 1212 (1st federal tax Commissioner of Cir.1987) provision Internal Revenue Nelson v. I.R.S. 796 F.2d 164 (6th federal tax no Cir.1986) provision Unit......
  • Hernandez v. Commissioner of Internal Revenue Graham v. Commissioner of Internal Revenue, Nos. 87-963
    • United States
    • United States Supreme Court
    • June 5, 1989
    ...whether those rulings contain any unifying Page 683 principle that would embrace auditing and training session payments. Pp. 700-703. 819 F.2d 1212 (CA1 1987) and 822 F.2d 844 (CA9 1987), affirmed. MARSHALL, J., delivered the opinion of the Court, in which REHNQUIST, C.J., and WHITE, BLACKM......
  • Domegan v. Ponte, Nos. 91-1625
    • United States
    • United States Courts of Appeals. United States Court of Appeals (1st Circuit)
    • December 4, 1991
    ...damage award); Allen v. Higgins, 902 F.2d 682, 684-85 (8th Cir.1990) ($10,000 fee based on $1.00 damage award); Home Placement Serv., 819 F.2d at 1212 (awarding $16,989 for portion of litigation relating to nominal damage award); McCann v. Coughlin, 698 F.2d 112, 129 (2d Cir.1983) (that suc......
  • Request a trial to view additional results
22 cases
  • Willhauck v. Halpin, No. 91-1328
    • United States
    • United States Courts of Appeals. United States Court of Appeals (1st Circuit)
    • October 11, 1991
    ...of discrimination against the defendant. See United States v. Michaud, 860 F.2d 495, 499-500 (1st Cir.1988); Hernandez v. Commissioner, 819 F.2d 1212, 1225-27 (1st Cir.1987), aff'd, 490 U.S. 680, 109 S.Ct. 2136, 104 L.Ed.2d 766 (1989). It must be shown that others similarly situated have no......
  • E.E.O.C. v. Townley Engineering & Mfg. Co., No. 87-2272
    • United States
    • United States Courts of Appeals. United States Court of Appeals (9th Circuit)
    • September 19, 1988
    ...Violated The Free Exercise Clause United States v. 848 F.2d 113 (8th federal marshal's no Slabaugh Cir.1988) regulation Hernandez v. 819 F.2d 1212 (1st federal tax Commissioner of Cir.1987) provision Internal Revenue Nelson v. I.R.S. 796 F.2d 164 (6th federal tax no Cir.1986) provision Unit......
  • Hernandez v. Commissioner of Internal Revenue Graham v. Commissioner of Internal Revenue, Nos. 87-963
    • United States
    • United States Supreme Court
    • June 5, 1989
    ...whether those rulings contain any unifying Page 683 principle that would embrace auditing and training session payments. Pp. 700-703. 819 F.2d 1212 (CA1 1987) and 822 F.2d 844 (CA9 1987), affirmed. MARSHALL, J., delivered the opinion of the Court, in which REHNQUIST, C.J., and WHITE, BLACKM......
  • Domegan v. Ponte, Nos. 91-1625
    • United States
    • United States Courts of Appeals. United States Court of Appeals (1st Circuit)
    • December 4, 1991
    ...damage award); Allen v. Higgins, 902 F.2d 682, 684-85 (8th Cir.1990) ($10,000 fee based on $1.00 damage award); Home Placement Serv., 819 F.2d at 1212 (awarding $16,989 for portion of litigation relating to nominal damage award); McCann v. Coughlin, 698 F.2d 112, 129 (2d Cir.1983) (that suc......
  • Request a trial to view additional results

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