Hernandez v. Commissioner of Internal Revenue Graham v. Commissioner of Internal Revenue

CourtUnited States Supreme Court
Citation490 U.S. 680,109 S.Ct. 2136,104 L.Ed.2d 766
Docket Number87-1616,Nos. 87-963,s. 87-963
Decision Date05 June 1989

The Church of Scientology (Church) provides "auditing" sessions designed to increase members' spiritual awareness and training courses at which participants study the tenets of the faith and seek to attain the qualifications necessary to conduct auditing sessions. Pursuant to a central tenet known as the "doctrine of exchange," the Church has set forth schedules of mandatory fixed prices for auditing and training sessions which vary according to a session's length and level of sophistication and which are paid to branch churches. Under § 170 of the Internal Revenue Code of 1954, petitioners each sought to deduct such payments on their federal income tax returns as a "charitable contribution," which is defined as a "contribution or gift" to eligible donees. After respondent Commissioner of Internal Revenue (Commissioner or IRS) disallowed these deductions on the ground that the payments were not "charitable contributions," petitioners sought review in the Tax Court. That court upheld the Commissioner's decisions and rejected petitioners' constitutional challenges based on the Establishment and Free Exercise Clauses of the First Amendment. The Courts of Appeals affirmed on petitioners' separate appeals.

Held: Payments made to the Church's branch churches for auditing and training services are not deductible charitable contributions under § 170. Pp689-703.

(a) Petitioners' payments are not "contribution[s] or gift[s]" within the meaning of § 170. The legislative history of the "contribution or gift" limitation reveals that Congress intended to differentiate between unrequited payments to qualified recipients, which are deductible, and payments made to such recipients with some expectation of a quid pro quo in terms of goods or services, which are not deductible. To ascertain whether a given payment was made with such an expectation, the external features of the transaction in question must be examined. Here, external features strongly suggest a quid pro quo exchange of petitioners' money for auditing and training sessions, since the Church established fixed prices for such sessions in each branch church; calibrated particular prices to sessions of particular lengths and sophistication levels; returned a refund if services went unperformed; distributed "account cards" for monitoring prepaid, but as-yet-unclaimed, services; and categorically barred the provision of free sessions. Petitioners' argument that a quid pro quo analysis is inappropriate when a payment to a church either generates purely religious benefits or guarantees access to a religious service is unpersuasive, since, by its terms, § 170 makes no special preference or such payments and its legislative history offers no indication that this omission was an oversight. Moreover, petitioners' deductibility proposal would expand the charitable contribution deduction far beyond what Congress has provided to include numerous forms of payments that otherwise are not, or might not be, deductible. Furthermore, the proposal might raise problems of entanglement between church and state, since the IRS and reviewing courts would be forced to differentiate "religious" benefits or services from "secular" ones. Pp. 689-694.

(b) Disallowance of petitioners' § 170 deductions does not violate the Establishment Clause. Petitioners' argument that § 170 creates an unconstitutional denominational preference by according disproportionately harsh tax status to those religions that raise funds by imposing fixed costs for participation in certain religious practices is unpersuasive. Section 170 passes constitutional muster, since it does not facially differentiate among religious sects but applies to all religious entities, and since it satisfies the requisite three-pronged inquiry under the Clause. First, the section is neutral both in design and purpose, there being no allegation that it was born of animus to religion in general or to Scientology in particular. Second, its primary effect—encouraging gifts to charitable entities, including but not limited to religious organizations—does not advance religion, there being no allegation that it involves direct governmental action endorsing religion or a particular religious practice. Its primary secular effect is not rendered unconstitutional merely because it happens to harmonize with the tenets of religions that raise funds by soliciting unilateral donations. Third, the section threatens no excessive entanglement between church and state. Although the IRS must ascertain the prices of a religious institution's services, the regularity with which such payments are waived, and other pertinent information about the transaction, this is merely routine regulatory interaction that does not involve the type of inquiries into religious doctrine, delegation of state power, or detailed monitoring and close administrative contact that would violate the nonentanglement command. Nor does the application of § 170 require the Government to place a monetary value on particular religious benefits. Petitioners' claim to the contrary raises no need for valuation, since they have alleged only that their payments are fully exempt from a quid pro quo analysis—not that some portion of those payments is deductible because it exceeds the value of the acquired service. In any event, the need to ascertain what portion of a payment was a purchase and what portion was a contribution does not ineluctably create entanglement problems, since the IRS has eschewed benefit-focused valuation in cases where the economic value of a good or service is elusive, and has instead employed a valuation method which inquires into the cost (if any) to the donee of providing the good or service. This method involves merely administrative inquiries that, as a general matter, bear no resemblance to the kind of governmental surveillance that poses an intolerable risk of entanglement. Pp. 695-698.

(c) Disallowance of petitioners' § 170 deductions does not violate the Free Exercise Clause. Although it is doubtful that, as petitioners allege, the disallowance imposes a substantial burden on the central practice of Scientology by deterring adherents from engaging in auditing and training sessions and by interfering with their observance of the doctrine of exchange, United States v. Lee, 455 U.S. 252, 260, 102 S.Ct. 1051, 1056-1057, 71 L.Ed.2d 127, establishes that even a substantial burden is justified by the broad public interest in maintaining a sound tax system, free of myriad exceptions flowing from a wide variety of religious beliefs. That this case involves federal income taxes, rather than the Social Security taxes considered in iLee, is of no consequence. Also of no consequence is the fact that the Code already contains some deductions and exemptions, since the guiding principle is that a tax must be uniformly applicable to all, except as Congress provides explicitly otherwise. Id., at 261, 102 S.Ct., at 1057. Indeed, the Government's interest in avoiding an exemption is more powerful here than in Lee, in the sense that the claimed exemption there stemmed from a specific doctrinal obligation not to pay taxes, whereas there is no limitation to petitioners' argument that they are entitled to an exemption because an incrementally larger tax burden interferes with their religious activities. Pp. 698-700.

(d) Petitioners' assertion that disallowing their claimed deductions conflicts with the IRS' longstanding practice of permitting taxpayers to deduct payments to other religious institutions in connection with certain religious practices must be rejected in the absence of any specific evidence about the nature or structure of such other transactions. In the absence of those facts, this Court cannot appraise accurately whether IRS revenue rulings allowing deductions for particular religious payments correctly applied a quid pro quo analysis to the practices in question and cannot discern whether those rulings contain any unifying 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, BLACKMUN, and STEVENS, JJ., joined. O'CONNOR, J., filed a dissenting opinion, in which SCALIA, J., joined, post, p. 704. BRENNAN and KENNEDY, JJ., took no part in the consideration or decision of the cases.

Michael J. Graetz, New Haven, Conn., for petitioners.

Thomas W. Merrill, Washington, D.C., for respondent.

Justice MARSHALL delivered the opinion of the Court.

Section 170 of the Internal Revenue Code of 1954 (Code), 26 U.S.C. § 170, permits a taxpayer to deduct from gross income the amount of a "charitable contribution." The Code defines that term as a "contribution or gift" to certain eligible donees, including entities organized and operated exclusively for religious purposes.1 We granted certiorari to determine whether taxpayers may deduct as charitable contributions payments made to branch churches of the Church of Scientology (Church) in order to receive services known as "auditing" and "training." We hold that such payments are not deductible.


Scientology was founded in the 1950's by L. Ron Hubbard. It is propagated today by a "mother church" in California and by numerous branch churches around the world. The mother Church instructs laity, trains and ordains ministers, and creates new congregations. Branch churches, known as "franchises" or "missions," provide Scientology services at the local level, under the supervision of the mother Church. Church of Scientology of...

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