Hernandez v. Commissioner of Internal Revenue/Dissent Connor

by Sandra Day O'Connor

Justice O'CONNOR, with whom Justice SCALIA joins, dissenting.

The Court today acquiesces in the decision of the Internal Revenue Service (IRS) to manufacture a singular exception to its 70-year practice of allowing fixed payments indistinguishable from those made by petitioners to be deducted as charitable contributions. Because the IRS cannot constitutionally be allowed to select which religions will receive the benefit of its past rulings, I respectfully dissent.

The cases before the Court have an air of artificiality about them that is due to the IRS' dual litigation strategy against the Church of Scientology (Church). As the Court notes, ante, at 686-687, n. 4, the IRS has successfully argued that the mother Church of Scientology was not a tax-exempt organization from 1970 to 1972 because it had diverted profits to the founder of Scientology and others, conspired to impede collection of its taxes, and conducted almost all of its activities for a commercial purpose. See Church of Scientology of California v. Commissioner, 83 T.C. 381 (1984), aff'd, 823 F.2d 1310 (CA9 1987), cert. denied, 486 U.S. 1015, 108 S.Ct. 1752, 100 L.Ed.2d 214 (1988). In the cases before the Court today, however, the IRS decided to contest the pay ents made to Scientology under 26 U.S.C. § 170 rather than challenge the tax-exempt status of the various branches of the Church to which the payments were made. According to the Deputy Solicitor General, the IRS challenged the payments themselves in order to expedite matters. Tr. of Oral Arg. 26-29. See also Neher v. Commissioner, 852 F.2d 848, 850-851 (CA6 1988). As part of its litigation strategy in these cases, the IRS agreed to several stipulations which, in my view, necessarily determine the proper approach to the questions presented by petitioners.

The stipulations, relegated to a single sentence by the Court, ante, at 686, established that Scientology was at all relevant times a religion; that each Scientology branch to which payments were made was at all relevant times a "church" within the meaning of § 170(b)(1)(A)(i); and that Scientology was at all times a "corporation" within the meaning of § 170(c)(2) and exempt from general income taxation under 26 U.S.C. § 501(a). See App. 38, &Par; 52-53; 83 T.C. 575, 576 (1984), aff'd, 822 F.2d 844 (CA9 1987). As the Solicitor General recognizes, it follows from these stipulations that Scientology operates for " 'charitable purposes' " and puts the "public interest above the private interest." Brief for Respondent 30. See also Neher, supra, at 855. Moreover, the stipulations establish that the payments made by petitioners are fixed donations made by individuals to a tax-exempt religious organization in order to participate in religious services, and are not based on "market prices set to reap the profits of a commercial moneymaking venture." Staples v. Commissioner, 821 F.2d 1324, 1328 (CA8 1987), cert. pending, No. 87-1382. The Tax Court, however, appears to have ignored the stipulations. It concluded, perhaps relying on its previous opinion in Church of Scientology, that "Scientology operates in a commercial manner in providing [auditing and training]. In fact, one of its articulated goals is to make money." 83 T.C., at 578. The Solicitor General has duplicated the error here, referring on numerous occasions to the commercial nature of Scientology in an attempt to negate the effect of the stipulations. See Brief for Respondent 13-14, 23, 25, 44.

It must be emphasized that the IRS' position here is not based upon the contention that a portion of the knowledge received from auditing or training is of secular, commercial, nonreligious value. Thus, the denial of a deduction in these cases bears no resemblance to the denial of a deduction for religious-school tuition up to the market value of the secularly useful education received. See Oppewal v. Commissioner, 468 F.2d 1000 (CA1 1972); Winters v. Commissioner, 468 F.2d 778 (CA2 1972); DeJong v. Commissioner, 309 F.2d 373 (CA9 1962). Here the IRS denies deductibility solely on the basis that the exchange is a quid pro quo, even though the quid is exclusively of spiritual or religious worth. Respondent cites no instances in which this has been done before, and there are good reasons why.

When a taxpayer claims as a charitable deduction part of a fixed amount given to a charitable organization in exchange for benefits that have a commercial value, the allowable portion of that claim is computed by subtracting from the total amount paid the value of the physical benefit received. If at a charity sale one purchases for $1,000 a painting whose market value is demonstrably no more than $50, there has been a contribution of $950. The same would be true if one purchases a $1,000 seat at a charitable dinner where the food is worth $50. An identical calculation can be made where the quid received is not a painting or a meal, but an intangible such as entertainment, so long as that intangible has some market value established in a noncontributory context. Hence, one who purchases a ticket to a concert, at the going rate for concerts by the particular performers, makes a charitable cont ibution of zero even if it is announced in advance that all proceeds from the ticket sales will go to charity. The performers may have made a charitable contribution, but the audience has paid the going rate for a show.

It becomes impossible, however, to compute the "contribution" portion of a payment to a charity where what is received in return is not merely an intangible, but an intangible (or, for that matter a tangible) that is not bought and sold except in donative contexts so that the only "market" price against which it can be evaluated is a market price that always includes donations. Suppose, for example, that the charitable organization that traditionally solicits donations on Veterans Day, in exchange for which it gives the donor an imitation poppy bearing its name, were to establish a flat rule that no one gets a poppy without a donation of at least $10. One would have to say that the "market" rate for such poppies was $10, but it would assuredly not be true that everyone who "bought" a poppy for $10 made no contribution. Similarly, if one buys a $100 seat at a prayer breakfast receiving as the quid pro quo food for both body and soul-it would make no sense to say that no charitable contribution whatever has occurred simply because the "going rate" for all prayer breakfasts (with equivalent bodily food) is $100. The latter may well be true, but that "going rate" includes a contribution.

Confronted with this difficulty, and with the constitutional necessity of not making irrational distinctions among taxpayers, and with the even higher standard of equality of treatment among religions that the First Amendment imposes, the Government has only two practicable options with regard to distinctively religious quids pro quo: to disregard them all, or to tax them all. Over the years it has chosen the former course.

Congress enacted the first charitable contribution exception to income taxation in 1917. War Revenue Act of 1917, ch. 63, § 1201(2), 40 Stat. 330. A mere two years later, in A.R.M. 2, 1 Cum.Bull. 150 (1919), the IRS gave its first blessing to the deductions of fixed payments to religious organizations as charitable contributions:

"[T]he distinction of pew rents, assessments, church dues, and the like from basket collections is hardly warranted by the act. The act reads 'contributions' and 'gifts.' It is felt that all of these come within the two terms.

"In substance it is believed that these are simply methods of contributing although in form they may vary. Is a basket collection given involuntarily to be distinguished from an envelope system, the latter being regarded as 'dues'? From a technical angle, the pew rents may be differentiated, but in practice the so-called 'personal accommodation' they may afford is conjectural. It is believed that the real intent is to contribute and not to hire a seat or pew for personal accommodation. In fact, basket contributors sometimes receive the same accommodation informally." The IRS reaffirmed its position in 1970, ruling that "[p]ew rents, building fund assessments and periodic dues paid to a church . . . are all methods of making contributions to the church and such payments are deductible as charitable contributions." Rev.Rul. 70-47, 1970-1 Cum.Bull. 49. Similarly, notwithstanding the "form" of Mass stipends as fixed payments for specific religious services, see infra, at 709, the IRS has allowed charitable deductions of such payments. See Rev.Rul. 78-366, 1978-2 Cum.Bull. 241.

These rulings, which are "official interpretation[s] of [the tax laws] by the [IRS]," Rev. Proc. 78-24, 1978-2 Cum.Bull. 503, 504, flatly contradict the Solicitor General's claim that there "is no administrative practice recognizing that payments made in exchange for religious benefits are tax deductible." Brief for Respondent 16. Indeed, an Assistant Commissioner of the IRS recently explained in a "question and answer guidance package" to tax-exe pt organizations that "[i]n contrast to tuition payments, religious observances generally are not regarded as yielding private benefits to the donor, who is viewed as receiving only incidental benefits when attending the observances. The primary beneficiaries are viewed as being the general public and members of the faith. Thus, payments for saying masses, pew rents, tithes, and other payments involving fixed donations for similar religious services, are fully deductible contributions." IRS Official Explains New Examination-Education Program on Charitable Contributions to Tax-Exempt Organizations, BNA Daily Report for Executives, Special Report No. 186, J-1, J-3 (Sept. 26, 1988). Although this guidance package may not be as authoritative as IRS rulings, see ante, at 703, n. 13, in the absence of any contrary indications it does reflect the continuing adherence of the IRS to its practice of allowing deductions for fixed payments for religious services.

There can be no doubt that at least some of the fixed payments which the IRS has treated as charitable deductions, or which the Court assumes the IRS would allow taxpayers to deduct, ante, at 690-691, are as "inherently reciprocal," ante, at 2145, as the payments for auditing at issue here. In exchange for their payment of pew rents, Christians receive particular seats during worship services. See Encyclopedic Dictionary of Religion 2760 (1979). Similarly, in some synagogues attendance at the worship services for Jewish High Holy Days is often predicated upon the purchase of a general admission ticket or a reserved seat ticket. See J. Feldman, H. Fruhauf, & M. Schoen, Temple Management Manual, ch. 4, p. 10 (1984). Religious honors such as publicly reading from Scripture are purchased or auctioned periodically in some synagogues of Jews from Morocco and Syria. See H. Dobrinsky, A Treasury of Sephardic Laws and Customs 164, 175-177 (1986). Mormons must tithe their income as a necessary but not sufficient condition to obtaining a "temple recommend," i.e., the right to be admitted into the temple. See The Book of Mormon, 3 Nephi 24:7-12 (1921); Reorganized Church of Jesus Christ of Latter-day Saints, Book of Doctrine and Covenants § 106:1b (1978); Corporation of Presiding Bishop of Church of Jesus Christ of Latter-day Saints v. Amos, 483 U.S. 327, 330, n. 4, 107 S.Ct. 2862, 2865, n. 4, 97 L.Ed.2d 273 (1987). A Mass stipend-a fixed payment given to a Catholic priest, in consideration of which he is obliged to apply the fruits of the Mass for the intention of the donor-has similar overtones of exchange. According to some Catholic theologians, the nature of the pact between a priest and a donor who pays a Mass stipend is "a bilateral contract known as do ut facias. One person agrees to give while the other party agrees to do something in return." 13 New Catholic Encyclopedia, Mass Stipend, p. 715 (1967). A finer example of a quid pro quo exchange would be hard to formulate.

This is not a situation where the IRS has explicitly and affirmatively reevaluated its longstanding interpretation of § 170 and decided to analyze all fixed religious contributions under a quid pro quo standard. There is no indication whatever that the IRS has abandoned its 70-year practice with respect to payments made by those other than Scientologists. In 1978, when it ruled that payments for auditing and training were not charitable contributions under § 170, the IRS did not cite much less try to reconcile-its previous rulings concerning the deductibility of other forms of fixed payments for religious services or practices. See Rev.Rul. 78-189, 1978-1 Cum.Bull. 68 (equating payments for auditing with tuition paid to religious schools).

Nevertheless, respondent now attempts to reconcile his previous rulings with his decision in these cases by relying on a distinction between direct and incidental benefits in exchange for payments made to a charitable organization. This distinction, adu brated as early as the IRS' 1919 ruling, recognizes that even a deductible charitable contribution may generate certain benefits for the donor. As long as the benefits remain "incidental" and do not indicate that the payment was actually made for the "personal accommodation" of the donor, the payment will be deductible. It is respondent's view that the payments made by petitioners should not be deductible under § 170 because the "unusual facts in these cases . . . demonstrate that the payments were made primarily for 'personal accommodation.' " Brief for Respondent 41. Specifically, the Solicitor General asserts that "the rigid connection between the provision of auditing and training services and payment of the fixed price" indicates a quid pro quo relationship and "reflect[s] the value that petitioners expected to receive for their money." Id., at 16.

There is no discernible reason why there is a more rigid connection between payment and services in the religious practices of Scientology than in the religious practices of the faiths described above. Neither has respondent explained why the benefit received by a Christian who obtains the pew of his or her choice by paying a rental fee, a Jew who gains entrance to High Holy Day services by purchasing a ticket, a Mormon who makes the fixed payment necessary for a temple recommend, or a Catholic who pays a Mass stipend, is incidental to the real benefit conferred on the "general public and members of the faith," BNA Daily Report, at J-3, while the benefit received by a Scientologist from auditing is a personal accommodation. If the perceived difference lies in the fact that Christians and Jews worship in congregations, whereas Scientologists, in a manner reminiscent of Eastern religions, see App. 78-83 (testimony of Dr. Thomas Love), gain awareness of the "immortal spiritual being" within them in one-to-one sessions with auditors, ante, at 684-685, such a distinction would raise serious Establishment Clause problems. See Wallace v. Jaffree, 472 U.S. 38, 69-70, 105 S.Ct. 2479, 2497, 86 L.Ed.2d 29 (1985) (O'CONNOR, J., concurring in judgment); Lynch v. Donnelly, 465 U.S. 668, 687-689, 104 S.Ct. 1355, 1366-1367, 79 L.Ed.2d 604 (1984) (concurring opinion). The distinction is no more legitimate if it is based on the fact that congregational worship services "would be said anyway," Brief for Respondent 43, without the payment of a pew rental or stipend or tithe by a particular adherent. The relevant comparison between Scientology and other religions must be between the Scientologist undergoing auditing or training on one hand and the congregation on the other. For some religions the central importance of the congregation achieves legal dimensions. In Orthodox Judaism, for example, certain worship services cannot be performed and Scripture cannot be read publicly without the presence of at least 10 men. 12 Encyclopaedia Judaica, Minyan, p. 68 (1972). If payments for participation occurred in such a setting, would the benefit to the 10th man be only incidental while for the personal accommodation of the 11th? In the same vein, will the deductibility of a Mass stipend turn on whether there are other congregants to hear the Mass? And conversely, does the fact that the payment of a tithe by a Mormon is an absolute prerequisite to admission to the temple make that payment for admission a personal accommodation regardless of the size of the congregation?

Given the IRS' stance in these cases, it is an understatement to say that with respect to fixed payments for religious services "the line between the taxable and the immune has been drawn by an unsteady hand." United States v. Allegheny County, 322 U.S. 174, 176, 64 S.Ct. 908, 910, 88 L.Ed. 1209 (1944) (Jackson, J.). This is not a situation in which a governmental regulation "happens to coincide or harmonize with the tenets of some or all religions," McGowan v. Maryland, 366 U.S. 420, 442, 81 S.Ct. 1101, 1113, 6 L.Ed.2d 393 (1961), but does not violate the Establishment Clause because it is founded on a neutral, secular basis. See Bob Jones University v. United States, 461 U.S. 574, 604, n. 30, 103 S.Ct. 2017, 2034-2035, n. 30, 76 L.Ed.2d 157 (1983). Rather, it involves the differential application of a standard based on constitutionally impermissible differences drawn by the Government among religions. As such, it is best characterized as a case of the Government "put[ting] an imprimatur on [all but] one religion." Gillette v. United States, 401 U.S. 437, 450, 91 S.Ct. 828, 836, 28 L.Ed.2d 168 (1971). That the Government may not do.

The Court attempts to downplay the constitutional difficulty created by the IRS' different treatment of other fixed payments for religious services by accepting the Solicitor General's invitation to let the IRS make case-specific quid pro quo determinations. See ante, at 702 ("The IRS' application of the 'contribution or gift' standard may be right or wrong with respect to these other faiths, or it may be right with respect to some religious practices and wrong with respect to others"). See also Brief for Respondent 41-42. As a practical matter, I do not think that this unprincipled approach will prove helpful. The Solicitor General was confident enough in his brief to argue that, "even without making a detailed factual inquiry," Mormon tithing does not involve a quid pro quo arrangement. Id., at 43-44. At oral argument, however, the Deputy Solicitor General conceded that if it was mandatory, tithing would be distinguishable from the "ordinary case of church dues." Tr. of Oral Arg. 36-37. If the approach suggested by the Solicitor General is so malleable and indefinite, it is not a panacea and cannot be trusted to secure First Amendment rights against arbitrary incursions by the Government.

On a more fundamental level, the Court cannot abjure its responsibility to address serious constitutional problems by converting a violation of the Establishment Clause into an "administrative consistency argument," ante, at 703, with an inadequate record. It has chosen to ignore both longstanding, clearly articulated IRS practice, and the failure of the respondent to offer any cogent, neutral explanation for the IRS' refusal to apply this practice to the Church of Scientology. Instead, the Court has pretended that whatever errors in application the IRS has committed are hidden from its gaze and will, in any event, be rectified in due time.

In my view, the IRS has misapplied its longstanding practice of allowing charitable contributions under § 170 in a way that violates the Establishment Clause. It has unconstitutionally refused to allow payments for the religious service of auditing to be deducted as charitable contributions in the same way it has allowed fixed payments to other religions to be deducted. Just as the Minnesota statute at issue in Larson v. Valente, 456 U.S. 228, 102 S.Ct. 1673, 72 L.Ed.2d 33 (1982), discriminated against the Unification Church, the IRS' application of the quid pro quo standard here-and only here-discriminates against the Church of Scientology. I would reverse the decisions below.

Notes