Opposition Brief — Hernandez v. Commissioner

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«MAR 14 1988

JOSEPH F. SPPNIOL, JR

No. 87-963

In the Supreme Court of the United States

OCTOBER TERM, 1987

ROBERT L. HERNANDEZ, PETITIONER

Vv.

COMMISSIONER OF INTERNAL REVENUE

ON PETITION FOR A WRIT OF CERTIORARI TO

THE UNITED STATES COURT OF APPEALS FOR

THE FIRST CIRCUIT

BRIEF FOR THE RESPONDENT

CHARLES FRIED

Solicitor General

WILLIAM S. ROSE, JR.

Assistant Attorney General

ROBERT S. POMERANCE

DAVID M. MOORE

Altorneys

Department of Justice

Washington, D.C. 20530

(202) 633-2217

is deductible from taxable

“contribution or gift” under Section 170 of the

Internal Revenue Code.

(1)

QUESTIONS PRESENTED

iting or training sessions

Whether a payment to the Church of Scientology

Whether the First Amendment requires that such a

payment be deductible from taxable income.

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TABLE OF CONTENTS

Page

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Jurisdiction 2c eee ee |

Statement ©. 6 eeeeee 2

DisCUSSION 220 ee eee eee 6

Conclusion 2.2.0.0 cee een _ id

TABLE OF AUTHORITIES

Cases:

Church of Scientology v. Commissioner, 83 T.C. 381

(1984), aff'd, 823 F.2d 1310 (9th Cir. 1987), petition for

cert. pending, No. 87-1377 ................0.00045. 4

Graham v. Commissioner, 83 T.C. 575 (1984), aff'd, 822

F.2d 844 (9th Cir. 1987)... 0000 eee ee 2, 3, 4,

5, 6, 7, 8, 9, 10

Miller v. Commissioner, 829 F.2d 500 (4th Cir. 1987),

petition for cert. pending, No. 87-1449 .............. 6,7,9

Staples v. Commissioner, 821 F.2d 1324 (8th Cir. 1987),

petition for cert. pending, No. 87-1382 ............. 6, 7, 10

United States v. American Bar Endowment, 477 U.S. 105

SEE 6.6450 044 404664545005046454 04450044504 044408 5,7

Constitution and statutes:

U.S. Const. Amend. I .... 2.000 oe ee eee 5,6, 8,9

Internal Revenue Code (26 U.S.C.):

§ 170(& Supp. HII)... 2. ee eee eee 2, 5, 6, 7, 8

§ 17O(D)I MAM) © ee 4

IR 6 24.0 6 046-4.6-40-046 44-00'056060406 50556404 800 2

ED ig occa bane annehs6sdunsbensdesseseess 4

EE a ccc un csenseseseseressessensasisvess 4

Miscellaneous:

A.R.M. 2,1 C.B. 150 (1919)... 0... eee eee y

(111)

Jn the Supreme Court of the United States

OCTOBER TERM, 1987

No. 87-963

ROBERT L. HERNANDEZ, PETITIONER

COMMISSIONER OF INTERNAL REVENUE

ON PETITION FOR A WRIT OF CERTIORARI TO

THE UNITED STATES COURT OF APPEALS FOR

THE FIRST CIRCUIT

BRIEF FOR THE RESPONDENT

OPINIONS BELOW

The opinion of the court of appeals (Pet. App. la-28a)

is reported at 819 F.2d 1212. The decision and order of the

Tax Court (Pet. App. 43a) is unreported.

JURISDICTION

The judgment of the court of appeals (Pet. App. 29a)

was entered on June 1, 1987. A petition for rehearing was

denied on July 15, 1987 (Pet. App. 30a). On October 6,

1987, Justice Brennan extended the time within which to

file a petition for a writ of certiorari to and including

December 12, 1987, and the petition was filed on

December 11, 1987. The jurisdiction of this Court ts in-

voked under 28 U.S.C. 1254(1).

(1)

STATEMENT

1. Petitioner paid $7,338 to a branch of the Church of

Scientology in 1981 and claimed that payment as a char-

itable deduction on his federal income tax return under

Section 170 of the Internal Revenue Code,' which permits

a deduction for a “contribution or gift” to certain eligible

donees (see 1.R.C. § 170(c)). On audit, the Commissioner

disallowed that deduction and determined a tax deficiency

of $2,245 (Pet. App. la-2a). Petitioner filed a petition in

the Tax Court for review of the Commissioner’s deter-

mination. There was no trial in the Tax Court, however,

nor any other evidentiary submission. Instead, the parties

entered into a stipulation to be bound by “any relevant

findings of fact or conclusions of law” (excluding those

relating to “subjective intent”) to be made by the Tax

Court in three consolidated “test cases” that were to be

tried. The stipulation further provided that the record in

the test cases, “to the extent relevant,” would be deemed

part of the record in this case for the purpose of appeal.

See Pet. App. 3a, 44a-45a.? After the Tax Court decided

the “test cases” in favor of the Commissioner (Graham v.

Commissioner, 83 T.C. 575 (1984), aff'd, 822 F.2d 844

(9th Cir. 1987), reprinted in Pet. App. 3la-41a), the court

entered a decision and order in the instant case “on the

authority of Graham,” finding a deficiency of $2,245 (Pet.

App. 43a).

' Unless otherwise noted, all statutory references are to the Internal

Revenue Code (26 U.S.C.), as amended (the Code or I.R.C.).

- The government entered into the same stipulation with numerous

other taxpayers who had filed petitions in the Tax Court challenging

the denial of a charitable deduction for payments to the Church ot

Scientology.

2. Inthe Graham case, the Tax Court entered findings

of fact pertaining to the general operation of the Church

of Scientology. Like petitioner, each taxpayer in Graham

had made payments to a branch of the Church of Scien-

tology’ and had sought to deduct them on his or her in-

come tax return as charitable contributions (Pet. App.

35a-36a). These payments were made in exchange for

“auditing” and “training” services provided by the Church.

Scientologists believe that auditing heips an individual to

achieve a higher level of “spiritual competence.” Auditing

is administered in a One-to-one session by a trained Scien-

tologist who asks the auditee questions and measures his

skin responses during the answers by means of an elec-

tronic device. “Training” courses study the doctrines of

Scientology and are believed to yield further spiritual

benefits. See id. at 33a; see also id. at 2a nn.1 & 2.

The Church charges a “fixed donation” for training and

auditing, which is almost never waived.4 The Church

“operates in a commercial manner” in providing these

services (Pet. App. 35a). It promotes its services through

lectures and radio and newspaper advertising. It gives a

standard discount for payments made weil in advance of

the services to be rendered, and it issues refunds of those

payments if the services ultimately are not received. /d. at

34a-35Sa.

In addition to these findings, the Graham decision was

based on certain stipulations concerning the Church

3 The Church of Scientology consists both of a central branch, the

“mother” Church of Scientology of California, and of numerous

branches that are separate entities for tax purposes.

4 Indeed, the Church’s official policy letter states that “[p]rice cuts

are forbidden under any guise” and “PROCESSING MAY NEVER

BE GIVEN AWAY BY AN ORG.” (Pet. App. 34a n.6). Free services

are awarded only to fully contracted staff, on the condition that the

staff member fulfill the terms of his contract (/bid.).

entered into for purposes of that litigation (see Pet. App.

46a-56a). The government did not contest that Scientology

is a religion and that each Scientology organization to

which the taxpayers paid money is a church within the

meaning of Section 170(b)(1)(A)(i) of the Code and a tax-

exempt religious organization under Section 501(c)(3) of

the Code that is an eligible donee of charitable contribu-

tions under Section 170(c)(2) of the Code. Pet. App. 32a.°

After making these factual findings, the Tax Court in

Graham ruled that the payments in question were not con-

tributions, but rather were non-deductible payments made

to purchase services (Pet. App. 36a-38a). The court ex-

plained that the payments “were not voluntary transfers

without consideration, but were made with the expectation

of receiving a commensurate benefit in return” (/d. at 38a).

The court continued (/bid.): “[W]here contributions are

made with the expectation of receiving a benefit, and such

5 The question of the validity of the “mother” Church’s tax exemp-

tion was the subject of separate litigation in the Tax Court. The par-

ties entered into the stipulations here in order to allow Graham and

the other charitable contribution cases to go forward without awaiting

the result of the tax exemption litigation, which would not necessarily

affect the outcome of those cases. It was further stipulated in

Graham, however, that the findings of fact in the tax exemption litiga-

tion and the record there could be incorporated in the Graham opin-

ion (Pet. App. 32a). After a lengthy trial, the Tax Court ultimately

held that the “mother” Church failed to qualify as an exempt

organization for the years 1970-1972 because it diverted its profits to

its founder and other persons, violated public policy by conspiring to

impede the collection of taxes, and conducted virtually all of its ac-

tivities, including auditing and training, for a commercial purpose.

See Church of Scientology v. Commissioner, 83 T.C. 381, 415-423,

473-480 (1984), aff'd, 823 F.2d 1310 (9th Cir. 1987), petition for cert.

pending, No. 87-1377. That determination is not necessarily control-

ling, however, for other tax years or for other branches of the Church.

benefit is received, the transfer is not a charitable con-

tribution, but rather a quid pro quo.” The court also re-

jected the contention that the denial of the deduction

violated the First Amendment (id. at 38a-41a).

3. In the present case, the court of appeals affirmed

the Tax Court’s decision in the Commissioner’s favor that

had been entered on the authority of Graham (Pet. App.

la-28a). The court stated (id. at Sa) that its inquiry into

whether the payments were “contribution[{s] or gift{s]”

within the meaning of Section 170 of the Code was framed

by this Court’s recent analysis of that question in United

States v. American Bar Endowment, 477 U.S. 105, 118

(1986): “The sine qua non of a charitable contribution is a

transfer of money or property without adequate con-

sideration. The taxpayer, therefore, must at a minimum

demonstrate that he purposely contributed money or

property in excess of the value of any benefit he received in

return.” The court rejected petitioner’s contention that this

inquiry into whether a particular payment was a contribu-

tion or, instead, pari of a quid pro quo arrangement did

not apply to payments for religious services. The court

stated (Pet. App. 6a): “We find no indication that Con-

gress intended to distinguish the religious benefits sought

by [petiticner] from the medical, educational, scientific,

literary, or other benefits that could likewise provide the

quid tor the quo of a nondeductible payment to a

charitable organization.” Relying on the factual findings

in Graham, the court concluded that petitioner had not

demonstrated that the payments in question were in fact

charitable contributions (id. at 8a-9a).

The court also rejected petitioner’s constitutional claims

(Pet. App. 9a-28a). The court held that Section 170 does

not create any denominational preferences on its face (Pet.

App. 9a-10a) or as applied in this case (/d. at 10a-15a). The

court explained that the statute is neutral; “gifts to all

charitable organizations are tax deductible; quid pro quo

payments are not” (id. at 14a). The court also held that the

denial of a deduction did not violate petitioner’s right

under the Free Exercise Clause to make “fixed donations”

in exchange for auditing and training classes (id. at

15a-24a), and that petitioner had not shown that he was

the victim of selective prosecution in connection with the

denial of the claimed deduction (id. at 24a-28a).

DISCUSSION

1. While we disagree with petitioner that the court of

appeals erred in affirming the denial of his claimed deduc-

tion, we agree that there exists a conflict in the circuits on

the statutory question presented. Accordingly, we do not

oppose the petition with respect to that question. The deci-

sion below, along with two other court of appeals deci-

sions, conflicts with the decision of the Eighth Circuit in

Staples v. Commissioner, 821 F.2d 1324 (1987), petition

for cert. pending, No. 87-1382. Because of the stipulation

to be bound by the findings of a test case, which was

entered into by the parties in numerous cases where the

taxpayers, like petitioner, are seeking to take a tax deduc-

tion for certain payments made to the Church of Scien-

tology (see page 2, supra), there have now been four

decisions issued by different courts of appeals that have

considered the statutory question presented here on the

basis of the same findings of fact. Three courts of appeals,

including the court below, have held that these payments

are not contributions within the meaning of Section 170 of

the Code. See Graham v. Commissioner, 822 F.2d 844

(9th Cir. 1987); Miller v. Commissioner, 829 F.2d 500 (4th

Cir. 1987), petition for cert. pending, No. 87-1449. But the

Eighth Circuit in Staples has held that these payments are

deductible contributions. These conflicting holdings, if

permitted to stand, will result in disparate tax treatmeni

for similarly situated taxpayers.

The Eighth Circuit in Staples rested its decision on a

legal proposition that was flatly rejected by the court

below. The Eighth Circuit concluded that, under the

stipulation, the auditing and training received in exchange

for the payments made by petitioner must be viewed as

“strictly religious practices” (821 F.2d at 1326, 1328). It

then held that, as a matter of law, participation in such

religious practices cannot be treated as “a recognizable

return benefit” for purposes of determining whether a par-

ticular payment is a contribution (/bid.). For that reason,

the court found “inapplicable” (/d. at 1328) the analysis set

forth by this Court in United States v. American Bar En-

dowment, 447 U.S. 105, 118 (1986), for determining

whether a payment is a contribution under Section 170 of

the Code (see page 5, supra). The broad rule advanced by

the Eighth Circuit —excepting payments for religious serv-

ices from the analysis applicable to all other claims for a

tax-deductible contribution—cannot be squared with the

decision below, which specifically rejected this proffered

exception and held the American Bar Endowment analysis

fully applicable. See Pet. App. 5a; see also Graham, 822

F.2d at 849 (“the deductibility of a contribution does not

depend on whether the benefits received in return are

secular or religious”); Miller, 829 F.2d at 504 (“no

justification * * * for drawing a distinction between

‘religious’ and other services that produce intangible

benefits”). Indeed, the court of appeals in Staples express-

ly acknowledged its “difference with the First Circuit” in

Hernandez on this point (821 F.2d at 1327).

2. Because of the stipulations entered into between the

taxpayers and the government in the cases presenting the

issue decided below, only the Ninth Circuit’s decision in

Graham was based on an actual record that contains find-

ings of fact directly pertaining to the case before the court.

We believe that it would be preferable for this Court to

consider the statutory question presented here, if possible,

in the concrete factual context that exists in Graham,

rather than in the situation that exists in the cases, like this

one, that were decided in the Tax Court on the basis of a

stipulation to be bound by the findings in Graham. A peti-

tion for a writ of certiorari in Graham is due in this Court,

on one extension, on March 30, 1988, and counsel for the

taxpayers in that case (who is also counsel for the peti-

tioner here) has informally advised us that he intends to

file a petition by that date. We do not intend to oppose

that petition. Accordingly, although we believe that

resolution by this Court of the conflict in the circuits on

the statutory question presented here would be ap-

propriate, we do not urge the Court to grant plenary

review in this case, but rather suggest that this case be held

pending disposition of the petition to be filed in Graham.

3. In addition to his contention (Pet. 10-24) that the

court of appeals erroneously interpreted Section 170 of the

Code, petitioner briefly argues (Pet. 25-27) that the denial

of his claimed deduction violates the First Amendment.

This contention was correctly rejected by the court of ap-

peals and by all the other courts of appeals that have con-

sidered it. In the absence of a conflict in the circuits, there

is no reason for this Court to review this unmeritorious

contention.

The thrust of petitioner’s First Amendment claim ap-

pears to be the assertion that denial of his claimed deduc-

tion reflects a “denominational preference” (Pet. 25). There

is no basis for this assertion. Section 170 is neutral; it per-

mits gifts to qualifying organizations to be deducted, but

payments to such organizations that are not gifts are not

deductible. The Revenue Ruling to which petitioner refers

(Pet. 27) that recognizes “pew rents” and “church dues” as

“ordinarily” deductible contributions was based on the

conclusion that “the real intent is to contribute and not to

hire a seat or a pew for personal accommodation”

(A.R.M. 2, 1 C.B. 150 (1919), reprinted in Pet. App. 57a).

Petitioner has laid no factual predicate for invoking that

ruling. The factual finding in Graham was that auditing

and training payments were “not voluntary transfers,” but

“were made with the expectation of receiving a commen-

Surate benefit in return” (Pet. App. 38a), and petitioner

has not disputed that he was in that respect similarly

situated to the Graham taxpayers. Nor has petitioner

shown or claimed that that ruling has not been applied

equally to pew or membership fees for churches of all

denominations, including the Church of Scientology. Ac-

cordingly, there is no basis for concluding that the denial

of petitioner’s claimed deduction proceeded frem any

discrimination among religions that would raise First

Amendment concerns. The courts have correctly rejected

the constitutional claims in this case and similar cases, and

there is no reason for this Court to review them. See Pet.

App. 10a-28a; Miller, 829 F.2d at 505-506; Graham, 822

F.2d at 850-853.

CONCLUSION

The petition for a writ of certiorari should be disposed

of as appropriate in light of the disposition of the pending

petition for certiorari in Commissioner v. Staples, No.

87-1382, and the petition for a writ of certiorari to be filed

from the judgment in Graham v. Commissioner, 822 F.2d

844 (9th Cir. 1987).

Respectfully submitted.