125 T.C. No. 14
UNITED STATES TAX COURT
MICHAEL AND MARLA SKLAR, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 395-01. Filed December 21, 2005.
Ps paid tuition and fees of $27,283 to two Jewish day schools for the religious and secular education of their five children in 1995. That amount includes $175 that Ps paid separately for an after-school Orthodox Jewish education class (Mishna) for one of their children.
Ps contend that they may deduct $15,000 of those payments as a charitable contribution under sec. 170, I.R.C., and that they are not liable for the accuracy- related penalty under sec. 6662, I.R.C.
Held: None of Ps’ payments for tuition, fees, and Mishna classes in 1995 are deductible as charitable contributions.
Held, further, Ps are not liable for the accuracy- related penalty under sec. 6662, I.R.C. - 2 -
Jeffrey I. Zuckerman, for petitioners.
Louis B. Jack, Sherri Wilder, and Julie E. Vandersluis, for
respondent.
COLVIN, Judge: Respondent determined a deficiency of
$10,198 in petitioners’ Federal income tax for 1995 and an
accuracy-related penalty of $2,040 under section 6662(a).1
After concessions,2 the issues for decision are:
1. Whether petitioners may deduct as a charitable
contribution $15,000 of the $27,283 in tuition and fees they paid
in 1995 to Orthodox Jewish day schools for the secular and
religious education of their five children, including $175 they
paid to one of the schools for Mishna classes. We hold that they
may not.
2. Whether petitioners are liable for the accuracy-related
penalty for 1995 because they deducted tuition payments for their
children’s secular and religious education. We hold that they
are not.
1 Unless otherwise specified, section references are to the Internal Revenue Code as amended, and Rule references are to the Tax Court Rules of Practice and Procedure. 2 Respondent concedes that petitioners are not liable for additional self-employment tax. Thus, petitioners are not entitled to a self-employment tax deduction. - 3 -
FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
A. Petitioners
1. Petitioners’ Family and Religion
Petitioners lived in North Hollywood, California, when they
filed the petition in this case. During 1995, Michael Sklar
(petitioner) was a self-employed certified public accountant.
Petitioner Marla Sklar (Mrs. Sklar) was a teacher. Petitioners
are Orthodox Jews.
During 1995, petitioners had five children of school age.
We refer to them by their initials: H.S., T.S., M.S., A.S., and
another T.S. It is important to petitioners to pass to their
children a devotion to their Jewish faith.
2. Schools Attended by Petitioners’ Children
Petitioners have educated all of their children at Emek
Hebrew Academy (Emek) and Yeshiva Rav Isacsohn Torath Emeth
Academy (Yeshiva Rav Isacsohn), private Orthodox Jewish day
schools in the Los Angeles area that provide classes for boys and
girls from preschool through eighth grade.
During the 1994-95 and 1995-96 school years (the school
years in issue), petitioners’ children attended the schools and
grade levels as follows: - 4 -
School School Year Child Attended Jan.-June 1995 Sept.-Dec. 1995
H.S. Yeshiva Rav Isacsohn 7th 8th T.S. Emek 6th 7th M.S. Emek 4th -- Yeshiva Rav Isacsohn -- 5th A.S. Emek 1st 2d T.S. Emek none preschool
3. Petitioners’ Educational Goals and Values
Petitioners did not consider sending their children to any
school other than an Orthodox Jewish school. Petitioners sent
their children to Emek and Yeshiva Rav Isacsohn because they
deeply believe that they should provide their children with an
Orthodox Jewish education in an Orthodox Jewish environment.
Petitioners were primarily concerned with the religious component
of their children’s education, but they were also interested in
the quality of their secular education.
B. Emek and Yeshiva Rav Isacsohn
1. General
During 1995, Emek and Yeshiva Rav Isacsohn were exempt from
Federal income tax under section 501(c)(3) and qualified as
organizations described in section 170(b)(1)(A)(ii); i.e., an
educational organization which normally maintains a regular
faculty and curriculum and normally has a regularly enrolled body
of pupils or students in attendance at the place where its
educational activities are regularly conducted. - 5 -
Emek and Yeshiva Rav Isacsohn gave their students daily
exposure to Jewish heritage and values. Students at Emek and
Yeshiva Rav Isacsohn were required to adhere to traditional
Orthodox Jewish dress codes.
In 1994, the Bureau of Jewish Education of Greater Los
Angeles3 mandated that all Jewish day schools in the Los Angeles
area obtain academic accreditation by 2000.4 The Western
Association of Schools and Colleges, Inc. (WASC), is a regional
association which accredits public and private schools, colleges,
and universities in the United States. Yeshiva Rav Isacsohn
became a candidate for academic accreditation by WASC on May 5,
1992. Emek became a candidate for academic accreditation by WASC
on June 28, 1995. WASC granted academic accreditation to both
schools after they completed a 3-year self-study program.
Yeshiva Rav Isacsohn was accredited as of July 1, 1996, and Emek
was accredited on July 1, 1998. Both schools were engaged in the
accreditation process during part or all of 1995. Their
accreditation was based in part on their programs during 1995.
3 The Bureau of Jewish Education of Greater Los Angeles provides educational support services and financial assistance to Jewish day schools in the Los Angeles area and imposes eligibility requirements on schools seeking its support. 4 Accreditation certifies to other educational institutions and to the general public that an institution meets established criteria or standards. - 6 -
Both schools earned accreditation for 6 years, which is the
maximum period of accreditation awarded by WASC.
2. Emek
a. General
In 1995, Emek believed its foremost goal was to help its
students develop a devotion to Jewish heritage and values. Emek
sought to provide a thorough and well-balanced curriculum in both
Torah and secular studies so every student could succeed, upon
eighth grade graduation, in the most rigorous yeshiva high
schools and other institutions of higher learning.
Boys and girls had separate classes, lunch, and recess at
Emek because of Orthodox Jewish religious considerations.
b. Religious Studies
The religious courses and periods of instruction at Emek
were virtually the same for both of the school years in issue.
On Monday through Thursday, boys had prayers from 8 to 9 a.m. and
religious classes from 9 a.m. to 12:20 p.m. The school day was
compressed on Friday to permit an early dismissal so that the
students could be home in time for the Sabbath (which begins on
Friday at sunset). On Friday, boys had religious classes from 9
to 11:40 a.m.
Girls had morning prayers each day from 8:15 to 9 a.m. On
Monday through Thursday, girls had four periods of Judaic studies
and afternoon prayers from 1 to 4:30 p.m. On Friday, girls had - 7 -
Judaic studies from 11:40 a.m. to 12:10 p.m., followed by lunch
from 12:10 to 12:30 p.m. and recess from 12:30 to 12:45 p.m. and
three periods of Judaic studies from 12:45 to 2:30 p.m.
c. Secular Studies
Emek aspired to provide a high-quality secular studies
program. On Monday through Thursday, boys had five secular
classes from 1 to 4:30 p.m. On Friday, boys had four secular
classes from 12:10 to 2:30 p.m.
On Monday through Thursday, girls had four periods of
secular studies from 9 to 11:40 a.m. After lunch and recess on
Monday through Thursday, girls had another period of secular
studies from 12:20 to 1 p.m. On Friday, girls had four periods
of secular studies from 9 to 11:40 a.m.
Emek had computer laboratories for its elementary and junior
high school students. Emek did not have an elementary science
enrichment teacher, a music appreciation teacher, or a full-time
librarian. Emek’s elementary students did not have use of a
gymnasium. They shared outdoor facilities with a nearby
synagogue. Emek’s junior high school students had athletic
facilities at Sherman Oaks, California.
d. Standardized Testing
During 1995, Emek administered the California Test of Basic
Skills (CTBS) to its students. The CTBS is a grade-level-
specific, nationally normed test of language skills, mathematics, - 8 -
social studies, history, and science. Emek invited parents to
come to the school to review their children’s CTBS scores so that
they could learn their children’s strengths and needs. Emek also
told each parent the percentile scores earned by each grade
level.
e. Mishna Class at Emek
One of petitioners’ children attended a Mishna class at Emek
during the first half of 1995, for which petitioners paid a
separate fee of $175. Mishna is part of the Jewish oral law and
is divided into six orders. The goal was for each boy to
complete one order each year and to complete all six orders
before completion of eighth grade.
The Mishna class was held for an hour after school
and for an hour on Sunday. The Mishna class at Emek was not part
of the regular curriculum.
3. Yeshiva Rav Isacsohn
In 1995, the primary goal of Yeshiva Rav Isacsohn was to
educate its students in the tenets of the Jewish faith. Yeshiva
Rav Isacsohn sought to provide a thorough and well-balanced
curriculum consisting of Orthodox Judaism and secular studies.
An additional goal of Yeshiva Rav Isacsohn was to prepare its
students for matriculation to yeshiva high schools and to attend - 9 -
a college or seminary. Yeshiva Rav Isacsohn made a concerted
effort to shelter its students from smoking, alcohol, and drugs.
Boys and girls at Yeshiva Rav Isacsohn occupied separate
campuses with separate principals and had no classes together.
There were no joint programs, and there was no time overlap in
common facilities such as the library.
In 1995, fifth grade boys had morning prayer and Judaic
studies from 8:25 a.m. to 2 p.m. on Monday through Thursday
(including an hour for lunch and recess), from 8:25 a.m. to 12
p.m. on Friday, and from 9 a.m. to 1 p.m. on Sunday with about 45
minutes per day for prayer. In 1995, eighth grade girls began
the day at 8:25 a.m. with prayer, followed by classes in
religious studies until 12:15 p.m. on Monday through Thursday,
and until 11:30 a.m. on Friday.
In 1995, fifth grade boys had secular studies from 2 to 5
p.m. on Monday through Thursday, and from 12 to 1:30 or 2:30 p.m.
on Friday, depending upon the time of year.
In 1995, from Monday to Thursday, seventh and eighth grade
girls had four periods of secular studies per day from 12:55 to
4:30 p.m., with afternoon prayer from 2:30 to 2:40 p.m., and
recess from 2:40 to 2:55 p.m. Girls had two periods of secular
study on Fridays. - 10 -
Yeshiva Rav Isacsohn had no science laboratory. The school
had a cart with science materials. Yeshiva Rav Isacsohn had no
computer room or gymnasium. Students played in school hallways
and the parking lot. Students were sometimes taken to a nearby
park.
4. Tuition and Fees at Emek and Yeshiva Rav Isacsohn
During the school years in issue, Emek and Yeshiva Rav
Isacsohn required petitioners to pay tuition, registration, and
certain other fees in order for their children to attend classes.
Emek and Yeshiva Rav Isacsohn required petitioners to sign an
agreement promising to pay the tuition and to give to each school
postdated checks covering all tuition and fees for the upcoming
school year.
Both Emek and Yeshiva Rav Isacsohn provided tuition
discounts to families based on financial need. Both schools
required parents seeking financial aid to submit detailed
financial information to the scholarship committee for each
school. Emek and Yeshiva Rav Isacsohn provided early
registration discounts, sibling discounts, and faculty discounts.
Petitioners did not seek or receive financial assistance from
Emek or Yeshiva Rav Isacsohn for the school years in issue.
An Orthodox Rabbinic ruling precluded either school from
expelling students from the Jewish studies program during the
school year for nonpayment of tuition. However, the ruling did - 11 -
not apply to expulsion from secular studies or to registration
for the following school year. The schools could refuse to
register a student whose tuition payments were delinquent.
If a student’s tuition payments became delinquent, e.g., if
a tuition check was not honored by the bank, both Emek and
Yeshiva Rav Isacsohn would send letters demanding payment or
threatening to bar the student from attending secular classes.
The annual income from tuition and registration fees for
both schools typically covers about 65 to 75 percent of that
school’s annual operating expenses. The rest of the annual
operating expenses are funded with grants from the Bureau of
Jewish Education, interest income, and other fundraising.
C. Petitioners’ Payments of Tuition and Fees
During 1995, petitioners paid a total of $27,283 to Emek and
Yeshiva Rav Isacsohn for tuition, registration and other
mandatory fees, and Mishna classes as follows:
Payment Emek Yeshiva Rav Isacsohn
Tuition $16,043 $8,050 Registration fees 900 400 Mishna classes 175 -0- Other 1,215 500 Total 18,333 8,950
D. Petitioners’ Tax Returns
1. 1991
Petitioners filed an amended tax return for 1991 in December
1993, in which they deducted as a charitable contribution a - 12 -
portion of the tuition payments they made in 1991 to their
children’s schools. Respondent apparently believed that
petitioners were Scientologists, because in February 1994
respondent wrote to petitioners to request verification of their
payments to the Church of Scientology. By letter to respondent
in May 1994, petitioner stated that the deductions were based on
tuition he had paid for religious education for his children.
In August 1994, respondent sent a letter to petitioners,
again erroneously stating that petitioners’ payments were to the
Church of Scientology. Petitioner telephoned the author of that
letter to say that he was not a Scientologist. By letter dated
November 7, 1994, respondent told petitioners that respondent
allowed in full their claim for a refund for 1991.
2. 1992-94
Petitioners filed an amended 1992 return and a 1993 return
in which they deducted part of their children’s tuition as a
charitable contribution. Petitioners received a refund based on
the amended 1993 return, and respondent did not disallow the
deduction claimed on their 1993 return.
Petitioners deducted 55 percent of their payments to Emek
and Yeshiva Rav Isacsohn as a charitable contribution deduction
for 1994. Petitioners described the deduction on a Form 8275,
Disclosure Statement, attached to their 1994 return. Respondent
examined petitioners’ 1994 tax return and disallowed the - 13 -
charitable contribution deduction. Litigation relating to
petitioners’ 1994 return is discussed below at paragraph E.
3. 1995
Petitioners timely filed their 1995 Federal income tax
return on October 15, 1996. Petitioners deducted $24,421 as a
charitable contribution for 1995, including $15,000 which
petitioners attributed to the cost of their children’s religious
education at Emek and Yeshiva Rav Isacsohn during 1995. That
amount ($15,000) is 54.97 percent (referred to here as 55
percent) of the total amount of tuition and fees that petitioners
paid to Emek and Yeshiva Rav Isacsohn during 1995. Petitioners
did not file a Form 8275 or otherwise describe their payment on
their 1995 return. Respondent had petitioners’ 1994 return under
examination when petitioners filed their 1995 return.
Pursuant to petitioner’s request, Emek and Yeshiva Rav
Isacsohn issued letters to petitioner dated November 5 and
November 10, 1997, respectively, in which each school estimated
that 45 percent of the education provided to petitioners’
children was secular and 55 percent was religious.
E. Litigation Relating to Petitioners’ 1994 Return
Petitioners filed a petition with the Court challenging
respondent’s notice of deficiency for 1994. In Sklar v.
Commissioner, T.C. Memo. 2000-118 (Sklar I), this Court held that
petitioners could not deduct as charitable contributions amounts - 14 -
for tuition and fees that they paid for their children’s
religious education that year. Our decision was affirmed on
appeal by the U.S. Court of Appeals for the Ninth Circuit in
Sklar v. Commissioner, 282 F.3d 610 (9th Cir. 2002), amending and
superseding 279 F.3d 697 (9th Cir. 2002).
OPINION
A. Whether Petitioners May Deduct Tuition and Fees They Paid to Orthodox Jewish Day Schools During 1995
1. Petitioners’ Contentions
Petitioners contend that they may deduct as a charitable
contribution $15,000 of the $27,283 they paid to Emek and Yeshiva
Rav Isacsohn in 1995.5 They deducted about 55 percent of those
payments because that was the portion of the school day that each
school estimated was devoted to religious studies.
Petitioners contend that: (a) The religious education that
Emek and Yeshiva Rav Isacsohn provided their children is an
“intangible religious benefit” as defined in sections 170(f)(8)
and 6115, and payments for intangible religious benefits are made
deductible by those sections; and (b) respondent’s disallowance
of their charitable contribution deduction for tuition and fees
violates the Establishment Clause of the First Amendment to the
U.S. Constitution because the Commissioner allows members of the
5 We separately discuss whether petitioners may deduct $175 of this amount they paid for Mishna classes. See Opinion par. A- 5, below. - 15 -
Church of Scientology to deduct as charitable contributions
“auditing” and “training” payments.6
2. Whether Petitioners’ Tuition Payments Qualify for Deduction Under Section 170 Pursuant to a Dual Payment Analysis
a. Introduction
To put our consideration of petitioners’ contentions in
context, we first consider whether petitioners’ payment of
tuition and fees is deductible under a dual payment analysis to
the extent the payments exceed the value of the secular education
received by their children. See United States v. Am. Bar
Endowment, 477 U.S. 105 (1986); Sklar v. Commissioner, supra at
612, 614 n.3, 621. We initially consider that issue without
regard to the enactment of sections 170(f)(8) and 6115 in 1993
and the Commissioner’s settlement with the Church of Scientology
on October 1, 1993. We then consider the effect (if any) of
those developments on our analysis.
b. Background
In 1967, the Commissioner issued Rev. Rul. 67-246, 1967-2
C.B. 104, in response to:
an increasing number of instances * * * in which the public has been erroneously advised in advertisements or solicitations by sponsors that the entire amounts
6 Petitioners contend that sec. 7491(a) requires respondent to bear the burden of proof on all factual issues in the case. We need not decide the point because our findings and analysis in this case do not depend on which party bears the burden of proof. - 16 -
paid for tickets or other privileges in connection with fund-raising affairs for charity are deductible. * * *
The examples that the Commissioner cited included tickets for
charitable events such as banquets, balls, bazaars, concerts, and
athletic events. In Rev. Rul. 67-246, supra, the Commissioner
ruled that, where a taxpayer receives an item of value for a
payment to a charitable organization, (1) the payment is not
deductible unless the taxpayer intends to make a gift; and (2)
any deduction is limited to the excess of the payment over the
fair market value of what is received in exchange.
Courts have also applied those two requirements. Thus, a
portion of a payment is deductible as a charitable contribution
under section 170 if the following two conditions are met:
“First, the payment is deductible only if and to the extent it
exceeds the market value of the benefit received. Second, the
excess payment must be ‘made with the intention of making a
gift.’” United States v. Am. Bar Endowment, supra at 117-118,
(quoting Rev. Rul. 67-246, 1967-2 C.B. at 105); Sklar v.
Commissioner, supra at 621.
In United States v. Am. Bar Endowment, supra at 118, the
Supreme Court said:
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 the value of any benefit he received in return. * * * - 17 -
A taxpayer may not deduct a payment as a charitable
contribution if the taxpayer receives a substantial benefit for a
payment to a charitable organization. Id. at 116-117; Ottawa
Silica Co. v. United States, 699 F.2d 1124, 1131 (Fed. Cir.
1983); Singer Co. v. United States, 196 Ct. Cl. 90, 449 F.2d 413,
420, 422 (1971); S. Rept. 1622, 83d Cong., 2d Sess. 196 (1954).
If the size of a taxpayer’s payment to a charity is clearly out
of proportion to the benefit received, the taxpayer may claim a
charitable contribution equal to the difference between a payment
to the charitable organization and the market value of the
benefit received in return on the theory that the payment has the
“dual character” of a purchase and a contribution. United States
v. Am. Bar Endowment, supra at 117. To be deductible, a
charitable contribution must be a gift; i.e., a transfer of
property without adequate consideration. Sec. 170(c); United
States v. Am. Bar Endowment, supra at 118; Sklar v. Commissioner,
supra at 612.
c. Dual Payment Theory and Tuition Paid for a Secular and Religious Education
It is well established that tuition paid to schools which
provide both secular and religious education is not deductible as
a charitable contribution because it is not paid with detached
and disinterested generosity and because the payor expects a
substantial benefit in return. Oppewal v. Commissioner, 468 F.2d
1000 (1st Cir. 1972), affg. T.C. Memo. 1971-273; Winters v. - 18 -
Commissioner, 468 F.2d 778, 780-781 (2d Cir. 1972), affg T.C.
Memo. 1971-290; DeJong v. Commissioner, 309 F.2d 373, 377-378
(9th Cir. 1962), affg. 36 T.C. 896 (1961); Fausner v.
Commissioner, 55 T.C. 620 (1971); McLaughlin v. Commissioner, 51
T.C. 233 (1968), affd. per curiam without published opinion 23
AFTR 2d 69-1763, 69-2 USTC par. 9467 (1st Cir. 1969); Bass v.
Commissioner, T.C. Memo. 1983-536; Ehrhart v. Commissioner, T.C.
Memo. 1981-567; Ryan v. Commissioner, T.C. Memo. 1969-212; Casey
v. Commissioner, T.C. Memo. 1965-282; Haak v. United States, 451
F. Supp. 1087 (W.D. Mich. 1978); see Brotman v. Commissioner,
T.C. Memo. 1977-65.
In DeJong v. Commissioner, supra, decided by the Court of
Appeals for the Ninth Circuit, the taxpayer made payments to a
religious organization which operated a school which imposed no
explicit tuition charges. Part of the payment was deductible as
a charitable contribution because the payment exceeded the amount
apparently expected to be paid by the parent to cover the
school’s estimated cost per student of operating the secular and
religious educational programs of the school. Id. at 379. That
kind of excess is not in dispute here; the only amounts in
dispute here were paid for tuition and fees. The Court of
Appeals in DeJong did not allow a charitable contribution
deduction for tuition paid for either the secular or the
religious education. - 19 -
d. Absence of Charitable Intent
Like the taxpayers in the cases just cited, petitioners
received a substantial benefit for their tuition payments. We
next consider whether petitioners had any charitable intent in
paying their children’s tuition. See United States v. Am. Bar
Endowment, 477 U.S. at 117-118; Sklar v. Commissioner, 282 F.3d
at 612. Petitioners do not so claim; and, as discussed next, the
record shows they could not have made that claim successfully.
In Sklar v. Commissioner, supra at 621, the Court of Appeals
said that petitioners did not show that “any dual payments they
may have made exceeded the market value of the secular education
their children received”; i.e., “the cost of a comparable secular
education offered by private schools”. The Court of Appeals also
said petitioners had “failed to show that they intended to make a
gift by contributing any such ‘excess payment’” and thus could
not prevail under United States v. Am. Bar Endowment, supra. Id.
The parties introduced into evidence information about
tuition costs and qualitative aspects of private schools,
primarily in the Los Angeles area. The record supports the
conclusion that tuition at Emek and Yeshiva Rav Isacsohn is
higher than the average tuition at Los Angeles area Catholic
schools, but equal to or lower than average tuition at other Los
Angeles area Orthodox Jewish schools (Ohr Eliyahu Academy and - 20 -
Yavneh Hebrew Academy), other Jewish day schools, and private
schools which do not provide religious education.7
Petitioners’ expert opined about the market value of a
secular education provided by Emek and Yeshiva Rav Isacsohn. He
apparently was proceeding from the assumption that a dual
payments analysis applies in this case; i.e., that petitioners
may deduct the excess of the tuition they paid over the market
value of a secular education at Emek and Yeshiva Rav Isacsohn.
However, more fundamentally, the record speaks to whether a dual
payments analysis applies in this case at all.
Petitioners must have a charitable intent to be entitled to
a deduction under section 170 for part of their tuition payments.
See Sklar v. Commissioner, supra at 612; see also sec. 170(c);
United States v. Am. Bar Endowment, 477 U.S. at 117-118. On the
basis of evidence in the record regarding tuition at various Los
7 The record also suggests several factors that may bear on the value of an elementary and secondary education, such as teachers’ salaries and seniority, whether teachers are certified, and student-teacher ratios; the amount of time students spend in classes and whether classes are held in the morning or afternoon or at different levels of difficulty; whether the school is accredited; the quality of libraries and facilities such as computer science and language laboratories, playgrounds and athletic facilities, and music and art facilities; nearness of the school to the student’s home; average standardized test scores; dress codes, personal safely of students, and prevalence of disciplinary problems; the success of the students at gaining admission to secular colleges; whether the school teaches the religion of the parents; and the percent of tuition devoted to administration costs. - 21 -
Angeles area schools we conclude: (1) Some schools charge more
tuition than Emek and Yeshiva Rav Isacsohn, and some charge less;
and (2) the amount of tuition petitioners paid is unremarkable
and is not excessive for the substantial benefit they received in
exchange; i.e., an education for their children. Thus,
petitioners have not shown that any part of their tuition
payments was a charitable contribution, and this case is
indistinguishable from those cited at par. B-2-c.
3. Whether Sections 170(f)(8) and 6115 Authorize Charitable Contribution Deductions for Tuition Payments to Schools Providing Religious and Secular Education
Petitioners contend that, under sections 170(f)(8) and 6115
as enacted in 1993, a portion of tuition payments to schools
providing a religious and secular education is deductible as a
charitable contribution.
a. Background
Sections 170(f)(8) and 6115 were enacted under the Omnibus
Budget Reconciliation Act of 1993, Pub. L. 103-66, secs. 13172
and 13173, 107 Stat. 455, to address “difficult problems of tax
administration”8 associated with taxpayers’ deductions of
8 See H. Rept. 103-111, at 785 (1993), 1993-3 C.B. 167, 361, which states in pertinent part:
Difficult problems of tax administration arise with respect to fundraising techniques in which an organization that is eligible to receive tax deductible contributions provides goods or services in consideration for payments from donors. Organizations (continued...) - 22 -
charitable contributions in connection with fund-raising events
involving quid pro quo transactions. To enhance taxpayer
compliance in this area, Congress imposed (a) a new
substantiation requirement under section 170(f)(8),9 and (b) a
8 (...continued) that engage in such fundraising practices often do not inform their donors that all or a portion of the amount paid by the donor may not be deductible as a charitable contribution. 9 Sec. 170(f)(8) provides in pertinent part:
(A) General rule.--No deduction shall be allowed under subsection (a) for any contribution of $250 or more unless the taxpayer substantiates the contribution by a contemporaneous written acknowledgment of the contribution by the donee organization that meets the requirements of subparagraph (B).
(B) Content of acknowledgment.--An acknowledgment meets the requirements of this subparagraph if it includes the following information:
(i) The amount of cash and a description (but not value) of any property other than cash contributed.
(ii) Whether the donee organization provided any goods or services in consideration, in whole or in part, for any property described in clause (i).
(iii) A description and good faith estimate of the value of any goods or services referred to in clause (ii) or, if such goods or services consist solely of intangible religious benefits, a statement to that effect.
For purposes of this subparagraph, the term “intangible religious benefit” means any intangible religious benefit which is provided by an organization organized (continued...) - 23 -
new disclosure requirement on charitable organizations under
section 6115.10
Section 170(f)(8) generally requires a taxpayer claiming a
charitable contribution deduction greater than $250 to
9 (...continued) exclusively for religious purposes and which generally is not sold in a commercial transaction outside the donative context. 10 Sec. 6115 provides:
SEC. 6115. DISCLOSURE RELATED TO QUID PRO QUO CONTRIBUTIONS.
(a) Disclosure requirement.--If an organization described in section 170(c) (other than paragraph (1) thereof) receives a quid pro quo contribution in excess of $75, the organization shall, in connection with the solicitation or receipt of the contribution, provide a written statement which--
(1) informs the donor that the amount of the contribution that is deductible for Federal income tax purposes is limited to the excess of the amount of any money and the value of any property other than money contributed by the donor over the value of the goods or services provided by the organization, and
(2) provides the donor with a good faith estimate of the value of such goods or services.
(b) Quid pro quo contribution.--For purposes of this section, the term “quid pro quo contribution” means a payment made partly as a contribution and partly in consideration for goods or services provided to the payor by the donee organization. A quid pro quo contribution does not include any payment made to an organization, organized exclusively for religious purposes, in return for which the taxpayer receives solely an intangible religious benefit that generally is not sold in a commercial transaction outside the donative context. - 24 -
substantiate the deduction by obtaining a contemporaneous written
acknowledgment of the contribution from the charitable
organization, including an estimate of the value of any goods or
services that the charitable organization provided to the
taxpayer. Under section 6115, a charitable organization that
receives a quid pro quo payment in excess of $75 must inform the
taxpayer that any charitable contribution deduction is limited to
the difference between the value of any money or property
transferred to the charitable organization and the value of any
goods or services that the taxpayer received from the charitable
organization.
Sections 170(f)(8) and 6115 except certain intangible
religious benefits from the substantiation and disclosure
requirements described above. Sections 170(f)(8) and 6115
provide, inter alia, that if a charitable organization is
organized exclusively for religious purposes and provides solely
an intangible religious benefit to a taxpayer in exchange for a
payment, the charitable organization need not assign a value to
the intangible religious benefit.
b. Petitioners’ Contentions
Petitioners contend that (1) sections 170(f)(8) and 6115
make tuition payments to religious schools deductible to the
extent the payments relate to religious education, (2) the
religious education that Emek and Yeshiva Rav Isacsohn provided - 25 -
to their children was an intangible religious benefit as defined
in those sections, and (3) their tuition payments are deductible
to the extent that the payments exceed the value of the secular
education their children received.11 Petitioners also contend
that they need not show that they intended to make a gift or
contribution to Emek and Yeshiva Rav Isacsohn.
c. Analysis
We disagree. Congress did not change what is deductible
under section 170 in these 1993 statutory changes. Neither
sections 170(f)(8) and 6115 nor the accompanying legislative
history suggests that Congress intended to expand the types of
payments that are deductible as charitable contributions under
11 Petitioners aver:
if a taxpayer pays $100 to his church and receives in return a book that could be purchased in any bookstore for $20 plus the right to sit in a certain pew at the church, $80 is deductible as a charitable contribution to the church, regardless of whether having the right to sit in that pew is worth $80 or more to the taxpayer, because that right is only an intangible religious benefit. Similarly here, to the extent petitioners’ dual payments to the schools exceeded the value of the secular studies they purchased, those payments are deductible as charitable contributions notwithstanding that petitioners received religious educations for their children worth that excess, because those religious educations are only intangible religious benefits. - 26 -
section 17012 or that Congress intended to overturn the long line
of cases (cited above) holding that no part of tuition paid to
religious schools is deductible as a charitable contribution.13
We believe that, if Congress had intended to overturn decades of
caselaw disallowing charitable contribution deductions for
tuition payments to schools providing a religious and secular
education, Congress would have made such an intention clear. It
did not.
12 See H. Conf. Rept. 103-213, at 566 (1993), 1993-3 C.B. 393, 444, stating that the sec. 6115 disclosure requirement “does not apply to transactions that have no donative element (e.g., sales of goods by a museum gift shop that are not, in part, donations).” Thus, a charitable organization need not make a sec. 6115 disclosure if the taxpayer did not intend to make a gift. 13 See H. Conf. Rept. 103-213, supra at 566 n.34, 1993-3 C.B. at 444, stating that the exception to the substantiation requirement for an intangible religious benefit “does not apply, for example, to tuition for education leading to a recognized degree, travel services, or consumer goods.” Along the same lines, H. Rept. 103-111, supra at 786 n.170, 1993-3 C.B. at 362, states:
The committee intends that, in the case of religious organizations, a quid pro quo contribution (for purposes of the substantiation and disclosure requirements) is limited to an exchange of goods or services that are generally available on a commercial basis, or advertised for an established price (e.g., tuition, travel and entertainment, and consumer goods). No inference is intended, however, whether or not any contribution outside of the scope of the bill’s substantiation or reporting requirements is deductible (in full or in part) under the present-law requirements of section 170. - 27 -
The exception to the substantiation and disclosure
requirements in sections 170(f)(8) and 6115 for intangible
religious benefits does not apply to the educational services at
issue here. The exception applies only where the organization is
organized exclusively for religious purposes. Petitioners
contend that Emek and Yeshiva Rav Isacsohn were organized and
existed solely for the religious purpose of allowing Jewish
parents to fulfill their religious obligation to teach their
children Torah, which includes providing a secular education in
an Orthodox Jewish environment.
We disagree that Emek and Yeshiva Rav Isacsohn were
organized exclusively for religious purposes. Emek and Yeshiva
Rav Isacsohn were organized and operated to provide both a
secular and a religious education. The Commissioner granted both
schools exemptions from tax under section 501(c)(3), and both
schools qualify as charitable organizations described in section
170(b)(1)(A)(ii), which pertains to educational organizations. A
substantial part of each day was spent on secular studies.
Petitioners concede that the education their children received in
1995 at Emek and Yeshiva Rav Isacsohn met educational
requirements imposed by the State of California. Both schools
were accredited by nonreligious accrediting agencies based in
part on their secular educational programs. - 28 -
Petitioners contend that Emek and Yeshiva Rav Isacsohn were
organized exclusively as religious organizations because
respondent excused both from filing Forms 990, Return of
Organization Exempt From Income Tax.14 We disagree.
Organizations exempt from tax under section 501(a) generally are
required to file Forms 990. Sec. 6033(a)(1). However, churches,
exempt organizations with gross receipts of not more than $5,000,
and exclusively religious activities of any religious order are
exempt from that requirement. The Commissioner may relieve any
exempt organization from filing a return where the Commissioner
determines that filing is not necessary to the efficient
administration of the internal revenue laws. Sec. 6033(a)(2)(B).
Emek and Yeshiva Rav Isacsohn do not qualify for the
exception to the general filing requirement provided in section
6033(a)(2)(A). Neither school is a church, an exempt
organization with gross receipts of not more than $5,000, or a
religious order. Given that Emek and Yeshiva Rav Isacsohn were
treated as charitable organizations described in section
170(b)(1)(A)(ii), i.e., educational organizations, we infer that
the Commissioner exercised discretion under section 6033(a)(2)(B)
to except Emek and Yeshiva Rav Isacsohn from filing Forms 990.
14 Petitioners rely in part on a letter from respondent’s counsel to petitioners’ counsel that petitioners attached to their reply brief. Because the letter in question was not offered into evidence at trial, the letter was returned to petitioners unfiled and is not part of the record. - 29 -
Emek and Yeshiva Rav Isacsohn provided a religious and
secular education for their students. Regardless of petitioners’
reasons for choosing to educate their children at Emek and
Yeshiva Rav Isacsohn, those schools did not provide exclusively
religious services.15
4. Whether the Agreement Reached Between the Internal Revenue Service and the Church of Scientology in 1993 Affects the Result in This Case
In Hernandez v. Commissioner, 490 U.S. 680, 702 (1989), the
U.S. Supreme Court held that the record did not support the
taxpayer’s claim of entitlement to deduct as charitable
contributions payments to the Church of Scientology for what the
Church of Scientology calls auditing and training. However, the
parties stipulated that an agreement dated October 1, 1993,
between the Commissioner and the Church of Scientology settled
several longstanding issues. According to a letter sent to
petitioners in 1994 from the chief of the adjustments branch,
Fresno Service Center, the settlement agreement between the
Commissioner and the Church of Scientology allows individuals to
15 Petitioners point out that the 1993 legislative history states that the exception in secs. 170(f)(8) and 6115 for intangible religious benefits does not apply to education leading to a recognized degree. Petitioners contend that the secular education provided by Emek and Yeshiva Rav Isacsohn does not lead to a recognized degree. In light of our conclusion that secs. 170(f)(8) and 6115 are substantiation and disclosure provisions, we need not consider this contention further. - 30 -
claim, as charitable contributions, 80 percent of the cost of
qualified religious services.
Petitioners contend that, because of that closing agreement,
the Commissioner is constitutionally required to allow a
deduction for tuition paid to schools that provide religious and
secular education to the extent that the tuition paid exceeds the
value of the secular education. Petitioners contend that the
religious education that the Jewish day schools provide in
exchange for tuition is jurisprudentially indistinguishable from
the auditing and training that the Church of Scientology provides
to its members in exchange for a fixed fee.
The U.S. Court of Appeals for the Ninth Circuit previously
rejected petitioners’ arguments about the Church of Scientology
in Sklar v. Commissioner, 282 F.3d at 619-620. Petitioners’
tuition payments were made to schools that in part provide
secular educational services, not to exclusively religious
organizations. Thus, the analysis in United States v. Am. Bar
Endowment, 477 U.S. 105 (1986), controls here. We conclude that
the agreement reached between the Internal Revenue Service and
the Church of Scientology referred to in the letter sent to
petitioners in 1994 from respondent’s Fresno Service Center does
not affect the result in this case.16
16 In Sklar v. Commissioner, 282 F.3d 610, 612 n.3 (9th Cir. 2002), affg. T.C. Memo. 2000-118, the U.S. Court of Appeals (continued...) - 31 -
5. Whether Petitioners May Deduct Their Payment for Mishna Classes
contribution the $175 that they paid for Mishna classes that Emek
provided separately from its regular classes and charged
separately from its regular tuition and fees. We disagree.
Petitioners’ payment for Mishna classes at Emek is not made
deductible merely because Emek offers those classes separately
from their regular educational programs, and Emek charges, and
petitioners pay, separately from Emek’s other charges.
Petitioners did not intend those payments to be a contribution or
gift to Emek within the meaning of section 170(c).17
6. Conclusion
We conclude that petitioners are not entitled to a
charitable contribution deduction under section 170 for any part
16 (...continued) said it is strongly inclined to the view that sec. 170 was not amended in 1993 to permit deductions for which the consideration is intangible religious benefits, and that Hernandez v. Commissioner, 490 U.S. 680, 702 (1989), is still controlling. That court also said that it need not rule definitively on this point because petitioners’ claims did not meet the requirements for partial deductibility of dual payments established by United States v. Am. Bar Endowment, 477 U.S. 105 (1986). Similarly, we have decided this case by applying United States v. Am. Bar Endowment, supra. 17 Emek is an educational organization, not a religious organization. We need not consider under what circumstances payments to a religious organization for religious instruction are deductible. - 32 -
of the tuition, including the fee for Mishna classes, they paid
to Emek or Yeshiva Rav Isacsohn in 1995.18
B. Whether Petitioners Are Liable for the Accuracy-Related Penalty
Respondent contends that petitioners are liable for the
accuracy-related penalty under section 6662 for deducting $15,000
of their tuition. We disagree.
Taking into account respondent’s concession, petitioners’
tax understatement is $3,209. That amount is not substantial for
purposes of section 6662 because it does not exceed the greater
of 10 percent of the amount required to be shown or $5,000. See
sec. 6662(d)(1)(A).
Respondent contends that petitioners knew that they lacked a
reasonable basis for claiming the disallowed deductions because,
unlike the return they filed for 1994, petitioners did not file a
Form 8275 or otherwise call attention to the deduction. We
disagree. Respondent permitted similar deductions for
petitioners’ 1991, 1992, and 1993 tax returns.
Petitioners timely filed their 1995 return on October 15,
1996. Petitioners’ 1994 return was being audited when they filed
their 1995 return pursuant to an extension on October 15, 1996.
Petitioners filed their petition in Sklar I on January 27, 1997.
18 In light of our conclusion, we need not decide whether petitioners complied with substantiation requirements imposed by sec. 170(f)(8). - 33 -
Decision was entered in that case on April 5, 2000, and affirmed
early in 2002. Thus, when they filed their 1995 return,
petitioners knew that respondent had allowed them to claim
similar deductions for 1991-93, and they knew their 1994 return
was being audited; but they did not know they would not prevail
on this issue for 1994. Under these circumstances, we conclude
that petitioners had a reasonable basis for claiming the
deductions that respondent disallowed, and that petitioners
believed in good faith that they could deduct the $15,000 for
tuition and Mishna payments on their 1995 return.
To reflect concessions and the foregoing,
Decision will be
entered under Rule 155.
[Reporter’s Note: This Opinion was amended by Order dated February
6, 2006.]