Hernandez v. Commissioner
490 U.S. 680 (1989)

Annotate this Case

U.S. Supreme Court

Hernandez v. Commissioner, 490 U.S. 680 (1989)

Hernandez v. Commissioner of Internal Revenue

No. 87-963

Argued November 28, 1988

Decided June 5, 1989*

490 U.S. 680




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. Pp. 490 U. S. 689-703.

(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'

Page 490 U. S. 681

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 for 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. 490 U. S. 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

Page 490 U. S. 682

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. 490 U. S. 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, 455 U. S. 260, 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 Lee, 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 455 U. S. 261. 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. 490 U. S. 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

Page 490 U. S. 683

principle that would embrace auditing and training session payments. Pp. 490 U. S. 700-703.

819 F.2d 1212 and 822 F.2d 844, 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. 490 U. S. 704. BRENNAN and KENNEDY, JJ., took no part in the consideration or decision of the cases.

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. [Footnote 1] We granted certiorari to determine

Page 490 U. S. 684

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 California v. Commissioner, 823 F.2d 1310, 1313 (CA9 1987), cert. denied,486 U. S. 1015 (1988).

Scientologists believe that an immortal spiritual being exists in every person. A person becomes aware of this spiritual dimension through a process known as "auditing." [Footnote 2] Auditing involves a one-to-one encounter between a participant (known as a "preclear") and a Church official (known as

Page 490 U. S. 685

an "auditor"). An electronic device, the E-meter, helps the auditor identify the preclear's areas of spiritual difficulty by measuring skin responses during a question and answer session. Although auditing sessions are conducted one on one, the content of each session is not individually tailored. The preclear gains spiritual awareness by progressing through sequential levels of auditing, provided in short blocks of time known as "intensives." 83 T.C. 575, 577 (1984), aff'd, 822 F.2d 844 (CA9 1987).

The Church also offers members doctrinal courses known as "training." Participants in these sessions study the tenets of Scientology and seek to attain the qualifications necessary to serve as auditors. Training courses, like auditing sessions, are provided in sequential levels. Scientologists are taught that spiritual gains result from participation in such courses. 83 T.C. at 577.

The Church charges a "fixed donation," also known as a "price" or a "fixed contribution," for participants to gain access to auditing and training sessions. These charges are set forth in schedules, and prices vary with a session's length and level of sophistication. In 1972, for example, the general rates for auditing ranged from $625 for a 12 1/2-hour auditing intensive, the shortest available, to $4,250 for a 100-hour intensive, the longest available. Specialized types of auditing required higher fixed donations: a 12 1/2-hour "Integrity Processing" auditing intensive cost $750; a 12 1/2-hour "Expanded Dianetics" auditing intensive cost $950. This system of mandatory fixed charges is based on a central tenet of Scientology known as the "doctrine of exchange," according to which any time a person receives something, he must pay something back. Id. at 577-578. In so doing, a Scientologist maintains "inflow" and "outflow," and avoids spiritual decline. 819 F.2d 1212, 1222 (CA1 1987).

The proceeds generated from auditing and training sessions are the Church's primary source of income. The Church promotes these sessions not only through newspaper,

Page 490 U. S. 686

magazine, and radio advertisements, but also through free lectures, free personality tests, and leaflets. The Church also encourages, and indeed rewards with a 5% discount, advance payment for these sessions. 822 F.2d at 847. The Church often refunds unused portions of prepaid auditing or training fees, less an administrative charge.

Petitioners in these consolidated cases each made payments to a branch church for auditing or training sessions. They sought to deduct these payments on their federal income tax returns as charitable contributions under § 170. Respondent Commissioner, the head of the Internal Revenue Service (IRS), disallowed these deductions, finding that the payments were not charitable contributions within the meaning of § 170. [Footnote 3]

Petitioners sought review of these determinations in the Tax Court. That court consolidated for trial the cases of the three petitioners in No. 87-1616: Katherine Jean Graham, Richard M. Hermann, and David Forbes Maynard. The petitioner in No. 87-963, Robert L. Hernandez, agreed to be bound by the findings in the consolidated Graham trial, reserving his right to a separate appeal. Before trial, the Commissioner stipulated that the branch churches of Scientology are religious organizations entitled to receive tax-deductible charitable contributions under the relevant sections of the Code. This stipulation isolated as the sole statutory issue whether payments for auditing or training sessions constitute "contribution[s] or gift[s]" under § 170. [Footnote 4]

Page 490 U. S. 687

The Tax Court held a 3-day bench trial during which the taxpayers and others testified and submitted documentary exhibits describing the terms under which the Church promotes and provides auditing and training sessions. Based on this record, the court upheld the Commissioner's decision. 83 T.C. 575 (1984). It observed first that the term "charitable contribution" in § 170 is synonymous with the word "gift," which case law had defined "as a voluntary transfer of property by the owner to another without consideration therefor." Id. at 580, quoting DeJong v. Commissioner, 36 T.C. 896, 899 (1961) (emphasis in original), aff'd, 309 F.2d 373 (CA9 1962). It then determined that petitioners had received consideration for their payments, namely, "the benefit of various religious services provided by the Church of Scientology." 83 T.C. at 580. The Tax Court also rejected the taxpayers' constitutional challenges based on the Establishment and Free Exercise Clauses of the First Amendment.

The Courts of Appeals for the First Circuit in petitioner Hernandez's case, and for the Ninth Circuit in Graham, Hermann, and Maynard's case, affirmed. The First Circuit rejected Hernandez's argument that, under § 170, the IRS' ordinary inquiry into whether the taxpayer received consideration for his payment should not apply to "the return of a commensurate religious benefit, as opposed to an economic or financial benefit." 819 F.2d at 1217 (emphasis in original).

Page 490 U. S. 688

The court found

"no indication that Congress intended to distinguish the religious benefits sought by Hernandez from the medical, educational, scientific, literary, or other benefits that could likewise provide the quid for the quo of a nondeductible payment to a charitable organization."

Ibid. The court also rejected Hernandez's argument that it was impracticable to put a value on the services he had purchased, noting that the Church itself had "established and advertised monetary prices" for auditing and training sessions, and that Hernandez had not claimed that these prices misstated the cost of providing these sessions. Id. at 1218.

Hernandez's constitutional claims also failed. Because § 170 created no denominational preference on its face, Hernandez had shown no Establishment Clause violation. Id. at 1218-1221. As for the Free Exercise Clause challenge, the court determined that denying the deduction did not prevent Hernandez from paying for auditing and training sessions, and thereby observing Scientology's doctrine of exchange. Moreover, granting a tax exemption would compromise the integrity and fairness of the tax system. Id. at 1221-1225.

The Ninth Circuit also found that the taxpayers had received a "measurable, specific return . . . as a quid pro quo for the donation" they had made to the branch churches. 822 F.2d at 848. The court reached this result by focusing on "the external features" of the auditing and training transactions, an analytic technique which "serves as an expedient for any more intrusive inquiry into the motives of the payor." Ibid. Whether a particular exchange generated secular or religious benefits to the taxpayer was irrelevant, for under § 170, "[i]t is the structure of the transaction, and not the type of benefit received, that controls." Id. at 849.

The Ninth Circuit also rejected the taxpayers' constitutional arguments. The tax deduction provision did not violate the Establishment Clause, because § 170 is "neutral in its design," and reflects no intent "to visit a disability on a particular

Page 490 U. S. 689

religion." Id. at 853. Furthermore, that the taxpayers would

"have less money to pay to the Church, or that the Church [would] receive less money, [did] not rise to the level of a burden on appellants' ability to exercise their religious beliefs."

Id. at 851. Indeed, because the taxpayers could still make charitable donations to the branch church, they were "not put to the choice of abandoning the doctrine of exchange or losing the government benefit, for they may have both." Ibid. Finally, the court noted that the compelling governmental interest in "the maintenance of a sound and uniform tax system" counseled against granting a free exercise exemption. Id. at 852-853.

We granted certiorari, 485 U.S. 1005 (1988); 486 U.S. 1022 (1988), to resolve a Circuit conflict concerning the validity of charitable deductions for auditing and training payments. [Footnote 5] We now affirm.


For over 70 years, federal taxpayers have been allowed to deduct the amount of contributions or gifts to charitable, religious, and other eleemosynary institutions. See 2 B. Bittker, Federal Taxation of Income, Estates and Gifts

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