No. 00-70753
__________________________
IN THE
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
__________________________
MICHAEL SKLAR and
MARLA SKLAR,
Appellants,
v.
COMMISSIONER OF INTERNAL REVENUE,
Appellee.
__________________________
On Appeal from the United States Tax Court
__________________________
REPLY BRIEF FOR APPELLANTS
__________________________
Jeffrey I. Zuckerman
Mark J. Feldman
CURTIS, MALLET-PREVOST,
COLT & MOSLE LLP
1801 K Street, N.W.
Suite 1205 L
Washington, D.C. 20006-1301
(202) 452-7350
Attorneys for Appellants
December 14, 2000
TABLE OF CONTENTS
SUMMARY OF ARGUMENT2
ARGUMENT
4
I. The Internal Revenue Code permits taxpayers to deduct as charitable contributions the portion of tuition payments to religious day schools attributable to religious instruction.
4
II. Taxpayers' substantiation of their deductions was sufficient.
15
III. Permitting members of the Church of Scientology to deduct as charitable contributions their tuition payments for religious instruction, but prohibiting Taxpayers from doing the same because they practice another religion, is an egregious violation by the Government of Taxpayers' First Amendment rights.
18
CONCLUSION
25
TABLE OF AUTHORITIES
Cases:Christensen v. Commissioner, 786 F.2d 1382 (9th Cir. 1986)
16
DeJong v. Commissioner, 309 F.2d 373 (9th Cir. 1962)
2
Epperson v. Arkansas, 393 U.S. 97 (1968)
19
Everson v. Board of Education, 330 U.S. 1 (1947)
19
Gillette v. United States, 401 U.S. 437 (1971)
19
Gomez v. United States, 490 U.S. 858
18
Graham v. Commissioner, 822 F.2d 844 (9th Cir. 1987), aff'd sub nom Hernandez v. Commissioner, 490 U.S. 680 (1989)
5
Haines v. Kerner, 404 U.S. 519 (1972)
16
Hernandez v. Commissioner, 490 U.S. 680 (1989)
2,3,5,6,
7,8,15
United States v. American Bar Endowment, 477 U.S. 105 (1986)
7,11,12
Statutes:
Internal Revenue Code (26 U.S.C.)
§170
passim
§6103
23
§6115
7,8
§6651(a)(1)
1
Omnibus Budget Reconciliation Act of 1993,
P.L. No. 103-66, 107 Stat. 312
7,8
Other:
H.R. Conf. Report No. 103-213,
reprinted in 1993 U.S.C.C.A.N. 1088
8,12
IRS Field Service Advice Memorandum,
Project No. F.S.A. 94
11
IRS Notice 95-15, 1995-1 C.B. 299
3,15,16,17
Rev. Rul. 78-189, 1978-1 C.B. 68
8,9
Rev. Rul. 93-73, 1993-1 I.R.B. 7
9
Tax Notes, Jan. 10, 1994
9
United States Constitution, First Amendment
1,4,,18,19,24
__________________________
Appellants Michael and Marla Sklar (hereinafter "Taxpayers") submit this reply to the Brief for the Appellee. For the reasons set forth below, and in Taxpayers' Informal Brief:[1]
1. the portion of Taxpayers' tuition payments to their children's schools attributable to religious instruction is deductible under Internal Revenue Code ("I.R.C.", or the "Code") §170; andTherefore, the decision of the Tax Court should be reversed, and judgment should be entered by this Court declaring that there is no deficiency in income tax from Taxpayers for the taxable year 1994, and that there is no addition to tax due from Taxpayers under I.R.C. §6651(a)(1) for the taxable year 1994.
2. the policy and practice of the Internal Revenue Service permitting members of the Church of Scientology to deduct their payments for religious instruction while prohibiting such deductions for practitioners of other religions -- including Jews, such as Taxpayers -- is an egregious violation of Taxpayers' First Amendment rights.
SUMMARY OF ARGUMENT
The Government makes three principal arguments in defense of the Tax Court's ruling. It first argues that the portion of Taxpayers' tuition payments attributable to religious instruction is not deductible simply because Taxpayers received something in return for those payments, i.e., their children's religious instruction. This argument fails because it is well-established, and recognized by IRS, that a taxpayer may receive some benefit from a payment for religious purposes without necessarily making that payment non-deductible. Most significantly, I.R.C. §§170(f)(8) and 6115 -- which were enacted in 1993, after the decisions in Hernandez v. Commissioner, 490 U.S. 680 (1989), and DeJong v. Commissioner, 309 F.2d 373 (9th Cir. 1962), upon which the Government relies -- recognize that a payment may be deductible even if an "intangible religious benefit" is received in return. Taxpayers received only an intangible religious benefit in exchange for the portion of their tuition payments that they deducted, and therefore those deductions were proper.The Government next argues that the Tax Court should have denied Taxpayers' charitable contribution deduction because they did not secure "contemporaneous" acknowledgments from the recipients as required by I.R.C. §170(f)(8). The Tax Court rejected this argument, properly holding that Taxpayers complied with §170(f)(8). For 1994, the year at issue in this action, IRS required only that taxpayers make "a good faith effort" to obtain acknowledgment of a contribution. IRS Notice 95-15, 1995-1 C.B. 299. Taxpayers made a good faith effort, and the Government does not contend otherwise. Thus, Taxpayers complied with §170(f)(8).
Finally, the Government argues that it has not violated Taxpayers' First Amendment rights, because no taxpayers are permitted to deduct any part of tuition payments for their children in religious schools. In other words, the Government is arguing that because (at least so far) members of the Church of Scientology only deduct tuition payments for adults' religious instruction, there is no problem with IRS denying deductibility of tuition payments for the religious instruction of non-Scientologists' children. It would be hard to imagine a better paradigm of a distinction without a difference. Indeed, the Supreme Court recognized in Hernandez v. Commissioner, supra, 490 U.S. at 693, that in terms of their deductibility, Scientologists' payments for their religious instruction (called "training", id. at 685) are the same as "tuition payments to parochial schools."
We submit that in light of the post-Hernandez amendment of I.R.C. §170, payments in exchange for the "intangible religious benefit" of religious instruction are deductible, whether made by members of the Church of Scientology, Jews, Christians, Moslems, or anyone else. If, however, this Court concludes that such payments are not deductible, then by nonetheless permitting members of the Church of Scientology to deduct such payments, but prohibiting Jews, Christians, Moslems and practitioners of all other faiths from deducting them, the Internal Revenue Service is plainly discriminating in favor of one religion -- Scientology -- over all others, which is absolutely prohibited by the Establishment Clause of the First Amendment.
For this reason, too, Taxpayers are entitled to deduct the portion of their tuition payments attributable to religious instruction. Indeed, avoiding this grave violation of the First Amendment is another reason for the Court to find that Taxpayers' payments are deductible.
ARGUMENT
I. The Internal Revenue Code permits taxpayers to deduct as charitable contributions the portion of tuition payments to religious day schools attributable to religious instruction.It is undisputed that contributions to the two schools attended by Taxpayers' children are deductible under I.R.C. §170. It is also undisputed that the portion of Taxpayers' tuition payments attributable to secular instruction required under California law is not deductible, because Taxpayers' children receive a non-religious benefit from that instruction. The only question is whether the portion of those tuition payments attributable to religious instruction is deductible, as Taxpayers contend.
The Government here argues at length that payments for religious instruction cannot be deductible, because a "specific return comes to the payor as a quid pro quo for the donation." Appellee Brief at 16, quoting Graham v. Commissioner, 822 F.2d 844, 848 (9th Cir. 1987), aff'd sub nom., Hernandez v. Commissioner, supra. It is, however, long-established, and long-recognized by IRS, that payments in a religious context may be deductible even if a specific return comes to the payor as a quid pro quo for the donation. For example, IRS recognizes and accepts that Christians' pew rents, Jews' admission tickets for High Holy Days worship services, Mormons' tithes as a condition of temple admission, and Catholics' Mass stipends are all deductible, notwithstanding that the payor receives a specific return in exchange for each of these types of payments. See Hernandez v. Commissioner, supra, 490 U.S. at 707-09 (O'Connor, J., dissenting).
The decision in Hernandez did not directly affect the deductibility of any of these payments, but it left the justification for their deductibility somewhat up in the air. The taxpayers in Hernandez, who were all members of the Church of Scientology, argued that their payments for doctrinal instruction (called "training" in the Church of Scientology, id. at 685) were deductible because "the benefit a taxpayer receives is purely religious in nature." Id. at 692. The Supreme Court rejected this argument, because "it finds no support in the language of §170. . . . The Code makes no special preference for payments made in the expectation of gaining religious benefits or access to a religious service." Id. at 692-93. The Court also observed that the petitioners' deductibility proposal would greatly expand the charitable contribution deduction, even to include "tuition payments to parochial schools"; and it was "loath to effect this result in the absence of supportive congressional intent." Id. at 693.[2]
This created a problem, for how could the deductibility of pew rents, religious service admission tickets, etc. be justified if there were "no special preference for payments made in the expectation of gaining religious benefits or access to a religious service"? The Court majority chose to ignore this problem in its Hernandez decision, finding that the record in that action was inadequate to appraise the deductibility of such payments, or the correctness of IRS' position with respect to them. Id. at 701-03. Congress, however, addressed this problem four years later, in the Omnibus Budget Reconciliation Act of 1993, P.L. No. 103-66, 107 Stat. 312 ("OBRA"). Among many other, totally unrelated provisions, OBRA enacted I.R.C. §§170(f)(8) and 6115, which introduced the phrase "intangible religious benefit" directly into the Code, and established the circumstances under which a payment is deductible even if the payor receives an intangible religious benefit in return. Section 6115 explicitly provides that "[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." (Emphasis added.)[3]
Thus, contrary to the situation when Hernandez was decided, the Code today contains "special preference for payments made in the expectation of gaining religious benefits or access to a religious service." Hernandez, supra, 490 U.S. at 692-93. Therefore today, when a payment is made with this expectation, it is deductible as long as, in the words of I.R.C. §§170(f)(8) and 6115, the taxpayer "receives solely an intangible religious benefit that generally is not sold in a commercial transaction outside the donative context."[4]
The effect of these post-Hernandez amendments to the Code is illustrated by the 180º turnabout in IRS' treatment of Scientologists' payments for "training" (i.e., "doctrinal courses", 490 U.S. at 685). Before Hernandez, IRS disallowed all deductions for these payments, Rev. Rul. 78-189, 1978-1 C.B. 68; and the Supreme Court upheld this position in Hernandez. OBRA was signed into law on August 10, 1993. About seven weeks later, on October 1, 1993, IRS entered into a "closing agreement" with the Church of Scientology, which provided, inter alia, that IRS would no longer oppose the deductibility of Scientologists' payments for training. ER 36, §VII[B]. One month later, on November 1, 1993, IRS completed its reversal by publishing Rev. Rul. 93-73, 1993-34 I.R.B. 7, which "obsoleted" Rev. Rul. 78-189. Also in November 1993, the Church of Scientology informed its members that pursuant to a settlement with IRS, "donations for auditing and training . . . qualify as charitable contributions and can be claimed as deductions on your federal (and state) income tax returns." See Tax Notes, Jan. 10, 1994, p. 131, quoting from a booklet published by the Church of Scientology entitled "Information on Taxes and Your Donations." In reversing itself, IRS recognized that in return for payments for doctrinal courses in the Church of Scientology, the payor receives "solely an intangible religious benefit that generally is not sold in a commercial transaction outside the donative context", and therefore the payments are deductible. Similarly here, to the extent Taxpayers' tuition payments to their children's schools were attributable to religious instruction ("doctrinal courses", as the Supreme Court called Scientologists' "training", 490 U.S. at 685), Taxpayers received "solely an intangible religious benefit that generally is not sold in a commercial transaction outside the donative context"; and therefore these payments, too, are deductible.[5]
As a fallback from its argument that any quid pro quo makes a payment non-deductible, the Government suggests that Taxpayers received something other than an intangible religious benefit through their children's religious instruction because "[t]he schools' secular and religious programs were intertwined", Appellee Brief at 24, and "the Hebrew Studies program reinforces the General Studies." Id., quoting Supp. ER 163 (trial testimony by Rabbi Yakov Krause, director of Yeshiva Rav Isacsohn, one of the two schools to which Taxpayers paid tuition).
In fact, Rabbi Krause's testimony as a whole establishes that the school clearly divides its program between religious instruction and secular instruction. Indeed, "as a matter of principle", the school generally does not have the rabbis who give religious instruction also teach secular studies. Trial Tr. 53. Of course, the school, and the parents who send their children there, believe that the religious instruction improves the children in every way, just like Christians who pay pew rents, and Mormons who pay tithes, and Scientologists who pay for training, believe that their religious practices improve them in their secular lives as well, but these are still deemed intangible religious benefits, and therefore not subject to quid pro quo analysis.[6] Surely the Government does not mean to suggest that if a minister's sermon addresses the social issues of the day, that morning's contributions to the collection plate will not be deductible -- but this is the ineluctable result of their concept of "intertwining" here.
The Government also challenges "taxpayers' suggested methodology" for allocating their tuition payments between deductible religious instruction and non-deductible secular studies, deeming it "plainly arbitrary." Appellee Brief at 39. The methodology, however, was used by the schools. The schools told Taxpayers that religious instruction accounted for 55% of their programs, and Taxpayers' therefore deducted 55% of their tuition payments. Just like with any payment to a charitable organization that has "the 'dual character' of a purchase and a contribution", United States v. American Bar Endowment, supra, 477 U.S. 105, the organization must allocate the payment between purchase and contribution, and the taxpayer should rely upon that allocation. IRS can always review and challenge a particular allocation, but there is nothing unusual about the process here, and nothing facially inappropriate or "plainly arbitrary" about the methodology.[7]
Finally, the Government cites the legislative history of the OBRA amendments to the Code, where Congress used "admission to a religious ceremony" as an example of "an intangible religious benefit that generally is not sold in commercial transactions outside the donative context", but excluded "tuition for education leading to a recognized degree" from this category. Appellee Brief at 33, quoting H.R. Conf. Rep. No. 103-213, at 565-66 & n.34 (1993), reprinted in 1993 U.S.C.C.A.N. 1088, 1254. The Government then makes two arguments based upon this legislative history. First, the Government argues that "a religious education is not a benefit that is 'not sold in commercial transactions outside the donative context'", because "orthodox [sic] Jewish schools compete against one another for students." Appellee Brief at 33-34. The Government does not explain, however, why competition for students among religious schools means that religious education is "sold in commercial transactions". Churches and synagogues compete for members, and some even advertise on radio and television, but this does not render church or synagogue memberships commercial transactions, and payments for those memberships are deductible under I.R.C. §170. Payments for religious education similarly are not commercial transactions, and are deductible under §170. For its last argument concerning the deductibility of tuition payments for religious education, the Government asserts that the religious studies in the schools attended by Taxpayers' children "lead to a recognized degree", because the combined secular and religious studies in those schools "leads to a recognized high school degree, and it also satisfies California's compulsory education laws." Appellee Brief at 35. In fact, however, the religious studies contribute nothing to either the recognized high school degree or to satisfaction of California's compulsory education laws. The secular studies alone support the degree and satisfy the compulsory education laws.
The weakness of these final arguments of the Government may be illustrated by imagining that Yeshiva Rav Isacsohn divided itself into two schools, separately organized under California law -- Yeshiva Rav Isacsohn for Religious Studies, and Yeshiva Rav Isacsohn for Secular Studies – and the former provided solely the religious instruction now offered by the existing school, and the latter offered solely the secular studies now offered by the existing school. The latter would be able to issue recognized high school diplomas, and would satisfy California's compulsory education laws. The former, however, would neither be able to issue recognized high school diplomas, nor satisfy the compulsory education laws. If under these circumstances, tuition payments to the former would be deductible, and tuition payments to the latter would not -- as is suggested by the Government's final arguments -- then the portion of tuition payments to the existing school attributable to religious education is deductible, while the portion attributable to secular studies is not.
For all these reasons, Taxpayers' tuition payments to their children's religious schools are deductible to the extent those payments are attributable to religious instruction at the schools. In Hernandez, the Supreme Court recognized that in terms of their deductibility under I.R.C. §170, payments for "training" in the Church of Scientology are the same as "tuition payments in parochial schools." 490 U.S. at 693. Therefore, just as today, after the post-Hernandez, OBRA amendments to the Code, Scientologists' payments for training are deductible under §170, so, too, are Taxpayers' tuition payments to their children's parochial schools.
II. Taxpayers' substantiation of their deductions was sufficient.
The Government argues that no part of Taxpayers' tuition payments is deductible because they did not obtain "a contemporaneous written acknowledgment of the contribution by the donee organization" as required by I.R.C. §170(f)(8)(A). Appellee Brief at 41-45. The Tax Court held that Taxpayers "fulfilled [this requirement] by substantial, if not strict compliance." ER 101. In fact, Taxpayers were in strict compliance.
1994, the tax year at issue here, was the first year for which the substantiation requirements of I.R.C. 170(f)(8) were applicable. Because of "confusion about these new requirements", IRS granted "transitional relief" from the substantiation requirements. IRS Notice 95-15, 1995-1 C.B. 299. Specifically, IRS said that for 1994, a taxpayer would be deemed to have satisfied the substantiation requirements if either "(1) the taxpayer has obtained the acknowledgment [of the contribution] by October 16, 1995, or (2) the taxpayer has made a good faith effort to obtain the acknowledgment by that date. An example of a good faith effort would be sending the donee organization a letter requesting a written acknowledgment that meets the requirements of §170(f)(8)." Id. "Michael Sklar did mail such a request by October 16, 1995." Petitioners' Response to Respondent's Motion for Summary Judgment at 5 (July 10, 1998).[8] Therefore, Taxpayers satisfied the substantiation requirements in effect for 1994.
Moreover, as a practical matter, it simply would not have been possible for Taxpayers to secure "a contemporaneous written acknowledgment of the contribution", meeting the standards of I.R.C. §170(f)(8)(B), from either of their children's schools. IRS' position that religious education (other than for members of the Church of Scientology) is not an "intangible religious benefit", and that no portion of any religious school tuition (outside the Church of Scientology) is deductible, is very well known among religious schools. Therefore, no official of a religious school (other than one affiliated with the Church of Scientology) would ever state that the school's religious education confers "intangible religious benefits", as would be required to satisfy the substantiation requirements of I.R.C. §170(f)(8)(B), because this would almost certainly bring down upon the school a host of unwanted IRS attention.
I.R.C. §170(f)(8)(E) explicitly recognizes that some or all of the substantiation requirements should "not apply in appropriate cases." Here, in computing their deductions, Taxpayers used the schools' estimates of the proportion of their educational programs attributable to religious instruction; and they secured written confirmation of these estimates. Under the circumstances here, no more could legitimately be asked, let alone required, of Taxpayers.[9] IRS required only a "good faith effort" to obtain acknowledgment for tax year 1994, which is the year at issue in this action, Notice 95-15, 1995-1 C.B. 299, cited in Appellee Brief at 44, and the Government quite properly has never questioned Taxpayers' good faith.[10]
Thus, the Tax Court correctly held that Taxpayers' substantiation of their deductions was sufficient.
III. Permitting members of the Church of Scientology to deduct as charitable contributions their tuition payments for religious instruction, but prohibiting Taxpayers from doing the same because they practice another religion, is an egregious violation by the Government of Taxpayers' First Amendment rights.
The Government correctly writes that it is the Supreme Court's "settled policy to avoid an interpretation of a federal statute that engenders constitutional issues if a reasonable alternative interpretation poses no constitutional question." Appellee Brief at 35, quoting Gomez v. United States, 490 U.S. 858, 864 (1989). Indeed, this is a compelling reason why this Court should reverse the Tax Court and hold that Taxpayers' payments for religious education are deductible under I.R.C. §170, because the Tax Court's interpretation of §170 "engenders constitutional issues." It leaves members of the Church of Scientology with permission to deduct their payments for religious instruction, but denies such deductions to members of all other religions. This is an intolerable situation under the First Amendment, because the Establishment Clause bars the Government from preferring one religion over another. "Government in our democracy . . . must be neutral in matters of religious theory, doctrine, and practice. It may not be hostile to any religion or to the advocacy of no-religion; and it may not aid, foster, or promote one religion or religious theory against another . . . . The First Amendment mandates governmental neutrality between religion and religion . . . ." Epperson v. Arkansas, 393 U.S. 97, 103-04 (1968) (emphasis added). Accord, Everson v. Board of Education, 330 U.S. 1, 15 (1947) ("Neither a state nor the Federal Government . . . can pass laws which . . . prefer one religion over another"). Indeed, "ensuring governmental neutrality in matters of religion" is "perhaps the central purpose of the Establishment Clause." Gillette v. United States, 401 U.S. 437, 449-50 (1971).
By denying the deductibility of the portion of Taxpayers' tuition payments attributable to religious education, while permitting Scientologists to deduct their payments for religious instruction, IRS has violated this cardinal principle of First Amendment law. The Federal Government is preferring one religion -- the Church of Scientology -- over all others. It simply may not do this. The Government does not dispute any of these principles. Rather, it offers three arguments as to why they are not applicable here. None is persuasive.
First, the Government asserts that "[t]here is no disparate treatment here", because "4 million school children are educated in private religious schools each year, including Catholic, Lutheran, Jewish, Baptist, and Mormon schools", and "Taxpayer has not alleged, and indeed could not correctly allege, that the IRS allows the deduction of tuition payments made to any of these schools for any of these 4 million schoolchildren or their families", or that "any school children are educated by the Churches [sic] of Scientology, let alone that tuition payments for such education is allowed by the IRS." Appellee Brief at 46. In other words, the Government is arguing that the age of the person receiving religious instruction determines the deductibility of payments for that instruction: payments for the religious education of adults are deductible according to this line of argument, whereas payments for the religious education of children are not.
There is absolutely no basis for this in logic or law. The fact that Taxpayers' payments were for religious instruction of "school children" whereas the Scientologists who deduct their payments for religious instruction are purportedly adults is utterly irrelevant to the constitutional principle applicable here. (There is also nothing in the record to support the Government's implication that no school children receive religious instruction in the Church of Scientology.) If payments for religious education are deductible when made by members of the Church of Scientology, then payments for religious education must be deductible when made by Catholics, Lutherans, Jews, Baptists, and Mormons, and regardless of the age of the person receiving the religious education.
The Government's final argument is perhaps its cheekiest:
The linchpin to taxpayers' argument regarding the Church of Scientology is the closing agreement the IRS and the Church of Scientology entered into, wherein the IRS allegedly agreed to allow adherents of the Church of Scientology to claim charitable contribution deductions for payments made for "auditing" and "training." Nothing in the record, however, establishes the terms of the closing agreement, or, for that matter, that payments for "auditing" and "training" are, in fact, the same as the tuition payments taxpayer made to Yeshiva Rav Isaacson and Emek Hebrew Academy. Taxpayers claim in this regard, therefore, fails.Appellee Brief at 47.
The closing agreement between IRS and the Church of Scientology is in the record. Petitioners' Trial Exhibit 39-P; see also Taxpayers' January 20, 1998, Request for Admissions, ER 112, ¶8. IRS has never denied the authenticity of this document, which was published in The Wall Street Journal. On the other hand, the Government also has never admitted the authenticity of that document, and thus perhaps in a technical sense, the record below does not "establish" the terms of the IRS/Church of Scientology closing agreement -- but only because the Government adamantly refused to admit the authenticity of the copy of the closing agreement that was proffered by Taxpayers, the Government objected to all of Taxpayers' interrogatories and document requests concerning the Church of Scientology, the Government objected to Plaintiff's Exhibit 39-P, and the Tax Court sustained the Government's objections. After this, the Government may not legitimately argue that the Tax Court should be affirmed because Taxpayers did not establish the terms of the closing agreement in the Tax Court.
Similarly, the Tax Court first barred Taxpayers from conducting discovery concerning "the operations of the Church of Scientology" and its closing agreement with IRS, because this "would not lead to evidence admissible and relevant to the issues presented in this case." ER 102. The Tax Court then ruled after the trial that all of the documents concerning the Church of Scientology and its closing agreement with IRS that Taxpayers had offered into evidence at trial, including the closing agreement itself, were "not admissible because they are irrelevant to this case." ER 7 n.3. In light of these rulings, the Tax Court erred in ultimately justifying its ruling in favor of IRS by saying that "[t]here is nothing in the record to show that petitioners' situation is analogous to that of the members of the Church of Scientology." ER 7. How could there have been evidence in the record showing this after the Tax Court precluded discovery on this subject, and refused to admit in evidence the documents that Taxpayers were nonetheless able to obtain?
The Tax Court erred in excluding Taxpayers' evidence, and that evidence, including the closing agreement, should be deemed part of the trial record.[11]
Moreover, even without the Government's acknowledgment of the authenticity of the copy of the closing agreement that is in the record, the record below "establishes" Taxpayers' key contention concerning the content of the closing agreement, i.e., that IRS permits members of the Church of Scientology to deduct their payments for religious instruction. In December 1993, Taxpayers filed an amended tax return (Form 1040X) for their 1991 taxable year, on which they wrote: "As it now appears that the I.R.S. is now allowing a charitable deduction for payments to qualified organizations which provide religious education, I have added payments to religious school to charitable contributions." ER 33-34. IRS investigated this deduction claim, but apparently misunderstood Taxpayers, and thought they were taking a deduction for payments in connection with religious classes in the Church of Scientology. Thus, in August 1994 IRS sent a letter to Taxpayers, advising them:
In order to be allowed your claimed contributions to the Church of Scientology, you must provide documentation which shows the complete name and cost of the courses taken and verification of the actual amount paid for these courses.ER 38.
Thus, IRS has admitted that it permits members of the Church of Scientology to deduct their payments for religious instruction. Therefore, in order to avoid violating the First Amendment, IRS must permit adherents of other faiths to deduct their payments for religious instruction.[12]
CONCLUSION
For the foregoing reasons, and for the reasons set forth in Appellants' Informal Brief, the decision of the Tax Court should be reversed, and judgment should be entered by this Court declaring that there is no deficiency in income tax from Taxpayers for the taxable year 1994, and that there is no addition to tax due from Taxpayers under I.R.C. §6651(a)(1) for the taxable year 1994.Dated: December 14, 2000
Respectfully submitted,
________________________________
Jeffrey I. Zuckerman
Mark J. Feldman
CURTIS, MALLET-PREVOST,
COLT & MOSLE LLP
1801 K Street, N.W.
Suite 1205L
Washington, D.C. 20006-1301
(202) 452-7350
Attorneys for Appellants
CERTIFICATE OF SERVICE
I hereby certify that on this 14th day of December, 2001, I served two copies of the foregoing REPLY BRIEF FOR APPELLANTS upon counsel for the Appellee and upon counsel for the Amicus Curiae by mailing the copies, first-class, to:The Honorable Paula M. Junghans
Kenneth L. Greene, Esquire
Thomas J. Sawyer, Esquire
Tax Division
U.S. Department of Justice
P.O. Box 502
Washington, D.C. 20044
Attorneys for the Appellee
Jay A. Friedman, Esquire
10 Hanover Square
New York, New York 10005
Attorney for the Amicus Curiae
David Zwiebel, Esquire
Mordechai Biser, Esquire
Agudath Israel of America
84 William Street
New York, New York 10038
Attorneys for the Amicus Curiae
________________________________
Jeffrey I. Zuckerman
______________________________________________
Footnotes
- [BACK] This Reply Brief marks the first time in this litigation that Taxpayers are represented by counsel. Both in the Tax Court, and for their initial brief in this Court ("Appellant's or Petitioner's Informal Brief", filed August 23, 2000), Taxpayers acted pro se.
- [BACK] In dicta, the Court also observed that "the deduction petitioners seek might raise problems of entanglement between church and state." Hernandez, supra, 490 U.S. at 694.
- [BACK] The Government asserts that "[United States v.] American Bar Endowment[, 477 U.S. 105 (1986)] and Hernandez [1989] stand for the proposition that charitable contributions are not deductible to the extent that a taxpayer receives a quid pro quo, and that the quid pro quo rule applies whether or not religious benefits are involved." Appellee Brief at 22. As we explain above, however, in 1993 Congress amended the Code to provide that a payment "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" is not a "quid pro quo contribution." I.R.C. §6115(b).
- [BACK] On the basis of a footnote in the House Conference Report concerning OBRA, the Government argues here that enactment of I.R.C. §§170(f)(8) and 6115 was not intended to change the Hernandez ruling that payments are not deductible if religious benefits are received as a quid pro quo. Appellee Brief at 31. In fact, the footnote implies the opposite. It says that "no inference is intended . . . regarding the full or partial deductibility of any payment outside the scope of the quid pro quo disclosure provision or substantiation provision under the present-law requirements of section 170." H.R. Conf. Rep. No. 103-213 at 566 n.37, reprinted in 1993 U.S.C.C.A.N. 1088, 1255 (emphasis added). The "scope of the quid pro quo disclosure provision [§170(f)(8)] or substantiation provision [§6115]" is limited to "an intangible religious benefit that generally is not sold in a commercial transaction outside the donative context." Thus, this footnote is saying that a payment would thereafter be deductible even if the payor received in return this type of intangible religious benefit, but that the OBRA amendments would not otherwise change "present-law requirements of section 170", i.e., the possible non-deductibility of donations made prior to OBRA in exchange for intangible religious benefits. By implication, Congress intended to make deductible such donations made subsequent to OBRA.
- [BACK] The Government cites several cases in which courts have held that tuition payments at private religious schools are not deductible. Appellee Brief at 23, 24-26. All of those cases pre-date the 1993 amendments of the Code, and are therefore inapposite.
- [BACK] Even post-OBRA, IRS observed that "Scientologists believe that Scientology services have a potential beneficial effect on not only the individual, but also the family, larger groups, the physical and spiritual universes, and the Supreme Being; they also believe that the widespread practice of Scientology will lead to a saner, more peaceful, more spiritually advanced world." IRS Field Service Advice Memorandum, Project No. F.S.A. 94, n.2 (April 27, 1999) (Petitioners' Trial Exhibit 26-P). None of this secular benefit from Scientology training has affected the deductibility of payments for that training.
- [BACK] Citing American Bar Endowment, supra, the Government also argues that Taxpayers were required to prove that their tuition payments were more than the value of the secular education that their children received. It further argues that because "tuition payments were insufficient to cover the schools' operating expenses . . ., it is highly questionable whether taxpayers' tuition payments exceeded the value of the education received in return." Appellee Brief at 40. However, many parents (but not Taxpayers) pay less than full tuition; and there is nothing in the record to suggest that tuition payments would not exceed operating costs if all parents paid full tuition (like Taxpayers). Indeed, American Bar Endowment principally stands for the proposition that to deduct part of a "dual character" payment, a taxpayer must show the market value of goods or services comparable to those purchased from the charitable organization. 477 U.S. at 118. Here, a secular education was available for Taxpayers' children at no cost in public schools. Therefore, by attributing 45% of their tuition payments to their children's secular studies in accordance with the schools' allocations, Taxpayers certainly avoided deducting the market value of those secular studies.
- [BACK] Because Taxpayers' were acting pro se in the Tax Court, this Court should accept their brief in opposition to the Government's motion for summary judgment as equivalent to an affidavit or declaration for evidentiary purposes. See Haines v. Kerner, 404 U.S. 519, 520 (1972) (pro se pleadings should be held "to less stringent standards than formal pleadings drafted by lawyers"); Christensen v. Commissioner, 786 F.2d 1382, 1385 (9th Cir. 1986) ("this policy of liberal reading of pro se papers . . . applies . . . in the Tax Court").
- [BACK] The Government writes that Taxpayers "largely dictated" the language of the letters from the schools confirming this information. Appellee Brief at 44. However, the key information in those letters -- the proportions attributable to religious studies -- were not dictated by Taxpayers; they were calculated by the schools themselves.
- [BACK] In a Form 8275, Disclosure Statement, filed with Taxpayers' 1994 tax return, they fully disclosed that they were "deducting payments for religious education." ER 15, ¶7.
- [BACK] The Government argues that it was entitled to resist discovery of the closing agreement because "a closing agreement is replete with return information", and I.R.C. §6103(a) bars it from disclosing "return information." Appellee Brief at 49-51. I.R.C. §6103(h)(4)(B) provides, however, that "return information" may be disclosed in a judicial proceeding where, as here, "the treatment of an item reflected on such return is directly related to the resolution of an issue in the proceeding." The Government contends that "§6103(h)(4) makes it clear that taxpayer return information may be disclosed in a judicial proceeding only when that taxpayer is a party to the suit or when the information directly relates to a transactional relationship with a party to the suit", Appellee Brief at 51, but these limitations apply only to §§6103(h)(4)(A) and (C), not to §6103(h)(4)(B), which is applicable here.
- [BACK] If the Court concludes that the record is inadequate concerning the comparability or deductibility of Scientologists' payments for religious instruction, it should vacate the decision of the Tax Court, and remand this action to that Court for further proceedings, including discovery concerning the IRS/Church of Scientology closing agreement, and other aspects of their relationship.
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