Hernandez v. Commissioner
490 U.S. 680, 1989 U.S. LEXIS 2773, 104 L. Ed. 2d 766 (1989)
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Rule of Law:
A payment made to a qualified religious organization in exchange for a specific, identifiable benefit, such as religious services, constitutes a quid pro quo exchange and is not a 'contribution or gift' deductible as a charitable contribution under § 170 of the Internal Revenue Code.
Facts:
- The Church of Scientology offers religious services known as 'auditing' and 'training' to its members, which are intended to increase spiritual awareness.
- The Church charges a 'fixed donation' or 'price' for these services, with rates set forth in schedules based on the length and sophistication of the session.
- This system of fixed charges is based on a central tenet of Scientology called the 'doctrine of exchange,' which requires that for anything received, something must be paid back.
- The Church promotes these paid services through advertisements, offers discounts for advance payment, and provides refunds for unused prepaid services, less an administrative charge.
- Robert Hernandez, Katherine Graham, Richard Hermann, and David Maynard each made payments to a branch of the Church of Scientology specifically for auditing or training sessions.
- The petitioners subsequently sought to deduct these payments on their federal income tax returns as charitable contributions.
Procedural Posture:
- Petitioners claimed deductions on their federal income tax returns for payments made to the Church of Scientology.
- The Commissioner of the Internal Revenue Service (IRS) disallowed these deductions and assessed tax deficiencies.
- Petitioners sought review in the U.S. Tax Court, a court of first instance for tax disputes.
- The Tax Court consolidated the cases and, following a bench trial, upheld the Commissioner's decision.
- Petitioner Hernandez appealed to the U.S. Court of Appeals for the First Circuit, which acted as the intermediate appellate court.
- The other petitioners appealed to the U.S. Court of Appeals for the Ninth Circuit, also an intermediate appellate court.
- Both the First and Ninth Circuits affirmed the Tax Court's decision, creating a conflict with other circuits.
- The U.S. Supreme Court, the highest court, granted certiorari to resolve the circuit split.
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Issue:
Does a taxpayer's payment to a church for religious services, such as auditing and training, constitute a 'contribution or gift' that is tax-deductible under § 170 of the Internal Revenue Code when the services are provided in a direct quid pro quo exchange for the payment?
Opinions:
Majority - Justice Marshall
No. A payment made to a religious organization for a specific service in a quid pro quo exchange is not a deductible 'contribution or gift' under § 170. The legislative history of § 170 indicates that Congress intended to deduct only unrequited payments, not those made with the expectation of receiving a commensurate return. The Court determined this by examining the 'external features' of the transaction, such as the Church's fixed price schedules, calibrated prices, refund policy, and refusal to provide services for free, all of which pointed to a quintessential quid pro quo exchange. The Court rejected the argument that a different standard should apply because the benefit received was purely religious, noting that the statute makes no such distinction. Allowing such a deduction would also risk excessive government entanglement with religion by forcing the IRS to differentiate between 'religious' and 'secular' benefits. The disallowance does not violate the Establishment Clause as § 170 is facially neutral and passes the Lemon test, nor does it violate the Free Exercise Clause, as any financial burden is justified by the compelling governmental interest in maintaining a uniform tax system, as established in United States v. Lee.
Dissenting - Justice O’Connor
Yes. The payments should be considered deductible charitable contributions. The IRS has a 70-year practice of allowing deductions for fixed payments made to other religions for specific services, such as pew rents, Mass stipends, and High Holy Day tickets. By denying the deduction only to Scientologists, the IRS is departing from its established practice and engaging in unconstitutional discrimination among religions in violation of the Establishment Clause. The majority’s strict quid pro quo analysis is inappropriate when the benefit received is an intangible religious experience that has no market value outside of a donative context. The IRS's attempt to distinguish Scientology's services from those of other faiths is based on impermissible and arbitrary distinctions between religions. The Court should not have ignored this clear constitutional issue by framing it as a mere matter of administrative inconsistency.
Analysis:
This decision solidifies the application of the 'quid pro quo' test to charitable contributions, establishing that the nature of the benefit received—whether religious or secular—is irrelevant to its deductibility. The ruling affirms that a payment made in direct exchange for any identifiable service is not a gratuitous 'gift' under the tax code. This has a significant impact on religious and other charitable organizations that fund their operations through set fees for services rather than through purely voluntary donations. The case reinforces the IRS's authority to examine the structure of transactions with charitable entities and limits the scope of the § 170 deduction to truly unrequited transfers.
