COMMISSIONER OF INTERNAL REVENUE, PETITIONER V. MAUREEN A. STAPLES AND MICHAEL P. STAPLES No. 87-1382 In the Supreme Court of the United States October Term, 1987 The Solicitor General, on behalf of the Commissioner of Internal Revenue, petitions for a writ of certiorari to review the judgment of the United States Court of Appeals for the Eighth Circuit in this case. Petition for a Writ of Certiorari to the United States Court of Appeals for the Eighth Circuit TABLE OF CONTENTS Question presented Opinions below Jurisdiction Statutes involved Statement Reasons for granting the petition Conclusion OPINIONS BELOW The opinion of the court of appeals (App., infra, 1a-9a) is reported at 821 F.2d 1324. The order and decision of the Tax Court (App., infra, 11a) is not reported. JURISDICTION The judgment of the court of appeals was entered on July 1, 1987. A petition for rehearing was denied on September 24, 1987 (App., infra, 10a). On December 12, 1987, Justice Blackmun extended the time within which to file a petition for a writ of certiorari to and including February 20, 1988. The jurisdiction of this Court is invoked under 28 U.S.C. 1254(1). STATUTES INVOLVED Section 170 of the Internal Revenue Code (26 U.S.C.) is set forth in pertinent part in a statutory appendix (App., infra, 23a-24a). QUESTION PRESENTED Whether a payment to the Church of Scientology for auditing or training sessions is deductible from taxable income as a "contribution of gift" under Section 170 of the Internal Revenue Code. STATEMENT 1. Respondents paid $2,928 to a branch of the Church of Scientology in 1975 and claimed that payment as a charitable deduction on their joint income tax return under Section 170 of the Internal Revenue Code, /1/ which permits a deduction for a "contribution or gift" to certain eligible donees (see I.R.C. Section 170(c)). On audit, the Commissioner disallowed that deduction and determined a tax deficiency of $302.80. C.A. Addendum 8. Respondents filed a petition in the Tax Court for review of the Commissioner's determination. There was no trial in the Tax Court, however, or any other evidentiary submission. Instead, the parties entered into a stipulation to be bound by "any relevant findings of fact and conclusions of law" (excluding those relating to "subjective intent") to be made by the Tax Court in three consolidated "test" cases that were to be tried. The stipulation further provided that the record in the test cases, "to the extent relevant," would be deemed part of the record in this case for the purpose of appeal. See C.A. Addendum 11-12. /2/ After the Tax Court decided the test cases in favor of the Commissioner (Graham v. Commissioner, 83 T.C. 575 (1984), aff'd, 822 F.2d 844 (9th Cir. 1987), reprinted in App., infra, 12a-22a), the court entered an order and decision in the instant case "on the authority of Graham," finding a deficiency of $302.80 (App., infra, 11a). 2. In the Graham case, the Tax Court entered findings of fact pertaining to the general operation of the Church of Scientology. Like respondents, each taxpayer in Graham had made payments to a branch of the church of Scientology /3/ and had sought to deduct them on his or her income tax return as charitable contributions (App., infra, 16a-17a). These payments were made in exchange for "auditing" and "training" services provided by the Church. Scientologists believe that auditing helps an individual to achieve a higher level of "spiritual competence." Auditing is administered in a one-to-one session by a trained Scientologist who asks the auditee questions and measures his skin responses during the answers by means of an electronic device. "Training" courses study the doctrines of Scientology and are believed to yield further spiritual benefits. See id. at 14a; see also id. at 2a. The Church charges a "fixed donation" for training and auditing, which is almost never waived. /4/ The Church "operates in a commercial manner" in providing these services (App., infra, 16a). It promotes its services through lectures and radio and newspaper advertising. It gives a standard discount for payments made well in advance of the services to be rendered, and it issues refunds of those payments if the services ultimately are not received. Id. at 15a-16a. In addition to these findings, the Graham decision was based on certain stipulations concerning the Church entered into for purposes of that litigation. The government did not contest that Scientology is a religion and that each Scientology organization to which the taxpayers paid money is a church within the meaning of Section 170(b)(1)(a)(i) of the Code and a tax-exempt religious organization under Section 501(c)(3) of the Code that is an eligible donee of charitable contributions under Section 170(c)(2) of the Code. App., infra, 13a. /5/ After making these factual findings, the Tax Court in Graham ruled that the payments in question were not contributions, but rather were non-deductible payments made to purchase services (App., infra, 17a-19a). The court explained that the payments "were not voluntary transfers without consideration, but were made with the expectation of receiving a commensurate benefit in return" (id. at 19a). The court continued (ibid.): "(W)here contributions are made with the expectation of receiving a benefit, and such benefit is received, the transfer is not a charitable contribution, but rather a quid pro quo." 3. In the present case, the court of appeals reversed the Tax Court's decision in the Commissioner's favor that had been entered on the authority of Graham (App., infra, 1a-9a). The court of appeals stated that the Tax Court in Graham had "ignored the fair impact of the government's stipulations" (App., infra, 3a) in ruling that the Church "operates in a commercial manner in providing these religious services" (id. at 16a) and in concluding that the payments were not contributions, but were payments made "with the expectation of receiving a commensurate benefit in return" (id. at 19a). See id. at 3a-4a. Rather, the court of appeals held that the stipulations required that auditing and training be viewed as "strictly religious practices" (id. at 4a). Citing United States v. American Bar Endowment, 477 U.S. 105 (1986), the court of appeals acknowledged that "(a) payment generally cannot constitute a deductible charitable contribution if the taxpayer expected a substantial benefit in return" (App., infra, 4a). But the court of appeals accepted the taxpayers' contention that "no recognizable return benefit is received when the taxpayer through the payments was seeking strictly spiritual gain" (ibid.), and thus, contrary to the Tax Court, ruled that the claim of contribution could not be rejected on the ground that the payments were just part of a quid pro quo arrangement. The court stated that "(s)piritual gain to an individual church member cannot be valued by any measure known in the secular realm," and it analogized the practice of charging fixed fees for auditing and training to passing the collection plate (id. at 6a-7a). The court held that religious benefits could not be regarded as "consideration" that would make a payment for them not a contribution, "both because of the inherently charitable nature of strictly religious practices and because of the incongruity of attempting to place a market value on religious participation" (id. at 7a). Accordingly, the court concluded, the commercial nature of the Church's practices provides no support for the Tax Court's decision. In the view of the court of appeals, the stipulations foreclosed any reliance on the "fixed donations as representing the value of its essential religious practices;" they "are not market prices set to reap the profits of a commercial moneymaking venture," but rather are simply the Church's "mechanism for raising funds from its members" (id. at 8a). REASONS FOR GRANTING THE PETITION 1. The decision below conflicts with the decisions of three other courts of appeals. Because of the stipulation to be bound by the findings of a test case, which was entered into by the parties in numerous cases where the taxpayers, like respondents, are seeking to take a tax deduction for certain payments made to the Church of Scientology (see page 2, supra), there have now been four decisions issued by different courts of appeals that have considered the question presented here on the basis of the same findings of fact. The other three courts of appeals have held, contrary to the court below, that these payments are not contributions within the meaning of Section 170 of the Code. Hernandez v. Commissioner, 819 F.2d 1212 (1st Cir. 1987), petition for cert. pending, No. 87-963; Graham v. Commissioner, 822 F.2d 844 (9th Cir. 1987); Miller v. Commissioner, 829 F.2d 500 (4th Cir. 1987). These conflicting holdings, if permitted to stand, will result in disparate tax treatment for similarly situated taxpayers. There are more than 1,000 taxpayers raising the same claim as respondents who already have cases pending in the courts, and there are likely to be more in the future. Thus, consistent treatment of similarly situated taxpayers will not be achieved unless the conflict in the circuits on this issue is resolved. The courts of appeals are also divided on the validity of the legal proposition upon which the court of appeals here rested its decision. That court concluded that, under the stipulation, the auditing and training received in exchange for the payments made by respondents must be viewed as "strictly religious practices" (App., infra, 4a, 8a). It held that, as a matter of law, participation in such religious practices cannot be treated as "a recognizable return benefit" for purposes of determining whether a particular payment is a contribution (id. at 4a, 8a). For that reason, the court found "inapplicable" (id. at 8a) the analysis set forth by this Court in United States v. American Bar Endowment, 477 U.S. 105 (1986), for determining whether a payment is a contribution under Section 170 of the Code. This Court there declared (477 U.S. at 118): "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." The broad rule advanced by the Eighth Circuit -- excepting payments for religious services from the analysis applicable to all other claims for a tax-deductible contribution -- cannot be squared with the decisions of the other courts of appeals that have considered the question presented here. Each of the other courts has specifically rejected this proffered exception and held that the American Bar Endowment analysis is fully applicable in the case of a payment for religious services. See Hernandez, 819 F.2d at 1217 ("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"); Graham, 822 F.2d at 849 ("the deductibility of a contribution does not depend on whether the benefits received in return are secular or religious"); Miller, 829 F.2d at 504 ("no justification * * * for drawing a distinction between 'religious' and other services that produce intangible benefits"). Indeed, the court of appeals below expressly acknowledged its "difference with the First Circuit" in Hernandez on this point (App., infra, 7a). By the same token, the Fourth Circuit in Miller specifically noted that it "disagree(d) with some of (the) critical points" of the analysis of the Eighth Circuit in this case (829 F.2d at 504). 2. The court of appeals erred in holding that payments for religious services must always be treated as tax-deductible contributions, regardless of the circumstances surrounding the payments. Section 170 of the Code provides a tax deduction only for a "contribution or gift" to an eligible donee, and those terms contemplate a donation, not a payment in fair exchange for benefits. Neither the language of Section 170 nor any other evidence of congressional intent supports the conclusion that a payment for religious benefits is excepted from this rule. Rather, the deductibility of a payment to a religious organization, just like a payment to any other organization described in Section 170(c)(2), depends upon a factual inquiry into the surrounding circumstances to determine whether the payment is a donation or a purchase of benefits. In the situation presented here, the Tax Court and the three other courts of appeals that have considered the issue correctly concluded that the same stipulated facts considered here demonstrate that the payments made by respondents were not "contributions". Rather, the aggressive marketing of the auditing and training services, the fixed price structure, and the inflexible connection between the payments and provision of the services all demonstrate a quid pro quo relationship of payments in exchange for personal services; such payments do not give rise to a tax deduction (see, e.g., Miller v. Commissioner, 829 F.2d at 504-505; Graham v. Commissioner, 822 F.2d at 849-850). 3. Because of the stipulations entered into between the taxpayers and the government in the cases presenting the issue decided below, only the Ninth Circuit's decision in Graham was based on an actual record that contains findings of fact directly pertaining to the case before the court. We believe that it would be preferable for this Court to consider the question presented here, if possible, in the concrete factual context that exists in Graham, rather than in the situation that exists in the cases, like this one, that were decided in the Tax Court on the basis of a stipulation to be bound by the findings in Graham. A petition for a writ of certiorari in Graham is due in this Court on February 29, 1988, and counsel for the taxpayers in that case has informally advised us that he intends to file a petition. We do not intend to oppose that petition. Accordingly, although we believe that resolution by this Court of the conflict in the circuits on the question presented here would be appropriate, we do not urge the Court to grant plenary review in this case, but rather suggest that this case be held pending disposition of the petition to be filed in Graham. CONCLUSION The petition for a writ of certiorari should be disposed of as appropriate in light of the disposition of the pending petition for certiorari in Hernandez v. Commissioner, No. 87-963, and the petition for a writ of Certiorari to be filed from the judgment in Graham v. Commissioner, 822 F.2d 844 (9th Cir. 1987). Respectfully submitted. CHARLES FRIED Solicitor General WILLIAM S. ROSE, JR. Assistant Attorney General ALAN I. HOROWITZ Assistant to the Solicitor General ROBERT S. POMERANCE DAVID M. MOORE Attorneys FEBRUARY 1988 /1/ Unless otherwise noted, all statutory references are to the Internal Revenue Code (26 U.S.C.), as amended (the Code or I.R.C.). /2/ The government entered into the same stipulation with numerous other taxpayers who had filed petitions in the Tax Court challenging the denial of a charitable deduction for payments to the Church of Scientology. /3/ The Church of Scientology consists both of a central branch, the "mother" Church of Scientology of California, and of numerous branches that are separate entities for tax purposes. /4/ Indeed, the Church's official policy letter states that "(p)rice cuts are forbidden under any guise" and "PROCESSING MAY NEVER BE GIVEN AWAY BY AN ORG." (App., infra, 15a n.6). Free services are awarded only to fully contracted staff, on the condition that the staff member fulfill the terms of his contract. /5/ The question of the validity of the "mother" Church's tax exemption was the subject of separate litigation in the Tax Court. The parties entered into the stipulations here in order to allow Graham and the other charitable contribution cases to go forward without awaiting the result of the tax exemption litigation, which would not necessarily affect the outcome of those cases. It was further stipulated in Graham, however, that the findings of fact in the tax exemption litigation and the record there could be incorporated in the Graham opinion (App., infra, 13a). After lengthy trial, the Tax Court ultimately held that the "mother" Church failed to qualify as an exempt organization for the years 1970-1972 because it diverted its profits to its founder and other persons, violated public policy by conspiring to impede the collection of its taxes, and conducted virtually all of its activities, including auditing and training, for a commercial purpose. See Church of Scientology of California v. Commissioner, 83 T.C. 381, 415-423, 473-480 (1984), aff'd, 823 F.2d 1310 (9th Cir. 1987). That determination is not necessarily controlling, however, for other tax years or for other branches of the Church. APPENDIX