Scientology IRS agreement : Couple Lose Bid for Tax Refund Tied to Tuition

A federal appeals court Tuesday unanimously denied the claim of a North Hollywood couple that they were entitled to a partial tax refund for tuition payments they made to two Orthodox Jewish day schools.

The couple had contended that 55% of the tuition payments--the portion of the school day devoted to religious education--represented charitable contributions to a tax-exempt religious organization.

Michael and Marla Sklar also maintained that they were entitled to the refund because the Internal Revenue Service since 1993 has permitted members of the Church of Scientology to obtain deductions for "auditing," the process Scientology adherents use for spiritual self-examination. In essence, three judges of the U.S. 9th Circuit Court of Appeals ruled that two wrongs don't make a right, upholding a ruling of a U.S. Tax Court judge denying the refund.

The judges said the Sklars were not entitled to a refund under either IRS regulations or applicable Supreme Court precedents.

The leading precedent, the judges said, is a 1989 high court decision holding that payments Scientologists made for "auditing" did not constitute charitable contributions.

That decision, Hernandez vs. Commissioner, was based on a section of the Internal Revenue Code that states that quid pro quo donations, for which a taxpayer receives something in return--such as education--are not deductible. The Hernandez decision held that the section applies to religious quid pro donations.

In Tuesday's decision, the appellate court criticized the IRS for refusing to disclose the terms of a 1993 settlement with the Church of Scientology. That agreement, among other things, permits Scientologists to get deductions in conflict with the 1989 Supreme Court decision, according to the 9th Circuit.

In support of their claim, the Sklars presented a 1997 Wall Street Journal article that provided details of the settlement. The 9th Circuit said that since the IRS failed to present any contradictory evidence on the nature of the settlement, the court was obliged to accept the Sklar's representations.

The settlement ended years of litigation that began in 1967 when the agency said the church should lose its tax-exempt status because it was, in reality, a for-profit enterprise that enriched its officials.

Although it was not directly at issue in the case, the 9th Circuit panel said that "it appears to be true that the IRS" had given Scientology a "preference in the interest of settling a long and litigious tax dispute."

In his majority opinion, Judge Stephen Reinhardt suggested that the preference represented unconstitutional favoritism toward a religious organization. Judges Harry Pregerson and Barry G. Silverman joined in the ruling.

In a separate concurring opinion, Silverman made an allusion to the Passover Holiday when he asked:

"Why is Scientology training different from all other religious training? We should decline the invitation to answer that question. The sole issue before us is whether the Sklars' claimed deduction is valid, not whether members of the Church of Scientology have become the IRS's chosen people."

In a highly unusual move, Silverman invited people who are troubled by the IRS settlement with Scientology to file a lawsuit to unravel the deal.

"If the IRS does, in fact, give preferential treatment to members of the Church of Scientology--allowing them a special right to claim deductions that are contrary to law and disallowed to everybody else--then the proper course of action is a lawsuit to put a stop to that policy.

"The remedy is not to require the IRS to let others claim the improper deduction, too," Silverman wrote.

Jesse Choper, a constitutional law professor at UC Berkeley's Boalt Hall School of Law, said Tuesday's ruling appeared to be correct, based on the Internal Revenue Code and the prior cases interpreting it.

Choper also said that he believed taxpayers would have standing to bring a suit challenging the IRS settlement with Scientology under a 1968 Supreme Court decision, Flast vs. Cohen.

In that case, the high court upheld a taxpayer's standing to challenge federal subsidies to parochial schools as violating the 1st Amendment's prohibition against government establishment of religion.
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But the case does point out a glaring inequity that has existed since 1993, when the IRS cut a controversial deal with the Church of Scientology, a 46-year-old Los Angeles-based religion that claims 3 million U.S. members, including actor John Travolta and composer Isaac Hayes.

The agreement made the group tax-exempt and allowed its members to deduct fees not just for auditing, but also for such religious courses as ''Success Through Communication'' and ''The Anatomy of the Human Mind.''

Note that in 1989 the Supreme Court had upheld the IRS' refusal to allow deductions for auditing and Scientology classes. In that decision the Court even noted that if these deductions were allowed, it could open the door for taxpayers to claim deductions for parochial school. Big dollars are at stake, since Americans pay an estimated $11 billion a year for parochial schools and religious education.

After the Scientology deal Cohen appealed to the IRS to issue clear rules about what religious education was now deductible. It never did.

''The IRS realizes that giving in to Scientology was a mistake, and they don't want to extend that mistake,'' says former IRS commissioner Donald C. Alexander. ''The result is most taxpayers are unfairly treated.''

Couple Lose Bid for Tax Refund Tied to Tuition

Courts: They had claimed that part of their payments to Jewish day schools constituted charitable contributions and cited an IRS break given to Church of Scientology members.