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Judges Press IRS on Church of Scientology Tax Break
More articles on this topic: A Jewish couple’s bid to take a tax deduction they say the Internal Revenue Service reserves only for members of the Church of Scientology is getting a friendly reception from a federal appeals court, increasing the possibility of a ruling that could create a tax break for taxpayers of many religions who pay tuition to religious schools.
During arguments on the case this week, three judges who ride the 9th Circuit Court of Appeals expressed deep skepticism of the IRS’s position that the way the agency treats Scientologists is irrelevant to the deductions the Orthodox Jews, Michael and Marla Sklar, took for part of their children’s day school tuition and for after-school classes in Jewish law.
“The view of the IRS is it can unconstitutionally violate the Constitution by establishing religion, by treating one religion more favorably than other religions in terms of what is allowed as deductions, and there can never be any judicial review of that?” Judge Kim Wardlaw asked at the court session Monday in Pasadena, Calif.
“That is not at all what I said,” a Justice Department lawyer representing the IRS, Ellen Delsole, said.
“That’s the bottom line,” Judge Wardlaw and a colleague on the panel, Harry Pregerson, both replied. “This does intrude into the Establishment Clause,” Judge Wardlaw added.
The case stems from an agreement the IRS reached with the Church of Scientology in 1993 to end more than a decade of lawsuits, audits, and other enforcement actions involving the tax agency, Scientology entities, and church leaders. The church paid $12.5 million, while the IRS agreed to drop arguments that Scientology, which was founded by L. Ron Hubbard, was not a bona fide religion.
At about the time of that deal, the IRS agreed to allow Scientologists to deduct at least 80% of the fees paid for “religious training and services.”
The Sklars took similar deductions for religious education on their returns for the early 1990s, without challenge by the IRS. However, the IRS rejected their deductions for 1994 and beyond.
The 1993 pact between the IRS and the Scientologists was memorialized in a 72-page “closing agreement,” which was published by the Wall Street Journal in 1997. However, the IRS has never acknowledged the accuracy of that document, and when the Sklars’ attorney, Jeffrey Zuckerman, sought it from the agency, the IRS refused to turn the document over.
Mr. Zuckerman also subpoenaed the agreement and other records from the Church of Scientology and its president, Reverend Heber Jentzsch. The tax court judge who handled the case, John Colvin, quashed the subpoenas without explanation.
Ms. Delsole told the appeals court that the agreement with the Scientologists must be kept confidential for privacy reasons. “That’s getting into the private taxpayer business of another taxpayer,” she said.
The government lawyer asserted that the Sklars were not “similarly situated” to the Scientologists because the couple was seeking to deduct fees related to basic education for children and not the kind of training Scientologists undergo.
“How do we know that?” Judge Wardlaw asked, according to a recording of the hearing.
“You tell us you don’t know anything either, but you read the Wall Street Journal,” Judge Pregerson said to Ms. Delsole. She said that even if the benefit for Scientologists went too far, the solution was not to give it to “one taxpayer and one more religion.”
“That’s your best argument: two wrongs don’t make a right,” the third judge on the case, Ronald Leighton, said. He called the agency’s refusal to explain its agreement with the Scientologists “a frustration that is hard to get beyond.”
Ms. Delsole warned the court that the IRS would have difficulty resolving tax disputes if it could be forced to justify those deals in cases involving other taxpayers. “Every person who can find out about it from any other religious group is going to come in and want the same thing and that would really tie the IRS’s hands,” she said.
Members of racial minorities could also claim taxpayers of other races got better deals, the government lawyer said. “That’s the sort of thing that would flow from the idea that the IRS can’t settle and keep this confidential,” she added.
Mr. Zuckerman rejected that idea. “If the IRS were saying white people were entitled to a certain deduction and black people were not, why would it be such a parade of horrors for the courts to come in and say the government may not act that way?” he asked.
The court made no immediate ruling, but an attorney who represents the Church of Scientology, Monique Yingling, said she was surprised by the judges’ statements that data on the church’s deal with the IRS was needed for the Sklars’ case. “There’s a lot of information already in the public record about this question,” she said. “I don’t know that there’s any need for any additional information.”
Ms. Yingling said the 1993 deal merely ensured parity for Scientologists under tax law. “They are not getting any kind of special treatment,” she said.
Ms. Yingling said the training Scientologists can deduct is not the same as religious education. “The use of the word ‘training’ in Scientology is not analogous to education,” she said. “It’s just another way of advancing spiritually in Scientology.”
Mr. Zuckerman said that alleged distinction is precisely what he wants to explore in the court case. “You need to get a factual record on that, then you can make your argument,” he said.
• Original title: Judges Press IRS on Church Tax Break
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