IN the Supreme Court of the United States

No. 08-___

IN THE Supreme Court of the United States

————

MICHAEL SKLAR AND MARLA SKLAR, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. ———— On Petition for a Writ of Certiorari to the United States Court of Appeals for the Ninth Circuit ———— PETITION FOR A WRIT OF CERTIORARI ————

WILSON-EPES PRINTING CO., INC. – (202) 789-0096 – WASHINGTON, D. C. 20002 QUESTION PRESENTED May the Internal Revenue Service permit practitioners of one religion — members of the Church of Scientology — to deduct as charitable contributions their payments for religious instruction, but disallow such deductions when claimed by practitioners of any other religion, such as the Jewish petitioners here?

(i) ii LIST OF PARTIES All parties appear in the caption of the case on the cover page.

TABLE OF CONTENTS

Page QUESTION PRESENTED ...... i LIST OF PARTIES ...... ii TABLE OF AUTHORITIES ...... v OPINIONS BELOW ...... 1 JURISDICTION ...... 2 CONSTITUTIONAL AND STATUTORY PROVISIONS INVOLVED ...... 2 STATEMENT OF THE CASE ...... 4 Historical Background ...... 8 Petitioners’ 1994 Case ...... 11 The Present Case ...... 13 REASONS FOR GRANTING THE WRIT ...... 18 I. The Ninth Circuit Erred in Sanction- ing—in Effect, Authorizing—IRS’ Pa- tently Unconstitutional Discrimination in Favor of Scientologists and Against Practitioners of All Other Religions ...... 18 II. The Ninth Circuit Has Decided an Important Federal Question in a Way that Conflicts With Relevant Decisions of This Court ...... 27 III. It Is Very Unlikely That This Court Will Ever Have Another Opportunity to Review IRS’ Unconstitutional Discrim- ination Against Non-Scientologists ...... 29 CONCLUSION ...... 31

(iii) iv TABLE OF CONTENTS—Continued APPENDIX Page Opinion below of the United States Court of Appeals for the Ninth Circuit, dated and filed December 12, 2008, and reported as Sklar v. Commissioner, 549 F.3d 1252 (9th Cir 2008) ...... 1a Opinion below of the United States Tax Court, dated and filed December 21, 2005, and reported as Sklar v. Commis- sioner, 125 T.C. 281 (2005) ...... 31a Opinion of the United States Court of Appeals for the Ninth Circuit in the related case of Sklar v Commissioner, 282 F.3d 610 (9th Cir 2002) ...... 59a Excerpts from Agreement between the Internal Revenue Service and the Church of Scientology and its constituent entities, dated October 1, 1993, as published by The Wall Street Journal Interactive Edition (Tax Court Exhibit 62 P) ...... 83a

v TABLE OF AUTHORITIES CASES Page Allegheny Pittsburgh Coal Co. v. County Commission, 488 U.S. 336 (1989)...... 22 Epperson v. Arkansas, 393 U.S. 97 (1968)... 19 Everson v. Board of Education, 330 U.S. 1 (1947) ...... 19 Foley v. Commissioner, 844 F.2d 94 (2d Cir. 1988) ...... 25 Gillette v. United States, 401 U.S. 437 (1971) ...... 19 Henson v. Internal Revenue Service, 2000 U.S. App. Lexis 23997 (9th Cir. 2000) ..... 27 Hernandez v. Commissioner, 490 U.S. 680 (1989) ...... 4, 5, 8, 9, 10, 11, 26 Hillsborough Township v. Crowell, 326 U.S. 620 (1946) ...... 22 Iowa-Des Moines National Bank v. Bennett, 284 U.S.239 (1931) ...... 21, 22, 26 Larson v. Valente, 456 U.S. 228 (1982) ... 19, 20, 21 McCulloch v. Maryland, 17 U.S. (4 Wheat.) 316 (1819) ...... 27 McKesson v. Division of Alcoholic Beve- rages & Tobacco, 496 U.S. 18 (1990) ...... 22 Sklar v. Commissioner, 549 F.3d 1252 (9th Cir. 2008) ...... 6, 7, 17, 18, 21, 24, 25 Sklar v. Commissioner, 125 T.C. 281 (2005) ...... 17 Sklar v. Commissioner, 282 F.3d 610 (9th Cir. 2002) ...... 13, 14, 15, 21, 24, 25, 27, 28 Sklar v. Commissioner, T.C. Memo 2000- 118 ...... 13 United States v. American Bar Endow- ment, 477 U.S. 105 (1986) ...... 12

vi TABLE OF AUTHORITIES—Continued CONSTITUTIONAL PROVISIONS, Page STATUTES AND REGULATIONS A.R.M. 2, C.B. 1, 150 (1919) ...... 24 I.R.C. § 170 ...... 4, 11, 12, 17, 18, 24, 26 I.R.C. § 501(c)(3) ...... 24 I.R.C. § 6033(a)(2)(A)(i) ...... 24 I.R.C. § 6115 ...... 11 I.R.C. § 6662(a) ...... 7 28 U.S.C. §1254(1) ...... 2 Omnibus Budget Reconciliation Act of 1993, P.L. No. 103-66, 107 Stat. 312 ...... 11 Rev. Rul. 70-47, 1970-1 C.B. 49 ...... 24, 25 U.S. CONST., AMEND. I ...... 12, 18, 19

OTHER 2006 Private School Universe Survey, National Center for Education Statistics, U.S. Department of Education ...... 28 Lawrence Zelenak, Should Courts Require the Internal Revenue Service to be Consistent?, 38 Tax L. Rev. 411 (1985) .. 26-27 “Scientology’s Puzzling Journey from Tax Rebel to Tax Exempt”, The New York Times, March 9, 1997 ...... 11 “Scientologists and IRS Settled for $12.5 Million”, The Wall Street Journal, Dec 30, 1997 ...... 11 “$12.5 Million Deal with I.R.S. Lifted Cloud Over Scientologists”, The New York Times, Dec. 31, 1997 ...... 11

IN THE Supreme Court of the United States ———— No. 08-___ ———— MICHAEL SKLAR AND MARLA SKLAR, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. ———— On Petition for a Writ of Certiorari to the United States Court of Appeals for the Ninth Circuit ———— PETITION FOR A WRIT OF CERTIORARI ———— Petitioners respectfully pray that a writ of certiorari issue to review the judgment below.

OPINIONS BELOW The opinion of the United States Court of Appeals for the Ninth Circuit is reported at Sklar v. Commis- sioner, 549 F.3d 1252 (9th Cir. 2008), and is contained in the appendix to this petition at 1a. The Ninth Circuit affirmed the opinion of the United States Tax Court, which is reported at Sklar v. Commissioner, 125 T.C. 281 (2005), and is contained in the appendix to this petition at 31a. 2 JURISDICTION The United States Court of Appeals for the Ninth Circuit rendered its decision on December 12, 2008. No petition for rehearing was filed. The jurisdiction of this Court is invoked under 28 U.S.C. § 1254(1).

CONSTITUTIONAL AND STATUTORY PROVISIONS INVOLVED THE ESTABLISHMENT CLAUSE, U.S. CONST. AMEND. I Congress shall make no law respecting an establishment of religion . . . . I.R.C. §170, CHARITABLE, ETC., CONTRIBUTIONS AND GIFTS (a) ALLOWANCE OF DEDUCTION.— (1) GENERAL RULE.—There shall be allowed as a deduction any charitable contribution (as defined in subsection (c)) payment of which is made within the taxable year. . . . * * * * (c) CHARITABLE CONTRIBUTION DEFINED.—For purposes of this section, the term “charitable contribution” means a contribution or gift to or for the use of— (1) . . . . (2) A corporation, trust, or community chest, fund, or foundation— (A) . . . . (B) organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes . . . . 3 * * * * (f) DISALLOWANCE OF DEDUCTION IN CERTAIN CASES AND SPECIAL RULES.— * * * * (8) SUBSTANTIATION REQUIREMENT FOR CERTAIN CONTRIBUTIONS.— (A) GENERAL RULE.—No deduction shall be allowed under subsection (a) for any contribution of $250 or more unless the taxpayer substantiates the contribution by a contemporaneous written acknowledgment of the contribution by the donee organization that meets the requirements of subparagraph (B). (B) CONTENT OF ACKNOWLEDGMENT.—An acknowledgment meets the requirements of this subparagraph if it includes the following information: (i) The amount of cash and a description (but not value) of any property other than cash contributed. (ii) Whether the donee organization provided any goods or services in consideration, in whole or in part, for any property described in clause (i). (iii) A description and good faith estimate of the value of any goods or services referred to in clause (ii) or, if such goods or services consist solely of intangible religious benefits, a statement to that effect. For purposes of this subparagraph, the term “intangible religious benefit” means any intangible religious benefit which is provided by an organization organized exclusively for religious purposes and which generally is not sold in a commercial transaction outside the donative context. 4 * * * * I.R.C. §6115, DISCLOSURE RELATED TO QUID PRO QUO CONTRIBUTIONS. (a) DISCLOSURE REQUIREMENT.—If an organization described in section 170(c) . . . receives a quid pro quo contribution in excess of $75, the organization shall, in connection with the solicitation or receipt of the contribution, provide a written statement which— (1) informs the donor that the amount of the contribution that is deductible for Federal income tax purposes is limited to the excess of the amount of any money and the value of any property other than money contributed by the donor over the value of the goods or services provided by the organization, and (2) provides the donor with a good faith estimate of the value of such goods or services. (b) Quid Pro Quo Contribution.—For purposes of this section, the term “quid pro quo contribution” means a payment made partly as a contribution and partly in consideration for goods or services provided to the payor by the donee organization. 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. STATEMENT OF THE CASE I.R.C. § 170 generally allows a deduction for a contribution or gift to or for the use of a religious or educational organization. In June 1989, this Court held in Hernandez v. Commissioner, 490 U.S. 680 5 (1989) (hereinafter “Hernandez”), that members of the Church of Scientology may not deduct as charitable contributions their payments for religious instruction (known as “auditing” and “training” in the Church of Scientology). Nonetheless, in October 1993, IRS and the Church of Scientology entered into an agreement that, inter alia, permitted members of the Church of Scientology to deduct as charitable contributions their payments for religious instruction. Moreover, although that agreement expired in 1999, we understand that IRS continues to this day to permit members of the Church of Scientology to deduct as charitable contributions their payments for religious instruction. IRS disallows, however, any such deductions when claimed by practitioners of any other religion. Specifically, IRS disallowed the Jewish Petitioners’ claim of a charitable deduction on their 1995 tax return for $15,000 they paid that year for their children’s religious instruction. The Tax Court and the Ninth Circuit below upheld IRS’ disallowance of Petitioners deduction. Petition- ers respectfully submit that the policy and practice of IRS to permit Scientologists to deduct their payments for religious instruction but to disallow such deductions when claimed by practitioners of other religions patently violates the Establishment Clause. Peti- tioners therefore ask this Court, in accordance with its long-established rule in cases involving unconstitutional discrimination by tax authorities, to permit Petitioners, too, to deduct their payments for religious instruction as charitable contributions. * * * * In 1995, Petitioners Michael and Marla Sklar, a husband and wife who are Orthodox Jews, sent their 6 five children to two Orthodox Jewish schools: Emek Hebrew Academy in North Hollywood, California (“Emek”); and Yeshiva Rav Isacsohn Torath Emeth Academy (“Yeshiva Rav Isacsohn”) in Los Angeles. Petitioners “did so because of their sincerely and deeply held religious belief that as Jews they have a religious obligation to provide their children with an Orthodox Jewish education in an Orthodox Jewish environment.” Sklar v. Commissioner, 549 F.3d 1252, 1254 (9th Cir. 2008) (“Sklar II”), Pet. App. 2a. Both schools provided daily exposure to Jewish heritage and values. Their goals included educating their students in Jewish heritage and values, as well as the tenets of the Jewish faith. To this end, time was allocated in the school day for prayers and religious studies, students were required to adhere to Orthodox Jewish dress codes, and boys and girls attended classes separately. A child’s day at each school included specified hours devoted to courses in religious studies and specified hours devoted to secular studies. The length of time that each student participated in secular classes, as opposed to religious studies, and the length of the school day varied with the gender and grade level of the particular student. Id., Pet. App. 2a-3a. The classes in religious studies also varied with the gender and grade level of the particular student, and included Bible, Talmud, Prayer, Jewish law and Jewish history, Regardless of gender or grade level, each student spent more than 50% of the school day in religious studies classes. In 1995, Petitioners paid a total of $27,283 to the two schools: $24,093 for tuition; $1,300 for registra- 7 tion fees; $1,715 for miscellaneous other charges; and $175 to Emek, for an extra-curricular, after-school class in Mishna1 for their son. On their 1995 tax return, Petitioners deducted $24,421 as charitable contributions, including $15,000 which they attributed to the cost of their children’s religious instruction at Emek and Yeshiva Rav Isacsohn. These $15,000 included the entire $175 they paid for their son’s after-school, extracurricular Mishna class, and that portion of the other payments which Petitioners attributed to their children’s religious instruction during the regular school day. Pet. App. 2a. In a notice of deficiency, IRS determined that Peti- tioners owed an additional $10,198 in federal income tax, based upon IRS disallowing $15,000 of Petition- ers’ charitable contributions, and assessing additional self employment tax. IRS also assessed an accuracy-related penalty of $2,040 under I.R.C. § 6662(a). Petitioners timely asked the Tax Court to review this IRS determination, and IRS immediately (in its Answer in Tax Court) conceded that Petition- ers did not owe any additional self-employment tax. The Tax Court was thus left to consider whether Petitioners owed an additional $3,209 of tax because of the disallowed deduction, and IRS’ proposed $2,040 accuracy-related penalty. Pet. App. 10a-11a, 31a. To understand this case and Petitioners’ contentions, it is necessary to understand the historical context in which Petitioners claimed the disallowed deductions in 1995. Therefore, we turn now to this historical context, and will return afterwards to the facts of this case.

1 The Mishna is part of the Talmud, which is the compendium of Jewish oral law. 8 Historical Background For decades, IRS and the Church of Scientology were engaged in what can only be described as a legal war, in which IRS refused to recognize the Church of Scientology and its affiliates as charitable organizations, and IRS disallowed various deductions claimed by members of the Church of Scientology; and the Church and many of its members brought a host of lawsuits against IRS. Ultimately, in 1989, this war reached this Court. In a 5-2 opinion, the Court ruled that taxpayers may not deduct as charitable contributions payments made to branch churches of the Church of Scientology in order to receive services known as “auditing” and “training.” Hernandez, supra. This Court explained: Scientologists believe that an immortal spiritual being exists in every person. A person becomes aware of this spiritual dimension through a process known as “auditing.” Auditing involves a one-to-one encounter between a participant (known as a “preclear”) and a Church official (known as an “auditor”). . . . The preclear gains spiritual awareness by progressing through sequential levels of auditing, provided in short blocks of time known as “intensives.” The Church also offers members doctrinal courses known as “training.” Participants in these sessions study the tenets of Scientology and seek to attain the qualifications necessary to serve as auditors. Training courses, like auditing sessions, are provided in sequential levels. Scientologists are taught that spiritual gains result from participation in such courses. 9 The Church charges a “fixed donation,” also known as a “price” or a “fixed contribution,” for participants to gain access to auditing and training sessions. These charges are set forth in schedules, and prices vary with a session’s length and level of sophistication. 490 U.S. at 686 (citations and footnote deleted). The taxpayers in Hernandez recognized that “quid pro quo” payments, which are payments in exchange for which goods or services are received, generally are not deductible as contributions under federal tax law. The Hernandez taxpayers argued, however, that they were entitled to deductions “because a quid pro quo analysis is inappropriate under [I.R.C.] § 170 when the benefit a taxpayer receives is purely religious in nature.” Id. at 692. They further argued that IRS discriminated against Scientologists by disallowing their payments for auditing and training, while permitting adherents of other religions to deduct specified payments for pew rents, building fund assessments, periodic dues paid to a church, attendance at High Holy Day services, Torah readings, and memorial plaques. Id. at 701. This Court rejected these arguments, holding that, “The Code makes no special preference for payments made in the expectation of gaining religious benefits or access to a religious service.” Id. at 693.2 The Court further found that it could not on the record before it “appraise accurately whether the IRS’ revenue rulings have correctly applied a quid pro quo

2 This Court observed that permitting the Hernandez taxpayers to deduct their payments for auditing and training could lead other taxpayers to deduct tuition payments to parochial schools. 490 U.S. at 693. 10 analysis with respect to any or all of the religious practices in question.” Id. at 702. The dissent in Hernandez castigated the Court for having acquiesced in IRS’ decision “to manufacture a singular exception to its 70-year practice of allowing fixed payments indistinguishable from those made by petitioners to be deducted as charitable contributions.” Id. at 704 (O’Connor, J., dissenting). Notwithstanding this victory for IRS in Hernandez, barely four years later, in October 1993, IRS entered into an agreement with the Church of Scientology in which, among other things, IRS agreed that at least through 1999, it would not “contest the deductibility of Church of Scientology fixed donations in connection with qualified religious services.” “Qualified religious services” were defined to encompass auditing and training. IRS announced in October 1993 that it had entered into an agreement with the Church of Scientology. However, it has never publicly disclosed the full terms or text of that agreement. In December 1997, however, The Wall Street Journal published on the Internet what it described as the full text of the agreement, and in Tax Court below, Petitioners offered this text into evidence as Ex. 62 P. (Excerpts from this text are contained in the appendix to this petition at 83a.) Section VII(B) permits members of the Church of Scientology to deduct as charitable contributions their payments for auditing and training. It is unclear why IRS agreed in October 1993 to permit members of the Church of Scientology to deduct their fixed payments for auditing and training after four years earlier winning a ruling from this 11 Court that such payments are not deductible. Never having publicly conceded that it agreed to this, IRS of course has never explained why it did so. Some have suggested that IRS simply was tired of litigating with the Church. See, e.g., “Scientologists and IRS Settled for $12.5 Million”, The Wall Street Journal, Dec. 30, 1997; “Scientology’s Puzzling Journey from Tax Rebel to Tax Exempt”, The New York Times, March 9, 1997. IRS, however, has maintained that the agreement was consistent with the law, but has not explained why or how. See “$12.5 Million Deal with I.R.S. Lifted Cloud Over Scientologists”, The New York Times, Dec. 31, 1997. In the courts below, Petitioners contended that certain 1993 amendments to the Internal Revenue Code reversed Hernandez in some respects, and authorized taxpayers to deduct as charitable contributions their payments for religious instruction. Specifically, the Omnibus Budget Reconciliation Act of 1993, P.L. No. 103 66, 107 Stat. 312, among many other unrelated provisions, enacted I.R.C. §§ 170(f)(8) and 6115, which introduced the phrase “intangible religious benefit” directly into the Code, and clarified that a payment to a religious organization is deductible even if the payor receives an intangible religious benefit in return. Thus, contrary to when Hernandez was decided, since 1993, the Code has contained “special preference for payments made in the expectation of gaining religious benefits or access to a religious service.” Hernandez, 490 U.S. at 692-93. Petitioners’ 1994 Case Upon learning of IRS’ agreement with the Church of Scientology, Petitioners filed an amended tax return for 1991, claiming a refund on the basis of deducting the part of their payments to their 12 children’s schools in 1991 which was attributable to the children’s religious instruction. After examination by IRS, the deduction was allowed and the refund was paid. Petitioners also claimed a deduction for part of their payments to their children’s schools on an amended tax return for 1992, and on their tax return for 1993. They received a refund based upon their amended 1992 return, and IRS did not disallow the deduction on their 1993 return. Petitioners claimed a similar deduction on their 1994 income tax return. That year, however, IRS disallowed this deduction after an audit. Petitioners petitioned the Tax Court to review this decision by IRS. As in 1995, the contributions disallowed for 1994 consisted of two types of payments: 1. payments to Emek for their son’s extracurricular, after-school Mishna class; and 2. the portion of their other payments to Emek and Yeshiva Rav Isacsohn attributable to their children’s religious instruction.3 Petitioners argued both that these deductions were authorized by I.R.C. § 170 per the 1993 amendments to the Code, and that in any event, because IRS permitted members of the Church of Scientology to deduct as charitable contributions their payments for religious instruction, the First Amendment required that IRS permit Petitioners to deduct their payments for religious instruction, too.

3 In United States v. American Bar Endowment, 477 U.S. 105, 117 (1986), this Court held that a “dual payment”, i.e., a payment made in part as consideration for goods or services and in part for charitable purposes, is deductible “to the extent it exceeds the market value of the benefit received.” 13 The Tax Court upheld IRS in the 1994 case, Sklar v. Commissioner, T.C. Memo 2000-118, and the Ninth Circuit affirmed, Sklar v. Commissioner, 282 F.3d 610, 622 (2002) (“Sklar I”).4 The Ninth Circuit held that Petitioners had “not shown that their ‘dual- payment’ tuition payments are partially deductible under the Tax Code, and, specifically, that the total payments they made for both the secular and religious private school education their children received [in 1994] exceeded the market value of other secular private school education available to those children.” Id. at 622, Pet. App. 80a. The Ninth Circuit also said that Petitioners had failed to show that their children’s religious studies were similar to auditing and training. 282 F.3d at 620, Pet. App. 76a. Neither the Tax Court nor the Ninth Circuit addressed Petition- ers’ payments for solely religious instruction, i.e., their payments for their son’s Mishna class. The Present Case In light of the Ninth Circuit’s decision in Sklar I, at trial below in the Tax Court, Petitioners sought to prove (1) that their tuition payments to the two schools in 1995 exceeded the market value of their children’s secular education, and (2) that their children’s religious studies were jurisprudentially indistinguishable from auditing and training in the Church of Scientology. In Sklar I, the Ninth Circuit held that Petitioners would have to show “that any dual tuition payments

4 A copy of the Ninth Circuit’s decision in Sklar I is contained in the appendix to this petition at 59a. In the 1994 case, Petitioners proceeded pro se in Tax Court, but were represented by counsel in the Ninth Circuit. In the present case, Petitioners were represented by counsel both in Tax Court and in the Ninth Circuit. 14 they may have made exceeded this market value of the secular education their children received” and that, “The market value [of the children’s secular studies] is the cost of a comparable secular education offered by private schools.” 282 F.3d at 621, Pet. App. 79a. Accordingly, at the trial below, Petitioners presented substantial, uncontroverted evidence as to “the cost of a comparable secular education offered by private schools.” Specifically, Petitioners presented testimony and documents to show the cost and quality of the education at Page Private Schools in Los Angeles, which are two secular, private schools close to Yeshiva Rav Isacsohn; and expert testimony by Dr. Lewis C. Solmon, a distinguished economist, with particular expertise concerning the economics of education, and former Dean of the Graduate School of Education at UCLA (1985 91), concerning the value of the secular educations at Emek and Yeshiva Rav Isacsohn. Dr. Solmon concluded that the market value of the secular education for boys at Yeshiva Rav Isacsohn was no more than $1,483 per student, and at Emek was no more than $1,700 per student; and that the market value of the secular education for girls at Yeshiva Rav Isacsohn was no more than $1,583 per student, and at Emek was no more than $1,724 per student. Based upon these conclusions, in exchange for Petitioners’ total payments to the schools of $27,283 in 1995, their children received religious instruction plus secular educations worth no more than $7,484.50. Thus, Petitioners’ paid at least $19,798.50 for their children’s religious instruction in 15 1995, which exceeds the $15,000 they claimed and IRS disallowed as charitable contributions.5 Petitioners also attempted to address at trial the second factual issue cited by the Ninth Circuit in Sklar I, i.e., whether their children’s religious studies were similar (in a jurisprudential sense) to “auditing”, “training” or other “qualified religious services” in the Church of Scientology. Petitioners also attempted to establish that IRS permits members of the Church of Scientology to deduct their payments for “auditing”, “training” or other “qualified religious services” as charitable deductions. Petitioners were largely stymied in these efforts, because the Tax Court sustained IRS’ objections to making disclosures concerning the Church of Scientology; and the Tax Court granted motions by the Church of Scientology and IRS to quash trial subpoenas that Petitioners served upon the Church of Scientology and its President.6

5 IRS also called an expert witness to testify at trial, but with- drew him and his testimony after conceding that he lied during voir dire and in his written report. 6 Petitioners first sought discovery on these issues from IRS in interrogatories and documents requests served on May 5, 2003. IRS moved for a protective order, and Petitioners moved to compel disclosure. IRS correctly recognized that Petitioners’ interrogatories and document requests were largely “intended to establish facts probative of their claim of disparate treatment.” IRS insisted, however, that “the Court need not, and should not, reach the claimed constitutional and administrative inconsistency issues posed by Petitioners.” Thus, IRS objected to the interrogatories and document requests as “irrelevant.” The Tax Court granted IRS’ motion for a protective order as to all interrogatories and document requests concerning the Church of Scientology and the deductibility of payments to the Church of Scientology for religious instruction, and denied Petitioners’ mo- 16 Ultimately, at trial, Petitioners could only (1) offer as an exhibit the agreement between IRS and the Church of Scientology as published by The Wall Street Journal, and (2) make an offer of proof as to what the testimony and documents of the Church of Scientology would have shown. The Tax Court upheld IRS’ disallowance of Peti- tioners’ 1995 deductions, but also held that Petition- ers were not subject to any accuracy-related penalty.

tion to compel disclosure, in two Orders dated July 28, 2003. Neither Order provides any reason for denying Petitioners discovery concerning these issues. Petitioners tried again by serving requests for admission on September 3, 2003, and IRS again moved for a protective order: “Insofar as they relate to the tenets of the Church of Scientol- ogy, the contents of a closing agreement entered into under I.R.C. § 7121, and the deductibility of actual and hypothetical payments made to the Church of Scientology, [IRS] submits that petitioners’ Requests for Admissions seek to establish facts that are irrelevant . . . .” The Tax Court again issued a protective order without explanation. Having failed to secure any information from IRS, the Sklars served trial subpoenas upon the Church of Scientology and its President, Reverend Heber C. Jentzsch. The Church and Rev. Jentzsch moved to quash these subpoenas, arguing that the information sought “is not relevant to the matters at issue in this case.” IRS made a motion in limine, to exclude testimony by Rev. Jentzsch or anyone else from the Church of Scientology, on the ground that “evidence relating to the Church of Scientol- ogy is not relevant.” The Tax Court quashed the subpoenas, without explanation. Finally, on November 4, 2004, Petitioners moved the Tax Court to reconsider its orders quashing the subpoenas, granting a protective order with respect to their requests for admissions, and granting a protective order with respect to their interrogatories and document requests. This motion was denied without explanation, and without any response by IRS. 17 Sklar v. Commissioner, 125 T.C. 281 (2005), Pet. App. 31a. Petitioners appealed to the Ninth Circuit; IRS did not appeal the Tax Court’s denial of a penalty. The Ninth Circuit affirmed the decision of the Tax Court. Sklar II, supra. The Court of Appeals held that the 1993 amendments to the Internal Revenue Code did not reverse Hernandez in any way, and therefore Petitioners’ payments for religious instruction are not deductible under I.R.C. § 170. 549 F.3d at 1260-64, Pet. App. 13a-24a. In addressing Peti- tioners’ constitutional claim, the Ninth Circuit first concluded “that tuition and fee payments to schools that provide secular and religious education as part of one curriculum are quite different from payments to organizations that provide exclusively religious services.” 549 F.3d at 1264-65, Pet. App. 25a. This difference is apparently intuitively obvious to the Ninth Circuit, because it did not even attempt to explain the difference. It is particularly not clear how Petitioners’ payments to Emek for their son’s Mishna class is in any way different jurisprudentially from payments to a branch of the Church of Scientology for auditing or training. The Ninth Circuit’s conclusion also ignores the existence of the Delphi Schools Net- work, a group of eight private schools associated with the Church of Scientology, see http://www.delphian. org/page.cfm?p=313, http://www.delphian.org/page.cfm? p=277, which are presumably covered by the agreement between IRS and the Church. In any event, however, the Ninth Circuit did not rest upon this conclusion to affirm the Tax Court. Rather, it went on to hold firmly and clearly that IRS’ agreement with the Church of Scientology “constitutes an unconstitutional denominational preference.” 549 F.3d at 1265, Pet. App. 26a. The Court 18 of Appeals held, however, that Petitioners are not entitled to claim the same deduction as Scientologists because this (1) would create a policy favoring all religions; (2) “could require excessive government entanglement with religion”; and (3) would permit Petitioners to violate I.R.C. § 170. Both in this case below and in the 1994 litigation, the Tax Court and the Ninth Circuit each devoted considerable attention to Petitioners’ contention that the 1993 amendments to the Internal Revenue Code authorize taxpayers to deduct as charitable contributions their payments for religious instruction; and in each case, each court rejected Petitioners’ contention. Petitioners do not ask this Court to review this question; we assume here arguendo that the Internal Revenue Code does not permit anyone to deduct their payments for religious instruction. Petitioners ask this Court to consider only whether because IRS permits Scientologists to claim such deductions, the First Amendment requires that IRS permit practitioners of other religions, such as the Jewish Peti- tioners here, to claim such deductions.

REASONS FOR GRANTING THE PETITION I. The Ninth Circuit Erred in Sanctioning— in Effect, Authorizing—IRS’ Patently Unconstitutional Discrimination in Favor of Scientologists and Against Practition- ers of All Other Religions. It would be difficult to imagine a clearer violation of the Establishment Clause than the policy and practice of IRS that Petitioners challenge. IRS permits practitioners of one religion—Scientologists—to deduct as charitable contributions their payments for religious instruction, but does not permit practition- 19 ers of any other religion—including the Jewish Peti- tioners—to deduct their payments for religious instruction. 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). Accord, e.g., 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). The Ninth Circuit has twice clearly explained and held that IRS’ policy and practice violates the Estab- lishment Clause: Applying [Larson v. Valente, 456 U.S. [228 (1982)] at 246-47, 102 S.Ct. 1673, 72 L.Ed.2d 33,] to the policy of the IRS towards the Church of Scientology, the initial inquiry must be whether the policy facially discriminates amongst religions. Clearly it does, as this tax deduction is available only to members of the Church of Scientology. The second Larson inquiry is whether or not the facially discriminatory policy is justified by a compelling governmental interest. 456 U.S. at 20 246-47, 102 S.Ct. 1673, 72 L.Ed.2d 33. Although the IRS does not concede that it is engaging in a denominational preference, it asserts in its brief that the terms of the settlement agreement cannot be used as a basis to find an Establishment Clause violation because “in order to settle a case, both parties are required to make compromises with respect to points on which they believe they are legally correct.” This is the only interest that the IRS proffers for the alleged policy. Although it appears to be true that the IRS has engaged in this particular preference in the interest of settling a long an litigious tax dispute with the Church of Scientology, and as compelling as this interest might otherwise be, it does not rise to the level that would pass strict scrutiny. The benefits of settling a controversy with one religious organization can hardly outweigh the costs of engaging in a religious preference. Even aside from the constitutional considerations, a contrary rule would create a procedure by which any denomination seeking a denominational preference could bypass Congressional law-making and IRS rulemaking by engaging in voluminous tax litigation. Such a procedure would likely encourage the proliferation of such litigation, not reduce it. Larson, 456 U.S. at 248, 102 S.Ct. 1673, 72 L.Ed.2d 33 (holding that even assuming arguendo that the government has a compelling governmental interest for a denominational preference, it must show that the rule is “closely fitted to further the interest that it assertedly serves”). Because the facial preferences for the Church of Scientology embodied in the IRS’s policy regarding its members cannot be justified by a compelling governmental interest, . . . 21 the IRS policy constitutes an unconstitutional denominational preference under Larson, 456 U.S. at 230, 102 S.Ct. 1673, 72 L.Ed.2d 33. Sklar II, 549 F.3d at 1265-66, Pet. App. 26a-28a, quoting Sklar I, 282 F.3d at 618-19, Pet. App. 74a- 75a. This Court has long held that where a tax authority’s practice results in some taxpayers paying higher taxes than they would have paid had they been part of an unconstitutionally favored group, as Petitioners here have paid higher taxes than they would have paid had they been Scientologists, the overtaxed taxpayers are entitled to a refund of their excess taxes paid. In Iowa-Des Moines National Bank v. Bennett, 284 U.S. 239 (1931) (“Bennett”), this Court found that Iowa’s administration of its tax law constituted discrimination against certain taxpayers in violation of the Equal Protection Clause. The Iowa Supreme Court had recognized that there was systemic discrimination because certain taxpayers were underas- sessed, id. at 241-43, but held “that the discrimination thus effected was remediable only by correcting the wrong under the state law in favor of the competitors and not by extending the benefits as [sic] of a similar wrong to the petitioners.” Id. at 244. This is also the holding of the Ninth Circuit below. This Court rejected the Iowa Supreme Court’s analysis. The Court held that petitioners had been subjected to an Equal Protection violation, and were entitled to refunds, notwithstanding the fact that they had been properly assessed under the Iowa statute: It may be assumed that all grounds for a claim for refund would have fallen if the state, promptly upon discovery of the discrimination, 22 had removed it by collecting the additional taxes from the favored competitors. By such collection the petitioners’ grievances would have been redressed; for these are not primarily overassess- ment. The right invoked is that to equal treatment; and such treatment will be attained if either their competitors’ taxes are increased or their own reduced. But it is well settled that a taxpayer who has been subjected to discriminatory taxation through the favoring of others in violation of federal law cannot be required him- self to assume the burden of seeking an increase of the taxes which the others should have paid. Nor may he be remitted to the necessity of awaiting such action by the state officials upon their own initiative. The petitioners are entitled to obtain in these suits refund of the excess of taxes exacted from them. Id. at 247 (citations omitted). Accord, e.g., Allegheny Pittsburgh Coal Co. v. County Commission, 488 U.S. 336 (1989) (although the petitioners had been properly assessed under the statute, they were entitled to refund because of constitutional violation resulting in lower taxes paid by other, similarly situated taxpayers); Hillsborough Township v. Crowell, 326 U.S. 620, 623 24 (1946) (state law that required property owner who was assessed at true value of land but who had been singled out for discriminatory taxation to seek increase in assessment of others would violate the Equal Protection Clause); McKesson v. Division of Alcoholic Beverages & Tobacco, 496 U.S. 18, 36 (1990) (quoting Bennett, supra, 284 U.S. at 247, for the proposition that a taxpayer victimized by differential tax treatment cannot be “remitted to the necessity of 23 awaiting . . . action [against the favored taxpayers] by the state officials”). Thus, this Court has established that a taxpayer who has been correctly assessed under a taxing statute, but has been systematically and unconstitutionally discriminated against through underassess- ments of others, is entitled to a refund, and may not be required to seek elevation of others’ taxes or any other correction of the situation. Refunds are proper relief for constitutional violations even where the disadvantaged party has been taxed in accordance with substantive law. Therefore, Petitioners are entitled to the deduction they claimed, even if it is not authorized by the Internal Revenue Code. The Ninth Circuit chose simply to ignore this well- established rule. Notwithstanding its clear and correct holding that IRS’ policy and practice patently violates the Establishment Clause, the Ninth Circuit sanctioned IRS’ unconstitutional policy and practice by upholding IRS’ refusal to permit Petitioners to deduct as charitable contributions any of their payment for their children’s religious instruction. The Ninth Circuit offered three reasons for permitting IRS to continue its unconstitutional policy and practice, none of which addresses this Court’s rule in Bennett and its progeny, and none of which is persuasive: First, we would be reluctant ever to presume that Congress or any agency of the government would intend that a general religious preference be adopted, as such preferences raise the highly sensitive issue of state sponsorship of religion. In the absence of a clear expression of such intent, we would be unlikely to consider extending a policy favoring one religion where the effect of our action would be to create a policy favoring 24 all. Second, the Supreme Court has previously stated that a policy such as the Sklars wish us to create would be of questionable constitutional validity under Lemon, because the administration of the policy could require excessive government entanglement with religion. Third, the policy the Sklars seek would appear to violate [I.R.C.] § 170. Sklar II, 549 F.3d at 1266, Pet. App. 28a, quoting Sklar I, 282 F.3d at 619-20, Pet. App. 75a-76a (citations omitted). The Ninth Circuit’s first argument ignores the fact that federal tax law contains a number of preferences for religious organizations, starting with the fact that every religious organization is entitled to tax exemption pursuant to I.R.C. § 501(c)(3), and contributions to every religious organization are deductible under I.R.C. § 170. Religious organizations also are exempt from the general requirement that tax-exempt organizations file an annual return (Form 990) with IRS. I.R.C. § 6033(a)(3)(A)(i). Furthermore, and particularly notable here, many types of payments to religious organizations are exempt from the usual rule that “‘quid pro quo’ payments, where the taxpayer receives a benefit in exchange for the payment, are generally not deductible as charitable contributions.” Sklar II, 549 F.3d at 1259, Pet. App. 13a. Ninety years ago, the Govern- ment declared that pew rents—payments to a church for the right to sit in a designated pew—are deductible as charitable contributions. A.R.M. 2, C.B. 1, 150 (1919). IRS reaffirmed this position thirty-nine years ago. Rev. Rul. 70-47, 1970-1 C.B. 49. The person paying a pew rent is receiving something in return, i.e., the right to sit in a particular pew in a particular 25 church. Moreover, the person making the payment presumably believes that this right is at least equal in value to the payment, for otherwise the person could simply make an unrestricted contribution to the church instead of paying a pew rent. Dues paid to a church also are deductible as a charitable contribution. Id. Again, however, the payor is receiving in exchange for the dues payments benefits from the church at least equal in value (to the payor) to the amount of the dues payments. Citing the same Revenue Ruling, the Second Circuit has held that, “specified payments for attendance at High Holy Day services, for tithes, for torah readings and for memorial plaques would fall into the same category”, i.e., are deductible as charitable contributions notwithstanding being payments in exchange for specifically designated rights or services. Foley v. Commis- sioner, 844 F.2d 94, 96 (1988). All these types of payments are in a literal sense “quid pro quo” payments. But they all have in common (1) that the “quid” in exchange for the taxpayer’s “quo” is an intangible religious benefit, and (2) that IRS permits taxpayers to deduct them as charitable contributions. Thus, there is a plethora of tax-related provisions and practices that provide special treatment for religious organizations. Pace the Ninth Circuit, permitting Petitioners to claim the same deductions as Scientologists would not constitute “state sponsorship of religion.” Sklar II, 549 F.3d at 1266, Pet. App. 28a, quoting Sklar I, 282 F.3d at 619, Pet. App. 76a. The Ninth Circuit’s second reason for permitting IRS to continue its unconstitutional policy and practice—that permitting the Petitioners to claim the 26 same deductions as Scientologists “could require excessive government entanglement with religion”, id., citing Hernandez v. Commissioner, 490 U.S. 680, 694 (1989)—is equally off-base. Determining whether a particular course is religious instruction certainly does not require more government entanglement with religion than determining whether a particular group is a religious organization in the first place. No material entanglement with religion was required to determine that the classes in Mishna, Talmud, Bi- ble, prayer and Jewish law which Petitioners’ children attended were religious instruction. No one—not IRS, not the Tax Court, not the Ninth Circuit—has ever questioned that these courses are all religious instruction. The Ninth Circuit’s third and final reason for not permitting Petitioners to claim the same deductions as Scientologists—that it would violate I.R.C. § 170— was rejected by this Court in Bennett, supra, and its progeny. As we explained above, this Court has consistently held that where a tax authority unconstitutionally favors certain taxpayers, a disfavored taxpayer is entitled to take advantage of the favorable treatment even if the favorable treatment violates the tax law. Moreover, as a practical matter, denying the Peti- tioners’ deductions immunizes, and thus in effect authorizes, IRS’ patent violation of the First Amend- ment. As Professor Lawrence Zelenak has pointed out, “[t]here is virtually no judicial review of a Ser- vice decision to be lenient” to other taxpayers: Taxpayers directly affected will not challenge the position because it is favorable to them. The Service will not, of course, challenge its own position. Third parties may sue to prevent Service 27 leniency toward other taxpayers . . . but such suits are almost always dismissed for lack of standing. Lawrence Zelenak, Should Courts Require the Inter- nal Revenue Service to be Consistent?, 38 Tax L. Rev. 411, 429 (1985) (footnote omitted).7 Thus, the Ninth Circuit erred by effectively authorizing IRS to continue its unconstitutional policy and practice.

II. The Ninth Circuit Has Decided an Im- portant Federal Question in a Way That Conflicts With Relevant Decisions of This Court. The question here—whether IRS must permit Jews and other practitioners of religions other than Scien- tology to claim the same deduction for religious instruction as Scientologists—is inherently important. In many ways, IRS is potentially the most powerful, and therefore most dangerous, government agency. This Court long ago recognized “That the power to tax involves the power to destroy; that the power to destroy may defeat and render useless the power to create.” McCulloch v. Maryland, 17 U.S. (4 Wheat.)

7 A concurring opinion in Sklar I, 282 F.3d at 623, Pet. App. 81a, suggests that “the proper course of action” is a lawsuit to stop IRS’ unconstitutional policy and practice, “not to let others claim the improper deduction, too.” As explained above, this Court rejected this position in Bennett and its progeny. More- over, because one taxpayer lacks standing to challenge the tax treatment of other taxpayers, an action to enjoin IRS’ unconstitutional preference for Scientologists was dismissed for lack of standing and the Ninth Circuit affirmed that dismissal. Henson v. Internal Revenue Service, 2000 U.S. App. Lexis 23997 (Sept. 11, 2000). 28 316, 411 (1819). It is critically important to ensure that this power is only applied constitutionally, not to punish perceived enemies, not to prefer favored (or litigious) religious groups. IRS knows that it is violating the Establishment Clause. Otherwise, it would not go to such lengths to try to keep its preference for Scientologists secret. IRS’ refusal to produce its agreement with the Church of Scientology in the Tax Court below, notwithstanding the Ninth Circuit’s ruling in Sklar I that the agreement must be publicly disclosed, 282 F.3d at 618, Pet. App. 73a, and IRS’ motion in Tax Court to quash Petitioners’ trial subpoenas to the Church of Scientology and its President, are frighten- ing, for they indicate that IRS is determined to discriminate against non-Scientologists, in secret, forever. IRS must not be allowed to hide, and to continue, its patently unconstitutional favoring of Scientologists. The issue presented in this case also has extremely substantial financial implications. The most recent available Private School Universe Survey by the U.S. Department of Education, National Center for Edu- cation Statistics, reports that in 2005-06, over 4 million students were enrolled in private schools with a religious orientation, including about 205,000 in Jewish schools. http://nces.ed.gov/surveys/pss/tables/ table_2006_02.asp. The Tax Court below ultimately ordered Petitioners to pay an additional $3,209.00 of tax for 1995, about $642 per child. Assuming this is reasonably typical for children in Jewish schools, and without taking into consideration increases in charges for religious instruction, based upon the 2005-06 enrollment data, the total additional tax imposed that year upon Jewish taxpayers alone as a result of 29 IRS’ unconstitutional discrimination against them is over $130 million annually! We understand that Jewish schools spend more time on religious instruction than most other religious schools. For example, Catholic schools, which are the overwhelming majority of religious private schools, devote only one in eight or one in nine periods per day to religious instruction—11.1-12.5% of the school day, compared to over 50% of the school day devoted to religious instruction at the Jewish schools attended by Petitioners’ children. Assuming, however, that the additional tax being paid by non- Scientologists averages even only 20% of the additional tax paid by Petitioners, i.e., $130 per child, in 2005-06, non-Scientologists paid over $530 million in additional taxes because of IRS’ discrimination against them!! Moreover, this reflects only payments to full-time religious schools for religious instruction of children; it does not reflect, for example, payments for religious instruction of adults. Thus, this case presents an important question of federal law both because it is extremely important to ensure that IRS respects the Constitution, and because the financial penalty imposed upon non- Scientologists by IRS’ unconstitutional discrimination is enormous.

III. It is Very Unlikely That This Court Will Ever Have Another Opportunity to Review IRS’ Unconstitutional Discrim- ination Against Non-Scientologists. The only way a person can challenge IRS’ policy and practice of discrimination against non- Scientologists is by claiming a deduction for payments for religious instruction on an individual 30 tax return, and then seeking either Tax Court or District Court review after IRS disallows the deduction. It is not possible for a taxpayer to bring a class action on behalf of all victims of IRS’ discrimination. As a practical matter, however, no taxpayer has a substantial individual financial claim or interest: Petitioners here, with five children in schools which devoted over half their school days to religious instruction, were assessed only $3,209 in additional tax. Few taxpayers would have any greater financial interest in litigating this issue. Moreover, Petitioners’ experience here suggests other barriers to future litigation over this issue. Because they claimed a deduction for payments for religious instruction, in both 1994 and 1995, IRS audited Petitioners’ tax returns. Moreover, for 1995, in addition to assessing $3,209 additional tax by disallowing Petitioners’ deduction for religious instruction payments, IRS assessed about $7,000 in additional self-employment tax, and a $2,040 “accuracy-related” penalty. The latter two assessments were pure harassment: IRS conceded quickly, in its Answer in Tax Court, that no additional self- employment tax was due; and IRS did not appeal the Tax Court’s finding that no penalty was due. Thus, any non-Scientologist considering claiming a deduction for payments for religious instruction would have to take into consideration not only the relatively small potential financial benefit, but also a very real possibility of substantial harassment by IRS.8

8 During a trial recess in the Tax Court below, the lead trial lawyer for IRS said that anyone who makes a claim like the Petitioners should be treated like the tax protesters who claim that the federal income tax is unconstitutional and therefore refuse to pay any income tax. We hope that this view is not widely held within IRS. 31 In light of these considerations, it is not surprising that there is no other reported case of a taxpayer challenging IRS’ unconstitutional discrimination against non-Scientologists by claiming a deduction for religious instruction payments and litigating IRS’ disallowance of that deduction. As we explained above, the total tax imposed upon non-Scientologists by IRS’ discrimination may exceed $530 million annually. Nonetheless, no single taxpayer has suffi- cient interest to justify challenging IRS on this issue, which is obviously extremely sensitive and embar- rassing for IRS. Therefore, unless this Court under- takes to review the decision of the Ninth Circuit below, IRS’ discrimination against non-Scientologists is likely to continue forever.

CONCLUSION For the foregoing reasons, Petitioners respectfully submit that the Court should issue a writ of certiorari to review the judgment below of the United States Court of Appeals for the Ninth Circuit.

Respectfully submitted,

JEFFREY IRA ZUCKERMAN Counsel of Record CURTIS, MALLET-PREVOST, COLT & MOSLE LLP 1200 New Hampshire Avenue, N.W. Suite 430 Washington, D.C. 20036 (202) 452-7350 Attorney for Petitioners March 12, 2009 1a APPENDIX UNITED STATES COURT OF APPEALS, NINTH CIRCUIT ———— No. 06-72961 ———— MICHAEL SKLAR; MARLA SKLAR, Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee. ———— Argued and Submitted Feb. 4, 2008 Filed Dec. 12, 2008 ———— Appeal from a Decision of the United States Tax Court. Tax Ct. No. 395-01 ———— Before: HARRY PREGERSON and KIM McLANE WARDLAW, Circuit Judges, and RONALD B. LEIGHTON,∗ District Judge. WARDLAW, Circuit Judge: Michael and Marla Sklar (“the Sklars”) appeal from a decision of the Tax Court affirming the disallowance of deductions they claimed for tuition and fees paid to their children’s Orthodox Jewish day

∗ The Honorable Ronald B. Leighton, United States District Judge for the Western District of Washington, sitting by designation. 2a schools. See Sklar v. Comm’r, 125 T.C. 281, 2005 WL 3497885 (2005). We have jurisdiction pursuant to 26 U.S.C. § 7482(a)(1), and we affirm. I. FACTUAL AND PROCEDURAL BACKGROUND A. Taxpayers The Sklars are Orthodox Jews who in 1995 had five school-aged children. Rather than send their children to public school to meet California State educational requirements, the Sklars enrolled each of their children in one of two Orthodox Jewish day schools, Emek Hebrew Academy (“Emek”) and Yeshiva Rav Isacsohn Torath Emeth Academy (“Yeshiva Rav”). They did so “because of their sincerely and deeply held religious belief that as Jews they have a religious obligation to provide their children with an Orthodox Jewish education in an Orthodox Jewish environment.” In 1995, the Sklars paid a total of $27,283 to Emek and Yeshiva Rav which included $24,093 for tuition, $1300 for registration fees, $1715 for other mandatory fees, and $175 for an after school Mishna program at Emek.1 During 1995, Emek and Yeshiva Rav each were exempt from federal income tax under I.R.C. § 501(c)(3), which provides tax exempt status for certain institutions “organized and operated exclusively for religious, charitable, ... or educational purposes,” among others. Both schools also qualified as organizations described in I.R.C. § 170(b)(1)(A), which allows donors to deduct charitable donations to qualifying institutions. Both schools provided daily exposure to Jewish heritage and values. Their goals included educating their students in Jewish heritage and values, as well

1 Mishna is the study of Jewish oral law. 3a as the tenets of the Jewish faith. To this end, time was allocated in the school day for prayers and religious studies, students were required to adhere to Orthodox Jewish dress codes, and boys and girls attended classes separately. A child’s day at each school included specified hours devoted to courses in religious studies and specified hours devoted to secular studies. The length of time that each student participated in secular classes, as opposed to religious studies, and the length of the total school day varied with the gender and grade level of the particular student. Quality secular education that fulfilled the mandatory education requirements of the State of California also was a goal of both schools. Emek sought to provide a thorough and well-balanced curriculum in both religious and secular studies so that every student could succeed “in the most rigorous yeshiva [(Jewish)] high schools and other institutions of higher learning.” Yeshiva Rav sought to prepare its students for matriculation to yeshiva high schools and to attend a college or seminary. During the school years in issue, the Sklars paid tuition and mandatory fees to Emek and Yeshiva Rav for their children’s education. To ensure payment, the Sklars, like other parents, were required to contract with each school to pay, and to give to each school postdated checks covering, the tuition for the upcoming school year. Both schools provided tuition discounts to families based on financial need, if documented by detailed financial information submitted to the schools’ scholarship committees, but the Sklars did not seek or receive such assistance. Although an Orthodox Rabbinic ruling precluded either school from expelling students from the Jewish 4a studies program during the school year, nonpayment of tuition could result in expulsion from secular studies and the schools’ refusal to allow the children to register for classes in the subsequent school year. B. The Prior Litigation In 1993, the Sklars learned of a confidential closing agreement2 the Internal Revenue Service (“IRS”) had executed with the Church of Scientology that pur- portedly allowed deductions for certain religious educational services such as auditing and training. The Sklars subsequently amended their tax returns for 1991 and 1992, and filed a return for 1993, including new deductions for a portion of the tuition they had paid to their children’s schools. See Sklar, 125 T.C. at 288. The IRS allowed these deductions, apparently under the impression that the Sklars were Scientologists. See id. The Sklars claimed similar deductions in 1994, but these were disallowed. Id. at 288-89. The IRS Notice of Deficiency explained that because the costs were for personal tuition expenses, they were not deductible. The Sklars pur- sued an unsuccessful petition for redetermination before the Tax Court regarding their 1994 deductions, which subsequently came before us. Judge Reinhardt, writing for our Court in an opinion joined

2 Under § 7121 of the Internal Revenue Code, the IRS is authorized to execute “closing agreements.” A closing agreement is “an agreement in writing with any person relating to the liability of such person (or of the person or estate for whom he acts) in respect of any internal revenue tax for any taxable period.” I.R.C. § 7121(a); see also 26 C.F.R. § 301.7121-1. Such closing agreements are intended to be “final and conclusive, and, except upon a showing of fraud or malfeasance, or misrepresentation of a material fact,” shall not be reopened or annulled. I.R.C. § 7121(b). 5a by Judge Pregerson, upheld the Tax Court’s denial of the deduction. See Sklar v. Comm’r (Sklar I), 282 F.3d 610 (9th Cir.2002), amending and superseding Sklar v. Comm’r, 279 F.3d 697 (9th Cir.2002). In Sklar I, the Sklars made virtually identical arguments to those they assert here, based predomi- nantly on their theories that a portion of their tuition payments are tax deductible because they received in exchange only intangible religious benefits and the Scientology Closing Agreement is an unconstitutional establishment of religion from which they should also benefit. The Sklar I panel soundly rejected the Sklars’ argument that certain 1993 amendments to the Tax Code rendered their tuition payments deductible as payments to exclusively religious organizations for which the Sklars received only intangible religious benefits. 282 F.3d at 612-14. Specifically, the panel noted that the amendments addressed “clearly procedural provisions” and that the deduction the Sklars alleged would be “of doubtful constitutional validity.” Id. at 613. Next, the Sklar I panel held that the IRS was compelled to disclose the contents of its Closing Agreement with the Church of Scientology, at least to the extent it fell under I.R.C. § 6104(a)(1)(A), see 282 F.3d at 614-18, and that such disclosure was necessary as a practical matter because the agreement affects “not just one taxpayer or a discrete group of taxpayers, but a broad and indeterminate class of taxpayers with a large and constantly changing membership.” Id. at 617. Further, the panel held “where a closing agreement sets out a new policy and contains rules of general applicability to a class of taxpayers, disclosure of at least the relevant part of 6a that agreement is required in the interest of public policy.” Id. In Sklar I, the panel therefore rejected the argument that the closing agreement made with the Church of Scientology, or at least the portion establishing rules or policies that are applicable to Scientology members generally, is not subject to public disclosure. The IRS is simply not free to enter into closing agreements with religious or other tax-exempt organizations governing the deductions that will be available to their members and to keep such provisions secret from the courts, the Congress, and the public. Id. at 618. The Sklar I panel nevertheless opined, without resolving the issue, that the Tax Court’s ruling that the Closing Agreement was irrelevant to the deductibility of the Sklars’ tuition payments was “in all likelihood correct.” Id. It continued: The Tax Court concluded that the Sklars were not similarly situated to the members of the Church of Scientology who benefitted from the closing agreement. While we have no doubt that certain taxpayers who belong to religions other than the Church of Scientology would be similarly situated to such members, we think it unlikely that the Sklars are. Religious education for elementary or secondary school children does not appear to be similar to the “auditing” and “training” conducted by the Church of Scientol- ogy. Id. at 618 n. 13; see also Hernandez v. Comm’r, 490 U.S. 680, 684-85, 109 S.Ct. 2136, 104 L.Ed.2d 766 (1989) (describing “auditing” and “training”). The Sklar I panel then turned to the Sklars’ Establishment Clause and administrative consis- 7a tency arguments. Although it was not required to decide those issues because the Sklars had “failed to show that their tuition payments constitute a partially deductible ‘dual payment’ under the Tax Code,” Sklar I, 282 F.3d at 620, the panel noted that had it been required to do so, it would have first concluded that the IRS policy constitutes an unconstitutional denominational preference under Larson v. Valente, 456 U.S. 228, 102 S.Ct. 1673, 72 L.Ed.2d 33 (1982).3 See Sklar I, 282 F.3d at 618-19. The panel reasoned that the denominational preference embodied in the Closing Agreement was unconstitutional because it “cannot be justified by a compelling governmental interest.” Id. However, the panel indicated it would not be willing to extend that preference to other religious organizations for three reasons: First, an extension of the preference would amount to state sponsorship of all religions, which the panel doubted “Congress or any agency of the government would intend.” Id. at 619-20. Second, an extension of the preference would be “of questionable constitutional validity under4 “because administering

3 Larson v. Valente established an analytical framework to assess the constitutionality of statutes granting denominational preferences. 456 U.S. 228, 245-52, 102 S.Ct. 1673, 72 L.Ed.2d 33 (1982). To survive an Establishment Clause challenge under Larson, a statute which grants a denominational preference must be justified by a “compelling governmental interest” to which it is “closely fitted.” Id. at 247-48, 252, 102 S.Ct. 1673; see also id. at 246, 102 S.Ct. 1673 (“[T]his Court has adhered to the principle, clearly manifested in the history and logic of the Establishment Clause, that no State can pass laws which aid one religion or that prefer one religion over another.”(internal citation and quotation marks omitted)). 4 In Lemon v. Kurtzman, 403 U.S. 602, 91 S.Ct. 2105, 29 L.Ed.2d 745 (1971), the Supreme Court established a three-prong test to determine whether the state has violated the 8a the policy “could require excessive government entanglement with religion.”5 Id. at 620, 91 S.Ct. 2105. Third, the requested policy appeared to violate I.R.C. § 170. Id. The panel also indicated it would reject the Sklars’ administrative consistency claim because it “seriously doubted” that the Sklars were similarly situated to the Scientologists. 6 The panel further stated that even if the Sklars were similarly situated, “because the treatment they seek is of questionable statutory and constitutional validity under § 170 of the IRC, under Lemon, and under Hernandez, we would not hold that the unlawful policy set forth in

Establishment Clause: “First, the statute must have a secular legislative purpose; second, its principal or primary effect must be one that neither advances nor inhibits religion; finally, the statute must not foster an excessive government entanglement with religion.” Id. at 612-13, 91 S.Ct. 2105 (1971) (internal citations and quotation marks omitted). 5 In Hernandez v. Commissioner, 490 U.S. 680, 109 S.Ct. 2136, 104 L.Ed.2d 766 (1989), the Supreme Court rejected the claim that payments made to the Church of Scientology for purely religious education and training were deductible as gifts or contributions under I.R.C. § 170. Id. at 692-94, 109 S.Ct. 2136. Among other reasons it gave for its decision, the Court explained that “the deduction petitioners seek might raise problems of entanglement between church and state.” Id. at 694, 109 S.Ct. 2136; see also infra Part II.B (discussing § 170 and Hernandez ). 6 Judge Silverman, concurring, concluded that the question of whether the Sklars were “similarly situated” to the Scientolo- gists had “no bearing on whether the tax code permits the Sklars to deduct the costs of their children’s religious education as a charitable contribution.” Sklar I, 282 F.3d at 622. Rather, he concluded that the Sklars were absolutely barred from taking the deduction by the Internal Revenue Code and Supreme Court precedent. See id. at 622-23. 9a the closing agreement must be extended to all religious organizations.” Id. at 620, 91 S.Ct. 2105. Finally, relying on United States v. American Bar Endowment, 477 U.S. 105, 106 S.Ct. 2426, 91 L.Ed.2d 89 (1986), the Sklar I panel rejected the argument that the Sklars’ tuition payments were deductible as a “dual payment” or “quid pro quo payment,” a payment made in part as consideration for goods and services and in part for charitable purposes. In American Bar Endowment, the Supreme Court held that the taxpayer must satisfy a two-part test to be entitled to the § 170 deduction for a quid pro quo payment: First, the payment is deductible only if and to the extent it exceeds the market value of the benefit received. Second, the excess payment must be made with the intention of making a gift. 477 U.S. at 117, 106 S.Ct. 2426 (internal citation and quotation marks omitted). The Sklar I panel held that the Sklars failed to introduce evidence demonstrating both “that any dual tuition payments they may have made exceeded the market value of the secular education their children received,” 282 F.3d at 621, or “that they intended to make a gift by contributing such ‘excess payment.’” Id. The panel also suggested that for the purpose of demonstrating the first part of the American Bar Endowment test, the “market value” for the tuition payments would be the cost of a comparable secular education offered by private schools, evidence the Sklars had failed to introduce, perhaps, because of the “practical realities of the high cost of education.” Id.

10a C. The Current Litigation On their 1995 tax return, the Sklars claimed $15,000 in deductions for purported charitable contributions that comprised a portion of their five children’s tuition at Emek and Yeshiva Rav. The deduction was based on their estimate that 55% of the tuition payments were for purely religious education, an estimate supported by letters submitted two years later (in 1997) that were drafted by each of the schools at the Sklars’ request. Sklar, 125 T.C. at 288-89. The IRS disallowed the $15,000 deduction. The IRS also determined the Sklars had “failed to meet the substantiation requirements of Internal Revenue Code Section 170(f)(8) with respect to the disallowed $15,000.00 of claimed charitable contributions.” The Sklars petitioned the Tax Court for a redetermination of deficiency, asserting that (1) the tuition and fee payments to exclusively religious schools are deductible under a dual payment analysis to the extent the payments exceeded the value of the secular education their children received (a question left somewhat open in Sklar I ); (2) Sections 170(f)(8) and 6115 of the Internal Revenue Code, as enacted in 1993, authorized the deduction of tuition payments for religious education made to exclusively religious schools (an issue all but foreclosed by Sklar I ); and (3) that the 1993 Closing Agreement between the Commissioner and the Church of Scientology constitutionally and administratively requires the IRS to allow other taxpayers to take the same charitable deductions for tuition payments to their religious schools (a question the panel discussed at length but declined to decide in Sklar I ). Before the Tax Court, the Sklars and the IRS stipulated that in 1993 the 11a IRS had executed a confidential closing agreement with the Church of Scientology, settling several outstanding issues between the IRS and the Church of Scientology. See id. at 298. Under this agreement, members of the Church of Scientology were authorized to deduct as charitable contributions at least 80% of the fees for qualified religious services provided by the Church of Scientology. See id. at 298-99. The Tax Court again rejected the Sklars’ arguments, holding that the tuition and fee payments to the Jewish Day Schools were not deductible under any of the Sklars’ theories.7 First, the Tax Court rejected the Sklars’ effort to prove that the tuition and fee payments so exceeded the market value of the secular education their children received that they took on a “dual character,” i.e. that the payments had the character of both a purchase of education and a charitable contribution. Id. at 291-94; see also American Bar Endowment, 477 U.S. at 117, 106 S.Ct. 2426. It found that the Sklars’ expert report regarding tuition at various Los Angeles area schools demonstrated only that (1) Some schools charge more tuition than Emek and Yeshiva Rav Isacsohn, and some charge less; and (2) the amount of tuition petitioners paid is unremarkable and is not excessive for the substantial benefit they received in exchange; i.e., an education for their children. 125 T.C. at 293-94. The Tax Court concluded that the Sklars failed to demonstrate that any part of their tuition payments was intended as a charitable con-

7 The Tax Court also ruled that the Sklars were not liable for an accuracy-related penalty the IRS had imposed under I.R.C. § 6662, an issue not before us on this appeal. 12a tribution and that the well-established law precluding deduction of tuition payments to schools providing both secular and religious education controlled. Second, the Tax Court held that the 1993 amendments to the Code “did not change what is deductible under section 170.” Id. at 296-97. In keeping with our reasoning in Sklar I, the Tax Court concluded that neither § 170(f)(8), nor § 6115, as amended in 1993, nor the accompanying legislative history suggested that Congress intended to make a substantive change to the Code or to overrule the “long line of cases” precluding deductibility of tuition payments to religious schools. Id. at 296. Third, the Tax Court held that the Closing Agreement between the IRS and the Church of Scientology is irrelevant to the question of whether the Sklars are entitled to the § 170 deductions. Id. at 299. Finally, the Tax Court concluded that the Sklars’ separate payments for Mishna classes, which were held apart from other classes at Emek, should not be treated any differently than the tuition and fee payments. The Sklars timely appeal. II. DISCUSSION A. Standard of Review “We review the Tax Court’s conclusions of law and its construction of the tax code de novo, and no deference is owed that court on its application of the law.” Sklar I, 282 F.3d at 612.We review the Tax Court’s factual determinations for clear error and its evidentiary rulings for abuse of discretion. See Sparkman v. Comm’r, 509 F.3d 1149, 1155-56 (9th Cir.2007).

13a B. The Sklars’ 1995 Tuition Payments Are Not Deductible as Charitable Contributions Under the Internal Revenue Code Section 170 of the Internal Revenue Code allows taxpayers to deduct “any charitable contribution,” defined as “a contribution or gift to or for the use of” certain eligible entities enumerated in § 170(c), including those exclusively organized for religious purposes and educational purposes. I.R.C. § 170(a)(1), (c). “[T]o ensure that the payor’s primary purpose is to assist the charity and not to secure some benefit,” we require such contributions to be “made for detached and disinterested motives.” Graham v. Comm’r, 822 F.2d 844, 848 (9th Cir.1987). Therefore, “quid pro quo” payments, where the taxpayer receives a benefit in exchange for the payment, are generally not deductible as charitable contributions. See Hernandez v. Comm’r, 490 U.S. 680, 689-91, 109 S.Ct. 2136, 104 L.Ed.2d 766 (1989). In keeping with this framework, tuition payments to parochial schools, which are made with the expectation of a substantial benefit, or quid pro quo, “have long been held not to be charitable contributions under § 170.” Id. at 693, 109 S.Ct. 2136; see also DeJong v. Comm’r, 309 F.2d 373, 376 (9th Cir.1962) (“The law is well settled that tuition paid for the education of the children of a taxpayer is a family expense, not a charitable contribution to the educating institution.”). In Hernandez, the Supreme Court considered “whether taxpayers may deduct as charitable contributions payments made to branch churches of the Church of Scientology”8 in return for services known

8 In Hernandez, the Commissioner had stipulated before the Tax Court that “the branch churches of Scientology are religious organizations entitled to receive tax-deductible charitable con- 14a as “auditing” and “training.” 490 U.S. at 684, 109 S.Ct. 2136. Both are considered forms of religious education. “Auditing” involves a form of spiritual counseling whereby a person gains spiritual awareness in one-on-one sessions with an auditor. By participating in “training,” a person studies the tenets of Scientology, gains spiritually, and may seek to become an auditor. Members of the Church of Scientology sought to deduct payments for auditing and training as charitable contributions for religious services. The Court held that such payments for religious educational services “do not qualify as ‘contribution[s] or gift[s].’” Id. at 691, 109 S.Ct. 2136. Rather, “[t]hese payments were part of a quintessen- tial quid pro quo exchange: in return for their money, petitioners received an identifiable benefit, namely, auditing and training sessions.” Id. The Court reasoned “‘[t]he sine qua non of a charitable contribution is a transfer of money or property without adequate consideration.’” Id. (quoting American Bar Endow- ment, 477 U.S. at 118, 106 S.Ct. 2426). The Court further rejected the taxpayers’ argument that a quid pro quo analysis was not even appropriate, because the payments for auditing and training services resulted in receipt of a purely religious benefit. Id. at 692-93, 109 S.Ct. 2136. The Court first found no support in the language of § 170, which

tributions under the relevant sections of the Code.” 490 U.S. at 686, 109 S.Ct. 2136. This stipulation isolated the statutory issue of “whether payments for auditing or training sessions constitute ‘contribution[s] or gift[s]’ under § 170.” Id. Similarly, the parties to the current litigation stipulated before the Tax Court “that an agreement dated October 1, 1993, between the Com- missioner and the Church of Scientology settled several longstanding issues.” 125 T.C. at 298. 15a makes “no special preference for payments made in the expectation of gaining religious benefits or access to a religious service.” Id. at 693, 109 S.Ct. 2136. Second, the Court reasoned that accepting the taxpayers’ “deductibility proposal would expand the charitable contribution deduction far beyond what Congress has provided.” Id. at 693, 109 S.Ct. 2136. For example, “some taxpayers might regard their tuition payments to parochial schools as generating a religious benefit or as securing access to a religious service,” which would be incorrect because “such payments ... have long been held not to be charitable contributions under § 170.” Id. Finally, the Court noted that “the deduction petitioners seek might raise problems of entanglement between church and state” because it would “inexorably force the IRS and reviewing courts to differentiate ‘religious’ benefits from ‘secular’ ones.” Id. at 694, 109 S.Ct. 2136. While declining to pass on the constitutionality of such hypothetical inquiries, the Court noted that “‘perva- sive monitoring’ for ‘the subtle or overt presence of religious matter’ is a central danger against which we have held the Establishment Clause guards.” Id. (quoting Aguilar v. Felton, 473 U.S. 402, 413, 105 S.Ct. 3232, 87 L.Ed.2d 290 (1985)). Thus, the Hernandez decision clearly forecloses the Sklars’ argument that there is an exception in the Code for payments for which one receives purely religious benefits. 1. The 1993 Amendments to the Tax Code Did Not Overrule Hernandez To circumvent Hernandez‘s clear holding, the Sklars resurrect their Sklar I argument that the 1993 amendments to IRS §§ 170(f)(8) and 6115 over- ruled the Court’s holding in Hernandez that only gifts 16a or contributions may be deducted under § 170. Ac- cording to the Sklars, the 1993 amendments provide for the deduction of tuition payments for which they receive only intangible religious benefits. We agree with the Tax Court that the Sklar’s interpretation of the 1993 amendments is misguided. Amended § 170(f)(8) requires the taxpayer to “substantiate[ ] the contribution by a contemporaneous written acknowledgment of the contribution by the donee organization.” I.R.C. § 170(f)(8)(A). This acknowledgment must include an estimate of the value of any goods or services the donor received in exchange, “or, if such goods or services consist solely of intangible religious benefits, a statement to that effect.” I.R.C. § 170(f)(8)(B)(iii). The amendment also defines an “intangible religious benefit” as one “which is provided by an organization organized exclusively for religious purposes and which generally is not sold in a commercial transaction outside the donative context.” Id. As the Tax Court correctly held, Sklar, 125 T.C. at 296-97, and as we have previously suggested, Sklar I, 282 F.3d at 613, this amendment creates an exception only to the new substantiation requirement created by § 170(f)(8)(A).9 Nothing in the

9 Although the Sklars rely on the new substantiation requirement as support for their deduction of tuition payments, they did not fully comply with the requirement themselves. Section 170(f)(8)(C) requires that substantiation be provided by the earlier of (1) the date on which the return is filed or (2) the due date for filing the return. However, the Sklars did not submit the required supporting documentation until November 1997. The IRS argues that this untimely substantiation should serve as an absolute bar to the Sklars’ claimed deductions. However, some of the Sklars’ deductions, such as payments for Mishna classes, were not subject to the substantiation requirement because they fell below the $250 threshold described in 17a amendment’s language suggests that Congress intended to expand the types of payments that are deductible contributions. As the Sklar I panel explained: Given the clear holding of Hernandez and the absence of any direct evidence of Congressional intent to overrule the Supreme Court on this issue, we would be extremely reluctant to read an additional and significant substantive deduction into the statute based on what are clearly procedural provisions regarding the documentation of tax return information, particularly where the deduction would be of doubtful constitutional validity. Id. The second pertinent 1993 amendment requires donee organizations to disclose limitations on the deductibility of certain quid pro quo payments to the donors of such payments. See I.R.C. § 6115. Amended § 6115(a) requires any organization that “receives a quid pro quo contribution in excess of $75” to provide the donor with a written statement declaring that the deductible portion of the contribution cannot include “the value of the goods or services provided by the organization,” along with “a good faith estimate of the value of such goods or services.” However, § 6115(b) explains:

section 170(f)(8). “Separate contributions of less than $250 are not subject to the requirements of section 170(f)(8), regardless of whether [they sum up to] $250 or more.” 26 C.F.R. § 1.170A-13(f)(1) (as amended in 1996). Because we conclude that no part of the Sklars’ payments were deductible, we need not reach the issue. 18a For purposes of this section, the term “quid pro quo contribution” means a payment made partly as a contribution and partly in consideration for goods or services provided to the payor by the donee organization. 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. I.R.C. § 6115(b) (emphasis added). The Sklars read the exemption from the disclosure requirement for organizations organized exclusively for religious purposes which provide solely an intangible religious benefit completely out of context. The Sklar I panel explained why the Sklars’ reading of the exemption is unsupportable: [Section] 6115 requires that tax-exempt organizations inform taxpayer-donors that they will receive a tax deduction only for the amount of their donation above the value of any goods or services received in return for the donation and requires donee organizations to give donors an estimate of this value, exempting from this estimate requirement contributions for which solely intangible religious benefits are received. 282 F.3d at 613. Nor does the legislative history of these amendments even mention Hernandez, and the House Report specifically states that, although the new requirements apply only to quid pro quo contributions for commercial benefits, “[n]o inference is intended ... [regarding] whether or not any contribution 19a outside the scope of the bill’s substantiation or reporting requirements is deductible (in full or in part) under the present-law requirements of section 170.” H.R.Rep. No. 103-111, at 786 n. 170 (1993), reprinted in 1993 U.S.C.C.A.N. 378, 1017 n. 170. Thus, the House Report confirms that Congress intended to preserve the *1262 status quo ante, and hardly serves as support for the Sklars’ argument.10 To put to rest the Sklars’ statutory claim, we now hold that neither the plain language of the 1993 amendments nor the accompanying legislative history indicates any substantive change to Hernandez‘s holding that payment for religious education to religious organizations is not deductible. We agree with the observation of both the Tax Court and the Sklar I panel that had Congress intended to overrule judicial precedent and to provide charitable contributions for tuition and fee payments to religious organizations that provide religious education, it would have expressed its intention more clearly. See 282 F.3d at 613, 125 T.C. at 296-97. 2. The Tuition Payments Were Not “Dual Payment” Contributions The Tax Court correctly concluded that no part of the Sklar’s tuition payments is deductible under a “dual payment” analysis. See Sklar, 125 T.C. at 290-

10 In light of certain well-established deductible payments to religious organizations in exchange for intangible religious benefits, such as pew rents and church dues, see Hernandez, 490 U.S. at 701-02, 109 S.Ct. 2136, it seems plausible that Congress contemplated these sorts of contributions in amending §§ 170(f)(8) and 6115 in a manner that did not impose the arduous task of valuing the intangible religious benefits, such as the ability to participate in religious celebrations, that donors receive in exchange for these contributions. 20a 94, 299-300. In American Bar Endowment, the Supreme Court considered the question of the extent to which payments to organizations that bear the “dual character” of a purchase and a contribution are deductible under § 170. 477 U.S. at 116-18, 106 S.Ct. 2426. IRS Revenue Ruling 67246 had set forth a two-part test for determining the extent to which such payments are deductible: First, the payment is deductible only if and to the extent it exceeds the market value of the benefit received. Second, the excess payment must be “made with the intention of making a gift.” Id. at 117, 106 S.Ct. 2426 (quoting Rev. Rul. 67-246, 1967-2 Cum. Bull. 104, 105 (1967)). The Court held that Revenue Ruling 67-246 embodied the proper standard, reasoning: “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.” Id. at 118, 106 S.Ct. 2426. In American Bar Endowment, taxpayer members of a charitable organization sought to deduct under § 170 refunds from insurance policies negotiated and purchased on their behalf by the charitable organization, which they donated to the organization. See id. at 106-09, 116-18, 106 S.Ct. 2426. They claimed that the premiums paid for the insurance, part of which was subsequently refunded due to the “experience rating” of the policies, were dual payments. Id. The Supreme Court held that the taxpayer members met neither prong of the two-part test for deductibility of dual payments. Stating that the “most logical test of 21a the value of the insurance [the benefit received in return for their payment] is the cost of similar policies,” the Court held that because three of the four taxpayers “failed to demonstrate that they could have purchased similar policies for a lower cost,” they failed to demonstrate that their payment exceeded the market value of the benefit received. Id. at 118, 106 S.Ct. 2426. Because the fourth taxpayer, who did prove that there was a comparable insurance program at a lower premium rate for which he was eligible, failed to demonstrate that he knew about the available lower premium during the tax years at issue, the Court held that he failed the second prong of the test-”that he intentionally gave away more than he received.” Id. The Sklars again have failed to meet their burden of satisfying either prong of the two-part test for a dual payment, and we seriously doubt that they could ever make the showing that would support a “dual payment” deduction for tuition for combined religious and secular education.11 In Sklar I, the panel concluded that the Sklars failed to satisfy the requirements for partial deductibility of their tuition payments. Our analysis has not changed, despite the Sklars’ effort to introduce evidence as to market value. First, the Sklar I panel reasoned that the Sklars “failed to show that they intended to make a gift by contributing any such ‘excess payment.’” 282 F.3d at 621. In fact, the Sklars have never even argued—not

11 Indeed, the Tax Court expressed skepticism as to whether a dual payment analysis would ever be appropriate in this context. See 125 T.C. at 293 (“[M]ore fundamentally, the record speaks to whether a dual payments analysis applies in this case at all.”). 22a in Sklar I, not before the Tax Court and not before us—that they intended to make a gift as a portion of their tuition payment. Indeed, the record is to the contrary. In their brief, the Sklars explain at length that they pay the tuition and fees to send their children to Orthodox Jewish schools because it is a religious imperative of Orthodox Judaism. They “sent their children to Yeshiva Rav Isacsohn and Emek in 1995 because of their sincerely and deeply held religious belief that as Jews they have a religious obligation to provide their children with an Orthodox Jewish education in an Orthodox Jewish environment.” Because they paid for religious education out of their own deeply held religious views, and because the record demonstrates that throughout the school day-during recess, lunch and secular, as well as religious, classes-the schools inculcate their children with their religion’s lifestyle, heritage, and values, the Sklars have actually demonstrated the absence of the requisite charitable intent. Second, the Sklar I panel reasoned that “the Sklars have not shown that any dual tuition payments they may have made exceeded the market value of the secular education their children received.” Id. The panel stated that the Sklars needed to present evidence that their total payments exceeded “[t]he market value [of] the cost of a comparable secular education offered by private schools.” Id. Before the Tax Court, the Sklars introduced expert testimony asserting that “Catholic schools are the most reasonable comparison benchmarks for the schools attended by the Sklar children.”Based on his estima- tion of tuition paid for Archdiocesan Catholic schools12 in Los Angeles County in 1995, the Sklars’

12 The flaws in the expert report itself are too numerous to 23a expert concluded that the market value of the secular education the Sklars’ children received was between $1483 and $1724, such that in 1995 the Sklars made “excess payments” of almost $5000 per child. The Sklars’ expert also included tuition data for other Los Angeles schools in his report. The Tax Court correctly concluded that the evidence in the record indicated: “(1) Some schools charge more tuition than Emek and Yeshiva Rav Isacsohn, and some charge less; and (2) the amount of tuition petitioners paid is unremarkable and is not excessive for the substantial benefit they received in exchange; i.e., an education for their children.” 125 T.C. at 293-94. Before us, the Sklars have failed to demonstrate-or even argue on appeal—that the Tax Court’s factual findings as to the data set forth in their expert’s report are clearly erroneous. Thus, the Tax Court did not err by concluding that the Sklars failed to show that any part of their tuition fees was a charitable deduction, subject to a dual payment analysis. We conclude that under Hernandez and the Internal Revenue Code, their tuition and fee payments must be treated like any other quid pro quo transaction, even if some part of the benefit received was religious in nature. See 490 U.S. at 691-94, 109 S.Ct. 2136. We therefore agree with the Tax Court that the Sklars’ tuition is not deductible, in whole or in part, under § 170. mention, but we point out only one: the archdiocesan schools are subsidized in large measure by the parishes in the Archdiocese in order to force down the costs of education and to afford all Catholic children the opportunity to attend Catholic schools. Thus, by choosing archdiocesan schools as the basis for his comparative market value, the Sklars’ expert guaranteed that the tuition and fees paid to the Sklars’ schools would greatly exceed the tuition at the archdiocesan Catholic schools. 24a C. The 1993 Closing Agreement Does Not Con- stitutionally and Administratively Require the IRS To Allow Charitable Deductions for the Sklars’ Tuition Payments to Religious Schools The Sklars reassert their Sklar I argument that in light of allegedly similar deductions allowed for members of the Church of Scientology under a closing agreement with the IRS, the disallowance of deductions for Orthodox Jewish religious education violates the Establishment Clause and principles of administrative consistency. They also argue that the Tax Court abused its discretion in denying discovery about the Closing Agreement, including compelling its production.13 Before the Tax Court, the Sklars and the Commissioner “stipulated that an agreement dated October 1, 1993, between the Commissioner and the Church of Scientology settled several longstanding issues.” 125 T.C. at 298. A letter the Sklars had received from the IRS was also admitted. It established that the Closing Agreement “allows individuals to claim, as charitable contributions, 80 percent of the cost of qualified religious services.” Id. The Sklars argued that because of the Closing Agreement, the Commissioner is constitutionally and administratively precluded from disallowing their deductions for school tuition and fees, which they contend are “jurisprudentially indistinguishable” from the auditing and training provided by the Church of Scientology.

13 The Sklars made several efforts to obtain the Closing Agreement. The IRS repeatedly objected and sought protective orders on grounds of relevance and in reliance on I.R.C. § 6103, which makes confidential certain taxpayer “return information,” including closing agreements. The Tax Court sustained the IRS’s objections, without disclosing its reasoning, and the document was not admitted into evidence. 25a The Tax Court correctly dispatched that argument by citing to Sklar I. See 125 T.C. at 299. There the panel stated that “[w]e seriously doubt that the Sklars are similarly situated to the persons who benefit from the Scientology closing agreement because the religious education of the Sklars’ children does not appear to be similar to the ‘auditing’, ‘training’ or other ‘qualified religious services’ conducted by the Church of Scientology.” 282 F.3d at 620; see also id. at 618 n. 13. We also conclude that tuition and fee payments to schools that provide secular and religious education as part of one curriculum are quite different from payments to organizations that provide exclusively religious services. Be- cause the Sklars are situated differently than members of the Church of Scientology, the Tax Court did not abuse its discretion in determining that the Closing Agreement itself was not relevant, and therefore not discoverable in the Sklars’ redetermination proceedings. Nor did the Tax Court err in its conclusion that “the agreement reached between the [IRS] and the Church of Scientology does not affect the result in this case,” Sklar v. Comm’r, 125 T.C. at 299, because “the analysis in [ American Bar Endowment ] controls here.” Id. (internal citation omitted). The Sklar I panel previously assumed the contents of the Closing Agreement, with reference to a Wall Street Journal article that purported to reprint the agreement in full. See Sklar I, 282 F.3d at 615; Scientologists and IRS Settle for $12.5 Million, Wall St. J., Dec. 30, 1997, at A12; agreement reprinted in Wall St. J. Interactive Edition (www.wsj.com). The panel also held that the IRS must make the Closing Agreement 26a publicly available.14 282 F.3d at 614-18. The Sklar I panel further presumed from the IRS’s failure to disclose that the terms of the Closing Agreement were as set forth in the Wall Street Journal article, and concluded that the Closing Agreement constitutes an unconstitutional denominational preference. Id. at 619. We cannot improve upon the original panel majority’s elucidation of the principles at stake: Applying [Larson v. Valente, 456 U.S. at 246-47, 102 S.Ct. 1673, 72 L.Ed.2d 33,] to the policy of the IRS towards the Church of Scientology, the initial inquiry must be whether the policy facially discriminates amongst religions. Clearly it does, as this tax deduction is available only to members of the Church of Scientology. The second Larson inquiry is whether or not the facially discriminatory policy is justified by a compelling governmental interest. 456 U.S. at 246-47, 102 S.Ct. 1673, 72 L.Ed.2d 33. Although the IRS does not concede that it is engaging in a denominational preference, it asserts in its brief

14 In Sklar I, we held that closing agreements “constitute, at least in part, information required to be disclosed under § 6104,” 282 F.3d at 615 n. 7, and that “in appropriate circumstances, disclosure may be required under § 6104 or otherwise,” id. at 616. Section 6104 of the Code compels certain 501(c) and 501(d) organizations to disclose any documents submitted in support of an application for exemption. However, § 6103 prohibits the disclosure of closing agreements and other confidential “return information.” Id. Considering the interaction of the two sections, we held that “§ 6103 does not categorically prohibit the disclosure of closing agreements,” but on the contrary “the disclosure prohibitions of § 6103 are subject to the mandatory disclosure requirements of § 6104.” Id. Our holding in Sklar I is binding here, although we do not decide the extent to which the Closing Agreement might be discoverable in an appropriate forum. 27a that the terms of the settlement agreement cannot be used as a basis to find an Establishment Clause violation because “in order to settle a case, both parties are required to make compromises with respect to points on which they believe they are legally correct.” This is the only interest that the IRS proffers for the alleged policy. Although it appears to be true that the IRS has engaged in this particular preference in the interest of settling a long and litigious tax dispute with the Church of Scientology, and as compelling as this interest might otherwise be, it does not rise to the level that would pass strict scrutiny. The benefits of settling a controversy with one religious organization can hardly outweigh the costs of engaging*1266 in a religious preference. Even aside from the constitutional considerations, a contrary rule would create a procedure by which any denomination seeking a denominational preference could bypass Con- gressional law-making and IRS rulemaking by engaging in voluminous tax litigation. Such a procedure would likely encourage the proliferation of such litigation, not reduce it. Larson, 456 U.S. at 248, 102 S.Ct. 1673, 72 L.Ed.2d 33 (holding that even assuming arguendo that the government has a compelling governmental interest for a denominational preference, it must show that the rule is “closely fitted to further the interest that it assertedly serves”). Because the facial preference for the Church of Scientology embodied in the IRS’s policy regarding its members cannot be justified by a compelling governmental interest, we would, if required to decide the case on the ground urged by the Sklars, first determine that the IRS policy 28a constitutes an unconstitutional denominational preference under Larson, 456 U.S. at 230, 102 S.Ct. 1673, 72 L.Ed.2d 33. 282 F.3d at 618-19 (footnote omitted). However, the Sklar I panel declined to follow the Sklars’ suggestion that they, too, are entitled to an unconstitutional denominational preference for three reasons: First, we would be reluctant ever to presume that Congress or any agency of the government would intend that a general religious preference be adopted, by extension or otherwise, as such preferences raise the highly sensitive issue of state sponsorship of religion. In the absence of a clear expression of such intent, we would be unlikely to consider extending a policy favoring one religion where the effect of our action would be to create a policy favoring all. Second, the Supreme Court has previously stated that a policy such as the Sklars wish us to create would be of questionable constitutional validity under Lemon, because the administration of the policy could require excessive government entanglement with religion. Hernandez, 490 U.S. at 694, 109 S.Ct. 2136, 104 L.Ed.2d 766; see Lemon, 403 U.S. at 612-13, 91 S.Ct. 2105, 29 L.Ed.2d 745. Third, the policy the Sklars seek would appear to violate section § 170. See Hernandez, 490 U.S. at 692-93, 109 S.Ct. 2136, 104 L.Ed.2d 766. Id. at 619-20. The Sklar I panel also rejected the Sklars’ administrative inconsistency claim on two grounds: First, in order to make an administrative inconsistency claim, a party must show that it is similarly situated to the group being treated 29a differently by the agency. United States v. Kaiser, 363 U.S. 299, 308, 80 S.Ct. 1204, 4 L.Ed.2d 1233 [(1960)]. We seriously doubt that the Sklars are similarly situated to the persons who benefit from the Scientology closing agreement because the religious education of the Sklars’ children does not appear to be similar to the “auditing”, “training” or other “qualified religious services” conducted by the Church of Scientology. Second, even if they were so situated, because the treatment they seek is of questionable statutory and constitutional validity under § 170 of the IRC, under Lemon, and under Hernandez, we would not hold that the unlawful policy set forth in the closing agreement must be extended to all religious organizations. Id. at 620 (citation omitted). These principles are as correct today as they were six years ago. We adopt the full force of the conclusions they dictate. To conclude otherwise would be tantamount to rewriting the Tax Code, disregarding Supreme Court precedent, only to reach a conclusion directly at odds with the Establishment Clause-all in the name of the Establishment Clause. The principle the Sklars advance does not stop with them and their 1995 taxes; its logic would extend to all members of religious organizations who benefit from educational services that are in whole or part religious in nature. The Tax Court correctly held that neither the Es- tablishment Clause nor principles of administrative consistency allow the Sklars the deductions they seek, and the Tax Court’s denial of discovery regarding the Closing Agreement in proceedings involving the deductibility of the Sklars’ tuition and fees was not an abuse of discretion. 30a CONCLUSION The Tax Court correctly affirmed the IRS’s disallowance of deductions the Sklars claimed for tuition and fees paid to their children’s Orthodox Jewish day schools. The decision of the Tax Court is AFFIRMED. 31a UNITED STATES TAX COURT ———— No. 395-01. ———— MICHAEL AND MARLA SKLAR, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent ———— Dec. 21, 2005. COLVIN, J. Respondent determined a deficiency of $10,198 in petitioners’ Federal income tax for 1995 and an accuracy-related penalty of $2,040 under section 6662(a).1 After concessions,2 the issues for decision are: 1. Whether petitioners may deduct as a charitable contribution $15,000 of the $27,283 in tuition and fees they paid in 1995 to Orthodox Jewish day schools for the secular and religious education of their five children, including $175 they paid to one of the schools for Mishna classes. We hold that they may not.

1 Unless otherwise specified, section references are to the Internal Revenue Code as amended, and Rule references are to the Tax Court Rules of Practice and Procedure. 2 Respondent concedes that petitioners are not liable for additional self-employment tax. Thus, petitioners are not entitled to a self-employment tax deduction. 32a 2. Whether petitioners are liable for the accuracy- related penalty for 1995 because they deducted tuition payments for their children’s secular and religious education. We hold that they are not. FINDINGS OF FACT Some of the facts have been stipulated and are so found. A. Petitioners 1. Petitioners’ Family and Religion Petitioners lived in North Hollywood, California, when they filed the petition in this case. During 1995, Michael Sklar (petitioner) was a self-employed certified public accountant. Petitioner Marla Sklar (Mrs. Sklar) was a teacher. Petitioners are Orthodox Jews. During 1995, petitioners had five children of school age. We refer to them by their initials: H.S., T.S., M.S., A.S., and another T.S. It is important to petitioners to pass to their children a devotion to their Jewish faith. 2. Schools Attended by Petitioners’ Children Petitioners have educated all of their children at Emek Hebrew Academy (Emek) and Yeshiva Rav Isacsohn Torath Emeth Academy (Yeshiva Rav Isac- sohn), private Orthodox Jewish day schools in the Los Angeles area that provide classes for boys and girls from preschool through eighth grade. During the 1994-95 and 1995-96 school years (the school years in issue), petitioners’ children attended the schools and grade levels as follows:

33a School Year Child School Jan.-June Sept.-Dec. Attended 1995 1995 H.S. Yeshiva Rav 7th 8th Isacsohn T.S. Emek 6th 7th M.S Emek 4th - Yeshiva Rav - 5th Isacsohn A.S. Emek 1st 2d T.S. Emek none preschool

3. Petitioners’ Educational Goals and Values Petitioners did not consider sending their children to any school other than an Orthodox Jewish school. Petitioners sent their children to Emek and Yeshiva Rav Isacsohn because they deeply believe that they should provide their children with an Orthodox Jew- ish education in an Orthodox Jewish environment. Petitioners were primarily concerned with the religious component of their children’s education, but they were also interested in the quality of their secular education. B. Emek and Yeshiva Rav Isacsohn 1. General During 1995, Emek and Yeshiva Rav Isacsohn were exempt from Federal income tax under section 501(c)(3) and qualified as organizations described in section 170(b)(1)(A)(ii); i.e., an educational organization which normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of pupils or students in attendance at the place where its educational activities are regularly conducted. 34a Emek and Yeshiva Rav Isacsohn gave their students daily exposure to Jewish heritage and values. Students at Emek and Yeshiva Rav Isacsohn were required to adhere to traditional Orthodox Jewish dress codes. In 1994, the Bureau of Jewish Education of Greater Los Angeles3 mandated that all Jewish day schools in the Los Angeles area obtain academic accreditation by 2000.4 The Western Association of Schools and Colleges, Inc. (WASC), is a regional association which accredits public and private schools, colleges, and universities in the United States. Ye- shiva Rav Isacsohn became a candidate for academic accreditation by WASC on May 5, 1992. Emek became a candidate for academic accreditation by WASC on June 28, 1995. WASC granted academic accreditation to both schools after they completed a 3- year self-study program. Yeshiva Rav Isacsohn was accredited as of July 1, 1996, and Emek was accredited on July 1, 1998. Both schools were engaged in the accreditation process during part or all of 1995. Their accreditation was based in part on their programs during 1995. Both schools earned accreditation for 6 years, which is the maximum period of accreditation awarded by WASC.

3 The Bureau of Jewish Education of Greater Los Angeles provides educational support services and financial assistance to Jewish day schools in the Los Angeles area and imposes eligibility requirements on schools seeking its support. 4 Accreditation certifies to other educational institutions and to the general public that an institution meets established crite- ria or standards. 35a 2. Emek a. General In 1995, Emek believed its foremost goal was to help its students develop a devotion to Jewish heritage and values. Emek sought to provide a thorough and well-balanced curriculum in both Torah and secular studies so every student could succeed, upon eighth grade graduation, in the most rigorous yeshiva high schools and other institutions of higher learning. Boys and girls had separate classes, lunch, and recess at Emek because of Orthodox Jewish religious considerations. b. Religious Studies The religious courses and periods of instruction at Emek were virtually the same for both of the school years in issue. On Monday through Thursday, boys had prayers from 8 to 9 a.m. and religious classes from 9 a.m. to 12:20 p.m. The school day was com- pressed on Friday to permit an early dismissal so that the students could be home in time for the Sab- bath (which begins on Friday at sunset). On Friday, boys had religious classes from 9 to 11:40 a.m. Girls had morning prayers each day from 8:15 to 9 a.m. On Monday through Thursday, girls had four periods of Judaic studies and afternoon prayers from 1 to 4:30 p.m. On Friday, girls had Judaic studies from 11:40 a.m. to 12:10 p.m., followed by lunch from 12:10 to 12:30 p.m. and recess from 12:30 to 12:45 p.m. and three periods of Judaic studies from 12:45 to 2:30 p.m. c. Secular Studies Emek aspired to provide a high-quality secular studies program. On Monday through Thursday, boys 36a had five secular classes from 1 to 4:30 p.m. On Friday, boys had four secular classes from 12:10 to 2:30 p.m. On Monday through Thursday, girls had four periods of secular studies from 9 to 11:40 a.m. After lunch and recess on Monday through Thursday, girls had another period of secular studies from 12:20 to 1 p.m. On Friday, girls had four periods of secular studies from 9 to 11:40 a.m. Emek had computer laboratories for its elementary and junior high school students. Emek did not have an elementary science enrichment teacher, a music appreciation teacher, or a full-time librarian. Emek’s elementary students did not have use of a gymnasium. They shared outdoor facilities with a nearby synagogue. Emek’s junior high school students had athletic facilities at Sherman Oaks, California. d. Standardized Testing During 1995, Emek administered the California Test of Basic Skills (CTBS) to its students. The CTBS is a grade-level-specific, nationally normed test of language skills, mathematics, social studies, history, and science. Emek invited parents to come to the school to review their children’s CTBS scores so that they could learn their children’s strengths and needs. Emek also told each parent the percentile scores earned by each grade level. e. Mishna Class at Emek One of petitioners’ children attended a Mishna class at Emek during the first half of 1995, for which petitioners paid a separate fee of $175. Mishna is part of the Jewish oral law and is divided into six orders. The goal was for each boy to complete one order 37a each year and to complete all six orders before com- pletion of eighth grade. The Mishna class was held for an hour after school and for an hour on Sunday. The Mishna class at Emek was not part of the regular curriculum. 3. Yeshiva Rav Isacsohn a. General In 1995, the primary goal of Yeshiva Rav Isacsohn was to educate its students in the tenets of the Jew- ish faith. Yeshiva Rav Isacsohn sought to provide a thorough and well-balanced curriculum consisting of Orthodox Judaism and secular studies. An additional goal of Yeshiva Rav Isacsohn was to prepare its students for matriculation to yeshiva high schools and to attend a college or seminary. Yeshiva Rav Isacsohn made a concerted effort to shelter its students from smoking, alcohol, and drugs. Boys and girls at Yeshiva Rav Isacsohn occupied separate campuses with separate principals and had no classes together. There were no joint programs, and there was no time overlap in common facilities such as the library. b. Religious Studies In 1995, fifth grade boys had morning prayer and Judaic studies from 8:25 a.m. to 2 p.m. on Monday through Thursday (including an hour for lunch and recess), from 8:25 a.m. to 12 p.m. on Friday, and from 9 a.m. to 1 p.m. on Sunday with about 45 minutes per day for prayer. In 1995, eighth grade girls began the day at 8:25 a.m. with prayer, followed by classes in religious studies until 12:15 p.m. on Monday through Thursday, and until 11:30 a.m. on Friday.

38a c. Secular Studies In 1995, fifth grade boys had secular studies from 2 to 5 p.m. on Monday through Thursday, and from 12 to 1:30 or 2:30 p.m. on Friday, depending upon the time of year. In 1995, from Monday to Thursday, seventh and eighth grade girls had four periods of secular studies per day from 12:55 to 4:30 p.m., with afternoon prayer from 2:30 to 2:40 p.m., and recess from 2:40 to 2:55 p.m. Girls had two periods of secular study on Fridays. Yeshiva Rav Isacsohn had no science laboratory. The school had a cart with science materials. Yeshiva Rav Isacsohn had no computer room or gymnasium. Students played in school hallways and the parking lot. Students were sometimes taken to a nearby park. 4. Tuition and Fees at Emek and Yeshiva Rav Isacsohn During the school years in issue, Emek and Ye- shiva Rav Isacsohn required petitioners to pay tuition, registration, and certain other fees in order for their children to attend classes. Emek and Yeshiva Rav Isacsohn required petitioners to sign an agreement promising to pay the tuition and to give to each school postdated checks covering all tuition and fees for the upcoming school year. Both Emek and Yeshiva Rav Isacsohn provided tuition discounts to families based on financial need. Both schools required parents seeking financial aid to submit detailed financial information to the scholarship committee for each school. Emek and Yeshiva Rav Isacsohn provided early registration discounts, sibling discounts, and faculty discounts. Petitioners 39a did not seek or receive financial assistance from Emek or Yeshiva Rav Isacsohn for the school years in issue. An Orthodox Rabbinic ruling precluded either school from expelling students from the Jewish studies program during the school year for nonpayment of tuition. However, the ruling did not apply to expulsion from secular studies or to registration for the following school year. The schools could refuse to register a student whose tuition payments were delinquent. If a student’s tuition payments became delinquent, e.g., if a tuition check was not honored by the bank, both Emek and Yeshiva Rav Isacsohn would send letters demanding payment or threatening to bar the student from attending secular classes. The annual income from tuition and registration fees for both schools typically covers about 65 to 75 percent of that school’s annual operating expenses. The rest of the annual operating expenses are funded with grants from the Bureau of Jewish Education, interest income, and other fundraising. C. Petitioners’ Payments of Tuition and Fees During 1995, petitioners paid a total of $27,283 to Emek and Yeshiva Rav Isacsohn for tuition, registration and other mandatory fees, and Mishna classes as follows: Payment Emek Yeshiva Ray Isacsohn Tuition $16,043 $8,050 Registration fees 900 400 Mishna classes 175 -0- Other 1,215 500 Total $18,333 8,950 40a D. Petitioners’ Tax Returns 1. 1991 Petitioners filed an amended tax return for 1991 in December 1993, in which they deducted as a charitable contribution a portion of the tuition payments they made in 1991 to their children’s schools. Res- pondent apparently believed that petitioners were Scientologists, because in February 1994 respondent wrote to petitioners to request verification of their payments to the Church of Scientology. By letter to respondent in May 1994, petitioner stated that the deductions were based on tuition he had paid for religious education for his children. In August 1994, respondent sent a letter to petitioners, again erroneously stating that petitioners’ payments were to the Church of Scientology. Peti- tioner telephoned the author of that letter to say that he was not a Scientologist. By letter dated November 7, 1994, respondent told petitioners that respondent allowed in full their claim for a refund for 1991. 2. 1992-94 Petitioners filed an amended 1992 return and a 1993 return in which they deducted part of their children’s tuition as a charitable contribution. Peti- tioners received a refund based on the amended 1993 return, and respondent did not disallow the deduction claimed on their 1993 return. Petitioners deducted 55 percent of their payments to Emek and Yeshiva Rav Isacsohn as a charitable contribution deduction for 1994. Petitioners described the deduction on a Form 8275, Disclosure Statement, attached to their 1994 return. Respondent examined petitioners’ 1994 tax return and disallowed the charitable contribution deduction. Litigation relating to 41a petitioners’ 1994 return is discussed below at paragraph E. 3. 1995 Petitioners timely filed their 1995 Federal income tax return on October 15, 1996. Petitioners deducted $24,421 as a charitable contribution for 1995, including $15,000 which petitioners attributed to the cost of their children’s religious education at Emek and Yeshiva Rav Isacsohn during 1995. That amount ($15,000) is 54.97 percent (referred to here as 55 percent) of the total amount of tuition and fees that petitioners paid to Emek and Yeshiva Rav Isacsohn during 1995. Petitioners did not file a Form 8275 or otherwise describe their payment on their 1995 return. Respondent had petitioners’ 1994 return under examination when petitioners filed their 1995 return. Pursuant to petitioner’s request, Emek and Ye- shiva Rav Isacsohn issued letters to petitioner dated November 5 and November 10, 1997, respectively, in which each school estimated that 45 percent of the education provided to petitioners’ children was secular and 55 percent was religious. E. Litigation Relating to Petitioners’ 1994 Return Petitioners filed a petition with the Court challenging respondent’s notice of deficiency for 1994. In Sklar v. Commissioner, T.C. Memo. 2000-118 (Sklar I), this Court held that petitioners could not deduct as charitable contributions amounts for tuition and fees that they paid for their children’s religious education that year. Our decision was affirmed on appeal by the U.S. Court of Appeals for the Ninth Circuit in Sklar v. Commissioner, 282 F.3d 610 (9th Cir. 2002), amending and superseding 279 F.3d 697 (9th Cir. 2002). 42a OPINION A. Whether Petitioners May Deduct Tuition and Fees They Paid to Orthodox Jewish Day Schools During 1995 1. Petitioners’ Contentions Petitioners contend that they may deduct as a charitable contribution $15,000 of the $27,283 they paid to Emek and Yeshiva Rav Isacsohn in 1995.5 They deducted about 55 percent of those payments because that was the portion of the school day that each school estimated was devoted to religious studies. Petitioners contend that: (a) The religious education that Emek and Yeshiva Rav Isacsohn provided their children is an “intangible religious benefit” as defined in sections 170(f)(8) and 6115, and payments for intangible religious benefits are made deductible by those sections; and (b) respondent’s disallowance of their charitable contribution deduction for tuition and fees violates the Establishment Clause of the First Amendment to the U.S. Constitution because the Commissioner allows members of the Church of Scientology to deduct as charitable contributions “auditing” and “training” payments.6

5 We separately discuss whether petitioners may deduct $175 of this amount they paid for Mishna classes. See Opinion par. A- 5, below. 6 Petitioners contend that sec. 7491(a) requires respondent to bear the burden of proof on all factual issues in the case. We need not decide the point because our findings and analysis in this case do not depend on which party bears the burden of proof. 43a 2. Whether Petitioners’ Tuition Payments Qualify for Deduction Under Section 170 Pursuant to a Dual Payment Analysis a. Introduction To put our consideration of petitioners’ contentions in context, we first consider whether petitioners’ payment of tuition and fees is deductible under a dual payment analysis to the extent the payments exceed the value of the secular education received by their children. See United States v. Am. Bar Endow- ment, 477 U.S. 105, 106 S.Ct. 2426, 91 L.Ed.2d 89 (1986); Sklar v. Commissioner, supra at 612, 614 n. 3, 621.We initially consider that issue without regard to the enactment of sections 170(f)(8) and 6115 in 1993 and the Commissioner’s settlement with the Church of Scientology on October 1, 1993. We then consider the effect (if any) of those developments on our analysis. b. Background In 1967, the Commissioner issued Rev. Rul. 67-246, 1967-2 C.B. 104, in response to: an increasing number of instances * * * in which the public has been erroneously advised in ad- vertisements or solicitations by sponsors that the entire amounts paid for tickets or other privi- leges in connection with fund-raising affairs for charity are deductible. * * * The examples that the Commissioner cited included tickets for charitable events such as banquets, balls, bazaars, concerts, and athletic events. In Rev. Rul. 67-246, supra, the Commissioner ruled that, where a taxpayer receives an item of value for a payment to a charitable organization, (1) the payment is not deductible unless the taxpayer intends to 44a make a gift; and (2) any deduction is limited to the excess of the payment over the fair market value of what is received in exchange. Courts have also applied those two requirements. Thus, a portion of a payment is deductible as a charitable contribution under section 170 if the following two conditions are met: “First, the payment is deductible only if and to the extent it exceeds the market value of the benefit received. Second, the excess payment must be ‘made with the intention of making a gift.’” United States v. Am. Bar Endowment, supra at 117-118, (quoting Rev. Rul. 67-246, 1967-2 C.B. at 105); Sklar v. Commissioner, supra at 621. In United States v. Am. Bar Endowment, supra at 118, the Supreme Court said: The sinequanon 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. * * * A taxpayer may not deduct a payment as a charitable contribution if the taxpayer receives a substantial benefit for a payment to a charitable organization. Id. at 116-117; Ottawa Silica Co. v. United States, 699 F.2d 1124, 1131 (Fed.Cir.1983); Singer Co. v. United States, 196 Ct.Cl. 90, 449 F.2d 413, 420, 422 (1971); S. Rept. 1622, 83d Cong., 2d Sess. 196 (1954). If the size of a taxpayer’s payment to a charity is clearly out of proportion to the benefit received, the taxpayer may claim a charitable contribution equal to the difference between a payment to the charitable organization and the market value of the benefit received in return on the theory that the payment 45a has the “dual character” of a purchase and a contribution. United States v. Am. Bar Endowment, supra at 117. To be deductible, a charitable contribution must be a gift; i.e., a transfer of property without adequate consideration. Sec. 170(c); United States v. Am. Bar Endowment, supra at 118; Sklar v. Commis- sioner, supra at 612. c. Dual Payment Theory and Tuition Paid for a Secular and Religious Education It is well established that tuition paid to schools which provide both secular and religious education is not deductible as a charitable contribution because it is not paid with detached and disinterested generos- ity and because the payor expects a substantial benefit in return. Oppewal v. Commissioner, 468 F.2d 1000 (1st Cir.1972), affg. T.C. Memo. 1971-273; Win- ters v. Commissioner, 468 F.2d 778, 780-781 (2d Cir. 1972), affg T.C. Memo. 1971-290; DeJong v. Commissioner, 309 F.2d 373, 377-378 (9th Cir.1962), affg. 36 T.C. 896, 1961 WL 1315 (1961); Fausner v. Commissioner, 55 T.C. 620, 1971 WL 2472 (1971); McLaughlin v. Commissioner, 51 T.C. 233, 1968 WL 1488 (1968), affd. per curiam without published opinion 23 AFTR 2d 69-1763, 69-2 USTC par. 9467 (1st Cir.1969); Bass v. Commissioner, T.C. Memo. 1983- 536; Ehrhart v. Commissioner, T.C. Memo. 1981-567; Ryan v. Commissioner, T.C. Memo. 1969-212; Casey v. Commissioner, T.C. Memo. 1965-282; Haak v. United States, 451 F.Supp. 1087 (W.D.Mich.1978); see Brotman v. Commissioner, T.C. Memo. 1977-65. In DeJong v. Commissioner, supra, decided by the Court of Appeals for the Ninth Circuit, the taxpayer made payments to a religious organization which operated a school which imposed no explicit tuition charges. Part of the payment was deductible as a 46a charitable contribution because the payment exceeded the amount apparently expected to be paid by the parent to cover the school’s estimated cost per student of operating the secular and religious educational programs of the school. Id. at 379. That kind of excess is not in dispute here; the only amounts in dispute here were paid for tuition and fees. The Court of Appeals in DeJong did not allow a charitable contribution deduction for tuition paid for either the secular or the religious education. d. Absence of Charitable Intent Like the taxpayers in the cases just cited, petitioners received a substantial benefit for their tuition payments. We next consider whether petitioners had any charitable intent in paying their children’s tuition. See United States v. Am. Bar Endowment, 477 U.S. at 117-118; Sklar v. Commissioner, 282 F.3d at 612. Petitioners do not so claim; and, as discussed next, the record shows they could not have made that claim successfully. In Sklar v. Commissioner, supra at 621, the Court of Appeals said that petitioners did not show that “any dual payments they may have made exceeded the market value of the secular education their children received”; i.e., “the cost of a comparable secular education offered by private schools”. The Court of Appeals also said petitioners had “failed to show that they intended to make a gift by contributing any such ‘excess payment’” and thus could not prevail under United States v. Am. Bar Endowment, supra. Id. The parties introduced into evidence information about tuition costs and qualitative aspects of private schools, primarily in the Los Angeles area. The record supports the conclusion that tuition at Emek and Yeshiva Rav Isacsohn is higher than the average 47a tuition at Los Angeles area Catholic schools, but equal to or lower than average tuition at other Los Angeles area Orthodox Jewish schools (Ohr Eliyahu Academy and Yavneh Hebrew Academy), other Jew- ish day schools, and private schools which do not provide religious education.7 Petitioners’ expert opined about the market value of a secular education provided by Emek and Yeshiva Rav Isacsohn. He apparently was proceeding from the assumption that a dual payments analysis applies in this case; i.e., that petitioners may deduct the excess of the tuition they paid over the market value of a secular education at Emek and Yeshiva Rav Isacsohn. However, more fundamentally, the record speaks to whether a dual payments analysis applies in this case at all. Petitioners must have a charitable intent to be entitled to a deduction under section 170 for part of their tuition payments. See Sklar v. Commissioner, supra at 612; see also sec. 170(c); United States v. Am. Bar Endowment, 477 U.S. at 117-118.On the ba-

7 The record also suggests several factors that may bear on the value of an elementary and secondary education, such as teachers’ salaries and seniority, whether teachers are certified, and student-teacher ratios; the amount of time students spend in classes and whether classes are held in the morning or afternoon or at different levels of difficulty; whether the school is accredited; the quality of libraries and facilities such as computer science and language laboratories, playgrounds and athletic facilities, and music and art facilities; nearness of the school to the student’s home; average standardized test scores; dress codes, personal safely of students, and prevalence of disciplinary problems; the success of the students at gaining admission to secular colleges; whether the school teaches the religion of the parents; and the percent of tuition devoted to administration costs. 48a sis of evidence in the record regarding tuition at various Los Angeles area schools we conclude: (1) Some schools charge more tuition than Emek and Yeshiva Rav Isacsohn, and some charge less; and (2) the amount of tuition petitioners paid is unremarkable and is not excessive for the substantial benefit they received in exchange; i.e., an education for their children. Thus, petitioners have not shown that any part of their tuition payments was a charitable contribution, and this case is indistinguishable from those cited at par. B-2-c. 3. Whether Sections 170(f)(8) and 6115 Au- thorize Charitable Contribution Deductions for Tuition Payments to Schools Providing Religious and Secular Education Petitioners contend that, under sections 170(f)(8) and 6115 as enacted in 1993, a portion of tuition payments to schools providing a religious and secular education is deductible as a charitable contribution. a. Background Sections 170(f)(8) and 6115 were enacted under the Omnibus Budget Reconciliation Act of 1993, Pub.L. 103-66, secs. 13172 and 13173, 107 Stat. 455, to address “difficult problems of tax administration”8 asso-

8 See H. Rept. 103-111, at 785 (1993), 1993-3 C.B. 167, 361, which states in pertinent part: Difficult problems of tax administration arise with respect to fundraising techniques in which an organization that is eligible to receive tax deductible contributions provides goods or services in consideration for payments from donors. Organizations that engage in such fundraising practices often do not inform their donors that all or a portion of the amount paid by the donor may not be deductible as a charitable contribution. 49a ciated with taxpayers’ deductions of charitable contributions in connection with fund-raising events involving quid pro quo transactions. To enhance taxpayer compliance in this area, Congress imposed (a) a new substantiation requirement under section 170(f)(8),9 and (b) a new disclosure requirement on charitable organizations under section 6115.10

9 Sec. 170(f)(8) provides in pertinent part: (A) General rule.-No deduction shall be allowed under subsection (a) for any contribution of $250 or more unless the taxpayer substantiates the contribution by a contemporaneous written acknowledgment of the contribution by the donee organization that meets the requirements of subparagraph (B). (B) Content of acknowledgment.-An acknowledgment meets the requirements of this subparagraph if it includes the following information: (i) The amount of cash and a description (but not value) of any property other than cash contributed. (ii) Whether the donee organization provided any goods or services in consideration, in whole or in part, for any property described in clause (i). (iii) A description and good faith estimate of the value of any goods or services referred to in clause (ii) or, if such goods or services consist solely of intangible religious benefits, a statement to that effect. For purposes of this subparagraph, the term “intangible religious benefit” means any intangible religious benefit which is provided by an organization organized exclusively for religious purposes and which generally is not sold in a commercial transaction outside the donative context. 10 Sec. 6115 provides: SEC. 6115. DISCLOSURE RELATED TO QUID PRO QUO CONTRIBUTIONS. (a) Disclosure requirement.-If an organization described in section 170(c) (other than paragraph (1) thereof) receives a 50a Section 170(f)(8) generally requires a taxpayer claiming a charitable contribution deduction greater than $250 to substantiate the deduction by obtaining a contemporaneous written acknowledgment of the contribution from the charitable organization, including an estimate of the value of any goods or services that the charitable organization provided to the taxpayer. Under section 6115, a charitable organization that receives a quid pro quo payment in excess of $75 must inform the taxpayer that any charitable contribution deduction is limited to the difference between the value of any money or property transferred to the charitable organization and the value of any goods or services that the taxpayer received from the charitable organization.

quid pro quo contribution in excess of $75, the organization shall, in connection with the solicitation or receipt of the contribution, provide a written statement which- (1) informs the donor that the amount of the contribution that is deductible for Federal income tax purposes is limited to the excess of the amount of any money and the value of any property other than money contributed by the donor over the value of the goods or services provided by the organization, and (2) provides the donor with a good faith estimate of the value of such goods or services. (b) Quid pro quo contribution.-For purposes of this section, the term “quid pro quo contribution” means a payment made partly as a contribution and partly in consideration for goods or services provided to the payor by the donee organization. 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. 51a Sections 170(f)(8) and 6115 except certain intangible religious benefits from the substantiation and disclosure requirements described above. Sections 170(f)(8) and 6115 provide, inter alia, that if a charitable organization is organized exclusively for religious purposes and provides solely an intangible religious benefit to a taxpayer in exchange for a payment, the charitable organization need not assign a value to the intangible religious benefit. b. Petitioners’ Contentions Petitioners contend that (1) sections 170(f)(8) and 6115 make tuition payments to religious schools deductible to the extent the payments relate to religious education, (2) the religious education that Emek and Yeshiva Rav Isacsohn provided to their children was an intangible religious benefit as defined in those sections, and (3) their tuition payments are deductible to the extent that the payments exceed the value of the secular education their children received.11 Petitioners also contend that they need not show that they intended to make a gift or contribution to Emek and Yeshiva Rav Isacsohn.

11 Petitioners aver: if a taxpayer pays $100 to his church and receives in return a book that could be purchased in any bookstore for $20 plus the right to sit in a certain pew at the church, $80 is deductible as a charitable contribution to the church, regardless of whether having the right to sit in that pew is worth $80 or more to the taxpayer, because that right is only an intangible religious benefit. Similarly here, to the extent petitioners’ dual payments to the schools exceeded the value of the secular studies they purchased, those payments are deductible as charitable contributions notwithstanding that petitioners received religious educations for their children worth that excess, because those religious educations are only intangible religious benefits. 52a c. Analysis We disagree. Congress did not change what is deductible under section 170 in these 1993 statutory changes. Neither sections 170(f)(8) and 6115 nor the accompanying legislative history suggests that Con- gress intended to expand the types of payments that are deductible as charitable contributions under section 17012 or that Congress intended to overturn the long line of cases (cited above) holding that no part of tuition paid to religious schools is deductible as a charitable contribution.13 We believe that, if Con- gress had intended to overturn decades of caselaw disallowing charitable contribution deductions for tuition payments to schools providing a religious and

12 See H. Conf. Rept. 103-213, at 566 (1993), 1993-3 C.B. 393, 444, stating that the sec. 6115 disclosure requirement “does not apply to transactions that have no donative element (e.g., sales of goods by a museum gift shop that are not, in part, donations).” Thus, a charitable organization need not make a sec. 6115 disclosure if the taxpayer did not intend to make a gift. 13 See H. Conf. Rept. 103-213, supra at 566 n. 34, 1993-3 C.B. at 444, stating that the exception to the substantiation requirement for an intangible religious benefit “does not apply, for example, to tuition for education leading to a recognized degree, travel services, or consumer goods.” Along the same lines, H. Rept. 103-111, supra at 786 n. 170, 1993-3 C.B. at 362, states: The committee intends that, in the case of religious organizations, a quidproquo contribution (for purposes of the substantiation and disclosure requirements) is limited to an exchange of goods or services that are generally available on a commercial basis, or advertised for an established price (e.g., tuition, travel and entertainment, and consumer goods). No inference is intended, however, whether or not any contribution outside of the scope of the bill’s substantiation or reporting requirements is deductible (in full or in part) under the present-law requirements of section 170. 53a secular education, Congress would have made such an intention clear. It did not. The exception to the substantiation and disclosure requirements in sections 170(f)(8) and 6115 for intangible religious benefits does not apply to the educational services at issue here. The exception applies only where the organization is organized exclusively for religious purposes. Petitioners contend that Emek and Yeshiva Rav Isacsohn were organized and ex- isted solely for the religious purpose of allowing Jewish parents to fulfill their religious obligation to teach their children Torah, which includes providing a secular education in an Orthodox Jewish environment. We disagree that Emek and Yeshiva Rav Isacsohn were organized exclusively for religious purposes. Emek and Yeshiva Rav Isacsohn were organized and operated to provide both a secular and a religious education. The Commissioner granted both schools exemptions from tax under section 501(c)(3), and both schools qualify as charitable organizations described in section 170(b)(1)(A)(ii), which pertains to educational organizations. A substantial part of each day was spent on secular studies. Petitioners concede that the education their children received in 1995 at Emek and Yeshiva Rav Isacsohn met educational requirements imposed by the State of California. Both schools were accredited by nonreligious accrediting agencies based in part on their secular educational programs. Petitioners contend that Emek and Yeshiva Rav Isacsohn were organized exclusively as religious organizations because respondent excused both from filing Forms 990, Return of Organization Exempt 54a From Income Tax.14 We disagree. Organizations exempt from tax under section 501(a) generally are required to file Forms 990. Sec. 6033(a)(1). However, churches, exempt organizations with gross receipts of not more than $5,000, and exclusively religious activities of any religious order are exempt from that requirement. The Commissioner may relieve any exempt organization from filing a return where the Commissioner determines that filing is not necessary to the efficient administration of the internal revenue laws. Sec. 6033(a)(2)(B). Emek and Yeshiva Rav Isacsohn do not qualify for the exception to the general filing requirement provided in section 6033(a)(2)(A). Neither school is a church, an exempt organization with gross receipts of not more than $5,000, or a religious order. Given that Emek and Yeshiva Rav Isacsohn were treated as charitable organizations described in section 170(b)(1) (A)(ii), i.e., educational organizations, we infer that the Commissioner exercised discretion under section 6033(a)(2)(B) to except Emek and Yeshiva Rav Isacsohn from filing Forms 990. Emek and Yeshiva Rav Isacsohn provided a religious and secular education for their students. Re- gardless of petitioners’ reasons for choosing to educate their children at Emek and Yeshiva Rav Isac-

14 Petitioners rely in part on a letter from respondent’s counsel to petitioners’ counsel that petitioners attached to their reply brief. Because the letter in question was not offered into evidence at trial, the letter was returned to petitioners unfiled and is not part of the record. 55a sohn, those schools did not provide exclusively religious services.15 4. Whether the Agreement Reached Between the Internal Revenue Service and the Church of Scientology in 1993 Affects the Result in This Case In Hernandez v. Commissioner, 490 U.S. 680, 702, 109 S.Ct. 2136, 104 L.Ed.2d 766 (1989), the U.S. Su- preme Court held that the record did not support the taxpayer’s claim of entitlement to deduct as charitable contributions payments to the Church of Scientol- ogy for what the Church of Scientology calls auditing and training. However, the parties stipulated that an agreement dated October 1, 1993, between the Com- missioner and the Church of Scientology settled several longstanding issues. According to a letter sent to petitioners in 1994 from the chief of the adjustments branch, Fresno Service Center, the settlement agreement between the Commissioner and the Church of Scientology allows individuals to claim, as charitable contributions, 80 percent of the cost of qualified religious services. Petitioners contend that, because of that closing agreement, the Commissioner is constitutionally required to allow a deduction for tuition paid to schools that provide religious and secular education to the extent that the tuition paid exceeds the value of the

15 Petitioners point out that the 1993 legislative history states that the exception in secs. 170(f)(8) and 6115 for intangible religious benefits does not apply to education leading to a recognized degree. Petitioners contend that the secular education provided by Emek and Yeshiva Rav Isacsohn does not lead to a recognized degree. In light of our conclusion that secs. 170(f)(8) and 6115 are substantiation and disclosure provisions, we need not consider this contention further. 56a secular education. Petitioners contend that the religious education that the Jewish day schools provide in exchange for tuition is jurisprudentially indistinguishable from the auditing and training that the Church of Scientology provides to its members in exchange for a fixed fee. The U.S. Court of Appeals for the Ninth Circuit previously rejected petitioners’ arguments about the Church of Scientology in Sklar v. Commissioner, 282 F.3d at 619-620.Petitioners’ tuition payments were made to schools that in part provide secular educational services, not to exclusively religious organizations. Thus, the analysis in United States v. Am. Bar Endowment, 477 U.S. 105, 106 S.Ct. 2426, 91 L.Ed. 2d 89 (1986), controls here. We conclude that the agreement reached between the Internal Revenue Service and the Church of Scientology in 1994 from respondent’s Fresno Service Center does not affect the result in this case.16 5. Whether Petitioners May Deduct Their Payment for Mishna Classes Petitioners contend that they may deduct as a charitable contribution the $175 that they paid for

16 In Sklar v. Commissioner, 282 F.3d 610, 612 n. 3 (9th Cir. 2002), affg. T.C. Memo.2000-118, the U.S. Court of Appeals said it is strongly inclined to the view that sec. 170 was not amended in 1993 to permit deductions for which the consideration is intangible religious benefits, and that Hernandez v. Commis- sioner, 490 U.S. 680, 702, 109 S.Ct. 2136, 104 L.Ed.2d 766 (1989), is still controlling. That court also said that it need not rule definitively on this point because petitioners’ claims did not meet the requirements for partial deductibility of dual payments established by United States v. Am. Bar Endowment, 477 U.S. 105, 106 S.Ct. 2426, 91 L.Ed.2d 89 (1986). Similarly, we have decided this case by applying United States v. Am. Bar Endowment, supra. 57a Mishna classes that Emek provided separately from its regular classes and charged separately from its regular tuition and fees. We disagree. Petitioners’ payment for Mishna classes at Emek is not made deductible merely because Emek offers those classes separately from their regular educational programs, and Emek charges, and petitioners pay, separately from Emek’s other charges. Petition- ers did not intend those payments to be a contribution or gift to Emek within the meaning of section 170(c).17 6. Conclusion We conclude that petitioners are not entitled to a charitable contribution deduction under section 170 for any part of the tuition, including the fee for Mishna classes, they paid to Emek or Yeshiva Rav Isacsohn in 1995.18 B. Whether Petitioners Are Liable for the Accuracy-Related Penalty Respondent contends that petitioners are liable for the accuracy-related penalty under section 6662 for deducting $15,000 of their tuition. We disagree. Taking into account respondent’s concession, petitioners’ tax understatement is $3,209. That amount is not substantial for purposes of section 6662 because it does not exceed the greater of 10 percent of

17 Emek is an educational organization, not a religious organization. We need not consider under what circumstances payments to a religious organization for religious instruction are deductible. 18 In light of our conclusion, we need not decide whether petitioners complied with substantiation requirements imposed by sec. 170(f)(8). 58a the amount required to be shown or $5,000. See sec. 6662(d)(1)(A). Respondent contends that petitioners knew that they lacked a reasonable basis for claiming the disallowed deductions because, unlike the return they filed for 1994, petitioners did not file a Form 8275 or otherwise call attention to the deduction. We disagree. Respondent permitted similar deductions for petitioners’ 1991, 1992, and 1993 tax returns. Petitioners timely filed their 1995 return on Octo- ber 15, 1996. Petitioners’ 1994 return was being audited when they filed their 1995 return pursuant to an extension on October 15, 1996. Petitioners filed their petition in Sklar I on January 27, 1997. Deci- sion was entered in that case on April 5, 2000, and affirmed early in 2002. Thus, when they filed their 1995 return, petitioners knew that respondent had allowed them to claim similar deductions for 1991-93, and they knew their 1994 return was being audited; but they did not know they would not prevail on this issue for 1994. Under these circumstances, we conclude that petitioners had a reasonable basis for claiming the deductions that respondent disallowed, and that petitioners believed in good faith that they could deduct the $15,000 for tuition and Mishna payments on their 1995 return. To reflect concessions and the foregoing, Decision will be entered under Rule 155. 59a UNITED STATES COURT OF APPEALS, NINTH CIRCUIT

———— No. 00-70753 ————

MICHAEL SKLAR; MARLA SKLAR, Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee. ———— Argued and Submitted Sept. 7, 2001. Filed Jan. 29, 2002. Amended Feb. 27, 2002.

————

AMENDED OPINION ————

Before PREGERSON, REINHARDT and SIVER- MAN, Circuit Judges. Opinion by Judge REINHARDT; Concurrence by Judge SILVERMAN REINHARDT, Circuit Judge. The taxpayer-petitioners in this action, Michael and Marla Sklar, challenge the Internal Revenue Service’s (“IRS”) disallowance of their deductions, as charitable contributions, of part of the tuition pay- 60a ments made to their children’s religious schools. In the notice of deficiency sent to the Sklars, the IRS explained that “[s]ince these costs are personal tuition expenses, they are not deductible.” Specifically, the Sklars sought to deduct 55% of the tuition, on the basis that this represented the proportion of the school day allocated to religious education. The Sklars contend that these costs are deductible under section 170 of the Internal Revenue Code, as payments for which they have received “solely intangible religious benefits.” They also argue that they should receive this deduction because the IRS permits similar deductions to the Church of Scientology, and it is a violation of administrative consistency and of the Establishment Clause to deny them, as Orthodox Jews, the same deduction. The Tax Court found that under De Jong v. Commissioner, 309 F.2d 373, 376 (9th Cir.1962), tuition paid for the education of a taxpayer’s children is a personal expense which is non-deductible under § 170. The Tax Court also rejected the administrative inconsistency argument and the Establishment Clause claim, and ruled inad- missible several documents supporting the Sklars’ contentions with respect to the Church of Scientology on the ground that the Sklars are not similarly situated to the members of the Church of Scientology. The Sklars filed this timely appeal. We review the Tax Court’s conclusions of law and its construction of the tax code de novo, and no deference is owed that court on its application of the law. Schachter v. Commissioner, 255 F.3d 1031, 1033 (9th Cir.2001); Custom Chrome, Inc. v. Commissioner, 217 F.3d 1117, 1121 (9th Cir.2000); Leslie v. Commis- sioner, 146 F.3d 643, 650 (9th Cir.1998). 61a I. The Provisions of the Tax Code Governing Cha- ritable Contribution Deductions Do Not Appear to Permit the Deduction Claimed by the Sklars The Sklars assert that the deduction they claimed is allowable under section 170 of the Internal Reve- nue Code which permits taxpayers to deduct, as a charitable contribution, a “contribution or gift” to certain tax-exempt organizations. Not only has the Supreme Court held that, generally, a payment for which one receives consideration does not constitute a “contribution or gift” for purposes of § 170, see United States v. American Bar Endowment, 477 U.S. 105, 118, 106 S.Ct. 2426, 91 L.Ed.2d 89 (1986) (stressing that “[t]he sine qua non of a charitable contribution is a transfer of money or property without adequate consideration”), but it has explicitly rejected the contention made here by the Sklars: that there is an exception in the Code for payments for which one receives only religious benefits in return. Hernandez v. Commissioner, 490 U.S. 680, 109 S.Ct. 2136, 104 L.Ed.2d 766 (1989). The taxpayers in Hernandez, members of the Church of Scientology, sought to deduct, as charitable contributions under § 170(c), payments made by them to the Church of Scientology in exchange for the religious exercises of “auditing” and “training.”1 The Court affirmed the Tax Court’s reading of the statute disallowing the

1 The Supreme Court, in Hernandez, described “auditing” as the process by which, through a one-to-one encounter with a Church of Scientology official, one becomes aware of his spiritual dimension. 490 U.S. at 684-85, 109 S.Ct. 2136. The Court de-scribes “training” as one of several “doctrinal courses” in which members study the tenets of the faith and train to become the leaders of auditing sessions. 490 U.S. at 685, 109 S.Ct. 2136. 62a deductions on the following three grounds: (1) Con- gress had shown no preference in the Internal Reve- nue Code for payments made in exchange for religious benefits as opposed to other benefits, 490 U.S. at 692-93, 109 S.Ct. 2136; (2) to permit the deductions the taxpayers demanded would begin a slippery slope of expansion of the charitable contribution deduction beyond what Congress intended, 490 U.S. at 693, 109 S.Ct. 2136; and (3) to permit these deductions could entangle the IRS and the government in the affairs and beliefs of various religious faiths and organizations in violation of the constitutional principle of the separation of church and state, 490 U.S. at 694, 109 S.Ct. 2136. Specifically, the Supreme Court stated that to permit these deductions might force the IRS to engage in a searching inquiry of whether a particular benefit received was “religious” or “secular” in order to determine its deductibility, a process which, the Court said, might violate the Establishment Clause. Hernandez, 490 U.S. at 694, 109 S.Ct. 2136. Despite the clear statutory holding of Hernandez, the Sklars contend that recent changes to the Inter- nal Revenue Code have clarified Congressional intent with respect to the deductibility of these payments. We seriously doubt the validity of this argument. The amendments to the Code appear not to have changed the substantive definition of a deductible charitable contribution, but only to have enacted additional documentation requirements for claimed deductions. Omnibus Budget Reconciliation Act of 1993 (“OBRA’ 93”), P.L. No. 103-66, 107 Stat. 312 (codified as amended in scattered sections of 26 U.S.C.). Section 170(f) of the Code adds a new requirement that taxpayers claiming a charitable contribution deduction obtain from the donee an estimate of the value of any 63a goods and services received in return for the donation, and exempts from that new estimate requirement contributions for which solely intangible religious benefits are received.2 I.R.C. § 170(f)(8)(A) & (B)(ii). Similarly, § 6115 requires that tax-exempt organizations inform taxpayer-donors that they will receive a tax deduction only for the amount of their donation above the value of any goods or services received in return for the donation and requires donee organizations to give donors an estimate of this value, exempting from this estimate requirement contributions for which solely intangible religious benefits are received. Given the clear holding of Hernandez and the absence of any direct evidence of Congressional intent to overrule the Supreme Court on this issue, we would be extremely reluctant to read an additional and significant substantive deduction into the statute based on what are clearly procedural provisions regarding the documentation of tax return information, particularly where the deduction would be of doubtful constitutional validity. Hernandez, 490 U.S. at 694, 109 S.Ct. 2136; see Lemon v. Kurtzman, 403 U.S. 602, 612-13, 91 S.Ct. 2105, 29 L.Ed.2d 745 (1971) (holding that a statute is unconstitutional under the Establishment Clause if it fosters “an excessive government entanglement with religion”). We need not, however, decide this issue definitively in this case.3

2 Section 170(f)(8)(C) permits the donee organization to provide this acknowledgment information to the IRS directly on its own tax return instead, thereby relieving the donor of this obligation. 3 Our concurring colleague may well be correct that Hernandez is still controlling of this case and that § 170 has not 64a II. The IRS Policy Regarding the Church of Scien- tology May Not Be Withheld from Public Scrutiny and Appears to Violate the Establishment Clause; Further, It Appears That the Sklars Have Not Made Out a Claim of Administrative Inconsistency Additionally, the Sklars claim that the IRS engages in a “policy” of permitting members of the Church of Scientology to deduct as charitable contributions, payments made for “auditing,” “training,” and other qualified religious services, and that the agency’s refusal to grant similar religious deductions to members of other faiths violates the Establishment Clause and is administratively inconsistent. They assert that the “policy” is contained in a “closing agreement”4 that the IRS signed with the Church of Scientology in 1993, shortly after the Hernandez decision and the 1993 changes to § 170 of the Inter- been amended to permit deductions of contributions for which the consideration consists of “intangible religious benefits.” As we have stated in the text, we are strongly inclined to that view ourselves. However, we need not issue a definitive holding on the effect of the statutory amendments here, because we can reject the Sklars’ claim on the ground that they have failed to satisfy the requirements for the partial deductibility of dual payments set out in United States v. American Bar Endowment, 477 U.S. 105, 106 S.Ct. 2426, 91 L.Ed.2d 89 (1986). Anderson v. United States, 417 U.S. 211, 218, 94 S.Ct. 2253, 41 L.Ed.2d 20 (finding it “inadvisable . . . reach out . . . to pass on important questions of statutory construction when simpler, and more settled, grounds are available for deciding the case at hand”). See Section IV, infra (rejecting the Sklars’ claim on the “dual payment” ground). 4 Closing agreements are governed by I.R.C. § 7121, which permits the IRS to enter into “an agreement in writing with any person relating to the liability of such person (or of the person or estate for whom he acts) in respect of any internal revenue tax for any taxable period.” I.R.C. § 7121(a); 26 C.F.R. § 301-7121-1. 65a nal Revenue Code.5 Because the IRS erroneously asserted that it is prohibited from disclosing all or any part of the closing agreement, we assume, for purposes of resolving this case, the truthfulness of the Sklars’ allegations regarding the terms of that agreement. However, rather than concluding that the IRS’s pro-Scientology policy would require it to adopt similar provisions for all other religions, we would likely conclude, were we to reach the issue, that the policy must be invalidated on the ground that it violates either the Internal Revenue Code or the Establishment Clause. See Hernandez, 490 U.S. at 694, 109 S.Ct. 2136; Lemon v. Kurtzman, 403 U.S. at 612-13, 91 S.Ct. 2105. A. The IRS’s Refusal to Disclose the Terms of Its Closing Agreement with the Church of Scientology We are required, for purposes of our analysis, to assume the contents of the IRS’s policy towards the Church of Scientology, because of the IRS’s refusal to reveal to the Sklars, to this court, or even to the De- partment of Justice,6 the contents of its closing agreement, although that agreement has apparently been reprinted in the Wall Street Journal. See Scien-

5 The year 1993 also saw the issuance by the IRS of Church of Scientology, Revenue Ruling 93-73, 1993 WL 436350 (RRU Nov. 1, 1993), which declared “obsolete” Church of Scientology, Reve- nue Ruling 78-189, 1978 WL 42290 (RRU 1978), which had explicitly prohibited the deduction of the costs of auditing, training and other courses in the Church of Scientology as charitable contribution deductions under § 170. 6 At oral argument the Justice Department lawyer specifically represented to the court that the Department of Justice has not been informed of the contents of the agreement, even for purposes of this appeal, because the IRS deems it to be confidential. 66a tologists and IRS Settle for $12.5 Million, Wall St. J., Dec. 30, 1997, at A12; agreement reprinted in Wall St. J. Interactive Edition (www.wsj.com). The IRS insists that the closing agreement in this case cannot be disclosed as it contains return information which the IRS is required to keep confidential under I.R.C. § 6103. Under § 6103, the IRS is prohibited from disclosing “return information,” which is defined to include closing agreements. I.R.C. § 6103(2).7 The prohibitions of § 6103 are subject to § 6104, where that provision applies, and § 6104 mandates public disclosure by each tax-exempt entity of its application for tax exemption (which itself contains detailed financial information about the entity, including revenues and expenses) as well as all documentation in support of that application. § 6104(a)(1)(A). The legislative history of the amendment to § 6103 which

7 In our original opinion we stated that “ § 6103 does not discuss closing agreements, nor does it explicitly prohibit their disclosure.” Slip Op. at 1379-1380. Shortly after the issuance of the opinion, however, the IRS brought to the court’s attention that subsequent to briefing in this case, Congress had amended § 6103 to prohibit the disclosure of closing agreements. I.R.C. § 6103(b)(2)(D). Despite this statutory change, our conclusion that § 6103 does not categorically prohibit the disclosure of closing agreements remains the same. As the IRS concedes, some “return information” prohibited from disclosure under § 6103 may nevertheless be required to be disclosed by tax- exempt entities under § 6104, because the disclosure prohibitions of § 6103 are subject to the mandatory disclosure requirements of § 6104. Therefore the critical question is not whether closing agreements constitute “return information” under § 6103, but whether they constitute information required to be disclosed by tax-exempt entities under § 6104. We conclude that these agreements constitute, at least in part, information required to be disclosed under § 6104. 67a added closing agreements to the definition of “return information,” makes it clear that [t]he [new] provision [§ 6103(b)(2)(D)] is not intended to foreclose the disclosure of tax-exempt organization closing agreements to the extent that such disclosure is authorized under section 6104. Since section 6103 permits the disclosure of return information as authorized by Title 26, a disclosure authorized by section 6104 is permissible, notwithstanding the fact that a closing agreement is return information. H.R. Conf. Rep. No. 106-1033, 2000 WL 1868642 at *1010 (footnote omitted). In Tax Analysts v. IRS, 214 F.3d 179 (D.C.Cir.2000), the only circuit court case on this issue, the D.C. Cir- cuit rejected the IRS’s argument, and held that disclosure of closing agreements is not categorically prohibited by § 6103, but may be required under § 6104. The legislative history of the § 6103 amendment, in addition to stating that § 6104 may still require disclosure of tax-exempt organization closing agreements, also specifically cites to Tax Analysts, stating that the new provision does not overrule its reasoning or its result. The Tax Analysts court concluded that the IRS’s reading of § 6103 was directly at odds with the broad language of § 6104, the statutory provision requiring public disclosure by each tax-exempt entity of its application for tax exemption as well as all documentation in support of that application. § 6104(a)(1)(A).8 In that case, Tax Analysts sought

8 There appears to be only one other federal case on this issue. In that case, also entitled Tax Analysts v. IRS, a district court, after conducting an in camera examination of the particular closing agreements sought to be disclosed, found that 68a disclosure of a closing agreement between the IRS and the Christian Broadcasting Network (“CBN”), a tax-exempt entity. The IRS had audited CBN and examined its eligibility for tax-exempt status after the network allegedly engaged in impermissible political activities. Tax Analysts argued that because CBN was able to retain its tax-exempt status only after signing the closing agreement, the agreement constituted documentation in support of the exemption application that must be publicly disclosed pursuant to § 6104(a)(1)(A). Rejecting the IRS’s argument that disclosure of closing agreements is categorically prohibited by § 6103, the D.C. Circuit held that judicial examination of such closing agreements is necessary to determine whether or not they might indeed constitute information in support of an application for tax exemption required to be disclosed under § 6104. 214 F.3d at 184. As the court stated with respect to the closing agreements at issue in that case: Precluding disclosure of a closing agreement, without regard to its content or circumstances, merely because it carries that particular label is . . . inconsistent with the statutory inclusion [in the disclosure requirements for tax-exempt organizations] of “any papers submitted” and “any letter or document issued” [in connection with an application for tax exemption]. Particu- larly in this case, where [the evidence] suggests that the closing agreement and application for exempt status were part of a single, overall nego- tiation between the IRS and [the Christian

§ 6103 prohibited their disclosure and that they did not fall within the provisions of § 6104. Tax Analysts v. IRS, 53 F.Supp.2d 449, 451, 453 (D.D.C.1999). 69a Broadcasting Network], the IRS’s rigid reliance on the type of documents at issue rather than their content is questionable. 214 F.3d at 184. We agree with the D.C. Circuit. Disclosure of closing agreements is not categorically prohibited by § 6103, which is subject to § 6104; in appropriate circumstances, disclosure may be required under § 6104 or otherwise. Similarly, we reject the notion that § 6103 prohibits the disclosure of the entire closing agreement whenever part of the agreement contains return information. We also conclude that there are several reasons why the closing agreement in the case before us likely is subject to disclosure, at least in substantial part. First, just as in the Tax Analysts case the settling of the Church of Scientology’s tax liability through the closing agreement was required in order for the organization to regain the tax-exempt status it had previously lost. Therefore the closing agreement would appear to constitute documentation in support of the exemption application which must be publicly disclosed pursuant to § 6104(a)(1)(A). See Alison H. Eaton, Can the IRS Overrule the Supreme Court? 45 Emory L.J. 987, 987-89 (1996) (discussing the fact that, as part of the closing agreement, the main Church of Scientology regained the tax-exempt status it had lost in the 1960s). This is fully consistent with the already extensive disclosure generally required of tax-exempt organizations under § 6104: in this case, the publication of the Church of Scien- tology’s application for tax-exempt status, which contains detailed financial information about the organization, including its revenues and expenses. I.R.C. § 6104(a)(1)(A); 26 C.F.R. 6104(d)-1; IRS Form 1023. 70a Second, public disclosure of agreements that affect not just one taxpayer or a discrete group of taxpayers, but a broad and indeterminate class of taxpayers with a large and constantly changing membership, is also necessary as a practical matter. In the case of the Church of Scientology agreement, there are potentially tens, if not hundreds, of thou- sands of taxpayers who were not parties to the agreement and must be informed of the nature of the tax deductions available to them.9 Indeed, the IRS, likely in recognition of that fact, has itself already disclosed some of the terms of this agreement, further confirming its adoption of the position that policy-making closing agreements can and must be disclosed. See Letter from Derome O. Bratvold, Chief, Adjustments Branch, IRS, to petitioners Michael and Marla Sklar (Feb. 4, 1994) ER 32 (“The settlement agreement between the Internal Revenue Service and the Church of Scientology allows individuals to claim, as charitable contributions, 80 percent of the cast [sic] of qualified religious services.”).10

9 Only the IRS and the Church of Scientology are parties to the alleged closing agreement, although it purports to address the tax liability of taxpayer members of the Church of Scientology. 10 In 1993, the Sklars filed an amendment to their 1991 tax return in which they claimed as a charitable contribution deduction the tuition paid for their children’s religious education and requested an appropriate refund. Michael Sklar stated, “Pursuant to Revenue Ruling 93-73, Revenue Ruling 78-189 disallowing charitable contribution deductions for ‘auditing’ payments to the Church of Scientology, has been obsoleted. 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. The IRS responded with the 1994 letter, cited above, explaining the nature of the deduction permitted to members of the Church of Scientology pur- 71a Third, where a closing agreement sets out a new policy and contains rules of general applicability to a class of taxpayers, disclosure of at least the relevant part of that agreement is required in the interest of public policy. That this is the IRS’s understanding as well is demonstrated by the fact that public disclosure has been a requirement contained in at least two such policymaking closing agreements. The IRS required publication of its closing agreement with Hermann Hospital of Houston, Texas, a tax-exempt entity, concluded following the hospital’s disclosure to the IRS of certain physician recruitment practices which might have constituted prohibited transactions for a tax-exempt entity. John W. Leggett, Physician Recruitment and Retention by Tax Exempt Hospitals: The Hermann Hospital Physician Recruitment Guide- lines, 8 Health Law. 1, 6 (Spring 1995). Under the closing agreement, the hospital was required to engage only in permissible physician recruitment activities, as detailed extensively in an attached set of “Guidelines.” Leggett at *1-*3. Public disclosure of the closing agreement put other non-profit hospitals on notice of the IRS’s definition of permissible physician recruitment activities.11 That such was the pur-

suant to the closing agreement, and disallowing the refund to the Sklars as they had “provided no verification to show that nay [sic] of the amount claimed was for specified services.” ER 32. For some reason, the IRS was apparently under the impression that the Sklars were Scientologists rather than Orthodox Jews. 11 See Robert C. Louthian III, and Elizabeth M. Mills, Physi- cian Recruitment after Hermann Hospital, 4 Annals Health L. 1, *5-*6 (1995) (discussing the fact that IRS was well within its authority to require disclosure of the agreement and that although closing agreements have no legal precedential value, the Hermann Hospital closing agreement will likely affect both 72a pose of requiring publication is clear from the fact that the agreement included provisions that did not apply to Hermann Hospital, but that might in the future be applicable to other tax-exempt hospitals. Leggett at *6 n. 35. Similarly, publication on the Internet was required of the IRS’s closing agreement with the Kamehameha Schools Bishop Estate, a tax- exempt educational trust in Hawaii. The agreement was concluded after the IRS threatened to revoke the trust’s tax-exempt status because the trustees had engaged in serious financial misconduct and self- dealing. Evelyn Brody, A Taxing Time for the Bishop Estate: What is the I.R.S. Role in Charity Gover- nance?, 21 U. Haw. L. Rev. 537, 539-540 (1999). It required that the incumbent trustees be removed, that the estate pay a penalty of nine million dollars, and that future governance of the estate conform to the agreement’s provisions, including restrictions on who could become trustees and a requirement that the estate make its financial records publicly available. Brody at 539-40. Because the IRS had not tradi- tionally intervened to this extent in matters of estate governance, the publication of the closing agreement served to put the members of other trusts on notice that the failure to administer trusts along the lines that the IRS required of the Bishop Estate might lead to loss of tax-exempt status.12 Here, there is a strong public interest in the disclosure of the con-

how tax-exempt hospitals conduct their affairs and how IRS agents evaluate the activities of tax-exempt hospitals). 12 Evelyn Brody, The Limits of Charity Fiduciary Law, 57 Md. L. Rev. 1400, 1410-1411 & n. 49 (1998) (“Lately, perhaps responding to criticism that closing agreements create a secret body of law, some [IRS] regulators have conditioned settlement on the charity’s assenting to public disclosure of the agreement.”). 73a tents of the IRS’s agreement with the Church of Scientology, especially as the agreement establishes a new policy governing charitable contributions to a particular religious organization which, while the pertinent statute may be unclear, clearly contravenes a prior Supreme Court holding. Therefore, we reject the argument that the closing agreement made with the Church of Scientology, or at least the portion establishing rules or policies that are applicable to Scientology members generally, is not subject to public disclosure. The IRS is simply not free to enter into closing agreements with religious or other tax-exempt organizations governing the deductions that will be available to their members and to keep such provisions secret from the courts, the Con- gress, and the public.13 B. The Constitutionality of the IRS’s Agreement with the Church of Scientology The Supreme Court has developed a framework for determining whether a statute grants an unconstitutional denominational preference. Under that test, articulated in Larson v. Valente, 456 U.S. 228, 246- 47, 102 S.Ct. 1673, 72 L.Ed.2d 33 (1982), the first

13 We believe that the Tax Court’s ruling that the closing agreement is not relevant is in all likelihood correct. The Tax Court concluded that the Sklars were not similarly situated to the members of the Church of Scientology who benefitted from the closing agreement. While we have no doubt that certain taxpayers who belong to religions other than the Church of Scientology would be similarly situated to such members, we think it unlikely that the Sklars are. Religious education for elementary or secondary school children does not appear to be similar to the “auditing” and “training” conducted by the Church of Scientology. See note 1, supra. Again, however, we need not resolve that issue here. 74a inquiry is whether or not the law facially discriminates amongst religions. The second inquiry, should it be found that the law does so discriminate, is whether or not, applying strict scrutiny, that discrimination is justified by a compelling governmental interest. Id. Applying this test to the policy of the IRS towards the Church of Scientology, the initial inquiry must be whether the policy facially discriminates amongst religions. Clearly it does, as this tax deduction is available only to members of the Church of Scientology. The second Larson inquiry is whether or not the facially discriminatory policy is justified by a compelling governmental interest. 456 U.S. at 24647, 102 S.Ct. 1673. Although the IRS does not concede that it is engaging in a denominational preference, it asserts in its brief that the terms of the settlement agreement cannot be used as a basis to find an Establish- ment Clause violation because “in order to settle a case, both parties are required to make compromises with respect to points on which they believe they are legally correct.” This is the only interest that the IRS proffers for the alleged policy. Although it appears to be true that the IRS has engaged in this particular preference in the interest of settling a long and litigious tax dispute with the Church of Scientology,14 and as compelling as this interest might otherwise be, it does not rise to the level that would pass strict scrutiny. The benefits of settling a controversy with

14 See Alison H. Eaton, Can the IRS Overrule the Supreme Court? 45 Emory L.J. 987, 987-89 (1996) (“Since its inception the Church [of Scientology] has been embroiled in an endless stream of litigation with the Internal Revenue Service . . . [h]owever, in late 1993, a truce was called [by way of the Clos- ing Agreement].”). 75a one religious organization can hardly outweigh the costs of engaging in a religious preference. Even aside from the constitutional considerations, a contrary rule would create a procedure by which any denomination seeking a denominational preference could bypass Congressional law-making and IRS rulemaking by engaging in voluminous tax litigation. Such a procedure would likely encourage the proliferation of such litigation, not reduce it. Larson, 456 U.S. at 248, 102 S.Ct. 1673 (holding that even assuming arguendo that the government has a compelling governmental interest for a denominational preference, it must show that the rule is “closely fitted to further the interest that it assertedly serves”). Because the facial preference for the Church of Scien- tology embodied in the IRS’s policy regarding its members cannot be justified by a compelling governmental interest, we would, if required to decide the case on the ground urged by the Sklars, first determine that the IRS policy constitutes an unconstitutional denominational preference under Larson, 456 U.S. at 230, 102 S.Ct. 1673. The Sklars contend that because “the IRS has admitted that it permits members of the Church of Scientology to deduct their payments for religious instruction . . . . in order to avoid violating the First Amendment, [the] IRS must permit adherents of other faiths to deduct their payments for religious instruction.” To the extent that the Sklars claim that the Establishment Clause requires that we extend the Scientology deduction to all religious organizations, they are in error for three reasons: First, we would be reluctant ever to presume that Congress or any agency of the government would intend that a general religious preference be adopted, by extension or otherwise, as such preferences raise the highly sensi- 76a tive issue of state sponsorship of religion. In the absence of a clear expression of such intent, we would be unlikely to consider extending a policy favoring one religion where the effect of our action would be to create a policy favoring all. Second, the Supreme Court has previously stated that a policy such as the Sklars wish us to create would be of questionable constitutional validity under Lemon, because the administration of the policy could require excessive government entanglement with religion. Hernandez, 490 U.S. at 694, 109 S.Ct. 2136; see Lemon, 403 U.S. at 612-13, 91 S.Ct. 2105. Third, the policy the Sklars seek would appear to violate section § 170. See Hernandez, 490 U.S. at 692-93, 109 S.Ct. 2136. To the extent that the Sklars are also making an administrative inconsistency claim, we reject that claim on two grounds. First, in order to make an administrative inconsistency claim, a party must show that it is similarly situated to the group being treated differently by the agency. United States v. Kaiser, 363 U.S. 299, 308, 80 S.Ct. 1204, 4 L.Ed.2d 1233 (Frankfurter, J., concurring) (“The Commissioner [of the IRS] cannot tax one and not tax another without some rational basis for the difference. And so, . . . it can be an independent ground of decision that the Commissioner has been inconsistent . . . . ”). We seriously doubt that the Sklars are similarly situated to the persons who benefit from the Scientology closing agreement because the religious education of the Sklars’ children does not appear to be similar to the “auditing”, “training” or other “qualified religious services” conducted by the Church of Scientology. Second, even if they were so situated, because the treatment they seek is of questionable statutory and constitutional validity under § 170 of the IRC, under Lemon, and under Hernandez, we would not hold 77a that the unlawful policy set forth in the closing agreement must be extended to all religious organizations. In the end, however, we need not decide the Establishment Clause claim or the administrative inconsistency claim as the Sklars have failed to show that their tuition payments constitute a partially deductible “dual payment” under the Tax Code. III. The Sklars’ Tuition Payments Do Not Constitute Partially Deductible “Dual Payments” Under the Tax Code A “dual payment” (or “quid pro quo payment”) under the Tax Code is a payment made in part in consideration for goods and services, and in part as a charitable contribution. I.R.C. § 6115. For example, the purchase, for seventy-five dollars, of an item worth five dollars at a charity auction would constitute a dual payment: five dollars in consideration for goods, and seventy dollars as a charitable contribution. The IRS permits a deduction under § 170 for the portion of a dual payment that consists of a charitable contribution, but not for the portion for which the taxpayer receives a benefit in return. Although the Sklars concede that they received a benefit for their tuition payments, in that their children received a secular education, they claim that part of the payment-the part attributable to their children’s religious education-should be regarded as a charitable contribution because they received only an “intangible religious benefit” in return. Leaving aside both the issue, discussed in section I, of whether the tax code does indeed treat payments for which a taxpayer receives an “intangible religious benefit” as a charitable contribution, as well as any constitutional considerations, we are left with the Sklars’ contention that their tuition payment was a dual one: in part in con- 78a sideration for secular education, and in part as a charitable contribution. The Sklars assert that because 45% of their children’s school day was spent on secular education, and 55% on religious education, they should receive a deduction for 55% of their tuition payments. On the record before this court, the Sklars failed to satisfy the requirements for deducting part of a “dual payment” under the Tax Code. The Supreme Court discussed the deductibility of such payments in United States v. American Bar Endowment, 477 U.S. 105, 106 S.Ct. 2426, 91 L.Ed.2d 89 (1986), and held that the taxpayer must establish that the dual payment exceeds the market value of the goods received in return. The facts of that case were as follows: The American Bar Endowment (“ABE”), a tax-exempt corporation organized for charitable purposes and associated with the American Bar Association (“ABA”), raised money for its charitable work by providing group insurance policies to its members, all of whom were also members of the ABA. ABE negotiated premium rates with insurers, collected premiums from its members and passed those premiums on to the insurers. 477 U.S. at 107, 106 S.Ct. 2426. Because the group policies purchased by ABE were “experience rated,” the group members were entitled to receive, each year, a refund of the portion of their premiums paid above the actual cost to the insurer of providing insurance to the group. Id. at 107-108, 106 S.Ct. 2426. Although normally these refunds, called “dividends,” would be distributed to individual poli- cyholders, ABE required its members to agree to turn the dividends over to ABE for use in its charitable work. Id. ABE members sought to deduct the dividends as charitable contributions to ABE, claiming that the premiums paid constituted partially 79a deductible “dual payments.” The Supreme Court held that the ABE members could not deduct the dividends as charitable contributions because they had not shown that the premiums they paid to ABE exceeded the market value of the insurance they purchased, or that the “excess payment,” if any, was made with the intention of making a gift. 477 U.S. at 117, 106 S.Ct. 2426. Because the ABE insurance was no more costly to its members than other policies that were available to them, the taxpayers could not prove that they “purposely contributed money or property in excess of the value of any benefit [they] received in return.” 447 U.S. at 118, 100 S.Ct. 2051. Similarly, the Sklars have not shown that any dual tuition payments they may have made exceeded the market value of the secular education their children received. They urge that the market value of the secular portion of their children’s education is the cost of a public school education. That cost, of course, is nothing. The Sklars are in error. The market value is the cost of a comparable secular education offered by private schools. The Sklars do not present any evidence even suggesting that their total payments exceeded that cost. There is no evidence in the record of the tuition private schools charge for a comparable secular education, and thus no evidence showing that the Sklars made an “excess payment” that might qualify for a tax deduction. This appears to be not simply an inadvertent evidentiary omission, but rather a reflection of the practical realities of the high costs of private education. The Sklars also failed to show that they intended to make a gift by contributing any such “excess payment.” Therefore, 80a under the clear holding of American Bar Endowment, the Sklars cannot prevail on this appeal.15 IV. Conclusion We hold that because the Sklars have not shown that their “dual payment” tuition payments are partially deductible under the Tax Code, and, specifically, that the total payments they made for both the secular and religious private school education their children received exceeded the market value of other secular private school education available to those children, the IRS did not err in disallowing their deductions, and the Tax Court did not err in affirming the IRS’s decision. We affirm the decision of the Tax Court on that ground. AFFIRMED.

15 Moreover, as the IRS argues in its brief, the Sklars’ deduction was properly denied on the alter-native ground that they failed to meet the contemporaneous substantiation requirement of § 170(f)(8)(A), (B) & (C). The Sklars did not present, prior to filing their tax return, a letter from the schools acknowledging their “contribution” and estimating the value of the benefit they received, as is required under the statute. As noted earlier, certain reporting requirements are not applicable where intangible religious benefits are received in exchange, but such exemptions apply only where the consideration consists solely of such benefits. See the discussion of § 170(f)(8)at p. 613, supra. 81a SILVERMAN, Circuit Judge, concurring: 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. The majority states that the Church of Scientology’s closing agreement is not relevant because “the Sklars[are] not similarly situated to the members of the Church of Scientology . . . . ” That may or may not be true, but it has no bearing on whether the tax code permits the Sklars to deduct the costs of their children’s religious education as a charitable contribution. Whether the Sklars are entitled to the deduction they claim is governed by 26 U.S.C. § 170, Hernandez v. Commissioner, 490 U.S. 680, 109 S.Ct. 2136, 104 L.Ed.2d 766 (1989), and United States v. American Bar Endowment, 477 U.S. 105, 106 S.Ct. 2426, 91 L.Ed.2d 89 (1986), not by the Church of Scientology closing agreement. - Section 170 states that quid pro quo donations, for which a taxpayer receives something in return, are not deductible. - Hernandez holds that § 170 applies to religious quid pro quo donations. - American Bar Endowment holds that charitable donations are deductible only to the extent that they exceed the fair market value of what is received in exchange. The Sklars receive something in return for their tuition payments-the education of their children. Thus, they are not entitled to a charitable deduction under § 170, as Judge Reinhardt carefully shows. 82a Hernandez clearly forecloses the argument that § 170 should not apply because the tuition payments are for religious education. Finally, the Sklars have not demonstrated that what they pay for their children’s education exceeds the fair market value of what they receive in return; therefore, they have not shown that they are entitled to a deduction under American Bar Endowment. It is as simple as that. Accordingly, under both the tax code and Supreme Court precedent, the Sklars are not entitled to the charitable deduction they claimed. The Church of Scientology’s closing agreement is irrelevant, not because the Sklars are not “similarly situated” to Scientologists, but because the closing agreement does not enter into the equation by which the deductibility of the Sklars’ payments is determined. An IRS closing agreement cannot overrule Congress and the Supreme Court. 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 rightly disallowed to everybody else- then the proper course of action is a lawsuit to stop to that policy.1 The remedy is not to require the IRS to let others claim the improper deduction, too.

1 See Bowen v. Kendrick, 487 U.S. 589, 108 S.Ct. 2562, 101 L.Ed.2d 520 (1988) (allowing a taxpayer group to challenge the constitutionality of the Adolescent Family Life Act under the Establishment Clause); School Dist. of City of Grand Rapids v. Ball, 473 U.S. 373, 380 n. 5, 105 S.Ct. 3216, 87 L.Ed.2d 267 (1985) (noting and affirming “the numerous cases in which we have adjudicated Establishment Clause challenges by state taxpayers to programs for aiding nonpublic schools.”), rev’d on other grounds, Agostini v. Felton, 521 U.S. 203, 117 S.Ct. 1997, 138 L.Ed.2d 391 (1997). 83a Excerpts from Agreement between the Internal Revenue Service and the Church of Scientology and its constituent entities, dated October 1, 1993, as published by The Wall Street Journal Interactive Edition (Tax Court Exhibit 62-P). Form 906 Rev. January 1987 Department of the Treasury—Internal Revenue Service Closing Agreement On Final Determination Covering Specific Matters Under section 7121 of the Internal Revenue Code, the parties named herein and the Commissioner of Internal Revenue make the following closing agreement: WHEREAS, the Church of Scientology and its constituent entities (the “Church”) and the Internal Revenue Service (the “Service”) have a long history of controversy spanning over 30 years; WHEREAS, the Church has pending with the Service applications on Form 1023 requesting that the Service recognize certain constituent entities within the church as exempt from income taxation pursuant to section 501(a) of the Internal Revenue Service Code, as exclusively charitable organizations described in section 501(c)(3) of the Code; WHEREAS, the controversy between the parties includes litigation (hereinafter “the section 170 litigation”) in which the deductibility under Code section 170 of parishioners’ payments to the Church in connection with their participation in religious service of the Scientology faith is at issue; 84a WHEREAS, the Church signatories and individual Scientologists have initiated, supported and/or otherwise participated in litigation under the Freedom of Information Act (FOIA) to compel the Service to disclose information withheld by the Service in response to FOIA requests about its treatment of Scientologists and Churches of Scientology (hereinafter “FOIA litigation”); WHEREAS, in October of 1991, the key officials of the Church, David Miscavige and Mark Rathbun, approached the service seeking to negotiate the resolu- tion of the above-described matters, and met with the then Commissioner; WHEREAS, at this meeting, the Commissioner indicated his desire to resolve all outstanding issues between the Church and the Service and appointed the Assistant Commissioner to negotiate and conclude a settlement with the Church on behalf of the Service; WHEREAS, the Church and the Service intend this closing agreement to be final and conclusive with respect to all matters but, while also final and conclusive, that its provisions relating to the continuing duties and obligations of both parties during the transition period shall generally be effective until December 31, 1999; NOW IT IS HEREBY DETERMINED AND AGREED, for purposes the Internal Revenue laws of the United States, and in consideration of the provisions contained herein that: * * * VII. Treatment of Parishioners’ Contributions A. The Service acknowledges its obligation to interpret and apply the “gift or contribution” requirement of 85a Code section 170(c) equally and consistently to the fundraising practices of all religious organizations that receive fixed donations from parishioners in connection with participation in worship and similar religious rituals or services. B. Until the earlier of (i) December 31, 1999, (ii) the issuance or adoption by the Service of audit policies or practices in the examination of tax returns utilizing uniform and consistent principles for determining the deductibility of fixed donations to all churches, or (iii) until legislation is enacted which affects the deductibility of such fixed donations, the Service agrees not to contest the deductibility of Church of Scientology fixed donations in connection with qualified religious services. The phrase “qualified religious services” means those appearing on the “Scientology Classification, Gradation and Awareness Chart.” If the taxpayer produces an accurate receipt or other documentation from the donee Church of Scientology substantiating (1) the amount of the taxpayer’s fixed donation and (2) the qualified religious services with respect to which the donation was made, then, for as long as this paragraph B. of this section VII. applies, as set forth in paragraph F., the full amount of the fixed donation for these services shall be treated as a charitable contribution under code section 170 and shall not be challenged on that basis. Nothing in the preceding sentence affects other requirements, including substantiation, as provided by law. In the absence of such documentation, the Service also may independently determine the amount of and the extent to which the taxpayer’s fixed donations were made in connection with qualified religious services. Individual taxpayers’ contributions to churches of Scientology not in connection with religious services or any substantial return benefit remain fully deductible if other requirements under the law are met. 86a Payments to churches of scientology for books or other religious articles are not deductible except to the extend [sic] that a dual payment exists.

* * *

I. Date of Agreement The date of this Agreement is October 1, 1993 Dated: October 1, 1993 /s/ ______DAVID MISCAVIGE Individual Member of CTCC Dated: October 1, 1993 /s/ ______NORMAN F. STARKEY, Individual Member of CTCC Dated: October 1, 1993 /s/ ______MARK RATHBUN, Individual Member of CTCC Dated: October 1, 1993 /s/ ______HEBER JENTZSCH, Individual Member of CTCC Dated: October 1, 1993 /s/ ______MARK YAGER, Chairman, Watchdog Committee At-Large Member of CTCC

87a Dated: October 1, 1993 /s/ ______JONATHAN EPSTEIN International Finance Director, At-Large Member of CTCC Dated: October 1, 1993 /s/ ______NIGEL OAKES, Chief Accountant International At-Large Member of CTCC Dated: October 1, 1993 RELIGIOUS TECHNOLOGY CENTER /s/ ______Mark Rathbun Title: President Dated: October 1, 1993 CHURCH OF SCIENTOLOGY INTERNATIONAL /s/ ______Heber Jentzsch Title: President Dated: October 1, 1993 CHURCH OF SPRITUAL TECHNOLOGY /s/ ______Title: POA Dated: October 1, 1993 CHURCH OF SCIENTOLOGY FLAG SERVICE ORGANIZATION, INC. /s/ ______Title: POA 88a Dated: October 1, 1993 CHURCH OF SCIENTOLOGY WESTERN UNITED STATES /s/ ______Title: POA Dated: October 1, 1993 BUILDING MANAGEMENT SERVICES /s/ ______Title: POA Dated: October 1, 1993 CHURCH OF SCIENTOLOGY RELIGIOUS TRUST /s/ ______Title: POA Dated: October 1, 1993 COMMISSIONER OF INTERNAL REVENUE SERVICE /s/ ______John E. Burke, Assistant Commissioner. Employee Plans and Exempt Organizations Dated: October 1, 1993 COMMISSIONER OF INTERNAL REVENUE SERVICE /s/ ______James J. McGovern, Associate Chief Counsel, Employee Benefits and Exempt Organizations