Scientologists Suffer New Legal Setback in Battle With U.S. Over Tax Deductions

In another legal setback for the Church of Scientology, a federal appeals court in California ruled Friday that church members cannot claim income tax deductions for donations they make to the church in exchange for spiritual training.

The ruling, which could affect a major source of revenue for the church, concludes that the thousands of dollars church members pay for “auditing” and “training” sessions with church leaders are not charitable contributions deductible under federal tax law.

The opinion from a three-judge panel of the U.S. 9th Circuit Court of Appeals conflicts with a ruling earlier this month in a nearly identical case by a federal appeals court in St. Louis, which held that such payments are deductible, but it concurs with a previous decision in Boston.

Nine Tax Appeal Cases

The three cases are among nine Scientology tax appeals brought before circuit courts throughout the nation. The issue is expected to be decided ultimately by the U.S. Supreme Court.

In the 9th Circuit case, three church members challenged the Internal Revenue Service’s disallowance of fees they paid to the church for general training in the principles of Scientology and for “auditing” services, a process by which church members believe they are able to gain spiritual competence.

The church says it charges fees for such services because it is a fundamental tenet of Scientology that any time a person receives something, he must pay it back, a concept known as the doctrine of exchange.

The fixed “donations” required for such services constitute the majority of the Church of Scientology’s funds and are used to pay for church operations, according to the court record.

Scientologists appealing the IRS ruling argued that their donations were no different from other churches’ requirements for tithing or dues in exchange for various church benefits.

They also argued that the ruling was an unconstitutional burden on the free exercise of their beliefs because they cannot make the same normally deductible donations available to members of other religions.

In an opinion written by Judge Arthur M. Kennedy, the court rejected those arguments, concluding that remittances to the church were not voluntary donations, but were made with the expectation of receiving some benefit.

“The test is not the economic character of what the payor receives, but whether there is a specific, measurable quid pro quo for the donation in question,” the court held.

The judges said there is no evidence that the doctrine of exchange prevents church members from making voluntary contributions, and thus rejected the taxpayers’ constitutional claims.

“If we are correct in this,” the court said, “the Scientologists are not hurt by today’s ruling. . . . Taxpayers may practice the doctrine of exchange whenever they receive a quid pro quo benefit from the church, and still deduct whatever contributions or gifts they make.”

Eric M. Lieberman, an attorney for the church members, said he is “disappointed in the failure of the courts to recognize any lack of basis for distinction” between the Church of Scientology’s practices and those of many other churches.

“Historically, and properly so, the IRS and the courts have never deemed a religious benefit to be an economic or financial benefit,” he said.

Lieberman said the ruling will be appealed to the U.S. Supreme Court.