Scientology Settlement Puts IRS in a Kosher Pickle

Marty Graham
The National Law Journal
November 29, 2004

Tax lawyers are watching a trial in Los Angeles that pits an orthodox Jewish family against the Internal Revenue Service over whether tuition for religious education is deductible -- based in part on a "secret" settlement between the IRS and the Church of Scientology.

"It's not clear that [plaintiffs] Michael and Marla Sklar will win, but if they do, it may well mean that millions of families will be able to deduct some portion of private religious school education," said professor Evelyn Brody, a Chicago-Kent College of Law tax specialist. "It would force the IRS to deal with millions of dollars in new deductions and it would overwhelm them."

Elizabeth Pierson, a tax attorney with Los Angeles' Hoffman Sabban & Watenmaker, said the case has tax lawyers' attention. "The Sklars are trying to establish a brave new world where private compromises between the government and taxpayers can be relied on by unrelated taxpayers, not the norm," she said. "And it's a constitutional question of the separation of church and state, because, if religious education becomes deductible, it means that taxpayers are subsidizing religion."

The fight is over $3,200 in taxes Sklar saved by deducting about $15,000 in tuition for his children's religious education at an orthodox school in Los Angeles. Sklar v. Commissioner, 000395-01 (U.S. Tax Ct., L.A.). Michael Sklar, who is an accountant, sued the IRS over the same deduction in 1997 over his 1994 return and lost. The current suit is over his 1995 tax return.

IRS attorney Louis Jack said he is not allowed to comment on the case. But in his opening remarks, Jack said that case law is clear that tuition for religious schooling is not deductible.

The Sklars have launched two arguments. First, according to Jeffrey Zuckerman, the family's attorney, Congress amended the tax code in 1993, adding intangible benefits from charitable donations to the list of things that are deductible. For example, a $125 ticket to a fund-raising dinner is reduced by the value of the dinner, and the difference can be deducted.

Sklar argues that part of the tuition, the excess beyond the actual cost of private secular education, which is considered tangible, can be deducted.

Second, the IRS struck a 1993 deal with the Church of Scientology that allows Scientologists to deduct the cost of training and auditing, a form of religious education, which means that all religious tuition should be deductible. Auditing refers to one-to-one encounters with church officials, through which the student becomes aware of his or her spiritual dimension. Training refers to doctrine classes, according to the U.S. Supreme Court opinion, Hernandez v. Commissioner, 490 U.S. 680 (1989). The settlement, which came after the 1993 opinion, ended a battle between the IRS and the church that began in the 1960s when Scientologists lost their IRS standing as a church.

"The IRS has publicly called them a church and described training and auditing as deductible," said Zuckerman, an antitrust and labor lawyer with the Washington, D.C., office of New York's Curtis, Mallet-Prevost, Colt & Mosle. "That recognition should be extended to all religions, and it is discrimination not to."

Brody, who serves on the American Bar Association Tax Committee, said the 9th U.S. Circuit Court of Appeals has already ruled on the disparate treatment argument. "They said it doesn't matter how the Scientologists are treated, and, anyway, the Scientologists shouldn't have gotten what they did," Brody said. "That's why we're all watching the case -- we've been expecting it." He added, "When the IRS settled with the Scientologists, after they'd beaten them, we knew deductions for tuition would come into question."

If the Sklars prevail, it will drive the issue back to Congress, according to Gail Richmond, a professor of law and associate dean at the Shepard Broad Law Center of Nova Southeastern University in Florida. "It will force the IRS to come up with a calculation and the next fight will be over where that line is," she said.
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