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From: firstname.lastname@example.org (Ron Newman)
Subject: Letter from NYC Bar official to IRS re Scientology tax exemption
Date: Sat, 08 Jul 1995 10:46:24 -0500
Organization: Cyber Access Internet Communications, Inc.
IRS Should Fully Explain Its Settlement With Church of Scientology
The following letter was sent by Jerome Kurtz, chairman of the Committee
on Taxation of the Association of the Bar of the City of New York, to
IRS Commissioner Margaret Milner Richardson on May 11, 1994. It was
published in the June 27, 1994, issue of _Tax Notes_, pages 1783-84.
Dear Commissioner Richardson:
On behalf of the Committee on Taxation of the Association of the Bar of the
City of New York, I write to express serious concern about the failure of the
Internal Revenue Serivce to comment on or explain the meaning of several aspects
of its settlement with the Church of Scientology. We believe that it is
important to provide guidance to tax-exempt organizations and their advisers
about the position of the Service on deductibility of gifts to charities when
certain types of quid pro quo payments are received in exchange by the donors.
In Rev. Rul. 78-189, 1978-1 C.B. 68, the Serivce ruled that no
deduction was available when a donor gave money to the Church of
Scientology  and received, in exchange for the donation, auditing,
training and processing courses and other services. In 1978, as the
ruling states, the IRS was conceding that the Church of Scientology was indeed
a "church" and entitled both to tax exemption and to receive tax-deductible
charitable contributions.  Its denial of the deduction rested on the
receipt of intangible religious benefits by the donor, which it treated as
a quid pro quo. Although this was in agreement with the IRS's prior
general position on quid pro quo payments, as per Rev. Rul. 67-246, 1967-2
C.B. 104 , it was difficult to reconcile with certain other pronouncements
permitting deductions to religious organizations. 
 Scientology was explicitly mentioned in the ruling.
 We take no position here on whether Scientology did or does qualify
as a "church" or religious organization.
 Rev. Rul. 67-246 is supported by G.C.M. 33497 (April 28, 1967)
 See, e.g. A.R.M. 2, 1 C.B. 150 (1919) (deduction permitted for "pew rents");
Rev. Rul. 70-47, 1970-1 C.B. 49 (same); Rev. Rul. 78-366, 1978-2 C.B. 241
(deduction permitted for "Mass stipends" for specific religious services).
Donors to Scientology challenged the valiidty of Rev. Rul. 78-189.
In _Hernandez v. Commissioner_, 490 U.S. 680 (1989), the Supreme Court
sustained teh IRS's denial of deductions. Five justices joined in the
majority pinion, written by Justice Marshall; two recused (Justices
Brennan and Kennedy); and two dissented, in an opinion by Justice O'Connor
in which Justice Scalia joined.
After 1978, but before the decision in _Hernandez_, the IRS had changed
its position and directly attacked the tax-exempt status of Scientology
organizations. It argued that they were _not_ tax-exempt because they
permitted personal inurement (to the benefit of founder L. Ron Hubbard),
conducted extensive commercial activities, and contravened fundamental
public policy by violating the law. Here, again, the Service was
sustained by the courts. E.g. _Church of Scientology of California_,
83 T.C. 381 (1984), aff'd, 823 F.2d 1310 (9th Cir. 1987), cert. denied,
486 U.S. 1015 (1988). The Supreme Court knew of this during the pendancy
of the _Hernandez_ litigation. However, the government stipulated, for
purposes of the _Hernandez_ case that Scientology was a tax-exempt
church. As Justice O'Connor said, "[t]he cases before the Court have
an air of artificiality about them that is due to the IRS' dual litigation
strategy against the Church of Scientology..."
Despite these litigation victories, many -- perhaps hundreds -- of donors
to Scientology were litigating their own deductions. The organization itself
was engaged in massive ongoing litigation with the IRS. L. Ron Hubbard died.
On October 1, 1993, the Service and the Scientologists announced a settlement
under which the Scientology organizations would be recognized, once more,
as tax-exempt. The IRS has not commented on or explained the basis for
or terms of this settlement in any way.
Finally, in November of 1993, the IRS surprised many observers by issuing
Rev. Rul. 93-73, 1993-34 I.R.B. 7, which declared Rev. Rul. 78-189 obsolete.
No reasoning was provided by the IRS; no explanation was, or has since been,
given by the Service. However, within the last months of 1993, the Church
of Scientology provided its members with a booklet entitled, "Information
on Taxes and Your Donations." (See _Tax Notes_, Jan. 10 1994, p. 131.)
That booklet describes the settlement restoring tax-exempt status to the
church. It goes on to say, in part:
"the [settlement] action means that donations you make
to the Church -- including donations for auditing and training --
qualify as charitable contributions and can be claimed as deductible
on your federal (and state) income tax returns!"
It says, further, that prior contributions -- whether in litigation
or audit -- will be allowed in full, and no taxes or interest will have
to be paid. Further, it says:
"In those instances where donations for services were made in
years prior to 1993 but were not claimed as income tax deductions,
or where a claim for refund for such taxes is alredy pending but not
under audit, the amount that can be claimed is limited to eighty percent
of the donation."
Congress and the IRS have recently indicated their serious concerns
about the proper tax treatment of charitable gifts when quid pro quo
transfers are involved . Yet the Service appears to be walking away
from its victory in the Supreme Court in _Hernandez_. Declaring a ruling
to be obsolete does not necessarily indicate that the ruling is overruled
or incorrect. Given the importance of the question, however, in our view
it is imperative that clarification be provided by the Internal Revenue
Serivce. That is particularly important in light of the claims made by
the Church of Scientology about the nature of the settlement and the
deductibility of gifts.
 For example, the IRS issued Publication 1391 in August 1988, and
distributed it widely to 501(c)(3) organizatios. It reprinted Rev. Rul.
67-2476, and also contained a message from then-Commissioner Larry Gibbs.
The Revenue Reconciliation Act of 1993 added two new provisions to the code:
new section 6115 requires charities to disclose, in writing, the existence
and amoutn of any quid pro quo payment in connection with any transfer of
more than $75; new section 6714 imposes penalties upon charities for failure
to comply with the disclosure requirements. They are effective for quid pro
quo contributions made after 1993.
We urge the Service to provide guidance. If for any reason the Service
finds itself unable to do so -- either because of the terms of the
settlement itself or because of concerns about the privacy of taxpayer
information -- we would urge the appropriate congressional committees to
hold hearings to elicit as much disclosure as possible, and we urge
the Treasury Department to provide generalized guidance on the subject.
Chairman, Committee on Taxation
The Association of the Bar
of the City of New York
New York, New York
Ron Newman email@example.com