Background. A few weeks ago the IRS released an internal memorandum (a "field service advisory") addressing the question of whether parents can claim a charitable contribution deduction for tuition payments they make for their children who attend an Orthodox Jewish school. This memorandum will be instructive to any church or religious organization that operates a school.
Facts. The parents cited the following facts in supporting their claim that tuition payments they made on behalf of their children were deductible as charitable contributions:
- The act of religious study for Orthodox Jews is an observance of their religion that begins at an early age and continues for life. As a result, tuition payments they make to Jewish religious schools are in furtherance of this religious function and are deductible as charitable contributions.
- For the Orthodox Jew, the obligation to study the Torah and the Talmud is a matter of duty and adherence to Jewish law, a lifelong commitment ranking aside the obligation to pray. The observance of such duties primarily benefits the community, not the individual.
- The primary purpose of Jewish schools is religious study. A significant portion of a student's time at a Jewish school is devoted to religious study.
- The United States Supreme Court ruled in 1990 that payments made directly to of two Mormon missionaries by their parents were not deductible since they were not made "to or for the use of" the Mormon Church. Davis v. Commissioner, 495 U.S. 472 (1990). The parents of the children attending the Jewish school argued that if the Mormon parents had made their payments to the Mormon Church with the understanding that such payments were for the support of the taxpayers' sons, then such payments would have been deductible as charitable contributions. Similarly, since payments to Jewish religious schools are placed under the unfettered control of the school to help it carry out its religious function of providing religious study and worship, they should be deductible.
- The payment of tuition to Jewish religious schools yields only an incidental benefit to the parent, and therefore avoids the Supreme Court's holding in Hernandez v. Commissioner, 490 U.S. 680 (1989). In Hernandez, the Court held that payments to the Church of Scientology for auditing and training represent a "quid pro quo" exchange for direct benefits by the payor and as such were not deductible as charitable contributions. The parents insisted that this ruling did not apply to them, since the payment of tuition for religious study results in only an "incidental benefit" to themselves but a direct benefit to members of the Jewish religion. Tuition payments to Jewish religious schools, the parents argued, provide the students with the religious observance of their religion through religious study, but this benefit is only incidental to both students and their parents. The primary beneficiaries are the Jewish people who have had their religion preserved for thousands of years through careful adherence to the study of Judaism by members of the faith.
What the IRS concluded. The IRS rejected all of the parents' arguments, and concluded that the tuition payments were not deductible as charitable contributions. The IRS based this conclusion on the following considerations:
The definition of a charitable contribution
The IRS noted that "a transfer of money or property to a charity is deductible … unless the taxpayer receives a valuable return benefit by reason of the transfer." It quoted from the Supreme Court's opinion in the Hernandez case: "The code makes no special preference for payments made in the expectation of gaining religious benefits or access to a religious service." In other words, a charitable contribution is a transfer of cash or property to a charity without any equivalent return benefit to the donor. A charitable contribution exists only to the extent that the value of the cash or money exceeds the value of any goods or services received by the donor in exchange. The IRS memorandum concludes with the observation that the parents "clearly derive a substantial benefit on account of the payment of tuition and accordingly, such payments are not deductible."
The implications of accepting the parents' position
The IRS expressed concern that an acceptance of the parents' position "would expand the charitable contribution deduction far beyond what Congress has provided." It continued:
Numerous forms of payments to eligible donees plausibly could be categorized as providing a religious benefit or as securing access to a religious service. 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; such payments, however, have long been held not to be charitable contributions ….
The IRS referred to a number of court decisions addressing the deductibility of tuition payments, including the following:
• Revenue Ruling 83-104. In 1983, the IRS issued a ruling addressing the deductibility of tuition payments. This ruling contained the following example:
A school requests parents to contribute a designated amount (e.g., $400) for each child enrolled in the school. Parents who do not make the $400 contribution are required to pay tuition of $400 for each child. Parents who neither make the contribution nor pay the tuition cannot enroll their children in the school. A parent who pays $400 to the school is not entitled to a charitable contribution deduction because the parent must either make the contribution or pay the tuition in order for his child to attend the school.
The IRS noted that no charitable contribution deduction is allowable in this example because the tuition payment "was not voluntary and was not made without the expectation of a commensurate benefit."
- DeJong v. Commissioner, 309 F.2d 373 (9th Cir. 1962). Parents made a "contribution" of $1,075 to the Society for Christian Instruction which operated full-time schools accredited by the state. The Society charged no tuition but raised funds from parents of enrolled students, churches and other entities. The stipulated annual cost of providing instruction for each child was $400. Although no tuition was charged, the parents who could so afford were expected to contribute to the Society at least to the extent of the cost of providing their children with an education. Though the cost of tuition covered both secular and religious education, the court concluded that the tuition payment ($400) was not deductible as a charitable contribution because it was not voluntary and was induced in substantial part by the benefits sought and anticipated from enrollment in the school.
- Oppewal v. Commissioner, 468 F.2d 1000 (1st Cir. 1972). Parents deducted $900 as a charitable contribution to the Whitinsville Society for Christian Instruction. The court disallowed that part of the payment which represented the cost of educating the taxpayers' children in the religiously-oriented school.
- Winters v. Commissioner, 468 F.2d 778 (2d Cir. 1972). Parents claimed a charitable contribution deduction for payments made to a church fund established to support certain Christian schools, enrollment in which did not require payment of tuition. The court concluded that to the extent that the taxpayers received a benefit in return, the payment constituted nondeductible tuition.
- Hernandez v. Commissioner, 490 U.S. 680 (1989). The Supreme Court ruled "contributions" made to the Church of Scientology for "auditing" were not deductible as charitable contributions. Auditing involves a counseling session between a Church official and a counselee during which the counselor utilizes an electronic device (an "E meter") to identify areas of spiritual difficulty by measuring skin responses during a question and answer session. Counselees are encouraged to attain spiritual awareness through a series of auditing sessions. The Church also offers members doctrinal courses known as "training." The Church charges fixed "donations" for auditing and training sessions (the charges are set forth in published schedules). The system of fixed charges was based on a tenet of Scientology (the doctrine of exchange) that requires persons to pay for any benefit received in order to avoid "spiritual decline." The Court concluded that payments made to the Church of Scientology for auditing and training sessions were a non deductible reciprocal exchange—specific benefits in exchange for specific fees:
the Church established fixed price schedules for auditing and training sessions in each branch church; it calibrated particular prices to auditing or training sessions of particular lengths and levels of sophistication; it returned a refund if auditing and training services went unperformed; it distributed account cards on which person who had paid money to the Church could monitor what prepaid services they had not yet claimed; and it categorically barred provision of auditing or training services for free. Each of these practices reveals the inherently reciprocal nature of the exchange.
In other words, "contributions" to the Church (1) were mandatory, in the sense that no benefits or services were available without the prescribed payment, and (2) represented a specified fee for a specified service.
The IRS, in commenting on the Hernandez case, observed:
The Scientology 'training' at issue in Hernandez involved the intensive study of the writings and tenets of Scientology. This training did not involve secular education, and was a means of progressing up the Scientology 'Bridge.' There seems to be no relevant distinction between such training and the intensive study of Jewish writing and tenets. The parents stress the amount of time spent in study by students at Orthodox Jewish schools. Even if it is true that they devote more time to the activity than students of Scientology, this is simply a question of degree, and we see no reason why this distinction supports a result different from the result in Hernandez. Thus, whether the payment involved is in consideration for training to become a good Scientologist, Christian or Jew, we conclude that, under Hernandez, such payments do not qualify as charitable contributions ….
The IRS memorandum concludes by noting that the parents in this case "are required to make specific payments in return for which they receive a benefit—religious and secular education for their children. Under the rationale postulated in Hernandez, the parents are not entitled to a charitable contribution deduction for tuition payments made to Jewish religious schools."
Relevance to church treasurers. Does your church operate a school or preschool? If so, are you allowing parents to deduct tuition payments as charitable contributions? Unfortunately, many church schools do so because of an unfamiliarity with the law. The IRS memorandum, and the cases it cites, demonstrate that tuition payments should not be treated or receipted as charitable contributions. There are three limited exceptions to this general rule:
1. Undesignated contributions to a scholarship fund. Church members are free to make undesignated payments to a school's scholarship fund. Such payments can be treated as deductible charitable contributions. However, note that this assumes that the contribution in fact is undesignated, and is not accompanied by any "secret" understanding that the church or school will use the funds for a specific student. To illustrate, a parent cannot deduct an "undesignated" contribution that church or school officials apply to the tuition of the parent's child. Further, the class of potential scholarship recipients must be substantial. A parent could not claim a charitable contribution deduction for "undesignated" contributions to a preschool's scholarship fund if the preschool has only four students (one of whom is the donor's daughter).
2. Payments in excess of tuition. The IRS and the courts have ruled that donors can claim a charitable contribution deduction to the extent that their donation exceeds the value of goods or services they receive in return. To illustrate, if a church school charges annual tuition of $3,000, and a parent makes a "contribution" of $4,000 to the school that is used to pay the tuition of the parent's child, the parent qualifies for a charitable contribution deduction in the amount of $1,000.
3. A 1983 IRS ruling. In 1983, the IRS recognized the following limited exception to the general rule of the nondeductibility of tuition payments:
A church operates a school providing secular and religious education that is attended both by children of parents who are members of the church and by children of nonmembers. The church receives contributions from all of its members. These contributions are placed in the church's general operating fund and are expended when needed to support church activities. A substantial portion of the other activities is unrelated to the school. Most church members do not have children in the school, and a major portion of the church's expenses are attributable to its nonschool functions. The methods of soliciting contributions from church members with children in the school are the same as the methods of soliciting contributions from members without children in the school. The church has full control over the use of the contributions that it receives. Members who have children enrolled in the school are not required to pay tuition for their children, but tuition is charged for the children of nonmembers. A church member whose child attends the school contributes $200 to the church for its general purposes. The IRS ordinarily will conclude that the parent is allowed a charitable contribution deduction of $200 to the church. Because the facts indicate that the church school is supported by the church, that most contributors to the church are not parents of children enrolled in the school, and that contributions from parent members are solicited in the same manner as contributions from other members, a parent's contributions will be considered charitable contributions, and not payments of tuition, unless there is a showing that the contributions by members with children in the school are significantly larger than those of other members. The absence of a tuition charge is not determinative in view of these facts.