Taxpayers who itemize are allowed a deduction for donations to qualifying religious organizations. Often the organization uses part of the money for religious education and indoctrination of its members. When a tax-exempt school offers both religious and secular education, one might assume that a portion of the tuition qualifies as a charitable contribution. But the law clearly states that tuition payments are a personal expense, are considered quid pro quo and are not deductible. In a recent case, the Tax Court held that no portion of the tuition payments to a religious school was deductible.
In Sklar v. Commissioner (TC Memo 2000-118), the taxpayers lived in California where four of their children attended orthodox Jewish day schools. They deducted the tuition paid to Emek Hebrew Academy and Yeshiva Rav Isacsohn Torath Emeth Academy, both tax-exempt organizations under IRC section 501(c)(3). A letter from the schools stated that an estimated 55% of their tuition was for religious education and 45% for secular education. The taxpayers accordingly deducted $13,240 on their 1994 income tax return.
The IRS sent a notice of deficiency disallowing the deduction. The taxpayers claimed their First Amendment rights were being violated and cited Hernandez, a 1989 case that discussed charitable contributions comparable to the tuition payments in question.
In Hernandez v. Commissioner (490 U.S. 680) the U.S. Supreme Court examined the deduction of fees paid to the Church of Scientology for “auditing”—a type of individualized spiritual counseling and training. These payments—the primary source of income for the Church of Scientology—are required of those being trained and, are, therefore, similar to tuition. The Court held the payments were nondeductible because they represented an exchange of money for an economic benefit. The Sklars argued that the dissenting opinion of Justice O’Connor allowed for the deductibility of payments similar to those made for auditing in Hernandez.
The Tax Court, however, stated that the current case had few parallels to the 1989 case and relied, in its opinion, on several other cases that disallowed the deduction of tuition to both parochial and secular entities. Courts have previously determined that tuition payments to a school in exchange for a child’s education are personal and not deductible. Additionally, tax law and the courts recognize that charitable contributions must be made from a “detached and disinterested generosity” or “out of affection, admiration, charity or like impulses.” The required intent is missing when the individual receives something of value, such as tuition, in return for his or her contribution.
In Sklar the court also reviewed an item that all tax professionals should consider. The husband in the case, who was a CPA, had failed to file a timely return, stating that his work load prevented him from filing by the due date. The IRS assessed a penalty. The Tax Court retained the penalty due to the taxpayer’s willful neglect and noted that the reasonable cause requirement was not met.
Observation. Contributions made to qualifying organizations are not always deductible under IRC section 170. Fees required by a charitable organization in return for an economic benefit, including religious services, are disallowed. This includes any donation made in anticipation of a benefit other than the gratification of benevolence. Payments such as those for tuition are always considered personal expenses and are nondeductible. Quid-pro-quo contributions received by charities in excess of $75 must be properly reported to the donor to eliminate possible confusion about deductibility.
—Cynthia Bolt Lee, CPA,
assistant professor of business administration,
the Citadel, Charleston, South Carolina.