Appeal from a Decision of the United States Tax Court. Tax Ct. No. 395-01.
The opinion of the court was delivered by: Wardlaw, Circuit Judge
Argued and Submitted February 4, 2008 -- Pasadena, California
Before: Harry Pregerson and Kim McLane Wardlaw, Circuit Judges, and Ronald B. Leighton,*fn1 District Judge.
Michael and Marla Sklar ("the Sklars") appeal from a decision of the Tax Court affirming the disallowance of deduc- tions they claimed for tuition and fees paid to their children's Orthodox Jewish day schools. See Sklar v. Comm'r, 125 T.C. 281 (2005). We have jurisdiction pursuant to 28 U.S.C. § 7482(a)(1), and we affirm.
I. FACTUAL AND PROCEDURAL BACKGROUND
The Sklars are Orthodox Jews who in 1995 had five school-aged children. Rather than send their children to public school to meet California State educational requirements, the Sklars enrolled each of their children in one of two Orthodox Jewish day schools, Emek Hebrew Academy ("Emek") and Yeshiva Rav Isacsohn Torath Emeth Academy ("Yeshiva Rav"). They did so "because of their sincerely and deeply held religious belief that as Jews they have a religious obligation to provide their children with an Orthodox Jewish education in an Orthodox Jewish environment." In 1995, the Sklars paid a total of $27,283 to Emek and Yeshiva Rav which included $24,093 for tuition, $1300 for registration fees, $1715 for other mandatory fees, and $175 for an after school Mishna program at Emek.*fn2 During 1995, Emek and Yeshiva Rav each were exempt from federal income tax under I.R.C. § 501(c)(3), which provides tax exempt status for certain institutions "organized and operated exclusively for religious, charitable, . . . or educational purposes," among others. Both schools also qualified as organizations described in I.R.C. § 170(b)(1)(A), which allows donors to deduct charitable donations to qualifying institutions.
Both schools provided daily exposure to Jewish heritage and values. Their goals included educating their students in Jewish heritage and values, as well as the tenets of the Jewish faith. To this end, time was allocated in the school day for prayers and religious studies, students were required to adhere to Orthodox Jewish dress codes, and boys and girls attended classes separately.
A child's day at each school included specified hours devoted to courses in religious studies and specified hours devoted to secular studies. The length of time that each student participated in secular classes, as opposed to religious studies, and the length of the total school day varied with the gender and grade level of the particular student.
Quality secular education that fulfilled the mandatory education requirements of the State of California also was a goal of both schools. Emek sought to provide a thorough and well-balanced curriculum in both religious and secular studies so that every student could succeed "in the most rigorous yeshiva [(Jewish)] high schools and other institutions of higher learning." Yeshiva Rav sought to prepare its students for matriculation to yeshiva high schools and to attend a college or seminary.
During the school years in issue, the Sklars paid tuition and mandatory fees to Emek and Yeshiva Rav for their children's education. To ensure payment, the Sklars, like other parents, were required to contract with each school to pay, and to give to each school postdated checks covering, the tuition for the upcoming school year. Both schools provided tuition discounts to families based on financial need, if documented by detailed financial information submitted to the schools' scholarship committees, but the Sklars did not seek or receive such assistance. Although an Orthodox Rabbinic ruling precluded either school from expelling students from the Jewish studies program during the school year, nonpayment of tuition could result in expulsion from secular studies and the schools' refusal to allow the children to register for classes in the subsequent school year.
In 1993, the Sklars learned of a confidential closing agreement*fn3 the Internal Revenue Service ("IRS") had executed with the Church of Scientology that purportedly allowed deductions for certain religious educational services such as auditing and training. The Sklars subsequently amended their tax returns for 1991 and 1992, and filed a return for 1993, including new deductions for a portion of the tuition they had paid to their children's schools. See Sklar, 125 T.C. at 288. The IRS allowed these deductions, apparently under the impression that the Sklars were Scientologists. See id. The Sklars claimed similar deductions in 1994, but these were disallowed. Id. at 288-89. The IRS Notice of Deficiency explained that because the costs were for personal tuition expenses, they were not deductible. The Sklars pursued an unsuccessful petition for redetermination before the Tax Court regarding their 1994 deductions, which subsequently came before us. Judge Reinhardt, writing for our Court in an opinion joined by Judge Pregerson, upheld the Tax Court's denial of the deduction. See Sklar v. Comm'r (Sklar I), 282 F.3d 610 (9th Cir. 2002), amending and superseding Sklar v. Comm'r, 279 F.3d 697 (9th Cir. 2002).
In Sklar I, the Sklars made virtually identical arguments to those they assert here, based predominantly on their theories that a portion of their tuition payments are tax deductible because they received in exchange only intangible religious benefits and the Scientology Closing Agreement is an uncon- stitutional establishment of religion from which they should also benefit.
The Sklar I panel soundly rejected the Sklars' argument that certain 1993 amendments to the Tax Code rendered their tuition payments deductible as payments to exclusively religious organizations for which the Sklars received only intangible religious benefits. 282 F.3d at 612-14. Specifically, the panel noted that the amendments addressed "clearly procedural provisions" and that the deduction the Sklars alleged would be "of doubtful constitutional validity." Id. at 613.
Next, the Sklar I panel held that the IRS was compelled to disclose the contents of its Closing Agreement with the Church of Scientology, at least to the extent it fell under I.R.C. § 6104(a)(1)(A), see 282 F.3d at 614-18, and that such disclosure was necessary as a practical matter because the agreement affects "not just one taxpayer or a discrete group of taxpayers, but a broad and indeterminate class of taxpayers with a large and constantly changing membership." Id. at 617. Further, the panel held "where a closing agreement sets out a new policy and contains rules of general applicability to a class of taxpayers, disclosure of at least the relevant part of that agreement is required in the interest of public policy." Id. In Sklar I, the panel therefore rejected the argument that the closing agreement made with the Church of Scientology, or at least the portion establishing rules or policies that are applicable to Scientology members generally, is not subject to public disclosure. The IRS is simply not free to enter into closing agreements with religious or other tax-exempt organizations governing the deductions that will be available to their members and to keep such provisions secret from the courts, the Congress, and the public.
Id. at 618. The Sklar I panel nevertheless opined, without resolving the issue, that the Tax Court's ruling that the Clos- ing Agreement was irrelevant to the deductibility of the Sklars' tuition payments was "in all likelihood correct." Id. It continued:
The Tax Court concluded that the Sklars were not similarly situated to the members of the Church of Scientology who benefitted from the closing agreement. While we have no doubt that certain taxpayers who belong to religions other than the Church of Scientology would be similarly situated to such members, we think it unlikely that the Sklars are. Religious education for elementary or secondary school children does not appear to be similar to the "auditing" and "training" conducted by the Church of Scientology.
Id. at 618 n.13; see also Hernandez v. Comm'r, 490 U.S. 680, 684-85 (1989) (describing "auditing" and "training").
The Sklar I panel then turned to the Sklars' Establishment Clause and administrative consistency arguments. Although it was not required to decide those issues because the Sklars had "failed to show that their tuition payments constitute a partially deductible 'dual payment' under the Tax Code," Sklar I, 282 F.3d at 620, the panel noted that had it been required to do so, it would have first concluded that the IRS policy constitutes an unconstitutional denominational preference under Larson v. Valente, 456 U.S. 228 (1982).*fn4 See Sklar I, 282 F.3d at 618-19. The panel reasoned that the denominational preference embodied in the Closing Agreement was unconstitutional because it "cannot be justified by a compelling governmental interest." Id. However, the panel indicated it would not be willing to extend that preference to other religious organizations for three reasons: First, an extension of the preference would amount to state sponsorship of all religions, which the panel doubted "Congress or any agency of the government would intend." Id. at 619-20. Second, an extension of the preference would be "of questionable constitutional validity under Lemon,"*fn5 because administering the policy "could require excessive government entanglement with religion."*fn6 Id. at 620. Third, the requested policy violated appeared to violate I.R.C. § 170. Id.
The panel also indicated it would reject the Sklars' administrative consistency claim because it "seriously doubted" that the Sklars were similarly situated to the Scientologists.*fn7 The panel further stated that even if the Sklars were similarly situated, "because the treatment they seek is of questionable statutory and constitutional validity under § 170 of the IRC, under Lemon, and under Hernandez, we would not hold that the ...