## Facts

- Robert L. Hernandez and other members of the Church of Scientology paid branch churches for “auditing” sessions and “training” courses intended to advance spiritual awareness and religious study.
- The Church set fixed, mandatory prices for these services, calibrated by session length and sophistication level, pursuant to a “doctrine of exchange.”
- The Church refunded payments if services were not performed, tracked prepaid but unused services through “account cards,” and did not provide free sessions.
- Petitioners claimed the payments as “charitable contributions” deductible under I.R.C. § 170 on their federal income tax returns.
- The IRS disallowed the deductions, concluding the payments were made in exchange for specific services rather than as contributions or gifts.
- The Tax Court sustained the IRS and rejected Establishment Clause and Free Exercise Clause challenges; courts of appeals affirmed.

## Issues

1. Whether amounts paid to a church for specified religious services at fixed prices qualify as deductible “contribution[s] or gift[s]” under I.R.C. § 170.
2. Whether denying the deduction violates the Establishment Clause by discriminating against religion or causing excessive entanglement.
3. Whether denying the deduction violates the Free Exercise Clause by burdening religious practice through increased cost.

## Decision

- The Supreme Court affirmed the disallowance of the deductions.
- Payments for auditing and training were not deductible under § 170 because the transaction’s objective features showed a quid pro quo exchange for specific services.
- Denial of the deduction did not violate the Establishment Clause because the rule was neutral in purpose and effect and could be applied by examining external economic features without theological inquiry.
- Denial of the deduction did not violate the Free Exercise Clause because the burden was incidental to a neutral, generally applicable tax rule, justified by the government’s interest in maintaining a sound and administrable tax system.

## Legal Principles

- A § 170 “contribution or gift” requires an unrequited transfer; payments made with an expectation of receiving goods or services in return are not deductible.
- The presence of fixed prices, refunds for nonperformance, monitoring of prepaid services, and categorical limits on free services supports finding a quid pro quo exchange.
- Applying generally applicable tax rules to religious organizations does not violate the Establishment Clause where enforcement turns on objective, external transaction features rather than doctrinal evaluation.
- Neutral, generally applicable tax provisions that incidentally increase the cost of religious practice do not violate the Free Exercise Clause when supported by strong governmental interests in tax administration.

## Conclusion

The Court held that fixed-fee payments for specific Scientology auditing and training services were nondeductible quid pro quo transactions under § 170, and that disallowing the deduction neither established religion nor unconstitutionally burdened religious exercise under the First Amendment.


Hernandez v. Comm’r, 490 U.S. 680 (1989)