                     125 T.C. No. 14



                UNITED STATES TAX COURT



        MICHAEL AND MARLA SKLAR, Petitioners v.
     COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket No. 395-01.               Filed December 21, 2005.



     Ps paid tuition and fees of $27,283 to two Jewish
day schools for the religious and secular education of
their five children in 1995. That amount includes $175
that Ps paid separately for an after-school Orthodox
Jewish education class (Mishna) for one of their
children.

     Ps contend that they may deduct $15,000 of those
payments as a charitable contribution under sec. 170,
I.R.C., and that they are not liable for the accuracy-
related penalty under sec. 6662, I.R.C.

     Held: None of Ps’ payments for tuition, fees, and
Mishna classes in 1995 are deductible as charitable
contributions.

     Held, further, Ps are not liable for the accuracy-
related penalty under sec. 6662, I.R.C.
                                - 2 -

     Jeffrey I. Zuckerman, for petitioners.

     Louis B. Jack, Sherri Wilder, and Julie E. Vandersluis, for

respondent.



     COLVIN, Judge:    Respondent determined a deficiency of

$10,198 in petitioners’ Federal income tax for 1995 and an

accuracy-related penalty of $2,040 under section 6662(a).1

     After concessions,2 the issues for decision are:

     1.    Whether petitioners may deduct as a charitable

contribution $15,000 of the $27,283 in tuition and fees they paid

in 1995 to Orthodox Jewish day schools for the secular and

religious education of their five children, including $175 they

paid to one of the schools for Mishna classes.    We hold that they

may not.

     2.    Whether petitioners are liable for the accuracy-related

penalty for 1995 because they deducted tuition payments for their

children’s secular and religious education.    We hold that they

are not.




     1
        Unless otherwise specified, section references are to the
Internal Revenue Code as amended, and Rule references are to the
Tax Court Rules of Practice and Procedure.
     2
        Respondent concedes that petitioners are not liable for
additional self-employment tax. Thus, petitioners are not
entitled to a self-employment tax deduction.
                                - 3 -

                           FINDINGS OF FACT

     Some of the facts have been stipulated and are so found.

A.   Petitioners

     1.   Petitioners’ Family and Religion

     Petitioners lived in North Hollywood, California, when they

filed the petition in this case.    During 1995, Michael Sklar

(petitioner) was a self-employed certified public accountant.

Petitioner Marla Sklar (Mrs. Sklar) was a teacher.    Petitioners

are Orthodox Jews.

     During 1995, petitioners had five children of school age.

We refer to them by their initials:     H.S., T.S., M.S., A.S., and

another T.S.   It is important to petitioners to pass to their

children a devotion to their Jewish faith.

     2.   Schools Attended by Petitioners’ Children

     Petitioners have educated all of their children at Emek

Hebrew Academy (Emek) and Yeshiva Rav Isacsohn Torath Emeth

Academy (Yeshiva Rav Isacsohn), private Orthodox Jewish day

schools in the Los Angeles area that provide classes for boys and

girls from preschool through eighth grade.

     During the 1994-95 and 1995-96 school years (the school

years in issue), petitioners’ children attended the schools and

grade levels as follows:
                                  - 4 -

                        School                   School Year
     Child             Attended        Jan.-June 1995 Sept.-Dec. 1995

      H.S.      Yeshiva Rav Isacsohn          7th           8th
      T.S.              Emek                  6th           7th
      M.S.              Emek                  4th           --
                Yeshiva Rav Isacsohn          --            5th
      A.S.              Emek                  1st           2d
      T.S.              Emek                  none       preschool

     3.      Petitioners’ Educational Goals and Values

     Petitioners did not consider sending their children to any

school other than an Orthodox Jewish school.      Petitioners sent

their children to Emek and Yeshiva Rav Isacsohn because they

deeply believe that they should provide their children with an

Orthodox Jewish education in an Orthodox Jewish environment.

Petitioners were primarily concerned with the religious component

of their children’s education, but they were also interested in

the quality of their secular education.

B.   Emek and Yeshiva Rav Isacsohn

     1.      General

     During 1995, Emek and Yeshiva Rav Isacsohn were exempt from

Federal income tax under section 501(c)(3) and qualified as

organizations described in section 170(b)(1)(A)(ii); i.e., an

educational organization which normally maintains a regular

faculty and curriculum and normally has a regularly enrolled body

of pupils or students in attendance at the place where its

educational activities are regularly conducted.
                                - 5 -

     Emek and Yeshiva Rav Isacsohn gave their students daily

exposure to Jewish heritage and values.   Students at Emek and

Yeshiva Rav Isacsohn were required to adhere to traditional

Orthodox Jewish dress codes.

     In 1994, the Bureau of Jewish Education of Greater Los

Angeles3 mandated that all Jewish day schools in the Los Angeles

area obtain academic accreditation by 2000.4   The Western

Association of Schools and Colleges, Inc. (WASC), is a regional

association which accredits public and private schools, colleges,

and universities in the United States.    Yeshiva Rav Isacsohn

became a candidate for academic accreditation by WASC on May 5,

1992.    Emek became a candidate for academic accreditation by WASC

on June 28, 1995.   WASC granted academic accreditation to both

schools after they completed a 3-year self-study program.

Yeshiva Rav Isacsohn was accredited as of July 1, 1996, and Emek

was accredited on July 1, 1998.   Both schools were engaged in the

accreditation process during part or all of 1995.    Their

accreditation was based in part on their programs during 1995.



     3
        The Bureau of Jewish Education of Greater Los Angeles
provides educational support services and financial assistance to
Jewish day schools in the Los Angeles area and imposes
eligibility requirements on schools seeking its support.
     4
        Accreditation certifies to other educational institutions
and to the general public that an institution meets established
criteria or standards.
                                - 6 -

Both schools earned accreditation for 6 years, which is the

maximum period of accreditation awarded by WASC.

     2.   Emek

          a.     General

     In 1995, Emek believed its foremost goal was to help its

students develop a devotion to Jewish heritage and values.    Emek

sought to provide a thorough and well-balanced curriculum in both

Torah and secular studies so every student could succeed, upon

eighth grade graduation, in the most rigorous yeshiva high

schools and other institutions of higher learning.

     Boys and girls had separate classes, lunch, and recess at

Emek because of Orthodox Jewish religious considerations.

          b.     Religious Studies

     The religious courses and periods of instruction at Emek

were virtually the same for both of the school years in issue.

On Monday through Thursday, boys had prayers from 8 to 9 a.m. and

religious classes from 9 a.m. to 12:20 p.m.   The school day was

compressed on Friday to permit an early dismissal so that the

students could be home in time for the Sabbath (which begins on

Friday at sunset).   On Friday, boys had religious classes from 9

to 11:40 a.m.

     Girls had morning prayers each day from 8:15 to 9 a.m.   On

Monday through Thursday, girls had four periods of Judaic studies

and afternoon prayers from 1 to 4:30 p.m.   On Friday, girls had
                                  - 7 -

Judaic studies from 11:40 a.m. to 12:10 p.m., followed by lunch

from 12:10 to 12:30 p.m. and recess from 12:30 to 12:45 p.m. and

three periods of Judaic studies from 12:45 to 2:30 p.m.

           c.   Secular Studies

     Emek aspired to provide a high-quality secular studies

program.   On Monday through Thursday, boys had five secular

classes from 1 to 4:30 p.m.    On Friday, boys had four secular

classes from 12:10 to 2:30 p.m.

     On Monday through Thursday, girls had four periods of

secular studies from 9 to 11:40 a.m.      After lunch and recess on

Monday through Thursday, girls had another period of secular

studies from 12:20 to 1 p.m.    On Friday, girls had four periods

of secular studies from 9 to 11:40 a.m.

     Emek had computer laboratories for its elementary and junior

high school students.   Emek did not have an elementary science

enrichment teacher, a music appreciation teacher, or a full-time

librarian.   Emek’s elementary students did not have use of a

gymnasium.   They shared outdoor facilities with a nearby

synagogue.   Emek’s junior high school students had athletic

facilities at Sherman Oaks, California.

           d.   Standardized Testing

     During 1995, Emek administered the California Test of Basic

Skills (CTBS) to its students.     The CTBS is a grade-level-

specific, nationally normed test of language skills, mathematics,
                                 - 8 -

social studies, history, and science.    Emek invited parents to

come to the school to review their children’s CTBS scores so that

they could learn their children’s strengths and needs.    Emek also

told each parent the percentile scores earned by each grade

level.

          e.   Mishna Class at Emek

     One of petitioners’ children attended a Mishna class at Emek

during the first half of 1995, for which petitioners paid a

separate fee of $175.    Mishna is part of the Jewish oral law and

is divided into six orders.   The goal was for each boy to

complete one order each year and to complete all six orders

before completion of eighth grade.

      The Mishna class was held for an hour after school

and for an hour on Sunday.    The Mishna class at Emek was not part

of the regular curriculum.

     3.   Yeshiva Rav Isacsohn

          a.   General

     In 1995, the primary goal of Yeshiva Rav Isacsohn was to

educate its students in the tenets of the Jewish faith.    Yeshiva

Rav Isacsohn sought to provide a thorough and well-balanced

curriculum consisting of Orthodox Judaism and secular studies.

An additional goal of Yeshiva Rav Isacsohn was to prepare its

students for matriculation to yeshiva high schools and to attend
                                 - 9 -

a college or seminary.   Yeshiva Rav Isacsohn made a concerted

effort to shelter its students from smoking, alcohol, and drugs.

     Boys and girls at Yeshiva Rav Isacsohn occupied separate

campuses with separate principals and had no classes together.

There were no joint programs, and there was no time overlap in

common facilities such as the library.

          b.   Religious Studies

     In 1995, fifth grade boys had morning prayer and Judaic

studies from 8:25 a.m. to 2 p.m. on Monday through Thursday

(including an hour for lunch and recess), from 8:25 a.m. to 12

p.m. on Friday, and from 9 a.m. to 1 p.m. on Sunday with about 45

minutes per day for prayer.   In 1995, eighth grade girls began

the day at 8:25 a.m. with prayer, followed by classes in

religious studies until 12:15 p.m. on Monday through Thursday,

and until 11:30 a.m. on Friday.

          c.   Secular Studies

     In 1995, fifth grade boys had secular studies from 2 to 5

p.m. on Monday through Thursday, and from 12 to 1:30 or 2:30 p.m.

on Friday, depending upon the time of year.

     In 1995, from Monday to Thursday, seventh and eighth grade

girls had four periods of secular studies per day from 12:55 to

4:30 p.m., with afternoon prayer from 2:30 to 2:40 p.m., and

recess from 2:40 to 2:55 p.m.    Girls had two periods of secular

study on Fridays.
                                - 10 -

     Yeshiva Rav Isacsohn had no science laboratory.       The school

had a cart with science materials.       Yeshiva Rav Isacsohn had no

computer room or gymnasium.     Students played in school hallways

and the parking lot.     Students were sometimes taken to a nearby

park.

     4.      Tuition and Fees at Emek and Yeshiva Rav Isacsohn

        During the school years in issue, Emek and Yeshiva Rav

Isacsohn required petitioners to pay tuition, registration, and

certain other fees in order for their children to attend classes.

Emek and Yeshiva Rav Isacsohn required petitioners to sign an

agreement promising to pay the tuition and to give to each school

postdated checks covering all tuition and fees for the upcoming

school year.

        Both Emek and Yeshiva Rav Isacsohn provided tuition

discounts to families based on financial need.      Both schools

required parents seeking financial aid to submit detailed

financial information to the scholarship committee for each

school.     Emek and Yeshiva Rav Isacsohn provided early

registration discounts, sibling discounts, and faculty discounts.

Petitioners did not seek or receive financial assistance from

Emek or Yeshiva Rav Isacsohn for the school years in issue.

        An Orthodox Rabbinic ruling precluded either school from

expelling students from the Jewish studies program during the

school year for nonpayment of tuition.      However, the ruling did
                                - 11 -

not apply to expulsion from secular studies or to registration

for the following school year.    The schools could refuse to

register a student whose tuition payments were delinquent.

     If a student’s tuition payments became delinquent, e.g., if

a tuition check was not honored by the bank, both Emek and

Yeshiva Rav Isacsohn would send letters demanding payment or

threatening to bar the student from attending secular classes.

     The annual income from tuition and registration fees for

both schools typically covers about 65 to 75 percent of that

school’s annual operating expenses.       The rest of the annual

operating expenses are funded with grants from the Bureau of

Jewish Education, interest income, and other fundraising.

C.   Petitioners’ Payments of Tuition and Fees

     During 1995, petitioners paid a total of $27,283 to Emek and

Yeshiva Rav Isacsohn for tuition, registration and other

mandatory fees, and Mishna classes as follows:

     Payment                       Emek       Yeshiva Rav Isacsohn

     Tuition                     $16,043            $8,050
     Registration fees               900               400
     Mishna classes                  175               -0-
     Other                         1,215               500
       Total                      18,333             8,950

D.   Petitioners’ Tax Returns

     1.   1991

     Petitioners filed an amended tax return for 1991 in December

1993, in which they deducted as a charitable contribution a
                               - 12 -

portion of the tuition payments they made in 1991 to their

children’s schools.   Respondent apparently believed that

petitioners were Scientologists, because in February 1994

respondent wrote to petitioners to request verification of their

payments to the Church of Scientology.    By letter to respondent

in May 1994, petitioner stated that the deductions were based on

tuition he had paid for religious education for his children.

     In August 1994, respondent sent a letter to petitioners,

again erroneously stating that petitioners’ payments were to the

Church of Scientology.   Petitioner telephoned the author of that

letter to say that he was not a Scientologist.    By letter dated

November 7, 1994, respondent told petitioners that respondent

allowed in full their claim for a refund for 1991.

     2.     1992-94

     Petitioners filed an amended 1992 return and a 1993 return

in which they deducted part of their children’s tuition as a

charitable contribution.   Petitioners received a refund based on

the amended 1993 return, and respondent did not disallow the

deduction claimed on their 1993 return.

     Petitioners deducted 55 percent of their payments to Emek

and Yeshiva Rav Isacsohn as a charitable contribution deduction

for 1994.     Petitioners described the deduction on a Form 8275,

Disclosure Statement, attached to their 1994 return.   Respondent

examined petitioners’ 1994 tax return and disallowed the
                              - 13 -

charitable contribution deduction.     Litigation relating to

petitioners’ 1994 return is discussed below at paragraph E.

     3.   1995

     Petitioners timely filed their 1995 Federal income tax

return on October 15, 1996.   Petitioners deducted $24,421 as a

charitable contribution for 1995, including $15,000 which

petitioners attributed to the cost of their children’s religious

education at Emek and Yeshiva Rav Isacsohn during 1995.       That

amount ($15,000) is 54.97 percent (referred to here as 55

percent) of the total amount of tuition and fees that petitioners

paid to Emek and Yeshiva Rav Isacsohn during 1995.     Petitioners

did not file a Form 8275 or otherwise describe their payment on

their 1995 return.   Respondent had petitioners’ 1994 return under

examination when petitioners filed their 1995 return.

     Pursuant to petitioner’s request, Emek and Yeshiva Rav

Isacsohn issued letters to petitioner dated November 5 and

November 10, 1997, respectively, in which each school estimated

that 45 percent of the education provided to petitioners’

children was secular and 55 percent was religious.

E.   Litigation Relating to Petitioners’ 1994 Return

     Petitioners filed a petition with the Court challenging

respondent’s notice of deficiency for 1994.     In Sklar v.

Commissioner, T.C. Memo. 2000-118 (Sklar I), this Court held that

petitioners could not deduct as charitable contributions amounts
                                - 14 -

for tuition and fees that they paid for their children’s

religious education that year.       Our decision was affirmed on

appeal by the U.S. Court of Appeals for the Ninth Circuit in

Sklar v. Commissioner, 282 F.3d 610 (9th Cir. 2002), amending and

superseding 279 F.3d 697 (9th Cir. 2002).

                                OPINION

A.   Whether Petitioners May Deduct Tuition and Fees They Paid to
     Orthodox Jewish Day Schools During 1995

     1.      Petitioners’ Contentions

     Petitioners contend that they may deduct as a charitable

contribution $15,000 of the $27,283 they paid to Emek and Yeshiva

Rav Isacsohn in 1995.5    They deducted about 55 percent of those

payments because that was the portion of the school day that each

school estimated was devoted to religious studies.

         Petitioners contend that:   (a) The religious education that

Emek and Yeshiva Rav Isacsohn provided their children is an

“intangible religious benefit” as defined in sections 170(f)(8)

and 6115, and payments for intangible religious benefits are made

deductible by those sections; and (b) respondent’s disallowance

of their charitable contribution deduction for tuition and fees

violates the Establishment Clause of the First Amendment to the

U.S. Constitution because the Commissioner allows members of the


     5
        We separately discuss whether petitioners may deduct $175
of this amount they paid for Mishna classes. See Opinion par. A-
5, below.
                               - 15 -

Church of Scientology to deduct as charitable contributions

“auditing” and “training” payments.6

     2.   Whether Petitioners’ Tuition Payments Qualify for
          Deduction Under Section 170 Pursuant to a Dual Payment
          Analysis

          a.   Introduction

     To put our consideration of petitioners’ contentions in

context, we first consider whether petitioners’ payment of

tuition and fees is deductible under a dual payment analysis to

the extent the payments exceed the value of the secular education

received by their children.    See United States v. Am. Bar

Endowment, 477 U.S. 105 (1986); Sklar v. Commissioner, supra at

612, 614 n.3, 621.    We initially consider that issue without

regard to the enactment of sections 170(f)(8) and 6115 in 1993

and the Commissioner’s settlement with the Church of Scientology

on October 1, 1993.    We then consider the effect (if any) of

those developments on our analysis.

          b.   Background

     In 1967, the Commissioner issued Rev. Rul. 67-246, 1967-2

C.B. 104, in response to:

     an increasing number of instances * * * in which the
     public has been erroneously advised in advertisements
     or solicitations by sponsors that the entire amounts


     6
        Petitioners contend that sec. 7491(a) requires respondent
to bear the burden of proof on all factual issues in the case.
We need not decide the point because our findings and analysis in
this case do not depend on which party bears the burden of proof.
                              - 16 -

     paid for tickets or other privileges in connection with
     fund-raising affairs for charity are deductible. * * *

The examples that the Commissioner cited included tickets for

charitable events such as banquets, balls, bazaars, concerts, and

athletic events.   In Rev. Rul. 67-246, supra, the Commissioner

ruled that, where a taxpayer receives an item of value for a

payment to a charitable organization, (1) the payment is not

deductible unless the taxpayer intends to make a gift; and (2)

any deduction is limited to the excess of the payment over the

fair market value of what is received in exchange.

     Courts have also applied those two requirements.    Thus, a

portion of a payment is deductible as a charitable contribution

under section 170 if the following two conditions are met:

“First, the payment is deductible only if and to the extent it

exceeds the market value of the benefit received.    Second, the

excess payment must be ‘made with the intention of making a

gift.’”   United States v. Am. Bar Endowment, supra at 117-118,

(quoting Rev. Rul. 67-246, 1967-2 C.B. at 105); Sklar v.

Commissioner, supra at 621.

     In United States v. Am. Bar Endowment, supra at 118, the

Supreme Court said:

     The sine qua non of a charitable contribution is a
     transfer of money or property without adequate
     consideration. The taxpayer, therefore, must at a
     minimum demonstrate that he purposely contributed money
     or property in excess of the value of any benefit he
     received in return. * * *
                              - 17 -

     A taxpayer may not deduct a payment as a charitable

contribution if the taxpayer receives a substantial benefit for a

payment to a charitable organization.     Id. at 116-117; Ottawa

Silica Co. v. United States, 699 F.2d 1124, 1131 (Fed. Cir.

1983); Singer Co. v. United States, 196 Ct. Cl. 90, 449 F.2d 413,

420, 422 (1971); S. Rept. 1622, 83d Cong., 2d Sess. 196 (1954).

If the size of a taxpayer’s payment to a charity is clearly out

of proportion to the benefit received, the taxpayer may claim a

charitable contribution equal to the difference between a payment

to the charitable organization and the market value of the

benefit received in return on the theory that the payment has the

“dual character” of a purchase and a contribution.     United States

v. Am. Bar Endowment, supra at 117.     To be deductible, a

charitable contribution must be a gift; i.e., a transfer of

property without adequate consideration.    Sec. 170(c); United

States v. Am. Bar Endowment, supra at 118; Sklar v. Commissioner,

supra at 612.

          c.    Dual Payment Theory and Tuition Paid for a Secular
                and Religious Education

     It is well established that tuition paid to schools which

provide both secular and religious education is not deductible as

a charitable contribution because it is not paid with detached

and disinterested generosity and because the payor expects a

substantial benefit in return.   Oppewal v. Commissioner, 468 F.2d

1000 (1st Cir. 1972), affg. T.C. Memo. 1971-273; Winters v.
                              - 18 -

Commissioner, 468 F.2d 778, 780-781 (2d Cir. 1972), affg T.C.

Memo. 1971-290; DeJong v. Commissioner, 309 F.2d 373, 377-378

(9th Cir. 1962), affg. 36 T.C. 896 (1961); Fausner v.

Commissioner, 55 T.C. 620 (1971); McLaughlin v. Commissioner, 51

T.C. 233 (1968), affd. per curiam without published opinion 23

AFTR 2d 69-1763, 69-2 USTC par. 9467 (1st Cir. 1969); Bass v.

Commissioner, T.C. Memo. 1983-536; Ehrhart v. Commissioner, T.C.

Memo. 1981-567; Ryan v. Commissioner, T.C. Memo. 1969-212; Casey

v. Commissioner, T.C. Memo. 1965-282; Haak v. United States, 451

F. Supp. 1087 (W.D. Mich. 1978); see Brotman v. Commissioner,

T.C. Memo. 1977-65.

     In DeJong v. Commissioner, supra, decided by the Court of

Appeals for the Ninth Circuit, the taxpayer made payments to a

religious organization which operated a school which imposed no

explicit tuition charges.   Part of the payment was deductible as

a charitable contribution because the payment exceeded the amount

apparently expected to be paid by the parent to cover the

school’s estimated cost per student of operating the secular and

religious educational programs of the school.    Id. at 379.   That

kind of excess is not in dispute here; the only amounts in

dispute here were paid for tuition and fees.    The Court of

Appeals in DeJong did not allow a charitable contribution

deduction for tuition paid for either the secular or the

religious education.
                              - 19 -

          d.    Absence of Charitable Intent

     Like the taxpayers in the cases just cited, petitioners

received a substantial benefit for their tuition payments.       We

next consider whether petitioners had any charitable intent in

paying their children’s tuition.   See United States v. Am. Bar

Endowment, 477 U.S. at 117-118; Sklar v. Commissioner, 282 F.3d

at 612.   Petitioners do not so claim; and, as discussed next, the

record shows they could not have made that claim successfully.

     In Sklar v. Commissioner, supra at 621, the Court of Appeals

said that petitioners did not show that “any dual payments they

may have made exceeded the market value of the secular education

their children received”; i.e., “the cost of a comparable secular

education offered by private schools”.     The Court of Appeals also

said petitioners had “failed to show that they intended to make a

gift by contributing any such ‘excess payment’” and thus could

not prevail under United States v. Am. Bar Endowment, supra.          Id.

     The parties introduced into evidence information about

tuition costs and qualitative aspects of private schools,

primarily in the Los Angeles area.     The record supports the

conclusion that tuition at Emek and Yeshiva Rav Isacsohn is

higher than the average tuition at Los Angeles area Catholic

schools, but equal to or lower than average tuition at other Los

Angeles area Orthodox Jewish schools (Ohr Eliyahu Academy and
                             - 20 -

Yavneh Hebrew Academy), other Jewish day schools, and private

schools which do not provide religious education.7

     Petitioners’ expert opined about the market value of a

secular education provided by Emek and Yeshiva Rav Isacsohn.    He

apparently was proceeding from the assumption that a dual

payments analysis applies in this case; i.e., that petitioners

may deduct the excess of the tuition they paid over the market

value of a secular education at Emek and Yeshiva Rav Isacsohn.

However, more fundamentally, the record speaks to whether a dual

payments analysis applies in this case at all.

     Petitioners must have a charitable intent to be entitled to

a deduction under section 170 for part of their tuition payments.

See Sklar v. Commissioner, supra at 612; see also sec. 170(c);

United States v. Am. Bar Endowment, 477 U.S. at 117-118.    On the

basis of evidence in the record regarding tuition at various Los



     7
        The record also suggests several factors that may bear on
the value of an elementary and secondary education, such as
teachers’ salaries and seniority, whether teachers are certified,
and student-teacher ratios; the amount of time students spend in
classes and whether classes are held in the morning or afternoon
or at different levels of difficulty; whether the school is
accredited; the quality of libraries and facilities such as
computer science and language laboratories, playgrounds and
athletic facilities, and music and art facilities; nearness of
the school to the student’s home; average standardized test
scores; dress codes, personal safely of students, and prevalence
of disciplinary problems; the success of the students at gaining
admission to secular colleges; whether the school teaches the
religion of the parents; and the percent of tuition devoted to
administration costs.
                             - 21 -

Angeles area schools we conclude:   (1) Some schools charge more

tuition than Emek and Yeshiva Rav Isacsohn, and some charge less;

and (2) the amount of tuition petitioners paid is unremarkable

and is not excessive for the substantial benefit they received in

exchange; i.e., an education for their children.    Thus,

petitioners have not shown that any part of their tuition

payments was a charitable contribution, and this case is

indistinguishable from those cited at par. B-2-c.

     3.   Whether Sections 170(f)(8) and 6115 Authorize
          Charitable Contribution Deductions for Tuition Payments
          to Schools Providing Religious and Secular Education

     Petitioners contend that, under sections 170(f)(8) and 6115

as enacted in 1993, a portion of tuition payments to schools

providing a religious and secular education is deductible as a

charitable contribution.

          a.   Background

     Sections 170(f)(8) and 6115 were enacted under the Omnibus

Budget Reconciliation Act of 1993, Pub. L. 103-66, secs. 13172

and 13173, 107 Stat. 455, to address “difficult problems of tax

administration”8 associated with taxpayers’ deductions of


     8
        See H. Rept. 103-111, at 785 (1993), 1993-3 C.B. 167,
361, which states in pertinent part:

          Difficult problems of tax administration arise
     with respect to fundraising techniques in which an
     organization that is eligible to receive tax deductible
     contributions provides goods or services in
     consideration for payments from donors. Organizations
                                                   (continued...)
                              - 22 -

charitable contributions in connection with fund-raising events

involving quid pro quo transactions.   To enhance taxpayer

compliance in this area, Congress imposed (a) a new

substantiation requirement under section 170(f)(8),9 and (b) a


     8
      (...continued)
     that engage in such fundraising practices often do not
     inform their donors that all or a portion of the amount
     paid by the donor may not be deductible as a charitable
     contribution.
     9
         Sec. 170(f)(8) provides in pertinent part:

          (A) General rule.--No deduction shall be allowed
     under subsection (a) for any contribution of $250 or
     more unless the taxpayer substantiates the contribution
     by a contemporaneous written acknowledgment of the
     contribution by the donee organization that meets the
     requirements of subparagraph (B).

          (B) Content of acknowledgment.--An acknowledgment
     meets the requirements of this subparagraph if it
     includes the following information:

                (i) The amount of cash and a description
           (but not value) of any property other than
           cash contributed.

                (ii) Whether the donee organization
           provided any goods or services in
           consideration, in whole or in part, for any
           property described in clause (i).

                (iii) A description and good faith
           estimate of the value of any goods or
           services referred to in clause (ii) or, if
           such goods or services consist solely of
           intangible religious benefits, a statement to
           that effect.

     For purposes of this subparagraph, the term “intangible
     religious benefit” means any intangible religious
     benefit which is provided by an organization organized
                                                   (continued...)
                                - 23 -

new disclosure requirement on charitable organizations under

section 6115.10

     Section 170(f)(8) generally requires a taxpayer claiming a

charitable contribution deduction greater than $250 to



     9
      (...continued)
     exclusively for religious purposes and which generally
     is not sold in a commercial transaction outside the
     donative context.
     10
          Sec. 6115 provides:

     SEC. 6115. DISCLOSURE RELATED TO QUID PRO QUO
                CONTRIBUTIONS.

          (a) Disclosure requirement.--If an organization
     described in section 170(c) (other than paragraph (1)
     thereof) receives a quid pro quo contribution in excess
     of $75, the organization shall, in connection with the
     solicitation or receipt of the contribution, provide a
     written statement which--

            (1) informs the donor that the amount of the
     contribution that is deductible for Federal income tax
     purposes is limited to the excess of the amount of any
     money and the value of any property other than money
     contributed by the donor over the value of the goods or
     services provided by the organization, and

            (2) provides the donor with a good faith
     estimate of the value of such goods or services.

          (b) Quid pro quo contribution.--For purposes of
     this section, the term “quid pro quo contribution”
     means a payment made partly as a contribution and
     partly in consideration for goods or services provided
     to the payor by the donee organization. A quid pro quo
     contribution does not include any payment made to an
     organization, organized exclusively for religious
     purposes, in return for which the taxpayer receives
     solely an intangible religious benefit that generally
     is not sold in a commercial transaction outside the
     donative context.
                                - 24 -

substantiate the deduction by obtaining a contemporaneous written

acknowledgment of the contribution from the charitable

organization, including an estimate of the value of any goods or

services that the charitable organization provided to the

taxpayer.    Under section 6115, a charitable organization that

receives a quid pro quo payment in excess of $75 must inform the

taxpayer that any charitable contribution deduction is limited to

the difference between the value of any money or property

transferred to the charitable organization and the value of any

goods or services that the taxpayer received from the charitable

organization.

     Sections 170(f)(8) and 6115 except certain intangible

religious benefits from the substantiation and disclosure

requirements described above.    Sections 170(f)(8) and 6115

provide, inter alia, that if a charitable organization is

organized exclusively for religious purposes and provides solely

an intangible religious benefit to a taxpayer in exchange for a

payment, the charitable organization need not assign a value to

the intangible religious benefit.

            b.   Petitioners’ Contentions

     Petitioners contend that (1) sections 170(f)(8) and 6115

make tuition payments to religious schools deductible to the

extent the payments relate to religious education, (2) the

religious education that Emek and Yeshiva Rav Isacsohn provided
                              - 25 -

to their children was an intangible religious benefit as defined

in those sections, and (3) their tuition payments are deductible

to the extent that the payments exceed the value of the secular

education their children received.11   Petitioners also contend

that they need not show that they intended to make a gift or

contribution to Emek and Yeshiva Rav Isacsohn.

           c.   Analysis

     We disagree.   Congress did not change what is deductible

under section 170 in these 1993 statutory changes.   Neither

sections 170(f)(8) and 6115 nor the accompanying legislative

history suggests that Congress intended to expand the types of

payments that are deductible as charitable contributions under




     11
          Petitioners aver:

           if a taxpayer pays $100 to his church and
           receives in return a book that could be
           purchased in any bookstore for $20 plus the
           right to sit in a certain pew at the church,
           $80 is deductible as a charitable
           contribution to the church, regardless of
           whether having the right to sit in that pew
           is worth $80 or more to the taxpayer, because
           that right is only an intangible religious
           benefit. Similarly here, to the extent
           petitioners’ dual payments to the schools
           exceeded the value of the secular studies
           they purchased, those payments are deductible
           as charitable contributions notwithstanding
           that petitioners received religious
           educations for their children worth that
           excess, because those religious educations
           are only intangible religious benefits.
                             - 26 -

section 17012 or that Congress intended to overturn the long line

of cases (cited above) holding that no part of tuition paid to

religious schools is deductible as a charitable contribution.13

We believe that, if Congress had intended to overturn decades of

caselaw disallowing charitable contribution deductions for

tuition payments to schools providing a religious and secular

education, Congress would have made such an intention clear.    It

did not.




     12
        See H. Conf. Rept. 103-213, at 566 (1993), 1993-3 C.B.
393, 444, stating that the sec. 6115 disclosure requirement “does
not apply to transactions that have no donative element (e.g.,
sales of goods by a museum gift shop that are not, in part,
donations).” Thus, a charitable organization need not make a
sec. 6115 disclosure if the taxpayer did not intend to make a
gift.
     13
        See H. Conf. Rept. 103-213, supra at 566 n.34, 1993-3
C.B. at 444, stating that the exception to the substantiation
requirement for an intangible religious benefit “does not apply,
for example, to tuition for education leading to a recognized
degree, travel services, or consumer goods.” Along the same
lines, H. Rept. 103-111, supra at 786 n.170, 1993-3 C.B. at 362,
states:

          The committee intends that, in the case of
     religious organizations, a quid pro quo contribution
     (for purposes of the substantiation and disclosure
     requirements) is limited to an exchange of goods or
     services that are generally available on a commercial
     basis, or advertised for an established price (e.g.,
     tuition, travel and entertainment, and consumer goods).
     No inference is intended, however, whether or not any
     contribution outside of the scope of the bill’s
     substantiation or reporting requirements is deductible
     (in full or in part) under the present-law requirements
     of section 170.
                              - 27 -

     The exception to the substantiation and disclosure

requirements in sections 170(f)(8) and 6115 for intangible

religious benefits does not apply to the educational services at

issue here.   The exception applies only where the organization is

organized exclusively for religious purposes.    Petitioners

contend that Emek and Yeshiva Rav Isacsohn were organized and

existed solely for the religious purpose of allowing Jewish

parents to fulfill their religious obligation to teach their

children Torah, which includes providing a secular education in

an Orthodox Jewish environment.

     We disagree that Emek and Yeshiva Rav Isacsohn were

organized exclusively for religious purposes.    Emek and Yeshiva

Rav Isacsohn were organized and operated to provide both a

secular and a religious education.     The Commissioner granted both

schools exemptions from tax under section 501(c)(3), and both

schools qualify as charitable organizations described in section

170(b)(1)(A)(ii), which pertains to educational organizations.      A

substantial part of each day was spent on secular studies.

Petitioners concede that the education their children received in

1995 at Emek and Yeshiva Rav Isacsohn met educational

requirements imposed by the State of California.    Both schools

were accredited by nonreligious accrediting agencies based in

part on their secular educational programs.
                                - 28 -

     Petitioners contend that Emek and Yeshiva Rav Isacsohn were

organized exclusively as religious organizations because

respondent excused both from filing Forms 990, Return of

Organization Exempt From Income Tax.14   We disagree.

Organizations exempt from tax under section 501(a) generally are

required to file Forms 990.   Sec. 6033(a)(1).   However, churches,

exempt organizations with gross receipts of not more than $5,000,

and exclusively religious activities of any religious order are

exempt from that requirement.    The Commissioner may relieve any

exempt organization from filing a return where the Commissioner

determines that filing is not necessary to the efficient

administration of the internal revenue laws.     Sec. 6033(a)(2)(B).

     Emek and Yeshiva Rav Isacsohn do not qualify for the

exception to the general filing requirement provided in section

6033(a)(2)(A).   Neither school is a church, an exempt

organization with gross receipts of not more than $5,000, or a

religious order.   Given that Emek and Yeshiva Rav Isacsohn were

treated as charitable organizations described in section

170(b)(1)(A)(ii), i.e., educational organizations, we infer that

the Commissioner exercised discretion under section 6033(a)(2)(B)

to except Emek and Yeshiva Rav Isacsohn from filing Forms 990.


     14
        Petitioners rely in part on a letter from respondent’s
counsel to petitioners’ counsel that petitioners attached to
their reply brief. Because the letter in question was not
offered into evidence at trial, the letter was returned to
petitioners unfiled and is not part of the record.
                               - 29 -

      Emek and Yeshiva Rav Isacsohn provided a religious and

secular education for their students.   Regardless of petitioners’

reasons for choosing to educate their children at Emek and

Yeshiva Rav Isacsohn, those schools did not provide exclusively

religious services.15

     4.   Whether the Agreement Reached Between the Internal
          Revenue Service and the Church of Scientology in 1993
          Affects the Result in This Case

      In Hernandez v. Commissioner, 490 U.S. 680, 702 (1989), the

U.S. Supreme Court held that the record did not support the

taxpayer’s claim of entitlement to deduct as charitable

contributions payments to the Church of Scientology for what the

Church of Scientology calls auditing and training.   However, the

parties stipulated that an agreement dated October 1, 1993,

between the Commissioner and the Church of Scientology settled

several longstanding issues.   According to a letter sent to

petitioners in 1994 from the chief of the adjustments branch,

Fresno Service Center, the settlement agreement between the

Commissioner and the Church of Scientology allows individuals to




     15
        Petitioners point out that the 1993 legislative history
states that the exception in secs. 170(f)(8) and 6115 for
intangible religious benefits does not apply to education leading
to a recognized degree. Petitioners contend that the secular
education provided by Emek and Yeshiva Rav Isacsohn does not lead
to a recognized degree. In light of our conclusion that secs.
170(f)(8) and 6115 are substantiation and disclosure provisions,
we need not consider this contention further.
                                - 30 -

claim, as charitable contributions, 80 percent of the cost of

qualified religious services.

     Petitioners contend that, because of that closing agreement,

the Commissioner is constitutionally required to allow a

deduction for tuition paid to schools that provide religious and

secular education to the extent that the tuition paid exceeds the

value of the secular education.    Petitioners contend that the

religious education that the Jewish day schools provide in

exchange for tuition is jurisprudentially indistinguishable from

the auditing and training that the Church of Scientology provides

to its members in exchange for a fixed fee.

     The U.S. Court of Appeals for the Ninth Circuit previously

rejected petitioners’ arguments about the Church of Scientology

in Sklar v. Commissioner, 282 F.3d at 619-620.    Petitioners’

tuition payments were made to schools that in part provide

secular educational services, not to exclusively religious

organizations.   Thus, the analysis in United States v. Am. Bar

Endowment, 477 U.S. 105 (1986), controls here.    We conclude that

the agreement reached between the Internal Revenue Service and

the Church of Scientology referred to in the letter sent to

petitioners in 1994 from respondent’s Fresno Service Center does

not affect the result in this case.16


     16
        In Sklar v. Commissioner, 282 F.3d 610, 612 n.3 (9th
Cir. 2002), affg. T.C. Memo. 2000-118, the U.S. Court of Appeals
                                                   (continued...)
                             - 31 -

     5.   Whether Petitioners May Deduct Their Payment for Mishna
          Classes

     Petitioners contend that they may deduct as a charitable

contribution the $175 that they paid for Mishna classes that Emek

provided separately from its regular classes and charged

separately from its regular tuition and fees.   We disagree.

     Petitioners’ payment for Mishna classes at Emek is not made

deductible merely because Emek offers those classes separately

from their regular educational programs, and Emek charges, and

petitioners pay, separately from Emek’s other charges.

Petitioners did not intend those payments to be a contribution or

gift to Emek within the meaning of section 170(c).17

     6.   Conclusion

     We conclude that petitioners are not entitled to a

charitable contribution deduction under section 170 for any part




     16
      (...continued)
said it is strongly inclined to the view that sec. 170 was not
amended in 1993 to permit deductions for which the consideration
is intangible religious benefits, and that Hernandez v.
Commissioner, 490 U.S. 680, 702 (1989), is still controlling.
That court also said that it need not rule definitively on this
point because petitioners’ claims did not meet the requirements
for partial deductibility of dual payments established by United
States v. Am. Bar Endowment, 477 U.S. 105 (1986). Similarly, we
have decided this case by applying United States v. Am. Bar
Endowment, supra.
     17
        Emek is an educational organization, not a religious
organization. We need not consider under what circumstances
payments to a religious organization for religious instruction
are deductible.
                                - 32 -

of the tuition, including the fee for Mishna classes, they paid

to Emek or Yeshiva Rav Isacsohn in 1995.18

B.   Whether Petitioners Are Liable for the Accuracy-Related
     Penalty

     Respondent contends that petitioners are liable for the

accuracy-related penalty under section 6662 for deducting $15,000

of their tuition.     We disagree.

     Taking into account respondent’s concession, petitioners’

tax understatement is $3,209.     That amount is not substantial for

purposes of section 6662 because it does not exceed the greater

of 10 percent of the amount required to be shown or $5,000.      See

sec. 6662(d)(1)(A).

     Respondent contends that petitioners knew that they lacked a

reasonable basis for claiming the disallowed deductions because,

unlike the return they filed for 1994, petitioners did not file a

Form 8275 or otherwise call attention to the deduction.     We

disagree.     Respondent permitted similar deductions for

petitioners’ 1991, 1992, and 1993 tax returns.

     Petitioners timely filed their 1995 return on October 15,

1996.     Petitioners’ 1994 return was being audited when they filed

their 1995 return pursuant to an extension on October 15, 1996.

Petitioners filed their petition in Sklar I on January 27, 1997.



     18
        In light of our conclusion, we need not decide whether
petitioners complied with substantiation requirements imposed by
sec. 170(f)(8).
                              - 33 -

Decision was entered in that case on April 5, 2000, and affirmed

early in 2002.   Thus, when they filed their 1995 return,

petitioners knew that respondent had allowed them to claim

similar deductions for 1991-93, and they knew their 1994 return

was being audited; but they did not know they would not prevail

on this issue for 1994.   Under these circumstances, we conclude

that petitioners had a reasonable basis for claiming the

deductions that respondent disallowed, and that petitioners

believed in good faith that they could deduct the $15,000 for

tuition and Mishna payments on their 1995 return.

     To reflect concessions and the foregoing,

                                              Decision will be

                                         entered under Rule 155.




[Reporter’s Note: This Opinion was amended by Order dated February

6, 2006.]
