DAVIS v. UNITED STATES
Legal provision: Internal Revenue Code
Argument of Rex E. Lee
Chief Justice Rehnquist: We'll hear argument first this morning in Number 89-98, Harold Davis v. the United States.
Mr. Lee: Mr. Chief Justice, and may it please the Court:
At issue in this case is the Federal income tax deductibility of contributions by the parents of Mormon missionaries made directly to the missionaries for the sole purpose of supporting the missionary efforts.
It is common ground that payments to support missionary work of a church that qualifies as charity, such as the Mormon church does, are in general deductible.
And the sole issue here concerns the means by which those payments are made.
The crucial language of the statute requires that in order to be deductible payments must be made to or for the use of the church.
The government's position that any method other than undifferentiated payments to the church itself can never, regardless of any other circumstances, be for the use of the church, not only ignores the plain language of the statute, but it also reflects, as does the government's entire brief, a profound failure to recognize even the most fundamental principles and operational aspects of Mormon missionary work as they are reflected in the record in this case, which must in any event be viewed in a light most favorable to Petitioners, against whom summary judgment was entered.
The only reason that the petitioners Harold and Enid Davis--
Unknown Speaker: When you say that the record must be viewed in the light most favorable but the petitioners, you just mean any factual evidence that could have been drawn?
Mr. Lee: --Excuse me, record, the factual record, yes, yes.
Unknown Speaker: And on that point, Mr. Lee, can we take this case as one in which the donations or the payments would not have been made but for the parent-child relation?
Mr. Lee: Oh no, no.
You can take it as one that would not have been made but for the fact that they were missionaries.
But these very petitioners have made contributions to missionary work other than to their sons, and it most assuredly is not the case that they would not have been made but for the fact that they are their own sons.
Unknown Speaker: Well, if... suppose we had had a trial, and as a factual matter the parents said well, I just want it understood that of course I supported the church and its doctrines and the missionary movement, but the only reason I made these particular payments was the fact that it was my boy that was doing the missionary work.
Mr. Lee: It would be--
Unknown Speaker: Would that be, then, a different case?
Mr. Lee: --I don't think so.
Unknown Speaker: So motive isn't irrelevant?
Mr. Lee: Well--
Unknown Speaker: Or isn't relevant?
Mr. Lee: --The motive to support the church's efforts is very relevant, because it demonstrates that the payments are for the use of the church.
Unknown Speaker: Well, then, suppose there is a mixed motive?
Mr. Lee: Then I think you look to what the Tenth Circuit said, what was the, who was the primary beneficiary.
It is not so much motive that--
Unknown Speaker: Well, is it the primary motive or the primary beneficiary?
Mr. Lee: --It's the primary beneficiary.
It's not so much motive, Justice Kennedy, it is who is the beneficiary, for whose use is it.
And the fact of the matter is--
Unknown Speaker: Well, I think those are two different tests.
Mr. Lee: --Oh, I think they are.
I think they are.
And I think the question is not so much the subjective one of what the motive is, but rather what the use is, which is an objective test.
Unknown Speaker: Mr. Lee, supposing that... then, I am not saying the record does show this, supposing it had showed that for 20 years before their children became missionaries the Petitioners gave $500 a year to the church, and then in the years when their children were missionaries they gave $3,000 or $4,000 a year to the church, or to their children, and claimed a religious deduction.
Then when their children ceased to be missionaries they went back to giving $500 a year to the church.
Now, does that make any difference in your case?
Mr. Lee: No, not so long as the difference between the 500 and the amount they gave did not exceed the church's guide... which the church has identified as the amount that is necessary in order to support their work.
Unknown Speaker: Well, in my hypothetical though, they give a lot more when their children are involved than when they are not.
Mr. Lee: That is correct.
That is correct.
And there are--
Unknown Speaker: But doesn't that show that there is not a detached motive of generosity for the church?
Mr. Lee: --What that shows, Justice Kennedy, is 160 years' worth of history in which the Mormon church prefers that its missionary work be a total family effort, including not only the family support, but also including specifically the direct payment.
And if I may elaborate on that just a bit, these are reasons that go twice as deep as the history of the income tax laws themselves, and they are borne out by the church's amicus brief and by the affidavit of Elder Robert Backman, who at the time was the executive director of the missionary work.
Over its 160-year history the church has found that missionary work has always been family centered, from the very beginning, with one or more members devoting full uncompensated time and effort, usually for a period of two years, while other family members have stayed at home but have participated through their prayers, their letters and most significantly, from the very beginning, their financial support.
And what the church has found is that the most effective missionary is one whose efforts are an integral part of a total, largely... larger family endeavor, and that that contribution to success from the family involvement is more effectively achieved if the missionary each month receives his check direct from his family rather than from the church itself.
Unknown Speaker: Mr. Lee, could I come back to your, as I understand your position it is that the motive doesn't matter, it is just whether the primary effect is to... is for the benefit of the church?
Mr. Lee: That is the way I would read the statute, Justice Scalia.
Unknown Speaker: Well, then that would mean that if I... if I am walking along the street, and I'm a compulsive benefactor, and I meet a young man that I take a liking to and I say here, young man, here is $5,000, and that young man turns out to be a Mormon missionary and he uses that to live for the next year as a missionary, then I have a deduction?
Mr. Lee: Most assuredly not.
Unknown Speaker: Well, but the primary effect would be to support the missionary work of the church.
Mr. Lee: Not because... no.
The primary effect is not to support the missionary.
And that brings us to another determination that the church has made which is also of more than 100 years' duration, and that is that up to the limits, that there are certain limits which are near survival, they border... frugality in the extreme, that serves the church's purposes for them to have that much money to do their missionary work.
Now, if they have money beyond that then they have time to spend on things like movies, plays and so forth, and their missionary work decreases.
And as a consequence, if you were to offer money to a Mormon missionary to support his efforts, if he is doing his job right he would just as politely as possible refuse it.
Unknown Speaker: Why wouldn't he take it and give the church back the $5,000 that he is using?
Mr. Lee: He could if you--
Unknown Speaker: And if he does that, then I would have a tax deduction, even though I don't even know he is a Mormon missionary.
I gave him $5,000--
Mr. Lee: --That is correct.
That is correct.
Unknown Speaker: --and he writes back to the church and he says you know, this fellow gave me $5,000.
Here is the money for my missionary support, I am going to use this other money.
And I have a tax deduction, even though I had no idea the person was even a Mormon.
Mr. Lee: That is not for the maximal use of the church.
That is not the way the church wants it done.
His first job is to talk you out of giving it to him, or to give it directly to the church--
Unknown Speaker: No, you have to take my hypothetical.
He doesn't do that.
Mr. Lee: --All right.
I will take your hypothetical.
Here is what he does do then.
He still supports his own efforts on what his family sends him, for reasons that I have just stated.
That is the way he is the most effective missionary.
What he can do is take the money that you give him and send it in to the church.
Unknown Speaker: You are not taking my hypothetical.
He doesn't do that.
He accepts the money, he sends back to the Mormon church the money that his parents have given him, and he says here, somebody else has given me money.
Mr. Lee: All right.
Unknown Speaker: And you really think that I would have a deduction, even though I had no motivation to help the Mormon church at all?
Mr. Lee: No, clearly you don't.
Unknown Speaker: Okay, so motive has to enter into it somehow, doesn't it?
Mr. Lee: I guess there is a relationship between the motive and... and it comes from the other end also.
Because what we are really concerned about here is the deductibility to his parents, who of course did make the contribution.
And I think that while it is principally an objective test, I suppose I have to say, Justice Kennedy, that it is not unaffected by the motive, for reasons that have just been borne out by Justice Scalia's hypothetical.
Unknown Speaker: Well, I suppose it's common ground in the government that if, if in the Chief Justice's example the family gave $500 a year to the church and then they gave... and then they send their children $5,000 a year or whatever the amount is... I suppose it's common ground, instead of sending it to them, they gave the church $5,000, that there would be a deduction.
Mr. Lee: Well, I would surely hope so.
I would surely hope so.
Now, the government's misunderstanding--
Unknown Speaker: So if the church ran its missionary support program differently, took the money itself from the parents, there would be no problem.
Mr. Lee: --I would certainly hope so.
I can't tell that for sure by reading the government's brief, but I would surely hope so.
The government relies principally on a fairly consistent line of lower court cases which involve charities, contribution to charities, but that are earmarked for particular individuals.
Now, those are lower court cases, they are not binding on this Court.
But we hope the Court finds them persuasive, because they solidly favor us and not the government.
Some earmarked contributions have been held deductible across a rather broad range, and most notably missionary contributions made to a church, but earmarked for the use of named individuals.
And the leading cases are the Fifth Circuit's Winn decision and the tax court's holding in Peace.
The classic case of an earmarked contribution that is not deductible is a contribution to pay the educational expenses of a student, where the donor, rather than the school, designates the recipient.
The government contends that those--
Unknown Speaker: Not a seminary student?
Mr. Lee: --That is correct.
That is correct.
The government says that those donor-selected tuition earmarking cases are analogous.
But they are analogous only if you accept the premise on which the government builds its entire case, and that premise is the following.
Although the church receives some indirect benefit from Petitioners' support of their children, the principal beneficiaries of the payments were these individuals.
The government's whole case depends on the correctness of that assumption, that the church's missionary program and the contributions that support it are the missionaries themselves.
If that assumption is correct, then the tuition earmarking cases are relevant because students are clearly the beneficiaries of the tuition payments.
But that assumption bears no resemblance to fact, as the record here shows.
Far from being its beneficiaries, Mormon missionaries are the church's missionary program.
The church has no other agents by which it carries out its missionary programs, other than these young people who wear white shirts and blouses and go in pairs.
The beneficiaries are the people that they teach.
These people devote two prime-time years, putting everything else on hold, school, social life, dating, family contacts, recreation, everything, not because it will advance any interest of their own, but because of their religious convictions about the importance of their message.
Unknown Speaker: It advances their spiritual interest, surely, right?
Mr. Lee: That is correct.
Unknown Speaker: --and their parents can say I am doing this because I think it will do my, my son spiritual good.
It reminds me of a case we had earlier this term that involved donations to a church in exchange for spiritual benefits.
It's sort of the same issue, isn't it?
Mr. Lee: Well, except that it is not the same issue for two reasons.
You are talking, of course, about the Hernandez case, and there the issue was not the, whether it was to or for the use of, it was a question of whether these were gifts or contributions.
And if there should be any doubt about this, there is no quid pro quo problem here.
And the reason is, there is a very important reason, the church itself has the ultimate responsibility to see that these missionary expenses are paid for.
And in the event that some parents cannot or will not pay the missionary expenses, the church picks it up and pays it out of its own, out of its own funds.
But to a greater extent than is true of any other endeavor of which I am aware, the life of the Mormon missionary is devoted exclusively to one use, and that use belongs to The Church of Jesus Christ of Latter-day Saints.
These people are no more beneficiaries of the church's missionary program than a Catholic nun is the beneficiary of the school in which she teaches, or a Red Cross volunteer is the beneficiary of the Red Cross' disaster relief efforts.
Look at the record.
Benjamin Davis averaged over 70 hours a week in proselyting, plus another 10 in study and preparations to proselyte, and his brother Cecil averaged 60 hours a week proselyting, plus 10 to 25 hours in preparation, which included language study, because he, unlike his brother, did his proselyting in a foreign tongue.
Now, 80 hours a week is hardly incidental.
They were doing only one thing, and that was proselyting.
Any other activities were incidental to and in support of their proselyting, and they were doing it on behalf of or for the use of the church.
And it necessarily follows that donations which do nothing more than sustain those proselyting efforts are also necessarily for the use of the church.
Harold Davis's affidavit, which is part of the record, states unequivocally that his motive was a sincere religious desire to support the church's missionary program, and that his contributions were subject to a clear understanding and commitment by the sons that the money would be used only in accordance with church guidelines for necessary mission-related expenditures, and was not intended by this... for the sons to use as they might see fit.
Now, there is no question that there are benefits, but they are religious in nature.
Insofar as any progress toward any other goal that might relate to the kind of thing that would be motivated by other than religion, it is negative.
After those two years, typically it comes right in the middle of a college career, and there is some retooling time and effort that is required once they return.
Unknown Speaker: How about the point that at the age these children were the parents might well have been supporting them, even had there been, had they been doing something else?
Mr. Lee: Of course.
And they were supporting them had they been doing something else.
And that something else was attending college.
But the attending college was preparing them for something that was related not to the use of the church, not for... but rather for their own interest, and therefore for their parents interest.
This involved taking time out from that, putting everything else on hold, and devoting 100 percent of their time solely for the use of the church.
Unknown Speaker: Mr. Lee, do we know from the record, as I recall these funds were sent to the locations where these students were proselytizing and deposited in a bank account in their--
Mr. Lee: Yes.
Unknown Speaker: --Do we know from the record what would have happened if the children had just taken off, what would have happened to the bank account?
Would it have gone to the church?
Mr. Lee: Yes, it would.
Unknown Speaker: Do we know that from the record?
Mr. Lee: The record sets that forth, yes.
Those are church monies.
Once they are devoted, and the record is very clear, Elder Backman's affidavit is very clear on this point.
Once those monies are given to them for that purpose, they are for the use of the church.
And similarly, if I can just drive that home a little further, there are areas in the world where those guideline amounts are so low that if you multiplied the monthly amount times 12 it comes out to less than $1,000 a year.
So that it would actually be more advantageous to the parents to take them as an exemption than it would to claim the income tax deductions.
They are not entitled to that exemption, in our view, notwithstanding the fact that it would be more advantageous, because they are not being supported by their parents.
They lack therefore the support feature.
Those are church monies once they are given to them.
Unknown Speaker: May I ask, you say the money belonged to the church?
Mr. Lee: Yes.
Unknown Speaker: Does the bank account show that?
Mr. Lee: No, belong to the church in the sense that the church was... if I can, there was a fiduciary relationship in which the money was technically and legally in their name, but the use belonged to the church, in typical fiduciary--
Unknown Speaker: I am sure it seldom happens, but what if a missionary did spend the money going to the theater?
How is it policed?
Is it, do you rely entirely on the moral commitment of the missionary?
Mr. Lee: --Yes.
Yes, particularly for de minimis kinds of things like that.
Unknown Speaker: What evidence in the record shows that this was a fiduciary relationship, and that the money would have gone to the church had the children simply run off?
Mr. Lee: Elder Backman's affidavit, plus--
Unknown Speaker: Whose affidavit?
Mr. Lee: --Excuse me?
Unknown Speaker: Whose affidavit?
Mr. Lee: Robert Backman, and it is in appendix to the petition.
And also, there is a letter that went out from the church that states it even more clearly.
And I need to clarify the status of that letter.
It appears in the appendix to the church's amicus brief.
It is part of the record in the White case in the Tenth Circuit.
For some reason it is not in the record in this case.
Unknown Speaker: Well, we don't ordinarily consider--
Mr. Lee: I understand.
Unknown Speaker: --appendices to amicus briefs as part of the record.
Mr. Lee: I understand.
Unknown Speaker: What part of the record in this case shows what you want to show?
Mr. Lee: Elder Backman's affidavit.
Unknown Speaker: And where is that?
Mr. Lee: That is in the petition... in the appendix to the petition.
Unknown Speaker: Appendix to the petition.
Mr. Lee: Yes.
In our view,--
Unknown Speaker: Under that affidavit, which is at page 28a, suppose, following Justice Stevens' question, contrary to the doctrines of his church and the wishes of his parents, a missionary took the money for a color television set and bought the color television.
Would the church have an action against him for embezzlement, or civil action for return of the funds?
Mr. Lee: --We have talked about that, and I think the answer is, technically, yes.
Unknown Speaker: Is there something in the Backman affidavit that tells us--
Mr. Lee: --No.
No, there is not.
What would happen, in fact, Justice Kennedy, is self-help.
There is a great deal of control that the church exercises over these missionaries, and that is much more effective than a prosecution.
I come next to the fact that "for the use of" really is, to a large extent, fact bound.
And in reaching the final question of which... of whether these are or are not "for the use of", I would invite the Court's attention to two propositions.
First of all, to the extent that there are any of these factual issues that are not adequately developed, we would invite the Court to remand for the development of any further issues.
Indeed, I would point out that in the Brinley case, which is the Mormon missionary case in the Fifth Circuit, the circuit did just exactly that with regard to such issues as the Chief Justice, necessarily, the Chief Justice has just been asking.
But I would also invite the Court's attention to these four considerations.
The first is that the church carries out its missionary program exclusively through the efforts of these young men and women.
There are no others.
Second, it is the church's program.
They are the church's missionaries, and the ultimate financial obligation is on the church.
There are thousands of cases throughout the world in which they can't do it the preferred way, and the church always picks up the slack, and they have the ultimate responsibility.
Third, the church, in its own interest, has set guidelines for monthly missionary expenditures in different parts of the world.
As the Court can determine from consulting those guidelines, they can only be described as frugal in the extreme.
And they always will be, because the church has determined that above those guideline amounts there is an inverse relationship between the amounts that are spent and the effectiveness of their missionary work.
And finally this, absent religious conviction there is not a person in this court room who would send his son or daughter off for two years to do the kinds of things that Benjamin and Cecil Davis did, in the prime of life and educational opportunity.
The incidental benefits to the children and the parents simply would not be worth the cost.
Why, then, did Harold and Enid Davis do it, and why were Cecil and Benjamin anxious to go?
And the answer is obvious.
It was because of religious conviction that they gave two of their best years, plus the meager amounts to pay their expenses, and they did it that way because the church wanted it done that way.
It was for the use of the church.
I would like to save the rest of my time for rebuttal.
Unknown Speaker: --Mr. Lee, matter of curiosity, you spoke of men and women.
Was there a time when only young men were sent out?
Mr. Lee: Very, very early in the church.
But that has not been within either my memory or yours.
Unknown Speaker: How many women... what is the proportion of women, roughly?
Mr. Lee: About four to one.
Unknown Speaker: About what?
Mr. Lee: About four to one.
Unknown Speaker: Mr. Lee, just on your last point, I am not sure I understand the relevance of that.
Suppose some... that is to say that the parents would not have out of material motivations done this, but it might have been spiritual motivation for their children.
I mean, I can't take a deduction, I assume, if I want to send my son off to a monastery to think about his soul for... for... for several months, can I?
Mr. Lee: That is correct.
Unknown Speaker: Or can I?
Mr. Lee: Excuse me, you cannot?
Unknown Speaker: I cannot; I assume I cannot.
I mean, suppose I pay his, you know, his living expenses so he can go think--
Mr. Lee: That is correct.
I will assume--
Unknown Speaker: --think about the permanent things.
Mr. Lee: --I will assume with you that that is correct, but that is quite different from the church asking that they go and do things that are... that carry out a responsibility that is one of the three core functions that the church has identified, and do it on behalf of the church.
Unknown Speaker: The missionary aspect of this is central to the whole case, isn't it?
Mr. Lee: Absolutely, absolutely.
Unknown Speaker: Mr. Lee, when you resume I would appreciate your pointing out the paragraph in the Backman affidavit pertinent to our previous discussion.
Ms. Peterson, we'll hear from you now.
Argument of Shirley D. Peterson
Mr. Peterson: Mr. Chief Justice, and may it please the Court:
This case does not concern the admittedly noble purposes of the Mormon church or its missionary program.
The only issue before the Court today is a question of statutory construction arising under Section 170 of the Internal Revenue Code, namely, whether payments made by taxpayers directly to their children are deductible as charitable contributions to or for the use of the Mormon church.
We believe the answer to that question is clearly no.
Congress has provided a mechanism in the statute for distinguishing between public and private charity.
Specifically, Congress has required that the recipient of deductible gifts be a qualified donee.
That is an organization which meets the requirements set forth in the statute.
The only way to ensure that a gift is for the public benefit and that the statute can be reasonably administered and enforced, is to require that all contributions for which deductions are granted under Section 170 be subject to the discretion of a qualified donee.
That is what the statute requires--
Unknown Speaker: Mrs. Peterson, do you, do you accept the proposition that if contributions were made by the parents to the church for use in the missionary program, that those are deductible?
Mr. Peterson: --Justice O'Connor, if the parents made the contributions to the church, and the church had complete, unfettered control over the use of those funds in its general missionary program, there is no doubt that the contribution would be deductible.
However, if the contribution were given to the church with the express understanding or limitation that the funds could be used only to support these particular missionaries, the contributions would not be deductible.
The government reads the Winn case and the Peace case quite differently from the manner in which Mr. Lee has described it to you.
In the Peace case, the court there determined that the contributions were made to the control of the mission generally, and for that reason the contributions were found deductible.
And those that were made to individual missionaries were found not deductible in the Peace case.
Unknown Speaker: Now, if the taxpayer making... filing the return was the missionary himself, I assume he could presumably deduct the expenses of his subsistence while serving in that capacity?
Mr. Peterson: That would depend on whether or not the missionary was away from home.
The question that you are asking, Justice O'Connor, is whether or not the amounts, had the contribution deduction been claimed by Petitioners' sons, whether or not those amounts would be deductible under Regulation (g) as an unreimbursed expense.
It would be deductible, if at all, only by Petitioners' sons, but it is the government's position that they would not... those expenses that were incurred for meals and lodging would not be deductible because these young men were not away from home for tax purposes at the time that the expenses were incurred.
Unknown Speaker: Well, I suppose you would say that... that even if the parent gave to the church some money and earmarked it for named individuals who were not their sons or daughters, that it would not be deductible either?
Mr. Peterson: That is correct, Justice White.
That is correct.
Unknown Speaker: And so, a fortiori, it wouldn't make any difference if these particular people involved were not the children of the givers?
Mr. Peterson: That is correct, Justice White.
When Congress established the mechanism for determining deductibility under Section 170, it relied on the mechanism of a qualified donee.
Those are organizations which by their charter are limited to expending funds for certain purposes that have been determined in advance to be charitable.
And it is by placing control in the hands of such qualified donees that the statute's purpose can be achieved.
Unknown Speaker: It doesn't say that, Ms. Peterson.
"to or for the use of. "
I can give it for the use of someone without giving it to that person.
Mr. Peterson: Justice Scalia--
Unknown Speaker: That must mean that I can give it to somebody else, so long as it is used for that organization.
Mr. Peterson: --Justice Scalia, 1921 for the express purpose of permitting deductions to trusts or other intermediary entities that served as fiduciaries having a legal obligation to hold and administer the funds for ultimate distribution to charity.
Congress viewed the insertion of those words as a minor change in the statute.
Unknown Speaker: Well, that might have been the immediate purpose, but its language goes beyond that.
It is common that Congress has a particular problem in mind, but adopts language that solves that problem and has other effects as well.
The assertion here is made that this is for the use of the church, and that the funds would... would even have to be returned to the church if the, if the children didn't use them for the purpose designated.
Mr. Peterson: --Justice Scalia, the entire thrust of Section 170 requires that the gift be for a public benefit.
The control requirement in the qualified donee is inherent in the basic definition of charitable contribution.
It is only the unfettered control in the charitable donee which... it's the hallmark of a charitable contribution because it ensures that element of indefiniteness of beneficiary, which is essential to having the contribution be deemed charitable.
And with respect to your... going back to your--
Unknown Speaker: But that is not the case, you say, when I give it to a trustee.
Mr. Peterson: --The trustee--
Unknown Speaker: I can give it to a trustee who is not at all a charitable person.
He may be a very commercial person.
Mr. Peterson: --The trustee, though, has a legal obligation to hold and administer the funds for the benefit of charity and for ultimate distribution to charity, Justice Scalia.
Unknown Speaker: But that is what the church asserts is the case here.
That these individuals had to use the funds in the work of the church.
Mr. Peterson: Justice Scalia, there is no evidence in the record of this case that I am aware of to indicate that these young men were fiduciaries of the church.
The facts of this case are undisputed, and contrary to Mr. Lee's invitation to remand, I would just point out that the... the facts are absolutely not in dispute here.
It is the taxpayer who petitioned for certiorari and who now suggests that there are factual issues that might require remand.
The facts here are very clear.
The parents made a direct deposit into their children's bank accounts.
The children were the sole signatories on those bank accounts.
The children determined how they would use the funds.
They determined how they would spend it, on food, housing, whatever.
Had they used the funds for some non-charitable purpose, to the best of my knowledge, the only result would have been... or could have been, that the mission might have been terminated and the child might have sent... been sent home.
Unknown Speaker: Well, how do we know that?
Mr. Peterson: The record in the case indicates that the children were the sole signatories over the accounts, and the church indicates that its control consisted of reviewing the expenditures, the total expenditures, not even the itemized expenditures, but the total expenditures that the children made, after the fact.
Unknown Speaker: If... if the case showed that the... that the church had legal control over the funds, would the case be different?
Mr. Peterson: If, if the church had received the funds--
Unknown Speaker: No, no, it's this case, but the church has legal control over the funds.
Mr. Peterson: --If the church had legal control over the funds, yes, then that would be a contribution to the church, Justice Kennedy, and would be deductible.
Unknown Speaker: So... so... so then your argument that it be, that it is paid directly to the missionary is, is not dispositive.
Mr. Peterson: Well, I am afraid I don't understand how the church could have total control over the funds if the payment is to the missionary.
Unknown Speaker: Well, let's say the missionary writes a letter to the church and said as your agent I have just received $1,500, which I am depositing in a bank account subject to whatever control you wish, and until I hear further from you I shall expend it for my support during my mission.
Mr. Peterson: If in fact a relationship was established under which--
Unknown Speaker: Well, it's the case I gave you.
Mr. Peterson: --If the agent is in fact an agent for the church--
Unknown Speaker: Well, suppose he says that he is.
Mr. Peterson: --The agency... the establishment of an agency relationship, it seems to me, Justice Kennedy, requires a contract between two parties, which, to the best of my knowledge, has not been established by the record in this case, except that--
Unknown Speaker: Well, Mr. Lee said it has been established over hundreds of years.
Mr. Peterson: --The record in this case will indicate that the Mormon church prefers that its missionaries not receive contributions from any party except their parents.
To the extent that they are agents of the church, they are agents only for the purpose of receiving money from their parents to spend on their own support.
Unknown Speaker: Well now that isn't... that isn't... that can't be so.
You say that it is not the practice sometimes for non-parents to support missionaries?
Mr. Peterson: There is no question that non-parents occasionally support missionaries, Justice White, but the record in this case indicates that the church does not want its missionaries to receive funds directly from third parties.
That is part of the affidavit that is in the record in this case.
The only person from whom these children... from whom these children are authorized to receive funds on behalf of the church is their parents.
Unknown Speaker: Well, you don't... I take it that even if there isn't some sort of a formal contract, I would think that it's perfectly plain that the children on the missions think they are under some obligation not only to their parents, but to the church, to spend this money only for their missionary activities.
Mr. Peterson: Justice White, they--
Unknown Speaker: Is that right or not?
Mr. Peterson: --I think not.
They used the money to support themselves.
Unknown Speaker: You think--
Mr. Peterson: They used it to purchase food--
Unknown Speaker: --That isn't what I asked you.
Mr. Peterson: --They used it to purchase housing.
Unknown Speaker: Do you think they feel under an obligation to spend it for... to support themselves so that they can be missionaries?
Mr. Peterson: Yes, but they had to eat, and they had to have housing.
Unknown Speaker: Well, I know, of course.
Mr. Peterson: And as, as the court in the Orr case said, the words
"to or for the use of. "
cannot be stretched to cover payments that the taxpayers would have made in any event.
And as was pointed out in the earlier questioning, these young men were 19 and 20 years of age.
It is likely that their parents would have supported them whether or not they were serving as missionaries for the church.
Unknown Speaker: Well, you don't argue, I take it, along the lines of the Court's earlier questions to Mr. Lee that there was a motive here that is relevant to the determination of the case.
Mr. Peterson: Justice Kennedy--
Unknown Speaker: --Is that in your brief or not?
Mr. Peterson: --I don't know that we addressed motive in great detail, but motive is relevant here in two respects, Justice Kennedy.
Unknown Speaker: Well, you didn't argue it in your brief, in other words.
Mr. Peterson: No, and I will address that.
Motive is relevant to determine whether or not there has been a contribution or gift.
That question is not before the Court here this morning, but it certainly would be very relevant if this case were remanded.
Motive is also relevant to determine whether or not a gift favors a particular individual.
And when a gift favors a particular individual, as we believe it did in this case, it lacks the indefiniteness of bounty that qualifies it as a charitable deduction.
This Court has recognized--
Unknown Speaker: Ms. Peterson, what cases do you cite for that proposition?
Mr. Peterson: --Well, since at least 1882 this Court has recognized--
Unknown Speaker: But what case do you cite in your brief for that?
Mr. Peterson: --Russell v. Allen.
Russell v. Allen.
Unknown Speaker: Russell v. Allen?
Mr. Peterson: Yes.
This Court has recognized that indefiniteness of beneficiary is key to a charitable gift.
Unknown Speaker: Well, maybe--
--I take it if... if my child were, say, a Methodist missionary in China, I could not send a donation to my child as a Methodist missionary and say do this, spend this money to support yourself while you are preaching the gospel.
That would not qualify because it is directed to a particular individual?
Mr. Peterson: That is right, Justice Rehnquist.
Unknown Speaker: Well, you can read that case.
I mean, I... that case is, it depends on whom you consider the beneficiary.
If it is a student in a secular college, you have to give the money to the college unrestricted.
You can't designate it for a certain student, because that student would be the beneficiary.
The church's argument here is that the beneficiary of this expenditure is not the, is not the son who got the money, but the people to whom he is preaching.
And all our earlier cases can certainly be reconciled with this on that theory, can't they?
Mr. Peterson: Justice Scalia, there is no doubt that the people to whom these boys were preaching were beneficiaries of the missionary program.
That's not the issue here.
The issue here, to the extent that use and beneficiary is relevant, is who is the beneficiary of these funds and who controlled these funds.
That is the real issue.
Unknown Speaker: Well, may I ask about--
Mr. Peterson: Did a qualified donee have control.
Unknown Speaker: --about control.
You, when you say somehow the paradigm case for this provision of the statute you say is a trust, like a community trust, which... which holds the money and then distributes it to various charities.
Does any one of the charities that get those monies control the trustee?
Mr. Peterson: They are... the trustee, however... well, there are two answers to your question, Justice Scalia.
The first is that the intermediary trustee who is holding it for the charity has a legal obligation... a case, a suit could be brought against him to enforce his legal obligation.
Second of all--
Unknown Speaker: The church asserts that here.
Mr. Peterson: --Second of all, that trustee will ultimately distribute the funds to the charity.
Congress understood the words "for the use of" to mean only that there would be some delay in the distribution to charity.
They did not mean that charity would never receive it.
When Congress reenacted this section of the statute in 1954, the legislative history, and again in 1964, the legislative history makes it very clear that Congress thought that the use of the words "for the use of" meant only that there would be some delay in the transmission of the funds to the charity.
Unknown Speaker: But insofar as control is concerned, it is no different from here, if you assume... if you assume that the church would have the right to those funds if the child abandoned missionary activity.
Mr. Peterson: Let's talk about that, because I am unable to find anything in the record that would indicate that in fact the funds would be distributable to the church at the end of the mission.
The affidavit to which Mr. Lee refers, at paragraph 22 on page 33a, says surpluses of contributions over expenditures are not contemplated because the monthly amount requested is determined by the Mission President based upon conservative estimates of actual need.
I am not--
Unknown Speaker: Why don't you read the next sentence too.
Mr. Peterson: --Furthermore, if a surplus starts to develop, the missionary is expected to take action to have the amount of the donation sent to him appropriately reduced.
Now, if there is something in the record I am not aware of it--
Unknown Speaker: May I ask you a question on this?
Mr. Peterson: --Yes, Justice Stevens.
Unknown Speaker: Supposing that they modified their arrangement in this respect, and said that the parent shall send the money in the form of a check payable to X as trustee for the Mormon church.
And they open a bank account in so, in his name as trustee for the Mormon church.
And the Mormon church writes them a letter saying you are our trustee, and you may spend the money for the following missionary purposes, including buying food and sustenance for yourself, but no other purpose.
And it is clear that it is a trust account.
Would the case be different?
Mr. Peterson: If the beneficiaries of that trust are determined in advance, and there is an understanding between the charity and the donor that it... in fact, the funds are going to be used to benefit specific individuals, then the transfer lacks the indefiniteness which is the hallmark of a charitable contribution.
It would not be deductible.
Unknown Speaker: Your answer is that would be the same case.
Mr. Peterson: It would not be deductible.
Unknown Speaker: That would be the same case, even though the church would then have a legal cause of action for misspent funds?
Mr. Peterson: That is correct, because any transfer that will qualify for a contribution deduction under 170 must be indefinite in nature.
It cannot be earmarked for the specific benefit of any person.
And I would like--
Unknown Speaker: Now, if the church spent money to support these individuals while they are on mission work, you would not say that that money was being spent for the benefit of those individuals.
You would say the money was being spent for the benefit of those whom they are proselytizing.
Mr. Peterson: --That is correct, Justice Scalia.
Unknown Speaker: But if the parents, if the same thing happens and the money comes from somebody else, you suddenly say that it is being spent for the benefit of those individuals and not for the benefit of the persons that they are proselytizing.
Why is that?
Mr. Peterson: Because that is what the statute requires, Justice Scalia.
The statute... well, let's talk about this for just a moment.
Unknown Speaker: How can it be for their benefit when the parents pay it, but it's not for their benefit when it comes from the church?
Mr. Peterson: The statute doesn't say for the benefit of.
The statute says pay the contribution to or for the use of a qualified donee.
Can you imagine how difficult it would be to administer this statute if checks written to individuals suddenly became subject to the contribution deduction under Section 170?
The Internal Revenue Service would find it impossible to administer the statute.
Not only would it be necessary to audit the donor's records, it would also be necessary to audit the donee's records to see whether or not the payment in question had in fact been used for a public purpose.
And when you are talking about missionaries in a missionary program, we could have the missionary in Tanzania or China, or wherever, and then determining whether or not they have used that money to advance the public benefit would be impossible.
Unknown Speaker: --You probably should have that covered by statute.
That does sound like a real problem.
Mr. Peterson: We believe that is what this statute does provide.
And I would just emphasize that it is not sufficient simply to confer a benefit on the charity.
Private charity, private donations, no matter how laudable, no matter how benevolent, are not deductible.
Congress has not seen fit to provide for deductions for individuals, and they simply are not deductible unless they pass to a qualified donee.
Unknown Speaker: May I ask you again, the problem of identifying... you are looking at checks, if you use my hypothetical and they wrote checks payable to X as trustee for the Mormon church, you wouldn't have any trouble identifying those checks.
Mr. Peterson: Well, yes, Justice Stevens, but that then goes back to the question of whether or not that transfer was designed to benefit a particular individual.
It is like... that could be analogous to the tuition case.
If I write a check to Bryn Mawr College to pay my daughter's tuition, it doesn't make it deductible just--
Unknown Speaker: But there isn't even arguably a second beneficiary there.
Mr. Peterson: --I beg your pardon, sir?
Unknown Speaker: There isn't even arguably a second beneficiary there.
Here at least it is arguable that the people that the missionary contacts when he is proselyting are the beneficiaries.
Mr. Peterson: Let me just point out that the lower court cases that have addressed this question have held that gifts or transfers to persons who are serving as missionaries, i.e., providers of services, are treated in the same way as those for receivers of services.
So that if... just because someone is serving as a missionary and is providing missionary services, the money still cannot be earmarked for that person, or it is not deductible under Section 170.
The statute is set up to ensure that the money passes through the hands of a qualified donee.
That is the only way that we can ensure that the public benefit is advanced, and that the indefiniteness of beneficiary is ensured.
Unknown Speaker: I suppose you would have the same... have the same... take the same position if some, if some member of the Mormon church agreed with the church to pay the salaries of the church employees in its office in London.
Mr. Peterson: I, would... I am sorry, Justice White, I didn't--
Unknown Speaker: Well, the church has an office in London, let's assume, and it has some employees there.
Mr. Peterson: --Yes.
Unknown Speaker: And some one agrees with the church to pay their salaries.
Mr. Peterson: Uh-hum.
I think that we would, we would continue to have that problem.
Unknown Speaker: Well, you would say, you would say that that, the amount that they pay to those individuals--
Mr. Peterson: Yes.
Unknown Speaker: --is not deductible.
Mr. Peterson: Yes.
Justice White, the statutory requirement of payment has been interpreted to deny a deduction where there is no payment of cash or property, even though the taxpayer's action may confer a measurable economic benefit on the charity.
Unknown Speaker: Ms. Peterson--
--Well, in Justice White's hypothetical, suppose that the donor said I don't know who any of your people in London are, but I think it is important for you to do your work in London.
I will simply send a check to all the people that are working for you in London for their year's work.
Just give me their names.
Mr. Peterson: And the check is made not to the church, but--
Unknown Speaker: It is not to the church, it is made to the people.
Mr. Peterson: --but to individuals.
Unknown Speaker: The donor never, didn't know it, doesn't know who they are.
He just asked the church for their names.
Mr. Peterson: I would have to say that in that event they have not, again not complied with the statutory requirement of having the money passed to the qualified donee.
The statute sets up formalities which must be observed if we are going to be able to administer the law.
Unknown Speaker: Ms. Peterson, suppose you have a... a... small church, a small Catholic church, only one priest there.
And I write out a check, you know, St. Mary's Church, and put it in the basket.
All the funds are kept in a bank account by the only priest in the church.
Would I be able to deduct that?
Mr. Peterson: --Justice Scalia, it is my understanding--
Unknown Speaker: Under your theory.
Mr. Peterson: --Yes.
It is my understanding that under those circumstances the priest would be serving as a fiduciary for the Catholic church for all purposes, that he is authorized to receive funds, to hold funds, and to administer funds on behalf of the church for every possible purpose.
Unknown Speaker: Why is that different from Justice Stevens's hypothetical, where you write a check to the missionary as trustee for the Mormon church?
Mr. Peterson: I understood Justice Stevens' hypothetical to involve earmarked contributions for the direct benefit of certain missionaries.
Whereas I understood your question to relate only to a contribution to the church's general program.
Unknown Speaker: I see.
So it would hinge upon whether that money could be taken out of St. Mary's and sent to other parishes.
Mr. Peterson: No, it would hinge on whether or not the priest could use it for the church's general program within St. Mary's parish, or for whatever purpose, but not for a specific individual's benefit.
I would just like to point out the possibilities of abuse that may arise if the Court were to accept the taxpayers' exceedingly broad reading of Section 170.
First of all, as I mentioned before, if direct payments to individuals were deductible, the Service would be required to scrutinize how the funds were spent, to ensure that a public purpose was served.
Moreover, we would raise the risk of double deductions.
And, as inadvertently occurred in this case, the problem where the parents claimed initially both a dependency deduction and a deduction for the monies that were contributed for the missionary service.
We have the possibility of shifting deductions between taxpayers, and, as you know, it is a fundamental principle of the tax law that income and deductions may not be shifted between taxpayers.
And absent a specific statutory exception, such as for medical expenses which are set forth in Section 213, the Code consistently treats individual family members as separate taxpayers.
If their parents had paid their sons' interest expense or taxes or any other deductible expense, they would not have been entitled to the deduction.
And this case is no different from that.
It would also permit the anticipation of deductions, because we have no way of knowing that the year in which the expenditure is actually made would be the same as the year in which the payment from the parent to the child is made.
In short, we believe that the taxpayers' reading of Section 170 is simply not justified by the statutory language.
It is not what Congress intended.
And we think that it would extend it far beyond what Congress intended and would make the administration of the statute almost impossible--
Unknown Speaker: Did I understand you to answer Justice Stevens that if I make a... if I am a member of the Mormon church and I make a, send some money to somebody, not my child, and say this is in trust for the Mormon church and you are to spend it as the church tells you to.
That is not deductible, is that it?
Mr. Peterson: --Oh, so long as it is not earmarked for a specific individual, Justice White.
Unknown Speaker: Well, he sends it... I send it to a specific individual.
Mr. Peterson: But, as a trustee--
Unknown Speaker: Exactly.
Mr. Peterson: --in a fiduciary relationship.
Clearly, no... that would be deductible, assuming that--
Unknown Speaker: Well then, all, all the parent has to do every month is to write a letter like that, then?
Mr. Peterson: --No, because then he has earmarked it for a specific individual.
Unknown Speaker: No, I send the money to some named person.
Mr. Peterson: Right.
Unknown Speaker: And I... a missionary.
And I say this is in trust for the church and you are to spend it as the church tells you to.
Mr. Peterson: Well, it seems to me that the example that you were positing is in effect a sham--
Unknown Speaker: I thought that was the example that Justice Stevens--
Mr. Peterson: --I may have understood Justice Stevens.
I was, I understood him to say a true fiduciary relationship, but--
Unknown Speaker: --Well, let's take my example--
Mr. Peterson: --where the beneficiary of the funds is not earmarked.
The moment you have earmarked funds to be used for the benefit of a specific--
Unknown Speaker: --Well, I am the trustee.
I make the person a trustee for the church.
I write him a letter, you are the trustee for the church.
And you are to use this money and spend it as the church tells you to.
Now what about that?
Mr. Peterson: --Only if it is ultimately distributable to the charity.
The charity must exercise control over it, Justice White, that is the only way that--
Unknown Speaker: Well, the church, the donee here is under an obligation from the donor, if he accepts it, to spend it the way the church tells him to.
And the church tells him here is what you are to spend it on: food, clothing and shelter.
Mr. Peterson: --It seems to me that what you have suggested here is the equivalent of the sort of sham transaction that existed with the tuition payments.
And so long as you have an understanding or arrangement between the donor and the donee that specific individuals are going to benefit by it, then the church does not have the unfettered discretion and control that is required.
Unknown Speaker: So a missionary... the church has a missionary sign a piece of paper that says that any funds you receive for your support will be held in trust for the church.
Mr. Peterson: Again, if it is earmarked for the use of a specific individual, it ought not to be deductible.
That is not what Congress intended when it enacted Section 170, I would submit.
Unknown Speaker: What language do you rely on for that?
Mr. Peterson: The legislative history of Section 170, in addition to this... Court has recognized the public charity aspect and the public benefit aspect of Section 170 repeatedly, Justice Scalia.
As recently as Bob Jones University this Court said public benefit permeates Section 170.
We agree with that.
Unknown Speaker: Thank you, Ms. Peterson.
Rebuttal of Rex E. Lee
Mr. Lee: Thank you, Mr. Chief Justice.
With regard to whether they were fiduciaries, I think probably the better support, Mr. Chief Justice, I was mistaken, is probably in the Davis affidavit, paragraphs nine and 10.
I think it also permeates the Backman affidavit.
Actually the best statement is in that letter from the church that is in the record in the White case, but not this case... but not this case.
But I would refer you to Justice White's question to Ms. Peterson.
Aren't they under an obligation to spend this money only for missionary work, and there is just no question about that.
And if there is any, then it ought to be remanded for those purposes.
Moreover, the government itself on other occasions has taken a position quite inconsistent with the one it has taken here.
In the Rockefeller case, in a brief that has been lodged with the Court, the government said many payments, other than payments to a trust, are payments for the use of charity.
But the language of this statute says is not to an intermediary trust that will eventually be transferred to someone else.
It says for the use of.
And there are many instances, many instances in which the lower courts have recognized payments as being for the use that are not in a strictly fiduciary capacity, such as, and those are cited in our brief, such as payments by a big brother directly to a little brother, disaster relief payments, unwed mother payments, and... so that in short we think we satisfied the trust relationship--
Unknown Speaker: Well, Mr. Lee, I am sure that for the use of is construable like you say it is, but don't you think it is also possible to construe it like the government does?
Mr. Lee: --No.
No court has construed it the way the government does, Justice White, and I want to make that very, very clear--
Unknown Speaker: Well, no court?
Mr. Lee: --No court.
The Ninth Circuit does not agree with Ms. Peterson.
What the Ninth Circuit says is that earmarking is all right, so long as the church has possession.
Now that's... that's not our preferred position, but we like it a lot better than what the government is suggesting.
And there is no court that supports the proposition that absolutely no earmarking is ever sufficient.
Unknown Speaker: Well, isn't it... isn't this construction in the regulations, or not?
Mr. Lee: I yield to no one, Justice White, in my respect for the government's... for that rule, not from this pulpit.
I have advocated it many times.
But that rule has never said that the government wins its cases and it can use it to bootstrap... there has never--
Unknown Speaker: I asked you is it in the regulations?
Is this construction in the regulations?
Mr. Lee: --No, it definitely is not in the regulations.
Unknown Speaker: It isn't?
Mr. Lee: No, no.
They use it for litigation purposes... well, I wouldn't say that.
But you can see that in Rockefeller, when it served their purposes to do otherwise, they said there are many cases other than a trust that can be for the use of the church.
Now let me, let me just lay to rest this business about abuse and about the impossible... I have never understood those arguments.
First, insofar as the impossibility of administration.
It is not the church that is going to be audited; it is the taxpayer that is going to be audited.
And you ask two questions.
And the burden of proof to satisfy these questions is on the taxpayer.
First, are these people on missions?
Yes or no, and present me proof.
Second, do these payments come within the guidelines that the church has set, and are those guidelines out of line?
Now, you are going to have to do that in any event.
And if I make the payment directly to a church fund and the church then sends that money on to my child, I will assure you the church is not going to send any more nor less money than what I am sending within those guidelines.
I do not understand that administration problem.
Similarly, I do not understand the abuse problem.
We are told that there are two.
The first is that of shifting deductions from a higher taxpayer to a lower bracket taxpayer.
That is just plain not a problem.
These people who are... because you can only shift if you shift large amounts.
And the only amounts that are going to be deductible are the amounts that the church has designated in any event for its own use.
Unknown Speaker: You can certainly shift small amounts.
It wouldn't do you as much good.
Mr. Lee: Justice Rehnquist, there is no one who is going to be able to live in Washington, D.C. on much less than $310 a month.
And so the only thing that you are going to be able to shift is the difference between whatever in fact they spend and the $310 a month.
Now, insofar as the double deductions are concerned, that is equally illusory because of the fact that these are people who don't have any income.
These are college students who take time out from their college.
They don't have anything from which to deduct those amounts.
Unknown Speaker: It may be... it may be that the Mormon church is one example where the... maybe the problems of abuse or administration wouldn't be hard, but that might not be true of all the other situations where these kind of deductions might be claimed in connection with all sorts of other churches.
Mr. Lee: But wouldn't it be too bad if we lost this case and lost 160 years' worth of tradition because of problems that you might attribute to somebody else?
Unknown Speaker: Well, all you, you would just internalize this operation.
You would just get... you would just have the money come to the church.
Mr. Lee: Earmarked?
They won't let us do it that way.
Unknown Speaker: No, but you wouldn't have any problem.
You would just have... you would then accumulate the total funds from people to support your missionaries.
Mr. Lee: May I just respond to that, Mr. Chief Justice?
Unknown Speaker: No, I don't think it was a question.
Your time has expired.
Chief Justice Rehnquist: The case is submitted.