By DOUGLAS FRANTZ
Published: December 31, 19971
The Church of Scientology paid $12.5 million to the Federal Government in 1993 as part of a settlement with the Internal Revenue Service that granted tax-exempt status to the church and ended a long and bitter battle with the agency.
The payment was part of a landmark agreement, whose details had been kept secret until yesterday, that saved the church tens of millions of dollars in taxes and provided Scientology with an invaluable public relations tool in its worldwide campaign for acceptance.
In addition to the $12.5 million payment, the agreement required the church to create an internal oversight committee of high-level church officials to monitor its compliance with tax laws and report annually to the tax agency for three years, according to a copy of the 76-page settlement agreement.
As part of the settlement, the church agreed to drop its lawsuits against the Internal Revenue Service and its officials and to stop helping church members who, along with the church itself, had brought 2,200 lawsuits against the agency and its officials over the years. In exchange, the tax agency stopped its audits of 13 major Scientology organizations, dismissed tax penalties and liens against some church organizations and granted tax-exempt status to 114 Scientology-related entities in the United States.
The outline of the agreement was announced by the tax agency in October 1993. But the details had been kept secret as private taxpayer information. Those details were first disclosed yesterday by The Wall Street Journal and copies of the agreement were posted on at least two Internet sites, including one operated by The Journal.
The agreement, signed on Oct. 1, 1993, represented a sharp reversal for the tax agency. For 25 years, the agency had refused to provide Scientology with the blanket tax exemption accorded bona fide churches.
The agency had contended that Scientology operated as a for-profit business that enriched some church officials. In response, the church had mounted an aggressive campaign against the revenue service and individual agency officials. In a campaign first described last March in The New York Times, private detectives dug into the backgrounds of agency personnel and the church helped finance an organization of agency whistle-blowers. According to the settlement document, two church leaders, David Miscavige and Mark Rathbun, approached the agency in October 1991 seeking to negotiate a resolution of the longstanding dispute.
Fred T. Goldberg Jr., the Commissioner of Internal Revenue at the time, met with the church officials and indicated that he, too, wanted to resolve the outstanding issues, the document said. Over the next two years, the agency conducted an exhaustive inquiry into the finances and operations of the church. The result was the final agreement reached in October 1993.
The Church of Scientology was founded in the 1950’s by L. Ron Hubbard, a science fiction writer who died in 1986. Its adherents believe that Scientology’s self-help techniques and counseling sessions, known as auditing, can help people live more productive and satisfying lives. But the cost of the auditing sessions, which can run into thousands of dollars an hour, have drawn criticism as have the church’s aggressive tactics toward its critics.
The newly disclosed details of the agreement show that the church agreed to more Federal Government intrusion than perhaps any religious organization has ever allowed.
Along with creating the oversight committee, called the Church Tax Compliance Committee, Scientology agreed that the tax agency could impose penalties of as much as $50 million on specific church organizations if they repeatedly spent money on noncharitable purposes from the time of the agreement through the end of 1999.
Mr. Rathbun, a senior Scientology official and member of the oversight committee, said the church had nothing to hide. ”When you are as pure as the driven snow, it doesn’t mean anything,” he said of the oversight. ”We’re doing what we have always done, and that is operating for religious and charitable purposes.”
Frank Keith, a spokesman for the revenue service, declined to comment on any details of the settlement because of the taxpayer privacy law. He said only that the agency had determined after a long inquiry that Scientology was entitled to its tax exemption. The settlement document does not disclose how much in back taxes the agency had sought from the various Scientology entities under investigation.
But Mr. Miscavige, the church’s highest ecclesiastical leader, told a gathering of members in 1993 that the tax bill could have been as much as $1 billion. Along with dismissing the audits and erasing any back-tax liability, the revenue agency reversed an earlier ruling and said that Scientologists could deduct from their taxes the money that they paid to the church for auditing sessions.
In recent years, the church has used the tax agency’s decision both to raise money from its members and to counter criticism from foreign governments about its practices.
It is not known how much the tax agency has spent investigating Scientology or defending itself against the hundreds of lawsuits filed by the church and its members.
When the IRS granted tax exemptions to the church, it did so mainly on the basis of what Scientology did with its money.
WASHINGTON — It might be easier for a camel to walk through the eye of a needle than for the IRS to judge the merits of a religion. So when it comes to considering tax exemptions, the agency sticks to what it knows: money.
For the Church of Scientology, which won a series of tax exemptions earlier this month, that meant proving no one was pocketing the millions of dollars in donations the organization collects for religious services.
It also had to assure the Internal Revenue Service that the church operates “exclusively for religious or charitable purposes.” And, as part of its deal with the IRS, the Scientologists agreed to drop a group of nettlesome lawsuits against the tax agency.
Those were the main issues that led the IRS to reverse decades of decisions against the Scientologists and grant exemptions to 153 Scientology churches, missions and corporations earlier this month, according to the IRS, documents in the case and private tax attorneys.
Despite the explanations, though, some taxpayers and tax lawyers remain puzzled.
The Church of Scientology is, after all, an organization that bugged IRS offices, saw 11 of its members sent to prison and was found to be financing founder L. Ron Hubbard’s lifestyle aboard a yacht.
“Either Scientology changed very basically or the IRS changed. Or maybe both,” former IRS commissioner Donald Alexander said of the settlement.
“I hope that the IRS did not give in to intimidation,” Alexander went on, alluding to the years in the 1970s when his agency battled the church. “By intimidation, I mean 2 o’clock in the morning telephone calls.”
To sum up, Alexander said, “I have great reservations, based on the public record and published stories, about this organization’s activities and whether this was, is, or remains a money-making cult.”
Sheldon Cohen, commissioner when the IRS first revoked a Scientology tax exemption in 1967, is surprised with the reversal, too, though he said IRS officials believe no one is profiting financially.
“They made the case that they are no longer sharing with the Hubbard family, and they are otherwise deserving of the exemption,” said Cohen, a tax lawyer in Washington, D.C.
The question of private enrichment — called “inurement” in legal jargon — is at the center of most tax-exemption disputes, lawyers say. In 1984, the U.S. Tax Court ruled that Scientology founder Hubbard was profiting from the Church of Scientology of California, and therefore blocked an exemption for what was then the organization’s “mother church.”
“It has made a business out of selling religion,” the court wrote, “It has diverted millions of dollars through a bogus trust fund and a sham corporation to key Scientology officials and it has conspired for almost a decade to defraud the U.S. government by impeding the IRS from determining and collecting taxes from it and affiliated churches.”
“Were we to sustain the petitioner’s exemption,” the court wrote, “we would in effect be sanctioning petitioner’s right to conspire to thwart the IRS at taxpayer’s expense.”
A lot has happened in the years since.
Hubbard died in 1986. The Scientologists insist they have kicked out the people who were involved in the Church’s notorious dirty-tricks operation. In another step toward legitimacy, the church hired former U.S. government tax lawyers who filed extensive responses to IRS inquiries about Scientology’s inner workings.
IRS spokesman Frank Keith said that based on the information the Church provided on its organizational and financial structure, the agency was able to determine there were no “issues of inurement” in the Scientology cases.
He said federal privacy laws prohibited him from providing a more detailed explanation of the tax exemption. He would not even say, for example, whether IRS Commissioner Margaret Richardson — an appointee of President Clinton — approved the agreement.
Records in the case indicate John Burke, the IRS’ assistant commissioner for employee plans and exempt organizations, invited the latest round of negotiations with the Scientologists in 1991, during the Bush administration. Burke, a career IRS employee, retired last month and could not be reached for comment.
As for Scientology’s opinion on why the IRS relented, spokesman Marty Rathbun said his church has “always been legitimate, and nothing’s changed.”
“The fact of the matter is they put us through more scrutiny than any other tax-exempt organization, including the Poynter Institute, which owns the St. Petersburg Times,” Rathbun said.
(The Poynter Institute for Media Studies, a school for journalists, is a tax-exempt organization. However, the newspaper pays taxes on its profits and contributes to the institute.)
There is no doubt the Church of Scientology underwent scrutiny. The IRS released nine boxes of material from the case that includes the questions that examiners asked and the lengthy responses from the Church of Scientology.
The documents do not make clear the total amount of money Scientology takes in through its numerous corporate entities. Records from 12 Scientology affiliates, all but one for 1992, list $275-million in assets.
Among the numerous questions from the IRS were inquiries about the cash flow of the church’s affiliates, the compensation the church’s top officials received, living expenses of church staff and the organization’s checkered past.
For the most part, the church lawyers’ written answers were direct. At other times, the responses blasted the government, or proselytized about Scientology.
“It is time to end this shameful IRS involvement in trying to destroy Scientology,” the Scientology legal papers said. “Why must the Service follow in the footsteps of the Nazis, who spread black propaganda about the Jews so that the German people would be inured to the massacre of millions?”
“Many such dogmas have borne the imprimatur of government — the indestructibility of the Roman Empire, the supremacy of the Aryan race, the inevitable triumph of communism over capitalism, the legal segregation of the races,” the brief said. “History, however, always has proven otherwise: Rome fell, the Nazis were defeated, communism collapsed and apartheid was unmasked for the evil it is. History is on our side today.”
In its filings, Scientology complained the IRS was applying what it called a “double standard” to the self-styled religion. As an example, church lawyers pointed out that the IRS extends a tax exemption to the Catholic Church despite accusations that some Catholic priests have molested children.
The IRS has, however, refused other church’s tax-exemption requests. For example, it rejected a request by a group called “Church by Mail,” run by two reverends who mailed minted sermons to several million households. The two collected excessive salaries from the advertising agency that printed and mailed their sermons, according to court records.
That was proof of “inurement” and was enough to reject the exemption for the Church by Mail. And the recently released documents show that the IRS was similarly interested in the biggest money-makers in Scientology.
The IRS wanted to know the compensation of the highest-ranking official, David Miscavige, and his family. The Scientology lawyers responded that in 1991, Miscavige was paid $62,683, his wife made $94,042 [Correction (10/27/93): An article about the Church of Scientology on Sunday overstated the salary for the spouse of top Scientology official David Miscavige. The 1991 salary for Miscavige’s wife, Michele, was $31,359, according to records the Church of Scientology filed with the Internal Revenue Service] and other family members were paid $11,082.
It turns out, though, that the highest-paid Scientologists are recruiters and fund-raisers who the lawyers say aren’t on the staff of the church. The recruiters and fund-raisers earn a commission of money they collect from new Scientologists and donors, according to the records.
“This practice defrays the cost of proselytization and obtains new members for a church. It extends the influence of the church into society by encouraging individual proselytization,” the Scientology lawyers explained.
The biggest 1991 salary: Ken Pirak earned $407,052 through fund-raising commissions, according to the documents.
If that sounds like a lot of money, the organizations themselves are collecting millions by charging Scientologists for a religious service called “auditing.” The process is essentially an ascending series of personal-evaluation sessions that, according to church doctrine, clear a person of bad thoughts. Each step of auditing intensifies and costs more.
Paying for religious services sounds non-traditional, but tax lawyer Cohen reasons that other places of worship have similar setups.
“For example, various denominations charge for seats” in a church, Cohen said. “I’ve seen (pews) in Episcopal churches with a family name on it: If you’re there, you get that seat.”
In his own case, Cohen says he receives a bill for dues from his synagogue. His name is on a seat in his synagogue as well.
Nonetheless, the Scientologists seemed sensitive to the question and, in their filings with the IRS, sought to assure that the church didn’t charge for absolutely everything.
“The amount of free religious services that Churches of Scientology provide is extensive,” the church wrote. Ever ready with numbers, the lawyers provided a statistical study of three church affiliates: “They found that they minister an average of 27 to 33 percent of their religious services without charge.”
In their inquiry, IRS examiners learned that the Scientologists are spending $114-million to archive L. Ron Hubbard’s writings and protect them in an underground storage vault. They’re spending millions more on advertising and renovations of Scientology facilities in Clearwater and elsewhere.
Cohen, the tax lawyer, noted that spending on such costly vaults is not a big issue in determining a church’s tax exemption.
“A church is a church. Some churches have very plain buildings, and a very meager house for their minister, and some have very elaborate buildings. . . . That’s a judgment,” Cohen said.
As for the underground vaults, he said, “If that makes them feel better, God bless ’em. You start judging that, and you’re in the religion business.”
Yet another area the IRS probed was the Church of Scientology’s troubled past.
The “Guardian Office,” set up to harass the government, has been shut down, the Church of Scientology says. “Any individuals who were found at that time to be on staff were dismissed and informed never to apply for re-employment,” the Scientology lawyers wrote.
New hires are checked against a list of former Guardian Office criminals, the lawyers wrote.
The Scientologists also have been busy in civil court, in both suing and getting sued, and the IRS was curious about that, too. The Scientology attorneys listed the lawsuits, including those from former members seeking donations with this explanation: “Our consistent view has been that the civil litigants are solely motivated by greed.”
As for the lawsuits it files, the church attorneys wrote, “We have to litigate seriously because we have been subjected to great persecution.”
The Scientologists filed as many as 100 lawsuits against the IRS that apparently strained the agency’s resources, according to published reports.
One tax lawyer said IRS officials had groused privately about the time spent on the lawsuits. “It’s consumed a fair amount of resources in the exempt organizations (division) over there to deal with them year after year after year,” said the lawyer, who declined to be quoted by name. I can see the motivation on the part of the service to work things out.”
Scientology spokesman Rathbun says the lawsuits were all settled as part of the agreement. IRS spokesman Keith would only say that “a variety of outstanding tax and litigation issues” were resolved.
[Picture / Caption: Founder L. Ron Hubbard died in 1986.]
[Picture / Caption: The Church of Scientology Flag Building: The church is spending millions on advertising and renovations of facilities in Clearwater and elsewhere.]
- Retrieved from http://www.xenu-directory.net/news/library-item.php?iid=1107 ↩
By STEPHEN LABATON,
Published: October 14, 1993
WASHINGTON, Oct. 13— The Government said today that it had agreed to grant a tax exemption to the Church of Scientology and more than 150 of its related corporations, ending one of the longest-running tax disputes in American history.
“This puts an end to what has been an historic war,” said Marty Rathbun, president of a Scientology organization that received a tax exemption. “It’s like the Palestinians and the Israelis shaking hands.”
Officials at the Internal Revenue Service and the Scientology group declined to spell out the details of the settlement and would not explain why it had finally been reached after four decades of costly and bitter court fights.
People familiar with the group’s closely held finances said the tax exemptions could save the organization at least tens of millions of dollars a year in taxes.
The exemptions were granted as part of a larger settlement between the Government and the Scientology organizations that ends legal disputes that go back to the founding of the church 39 years ago. Church officials said the settlement would close more than a dozen lawsuits.
Officials at the Internal Revenue Service said the decision granting the Scientologists tax-exempt status does not change the standards for determining when an institution is to be considered religious for tax purposes. They also said that the ruling would not affect how other groups are treated.
But some tax lawyers who have advised organizations seeking tax-exempt status said the ruling would make it easier for them to argue their cases.
The church’s California branch had a Federal tax exemption at one point but lost it 26 years ago, and most of the other related organizations never had exemptions. For decades, the Government has said that although Scientology can be considered a religion, its affiliated organizations had operated as businesses for the financial gain of the church’s leaders, most notably L. Ron Hubbard.
Mr. Hubbard, who founded the group in the 1950’s after his book “Dianetics” became a best seller, responded to the Internal Revenue Service’s challenge by making anti-Government statements that became part of the church’s dogma. And after Mr. Hubbard died in 1986, other Scientology leaders, including its top official, David Miscavige, continued to preach against the Government and the tax collectors. Charitable and Religious
But today, Frank Keith, a spokesman for the Internal Revenue Service, said that as part of the settlement the Government had decided to classify the sprawling empire as a charitable and religious organization.
Mr. Keith said the group was notified of the decision on Oct. 1 and that it followed a two-year review of financial statements and other information provided by the organizations about their structure and purposes. He would not say whether the final decision had been made by the new Commissioner of the Internal Revenue Service, Margaret M. Richardson, who would normally have to approve any large settlement.
The ruling means that the church and more than 150 related educational and counseling groups will no longer have to pay Federal income taxes. Church members may also deduct their membership dues from their taxes. Mr. Rathbun said that the groups did not expect to receive refunds of back taxes because they had not been assessed for many of the years that they were contending to be a religious organization.
Mr. Rathbun was unusually conciliatory toward the I.R.S. today. He said the church had prevailed after what he called “an objective review” under the auspices of John Burke, an assistant commissioner who heads the agency’s Employee Plans and Exempt Organizations division.
The Church of Scientology has branches around the world and has its headquarters in Los Angeles. It calls itself a “new religion,” one not based on the worship of a god, but rather one that purports to teach members how to improve the quality of their lives. Instead of salvation, it promises to rid the mind of mental obstacles to happiness and help members improve the world.
But some courts and many former members have called the organization a sham, saying it relies on religious pretenses to mask a highly profitable business. Membership in Dispute
The group claims a membership of eight million, although former members say that those figures are grossly inflated and that the total is probably closer to 50,000.
The Federal Government recognized the Church of Scientology of California as a tax-exempt religious organization in 1957, but revoked that exemption in 1967. Its decision led to a wave of litigation by the church and the Government over various issues, like the church’s request under the Freedom of Information Act for Government files, to the Government’s attempts to assess the organization.
In 1984, a Tax Court concluded that the church had “made a business out of selling religion,” and that Mr. Hubbard and his family had diverted millions of dollars of church funds. And a Los Angeles Superior Court judge called Mr. Hubbard “a pathological liar” who seemed gripped by “egotism, greed, avarice, lust for power and vindictiveness and aggressiveness against persons perceived by him to be disloyal or hostile.”
Court documents showed that the church had an extensive project to infiltrate Government agencies in the United States and more than 30 countries to suppress investigations of the organization. Ultimately, 11 church leaders, including Mr. Hubbard’s wife, Mary Sue, served prison terms for the wiretap of an Internal Revenue Service office and other crimes.