From martinottmann@yahoo.com Tue Dec 31 19:23:03 2002
The War against the IRS (1984 – 1992)

After 6 years of litigation the tax case between CSC and the IRS
finally came to a decision before the U. S. Tax Court ("CSC vs.
Commissioner of the IRS," No. 3352-78). On September 24th, 1984 the
court issued following judgement:

"Petitioner, a Church incorporated in the State of California, was
granted tax-exempt status in 1957 under Sec. 501(c) (3), I.R.C. 1954.

"In 1967, respondent sent petitioner a letter revoking its exemption
following an audit of petitioner's records which was in part sparked
by litigation involving the tax-exempt status of an affiliated Church
of Scientology. Subsequent to issuing the letter of revocation,
respondent conducted several audits of petitioner's records for
various tax years and also reviewed the tax status of several
affiliated churches.

"Petitioner was also investigated by several intelligence groups which
respondent specially formed during 1969 through 1975 to investigate
taxpayers allegedly selected by essentially political criteria. During
the period that petitioner's taxes were under administrative review,
petitioner conspired to prevent the IRS from determining and
collecting taxes due from petitioner and affiliated churches.

"Petitioner sold religious services, books, and artifacts according to
a fixed-fee schedule through its branch churches and franchises.
Petitioner's profits from these sales were not less than $
1,494,617.53 in 1970, $ 881,131.18 in 1971, and $ 1,707,287.17 in
1972. Petitioner maintained large cash reserves in a sham corporation
and in a bogus trust controlled by key church officials including
petitioner's founder.

"Held, petitioner was not the victim of selective enforcement of the
tax laws since the notice of deficiency was based on valid regulatory
considerations. Held, further, various other asserted constitutional
rights of petitioner not violated. Held, further, petitioner was not
operated exclusively for an exempt purpose under sec. 501(c) (3),
I.R.C. 1954, since petitioner had a substantial commercial purpose,
since its net earnings benefited key Scientology officials, and since
it had the illegal purpose of conspiring to impede the IRS from
collecting taxes due from petitioner and affiliated churches and thus
its activities, dictated at the highest level, violated well-defined
public policy."

In a first response to the decision the President of the "Church of
Scientology International" (CSI), Heber Jentzsch, denounced the
Internal Revenue Service as the "American Gestapo." He announced that
the decision would be appealed and that Scientology would continue to
"expose the crimes of the IRS." [Exh. No. 131] Shortly after
Jentzsch's declaration, CSI's "Office of Special Affairs" published a
series of advertisements in big newspapers "seeking information about
IRS-abuses" or "exposing their crimes" [Exh. No. 132]. OSA-writers
also would issue several very negative articles about the IRS in OSA's
own magazine "Freedom" over the next 9 years.

On July 9th, 1985 one of the follow-up suits of the FBI-raids was
dismissed after L. Ron Hubbard had failed to show up for a deposition
("FCDC vs. FBI et al.," No. CV 78-0107). The Scientology organization
of Washington, DC had sued several government agencies, alleging it
had been the victim of "an extensive campaign of government
harassment." In that suit the U.S. district court in Washington, DC
pronounced Hubbard as the managing agent of the Church of Scientology.
At this point, Hubbard had been in hiding for several years and the
Scientology organization claimed he had neither anything to do with
the management of organizations nor the burglaries in Washington.
Scientology appealed the decision, but the U.S. Appeals Court upheld
the earlier judgement on September 26th, 1986. The court specifically
stated with regards to the role of L. Ron Hubbard ("FCDC vs. FBI et
al.," No. CV 85-5885):

"From evidence adduced below, Hubbard appears to have maintained
control in administrative matters through high positions in such
entities as the Sea Organization, ‘an elite fraternity of
Scientologists.' Church of Scientology of California v. Comm'r, 83
T.C. 381, 389 (1984). Indeed, uncontested declarations before the
District Court leave little doubt about either the ecclesiastical or
administrative dimensions of Hubbard's authority during the period
from 1966 to 1982. …

"The Tax Court decision to which we just alluded, in denying the
California Church of Scientology tax-exempt status for the years 1970,
1971 and 1972, set forth detailed findings about Hubbard's relation to
that organization along with the numerous other Scientology
organizations. Church of Scientology v. Comm'r, supra. The Tax Court
harbored no doubt that Hubbard ‘kept control over' the policies,
actions, and even the finances of the California Church. …

"Beyond the overall dominance that he exercised over the Scientology
organizations during this earlier period, Hubbard was closely linked
to, if not in charge of, the activities for which appellees initially
sought his deposition. The primary evidence about these activities
emerges from the criminal prosecution in which seven members of the
church, including Hubbard's wife, were found guilty of conspiracy to
obstruct justice. In that trial, one defendant was found guilty of
conspiring illegally to obtain government documents, and another was
found guilty of theft of government property. See United States v.
Hubbard, 208 U.S. App. D.C. 399, 650 F.2d 293, 301 (D.C. Cir. 1980).
In a Stipulation of Evidence submitted in that case, the defendants
recounted a full-fledged campaign mounted by the Church of Scientology
and its affiliated organizations against the United States Government,
particularly the Internal Revenue Service. … The Stipulation indicated
that Hubbard ‘was, by virtue of his role as the founder and leader of
Scientology, overall supervisor of the Guardian's Office,' a
Scientology entity, which carried out these illicit activities. …
Indeed, the grand jury named Hubbard as an unindicted co-conspirator
in that case.

"The criminal case does not stand alone. The Tax Court decision to
which we previously referred denied the Church tax exempt status in
part because of this conspiracy by the Scientology organizations,
‘beginning in 1969 and continuing at least until July 7, 1977.'

"Finding that the Church of Scientology of California ‘filed false tax
returns, burglarized IRS offices, stole IRS documents, and harassed,
delayed, and obstructed IRS agents who tried to audit the Church's
records,' id., the Tax Court held that the California Church had
violated public policy and thereby lost entitlement to any exemption
which it might otherwise have enjoyed. …

"Abundant evidence supports the proposition that Hubbard continued in
his de facto position as head of the Church. Based on the evidence in
the record, the District Court rightly concluded that Hubbard was in a
position to provide information about the conspiracy on behalf of the
Scientology organizations for this purpose."

When the new management structure of Scientology with the "Religious
Technology Center" (RTC) as trademark holder and "Church of
Scientology International" as the new "mother church" was set up, it
was proclaimed by Scientology that the activities were in fact bona
fide religious. RTC, CSI and other new Scientology-corporations
consequently applied for tax-exemption with the IRS. The IRS
nevertheless initiated an investigation through its "Criminal
Investigations Division" in Los Angeles (CID) into the operations of
the organizations. Scientology countered the IRS-efforts by organizing
an anti-IRS front group, called "Coalition of IRS-whistle blowers" and
staging class action suits against the agency, initiated by
"IRS-victims" [Exh. No. 133].

Around the same time period, during Spring of 1985, Scientology made
public that it had run a covert operation against an ex-Scientologist,
Gerald Armstrong, who had been an informant of the CID in Los Angeles.
The previous year, in 1984, Armstrong had been approached by three
Scientology double agents, David Kluge, Daniel Sherman and Michael
Rinder, who had pretended to be part of a group of dissatisfied
Scientology-members (the "Loyalists") who wanted to take over the
Scientology-management and looked for his assistance.

Four "clandestine" meetings between Armstrong, Kluge and Rinder were
arranged during November 1984 at Griffith Park in Los Angeles, where
the potential take-over and a possible suit by the "Loyalists" against
the Scientology management were discussed. Unbeknownst to Armstrong
every meeting was videotaped by private investigator Eugene Ingram and
was used five months later as a provocation operation against the IRS
CID agents Al Lipkin, Alfonse Ristuccia and the three U.S Attorneys
Richard Greenberg, Thomas Doughty and Bracket Denniston [Exh. No.
134].

On July 28th, 1987 the U. S. Court of Appeals issued its ruling in the
Scientology tax case between CSC and the IRS ("CSC vs. Commissioner of
the IRS," No. 85-7324). It upheld the decision of the lower court in
1984 and stated:

"Internal Revenue Code @ 501 exempts certain organizations from
taxation.

"Section 501(c) (3) exempts: corporations and any community chest,
fund, or foundation, organized and operated exclusively for religious
… purposes, … no part of the net earnings of which inures to the
benefit of any private shareholder or individual.

"To qualify for exemption, a church must show that it is (1)
organized, and operated, exclusively for religious or charitable
purposes. Hall v. Commissioner, 729 F.2d 632, 634 (9th Cir. 1984).

"The Church strenuously argues that the trial court failed to
recognize it as a bona fide religion. This argument goes to whether
the Church meets the organizational test. Neither the Commissioner,
nor the Tax Court, nor this court questions that the Church of
Scientology
of California was organized for a bona fide religious purpose. The
only question before the court, is whether the Church met the second
requirement for tax-exempt status, the operational test.

"Four elements compose the operational test. First, the organization
must engage primarily in activities which accomplish one or more of
the exempt purposes specified in @ 501(c) (3). … Second, the
organization's net earnings may not inure to the benefit of private
shareholders or individuals. … Third, the organization must not expend
a substantial part of its resources attempting to influence
legislation or political campaigns. …

"Courts have imposed a fourth element. Organizations seeking exemption
from taxes must serve a valid public purpose and confer a public
benefit. Bob Jones University v. United States, 461 U.S. 574, 585-92,
76 L. Ed. 2d 157, 103 S. Ct. 2017 (1983). If an organization fails to
comply with anyone of these four elements, it will fail the
operational test and lose its eligibility for tax-exempt status.
Harding Hospital, Inc. v. United States, 505 F.2d 1068, 1072 (6th Cir.
1974).

"We conclude that the Church failed to establish that ‘no part of the
net earnings … inures to the benefit of any private shareholder or
individual …' 26 U.S.C. @ 501(c) (3). Because we may affirm the Tax
Court on this ground, we do not reach the questions of whether the
Church operated for a substantial commercial purpose or whether it
violated public policy. …

"We affirm the Tax Court decision upholding the Commissioner's
revocation of the Church of Scientology of California's tax exempt
status on the ground that a portion of its income inured to the
benefit of L. Ron Hubbard and others. We reject the Church's argument
that the notice of deficiency was constitutionally and
administratively defective. Finally, we uphold the Commissioner's
imposition of a penalty on the Church for failure to file the proper
returns."

In another tax case, where a public Scientology member sued the IRS,
when the agency did not allow "donations to the Church" as
tax-deductible contributions, the U. S. Appeals Court for the 9th
Circuit upheld the decision of the IRS [Exh. No. 135].

Around that time another Appeals Court, this time in St. Louis, ruled
that such donations were in fact tax-deductible, while another court
in Boston decided similar as the one in California. Two years later,
on June 5th, 1989, the U. S. Supreme Court ultimately decided in the
California tax case that "donations" towards the Church of Scientology
were not tax-deductible ("Hernandez vs. Commissioner of the IRS," No.
87-963):

"Payments to the Church's branch churches for auditing and training
services are not deductible charitable contributions under § 170.

"a) Petitioners' payments are not ‘Contribution(s) or gift(s)' within
the meaning of § 170. The legislative history of the ‘contribution or
gift' limitation reveals that Congress intended to differentiate
between unrequited payments to qualified recipients, which are
deductible, and payment made to such recipients with some expectation
of a quid pro quo in terms of goods or service, which are not
deductible. To ascertain, whether a given payment was made with such
an expectation, the external features of the transaction must be
examined. Here external features strongly suggest a quid pro quo
exchange of petitioners' money for auditing and training sessions,
since the Church established fixed prices for such sessions in each
branch church; calibrated particular prices to sessions of particular
lengths and sophistication levels; returned a refund if services were
unperformed; distributed ‘account cards' for monitoring pre-paid but
as-yet-unclaimed services; and categorically barred the provision of
free services."

Still in 1987, Scientology finally lost its FOIA-suit against the IRS,
which was originally filed on December 18th, 1980 at the U.S. District
Court in Washington ("CSC vs. IRS et al.," No. CV 80-03239).
Scientology requested in that suit:

"1. All documents or records ‘relating to or containing the names of
Scientology, Church of Scientology, any specific Scientology church or
entity identified by containing the words Scientology, Hubbard and/or
Dianetics in their names, L. Ron Hubbard or Mary Sue Hubbard,' which
could be located in a number of systems of records or files
specifically identified in the FOIA request, ‘including but not
limited to those located at the National Office, Regional Offices,
Service Centers, District offices or Local IRS offices.'

"2. All documents generated, received or which otherwise came into the
possession of the IRS subsequent to the preparation of an index in a
tax case involving the Church of Scientology of California pending in
the United States Tax Court, … ."

The U. S. Supreme Court ultimately denied Scientology the right to get
that information and stated that the IRS "has no duty under the
Freedom of Information Act" to disclose internal records. [Exh. No.
136]

In another setback for the Scientologists on July 8th, 1988 the IRS
denied three corporations, CST, RTC and CSI, tax-exempt status [Exh.
No. 137]. In a lengthy letter the IRS summarized the major events in
the history of Scientology's tax-exempt applications and concluded the
finding by stating:

"1. You have failed to establish that you are operated exclusively for
exempt purposes as required by section 501 (c) (3) of the Code. You
have not demonstrated that your activities and purposes conform to
exempt purposes and activities as required by section 501 (c) (3) of
the Code.

"2. You are operated for a substantial non-exempt commercial purpose.

"3. You are operated for the benefit of private interests and your net
earnings to the benefit of private individuals.

"4. You have failed to establish that you are not operated for the
benefit of private interests and that your net earnings do not inure
for the benefit of private individuals."

In response, CST filed suit against this decision at the U. S. Claims
Court on October 6th, 1988 ("CST vs. United States," No. 88-581).

In 1989/'90 the FBI conducted an investigation into the activities of
Scientology, due to allegations of blackmail brought up by ex-members
[Exh. No. 138] but closed the case after several months of
investigating.

After its application for tax-exemption was denied, CSI submitted a
new request on March 15th, 1990 with the IRS' National Office in
Washington. In its later application from 1993 it stated that in the
course of the determination an IRS working group was formed in 1991
"to consider the exempt status of CSI and all churches of Scientology
and all related organizations" [Exh. No. 139, Excerpt].

During that year, CSI launched another media campaign against the IRS,
this time in alliance with a sweeping attack against "Time" magazine
and the pharmacy giant Eli Lilly in retaliation for a negative article
that had appeared in a May issue of Time [Exh. No. 140].

According to a public speech from October 1993 by David Miscavige, the
head of RTC, the Scientologists filed another suit (for seeking $ 128
million) against the IRS during that period in the early 1990s,
alleging misconduct in handling Scientology's tax-exempt applications.

Additionally, four senior executives of Scientology, including
Miscavige, filed FOIA-suits against the IRS and the FBI at the U. S.
District Court in Los Angeles:

- Mark Rathbun vs. IRS, No. CV 91-00844, filed on February 14th, 1991;
- David Miscavige vs. IRS, No. CV 91-03721, filed on July 10th, 1991;
- Norman Starkey vs. IRS, No. CV 91-04158, filed on August 2nd, 1991
and
- Lyman Spurlock vs. FBI, No. CV 91-05602, filed on October 15th,
1991.

Last but not least, on August 12th, the Church of Scientology
International filed a complaint for discrimination against the IRS
("CSI vs. IRS & William Connett," No. CV 91-0070 (JHG)). A later U. S.
District Court opinion stated:

"Plaintiff, … , initiated this action against the Internal Revenue
Service (‘IRS') and William Connett (‘Connett'), the IRS
representative in Paris and the IRS District Director for the Los
Angeles, California office from 1973 to 1986, alleging, inter alia,
that defendants interfered with the ability of Plaintiff's members to
obtain valid entry visas under the immigration laws of the United
States by furnishing to United States consular officials in Europe
false and misleading information regarding CSI, the Scientology
religion, and the legal requirements for the entry of such members
into the United States."

The conflict arose when two Belgian Scientologists applied for visas
at the U. S. embassy in Brussels in order to do Scientology training
in Los Angeles. The consular official Jones denied the request, after
having been informed by IRS representative in Paris, William Connet,
that Scientology was not found tax-exempt by U.S. courts. The Legal
Officer of the local Office of Special Affairs, Martin Weightman,
however relied on a telex sent by the State Department, informing all
embassies that it would recognize the Scientology organization in the
U. S. as a "bona fide religion." The two Scientologists finally
received "temporary visas" and apparently could later enter the United
States.

In the above-mentioned speech, Miscavige revealed a particular detail
of Scientology's dealings with the IRS that happened in 1991 and that
later caused some speculation about its importance for the subsequent
course of events:

"In October of 1991, while this war was raging at its apex, Marty
Rathbun and I were in Washington D.C. to attend one of these court
hearings I mentioned. It was to be the next day. We had just finished
a lunch meeting and our next appointment wasn't for a couple of hours.
In other words – we had some spare time on our hands. That's not
something we're accustomed to! So we thought at least we could create
some mischief. We told the lawyers we'd see them in an hour or so and
that we would be down at the IRS building. Of course they had a good
chuckle as we left the room. Off we proceeded to 1111 Constitution
Avenue – which if you didn't know is the address of the National
Headquarters of the IRS. We presented ourselves at security at the
front door, signed the visitors log and informed them we were there to
see Fred. They asked, ‘Fred who?' We answered, ‘Fred Goldberg of
course, the commissioner of the IRS.' ‘Is he expecting you?' they
asked. ‘No', was our response. ‘But if you phone him on the intercom
and tell him we are from the Church of Scientology, I am sure he would
love to see us.' Have you ever wondered whether we were really
impinging, when we have spoken of the IRS at previous events? Well –
if so – shame on you.

"We did meet with the commissioner, and, as the saying goes – the rest
is history."

The next year saw, for the time being, the last legal defeat for the
Scientologists against the IRS. On June 29th, 1992 the U. S. Claims
court confirmed the decision of the IRS that CST was not operated for
tax-exempt purposes.

With regards to CST's alleged "religious activity" of archiving
Hubbard's writings, the court stated:

"1. Activity Cannot be Confused with Purpose

"CST has assiduously developed a record which demonstrates that most,
if not all, of its prior activities are directed at preserving
scripture. CST does not sell or market archived material, or make any
profit on its activities. But even if CST could show that 95 per cent
of its employees did nothing but archive Scientology documents, and
only the remaining five percent were in charge of CST's property
interests and finances that alone would not be enough to secure
tax-exempt status. Congress did not intend for mere quantity of
dedicated resources to be the deciding factor in whether an
organization is operated for exclusively exempt purposes. Section
501(c) (3) contemplates that the IRS (and the court, if necessary)
will inquire into the reality of an organization. ‘The bare fact that
approximately half of each group is composed of not-for-profit
organizations does not compel the conclusion that there is absent a
substantial nonexempt purpose.' Copyright Clearance Ctr. v.
Commissioner, 79 T.C. 793, 809 (1982); See also Better Business
Bureau, 326 U.S. at 283.

"CST confuses activity with purpose. The law does not. As the Tax
Court has held, ‘The operational test focuses on the purpose and not
on the nature of the activity.' Goldsboro Art League v. Commissioner,
75 T.C. 337, 343 (1980). The Commissioner, and the court, are
permitted to consider not just an organization's activities, but also
to inquire into its purposes. The fact that an organization's
activities have religious overtones and do not produce profits is no
assurance those activities will be tax-exempt. ‘The critical inquiry
is whether petitioner's primary purpose for engaging in its sole
activity is an exempt purpose, or whether its primary purpose is the
non-exempt one of operating a commercial business producing net
profits for petitioner.' B.S.W. Group, Inc. v. Commissioner, 70 T.C.
352, 359 (1978); accord Christian Manner Int'l, Inc. v. Commissioner,
71 T.C. 661, 668 (1979).

"In evaluating the real purpose of a transaction, the Supreme Court
has cautioned against uncritical reliance on form as against function.
Gregory v Helvering, 293 U.S. 465, 470 (1935), involved a scheme to
avoid taxation of corporate distributions by invoking a code provision
applicable to reorganizations: The whole undertaking, though conducted
according to the terms of subdivision (B), was in fact an elaborate
and devious form of conveyance masquerading as a corporate
reorganization, and nothing else. The rule, which excludes from
consideration the motive of tax avoidance is not pertinent to the
situation, because the transaction upon its face lies outside the
plain  intent of the statute. To hold otherwise would be to exalt
artifice above reality and to deprive the statutory provision in
question of all serious purpose.

"In like fashion here, CST must demonstrate that it was organized for
an independent and bona fide purpose. Given the prior history of
Scientology and the peculiar circumstances of CST's birth, it is
appropriate to look beyond the flurry of archiving activity and
inquire into whether the very existence of CST was brought about
primarily to serve the non-exempt ends of other Scientology
organizations. Although CST is entitled to minimize its own taxes, it
would be a misuse of I.R.C. @ 501(c) (3) if its primary raison d'etre
was to shield the income of other organizations from tax."