Did the cult Scientology bludgeon the IRS into a billion dollar tax revenue give-away?
A secret, unprecedented tax deal the Internal Revenue Service (IRS) made with the Church of Scientology in 1993 was recently exposed by the Wall Street Journal and New York Times. The questionable means by which Scientology obtained this secret deal has captured the interest of tens of millions of U.S. taxpayers, major worldwide corporations with U.S. tax liabilities, and diverse special interest groups with concerns ranging from taxation to religion to separation of church and state.
The New York Times reported that in 1993 David Miscavige, Scientology's leader, told a gathering of Scientologists that Scientology's U.S. tax bill could have been as much as one billion dollars. But according to the terms of the secret IRS deal, Scientology did not have to pay one billion dollars, and that was just the beginning of Scientology's tax windfall.
The Wall Street Journal just disclosed the confidential 76-page agreement through which Scientology was given previously unprecedented tax relief.
What Scientology got in its secret IRS deal
- The IRS agreed to dismiss all tax penalties and liens against Scientology organizations for an undisclosed number of years before 1993.
- The IRS would grant tax-exempt status to 114 Scientology-related entities in the U.S. This stipulation itself gives Scientology an ongoing financial benefit of an estimated $100 million per year.
- The IRS would drop its tax audits of the mother church, the Church of Scientology International (CSI), and 12 other Scientology organizations.
- Scientology would receive a special religious education tax deduction for its members. Scientologists can deduct tens -- sometimes hundreds -- of thousands of dollars per year for their private religious education. This kind of religious education deduction appears not to be available to Catholics, Protestants, or Jews sending their children to private religious schools. The Tax Notes Journal published by the prestigious Tax Analysts' organization, a nonprofit organization which provides information relating to U.S. tax laws, also noticed this most unusual inequity. According to Tax Analysts, The IRS's Revenue Ruling 93-73 may give a tax break to the Church of Scientology which is not shared by other churches.
- The IRS would cancel payroll taxes and penalties it had assessed against church entities and officials.
- The IRS's Exempt Organizations Technical Division was "instructed not to review the exemption applications filed by the Church of Scientology and its affiliates for compliance with non-profit IRC 501(c)(3) tax regulations."
- The IRS agreed not to audit the church for any year before 1993 and dropped its litigation in pursuit of church records.
What the IRS and U.S. taxpayers got in return
- Scientology agreed to drop the 2,200 lawsuits it had brought against the IRS and IRS officials, and to stop helping church members in filing similar lawsuits.
- Cash-rich Scientology paid the IRS a token $12.5 million for all its tax bills, about 1% of the estimated one billion dollar tax bill. Those angered by this secret deal are loudly asking if it is legal. Wouldn't common U.S. taxpayers or corporations have to first prove near-insolvency to get a negotiated tax payment reduction? And wouldn't the reduction normally be a great deal more than 1% of the estimated tax liability deal Scientology got?
- Scientology agreed to set up an internal tax compliance mechanism. This internal tax compliance mechanism has now issued policies barring all Scientologists from religious salvation if they don't comply with IRS tax regulations. This marks an intrusion by government tax enforcement into religious practices that has alarmed groups supporting the separation of church and state.
To understand the unprecedented scope of the this secret IRS deal and the growing allegations of foul play surrounding the means by which this secret deal was extracted from the IRS, one should understand some of the context and history of Scientology's previous dealings with the IRS.
Scientology's history of tax fraud
In 1969, the IRS's Court of Claims issued a ruling on the case known as Founding Church of Scientology v. United States (188 Ct. C1. 490, 412 F. 2d 1197). The case involved the then mother church of Scientology. Scientology was denied religious tax-exempt status by the IRS because payments were disguised and a portion of Scientology's income was secretly going to Scientology's founder, L Ron Hubbard, and his family.
Fifteen years later in 1984, the IRS's tax court decided another Scientology case, the Church of Scientology of California v. Commissioner (104 S.Ct. 2136,2142 n.4). The case concerned the "new" Scientology mother church for the years 1970 through 1972. Again Scientology was denied tax-exempt status for covertly funneling money to Hubbard and his family, this time through dummy and sham corporations. This more recent asset-skimming during the 1970's involved money laundering through Panama and then through Swiss and other foreign bank accounts. In this decision, the court stated:
"OTC [Operation Transport Corp. Ltd.], was a sham corporation controlled by L Ron Hubbard and petitioner [CST] (p. 399)… Its board of directors lacked bona fides (p. 399)… To disguise these payments as debt repayment and to conceal the OTC sham a cover story was developed (p. 439)… In pursuit of the conspiracy, petitioner filed false tax returns, burglarized IRS offices, stole IRS documents, and harassed, delayed, and obstructed IRS agents. Petitioner gave false information to, and concealed relevant information from, the IRS about its corporate structure and relationship to OTC… CHURCH MEMBERS AT THE HIGHEST LEVELS OF THE HIERARCHY, NOT JUST ORDINARY CHURCH MEMBERS, PARTICIPATED IN THE CONSPIRACY (emphasis added, p. 505-506)." [From Church of Scientology v. Commissioner of Internal Revenue, 83 T.C. 381 Aff'd, 823 F.2d 9th Cir. (1987) cert. den. 486 U.S. 108 S. Ct. 1752 (1988). Also see Hernandez v. Commissioner of Internal Revenue.]
Scientology persisted in its quest for religious recognition and tax-exempt status. It filed again under a new, supposedly reformed mother church, the Church of Spiritual Technology (COST). This new corporate entity was formed in part from assets stripped from the Church of Scientology of California (the previous mother church already turned down by the IRS). On July 8, 1988 the IRS again denied tax exempt status in a ruling called the "Final Adverse Ruling." And again, new and intermediary dummy or shell corporations were found to have funneled money to L Ron Hubbard for his private benefit, until he died in 1986.
Quotes from the Final Adverse Ruling
- "The same persons who were in charge of Scientology prior to Mr. Hubbard's death hold positions of control or influence in some of these new organizations...Thus as happened in the Church of California case, the income of an allegedly exempt organization, (Church of Spiritual Technology should it obtain recognition of exemption), will be passed through a for profit corporation which is controlled by persons who also hold positions of influence in the Scientology structure....
- "Such self-dealing does not lose its identity as private benefit and inurement merely because it is conducted through intermediary individuals and\or organizations." [IRS's Final Adverse Ruling for Church of Spiritual Technology (COST), July 8, 1988, pages 8-10].
- "The California case also demonstrates inurement... amid continuous representations denying control by and benefit to Mr. Hubbard, and a tenacious denial of the actual state of the organization's actual affairs in the face of overwhelming evidence establishing the true nature of the organization's operations." [IRS's Final Adverse Ruling for Church of Spiritual Technology (COST), July 8, 1988, page (p. 4)].
- "Mr. Hubbard (the founder of Scientology) died on January 24, 1986. But his death did not alter the history of Scientology's prior operations. Moreover the same individuals who controlled Scientology operations prior to Hubbard 's death, and who participated in arrangements which resulted in inurement and private benefit continue to control your operations and those of other top level Scientology organizations after Mr. Hubbard's death." [IRS's Final Adverse Ruling for Church of Spiritual Technology (COST), July 8, 1988, page (p. 4)].
The strange episode of the MCCS project
A set of transcripts emerged containing dialogues from meetings of top Scientology executives as they planned a sham Scientology corporate structure. These transcripts, from recordings of what was known as the "MCCS project," were remanded from the Supreme Court and the 9th Circuit Appeals court in the Zolan case on June 20, 1990. The court ruled:
"The purpose of the MCCS project was to cover up past criminal wrongdoing… The MCCS project involved the discussion and planning for future frauds against the IRS in violation of 18C USC 371… The figures involved in the MCCS admit on tape they are attempting to confuse and defraud the U.S. government."
Scientology tried to use the attorney-client privilege to bar the use of the MCCS tapes as evidence against them. The court ruled that, "The purpose of the crime fraud exception is to exclude such transactions from the protection of the attorney-client privilege." [9th Circuit Appeals, June 20,1990, CV 85-444- HLH].
Based on Scientology's history of intimidation and perseverance, how far would the organization go and how much would it spend to bludgeon the IRS into submission if more than a billion dollars was at stake?
How the secret deal was done: Scientology obtains tax-exempt status
After repeatedly and justifiably denying Scientology's tax-exempt status, the IRS suddenly reversed its position in 1993 with the secret settlement which granted Scientology religious status and canceled most of the organization's huge tax debt. As outrageously unfair as this secret deal appears, the means by which Scientology obtained it may be even worse.
- Firstly, Scientology brought 2,200 lawsuits against the IRS and IRS officials.
Scientology has a 40-year history of bringing scores of lawsuits against perceived adversaries to silence or bend them to its fanatical will. In one instance Scientology filed 50 lawsuits against a small non-profit cult education organization called the Cult Awareness Network, ultimately driving it into bankruptcy and taking over control of it.
The IRS was well aware of Scientology's history of using malicious and frivolous litigation. In the IRS's own Investigation of Scientology, it disclosed the following secret Scientology policies: "The goal of the department [of government affairs] is to bring the government and hostile philosophies or societies into a state of complete compliance with the goals of Scientology. This is done by a high level ability to control and in its absence by a low-level ability to overwhelm. Introvert such agencies. Control such agencies....
"The purpose of the legal officer is to help LRH [L Ron Hubbard] handle every legal, government, suit, accounting and tax contact or action for the organization and by himself or employed representative, to protect the organization and its people from harm and to bring the greatest possible confusion and loss to its enemies." [COST v. U.S., November 22, 1989].
Filing 2,200 harassment lawsuits against the IRS was a good way to overwhelm, financially drain, and confuse the IRS, setting the stage for the IRS's total compliance with the goals of Scientology. But with Scientology's history of extremism, these actions would not be enough. Much more would have to be done to ensure the IRS would be made an offer they literally couldn't refuse.
- Scientology turned loose its infamous team of private investigators to penetrate and expose personal and professional secrets of IRS officials involved in the Scientology tax-exemption investigation and approval process.
Scientology's private investigators historically have been sent out by the Church of Scientology with specific orders to find humiliating events from the personal lives of the individuals they are investigating, to give Scientology coercive leverage over them. Investigators seek out sexual indiscretions, gambling or drug abuses, family problems, histories of mental illness, unmarried pregnancy or abortion, domestic violence, DUIs, misdemeanor or criminal charges, political connections – anything which, if exposed, would cause great harm to the target. Scientology's PIs are expected to investigate so loudly and obviously that the person being investigated knows and fears the secrets that might be uncovered.
And Scientology is infamous for leaking whatever it finds on an individual if the individual does not comply with Scientology's will. Hubbard bragged that threat and mystery are the power of intelligence, and through threat and mystery maximum amounts of leverage may be exerted on an adversary.
Every IRS official involved in deciding whether or not to give Scientology what it wanted knew that if they had anything to keep private as most people do, without any doubt their personal lives could be exposed to severe humiliation and ruin if they did not comply with Scientology's demands.
An internal Scientology directive states, "NEVER agree to an investigation of Scientology. ONLY agree to investigate the attackers... This is the correct procedure: (1) Spot who is attacking us. (2) Start investigating them for FELONIES or worse, using our own professionals, not outside agencies. (3) Double curve our reply by saying we welcome an investigation of them. (4) Start feeding lurid, blood, sex, crime actual evidence on the attackers to the press... Don't ever submit tamely to an investigation of us. Make it rough on the attackers all the way...You can get "reasonable about it" and lose... so BANISH all ideas that any fair hearing is intended and start our attack with their first breath. Never wait. Never talk about us --only them. Use their blood, sex, crime to get headlines. Don't use us." [HCO policy letter of February 25, 1966, "Attacks on Scientology"].
Scientology ruthlessly has enacted these and its famous "fair game" policies throughout its history to remove any and all obstacles to its advancement. "Fair game" tells Scientologists, "An enemy may be deprived of property or injured by any means by any Scientologist without any discipline of the Scientologist... [The enemy] may be tricked, sued, lied to, or destroyed." [L. Ron Hubbard, HCO policy letter, October 18, 1967, "Fair Game Policy"].
- Many individuals believe that in other ways not alleged above, Scientology unethically and unduly influenced the key decision-makers of the secret deal by once again infiltrating the IRS.
In line with its overwhelm-and-confuse policies, its financial wealth, and its legal onslaught of the IRS, Scientology hired Monica Yingling (of Zuckert, Scoutt and Rasenberger) and Meade Emory (former Assistant to IRS Commissioner Donald C. Alexander and Legislation Counsel of the Joint Committee on Taxation of the U.S. Congress).
Serious questions have been raised about the influence Meade Emory may have had in Scientology's secret 1993 IRS tax exemption deal. The organization created for Scientology's final application for tax-exempt status was the Church of Spiritual Technology (CST), another corporate shell. Emory, along with other non-Scientologist tax and probate attorneys, were the co-founders and special directors of CST. Only one Scientologist was involved with the creation of this organization, and that Scientologist is a CPA. CST is the Scientology organization that finally gained tax-exempt status.
- According to outside reviewers, the information and tax-exempt application Scientology filed with the IRS are riddled with fraud. Reviewers believe that the application itself, if properly reviewed by the IRS, never could have supported tax-exempt status. One of the many areas of fraud is the long list of sham corporations and corporate shells that Scientology represented to the IRS as separate and distinct corporations.
>From 1956 to the present, Scientology appears to have never ceased its efforts to perpetrate corporate fraud on the IRS. A Los Angeles Superior Court ruled on October 10, 1997 that Scientology corporations are all alter egos of each other:
"Authority over CSC [Church of Scientology of California] and its affairs was handed over to CSI [Church of Scientology International] and RTC [Religious Technology Center], especially David Miscavige, who controls both corporations and all of Scientology after the death of L.Ron Hubbard. "Sea Org" is the unincorporated association which is the power center -- Miscavige is its highest ranking member. [Exh. B, p.153819.] Miscavige is also chairman of RTC and ASI [Author Services, Inc.]. Scientology's corporate officers and trustees are intermingled at will." [Lawrence Dominic Wollersheim vs.Church of Scientology, ET AL., case no. C332027].
In another Los Angeles Superior Court the judge called Scientology's pretence of separate corporations an out-and-out deception.
Some reactions to Scientology's Secret IRS Deal
The IRS Scientology settlement agreement represented a mysterious and shocking reversal for the U.S. tax agency. For 25 years, the agency steadfastly refused to provide Scientology with the tax exemption given to normal bona fide churches. This radical and unexpected reversal and the unprecedented scope of Scientology's deal with the IRS has even baffled a former IRS commissioner. "It was a very surprising decision," said Lawrence B. Gibbs, the IRS commissioner from 1986 to 1989. "When you have as much litigation over as much time, with the general uniformity of results that the service had with Scientology, it is surprising to have the ultimate decision be favorable. It was even more surprising that the service made the decision without full disclosure, in light of the prior background."
An IRS staff member who claims to have worked on the case called the secret deal a sell-out by higher management. Speaking on the condition of anonymity, the individual said that agents working on the case had endured frightening calls to their homes and disappearing pets, and that Scientology should have never been given what was given.
Was it an IRS staff member disgusted with Scientology's deal who leaked the secret deal to the Wall Street Journal? We may never know.
The IRS dilemma
Did Scientology bludgeon the IRS into complying with its will at a huge cost to all other taxpayers? Many believe that the scope of what was given away by the IRS to the multi-billion dollar Scientology organization, in financial benefit and other special considerations, is far, far beyond anything that has been given to any other religious group, corporation, or normal taxpayer.
An active movement is underway by diverse parties and interest groups to get the IRS to completely review all the issues related to its secret agreement with Scientology. To review or not to review must be a dilemma for the IRS. If it doesn't review the Scientology deal, then other individuals, tax protesters, and corporations will imitate Scientology's apparently successful tactics to get the IRS and its staff to capitulate. And if it doesn't review soon, the IRS could be facing tens of thousands of new lawsuits and other Scientology-like activities.
If the IRS doesn't review the deal at all, there is little doubt normal citizens will begin demanding the same full tax-deductibility for the private religious education of their children. Wealthy individuals and corporations will seek the same negotiated reduction of their tax liabilities to the minuscule 1% level that was given to Scientology.
The new IRS commissioner needs to initiate this review as soon as possible. Justice and fairness demands it. There is little doubt about Scientology's fanatical dedication to exert its will. The following excerpt is from federal prosecutor's memorandum to the judge urging stiff jail sentences for nine top leaders of Scientology who pled guilty in 1979 to criminal charges for their involvement in the infiltration of over 100 U.S. government agencies.
"The crime committed by these defendants is of a breadth and scope previously unheard of. No building, office, desk, or file was safe from their snooping and prying. No individual or organization was free from their despicable conspiratorial minds. The tools of their trade were miniature transmitters, lock picks, secret codes, forged credentials and any other device they found necessary to carry out their conspiratorial schemes."
What you can do about this outrageous secret IRS deal with Scientology
- Forward this editorial alert to all individuals and organizations concerned with issues related to taxes, religious education, and separation of church and state. All will have an interest in seeing that this secret IRS deal is reviewed. Parents paying for their children's private religious education may then be able to deduct its full cost from their taxes.
- Personally write the new Commissioner of the IRS, Charles O. Rossotti (who was not involved in the secret deal), and ask him to open an investigation into the secret agreement, the process of its approval, and the alleged fraud in Scientology's original application. Tell him you believe that this special Scientology secret deal gives grossly unfair and inappropriate tax considerations to one church over another and appears to pierce the separation of church and state. E-mail the commissioner by name from this web site: email.html. Or write him at:
Charles O. Rossotti Commissioner
Internal Revenue Service
Department of the Treasury
500 N Capitol St, NW, 1st Floor
Washington, DC 20221
- Learn more about the capitulation of the IRS to Scientology's alleged coercion. Go to:
- For more information on Scientology in general, see:
- For the text of the secret settlement deal, see:
- For more information on Scientology's controversial religious status, see:
- For more information on Scientology's infamous history of intimidating critics and adversaries into submission, see:
- For the Wall Street Journal article which revealed the secret deal, see:
- For the New York Times article, see:
- Go to one of the discussion groups forwarding the IRS's review of the secret Scientology:
For more Information on the Tax Notes Journal comments, see:
JOURNAL ISSUE: April 17, 1995 67, n3, p324-325
AUTHOR: Stokeld, Fred
TITLE: Do Scientologists get a break not extended to other churches?
This editorial opinion provided by FACTNet, Inc. FACTNet is a nonprofit Internet library dedicated to protecting freedom of mind by reducing harms caused by cults and mind control. FACTNet's web page, which received over half a million hits in 1997, is located at www.factnet.org