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1980 Pulitzer series #3
Dispute over tax status goes to court
-- by Charles Stafford
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On Jan. 4, 1963, two large vans escorted by motorcycle policemen pulled
up before the Washington headquarters of the Founding Church of Scientology
at 19th and R streets.
U.S. marshals climbed out of the vans and entered the church property.
There they seized 100 "E-meters" and about 20,000 pages of church
literature. They were acting for the U.S. Food and Drug Administration
(FDA).
Though relations between the Church of Scientology and the government
had been strained for most of the 13 years since L. Ron Hubbard created the
new religion, that incident marked the first formal action against the
church by the government.
Others followed, most of them generated by the Internal Revenue Service
(IRS). The church has long claimed that it is the victim of harassment by
a government angered because Hubbard refused to share with it revolutionary
knowledge about freeing the mind of traumas. But the actions the government
has taken against Scientology all center on a fundamental question: Is
Scientology a religion, or a pseudo-scientific con game involving amateur
psychology?
The answer is vitally important. A valid religion, or church, pays no
taxes.
Scientology has been in and out of federal courts and in again in
battles with IRS over its tax-exempt status. It has even resorted to
illegal tactics, placing an agent in IRS headquarters where he stole
thousands of documents concerning the church.
The battle is fought at every level of government. Since coming to
Clearwater, the church has been locked in a fight with Pinellas County
officials over whether it must pay property taxes on the Fort Harrison
Hotel, the old Bank of Clearwater building, and other property it has
bought in the county.
Last Friday, the Church of Scientology paid $126,753.82 in back taxes,
a figure representing 45 percent of its total four-year tax bill in
Pinellas County.
The payment ended a long legal battle between the Scientologists and
Property Appraiser Ron Schultz's office over the church's 1976 and 1977 tax
bills. But it does not mean the church is giving up its claim to be
tax-exempt as a church. Scientology President Kenneth Whitman vowed the
church will pursue legal battles over its 1978 and 1979 tax bills, which
total $151,157.51.
Schultz said the church was certain to lose its case on the earlier tax
bills and hence decided to go ahead and pay them in an effort to "buy some
PR (public relations)."
The Pinellas County Circuit Court held that the church had to pay its
1976 tax bill, a decision affirmed by the Court of Appeal in Lakeland. The
case was pending before the Florida Supreme Court. The 1977 tax bill was
pending at the Circuit Court level.
There is much at stake in the tax battles. The Church of Scientology is
obviously wealthy. It paid around $3-million cash for the two pieces of
property in downtown Clearwater. Its funds come from the fixed donations
that church members pay for auditing, the pastoral-counseling procedure
designed to free their minds of painful memories.
The Food and Drug Administration charged the church in 1963 with making
false claims for a small device called a Hubbard Electrometer, or E-meter,
a device used in some auditing sessions.
The E-meter -- essentially a simple galvanometer -- is a small box
bearing five knobs and a magnetic needle. It operates on a rechargeable
1 1/2-volt battery. A Y-cord from the box leads to two small cans that
resemble frozen orange juice cans. The person being counseled grasps the
cans as the counselor asks questions. By watching the needle on the dial,
the church says, the counselor knows when the person is recalling pain.
FDA accused the church of falsely claiming that the meter would
"improve the health, intelligence, ability, behavior, skill and appearance"
and cure arthritis, tuberculosis, ulcers and other ailments that Hubbard
considered to be psychosomatic.
The FDA case lingered in the courts for 10 years. It was finally
settled in 1973 when U.S. District Judge Gerard A. Gesell ordered the
E-meters returned to the church.
He ruled that (1) the church could no longer advertise its services as
a scientific cure for disease, (2) must label the E-meters as ineffective
in treating illnesses, and (3) could only use the E-meter in "bona fide
religious counseling."
In his 14-page opinion, Gesell described Scientology as a
"pseudo-science that has been adopted and adapted for religious purposes
.. There is a religious substance to everything when seen with the eyes of
the believer." He called Hubbard "a facile, prolific author" whose
"quackery flourished throughout the United States and in various parts of
the world."
The judge said Hubbard first advanced "the extravagant, false claims
that various physical and mental illnesses could be cured by auditing" in
a science fiction magazine in the 1940s.
As the church developed, he said, "auditing was guaranteed to be
successful. All this was and is false -- in short, a fraud. Contrary to
representations made, there is absolutely no scientific or medical basis in
fact for the claimed cures attributed to E-meter auditing."
Since Gesell had said the church was entitled to First Amendment
protection as a religion and that it could use the E-meters for religious
counseling, the church hailed the decision as a victory.
# # #
The church's fight with the Internal Revenue Service seems destined to
go on forever.
At present, 14 churches of Scientology in the United States -- all
except one -- are recognized as tax-exempt. The Church of Scientology of
California, of which the Clearwater operation is a branch, is contesting in
U.S. Tax Court an IRS ruling that it must pay taxes.
The IRS does not grant tax-exempt status, a spokesman explained.
Churches are exempt by law as long as they comply with the law. Should IRS
have reason to believe a church is not complying, then it can audit the
church's records, which can lead to a determination that it must pay taxes.
The crucial question is how a church makes its money and how it spends
it. The income must be used for the general good and not for the profit of
individuals.
How this applies to Scientology is well illustrated by an IRS
memorandum concerning the tax-exempt status of the Church of Scientology of
Florida, headquartered in Miami. The Florida church is separate from the
Clearwater operation, which is a branch of the Church of Scientology of
California.
The IRS memorandum, dated Sept. 1, 1972, was among the documents stolen
from IRS headquarters in Washington by the church's agent. It was made
public in connection with the trial in Washington of the agent and eight
other Scientologists on charges of conspiring to steal government
documents.
The National Office Technical Advice Memorandum was sent to the IRS
district director in Atlanta in reply to his request for advice on
revocation of the exempt status of the Church of Scientology of Florida.
The memorandum stated that almost all income of the Florida church came
from fees paid for counseling and from the sale of books and artifacts. The
church in turn paid 10 percent of its income "to the international
organization as a 'tithe' to promulgate and defend the religion of
Scientology." This money went into Swiss Trust Accounts.
"In order to qualify for the claimed exemption, Scientology must
establish that it is devoted exclusively to religious purposes," the
memorandum said. "The presence of a single nonexempt purpose, if
substantial in nature, will destroy the exemption, regardless of the number
or importance of truly exempt or religious purposes ... Based on this
exclusivity test, we have concluded the Church of Scientology of Florida
fails to qualify for exemption because (1) its sales of books, tapes,
artifacts, processing and training constitute a substantial commercial
purpose, and (2) a portion of the net earnings of Scientology may inure to
the benefit of L. Ron Hubbard, a private individual ...
"While the information available does not specifically disclose the
inurement of funds, the organization has not established that the tithing
of 10 percent of its gross income to the Swiss Trust Accounts has been
distributed for exempt purposes. The Trust accounts are held in the name of
L. Ron Hubbard and Mary Sue Hubbard, his wife, as the sole signatories.
Therefore, the organization has failed to establish that neither the legal
title nor the beneficial use of the funds is held for a recognized charity
or charitable purpose."
The memorandum recommended revocation of the Florida church's tax
exemption, but no action was taken.
In an apparent effort to circumvent the objection that Scientology
funds went to the benefit of Hubbard, he and representatives of five
churches of Scientology -- California, Washington, D.C., Michigan,
Minnesota and New York -- signed a document on June 25, 1973 "to
memorialize in writing" a trust arrangement they said had been in existence
since July 18, 1962. The five churches agreed to pay tithes of 10 percent
of their monthly incomes to the trust fund. Hubbard, as the sole trustee,
was responsible for managing, administering and disposing of the fund.
A month later, a new agreement recorded the resignation of Hubbard as
trustee. Responsibility for the fund was placed in the hands of a
three-member board of trustees, one of whom was Mary Sue Hubbard. The
agreement gave Mrs. Hubbard life tenure and the power to appoint the other
two trustees who would serve two-year terms.
Terms of this agreement were reported in July 1976 by St. Petersburg
Times reporter Bette Orsini. She also found that 11 of the 12 churches of
Scientology then holding tax-exempt status had collected a total of
$3.3-million in 1974 and contributed $846,310 of that to the Church of
Scientology of California. Nine of the churches had deposits totaling
$1-million in bank accounts in Luxembourg.
The trust agreement was put in written form at a time when the IRS was
going to court to force the Church of Scientology of California to open its
books for audit. Today, the California church is contesting revocation of
its tax-exempt status in the U.S. Tax Court.
The IRS said the church owes $1,150,458 in taxes on $8,684,452 in gross
receipts for 1970, '71 and '72. To this it has added a penalty of $287,614.
The church replied that the church was tax-exempt. But should it be
found that it was not, the church said, the government was still wrong in
its assessment of tax liability because it had understated church expenses.
The church claimed it had net taxable losses for the three years totaling
$8,859,165.
The church asked why IRS was putting the church and the court to the
time and expense of a trial "when the IRS has already acknowledged to
petitioners that after an extensive 1 1/2-year audit of church records,
they could find no basis for denying the church exempt status."
It accused IRS of stalling and of violating the church's First
Amendment rights.
The case was opened in December 1977. Court observers say it won't be
settled for quite some time. A decision in any court case involving the
church seldom comes swiftly.
In its 16-year war with the government, the church has employed tactics
that reveal the dark side of Scientology.
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