The Church of Scientology and Tax Exemption — Part I

Mark “Marty” Rathbun is the only former Scientology executive involved in the Church of Scientology’s 1993 tax exemption process who has publicly written about behind the scene details. These details are contained in Rathbun’s excellent third book Memoirs of a Scientology Warrior.  In this work, Rathbun recounts the extensive and lengthy examination process conducted by the IRS. This book provides an excellent overview of Scientology’s legal battles in the 1980’s and 1990’s and is on my recommended reading list for any serious Scientology watcher.

The IRS examination process ended with the IRS granting the Church of Scientology International (CSI) and its related entities 501(c)3 tax exemption in a secret closing agreement that shocked many people. Until and unless both the Church of Scientology and the IRS agree to make public the details, Rathbun’s account — and it accords with what is available in the public record to date — remains the authoritative account. I will quote from portions of Rathbun’s account in this series.

The Benefits of Tax Exemption for the Church of Scientology

My opinion is that the Church of Scientology fought for tax exemption in the 1980’s for several reasons, but primarily as a way to erect a structural barrier to protect its business model of obtaining sustainable and endless excessive profits from the sale of its proprietary goods and services to a captive customer base. Writing about the bankruptcy of the Monitor Group in a 2012 article for Forbes, Steve Denning asked a dynamite question that equally applies to the Church of Scientology:

“Why go through the hassle of actually designing and making better products and services, and offering steadily more value to customers and society, when the firm could simply position its business so that structural barriers ensured endless above-average profits?” — Steve Denning in Forbes

In addition to its numerous self-serving internal policies that generate lavish profits — items such as mandated sec checks, six month OT sec checks, IAS donations, and the continuous reissues of old products that customers are ordered to purchase multiples of — 501(c)3 status gave the Church of Scientology a government-approved monopoly with significant competitive advantages. In other words, tax-exemption guaranteed the Church a sustainable competitive advantage that it would not possess if it were rightly classed as a business. For instance, tax exemption allowed the Church to Fair Game its competitors and critics and while calling such atrocious conduct “religious.” The Church has used terror and vigilanteeism in lieu of trademark enforcement and lawsuits in certain instances. Copyright lawsuits have been a mixed bag for the Church of Scientology, and perhaps most notably when it lost a ten year legal battle with Karin Spaink. In this case, Spaink successfully prevailed over the Church and now the OT levels are legally webbed online here.

The Church of Scientology is, in the final analysis, all about the money. Accordingly, tax exemption is crucial as it generates tax free profits for the Church while allowing it to engage in outrageous conduct behind First Amendment protections. Absent such protections, certain Scientology forms of conduct, such as Fair Game, invasion of privacy,  forced abortions, etc. would be civilly and criminally actionable.

My Position on the Church of Scientology

My position at the outset is therefore crystal clear: I do not consider the corporate “Church of Scientology” in its present form to be a religion in any meaningful sense of the word.

I consider the corporate Church of Scientology in its present form to be a fascist transnational capitalist organization masquerading as a religion. In this sense, I view the Church of Scientology as a deceptive organization that gained tax exemption, in part, by making certain dishonest and fraudulent representations to the IRS. The Church continues to maintain tax exemption by dishonesty and fraud, e.g. the Church’s deceptive claim that David Miscavige does not run the entire Scientology Enterprise. This is a deceptus visus.

I consider that there are two parts to the Church of Scientology:

1. The part you see.

2. The part you do not see.

In this series — and on this blog — I am generally focusing upon the part of the Church of Scientology you do not see and the Church does not want you to see.

A History of the Church of Scientology and Tax Exemption

In 2009, a poster called Probity wrote an excellent summary of Scientology and tax exemption on xenu.net. I post here in its entirety and will add details in later installments. Note: That I am reposting Probity’s comments here does not mean that this writer agrees with any of my opinions concerning Scientology and tax exemption.

Church of Scientology of California, 1954 – 2004

• The Church of Scientology of California (CSC) forms on 02/18/1954 to accept and adopt the aims, purposes, principles and creed of The Mother Church, “THE CHURCH OF AMERICAN SCIENCE”, of Camden, New Jersey. On 01/02/1957 the Internal Revenue Service exempts CSC from tax.

• The IRS revokes CSC tax-exempt status in 1967 for financial irregularities. CSC refuses to file for-profit income tax returns, instead CPA Greenberg prepares Form 990 returns (as if exempt) for years 1970 – 1972. On 03/28/1978 CSC files suit against the IRS in US Tax Court to challenge the IRS determination of tax deficiency based on filed CSC exempt returns for 1970 – 1972.

• New California corporations are formed to assimilate CSC authority in a reorganization attempt to sidestep mounting legal and tax threats: Church of Scientology International (CSI) 11/18/1981, Religious Technology Center (RTC) 01/01/1982, and Church of Spiritual Technology (CST) 05/28/1982.

• The Church of Scientology Flag Service Organization, Inc. (FSO) incorporates in Florida 05/19/1981. FSO takes over from CSC the Flag Land Base (Mecca of Scientology Gross Income) and severs CSC’s income source. In the UK, CSC assets are transferred to the Church of Scientology Religious Education College Incorporated (Australia). Bridge Publications 02/02/1981 (later Galaxy Press) perpetuate CSC financial fiction that LRH fiction income funds LRH research.

• After six years litigation the tax case between CSC and the IRS comes to a decision before the US Tax Court (“CSC vs. Commissioner of the IRS,” No. 3352-78 ). On 09/24/1984 the court issues judgment against CSC, which CSC appeals. On 07/28/1987 the US Court of Appeals ruling in this case (“CSC vs. Commissioner of the IRS,” No. 85-7324) upholds the 1984 decision:

“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…”

• On 07/08/1988 the IRS (citing CSC bad acts) denies tax-exempt status to CST, RTC and CSI and demands for-profit income tax returns for all years since inception. The IRS assigns examiners full-time to audit CSC income tax for years 1967 – 1984. CSC consolidates income of both Scientology UK operations and the clandestine income siphoning to LRH via the Religious Research Foundation (RRF) during the Flagship Apollo era. CSI funds and directs the CSC tax audit legal defense. Weekly OSA INT statistics graph CSC tax liability as income and expense issues undergo examination.

• The US Supreme Court denies Scientologist charitable tax deductions in Hernandez v. Commissioner, 490 U.S. 680 (1989). CSI asserts inconsistent IRS administration in US Tax Court trial April 4-22, 1992 (Garrison v Commissioner).

• The IRS completes the CSC audit by 1993, a half billion dollars with penalty and interest. With both the final CSC tax assessment and the decision in Garrison on the horizon, the IRS abruptly pulls the plug on the CSC assessment, instead enters into the 10/01/1993 closing agreement with David Miscavige. The closing agreement is explicitly silent on the CSC income tax examination. The hot topic of CSC tax liability, which is for years the IRS primary attack target, mysteriously evaporates in a rumor cloud that David Miscavige sanctions covert operations against government officials. Here are the clear, simple facts:

• The closing agreement does not recognize CSC as tax exempt. CSI pays $12.5 million to the IRS, a suppressive (2½%) percentage of the half billion dollar CSC liability, or hardly enough to cover unreported Social Security taxes on CSC employee wages, wages which are never to appear on a Social Security earning statement despite CSI & IRS joint promises to rectify this omission.

• The State of California, long since agreed to abide by IRS findings, ultimately settles with its namesake for cents on the California tax dollar.

• Since 1993, CSC files for-profit tax returns ‘under protest’, vows to never give in only to dissolve quietly without sorrow in a 2002 to 2004 filing approved by California Attorney General Bill Lockyer (now California State Treasurer).

• CSI presently touts US tax exemption as proof of church status without mention that Hubbard’s mother church CSC is not US tax exempt but factually was considered by the IRS only a for-profit entity up to final dissolution in 2004.

• Inurement to the benefit of LRH is the undisclosed basis of Scientology.

3 comments

  1. Thank you Jeff. That was excellent and we will distribute it far and wide.

    I love how you are making the scam so transparent for all to see.

    It is disheartening to live in the USA and find out that your government does not protect consumers from such religious fraud.

    Caveat Emptor – when one is $elling Religion in the USA.

  2. Hadn’t read Marty’s latest book yet, tho planned. Now that I’ve read your ‘review’, I must have it for myself and a friend who’s interested in the legal information it suggests here. I just ordered them from Amazon. Thank you for the inspiration and the needed nudge.

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