Top Stories from the Front Page of the International Herald Tribune,
Monday, March 10, 1997

How Scientologists Won Tax-Exempt Status in U.S.


By Douglas Frantz New York Times Service
On Oct. 8, 1993, 10,000 cheering Scientologists thronged the Los Angeles Sports Arena to celebrate the most important milestone in the church's recent history: victory in its all-out war against the Internal Revenue Service.

For 25 years, IRS agents had branded Scientology a commercial enterprise and refused to give it the tax exemption granted to churches. The refusals had been upheld in every U.S. court. But that night the crowd learned of an astonishing turnaround. The IRS had granted tax exemptions to every Scientology entity in the United States.

''The war is over,'' David Miscavige, the church's leader, declared to tumultuous applause.

The landmark reversal shocked tax experts and saved the church tens of millions of dollars in taxes. More significantly, the decision was an invaluable public relations tool in Scientology's worldwide campaign for acceptance as a mainstream religion.

On the basis of the ruling, the State Department recently criticized Germany for discriminating against Scientologists. Bonn regards the organization as a business, not a tax-exempt religion.

The full story of the IRS turnabout has remained hidden behind taxpayer privacy laws for nearly four years. But a New York Times examination found that the exemption followed a series of unusual internal IRS actions that came after a broad campaign orchestrated by Scientology against the IRS and people who work there. Among the findings of the review, based on interviews and public and internal church records, were:

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Scientology lawyers hired private investigators to dig into the private lives of IRS officials and to conduct surveillance to uncover potential vulnerabilities. One investigator said he had interviewed tenants in buildings owned by three IRS officials, seeking housing code violations. He also said he had created a phony news bureau in Washington to gather information on church critics. The church also financed an organization of IRS whistle-blowers that attacked the agency publicly.

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The IRS decision to negotiate with the church came after Fred Goldberg Jr., the commissioner at the time, had an unusual meeting with Mr. Miscavige in 1991. Scientology's own version of the event recounts how the church leader walked into the agency's headquarters without an appointment and got in to see Mr. Goldberg. Mr. Miscavige offered to call a halt to Scientology's lawsuits against the IRS in exchange for tax exemptions.

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After the meeting, Mr. Goldberg created a committee to negotiate a settlement with Scientology outside normal agency procedures. When it found that all church entities should be tax-exempt, IRS tax analysts were ordered to ignore the substantive issues in reviewing the decision, according to IRS memorandums and court files.

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The IRS refused to disclose terms of the agreement, including whether the church was required to pay back taxes, saying it was confidential taxpayer information. The agency required both the Jimmy Swaggart Ministries and an affiliate of the Reverend Jerry Falwell to disclose that they paid back taxes in settling disputes in recent years.

In interviews, senior Scientology officials and the IRS denied that the church's aggressive tactics had any effect on the agency's decision.

Mr. Goldberg, who left as IRS commissioner in January 1992 to become an assistant treasury secretary, said privacy laws prohibited him from discussing Scientology or his meeting with Mr. Miscavige.

The IRS reversal on Scientology was nearly as unprecedented as the long and bitter war between the organizations. Over the years, the agency had steadfastly refused exemptions to most Scientology entities, and its agents had singled out the church for numerous investigations and audits.

Throughout the fight, the agency's view was supported by the courts. A year before the IRS's reversal, the U.S. Claims Court had upheld its denial of an exemption to Scientology's Church of Spiritual Technology, which had been created to safeguard the writings and lectures of L. Ron Hubbard, the late science fiction writer whose preachings form the church's scripture.

Among the reasons listed by the court were ''the commercial character of much of Scientology,'' its ''virtually incomprehensible financial procedures'' and its ''scripturally based hostility to taxation.''

In October 1993 the IRS announced that it was issuing 30 exemption letters covering about 150 Scientology churches, missions and corporations. Among them was the Church of Spiritual Technology.

''It was a very surprising decision,'' said Lawrence Gibbs, the IRS commissioner from 1986 to 1989 and Mr. Goldberg's predecessor. ''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.''

While IRS officials insisted that Scientology's tactics did not affect the decision, some officials acknowledged that ruling against the church would have prolonged a fight that had consumed extensive government resources and exposed individual officials to personal lawsuits. At one time, the church and its members had more than 50 suits pending against the IRS and its officials.

''Ultimately the decision was made on a legal basis,'' said a senior agency official who was involved in the case and spoke on the condition that he not be identified.

The church's tactics appeared to violate no laws. Its officials and lawyers said in a three-hour interview in Los Angeles last month that the church had been the victim of a campaign of harassment and discrimination by ''rogue agents'' within the IRS.

Church officials and lawyers acknowledged that Scientology had used private investigators to look into their opponents, including IRS officials.

''This is a church organization that has been subjected to more harassment and more attacks certainly than any religion in this century and probably any religion ever, and they have had to perhaps take unusual steps in order to survive,'' said Monique Yingling, a Washington lawyer who represented the church in the tax case.

Since its founding in 1950, Scientology has grown into a worldwide movement that boasts 8 million members. The church has vast real estate holdings around the world and operates a yacht based in the Caribbean.

Its founder, Mr. Hubbard, asserted that people are immortal spirits who have lived through many lifetimes. In Scientology teachings, he described humans as clusters of spirits that were trapped in ice and banished to Earth 75 million years ago by Xenu, the ruler of the 26-planet Galactic Confederation.

Scientology describes its goal as ''a civilization without insanity, without criminals and without war, where the able can prosper and honest beings can have rights, and where Man is free to rise to greater heights.'' To reach those heights, Scientologists believe, each individual must be ''cleared'' of problems and afflictions through a series of counseling sessions known as ''auditing.'' The sessions are performed by a trained auditor assisted by a device similar to a lie detector, known as an E-meter.

Although Scientology's complicated finances make a total estimate difficult, records on file at the IRS indicate that in the early 1990s the church was earning about $300 million a year from auditing fees, the sale of Scientology literature and recordings, management services and the franchising of its philosophy. Church officials said those figures were higher than actual earnings.

Mr. Hubbard established the original mother church, the Church of Scientology of California, in Los Angeles in 1954. Three years later, it was recognized as tax exempt by the IRS. But in 1967, the agency stripped the church of its exemption, and a fierce struggle broke out between the agency and the church.

In its revocation letter, the agency said that Scientology's activities were commercial and that it was being operated for the benefit of Mr. Hubbard. The church ignored the action and withheld taxes.

Minutes of IRS meetings indicate that some agents subsequently engaged in a campaign to shut down Scientology, an effort that church officials cite as evidence of bias. Some of the tactics led to rebukes by judges, including a 1990 ruling in Boston that criticized the agency for abusive practices in seeking access to church records.

Scientology retaliated. In 1973 the church embarked on a program code-named Snow White. In a document labeled ''secret,'' Mr. Hubbard outlined a strategy to root out all ''false and secret files'' held by governments around the world regarding Scientology.

''Attack is necessary to an effective defense,'' Mr. Hubbard wrote.

Under the supervision of his third wife, Mary Sue, Scientologists infiltrated the Department of Justice and the IRS to uncover information on the founder. They broke into offices at night and copied mountains of documents. At one point, an electronic bugging device was hidden inside an IRS conference room the day before a meeting about Scientology.

Critics say those actions fell under a church doctrine that Mr. Hubbard had called the Fair Game policy. Mr. Hubbard wrote that church enemies may ''be deprived of property or injured by any means by any Scientologist without any discipline of the Scientologist. May be tricked, sued or lied to or destroyed.''

The conspiracy was uncovered in 1977, and Mrs. Hubbard and 10 others were eventually sentenced to prison. Mr. Hubbard was named an unindicted co-conspirator because investigators could not link him to the crimes.

The church promised to change its ways. Members who broke the law were purged, including Mrs. Hubbard, Scientologists said, and the church restructured to protect against a recurrence. The Fair Game policy, they said, has been misinterpreted by courts and critics.

''There is nothing like that,'' said Elliot Abelson, the church's general counsel. ''It doesn't happen.''

But interviews and an examination of court files across the United States show that after the criminal conspiracy was broken up, the church's battle against the IRS continued on other fronts. When Mr. Hubbard died in January 1986, his opposition to taxes lived on among the new generation of leaders, including Mr. Miscavige, a second-generation Scientologist.

Part of the battle was public. A leading role was played by the National Coalition of IRS Whistle-Blowers, which Scientology created and financed for nearly a decade.

On the surface, the coalition was like many independent groups that provide support for insiders who want to go public with stories of corruption. But Stacy Young, a senior Scientology staff member until she departed in 1989, said she helped plan the coalition as part of Scientology's battle against the IRS in late 1984, while she was managing editor of the church's Freedom Magazine.

''The IRS was not giving Scientology its tax exemption, so they were considered to be a pretty major enemy,'' Ms. Young said. ''What you do with an enemy is you go after them and harass them and intimidate them and try to expose their crimes until they decide to play ball with you. The whole idea was to create a coalition that was at arm's length from Scientology so that it had more credibility.''

Ms. Young said she recruited Paul DesFosses, a former IRS agent who had spoken out against the agency, to serve as the group's president. Mr. DesFosses acknowledged that Scientology provided substantial financing, but he denied that the church created or ran the coalition.

Kendrick Moxon, a longtime church lawyer, acknowledged that the coalition was founded by Freedom Magazine. He said its work was well known and part of a campaign by Scientology and others to reform the IRS.

The church's war had a covert side, too, and its soldiers were private investigators. Octavio Pena, a private investigator in Fort Lee, New Jersey, achieved a measure of renown in the late 1980s when he helped expose problems within the Internal Revenue Service while working on a case for Jordache Enterprises, the jeans manufacturer.

In the summer of 1989, Mr. Pena disclosed in an interview, a man who identified himself as Ben Shaw came to his office. Mr. Shaw, who said he was a Scientologist, explained that the church was concerned about IRS corruption and would pay $1 million for Mr. Pena to investigate IRS officials, Mr. Pena said.

''I had had an early experience with the Scientologists, and I told him that I didn't feel comfortable with him, even though he was willing to pay me $1 million,'' Mr. Pena said.

Scientology officials acknowledged that Mr. Shaw worked for the church at the time, but they scoffed at the notion that he had tried to hire Mr. Pena.

Michael Shomers, another private investigator, said he shared none of Mr. Pena's qualms, at least initially.

Describing his work on behalf of Scientology in a series of interviews, Mr. Shomers said that he and his boss, Thomas Krywucki, worked for the church for at least 18 months in 1990 and 1991.

Working from his Maryland office, he said, he set up a phony operation, the Washington News Bureau, to pose as a reporter and gather information about church critics. He also said he had infiltrated IRS conferences to gather information about officials who might be skipping meetings, drinking too much or having affairs.

''I was looking for vulnerabilities,'' Mr. Shomers said.

In one instance, information that Mr. Shomers said he had gathered at an IRS conference at a mountain resort was turned over to an associate of Jack Anderson and appeared in one of the investigative reporter's columns criticizing top agency managers for high living at taxpayer expense.

At one point, Mr. Shomers said, he slipped into a meeting room at a California hotel where an IRS conference was being held and took a stack of internal agency documents. He said he mailed the material to an address provided by his church contact.

It is impossible to verify all of Mr. Shomers' statements or determine whether his actions were based on specific instructions from church representatives.