The tax status of the Church of Scientology in the United States has been the subject of decades of controversy and litigation. Although the Church of Scientology was initially partially exempted by the Internal Revenue Service (IRS) from paying federal income tax, its two principal entities in the United States lost this exemption in 1957 and 1968. This action was taken because of concerns that church funds were being used for the private gain of its founder L. Ron Hubbard (according to the IRS) or due to an international psychiatric conspiracy against Scientology (according to Scientology).
In the course of a 37-year dispute with the IRS, the church was reported to have used or planned to employ blackmail, burglary, criminal conspiracy, eavesdropping, espionage, falsification of records, fraud, front groups, harassment, money smuggling, obstruction of audits, political and media campaigns, tax evasion, theft, investigations of individual IRS officials and the instigation of more than 2,500 lawsuits in its efforts to get its tax exemption reinstated. A number of the church's most senior officials, including Hubbard's wife, were eventually convicted and jailed for crimes against the United States government related to the anti-IRS campaign. The IRS, for its part, carried out criminal investigations of the church and its leaders for suspected tax fraud.
Although the church repeatedly lost in court cases heard up to the level of the Supreme Court, it undertook negotiations with the IRS from 1991 to find a settlement. In October 1993, the church and the IRS reached an agreement under which the church discontinued all of its litigation against the IRS and paid $12.5 million to settle a tax debt said to be around a billion dollars. The IRS granted tax exemption to 153 Scientology-related corporate entities with the right to declare subordinate organizations tax-exempt in the future.
The terms and circumstances of the agreement remained secret until details emerged through leaks and litigation beginning in 1997. The terms have attracted controversy for their perceived favorability toward the church, and have been described as unconstitutional by federal courts for their bestowal of privileges on Scientologists shared by no other religious group. Questions have also been raised about whether the IRS exceeded its authority by effectively overruling the Supreme Court in setting the terms of the agreement and permitting tax deductions not authorized in law. Some legal commentators have concluded that the agreement can no longer be effectively challenged in court.
Early corporate structure
L. Ron Hubbard initially incorporated Scientology in April 1952 as a for-profit entity called the Hubbard Association of Scientologists (HAS). It was not at first presented as a religion. However, in April 1953 Hubbard wrote to a colleague to canvass her views on pursuing "the religion angle" to improve Scientology's business prospects. Soon afterwards, in December 1953, he incorporated the first Church of Scientology in Camden, New Jersey.
Hubbard made no secret of why he was interested in a religious approach. Jana Daniels, one of Hubbard's early followers, recalled that, among Scientologists, the move to a nominally religious status "was a most unpopular idea until it was explained by Mr. Hubbard that for tax reasons, a church would get a better shake." On February 18, 1954, the Church of Scientology of California was incorporated by Burton Farber, a local Scientologist. It was subordinate to the Church of American Science, an entity headed by Hubbard, to which it paid a twenty percent tithe. A Founding Church of Scientology was also established in Washington, D.C.
The HAS was dissolved the following June, and was replaced by the Hubbard Association of Scientologists International (HASI). Hubbard explained that the intention was to give Scientology "complete security from legal interference" due to "the constitutional guarantees of a Supreme Court ruling that no state shall take action to prevent operation of any organization concerned with the study of the human soul." The HASI would operate as the parent organization which franchised local Scientology churches or "orgs" and received ten percent of their gross income.
Initial tax exemption and revocation
The Internal Revenue Service awarded tax exemption to the California and Washington, D.C. churches in 1956 and 1957 respectively. In 1958, however, the Washington church lost its tax-exempt status on the grounds that its tenets and practices did not constitute an exclusively religious or educational activity. A key factor in the revocation of its exemption was the issue of private inurement – the use of tax-exempt monies to benefit a non-tax-exempt individual or entity. The Court of Claims found that Hubbard and his family had profited from the Washington Church of Scientology. He had been given $108,000 over four years by the church, with the free use of a car and a private residence. His family had withdrawn thousands of dollars from the church's funds, and his wife Mary Sue had earned over $10,000 from renting property to it. Hubbard had also been tithed ten percent of the church's gross income. The church appealed to the US Court of Claims, but lost. The court ruled that Scientology was a "business, a profit-making organization run by Hubbard for his personal enrichment."
In 1959, Hubbard moved to England where he purchased Saint Hill Manor in East Sussex to serve as a family home and world headquarters of Scientology. Over the following seven years, he tried repeatedly to establish a tax-exempt corporate vehicle in the United Kingdom by establishing multiple limited companies under the aegis of various Scientology entities and applying for non-profit status. However, the British Inland Revenue consistently refused the applications.Hubbard, L. Ron. "Corporate Status". HCO Executive Letter of 12 March 1966
The Church of Scientology of California (CSC), a fairly minor part of the Scientology corporate structure at the time, had managed to retain its tax exemption. In contrast to the Washington "Founding Church", an IRS audit concluded in 1964 that the CSC was operating for legitimate tax-exempt purposes. The IRS reconfirmed CSC's tax-exempt status.Church of Scientology of California, Petitioner v. Commissioner of Internal Revenue, Respondent. Docket No. 3352-78. United States Tax Court. September 24, 1984. In March 1966, Hubbard took advantage of this action by transferring the HASI's assets in the United States, the Commonwealth and South Africa to the CSC. By transferring Scientology's overseas operations to the control of the CSC, he was able to take advantage of reciprocal tax exemption agreements to ensure that Scientology could operate internationally under the tax-exempt mantle of the CSC.
The Founding Church of Scientology in Washington, D.C. had an ongoing lawsuit against the United States Government for a refund of the federal income taxes that the church had to pay following the loss of its tax exemption in 1957. The Department of Justice asked the IRS to review the tax-exempt status of the CSC and other Scientology entities, believing that the CSC's exemption was inconsistent with the earlier revocation of the Founding Church's exemption. In July 1966, the IRS sent the CSC a letter stating that the IRS proposed to revoke the tax exemption on the grounds that the CSC's income was inuring to the benefit of Scientology practitioners, that CSC was engaged in commercial activities, and that CSC was serving the private interests of L. Ron Hubbard. On July 18, 1967, the IRS officially revoked the CSC's tax exemption with retroactive effect. The Founding Church's case against the government went before the US Court of Claims in July 1969, where it argued that it should be exempted from federal income tax as it was constituted "exclusively for religious purposes." Its argument was rejected,The Founding Church of Scientology v. The United States. No 226-61. United States Court of Claims, July 16, 1969 setting the scene for what Scientology's leadership would later characterize as a "war" with the IRS.
The IRS revocation of tax exemption was, however, not total. While the California and Washington Scientology organizations lost their tax exemption over the issue of inurement and their business practices, fourteen other separately incorporated organizations in the United States gained or retained exemption despite similar concerns about their activities. The agency's approach to the other organizations was inconsistent. In a 1972 memorandum on the Church of Scientology of Florida (CSF), the IRS recommended that the CSF exemption should be revoked because it had not established that its funds were being used for charitable purposes. Despite this, no action was taken and the CSF retained its exemption.
Scientology's views of taxation and the dispute with the IRS
Underlying the dispute with the IRS was what a court later called Scientology's "scripturally based hostility to taxation". The hostility is derived to a large degree not from religious belief but from political ideology. For many years, Hubbard expressed strident opposition to Communism, denouncing colleagues to the FBI for supposedly being Communist infiltrators and claiming that the Soviets were trying to obtain his discoveries. In 1955, Hubbard said in a manual on brain-washing that the 1909 Income Tax Law of the United States was a Communist conspiracy, even though the Russian Revolution was in 1917, and in 1956, he wrote that mankind had become so desperate that "he will buy almost any ideology whether it is communism or druidism. He will buy the garbage of Marx and even write it unsuspectingly into the United States Constitution under the heading of 'Income Tax.'"Hubbard, Professional Auditor's Bulletin no. 81, 24 April 1956
Soon after the Washington church lost its appeal against the withdrawal of tax exemption, Hubbard issued a bulletin to Scientologists urging them to campaign for radical reform of income tax in the United States on the grounds that the "basic principles of US income tax were taken from Das Kapital and are aimed at destroying capitalism. Unless the US ceases to co-operate with this Red push, Communism could win in America."Hubbard, "Income Tax Reform", HCO Bulletin of 18 July 1959 Income tax was also a symptom of impending fascism, in Hubbard's view; in an undated note issued to Scientologists, he wrote, "It is highly possible that a government only enters upon individual taxation when its ability to produce service for its citizens has dropped below the point of non-existence. A government is justified only so long as it serves the people. A business goes bankrupt when it is not voluntarily contributed to. A government goes Fascist."Hubbard, "Principles of Government". Undated advice note, reissued as OSA Network Order 10
In later years, he characterised income tax as an alien mind implant left over from the galactic tyrant Xenu's genocide of billions of beings on Earth 76 million years ago. In a 1968 lecture, he told Scientologists that "the United States just copies income tax", which had been used by Xenu to bring in his victims: "One of the mechanisms they used was to tell them to come in for an income tax investigation."Hubbard, "Assists", Class VIII lecture of 3 October 1968 Hubbard said that in the last few thousand years, income tax had been used as a punishment by the alien Marcabian civilization, which "looks an almost exact duplicate, but is worse off than the current U.S. civilization".Hubbard, "Auditing Comm Cycles" (alternate title "Definition of an Auditor"), Saint Hill Special Briefing Course lecture 291 (renumbered 320), 6 August 1963