The Church of Scientology has had a long and complicated history of conflict with the taxation authorities. The most recent articles on the subject (see the New York Times piece, "The Shadowy Story Behind Scientology's Tax-Exempt Status") have focused on the events of the 1980s and 1990s. But it's necessary to go considerably further back to appreciate the extraordinary nature of the Scientology-IRS conflict.
Scientology was between 1952 and 1966 administered by an apparently secular organization, originally called the Hubbard Association of Scientologists (HAS). This was established in Arizona on 10 September 1952 with an authorized capital stock of $200,000. On 1 September 1954, the HAS became the HASI (HAS International) "to establish a religious fellowship and association for research into the spirit and the human soul and the use and dissemination [of Scientology materials]." The first Church of Scientology was founded in December 1953 in Camden, New Jersey, along with the Church of American Science and the Church of Spiritual Engineering. All three were rapidly abandoned, with the first incorporated Church of Scientology being founded in California on 18 February 1954. It changed its name to "The Church of Scientology of California" - a name it has retained ever since - on 19th June 1956. However, the organization as a whole was run by the HASI, "a religious fellowship" rather than a church. A bewildering variety of other bodies has existed, both in the US and abroad, making the job of tax investigators extremely difficult: for instance, one of Scientology's UK entities, Hubbard Communications Office Limited, traded as "Hickstead Garage" [sic] apparently in the vain hope of it being overlooked by the tax authorities.
By the end of the 1950s, Scientology was beginning to earn considerable amounts of money. Government taxes were, however, eating into this. Major efforts to gain tax exemption appear to have dated from this time, with HASI Ltd. established in the United Kingdom on 20 June 1960. Scientologists were invited to purchase shares in it for £25 each. The intention appears to have been to transfer all HASI Inc. assets to the control of a tax-exempt UK-based HASI Ltd. The scheme failed when the Inland Revenue refused to grant exemption. However, Scientology did not refund the now-useless shares, but instead generously re-bought them for 1 shilling each plus a "lifetime membership" of HASI Arizona; the shareholder would have to pay the stamp duty (4 pence per share) himself. So despite failing to gain tax-exemption, Scientology still managed to cream several thousand pounds off its members.
The "breakthrough" came in 1966. The Church of Scientology of California (CSC) - then a small, obscure entity based in Los Angeles - had some years previously been granted tax-exempt status by the United States Inland Revenue Service (IRS). Hubbard had the bright idea of transferring all HASI assets to CSC, thus finally gathering Scientology under one tax-exempt roof. He set this out very fully in an Executive Letter of 1966 (cited in full in the 1971 Enquiry into the Practice and Effects of Scientology):
Note the last paragraph. Despite Hubbard's claim that protection from official scrutiny was not the reason why the HASI's assets were being moved, this was in fact a great concern of his: see Prof. Stephen A. Kent's comments on "Allegations Concerning Practicing Medicine Without a License" in his paper, Scientology's Relationship With Eastern Religious Traditions.
HCO EXECUTIVE LETTER OF 12 MARCH 1966
To: All Staffs
Subject: CORPORATE STATUS
Well at last we are able to consolidate our corporate status in the UK and Commonwealth and S.A.
The big stumbling block has been Inland Revenue's refusal to grant non-profit status to limited companies. Without that we could not transfer the various organizations and US assets in the UK and Commonwealth to a UK or Commonwealth company.
For nearly 10 years, HASI Inc Arizona, has had to continue to operate in the UK and Commonwealth. In 1955 it found it cost the US office a fortune to support their overseas interests and they could not afford them. Currency exchange laws in UK. Aust, NZ etc. made it impossible for the Scientology offices there to pay the US office back for anything it furnished or did. This one way flow could be reduced by giving no service but even so left the US company at risk without pay.
In the mid-fifties a 12 man Board of Directors of which I was not a member determined to transfer all the HASI overseas offices to limited companies and be shut of them. I was appointed trustee for transfer.
But all the properties were non-profit and by the laws of Arizona no property of a non-profit company can be transferred to a profit company. Inland Revenue refused non-profit status to each of the limited companies I organized and I could not transfer the US assets to them. This was hard because the tax crazy UK and Commonwealth governments (their peoples are the highest taxed people in the world) demanded a limited company operate a year before Inland Revenue would say it was non-profit. So we would form a limited company and then after a year have the tax nuts say "No" and have to start all over again. This went on for 10 years! They would have gained all these US assets but no, they would not award a non-profit status.
HASI Ltd, HCO Ltd. local proprietary limited companies, one after another got the axe from Inland Revenue.
If you think that didn't make problems . . . . . !
Meanwhile the US offices continued to scream, cut off this expense of supporting England!
I supported a lot of these overseas companies with my own funds trying to get them to stand on their own feet. And at last in 1960 I organized the Saint Hill organization to help technology and to support the UK and Commonwealth. By Jan. 22, 1963, I was able at last to cut off the bulk of US support funds and handle things from Saint Hill for the overseas area particularly.
Finally, in January of 1966 while handling another lot of stupidity by Inland Revenue and UK accountants, I was able to sort out the picture.
The Church of Scientology of California was willing to take over all US, Commonwealth and South African interests. It is a Federal certified US non-profit corporation and Inland Revenue will apparently accept its certificate.
Thus for the first time I can execute my orders as Trustee and transfer the UK and Commonwealth properties off the back of the US HASI.
The companies are no longer absorbing US funds to keep going and a method of returning the US investment has been worked out by furnishing films and service to the US and not putting any further US funds into the Commonwealth. The Church of Scientology of California is willing to undertake this.
Rapidly the C of S of Calif as a foreign corporation (not as a new friendly society just being registered) is being qualified to do business through the UK and Commonwealth and every HASI office abroad is being turned over to it.
This means no change in staff or character of business. It means a change of name and bank accounts. All successful executive secretaries will be retained and things will go on as usual.
Every company of Scientology abroad is being turned over to C of S of Calif. by HASI, Inc. Arizona. This means HASI Ltd, HCO Ltd, and any and all inactive companies as well.
This finally gets me off the hook as personally supporting these companies.
I remain the US agent to effect the transfer and a HASI board minute of Feb. 20, 1966, directs all staffs and officers to assist me in making the transfer to C of S of Calif everywhere in the UK and Commonwealth.
I am of course a board member of C of S of Calif. and remain as Executive Director of the orgs.
Saint Hill, which was mine, is being sold to C of S of Calif, the other orgs are simply being given.
I receive no salary for my work and have no service contract with any organization. But I am consigning to C of S of Calif exclusive use of my name in connection with Scientology.
This makes a single, neat corporate structure.
Saint Hill (and probably London) begins to operate as C of S as of 5 April 1966. Other orgs will as fast as the Legal Officer at Worldwide can effect qualification of C of S in their countries.
The International Executive Division at Saint Hill is in firm control of Scientology and will continue to be and remains the Int Exec Div of each org in the world, authorized by their boards.
Such transfers are usually attended by a lot of heads rolling. But our statistics are mainly up and nothing desperate is planned.
Suppressives hate to see up statistics and as this new corporate structure will result in soaring statistics, being relieved of tax burdens. I dare say a lot of rumour will be started to make people insecure about it. But if getting very legal and all arrangements solid is insecurity then mountains are the sea.
Our corporate structure has been attacked many times But oversees it could not be consolidated due to Inland Revenue. Some people are naive enough to believe the purpose of such offices is to collect tax. It isn't. It's a mechanism invented by suppressives to stamp on rising statistics. Don't believe it? Well, what would happen if you got a rise? That would be an up statistic for you but there would be a fine for it by Inland Revenue! They just refused to accept US assets, that's all. The only cheerful note is that they'll break their own governments before they break us!
So we're getting all straight now, it seems. And good news! As all auditors will be ministers, ministers have in many places special privileges including tax and housing allowances.
Of course anything is a religion that treats the human spirit. And also Parliaments don't attack religions. But that isn't our real reason - it's been a long hard task to make a good corporate structure in the UK and Commonwealth so the assets could be transferred.
Apparently we've done it.
L. RON HUBBARD
Copyright © 1966
by L. Ron Hubbard
ALL RIGHTS RESERVED
The transfer went ahead. But only a year later, in 1967, disaster struck - the IRS stripped all US-based Scientology entities of their tax exemption, declaring that Scientology's activities were commercial and that it was being operated for the benefit of Hubbard. The Founding Church of Scientology of Washington, D.C. sued, claiming to be exempt from Federal income tax on the grounds that it was "a corporation organised and operated exclusively for religious purposes, no part of the earnings of which inures to any individual".
The U.S. Department of Justice contested the claim, on the grounds that the taxpayer's "most extensive and significant activities are directed towards the earnings of substantial fees from the "auditing" of persons to alleviate a wide variety of physical and emotional problems", and that "the founder of the organisation remains in complete control and receives substantial remuneration and perquisites both from the taxpayer and a network of affiliates".
The Founding Church's claim failed, because the Court (in a judgment delivered on 16th July 1969) held
"that plaintiff has failed to prove that no part of the corporation's net earnings inured to the benefit of private individuals, and plaintiff is not entitled to recover. The court finds it unnecessary to decide whether plaintiff is a religious or educational organization as alleged, since, regardless of its character, plaintiff has not met the statutory conditions for exemption from income taxation. In any event, the Government has not raised this issue. Because of the manner in which the second question framed by the parties is resolved, we need not and do not determine whether plaintiff's operations were exclusively for religious or educational purposes."That holding was based on the following findings of fact:-
"According to the trial commissioner's findings, L. Ron Hubbard received over $108,000 from plaintiff and related Scientology sources during the 4-year period June 1955 through June 1959. This figure represents $77,460 in fees, commissions, royalties, and compensation for services, plus $13,538 in payment for expenses incurred in connection with his services, as well as a total of $17,586 in reimbursement for expenditures made in plaintiff's behalf, in repayment of loans made to plaintiff and the New York organization, and as a loan from plaintiff to Hubbard. As the commissioner found, and we agree, the precise nature of the loans and reimbursed expenditures does not appear in the record. Nor do we find any explanation for most of the expenses paid. The portion of the $17,460 actually paid by plaintiff amounted to approximately $6,000 in 1955 56, more than $11,500 in 1956-57, approximately $18,000 in 1957-58, and over $22,000 in 1958-59.A subsequent attempt by the Scientologists to have this decision reviewed by the U.S. Supreme Court failed on 8th December 1969; hardly surprising, in the absence of any convincing financial controls within Scientology. The church ignored the reversal, which it deemed unlawful, and withheld taxes. And the fraudulent channeling of money to Hubbard went on.
Hubbard also had the use of an automobile at plaintiff's expense. During plaintiff's taxable years ending in 1958 and 1959, the organization provided and maintained a personal residence for Hubbard and his family. Moreover, in addition to all the foregoing, Hubbard received a percentage (usually 10 per cent) of the gross income of affiliated Scientology organizations.
Mary Sue Hubbard, the wife of plaintiff's founder, had income from September 1955 through December 1958 by virtue of renting property owned by her to plaintiff. Her total receipts from this venture were $10,685. Payments amounting to $l,450, attributable to the debts of her son, were made in 1956 and 1957. A completely unexplained figure of $250 and loans of $800 were received in 1958-59.
L. Ron Hubbard. Jr., was the recipient of loans in 1955-56 and 1958-59 totalling $1,226. He was reimbursed for expenditures of approximately $200 in behalf of plaintiff in 1957-58 and 1958-59.
In fiscal years 1957-58 and 1958-59, Kay [Catherine] Hubbard, the daughter, received payments, generally designated as salary or wages, totalling $3,242. The record is devoid of any evidence showing services performed by Miss Hubbard for plaintiff. This amount includes loans of $550 made in 1953.
What emerges from these facts is the inference that the Hubbard family was entitled to make ready personal use of the corporate earnings."
[Sir John Foster, Enquiry into the Practice and Effects of Scientology, chapter 4]
The means through which this was accomplished were two companies established to provide a cover for the activities of the Sea Org, Scientology's newly-created "spiritual élite". The first was the Hubbard Explorational Company Limited, incorporated on 22nd November 1966. Hubbard (described as an "Expedition Supervisor") held 97 of the 100 £1 shares, and he and his wife were the only directors. The main object was "to explore oceans, seas, lakes, rivers and waters, land and buildings in any part of the world and to seek for, survey, examine and test properties of all kinds." Needless to say, Hubbard had no intention of "exploring" anything; he spent the next few years sailing from port to port in the Mediterranean, out of reach of troublesome governments.
HEC Ltd. was soon replaced by another "front" entity, "Operations and Transport Corporation Ltda [sic]", created in 1968 through the Panamanian consulate in Valencia, Spain. It was essentially a channel for Hubbard to cream money off Scientology - he owned 98 of the 100 issued shares. The OTC played a key role in the "shore stories" told by the crews of Hubbard's ships. According to Hubbard's Flag Order 2673, "Stories Told", the Scientology fleet was part of "an international business management organization" involved in training businessmen. Any mention of Scientology was strictly forbidden; on the rare occasions when visitors boarded the Sea Org ships, pictures of Hubbard and evidence of Scientological activity were carefully hidden. The "business affairs" of the OTC gave Scientology the opportunity to engage in a number of strange activities. Mike Goldstein, an anthropology major from the University of Colorado and Sea Org member, was pressed into service as a courier:
"I was briefed in Los Angeles and drilled on my shore story. It was all made to seem very mysterious and cloak and dagger. It was scary. I was warned to follow my instructions to the letter and given a box to take out with me to the ship. I was to say it contained company papers of the Operation and Transport Corporation. Going through the security control in Los Angeles airport, the box set the buzzer off. I nearly died. They opened it up and discovered it contained Hubbard's underpants, tied in a bag with metal clips.Large amounts of money are said to have been diverted from the Church of Scientology to the OTC, the bank account of which, because Hubbard was its controller, was effectively Hubbard's own personal account. There was a total lack of financial accountability - a situation which persists to this day. (The Church of Scientology does not appear to give its members any hard information on its finances and expenditure.)
"When I got to New York I found I was expected to courier something else - fourteen boxes which had to be maintained at a certain temperature. No one would tell me what was in them, only that it was vital they arrived intact at the ship. In London I had to change planes. Transferring from one terminal to another with these fourteen boxes was murder. I arrived in Madrid and was taken by Sea Org members to an apartment, where the boxes were put in refrigeration. Next day I caught a plane for Casablanca, only to discover the ship had moved on further south to sail. By then I was completely paranoid about the boxes, terrified that the heat would get to whatever was in them. I got them wrapped up and found a bus to take me to Sail, where I finally arrived at the ship and handed over the boxes. I was wondering what the hell was in them, but I didn't find out until later. I was carrying fourteen boxes of frozen shrimps for the Hubbard family."
[in Russell Miller, Bare-Faced Messiah, chapter 18]
Legal contests continued fruitlessly through the 1970s. By 1975, Hubbard was 64 years old, in poor health and back in the United States for the first time in a decade. He became determined that he would obtain tax exemption for his organisation, by any means necessary. On 26 November 1975, whilst living incognito in Clearwater, Florida, Hubbard wrote to Henning Heldt, Deputy Guardian of the United States - a fancy title for the deputy head of the Guardian's Office, Scientology's "intelligence agency". In his letter, marked "SECRET", he stated:
"And we count on your B-1 to very quickly pre-alert any trouble so I can go fishing until you handle.B-1 was the Intelligence (later Information) Bureau of the Guardian's Office, responsible for investigating "external suppression." Heldt and the head of B1, Dick Weigand, quickly responded to Hubbard's order with a secret minute of 5 December 1975, GO 158, "Early Warning System B-1." GO 158 stated:
AND WE COUNT ON YOU GUYS TO MOW IRS DOWN AND WIN ACROSS THE BOARDS."
[Hubbard, secret minute of 26 Nov 1975 - capitalization as in original]
"MAJOR TARGETAmongst the measures ordered by Heldt and Weigand were:
Maintain an Alerting EARLY WARNING SYSTEM throughout the GO Network so that any situation concerning governments or courts by reason of suits is known in adequate time to take defensive actions to suddenly raise the levels on LRH Personal Security very high [i.e. so that Hubbard could go into hiding]."
[Heldt & Weigand, GO 158, "Early Warning System B-1", 5 Dec 1975]
Needless to say, there was no way that this could have been accomplished legally. Since the start of 1975, GO agents had stolen tens of thousands of classified government documents and had burgled offices of, amongst other agencies, the Department of Justice and the IRS. But things went drastically wrong in 1976, when GO agents were caught red-handed in the US Courthouse Library. On 20 June 1977, Michael Meisner, the GO agent and IRS employee responsible for overseeing the espionage campaign, gave himself up to the FBI after spending eight months as a fugitive and semi-prisoner of the GO. At six o'clock on the morning of 8 July 1977, 134 FBI agents armed with search warrants and sledgehammers, simultaneously broke into the offices of the Church of Scientology in Washington and Los Angeles and carted away 48,149 documents. They would reveal an astonishing espionage system which spanned the United States and penetrated some of the highest offices in the land.
Place an agent into the US Attorney's Office DC
as a first action as this office should cover all Federal
agencies that we are in litigation with or may be in
litigation with. AG I DC
Obtain data on their intended actions toward
Scientology, LRH, MSH. AG I DC
Place a separate agent into the IRS Office of
International Organizations (OIO) (as this office
has a case preparation or investigative action
going on LRH personally for income tax evasion
or something similar. AG I DC
Obtain their files on LRH/MSH and Scientology and
monitor the line continuously of other actions against
LRH/MSH. AG I DC
Determine from what area IRS attack would be
implemented (National Office, District Director
of area, or local IRS headquarters). ER I DIR US
[Heldt & Weigand, GO 158, "Early Warning System B-1", 5 Dec 1975]
The moment of maximum danger for Hubbard came in the summer of 1978. On 15 August 1978, a federal grand jury in Washington indicted nine Scientologists on twenty-eight counts of conspiring to steam government documents, theft of government documents, burglarizing government offices, intercepting government communications, harbouring a fugitive, making false declarations before a grand jury and conspiring to obstruct justice. Heading the list of those indicted was Mary Sue Hubbard. She faced a maximum penalty, if convicted, of 175 years in prison and a fine of $40,000. On 29 August, all nine defendants were arraigned in the federal courthouse at the foot of Capitol Hill and pleaded not guilty. Ron was convinced that Mary Sue would spill the beans on him and reveal his own close involvement in the illegalities. Quite typically, he cynically abandoned her and blamed the whole affair on her. His "Personal Communicator, Ken Urquhart, later commented:
"He was privy to almost all of it, he was as guilty of conspiracy as Mary Sue. There were a number of reports that could be interpreted that way. He didn't mind the fuss, flaps or errors he made. One thing I find hard to forgive was that he allowed his wife to go to jail for crimes he was equally guilty of. He publicly abandoned her. He made it perfectly clear within the org that she was abandoned."Mary Sue never did expose her husband, but on 26 October 1979, US District Judge Charles R. Richey accordingly found the nine Scientologists guilty on one count each of the indictment. Mary Sue and two others were fined the maximum of $10,000 and jailed for five years. The remaining defendants received similar fines and prison sentences of between one and four years. Sentencing Mary Sue, the judge told her: "We have a precious system of government in the United States... For anyone to use those laws, or to seek under the guise of those laws, to destroy the very foundation of the government is totally wrong and cannot be condoned by any responsible citizen." The sentencing memorandum was even more condemnatory:
[Ken Urquhart, interview with Russell Miller, Mclean, Virginia, Apr/May 86]
"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. It is interesting to note that the founder of their organization, unindicted co-conspirator L. Ron Hubbard, wrote in his dictionary entitled Modern Management Technology Defined that, "Truth is what is true for you." Thus, with the founder's blessings, they could wantonly commit perjury as long as it was in the interests of Scientology."All the defendants indicated an intention to appeal on the grounds that the evidence against them had been obtained illegally. The appeals were subsequently quietly dropped. In any event, all of those convicted - including Mary Sue - were out of jail by 1982, with remission granted for good behaviour. They were publicly expelled from the Church and supposedly barred from rejoining; however, one of those convicted, Dick Weigand, has since 1993 been working for the Church to introduce Scientology to the education and military authorities of Colombia.
The repercussions of this affair were very significant for Scientology itself. L. Ron Hubbard went into deep hiding, afraid that he would be arrested by the FBI, and remained in hiding until his death in January 1986. The remnants of the GO - which had effectively become the power base of the Hubbard family - were swept aside in 1981-82 in a palace coup led by a 20-year-old "messenger", David Miscavige, and his Commodore's Messenger Organization. The subsequent years saw round after round of massive purges in which possibly as much as half of the Church's membership was expelled or deserted. Scientology survived, however, and has more than recovered since then. The CMO remains the dominant force in the Scientology leadership. And under Miscavige, the battle against the IRS continued - in ways that only now are becoming evident.
Last updated 14 April 1997
by Chris Owen (email@example.com)