Scientology Paid Government $12.5 Million Under Terms Of Agreement

December 31, 1997

The Church of Scientology paid the federal government more than $12 million as part of a settlement that gave the church tax-exempt status.

According to the agreement, a copy of which was obtained by Tax Analysts and which was first reported in the Wall Street Journal, the church's payment of $12.5 million was intended to cover the church's payroll, income, and estate tax bills for an undisclosed number of years before 1993.

The church agreed to establish a special committee of church officials to monitor its compliance with the agreement and with laws governing exempt organizations. It also agreed to drop thousands of lawsuits it had filed against the Service and to stop helping people and other groups sue the IRS based on claims made before October 1, 1993, the settlement date.

Also, the IRS canceled payroll taxes and penalties, as well as liens and levies, it had assessed against church entities and officials. It also dropped its audits of the mother church, the Church of Scientology International, and 12 other Scientology organizations. The Service also agreed not to audit the church for any year before 1993 and dropped its litigation in pursuit of church records.

The church agreed to give the IRS compensation information on its top officials and other financial data pertaining to 23 member churches, businesses, and organizations. Failure to provide this information could result in fines as high as $75,000 for members of the church's tax compliance monitoring committee. The agreement also empowers the IRS to impose up to $50 million in penalties if church funds repeatedly are spent on noncharitable purposes, such as enriching church officials.


The IRS revoked the church's exemption in 1967, charging that the church's founders were getting rich from church funds. However, to the surprise of many, the Service restored the church's exempt status in 1993. An article in the New York Times on March 9, 1997, suggested the reversal may have resulted from an impromptu 1991 meeting at Service headquarters between then-IRS Commissioner Fred T. Goldberg Jr. and church officials. (The church has denied this account.)

Tax Analysts has sued the IRS for release of the closing agreement that set the terms of the exemption, arguing that the agreement is part of the church's exemption application and is subject to disclosure under section 6104. In response, the IRS has argued that the agreement's disclosure would violate section 6103 rules prohibiting release of taxpayer return information.

Attorney William J. Lehrfeld of Washington, who has represented Tax Analysts in its quest to have the closing agreement disclosed, said it is unclear how its release to journalists this week will affect Tax Analysts' case. However, the issue of whether the agreement is subject to disclosure as part of the exemption application remains unresolved, he told Tax Analysts.

It is not known how the Wall Street Journal obtained a copy of the document.

Church Official Angry

Mark Rathbun, director of the church's Religious Technology Center, was angry that the agreement had been disclosed, arguing that the document's release constitutes a felony. "How would you feel if your tax returns were spread about without your authorization?" he remarked in a conversation with Tax Analysts.

On the agreement's enforcement procedures, Rathbun said, "When you're as pure as the driven snow, you don't worry about that kind of thing."

The church's attorney, Monique Yingling of Zuckert, Scoutt & Rasenberger, Washington, could not be reached for comment. But she told the Journal the $12.5 million payment was not a tax bill, but was "meant to resolve all outstanding disputes" between the church and the IRS.

Lehrfeld said he finds it interesting that the payment apparently was not paid in relation to any one tax. "The Service apparently thinks it has authority just by the mere power to execute a closing agreement to assert a dollar sum as the equivalent of a fine or cost without regard to whether it is a tax, a penalty, or an interest payment," he told Tax Analysts. "The implications are enormous."

Lehrfeld also said the settlement appears to give exempt organizations little leeway to comply with tax law.

"The conditions and limitations that are in this agreement reach so far over the horizon that they have the effect of a binding contract that removes any discretion as to the leeway allowed to an exempt organization to comply in its own judgment with the law as their lawyers read the law," Lehrfeld said. "They've got some conditions in there that are extraordinary."


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Last updated 3 January 1998
by Chris Owen (