What We Know About The Scientology Closing Agreement

From AFF - THE CULT OBSERVER Vol. 11 No. 2 1994

Paul Streckfus

This article first appeared in Tax Notes, January 10, 1994, 131-132. Copyright 1994 by Tax Analysts. Reprinted with permission.

It's hard to imagine how two entities desperately seeking respectability in the world of tax-exemption could have done much worse than what has transpired over the past couple of months.

In October 1993 - after three decades of fighting - the IRS released favorable exemption ruling letters to at least 25 Church of Scientology-related groups. When asked about these developments, the IRS's only response was, "Trust us." Not surprisingly, attorneys for the Church of Scientology, as well as a church representative, made a similar response. Mistake number one - reporters always take "no comment" to mean "catch me if you can."

On the Trail

This reporter's first Tax Notes article on these developments (Oct. 18, 1993, p. 279) asked about the retroactivity of the rulings and the continuing vitality of the Supreme Court's holding in Hernandez (109 s. Ct. 2136 (1989). It now looks like it was naive to guess that Hernandez [a decision that held certain Scientology activities not tax-exempt] would remain the law of the land. This reporter also penned a "Viewpoint" article in the October 25 issue of Tax Notes (p. 500), critically noting the IRS's failure to explain why it was now granting exemption "in cases where numerous courts have found evidence of inurement and private benefit in the operations of Scientology organizations."

In response, one of Scientology's attorneys, Thomas C. Sprong, wrote a letter (Tax Notes, Nov. 1, 1993, p. 627), telling readers what I should do if I "really cared for the truth," and labeling my reporting as "irresponsible and unprofessional."

A second article (Nov. 1, 1993, p. 525) reported on an intensive review of the administrative record made available by the IRS. The record, probably inintentionally, revealed the existence of an IRS "negotiations committee" chaired by Howard M. Schoenfeld, special assistant to the assistant commissioner (EP/EO). Somewhat ironically, Schoenfeld's office had been bugged by the Scientologists during earlier, less pleasant times. Apparently, the Scientologists were now satisfied that Schoenfeld was not one to hold a grudge.

It was later learned that the move to a negotiated settlement had apparently been directed by then-commissioner Fred T. Goldberg Jr., whose adminis-tration had been marked by charges of "giving away the store," as documented in an article in Tax Notes (Feb. 1, 1993, p. 530). In that article, Goldberg seemed to be arguing that his power as IRS commissioner included reversing Supreme Court decisions, which now appears to have happened in the Hernandez case. The article also detailed a number of other disturbing administrative actions by the IRS.

This story, too, was greeted by a blast (Nov. 8, 1993, p. 747) from an attorney for the Scientologists, Monique E. Yingling. She accused me of attacking the settlement "simply because it involves Scientology." In addition, the Scientologists' designated spokesperson, Marty Rathbun, weighed in, accusing me of "prevaricating with reckless abandon." (Nov. 15, 1993, p. 871).

A third article (Nov. 8, 1993, p. 643) reported on what appears to be the IRS throwing in the towel on the Hernandez issues, notwithstanding its victory in the Supreme Court. Four former IRS commissioners, who apparently don't share Goldberg's expansive view of the power of IRS commissioners to overturn Supreme Court decisions, expressed misgivings about this action.

A fourth article (Dec. 6, 1993, p. 1144) provided a hint that the IRS was granting almost full deductibility to all past contributions (including auditing [Scientology counseling] payments that were addressed in Hernandez) made by Scientologists. This article prompted a reader to send in a Scientology booklet titled, "Information on Taxes and Your Donation," that provided the main details of the church's secret closing agreement with the IRS.

Details of Secret Agreement

According to the booklet, the Internal Revenue Service's action has two consequences of utmost interest to Scientologists. First, this action signifies that the Internal Revenue Service - and the United States government as well - has formally recognized that the Church operates exclusively for religious purposes and that Scientology, as a bona fide religion, is beneficial to society as a whole. Second, the action means that the donations you make to the Church - including donations for auditing and training - qualify as charitable contributions and can be claimed as deductions on your federal (and state) income tax returns!"

The booklet then states that "those actions by the Internal Revenue Service encompass every Scientology church in the United States," as well as "several of the most significant Scientology organizations located outside of the United States."

Regarding contributions, the booklet states that "donations for Scientology auditing and training services . . . qualify for the charitable contribution deduction." This has been a controversial aspect of the closing agreement, since it appears to directly violate the Supreme Court's ruling in the Hernandez case.

As for effective dates, the booklet explains that "the entire amount of donations you make from January 1, 1993 on for auditing and training qualify [sic] as charitable contributions." For years before 1993, two rules apply. For Scientologists engaged in litigation with, or under audit by, the IRS, "the IRS will drop all pending cases in litigation, and will also discontinue any audits that are underway." This means "any taxes and interest claimed by the IRS by reason of such disallowed donation deductions will not have to be paid." In case there is still any doubt about this the booklet states, "These tax cases and IRS audits are gone."

For "those instances where donations for services were made in years prior to 1993 but were not claimed as income tax deductions, or where a claim for refund for such taxes is already pending but not under audit," the booklet advises that "the amount that can be claimed is limited to 80 percent of the donation." To date there has been no explanation of the significance of this amount, but it would appear to entail a significant revenue loss to the government.

A Public Matter

What is one to make of all this? First, the IRS has tried to make private what should be a public matter. The Service has aroused strong suspicion that it is acting outside its authority in disregarding the requirements for exemption and in ignoring a Supreme Court decision that seemed to settle the issue of deductibility of auditing payments to the Church of Scientology.

The church, on the other hand, seems to be using its usual tactics with the press. It's interesting that at the same time the Scientologists were blasting the coverage in Tax Notes of their rapprochement with the IRS, their former public relations head, Robert Vaughn Young, who has turned against them, was writing abut how Scientologists fool the press (Quill, November/December 1993). In this critical review, he reported on tactics such as "how to respond to a question without answering, how to divert the issue, how to tell 'an acceptable truth,' how to stall for time, how to 'attack the attacker,' " and much more. It would appear that church representatives continue to use these tactics. To date, despite repeated requests, no information (unless you count fulminations) has been forthcoming from church representatives.

At this point in time, the IRS-Church of Scientology closing agreement cannot be fully evaluated since many of its details remain secret. Tax Analysts is currently seeking the closing agreement under the Freedom of Information Act.

The IRS failed to explain why it was now granting exemption "in cases where numerous courts have found evidence of inurement and private benefit in the operations of Scientology organizations." Four former IRS commissioners, who apparently don't share Goldberg's expansive view of the power of IRS commissioners to overturn Supreme Court decisions, expressed misgivings about this action. The evidence released to date, and the lack of information available to the public from the IRS, bring into question the process of recognizing tax exemption and taxpayer confidence in that system.


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Last updated 12 April 1997
by Chris Owen (chriso@lutefisk.demon.co.uk)