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Scientology's Pinellas tax battle isn't the first

Title: Scientology's Pinellas tax battle isn't the first
Date: Wednesday, 4 August 1976
Publisher: St. Petersburg Times (Florida)
Author: Bette Orsini
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The controversial Church of Scientology's failure to gain tax-exempt status for $3-million worth of Pinellas County properties is only the latest chapter in a stormy history of legal battles over taxes.

And the latest battle, which opened in the county courthouse last week, appears far from over.

Scientology spokesmen vow to take their Pinellas tax case to the U.S. Supreme Court if necessary. Pinellas officials, for their part, are just as determined to defend their denial of tax-exempt status for the Scientologists' property in Clearwater.

AT STAKE, on the surface at least, is an annual tax bill of about $40,000 on the church's two properties — the former Fort Harrison hotel and the old Bank of Clearwater building that the California church surreptitiously purchased late last year.

The real stakes may be much bigger.

"There really hasn't been a definitive decision that I know of in this country as to whether or not the Church of Scientology of California is in fact a nonprofit organization, so this might very well be the case that determines that," said James Helinger Jr., the assistant county attorney who advised Property Appraiser Mac Haines and the Tax Adjustment Board.

Both Haines, who acted May 24, and the appeal board, which acted Friday, turned down requests from the Scientologists for exemption from property taxes.

Contemplating the expected legal battle, Helinger said, "It may act as a precedent in future (court) decisions."

The California church will be an experienced legal opponent for Pinellas officials.

For the better part of a decade, the California church has proved itself skillful adversary for Internal Revenue Service (IRS) agents and government attorneys trying to sort out the church's tax liabilities.

IN PINELLAS, representatives of the California church offered to disclose some financial information in support of their sought-for tax exemption. But they attached strings to the offer. They wanted the financial information kept secret, something Florida's public records laws probably wouldn't allow.

In California, the IRS complains that the Scientologists stalled over IRS requests for specific records for two years. They have since locked up their records in 23 trunks, which have remained sealed while a three year legal battle has been waged in the courts. IRS efforts to gain access to the records has been frustrated for more than five years.

The interest of the IRS in the affairs of the California church was made public on Sept. 30, 1968, when three printed lines appeared in the Internal Revenue Bulletin of that date.

"Church of Scientology of California and subordinate branch churches. Qualification terminated as of Jan. 2, 1967."

The 1968 notice informed the public for the first time that the church's tax-exempt status had been revoked, and that contributions to the church were no longer deductible for income tax purposes. The exemption was revoked retroactively to the date of the church's founding.

THE CHURCH'S troubles with the IRS began more than a year before the notice was published in 1968, however.

According to a government legal brief, obtained by The St. Petersburg Times, the IRS revoked the California church's exemption in mid-1967:

"On July 18, 1967, the church was advised that its tax-exempt status had been revoked."

The California church, which owns the two buildings in Clearwater, apparently permitted IRS auditors to examine its books for the years 1964-67 — years in which the church collected slightly more than $500,000 or roughly $125,000 a year. Government documents indicate that "an examination of the taxable years 1964 through 1967" was made, and the IRS found that the church was liable for taxes.

But when an IRS auditor asked for a look at the records for 1968 and 1969 — when the church reported that its income jumped nearly 1,600 per cent from previous levels to an average of more than $2-million a year — the IRS says it encountered stalling tactics.

"A CURSORY glance at the figures supplied by the church in its information returns for the years 1964 through 1969 manifests clear change in the financial operation of the organization," a government document submitted to a court in California states.

"In 1964, the gross receipts of the church were $87,147; they rose to $237,653 in 1967, and leaped to $2,401,954 in 1969."

If the government had found what it terms "deficiencies" in audits covering the previous four years, it definitely wanted a closer look at the years 1968 and 1969.

In 1971, a soft-spoken IRS auditor named Robert H. Cluberton began asking the Scientologists to surrender the records "voluntarily." According to government documents, "these efforts (to secure the records voluntarily) encompassed a period of approximately two years."

After nearly two years of fruitless negotiations, the IRS agent issued a summons ordering one of the church officials to produce the records.

When the official appeared in answer to the summons, he didn't bring the records. He said he had resigned one week after the summons was issued — and four days before the date he was ordered to produce the records — and thus would not be able to comply with the summons.

THE IRS THEN WENT to court, and asked a judge to order compliance. The judge responded by ordering the church and the official to "show cause" why they shouldn't obey the summons.

Two weeks later, the church, charging harassment, launched its legal counterattack. It notifed the court that it wanted to question the IRS auditor, his boss and the regional commissioner under oath.

For nearly two years, the Scientologists used almost every conceivable legal maneuver to delay obeying the summons for their records, and the court files in California are thick with motions to quash, petitions to postpone and appeal briefs.

When the case finally reached the U.S. 9th Circuit Court of Appeals, the Scientologists repeated their charges of IRS harassment, and renewed their demand that they be allowed to inspect internal IRS records and question IRS officials under oath. They argued that the questioning was necessary to prove their charges of harassment.

The appeals court issued a ruling last year, but the matter didn't end there. It said the church has to prove its allegations of IRS harassment. It can't just make them.

"THE PARTY RESISTING enforcement should be required to do more than allege an improper purpose before discovery is granted . . ." the court said.

"Allegations . . . that the (IRS) has issued a summons for an improper purpose . . . are easily made."

The church's request to inspect internal IRS records "would place undue burdens on the Service and impede what is supposed to be a summary enforcement procedure," the court found in rejecting the Scientologists' argument that it should have access to IRS files.

Nonetheless, the appeals court ruled that "the church's allegations of bad faith harassment by the Service, though thin, raised sufficient doubt about the Service's purposes" in seeking to audit the church's books, and required the lower courts to allow the Scientologists to have a "limited" hearing on the purpose behind the IRS summons so they would "at least have some opportunity to substantiate (their) allegations."

The appeals court sent the case back to the lower courts, where it remains unresolved.

REGARDLESS of the outcome of the California church's legal battles with the IRS, Helinger, the assistant Pinellas County attorney, said the Scientologists still will have to prove their cast for an exemption form Pinellas taxes under Florida law.

"The Florida statutes set forth their own statutory criteria for things to be considered in determining whether or not an individual or an organization is in fact non-profit or profit-making for tax purposes," said Helinger.

"Florida law prescribes the two-prong test of both ownership and use that must be met in order to qualify for tax-exempt status on any given piece of property."

In other words, the Scientologists must prove that they are entitled to an exemption as a nonprofit organization, and they must prove that the former Fort Harrison and the old Bank of Clearwater building are not used for profit-making operations.

Thus far, they have failed to convince either Property Appraiser Mac S. Haines or the five-member Tax Adjustment Board.

[Illustration / Caption: Three printed lines in an Internal Revenue Bulletin conveyed the public warning]