How the church bullied IRS into exempting its taxes

By Douglas Frantz
New York Times News Service

On Oct. 8, 1993, 10,000 cheering Scientologists thronged the Los Angeles Sports Arena to celebrate the most important milestone in the church's recent history: victory in its all-out war against the Internal Revenue Service.

For 25 years, IRS agents had branded Scientology a commercial enterprise and refused to give it the tax exemption granted to churches. The refusals had been upheld in every court. But that night the crowd learned of an astonishing turnaround. The IRS had granted tax exemptions to every Scientology entity in the United States.

"The war is over." David Miscavige, the church's leader, declared to tumultuous applause.

THE LANDMARK reversal shocked tax experts and saved the church tens of millions of dollars in taxes. More significantly, the decision was an invaluable public relations tool in Scientology's worldwide campaign for acceptance as a mainstream religion.

THE FULL story of the turnabout by the IRS has remained hidden behind taxpayer privacy laws for nearly four years. But an examination by The New York Times found that the exemption followed a series of unusual internal IRS actions that came after an extraordinary campaign orchestrated by Scientology against the agency and people who work there. Among the findings of the review by The New York Times, based on more than 30 interviews and thousands of pages of public and internal church records, were these:

• Scientology's lawyers hired private investigators to dig into the private lives of IRS officials and to conduct surveillance operations to uncover potential vulnerabilities, according to interviews and documents. One investigator said he had interviewed tenants in buildings owned by three IRS officials, looking for housing code violations. He also said he had taken documents from an IRS conference and sent them to church officials and created a phony news bureau in Washington to gather information on church critics. The church also financed an organization of IRS whistle-blowers that attacked the agency publicly.
• The decision to negotiate with the church came after Fred T. Goldberg Jr., the commissioner of the Internal Revenue Service at the time, had an unusual meeting with Miscavige in 1991. Scientology's own version of what occurred offers a remarkable account of how the church leader walked into IRS headquarters without an appointment and got in to see Goldberg, the nation's top tax official. Miscavige offered to call a halt to Scientology's lawsuits against the IRS in exchange for tax exemptions.
• After that meeting, Goldberg created a special committee to negotiate a settlement with Scientology outside normal agency procedures. When the committee determined that all Scientology entities should be exempt from taxes, IRS tax analysts were ordered to ignore the substantive issues in reviewing the decision, according to IRS memorandums and court files.
• The IRS refused to disclose any terms of the agreement, including whether the church was required to pay back taxes, contending that it was confidential taxpayer information. The agency has maintained that position in a lengthy court fight, and in rejecting a request for access by The New York Times under the Freedom of Information Act. But the position is in stark contrast to the agency's handling of some other church organizations. Both the Jimmy Swaggart Ministries and an affiliate of the Rev. Jerry Falwell were required by the IRS to disclose that they had paid back taxes in settling disputes in recent years.

IN INTERVIEWS, senior Scientology officials and the IRS denied that the church's aggressive tactics had any effect on the agency's decision.

They said the ruling was based on a two-year inquiry and voluminous documents that showed the church was qualified for the exemptions.

Goldberg, who left as IRS commissioner in January 1992 to become an assistant secretary at the Treasury Department said privacy laws prohibited him from discussing Scientology or his impromptu meeting with Miscavige.

The meeting was not listed on Goldberg's appointment calendar, which was obtained by The New York Times through the Freedom of Information Act.

The IRS reversal on Scientology was nearly as unprecedented as the long and bitter war between the organizations. Over the years, the IRS had steadfastly refused exemptions to most Scientology entities, and its agents had targeted the church for numerous investigations and audits.

THROUGHOUT the battle, the agency's view was supported by the courts. Indeed, just a year before the agency reversal, the US Claims Court had upheld the IRS denial of an exemption to Scientology's Church of Spiritual Technology, which had been created to safeguard the writings and lectures of L. Ron Hubbard, the late science fiction writer whose preachings form the church's scripture.

Among the reasons listed by the court for denying the exemption were '"the commercial character of much of Scientology," its "virtually incomprehensible financial procedures" and its "scripturally based hostility to taxation."

Small wonder that the world of tax lawyers and experts was surprised in October 1993 when the IRS announced that it was issuing 30 exemption letters covering about 150 Scientology churches, missions and corporations. Among them was the Church of Spiritual Technology.

"IT WAS A very surprising decision," said Lawrence B. Gibbs, the IRS commissioner from 1986 to 1989 and Goldberg's predecessor. "When you have as much litigation over as much time, with the general uniformity of results that the service had with Scientology, it is surprising to have the ultimate decision be favorable. It was even more surprising that the service made the decision without full disclosure, in light of the prior background."

While IRS officials insisted that Scientology's tactics did not affect the decision, some officials acknowledged that ruling against the church would have prolonged a fight that had consumed extensive government resources and exposed individual officials to personal lawsuits. At one time, the church and its members had more than 50 suits pending against the IRS and its official.

[This is a partial reprint of a story published the day earlier in the New York Times. I strongly suggest you read the complete news story, The Shadowy Story Behind Scientology's Tax-Exempt Status, which was brought back online at some point.]

Lawsuit, privates eyes hound Scientology's legion of critics

New York Times New Service

For years, Scientology has gone to great lengths to defend itself from critics. Often its defense has involved private investigator working for its lawyers. While the use of private investigators is common in the legal profession, some instances involving the church have been unusual.

Scientology officials said that the investigators operated within the law and that the tactics were necessary to counter attacks made over the years by Internal Revenue Service agents and the press.

 "When people stop spreading lies about them and stop printing false allegations about them in newspapers, the church will stop using private investigators." said Monique E. Yingling, a church lawyer.

In 1986 the Federal Court of Appeals in Boston said evidence in an extortion case indicated that Scientology investigators had induced witnesses to lie. It identified one investigator as Eugene M. Ingram.

Eight years later, Ingram was charged with impersonating a police officer in seeking information about a sheriff in Tampa, Fla., while working as a church investigator. He and a Scientology employee flashed badges and told a woman that they were police detectives before questioning her about possible links between a county sheriff and what was said to be a prostitution ring, police records say.

Court officials said a warrant for Ingram's arrest was still outstanding. A church official said the Tampa case was phony.

Richard Behar, an investigative reporter, incurred Scientology's wrath when he wrote a cover article about the church in Time magazine in 1991. The article called the church "a hugely profitable global racket that survives by intimidating members and critics in a Mafia-like manner."

The church and a member sued Time and Behar for libel, and the company spent more than $7 million defending the cases. The church's suit was dismissed last year by a Federal District Court judge, an action being appealed by Scientology. The individual's suit was settled with a corrective paragraph, but no money.

Behar contends in a countersuit that even before the article ran, church investigators questioned his acquaintances about his health and whether he had had tax or drug problems. Behar said that after the article ran, he had been followed by Scientology agents and had been so concerned he had hired bodyguards.

In 1992, Judge Ronald Swearinger of Los Angeles County Superior Court told The American Lawyer magazine that he believed Scientologists had slashed his car tires and drowned his collie while he was presiding over a suit against the church. The church denied the accusations.

Scientology's tactics in court have also drawn judicial rebukes. Last year, the California Court of Appeal accused Scientology of using "the litigation process to bludgeon the opponent into submission." The Federal Court of Appeals in San Francisco said last year that Scientology had played "fast and loose with the judicial system" and levied $2.9 million in sanctions against the church.

By aggressively pursuing its opponents in court, the church seems to heed the preaching of L. Ron Hubbard, its founder, who once wrote: "The purpose of the suit is to harass and discourage rather than win. ... If possible, of course, rum him utterly."