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March 9, 1997

Scientology's Puzzling Journey From Tax Rebel to Tax Exempt


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, I.R.S. 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 I.R.S. 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. On the basis of the I.R.S. ruling, the State Department formally criticized Germany for discriminating against Scientologists. The German Government regards the organization as a business, not a tax-exempt religion, the very position maintained for 25 years by the American Government.

The full story of the turnabout by the I.R.S. 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 I.R.S. 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 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 I.R.S. 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 I.R.S. officials, looking for housing code violations. He also said he had taken documents from an I.R.S. 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 I.R.S. 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 Mr. Miscavige in 1991. Scientology's own version of what occurred offers a remarkable account of how the church leader walked into I.R.S. headquarters without an appointment and got in to see Mr. Goldberg, the nation's top tax official. Mr. Miscavige offered to call a halt to Scientology's suits against the I.R.S. in exchange for tax exemptions.

After that meeting, Mr. 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, I.R.S. tax analysts were ordered to ignore the substantive issues in reviewing the decision, according to I.R.S. memorandums and court files.

The I.R.S. 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 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 I.R.S. to disclose that they had paid back taxes in settling disputes in recent years.

In interviews, senior Scientology officials and the I.R.S. 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.
Mr. Goldberg, who left as I.R.S. 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 Mr. Miscavige.

The meeting was not listed on Mr. Goldberg's appointment calendar, which was obtained by The Times through the Freedom of Information Act.
The I.R.S. reversal on Scientology was nearly as unprecedented as the long and bitter war between the organizations. Over the years, the I.R.S. had steadfastly refused exemptions to most Scientology entities, and its agents had focused numerous investigations and audits on the church.

Throughout the battle, the agency's view was supported by the courts. Indeed, just a year before the agency reversal, the United States Claims Court had upheld the I.R.S. 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 I.R.S. 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 I.R.S. Commissioner from 1986 to 1989 and Mr. 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 I.R.S. officials insisted that Scientology's tactics had not affected the decision, some officials acknowledged that ruling against the church would have prolonged a fight that had consumed extensive Government resources and exposed officials to personal lawsuits. At one time, the church and its members had more than 50 suits pending against the I.R.S. and its officials.

''Ultimately the decision was made on a legal basis,'' said a senior I.R.S. official who was involved in the case and spoke on the condition that he not be identified. ''I'm not saying Scientology wasn't taking up a lot of resources, but the decision was made on a legal basis.''

The church's tactics appear to violate no laws, and its officials and lawyers argued strenuously in a three-hour interview at church offices in Los Angeles last month that the exemptions had been decided solely on the merits. They said the church had been the victim of a campaign of harassment and discrimination by ''rogue agents'' within the I.R.S. Once the agency agreed to review the record fairly, they said, it was inevitable that the church would be granted its exemptions. ''The facts speak for themselves,'' said Monique E. Yingling, a Washington lawyer who represented the church in the tax case. ''The decision was made based on the information that the church provided in response to the inquiry by the Internal Revenue Service.''

Church officials and lawyers acknowledged that Scientology had used investigators to look into their opponents, including I.R.S. officials, but they said the practice had nothing to do with the I.R.S. decision. ''This is a church organization that has been subjected to more harassment and more attacks certainly than any religion in this century and probably any religion ever, and they have had to perhaps take unusual steps in order to survive,'' Ms. Yingling said.

The Origins
An Expanding Church On a Collision Course

Since its founding in 1950, Scientology has grown into a worldwide movement that boasts eight million members, although defectors say the number is much smaller. The church, which has vast real estate holdings around the world and operates a yacht based in the Caribbean, describes itself as the only major new religion to have emerged in the 20th century.

Its founder, Mr. Hubbard, asserted that people are immortal spirits who have lived through many lifetimes. In Scientology teachings, Mr. Hubbard described humans as clusters of spirits that had been trapped in ice and banished to Earth 75 million years ago by Xenu, the ruler of the 26-planet Galactic Confederation.

Scientology describes its goal as ''a civilization without insanity, without criminals and without war, where the able can prosper and honest beings can have rights, and where Man is free to rise to greater heights.'' To reach those heights, Scientologists believe, each individual must be ''cleared'' of problems and afflictions through a series of counseling sessions known as ''auditing.'' The sessions are performed by a trained auditor assisted by a device similar to a lie detector, known as an E-meter.

Although Scientology's complicated finances make a total estimate difficult, records on file at the I.R.S. indicate that in the early 1990's the church was earning about $300 million a year from auditing fees, the sale of Scientology literature and recordings, management services and the franchising of its philosophy. Church officials said those figures were higher than actual earnings.

The mother church, the Church of Scientology of California, was established by Mr. Hubbard in Los Angeles in 1954. Three years later, it was recognized as tax exempt by the I.R.S. But in 1967, the agency stripped the church of its exemption.

In its revocation letter, the agency said that Scientology's activities were commercial and that it was being operated for the benefit of Mr. Hubbard, a view supported by the courts several times in the ensuing 25 years. The church ignored the action, which it deemed unlawful, and withheld taxes.

The I.R.S. put Scientology on its hit list. Minutes of I.R.S. meetings indicate that some agents engaged in a campaign to shut down Scientology, an effort that church officials cite as evidence of bias. Some of the tactics led to rebukes by judges, including a 1990 ruling in Boston that criticized the I.R.S. for abusive practices in seeking access to church records.

Scientology retaliated. In 1973 the church embarked on a program code named Snow White. In a document labeled ''Secret,'' Mr. Hubbard outlined a strategy to root out all ''false and secret files'' held by governments around the world regarding Scientology. ''Attack is necessary to an effective defense,'' Mr. Hubbard wrote.

Snow White soon turned sinister. Under the supervision of Mr. Hubbard's third wife, Mary Sue, Scientologists infiltrated the Department of Justice and the I.R.S. to uncover information on Mr. Hubbard. They broke into offices at night and copied mountains of documents. At one point, an electronic bugging device was hidden inside an I.R.S. conference room the day before a meeting about Scientology.

Critics say those actions fell under a church doctrine that Mr. Hubbard called the Fair Game policy. Mr. Hubbard wrote that church enemies might ''be deprived of property or injured by any means by any Scientologist without any discipline of the Scientologist. May be tricked, sued or lied to or destroyed.''

The conspiracy was uncovered in 1977, and Mrs. Hubbard and 10 others were sentenced to prison. Mr. Hubbard was named an unindicted co-conspirator because investigators could not link him to the crimes.

The church promised to change its ways. Scientologists said that members who had broken the law had been purged, including Mrs. Hubbard, and that the church had been restructured to protect against a recurrence. The Fair Game policy, they said, has been misinterpreted by courts and critics.

''There is nothing like that,'' said Elliot J. Abelson, the church's general counsel. ''It doesn't happen.''

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