§  What's New  ||  Search  ||  Legal Archive  ||  Wog Media  ||  Cult Media  ||  CoW ® ||  Writings  ||  Fun  ||  Disclaimer  ||  Contact  §

     
 

[CT 6240]

Internal Revenue Service

Church of Spiritual
Technology
419 North Larchmont, Suite 162
Los Angeles, Ca 90004

Department of the Treasury

Washington, DC 20224

Person to Contact:
Mr. M. Friedlander
Telephone Number:
(202) 566-6701
Refer Reply to:
E:EO
Date: [stamp] JUL 8 1988

Employer Identification Number: 95-3781769
Form:1120
Tax Years: All Years

Dear Applicant:

           This is a final adverse ruling as to your exempt status under section
501 (c) (3) of the Internal Revenue Code.

           This ruling is made for the following reasons:

1. You have failed to establish that you are operated exclusively
for exempt purposes as required by section 501 (c (3) of the Code.
You have not demonstrated that your activities and purposes conform
to exempt purposes and activities as required by section 501 (c (3)
of the Code.

           You are one of a number of organizations which were created pursuant
to a reorganization of the Church of Scientology which took place in
1981 and 1982. The reorganization was undertaken after the Service
revoked the exempt status of the Church of Scientology of California,
the former "Mother Church" of the denomination. The basis of the
revocation was that the California church was an ordinary commercial
enterprise, the Church's income inured to L. Ron Hubbard, founder
of the Scientology religion, and the Church had violated public
policy by conspiring to impede the Service from assessing and
collecting taxes which were lawfully due. Church of Scientology of
California v. C. I.R.
, 83 T.C. 381 (September 1984). The
revocation was sustained by the Tax Court and upheld by the Court
of Appeals for the Ninth Circuit. 823 F. 2d 1310 (9th Cir. 1987).

           An earlier case involving a Scientology organization had also resulted
in a finding of private benefit to Mr. Hubbard and members of his family.
Founding Church of Scientology v. U.S., 412 F. 2d 1197 (Ct. C1. 1969),
cert. den., 39 U.S. 1009 (1970).

           In the Church of California case, cited above, the Tax Court described
how the Church attempted to frustrate the Service's efforts to examine its
financial affairs. The Church maintained no books or journals to record

 

[CT 6241]

-2-

Church of Spiritual Technology

and systematize its financial transactions. Therefore, the examination had
to proceed on the basis of millions of separate checks, invoices, and
disbursement vouchers. The Church's accountant saw to it that these
documents were provided in no semblance of order. He advised another
church to "give the IRS agent a bunch of records in a box in no semblance
of order, to place the agent in a dark, small, out-of-the-way room, [and]
to refuse to give practical assistance locating records." In the face of
such tactics, the IRS spent approximately two years in an unsuccessful
attempt to audit the Church's 1958 and 1969 financial operations.

           In addition to the above tactics, the Church knowingly and purposely
misled the IRS concerning extensive operations it conducted in the United
Kingdom. It concealed from the examiners the fact that it regularly received
debit advices from foreign banks in lieu of canceled checks. It never
produced canceled checks from some of its accounts which it maintained in
the name of another corporation. When checks were produced, they were
sometimes detached from their stubs. Boxes of records were mislabeled.
The Church intentionally delayed in providing requested records and in some
instances it never provided the records at all.

           In order to establish whether the reorganized Church of Scientology was
operated exclusively in furtherance of exempt purposes, we sought to obtain
detailed information from you and from the other newly created entities
which had filed applications for recognition of exemption. Although some
information was initially provided, the information was incomplete or partial.
Eight of the organizations eventually withdrew their applications without
providing the information we had requested.

           While the applications were pending, witnesses gave testimony in court
cases involving churches of Scientology. See Church of Scientology of
California v. Gerald Armstrong
, No. C 420153 (Calif. Super. Ct., July 20, 1984);
Founding Church of Scientology of Washington, D.C., Inc., et al. v. Director,
Federal Bureau or Investigation, et al.
, 802 F. 2nd 1448 , cert. den.,
56 U.S.L.W. 3231 (October 6, 1987). The testimony was to the effect that
L. Ron Hubbard continued to control the Church of Scientology for his
private benefit. Witness testimony in the Armstrong case alleged that the
project known as Mission Corporate Category Sort-Out (MCCS) had been
undertaken by the Church of Scientology of California in 1980. The alleged
purpose of the MCCS project was, according to the testimony of Laurel
Sullivan, to devise a new organizational structure to conceal L. Ron
Hubbard's continued control of the Church of Scientology. In the Founding
Church.v. Director, F.B.I.
case, to which the Service was a party, the
government successfully argued that L. Ron Hubbard should be required to
appear and be deposed because he was a managing agent of the Church. Mr.
Hubbard did not appear and the case against the government defendants was
dismissed with prejudice.

[CT 6242]

-3-

Church of Spiritual Technology

           We asked the remaining applicants who had not withdrawn their applications
to comment on the matters noted in the Armstrong and Founding Church v.
Director F.B.I.
cases. They responded that the testimony related to other organizations
and time periods, attacked the credibility of the witnesses, and stated
that L. Ron Hubbard did not hold any position of control in any church of
Scientology even though he was still revered as the founder of the religion.
We were told that the present corporate structure had been designed after those
responsible for the MCCS project had been dismissed from the church and that
the work done on the MCCS project was not considered or consulted in
designing the new organizational structure presently in place. At the same
time, we were furnished for the first time a chart showing levels of
authority and departments within the new organizational structure. One of
the departments, the Commodore's Messenger Organization (International),
exists within the corporate structure of Church of Scientology International,
the new "Mother Church" of the denomination. According to allegations made
in the Armstrong case, L. Ron Hubbard controlled the church through the
Commodore's Messenger Organization utilizing David Miscavige, Pat Broeker
and Anne Broeker to carry out his orders. David Miscavige, Anne Broeker,
and Lyman Spurlock were the original trustees of Religious Technology
Center. Mr. Miscavige enjoys a position of influence in the reorganized
Scientology structure which we have been informed derives from"moral
authority" rather than from any official position in the corporate structure.
Lyman Spurlock is president of Church of Spiritual Technology and, along
with Mr. Miscavige, is an employee of Author Services, Inc. Author Services,
Inc., is a for-profit corporation formed to provide services to L. Ron
Hubbard in connection with exploitation of patents and copyrights which Mr.
Hubbard owned.

           On January 7, 1986, we issued an initial adverse ruling on your
application. You submitted a written protest to our initial adverse ruling.
In your protest we learned for the first time of the existence of still
other organizations which were related to the new Scientology operating
structure. Following your protest conference, which was held in January,
1987, we asked you to provide more detailed information about these new
"international" organizations, including International Association of
Scientologists, International SOR Trust, SOR Management Services, Ltd.,
Scientology International Missions Trust, and International Scientology
Religious Trust. In a letter dated November 24, 1937, we noted that you
had previously agreed to supply that information to us. However, you did
not supply the information.

           In support of the protest to our initial adverse ruling, we were supplied
with copies of affidavits dated December 4, 1986, from Gerald Armstrong and
Laurel Sullivan. Ms. Sullivan was the person in charge of the MCCS project.
The affidavits state that the new church management "seems to have returned
to the basic and lawful policies and procedures as laid out by the founder
of the religion, L. Ron Hubbard." The affidavits conclude as follows:

[CT 6243]

-4-

Church of Spiritual Technology

           "Because of the foregoing, I no longer have any conflict with the Church
of Scientology or individual members affiliated with the Church. Accordingly,
I have executed a mutual release agreement with the Church of Scientology
and sign this affidavit in order to signify that I have no quarrel with the
Church of Scientology or any of its members."
[See also: Armstrong Declaration 12-25-1990]

           The history of Scientology's operations detailed in the Church of
California case includes a lack of adequate financial records, public policy
violations, deceptive practices and the maintenance of enemies lists
against whom any actions, however illegal, were justified. The California case
also demonstrates inurement of net earnings and benefit to the private interest
of Mr. Hubbard, operations that primarily furthered commercial purposes
conducted amid continuous representations denying control by and benefit to
Mr. Hubbard, and a tenacious denial of the actual state of the organization's
affairs in the face of overwhelming evidence establishing the true nature
of the organization's operations. More recently, attempts to conceal
Mr. Hubbard's ongoing control of Scientology were alleged in the Armstrong
case. Utilizing testimony any witnesses from the Armstrong case, the government
successfully argued that Mr. Hubbard was a managing agent of
the Church of Scientology as late as 1984. See the Founding Church v. Director,
F.B.I.
case, cited earlier.

           The events detailed in these court cases, which span almost the entire
period of Scientology's history, create an inference that Scientology, even
after reorganization, is not operated exclusively for exempt purposes. The
fact that Mr. Armstrong and Ms. Sullivan elected to settle their personal
differences with Scientology does not detract from the relevance of the
statements they previously made concerning Mr. Hubbard's use of Scientology
organizations to serve his private interest. Our experience with your
organization similarly reflects a continuation of the pattern of. inurement
and benefit to the private interest of Mr. Hubbard, operations that
primarily further commercial purposes, and denials of control by and benefit
to Mr. Hubbard for periods prior to his death despite contrary judicial and
Service findings. Blanket denials that Mr. Hubbard personally profited
from his position of influence in Scientology and assertions that your
operations exclusively further exempt purposes do not dispel this inference.

           Mr. Hubbard died on January 24, 1986. But, his death did not alter the
history of Scientology's prior operations or make available complete
information about your actual operations. Moreover, the same individuals
who controlled Scientology operations prior to Mr. Hubbard's death, and who
participated in arrangements which resulted in inurement and private benefit,
continued to control your operations and those of the other top level Scientology
organizations after Mr. Hubbard's death. Thus, the possibility of inurement
and private benefit continued after Mr. Hubbard's death and more complete
information about your operations and financial affairs was required to assure
that your operations had changed to eliminate any further private benefit.

[CT 6244]

-5-

Church of Spiritual Technology

           For the reasons explained above, in a letter dated March 17, 1988, we
proposed to review your books of account and records and those of Church
of Scientology International and Religious Technology Center. As explained in
our letter of :March 17, 1983, the purpose of this review was twofold.
First, to determine the integrity of your financial and accounting systems so
we could verify that the information you had provided was accurate. Second
to verify that no part of your net earnings inures to the benefit of any
private shareholder or individual and that there is no other disqualifying
activity.

           Church of Spiritual Technology, Church of Scientology International,
and Religious Technology Center agreed to participate in the financial
reviews pursuant to the letters of March 17, 1988. Church of Spiritual
Technology, Religious Technology Center and Church of Scientology International
informed us by letter dated June 24, 1988, that they would no longer
participate in the review. The refusal to continue the review, concentrating
on those areas of concern, and their failure to fulfill the terms of the
March 17, 1988, agreement, prevents us from concluding that Scientology's
operations have changed and that activities previously found to be
disqualifying for purposes of section 5O1(c)(3) of the Code have been
discontinued. Therefore, we conclude that you have not established that
you are operated exclusively for exempt purposes as required by section
501(c) (3) of the Code.

2. You are operated for a substantial non-exempt commercial purpose.

           In our initial adverse ruling of January 7, 1936, we concluded
that you were operated for a substantial non-exempt commercial purpose
because your activities assisted other organizations in maximizing
sales of goods and services associated with the practice of Scientology.

           In your protest and subsequent submissions you argued that your
activities were engaged in for religious rather than commercial purposes.
You contended that the provision of goods and services for a fee, which
is characteristic of Scientology, was a permissible means of providing funds
necessary for Scientology to support its operations, provide reserves
for renovations and expansion, and to attract potential new members
to the religion.

[CT 6245]

-6-

Church of Spiritual Technology

           We have carefully considered your arguments, but fail to see that
sales of goods and services for a fee by Scientology organizations under
policies and directives which emphasize sales and profits does not result
in a primary purpose of engaging, in activities similar in nature to
those of an ordinary commercial enterprise, in which profits are the
primary goal, rather than in advancing religious purposes. The fact
that the fees provide a source of funds for operating expenses and future
expansion and dissemination does nothing to distinguish these fee-for-service
operations from similar activities of ordinary commercial enterprises.
Therefore, by assisting and aiding in the marketing of Scientology, you
are engaged in activities which further a substantial non-exempt commercial
purpose.

           Your archival activities relate to the materials constituting the
scriptures of Scientology. These materials consist of the written and
spoken works of L. Ron Hubbard on the subject of Scientology. Prior to
his death, Mr. Hubbard held the copyrights on these materials. The
works you collected were being commercially exploited by Mr. Hubbard
and some of the organizations licensed by him. You were supported by
income paid to you by some of the organizations engaged in this
exploitation, notably Religious Technology Center and Church of
Scientology Flag Service Organization, Inc., a subordinate of Church of
Scientology International. You were thus performing functions which
benefited these organizations and furthered their objective of marketing
Scientology products and services.

           After Mr.. Hubbard's death, Religious Technology Center and Church
of Scientology International and its subordinates have continued to
market Scientology products and services. Your collection of original
Hubbard writing and tape recordings enhances their marketing efforts
because the products they market are derived from these original writings
and tape recordings. Therefore, you are operated for a substantial
non-exempt commercial purpose.

           In addition, the refusal to continue the review agreed to in the
letters of March 17, 1988, to Church of Spiritual Technology, Church of
Scientology International, and Religious Technology Center, concentrating
on those areas of concern, and their refusal to fulfill the terms of
the March 17, 1988, agreement prevents us from concluding that
Scientology's operations have changed and that activities previously
found to be disqualifying for purposes of section 501(c) (3) of the Code
have been discontinued. Therefore, we conclude that you have not
established that you are operated exclusively for exempt purposes as
required by section 501(c) (3) of the Code.

[CT 6246]

-7-

Church of Spiritual Technology

3. You are operated for the benefit of private interests and
your net earnings inure to the benefit of private individuals
.

           In our initial adverse ruling, we concluded that your operations
furthered the private interest of and resulted in inurement of net
earnings to L. Ron Hubbard because he received royalties on the
sales of products associated with the practice of the religion he
founded. We also concluded that your activities served Mr. Hubbard's
private interest through your participation in a plan to exploit
Mr. Hubbards's trademarks, trade names, service marks, copyrights,
and patents through licensing and assignment arrangements. We also
concluded that your activities served the private interests of and
resulted in inurement of net earning to organizations associated
with Mr. Hubbard.

           In your protest you called our attention to the fact of
Mr. Hubbard's death and noted that his estate is in probate. Church
of Spiritual Technology is the principal beneficiary of the estate
and will receive the royalty income formerly received by Mr. Hubbard
if it is determined to be exempt under section 501(c) (3). Based
on these facts, you contend that private benefit, if there was any,
ceased upon the death of Mr. Hubbard on January 24, 1986.

           Mr. Hubbard's death does not erase the benefit and inurement
to his private interest that occurred.

           Further, both before and after Mr. Hubbard's death, you made
the original writings and other materials formerly owned by Mr.
Hubbard available to Church of Scientology International and
Religious Technology Center in exchange for so-called "contributions"
from Religious Technology Center and Church of Scientology Flag
Service Org, Inc., a subordinate of Church of Scientology International.
Religious Technology Center and Church of Scientology International
engage in marketing Scientology to the public in a manner
indistinguishable from that of an ordinary commercial enterprise.
Therefore, your provision of the original Hubbard Materials to
Religious Technology Center and Church of Scientology International
serves the private interests of Religious Technology Center and
Church of Scientology International.

           In addition, the refusal to continue the review agreed to in
the letters of March 17, 1988, to Church of Spiritual Technology,
Church of Scientology International, and Religious Technology
Center, concentrating on those areas of concern, and their refusal
to fulfill the terms of the March 17, 1988, agreement prevents us
from concluding athat Scientology's operations have changed and

[CT 6247]

-8-

Church of Spiritual Technology

that activities previously found to be disqualifying for purposes
of section 501(c) (3) of the Code have been discontinued. Therefore,
we conclude that you have not established that you are operated
exclusively for exempt purposes as required by section 501(c) (3) of
the Code.

4. You have failed to establish that you are not operated for
the benefit of private interests and that your net earnings
do not inure to the benefit of private individuals
.

           Trusts and corporations can be used to siphon income from
allegedly exempt organizations for the benefit of private individuals.
This happened in the Church of California case. An allegedly religious
trust and dummy Panamanian corporations were used to funnel money
to L. Ron Hubbard.

           Although the organizational structures employed by Scientology
have changed since the California case, you have not clearly
established that your relationship with the new entities furthers
your exclusively exempt purposes. The past history of Scientology's
operations suggests that the purpose of these organizations may be
to disguise the fact that private interests are the ultimate
beneficiaries of the reorganized operating structure.

           An example of an organization which may serve private interests
is International Publications Trust (IPT). Prior to the formation
of IPT, L. Ron Hubbard granted licenses to New Era Publications (NEP)
to produce Scientology books and E-meters. NEP sublicensed Bridge
Publications, Inc. (BPI). The license and sublicense agreements
provided for royalty payments from BPI to NEP and from NEP to L.
Ron Hubbard. Then, IPT was formed to act as the holding company parent
of BPI and NEP.

           You informed us that IPT has two foreign trustees, Church of
Scientology Religious Education College, a corporation, and Geoffrey
Clunie, an individual. Our requests for additional information
about IPT and its trustees and their relationship to the reorganized
Scientology structure have not been answered. So, we see in place
an entity that controls Scientology publications and E-meter
production controlled by persons about whom no information has
been provided. In the absence of any other explanation for this
arrangement, we have no alternative but to conclude that the
holding company's real purpose could be to benefit Mr. Clunie's
private interest or the private interest of the College, just as
intervening trusts and corporations were used to mask benefits to
the private interest of L. Ron Hubbard.

[CT 6248]

-8-

Church of Spiritual Technology

           It is also clear that NEP and BPI share in the commercial
exploitation of these properties to benefit their own private
interests. Mr. Hubbard's death did not effect the rights that NEP
had already received from Mr. Hubbard prior to his death. Therefore,
NEP and BPI are continuing to benefit from their part in the
commercial exploitation of these properties even though Mr. Hubbard
is no longer sharing in the benefits of the commercial exploitation.
Even if Church of Spiritual Technology does eventually become the
owner of the patents and copyrights formerly owned by Mr. Hubbard
the licenses granted to NEP will still be in effect. Thus the
private benefit to NEP and BPI is ongoing even though Mr. Hubbard
is dead and even though a number of new Scientology organizations
have been created. Further, it has not been established that
other new and old organizations about which our requests for
detailed information remain unanswered are not sharing in private
benefit. The potential beneficiaries include Author Services,
Inc., SOR Management Servies, Ltd, International Scientology Film
Trust, and International Scientology Religious Trust.

           The same persons who were in charge of Scientology prior to
Mr. Hubbard's death hold positions of control or influence in some
of these new organizations. For example, persons who hold positions
of influence in the reorganized Scientology structure also hold
positions in Author Services, Inc., a for-profit corporation formed
to benefit L. Ron Hubbard, Lyman Spurlock, David Miscavige, Greg
Wilhere, Terri Gamboa, Marion Meisler, Maria Starkey, and Becky
Hay, persons who hold influence in the reorganized Scientology
structure, also hold positions in Author Services, Inc. Author
Services, Inc., is now performing the same function of "collecting
royalties" for the beneficiary of L. Ron Hubbard's estate. Thus,
as happened in the Church of California case, the income of an
allegedly exempt organization (Church of Spiritual Technology
should it obtain recognition of exemption) will be passed through
a for-profit corporation which is controlled by persons who also
hold positions of influence in the Scientology structure.

           A similar problem exists with regard to the "central reserves"
of Church of Scientology International and its subordinate churches.
A nonexempt foreign entity, SOR Management Services, is being paid
under a contract to "manage" these reserves. Again, the income of
allegedly exempt organizations is being passed through a nonexempt
organization controlled by persons who hold positions in, or act
as nominees for, organizations in the topmost levels of the
reorganized Scientology structure.

[CT 6249]

-10-

Church of Spiritual Technology

           Moreover, a newly revealed organization, International SOR Trust,
about which our inquiries remain unanswered, has an ongoing
relationship with some of the organizations engaged in the
exploitation of the properties formerly owned by Mr. Hubbard. For
example, at one time International SOR Trust purchased the stock
of Bridge Publications, Inc., from Church of Scientology of
California and later disposed of the stock to International
Publications Trust.

           Furthermore, individuals closely associated with Cancorp
Investment Properties, a for-profit British Columbia corporation
allegedly formed to serve the private interests of L. Ron Hubbard,
about which we inquired, have been in positions of influence in
the reorganized Scientology structure. You refuse to provide
detailed information about Cancorp Investment Properties or
Religious Research Foundation, another organization allegedly
formed to serve the private interest of L. Ron Hubbard, about
which we also inquired.

           The proliferation of associated entities also includes a number of
other new "international" organizations, about which we have inquired but
you have not responded to our inquiries. Since the Scientology operating
structure is the only funding source for these organizations, they and the
persons who control then are also sharing in the income generated by the
activities of. Church of Spiritual Technology, Church of Scientology
International, and Religious Technology Center.

           In light of the past history of Scientology's operations, this
continuing sharing in the net earnings of Scientology by nonexempt
entities is sufficient by itself to raise serious concerns about
private benefit and inurement. Nonetheless, you have chosen to
ignore these concerns or have provided incomplete or partial information
which is not adequate to establish that private benefit and inurement
are not flowing to nonexempt entities, some of which employ and are
directed by the same people who hold positions of influence in the
new Scientology operating structure. Such self-dealing does not
lose its identity as private benefit and inurement merely because
it is conducted through intermediary individuals and/or organizations.

           Accordingly, we find that you are not exempt because you have failed
to establish that you do not operate for the benefit of private
interests and that your net income does not inure to private individuals
contrary to the prohibition contained in section 501(c) (3) of the
Internal Revenue Code. In addition, the refusal to continue the
review agreed to in the letters of March 17, 1988, to Church of Spiritual
Technology, Church of Scientology International, and Religious Technology

[CT 6250]

-11-

Church of Spiritual Technology

Center, concentrating on those areas of concern, and their refusal to
fulfill the terms of the March 17, 1988, agreement prevents us from concluding
that Scientology's operations have changed and that activities previously
found to be disqualifying for purposes of section 501(c) (3) of the Code
have been discontinued. Therefore, we conclude that you have not established
that you are operated exclusively for exempt purposes as required by section
501 (c) (3) of the Code.

           Furthermore, the Service considers your failure to fulfill the terms
of the March 17, 1988, agreement as constituting a failure to exhaust
administrative remedies, as required by section 7428(b) (2) of the Code.

           Contributions to your organization are not deductible under Code section
170.

           You are required to file federal income tax returns on the above form.
Based on the financial information you furnished, it appears that returns
should be filed for the tax years shown above. You should file these
returns with your key District Director for exempt organization matters
within 30 days from the date of this letter, unless a request for an
extension of time is granted. Returns for later tax years should be filed
with the appropriate service center as indicated in the instructions for those
returns.

           If you decide to contest this ruling under the declaratory judgment
provisions of section 7428 of the Code, you must initiate a suit in the
United States Tax Court, the United States Claim Court, or the District
Court of the United States for the District of Columbia before the 91st
day after the date that this ruling was mailed to you. Contact the clerk
of the appropriate court for rules for initiating suits for declaratory
judgment. Processing of income tax returns and assessment of any taxes due
will not be delayed because a declaratory judgment snit has been filed under
code section 7428.

           If you have questions, please contact the person whose name and telephone
number are shown in the heading of this letter.

Sincerely yours,
(Signed) E. D. Coleman
E.D. Coleman
Director, Exempt Organizations
Technical Division

 

 
 

 

 

§  What's New  ||  Search  ||  Legal Archive  ||  Wog Media  ||  Cult Media  ||  CoW ® ||  Writings  ||  Fun  ||  Disclaimer  ||  Contact  §