Scientologists’ Loss of Tax-Exempt Status Upheld by U.S. Court

SAN FRANCISCO — A federal appellate court Tuesday upheld the revocation of the tax-exempt status of the Church of Scientology of California, saying the church used a sham corporation and other methods to funnel money to founder L. Ron Hubbard.

The U.S. 9th Circuit Court of Appeals also upheld more than $1.4 million in federal taxes and penalties levied against the Los Angeles-based church for the years 1970 through 1972.

The court said the Internal Revenue Service and the U.S. Tax Court had properly revoked the church’s tax-exempt status on the grounds that a portion of its earnings “inured to the benefit of a private individual,” Hubbard and his family.

Richard Riley, a lawyer for the church, declined comment.

Hubbard, who has since died, resigned as executive head of Scientology churches in 1966 but continued to hold significant control over the operations, the court said.

The court said the salaries paid to Hubbard and his wife, Mary Sue, totaling $185,000 in 1970-72, were not excessive and did not disqualify the church from tax-exempt status. But other types of payments “cross the line between reasonable and excessive,” the court said:

- The church required all books on Scientology and Dianetics, a related subject, to be copyrighted in Hubbard’s name, even if someone else wrote them.

- A “sham corporation,” Overseas Transport Corp., “funneled millions of dollars of church assets to L. Ron Hubbard.”

- The church required its organizations around the world to pay Hubbard 10% of their income as a “debt repayment” for his work in founding Scientology.

- Hubbard was sole trustee of a church trust fund to which church assets were transferred. In 1972, more than $1 million was withdrawn from the trust, taken aboard a yacht on which Hubbard and his family lived while cruising the Mediterranean and kept in a file cabinet to which Mary Sue Hubbard had the only keys.

The court rejected the church’s argument that Hubbard’s control over church assets was no different than that of pastors who collect money from their congregations each week and hold it for church uses.

“Unlike the typical Saturday or Sunday when parishioners donate their money to the church, here the church transferred millions of dollars to bank accounts controlled by private individuals who had no official responsibility for managing church assets,” said Judge Thomas Tang, writing for a unanimous three-member panel.

He said the church failed to document its assertion that the money in the yacht file cabinet remained intact, and also failed to produce evidence that the 10% “debt repayments” to Hubbard were for a legitimate debt.

The court also rejected the church’s contention that the IRS had been unconstitutionally motivated by hostility toward Scientology in revoking the tax exemption in 1967.

Tang said the church had provided “evidence of religious animus” in its claims of government harassment over the years, such as raids, alleged spying and statements attributed to IRS agents calling Scientology a “threat to the community.” But he said the church had failed to demonstrate that the tax revocation was a product of hostility.

“The IRS has revoked the tax-exempt status of many other churches,” and showed in this case that its decision was “based upon exhaustive and responsible investigation,” Tang said.