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Tax experts: Church's money-raising practices don't appear to threaten tax-exempt status

FOR 40 years beginning in the 1950s, IRS officials sorted through the maze of corporate entities that compose Scientology, trying to make sense of the organization. So when the church made a bid in the early 1990s to have its tax-exempt status reinstated, the agency had questions.

What about all those lawsuits against the church, including many saying it was slow to refund parishioners' money?

If so many of Scientology's staff members and so much of its writings were devoted to making money, wasn't it really a business?

How close is the relationship between the church and its well-financed membership group, the International Association of Scientologists?

The church answered emphatically:

Refunds were granted — no problem.

It wasn't obsessed with making money.

The IAS wasn't part of the church, and joining it was voluntary.

Scientology got its exemption in 1993. But former church insiders told the St. Petersburg Times that none of those answers holds true today.

• Many say the church is still slow to grant refunds. And its practices differ from what it told the IRS. The church now says refunds are granted only in "certain circumstances" and the law does not require they be returned at all.

• Former insiders say large numbers of church staffers are involved in raising money. That's not the impression the church left when it answered the IRS's questions. For example, it said, only 4 percent of its staff worked in the finance department.

• Membership in the IAS is not voluntary for practicing Scientologists, many former church members say. Parishioners are told it is a necessary step toward the church's upper levels of spiritual awareness.

"It was assumed and expected that every person doing services was a member (of the IAS)," said Hy Levy, who worked for 16 years as a church "registrar" in Clearwater, signing up parishioners for services. "And it was gasps of 'Oh, my God!' if they weren't."

The church told the Times there is no conflict between what it does today and what it told the IRS 20 years ago.

IRS spokesman Mike Dobzinski said the agency does not comment about individual taxpayers or tax-exempt groups. But tax experts said the church's money-raising practices don't appear to put its federal tax exemption at risk.

If aspects of Scientology's operations have changed, "it's not of interest to anyone" as long as the church is still pursuing a charitable purpose, said John D. Colombo, an associate dean at the University of Illinois College of Law and a professor specializing in tax-exempt organizations.

"If they're just being aggressive, but they haven't crossed the line into illegality, then the answer is nothing (can be done)," he said. "The answer is, if you don't like it, drop out of the church and go somewhere else."

Scientology's original main church, the Church of Scientology of California, was granted tax-exempt status in 1957, three years after it was formed. But the IRS revoked the exemption in 1967, saying the church's activities were commercial and founder L. Ron Hubbard was profiting.

The IRS and the church feuded for years after that, with Scientology working to discredit the agency and cast its officials as biased. Some court rulings said the IRS had indeed been unfair. In the mid 1970s — years before current church leader David Miscavige took power — Scientology operatives infiltrated the IRS and Department of Justice, and broke into an IRS office seeking the government's secret files on the church. Eleven Scientologists were convicted and Hubbard was named an unindicted co-conspirator.

Then came the October surprise. One fall afternoon in 1991, Miscavige and his top lieutenant, Marty Rathbun, popped in unannounced at IRS headquarters in Washington. The bold move resulted in two years of negotiations between the church and the agency.

Records of those talks detail the IRS's questions and church answers that led to Scientology reclaiming its exemption.

Refunds came up when the IRS asked about numerous parishioner lawsuits against the church. The IRS wanted assurances from the group that once bugged its offices that there wouldn't be "continuing violations of public policy."

Scientology told the IRS: "If someone isn't happy with Scientology — which is a very small minority of people — he simply has to make a proper request for his donations back, agree to forgo further services and his donations will be returned."

But in 1996, three years after receiving the exemption, the church took a strikingly different tone in a policy directive titled "Return of Donations." The church provided a copy to the Times. It says the church "may return" money "under certain circumstances," provided the person has "availed himself of all remedies to resolve his or her upsets with the religion."

Deviating from the refund procedure — by hiring a lawyer, for example — will shut down the process, the directive says. The document contends the church is fairer about refunds than other religions are. It says donations are accepted in good faith and refunds impede Scientology's objectives.

The church said refunds weren't an issue in the IRS's decision to grant the tax exemption. It said the IRS's principal concern was how the church used donations. They are used "exclusively to further (Scientology's) worldwide program of religious and charitable activities," spokeswoman Karin Pouw said.

Active Scientologists typically keep money in accounts with the church rather than pay for services as they go. For many, the balances are in the thousands.

There are two ways to get money back.

Parishioners who take a service and are dissatisfied can get a refund if they make a request within 90 days. Parishioners who simply want the unused portion of their accounts back are told to start a "repayment" process — talking to a chaplain about their dissatisfaction and walking the required paperwork through the church's bureaucracy.

In either case, parishioners are told they can never again receive Scientology services.

The Times learned of many parishioners who found Scientology's refund process to be difficult at best.

More than a dozen former members have complained to the Pinellas County Department of Justice & Consumer Services, saying the church failed to refund their money. A few eventually got refunds.

Records show the church telling the agency it has no standing to intervene.

Former church member David St Lawrence said he has helped about 20 former parishioners seek repayments from the church. All but one received money back, he said, but it took persistent effort for four to 20 months.

The difficulty level is an eight on a scale of 10, he said.

"These people are very polite, but they do everything possible not to give you straight answers and not to deliver," St Lawrence said. "You can sort of see the desperation."

Longtime Scientologist Carisa Marion gave the Times documents showing that the church confirmed she had $399,161.81 in her parishioner account. She left the church and started asking for her repayment in December, providing the documentation the church requested. She didn't get her money back until Oct. 31, after she told the church she was talking with the Times.

Former Boston parishioner Brian Culkin, who spent $330,000 on the church in 2009, said he left with about $40,000 in unused money in his account. He's also seeking thousands in refunds for services. He has been waiting for his money for more than a year.

The church declined to discuss either parishioner's account.

When the IRS was considering the church's tax exemption, it expressed concern about Hubbard's 1972 directive that staffers "make more money" and "make other people produce so as to make money."

At the time, the church argued that those statements were aimed only at the 4 percent of staffers who worked in its finance offices. That percentage has not changed, the church said recently.

Former longtime members say Scientology in recent years has been more focused on collecting money than at any time they can remember. That was especially true after the 2007 release of book sets known as "The Basics," they said.

"Every staff member became a salesman. Every staff member," said Levy, the former Clearwater staffer. "A person would walk into (a church) and they would get pounced on."

The church said it has called on staffers for "all hands" activities many times.

"All church staff, in whatever position, assist in the dissemination of the scripture," spokeswoman Pouw said, comparing its staff to medieval monks who hand-copied Catholic texts before the printing press.

"The line of questioning is, frankly, silly," she said. "There is no inconsistency with the church's practices and representations made to the IRS."

Tax experts say the Internal Revenue Code requires a tax-exempt organization to operate for a charitable, religious or educational purpose, and bars any individual from receiving any portion of the group's net earnings. Such groups generally can't influence legislation or engage in campaigns for public office.

Beyond that, the only other requirement is that they follow federal and state laws, said Colombo, the University of Illinois professor.

Tax-exempt churches are not required to file annual financial reports with the IRS, as other tax-exempt organizations must do.

The IRS can audit a church to see if an appropriate percentage of its proceeds is spent on tax-exempt purposes. The agency can launch such an inquiry based on media reports, tips from informers or other sources.

But the 1984 Church Audit Procedures Act buffers churches from the IRS overreaching. The agency must have "reasonable belief" that a church is not operating for a tax-exempt purpose.

"Churches generally know that, through this act, the IRS has to have a good reason," said Jaclyn A. Cherry, an assistant professor specializing in nonprofit and tax-exempt law at the University of South Carolina School of Law.

"And then the IRS has to actually walk through some pretty lengthy procedures to even then get to audit. And the church will usually hold the IRS accountable at each step."

None of the practices described by former church members appear to be "inconsistent with an overall charitable purpose," Colombo said. "You don't have to be poor to be a charity and you don't necessarily have to help the poor to be a charity. So nothing you've described raises immediate red flags."

WHEN THE CHURCH was seeking the tax exemption in the early 1990s, the IAS brought in an average of $24 million a year in donations and fees, and had reserves totaling $92 million.

Scientology told the IRS that the IAS was "not a part of the church." It also said "requiring membership in the IAS in order to participate in religious services never has been valid and membership in the IAS was and remains wholly voluntary." The church reiterated that point in its statements to the Times.

"On paper that's true; in practice it was never true," Levy said. He said the church makes it clear parishioners must join the IAS — and continue donating — to make it up Scientology's "Bridge to Total Freedom," especially the upper levels.

"If you weren't properly donating, things would come pretty much to a halt as far as the progress up the Bridge," said Kim Hawkins, a former Scientologist living in Portland, Ore.

Culkin, the former Boston parishioner, said church staffers told him he needed to keep giving to the IAS to make it through Scientology's advanced levels.

Can parishioners advance without giving extra?

"Good luck, man," Culkin said. "I would say it would be very challenging based on what I witnessed with myself and with other people."

Tax experts: Church's money-raising practices don't appear to threaten tax-exempt status 11/20/11 [Last modified: Sunday, November 20, 2011 6:00pm]
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