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Scientology retail plan is rare, as few churches back non-religious businesses

Churches creating retail districts, like Scientology plans to do on Cleveland Street in downtown Clearwater, are unusual but not unique.
Published Mar. 19, 2017

CLEARWATER — Scientology has long set its practices apart from other tax-exempt religions by charging members for auditing sessions and courses required to advance through the faith.

But the church's proposal to develop a retail and entertainment district in downtown Clearwater makes it more of an outlier.

The IRS permits tax-exempt churches to have for-profit business ventures unrelated to their religious missions, but it is rare in the United States.

Of the country's 1.5 million nonprofits, only 34,181, including 16,416 churches and charities, reported having income from unrelated businesses in 2013, according to the most recent data from the IRS.

The most notable example is a $1.5 billion mixed-use development in Salt Lake City, backed by the Church of Jesus Christ of Latter-day Saints.

While it's impossible to know all of a private organization's holdings, most of the real estate portfolios and other business investments churches have are related to their missions, such as schools, hospitals and even bookstores or cafes for congregations, said Notre Dame Law School professor Lloyd Mayer.

When churches invest in business outside of their spiritual purposes, profits other than investment income are taxed at the same rate as corporations. But because churches are not required to file tax returns with the IRS, Mayer said questions can arise around whom those proceeds are benefiting and whether the non-faith-related businesses make up a disproportionate amount of the church's activities.

"There's nothing illegal about a charity, including a church, taking its assets and investing them in a productive way, including a for-profit business," Mayer said. "The thing you worry about is, is it paying taxes like it should and is it benefiting the insiders of the church? The question is do these business deals in some way help the Church of Scientology leaders personally make money?"

Scientology spokesman Ben Shaw did not respond to a request for comment.

In addition to the $260 million in real estate Scientology owns under its name in Clearwater, 75 percent of which is tax-exempt for religious uses, the church also bought more than $26 million in property over the past two months through shell companies.

In individual meetings Tuesday that were closed to the public, Scientology leader David Miscavige briefed Clearwater City Council members on his retail plan that includes the church recruiting businesses to Cleveland Street and building an entertainment complex involving actor and noted Scientologist Tom Cruise on Myrtle Avenue.

Washington, D.C., tax attorney Charles Watkins said rental income from a retail business leasing space in a church-owned building would be tax-exempt because it's viewed as investment income, even though the church would pay property taxes for the non-religious use of the building.

But if the church owns the building through shell companies, it's more complicated.

"If a church owns a gas station and sells gas and services in the same way as the ExxonMobil on the corner, it would be taxed on those profits, but if it invests in a corporation that owns a business, the corporation would be taxed but the dividends to the church would not," Watkins said.

Churches also participate in businesses by running them as separate for-profit entities where the church is the sole owner.

The largest-scale retail development known to be backed by a religious organization in the U.S. is the City Creek Center built in downtown Salt Lake City in 2012.

The development of 104 stores, seven restaurants and 536 condos and apartments was financed by the Church of Jesus Christ of Latter-day Saints.

The development is owned by the church's for-profit real estate arm, City Creek Reserve, and managed by Taubman Inc., so there is no ecclesiastical oversight.

City Creek Reserve spokesman Dale Bills declined to answer specific questions, providing only a 14-year-old statement where former LDS president Gordon Hinckley said "tithing funds have not and will not be used to acquire this property. Nor will they be used in developing it for commercial purposes."

The project is credited with turning around the struggling downtown that was reeling from the recession and lingering disruption from a massive 2002 freeway construction project.

Its opening in 2012 prompted about $3 billion in additional private development in the city, according to Salt Lake Chamber CEO Lane Beattie.

"It wasn't even questioned here," Beattie said of the public's reception of a church backing a commercial enterprise. "The word religion didn't enter into it. It was the fact that any organization was doing it."

Natalie Gochnour, associate dean of the David Eccles School of Business at the University of Utah, said part of the success has to do with the Mormon church's collaboration with the general public and city officials in the planning and design.

Salt Lake City is about 50 percent Mormon, with the religion's headquarters based downtown.

Gochnour said the church's massive Temple Square District operates harmoniously near the Utah Jazz basketball arena, the Utah Symphony, and the state's arts, culture and culinary nucleus, where more than 100,000 people commute every day to work.

"I think now people think of City Creek Center as just an incredible destination, and they don't associate it with the church," Gochnour said. "They didn't cut corners, they didn't go with their own plans, but they listened to the public."

Contact Tracey McManus at tmcmanus@tampabay.com or (727) 445-4151. Follow @TroMcManus.

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