Originally published on Forbes.com on July 17th, 2012
The Katie Holmes – Tom Cruise story inspired me to look into the tax history of Scientology. All I knew to start was that there was enough Scientology tax litigation to scatter numerous references throughout current tax cases. The volume of recorded decisions, which are the result of a “thirty years war” between IRS and Scientology is impressive. What is most intriguing is how the war ended. There were two major issues. One was whether Scientology organizations qualified for exempt status. The other was whether the “donations” that members made for “auditing” sessions, where they were attached to “E-meters” could be deducted. Circuit courts split on the donation issue and it was ultimately resolved by the Supreme Court in favor of the IRS.
The war ended in 1993, with a closing agreement, which was confidential. The agreement was leaked in 1997. Although the IRS has never confirmed it, there seems to be little doubt that the leaked document is genuine. The most surprising, some might say shocking, aspect of the agreement was that the IRS gave up on the deduction issue for “auditing” after having won it in the Supreme Court. It raised constitutional concerns. The IRS will often continue to litigate an issue after it loses in court. As a matter of fact, it makes announcements as to whether it will or will not “acquiesce” in decisions of various courts. When the Supreme Court rules against it though, it is game over. Here we have the Supreme Court ruling in favor of the IRS and the IRS not following the decision. Very disturbing.
One of my commenters thought that I was pretty soft on Scientology. I invited him to do a guest post. Scott Pilutik is often cited by the Village Voice as a legal expert. You have no idea how cool that makes me think he must be. His piece is more nuanced, but the heart of his argument seems to be that Scientology should have its exempt status revoked, because of some very bad behaviors its leadership engages in, its operation as a for-profit-business and the fact that it benefits its current leader, David Miscavige in much the same way it did founder L Ron Hubbard, which is what led to revocation of its exempt status in the sixties :
However, if Scientology’s practices were to be examined under the second IRS “religious purpose” criteria, requiring that an entity’s practices not contravene public policy, significant questions are raised, given how Scientology (1) forces its members to “disconnect” from family members; (2) mistreats children; (3) coerces abortions by its staff members; (4) maintains a practice of what it calls “Fair Game” by which its perceived enemies can be and often are retaliated against in extrajudicial manners; (5) operates in every way as a taxable for-profit business, by accepting money in a quid pro quo exchange for its services; and finally, (6) continues to personally benefit an individual (inurement), this time Hubbard’s successor, David Miscavige.
We, as a country, presumptively bestow exempt status on religious groups because we believe religious groups provide a net benefit to the larger community. In sharp contrast, Scientology, by its morally repugnant practices, benefits itself at significant cost to the larger community. It’s high time the IRS rescinded Scientology’s exempt status.
You will have to forgive me if I remain agnostic on the question of whether the bad behaviors have happened. I’m a tax blogger, not an investigative reporter. My presence on a prestigious platform, which some commenters are astounded by, as am I, does not give me access to enormous research resources. So I am not going to agree or disagree with Mr. Pilutik on Scientology’s behaviour. Where I strongly disagree is in his utilitarian calculus of exempt status for religious groups. I believe that religion is a separate sphere of life that as far as possible should be free of government intrusion. Don’t expect a CPA living in North Oxford, Massachusetts to take on a legal expert for the Village Voice unaided. I had an e-mail exchange with Edward A. Zelinsky, of the Benjamin N. Cardozo School of Law], Yeshiva University. Here is what he wrote:
It’s important to identify three distinct issues:
1) Why are religious institutions tax-exempt? While there are many who adhere to the public benefit theory. I, like you, find the autonomy rationale more persuasive, i.e., religious institutions are tax-exempt to respect the autonomy of religion from government.
2) Who is religious? That doesn’t mean that anyone can be a religion. It is necessary (and difficult) to police the borderline between those institutions which should legitimately receive tax-exempt status and those which should not.
3) Was the IRS correct in its closing agreement with the Church of Scientology and in the IRS’s subsequent enforcement policies? I think the critics score some points on this. Full disclosure note: I sent four children to Jewish elementary schools, paid full tuition, deducted nothing. It appears that, in practice, the IRS is permitting at least some Scientologists to deduct expenses while forbidding others (e.g., me, the Sklar family) from taking comparable deductions. This is a legitimate source of concern.
Professor Zelinsky did a great article on the parsonage exclusion (the provision that allows “minsters of the gospel” to exclude cash payments for housing from their income). He concluded that the exclusion is both constitutional and bad tax policy, a nuanced view which I really applaud. He notes that when the state’s taxing power meets religion, you cannot avoid a constitutional dilemma, you just get to pick your poison:
In this setting, there are no disentangling alternatives. If religious entities and actors are taxed, they are subjected to the inherently intrusive relationship between the tax collector and the taxpayer. If religious entities and actors are not taxed, there are inevitable tensions policing the boundaries of exemption. The choice between borderline entanglement and enforcement entanglement is inherent in the relationship between the modern state’s tax system and contemporary religious institutions and their personnel.
Critics argue that Scientology is not a religion, but rather a destructive cult. Mr. Pilutik leads with the allegation that Scientology busts up families, by prohibiting members from communicating with people who have left. Assume, for the sake of argument that there is truth in that. Consider this:
If any man come to me, and hate not his father, and mother, and wife, and children, and brethren, and sisters, yea, and his own life also, he cannot be my disciple.
Who said that ? Most people, who could figure out where to look it up would say it was something that Jesus said, regardless of how the Jesus Seminar might have rated it. It is not unusual for religions to demand first place and when push comes to shove, take precedence over family. Whether something is a religion as opposed to a “destructive cult” is a religious question. It is not something that can sorted out by the government. Some of the allegations against Scientology might require the attention of law enforcement. As a matter of fact some Scientologists were jailed in the seventies for some pretty nasty behavior, but most of the bad behaviors are not relevant to tax exemption. The IRS has a set of fourteen criteria to determine whether an organization is a church. An organization does not have to have all of them:
a. a distinct legal existence
b. a recognized creed and form of worship
c. a definite and distinct ecclesiastical government
d. a formal code of doctrine and discipline
e. a distinct religious history
f. a membership not associated with any other church or denomination
g. a complete organization of ordained ministers ministering to their congregations
h. ordained ministers selected after completing prescribed courses of study
i. a literature of its own
j. established places of worship
k. regular congregations
l. regular religious services
m. Sunday schools for religious instruction of the young
n. schools for the preparation of its ministers
I have been poking around their website a bit and I’m pretty sure that I would be able to find just about all fourteen criteria. Like it or not, it looks like a church. Just because it is a church does not mean that it is a good thing, but it does mean that it is presumptively an exempt organization. People who want to fight Scientology might find that trying to get a bunch or Revenue Agents on their team is probably not a worthwhile endeavor. I will discuss inurement and the deductibility of auditing in my next and possibly final post on Scientology.
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