Archives for May 2008

May 29, 2008

Will Sklar II crack open Scientology's Secret Agreement with the IRS?

In the early 1990s, Michael and Marla Sklar deducted part of their children's school tuition from their income tax in an amount equal to the proportion they viewed their tuition going toward religious instruction, as opposed to secular teaching (e.g., math, english). He listed his deductions under section 170 of the Tax Code, which permits deductions for charitable and religious contributions. The IRS denied the Sklars their deduction, noting that the Sklars had not provided receipts from the Church of Scientology. Scientologists are permitted to deduct (hefty) payments for auditing because Scientology and the IRS agreed to view payments for auditing as “donations.”

The IRS and Scientology didn't always agree on this, however—in fact, a U.S. Supreme Court case, Hernandez v. Commissioner, 490 U.S. 680 (1989), explicitly held that payments made by Scientologists for auditing were not deductible charitable contributions under section 170, because they were, in essence and structure, quid pro quo transactions. Prices for auditing services were fixed by the organization, which refunded payments if the auditing services went unperformed, the court noted.

Despite the IRS's win over Scientology in 1989, Hernandez was not the only lawsuit Scientology was bringing against the IRS, and the IRS eventually relented and “settled” with the Church of Scientology (see Chris Owen compendium for more), which ceased all ongoing litigation against the IRS, and made a payment of $12.5 million (there were other details to the settlement, which is best summarized in this WSJ article).

“The IRS normally settles on tax issues alone,” said Robert Fink, a New York tax lawyer who reviewed the agreement. “What the IRS wanted was to buy peace from the Scientologists. You never see the IRS wanting to buy peace.”

Although the agreement was reached in 1993, it didn't come to light until 1997, when someone within the IRS leaked it to the Wall Street Journal, which published it in its entirety. Since then, neither the IRS nor Scientology has ever confirmed its veracity, but the parties haven't denied it, either. (As an aside, Alison Eaton asked a compelling, somewhat related question in a 1996 law review article—Can the IRS overrule the Supreme Court? See 45 Emory L.J. 987 (1996).)

In light of the above, the Sklars argued that the IRS's disparate treatment of Scientology was an establishment clause violation—the First Amendment prohibits the government from preferring any one religion over another. The Ninth Circuit (the Sklars appealed after losing at the Tax Court level) agreed with the Sklars insofar as there was an establishment clause violation, but declined to grant them their desired remedy. The cure to the Constitutional problem, they said, was not to give everyone what the Scientologists were getting, but to rescind any such unconstitutional privilege.

“The remedy is not to require the IRS to let others claim the improper deduction, too,” Judge Barry G. Silverman wrote. But then he went on to say:

“If the IRS does, in fact, give preferential treatment to members of the Church of Scientology—allowing them a special right to claim deductions that are contrary to law and disallowed to everybody else—then the proper course of action is a lawsuit to put a stop to that policy.”

Unfortunately, this is nearly impossible, as few, if any, taxpayers have standing to bring such a suit, especially after the Supreme Court's recent narrowing of the Flast (392 US 83) doctrine, in Hein (433 F.3d 989). I'll refrain from dragging this post down with a discussion of standing, but there's more here and here as to why it's effectively impossible for any person to bring a lawsuit against the IRS to rescind its unconstitutional agreement with Scientology.

Despite losing their appeal, the Sklars weren't finished—they attempted the same type of deduction in consecutive years, so a second lawsuit was triggered by the subsequent denial, and the Sklars were back before the Ninth Circuit on February 4 of this year (I'll refer to this case as Sklar II). The lower court quashed the Sklars' attempts to subpoena Scientology for the secret agreement and other materials, so the oral arguments (which can be heard here and which is nicely summarized by the NY Sun here), were mainly about the IRS-Scientology secret agreement, and there were some encouraging signs.

As noted above, because neither Scientology nor the IRS have admitted to the veracity of the secret agreement published by the Wall St. Journal, the Tax Court has not allowed the agreement into evidence. And because the secret agreement is necessary for the Sklars to be able to make their disparate treatment argument—i.e., the Sklars must be permitted to deduct religious school tuition to remedy the IRS's preferential treatment of Scientology—the secret agreement, they argue, must be disclosed.

The IRS has a few responses to this argument. First, the type of religious training Scientologists are permitted to deduct (payments for auditing) is different than religious training that goes on in private schools. But as Ninth Circuit Judge Wardlaw asked IRS attorney Ellen Delsole, “How do we know that?” The IRS's argument relies on interpreting an agreement they won't acknowledge exists, but admits to having read in the Wall Street Journal. “You tell us you don't know anything of it, but you read the Wall Street Journal,” Judge Pregerson incredulously ponders.

Second, the IRS argues, the secret agreement is a settlement document between the IRS and private individual Scientologists, and to disclose the agreement would violate the privacy of those individuals (specifically, section 6103 of the Tax Code). This is also preposterous, because—assuming the secret agreement published by the WSJ is accurate, and there's no reason to think it's not—the individual taxpayers at issue are barely even addressed in the secret agreement. The settlement agreement largely addresses the restructuring of the Scientology corporate maze, its front groups, and so on. Plus, as Judge Wardlaw pointed out, judges have an array of tools to cure any privacy issues related to individuals—the document could be partially redacted, held under seal, etc.

Third (and this is really their only marginally valid argument), the Ninth Circuit in Sklar I already recognized the unfairness of the preferential treatment Scientology is apparently receiving, but that fact—true or not—does not alter the outcome of the Sklars’ request, whose outcome is determined by prior case law, most notably United States v. American Bar Endowment, 477 U.S. 105 (1986), and Hernandez. (That's right: The same Hernandez decision that categorically barred Scientologists from deducting auditing payments, if you can wrap your head around that irony.)

“That's your best argument: two wrongs don't make a right,” remarked Judge Ronald Leighton (Western District of Washington, sitting by designation). But Judge Wardlaw openly questioned how the tax court could possibly know the outcome without considering Sklars’ argument in light of disclosed secret agreement, and may have tipped her hand when she said, “I think that's what we're going to have to do [remand with instructions to disclose].”

The IRS also offered a weak administrative nightmare argument—the IRS would be forced to answer to other taxpayers who might want the same deal the Scientologists are getting. The Sklars’ lawyer, Jeffrey Zuckerman, ably dismissed this argument: “If the IRS were saying white people were entitled to a certain deduction and black people were not, why would it be such a parade of horrors for the courts to come in and say the government may not act that way?”

It's usually not possible to determine how a case is going to go based on oral arguments and the questions that judges ask, but one moment in the February 4 oral argument stood out to me as a “very good indicator,” to borrow a Scientology term of art.

Judge Wardlaw: “The view of the IRS is it can unconstitutionally violate the Constitution by establishing religion, by treating one religion more favorably than other religions in terms of what is allowed as deductions, and there can never be any judicial review of that?”
IRS (Delsole): “That is not at all what I said.”
Judges Pregerson & Wardlaw (simultaneously): “That's the bottom line!”
Judge Wardlaw: “This does intrude into the Establishment Clause.”

It'll be four months since those arguments next week, and an opinion should be issued soon. It seems entirely possible that the Ninth Circuit will remand with instructions to force the IRS to disclose the secret agreement so that the Sklars can make their disparate treatment argument. I suspect it won't do Sklar any good, as the type of deduction he seeks is the type instituted by Congress, not via some loophole left open by an IRS settlement with Scientology, as patently unfair as that settlement agreement is and might be. But what it would do is make the secret agreement “fair game,” to borrow another term all-too-familiar to Scientology. Disclosure of the agreement doesn't solve the standing problem (see above), but it does brighten a dark and ugly secret that both the IRS and Scientology wish to keep dark.

posted by scott pilutik at May 29, 2008 04:45 PM

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May 26, 2008

are non-profits finally being scrutinized?

Judges and congress are (finally) becoming skeptical of non-profits, according to the NY Times, which cites a Minnesota State Supreme Court case from December (Under the Rainbow Child Care Ctr., Inc. v. County of Goodhue, 741 N.W.2d 880 (Minn. 2007)), which held that a nonprofit day care agency here had to pay property taxes because it was not charitable.

The agency, the Under the Rainbow Child Care Center, charges the same price per child regardless of whether their parents are able to pay the full amount themselves or they receive government support to cover the cost.

These two elements of the ruling have profoundly alarmed nonprofit groups in Minnesota and elsewhere.

“There are between 300 and 500 nonprofit groups in this state that could lose their property tax exemptions under that ruling,” said Jon Pratt, executive director of the Minnesota Council of Nonprofits, which represents about 2,000 of the state’s roughly 3,400 charities.

Why can't Congress and the Service leave it to the business judgment of boards and donors? If donors continue to give to those charities that are accumulating wealth, the donors must see value in such accumulations.

posted by scott pilutik at May 26, 2008 11:24 PM

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May 20, 2008

You can't say CULT in England

The Guardian is reporting that a 15 year old member of Anonymous is facing prosecution for daring to brandish the word "cult" on a sign while he was picketing Scientology last Saturday. The law in question is Public Order Act, Section 5, which is apparently intended to permit the police to control unruly mobs and to quell riots. Here's the relevant portion of the statute:

5 Harassment, alarm or distress

(1) A person is guilty of an offence if he—

(a) uses threatening, abusive or insulting words or behaviour, or disorderly behaviour, or (b) displays any writing, sign or other visible representation which is threatening, abusive or insulting, within the hearing or sight of a person likely to be caused harassment, alarm or distress thereby.

[...]

(3) It is a defence for the accused to prove—

[...]

(c) that his conduct was reasonable.

Police officers are aware of the difficult balance to be struck in dealing with those whose behaviour may be perceived by some as exuberant high spirits but by others as disorderly. In such cases informal methods of disposal may be appropriate and effective; but if this approach fails and the disorderly conduct continues then criminal proceedings may be necessary.

• causing a disturbance in a residential area or common part of a block of flats;
• persistently shouting abuse or obscenities at passers-by;
• pestering people waiting to catch public transport or otherwise waiting in a queue;
• rowdy behaviour in a street late at night which might alarm residents or passers-by, especially those who may be vulnerable, such as the elderly or members of an ethnic minority group;

So why haven't they actually served anyone? My guess is that they won't, or they would have already. My guess is that they're trying to split the middle because they're under intense pressure from Scientology to do something--after all, it was only two years ago that the London police force was caught in bed with Scientology:

Dozens of police officers have accepted film premiere tickets, banquet invitations and the use of a jazz band from the controversial Church of Scientology, it has emerged.

I've no idea whether there's a connection, but it's certainly worth poking around further. In the meantime, I'm pondering whether the actions the police are taking with this quasi-summons is worse than actually bringing a case. The net effect of such a tactic--threats of prosecution but no actual prosecution--is a profoundly direct chill on speech, across the entirety of Anonymous. But the Crown is likely aware that it would lose any such case it brought forward under this law and these facts.

If it does go to court, the 15 year old warning recipient is apparently wise beyond his years, responding to the police who handed him the warning by quoting British High Court Justice Latey, who said in 1984, "It is dangerous because it is out to capture people and to indoctrinate and brainwash them so they become the unquestioning captives and tools of the cult, withdrawn from ordinary thought, living, and relationships with others." [ironic emphasis added]

UPDATE: "Orderous" on the Ex Scientology Kids forum responded to this article (I'd reply there but my registration is pending), identifying my citing the bribery scandal from a year and half ago as "tin foil hattery." The poster appears to be from London him/herself, and so I'll certainly defer to his/her knowledge of the particulars, noting that my speculation was only speculation--and my speculation was merely intended to point out that Scientology has successfully dangled carrots before the London Police before, and it wasn't even that long ago. Given that context, my speculation is certainly reasonable. That said, Orderous quotes another poster, "theanonymoustipster," who is identified by Orderous as the person making all the calls to the CPS & CoL (Crown Prosecution Service & City of London[?]):

• This is how it happened. Absolute fact, not a case of interpretation (except for ones marked *):
  • Scilons baaw to every police force in the land
  • None of the forces want to take the jump and involve the CPS, as they are bureaucratic twats
  • CoL is the first to cave as they get harassed the most. All other forces sigh in relief.
  • CPS make bad decision, everyone knows it but because the CoL asked for advice, they have to listen to it. The other forces dont as they didnt ask for it
    
  • This leads to ENG [Epic Nose Guy], the inspector on the day was less than thrilled but had no choice
  • ENG is being done under public order act (fact). The inspector obviously cant say exact details, but my guess is its not specifically the sign as they know thats retarded. It is more likely he is being done for non-compliance (didnt take it down when asked)*
  • ENG probably will go to court, but what the court decides is anybody's guess*
  • The CPS are reviewing their decision, and will hopefully reverse it

This certainly seems plausible--that the London policle sought an opinion from the Crown Prosecution Service, which decided on this policy of handing out quasi-summons, which the police were beholden to enforce. If so, my speculation was merely aimed at the wrong target. Scientology routinely brings tremendous pressure to bear on public officials--sometimes via the carrot, sometimes via the stick. Read about Clearwater then-Medical Examiner Joan Wood, read about NYC council member Margarita Lopez, read about CCHR's involvement in getting anti-psychiatry bills passed by local governments, read about the IRS (where Scientology's consideration in the parties' secret deal was merely to cease ongoing litigation against the IRS), and so on. Speculating that Scientology may have corrupted public officials where those public officials find themselves out on a limb for the organization, in light of history, is measured skepticism, not tin-foil hattery. There is also a difference between a specific allegation of corruption and hedged speculation that it might exist, a difference, which, ironically, appears to be at the heart of this controversy, which highlights the UK's weak protections for speech.

UPDATE II: The Crown Prosecution Service decided against bringing the case to court, as expected.

A CPS spokesman said: "In consultation with the City of London police, we were asked whether the sign, which read 'Scientology is not a religion it is a dangerous cult', was abusive or insulting.

"Our advice is that it is not abusive or insulting and there is no offensiveness, as opposed to criticism, neither in the idea expressed nor in the mode of expression. No action will be taken against the individual."

The teenager's mother said the decision was "a victory for free speech".

"We're all incredibly proud of him. We advised him to take the placard down when we realised what was happening but he said 'No, it's my opinion and I have a right to express it'," she said.

posted by scott pilutik at May 20, 2008 07:44 PM

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May 17, 2008

Hard evidence of Scientology's illegal e-meter policy

Not long ago I posted about Scientology's abuse of eBay's VeRO program, which permits intellectual property holders to determine what constitutes an infringement and thus unchecked permission to remove sale listings. eBay’s VeRO program thus encourages overreaching by rightsholders.

One of the most notorious VeRO overreachers has been the Church of Scientology, which predicates its routine removal of e-meter listings on vague and specious intellectual property bases such as patent and trademark law. 

Scientology does this in order to control the secondary market for used e-meters for both economic reasons—if used e-meters were more available, Scientology would have a difficult time selling new ones for thousands of dollars; and cultish reasons—by making itself the sole sales source for e-meters, Scientology imbues the e-meter with a religious mystique, albeit an unwarranted one, as the device is basically a crudely designed lie-detector.

If there were any doubt about the illegitimacy of Scientology’s intellectual property claims with regard to the e-meter sales on eBay, the following letter should put that to rest. Ruth Lorenzen is a recently departed ex-member of Scientology, and her departure was somewhat acrimonious—she was declared a suppressive person and even her business partner (a Scientologist) was instructed to cease communicating with her. They also sent her the following letter pertaining to the e-meter Ruth purchased during her time as a Scientologist [PDF here from Ruth's site, my transcription below, with my emphasis added]:

[FLAG LOGO]
Church of Scientology Flag Service Organization
PO Box 31751
Tampa, Florida 33631-3751, U.S.A.
(727) 467-5000, email: flagserviceorg@flag.org

[Ruth's personal address withheld]

9 August 2007

Dear Ruth,

Have you now completed a review of the documents you have?

You had mentioned a meter earlier. What org did you get this from? It cannot be sold in any other way than back to an org. Please see the qualifying tag on the meter regarding ministers.* It is a separate matter to doing the Claims Verification Board routing form but it does need to be handled.

It has been since the 1st of July that you wrote to the Claims Verification Board Secretrary [sic] and this matter should be resolved by now.

Do let me know by return communication what has to be done to complete this cycle.

Sincerely,

[Signature]
Bob Bolger
FSO

This letter demonstrates how Scientology views its ex-members as being so beneath contempt that their right to resell goods is somehow magically nullified by a tag on the item. Like so much else in Scientology, the language on the tag is legal bluster meant to intimidate and is without much legal weight, if any. The unfortunate part is that legal bluffs are somewhat effective, especially against cult members, and even ex-members.

A similar legal bluff Scientology employs is what Professor Dave Touretzky has accurately termed the “Lisa Clause”—a broadly worded waiver of every personal and procedural right Scientology’s lawyers could imagine, intended to shield itself from the sort of liability that arose in the case of Lisa McPherson. If challenged, their proposed release form (which every Scientologist is forced to sign) would crumble fast on any number of bases (adhesion, unconscionability, lack of consideration are the first things that come to mind), but these agreements are rarely challenged, and it’s likely that Scientology even knows that. But the purpose of the Lisa Clause is identical in form to the e-meter tag: it’s not intended to withstand a challenge, only prevent challenges from arising in the first place.

* Tag language is as follows: "By itself, this meter does nothing. It is solely for the guide of Ministers of the Church in Confessionals and pastoral counseling. The Electrometer is not medically or scientifically capable of improving the health or bodily function of anyone and is for religious use by students and Ministers of the Church of Scientology only."

posted by scott pilutik at May 17, 2008 10:57 PM

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May 10, 2008

Scientology’s Tax Exemption, Inurement, and Tom Cruise

In 1992 1993, the Church of Scientology was finally granted501(c)(3) tax exempt status, the result of a long war waged by the church against the IRS. Years later, an array of reasons to revoke Scientology’s exemption remain: Scientology is self-interested and does not serve the general community interest; practices based on its belief system (such as fair game and disconnection) contradict public policy; and some of its also-exempt subsidiaries, like CCHR, operate as lobbying groups instead of charitable arms.

One basis (amongst others) by which religious entities often have their tax exempt status revoked is inurement, which arises where private individuals are personally benefited by church funds absent any charitable, educational, religious, or other exempt purpose. The penalty for inurement is revocation of its 501(c)(3) status. Inurement-triggered revocations typically arise, for example, where the pastor of a small church is paying his mortgage (or a yacht, perhaps) with church funds.

Inurement is rarely a basis for revocation amongst larger, more successful churches because as a religious entity expands, it becomes easier to justify the purchase of luxury items as being part of the organization’s religious mission, which is why (televangelists) Creflo Dollar and Benny Hinn can write off multimillion dollar jets as part of their religious ministry.

With regard to Scientology, inurement is a difficult argument to make out because it is not easy to determine whether its leader, David Miscavige, personally benefits. It’s unclear whether he even has a personal life distinguishable from Scientology, and this ambiguity is compounded by the fact that so much of Scientology is shrouded in paranoid secrecy.

Despite all this, a potentially lethal inurement argument against Scientology’s exemption in fact exists, albeit an atypical one. In short, Scientology treats one particular person to private, non-religious benefits as a matter of course, and these benefits derive from church funds. This person’s name is Tom Cruise.

As early as 1955, L Ron Hubbard directly targeted celebrities for recruitment,  astutely aware of their ability to affect popular opinion. Although “Project Celebrity” was a failure (all those targeted, including Walt Disney, Ernest Hemmingway, Jackie Gleason, and Liberace, failed to join), Scientology eventually landed quite a few celebrities, including John Travolta, Kirstie Alley, Isaac Hayes, and—of course—Tom Cruise.

By numerous accounts, celebrities in Scientology are treated differently than non-celebrities, and no celebrity is treated as well as Tom Cruise. In his biography on Tom Cruise, author Andrew Morton details the preferential treatment Cruise receives.

The IRS makes clear its policy against inurement in a host of places, but explains the policy best in its publication, Tax Guide For Churches and Religious Organizations.  The IRS first distinguishes between inurement and “private benefit,” and the distinction is meaningful. Inurement occurs where church funds benefit “insiders,” which could include “the minister, church board members, officers, and in certain circumstances, employees.” Inurement is absolutely prohibited: “[A]ny amount of inurement is, potentially, grounds for loss of tax-exempt status.” Comparatively, a private benefit “may occur even if the persons benefited are not insiders,” but the prohibition is not absolute: The private benefit “must be substantial in order to jeopardize tax-exempt status.”

Whether the Church of Scientology is jeopardizing its tax exempt status by bestowing private benefits on Tom Cruise, then, hinges on answers to the following questions:

• If the IRS were to inquire as to inurement by the Church of Scientology to Tom Cruise, would Tom Cruise be considered an “insider”?
• Assuming that Tom Cruise is not, as the Church of Scientology would contend, an insider, are the private benefits he receives and has received “substantial”?

• At Tom Cruise’s wedding to Nicole Kidman, “the event was choreographed and orchestrated by Miscavige, who arranged for two Scientology chefs and other Sea Org disciples to cater and care for the newlyweds and their guests.”
• Morton describes Miscavige’s wedding gift to Cruise and Kidman: “A team of twenty Sea Org disciples was set to work digging, hoeing, and planting wheat grass and wildflower seed near the Cruises’ bungalow” after Miscavige learned of the “couple’s fantasy of running through a meadow of wildflowers together.” [legal affidavit testifying to this from Karen Pressley]
• After Tom Cruise purchased a $9.75 million house in Pacific Palisades, “many [of those employed as house staff] were Scientologists who were carefully vetted by Scientology officials…. Candidates would be interviewed on videotape by a Scientology executive before being approved.”
• At Scientology’s Celebrity Centre—which already caters to a privileged subset of parishioners—“Tom and Nicole were special. They had their own private entrance into an underground garage, their own rooms for auditing, and, of course, dedicated waiter service.”
• “At Gold, in addition to their VIP bungalow and personal chef and butler, Tom had two motorcycles, a Mercedes convertible, and a motor home garaged in the compound, while Nicole had her own private garden. When Tom and Nicole wanted to play tennis, Sea Org laborers built them a private court.”
• “[Miscavige] had a gym built for himself and Tom at Gold, which could be used only by senior executives and only when the actor was not around.” David Miscavige’s father, Ronnie Miscavige, estimated the cost at $150,000.
• “The ecclesiastical largesse did not stop there. Not only did Miscavige send Tom regular gifts of fine wine, but on at least one occasion he dispatched his assistant Shelly Britt with a picnic hamper to Tom’s Gulfstream jet for his enjoyment.”
• On behalf of Scientology, Cruise has met with United States government officials to protest the treatment of Scientology is European states such as Germany and France; specifically, in 2003, Cruise met with Deputy Secretary of State Richard Armitage and Scooter Libby on separate occasions. The meeting with Armitage also included Scientology officials Tom Davis (head of the Hollywood Celebrity Centre and son of actress Anne Archer) and Kurt Weiland, a director for Scientology’s Office of Special Affairs (OSA). Also in 2003, he lobbied in Washington D.C. for No Child Left Behind program funds for front groups promoting Scientology’s “Study Tech.”
• Ex-member Marc Headley, in an interview with Glosslip’s Dawn Olsen, discussed an unwritten policy whereby Sea Org members—the staff that runs the Church of Scientology—were instructed to only refer to Tom Cruise as “Sir,” despite a longstanding policy that SO members would only refer to higher-ranking Sea Org members as “Sir.”
• Staff also interviewed girlfriends – it was an internal project headed by Shelly Miscavige; the project reportedly yielded several candidates—including actresses Scarlett Johansson and Jennifer Garner before finally settling on Katie Holmes.
• Scientology reportedly threw a birthday party for Tom Cruise aboard its cruise ship, the Freewinds, that cost the organization $300,000. Videos of the party can be found on Youtube (here and here).

posted by scott pilutik at May 10, 2008 05:47 PM

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