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Tax Exemption and the State Department (1993 – 2001)

As seen in the previous sub-chapter, the relations between Scientology and the U. S. embassies were not always easy. This is also documented through an internal Scientology document, titled "American Consulate Handling Program." This program that was issued to OSA's local branch in Athens [Exh. No. 141]. The local branch was urged to establish "PRO area control with the American consulate" and to demonstrate the Consulate officials that "the Church is a bona fide religion."

In 1993 the discussions between Scientology and the IRS about the tax status of the various organizations were still going on, and on August 18th and 19th all the American Scientology corporations submitted new applications for tax-exemptions to the National Office of the IRS, including RTC [Exh. No. 142, Excerpt], CSI [Exh. No. 143, Excerpt], CSWUS [Exh. No. 144, Excerpt] and the FSO [Exh. No. 145, Excerpt].

1 ½ months later, on October 1st, several representatives of Scientology met with the Commissioner of the IRS, John Burke and an associate counsel of the IRS, James McGovern to sign a final settlement agreement between Scientology and the IRS [Exh. No. 146]. By then a so-called "Church Tax Compliance Committee," consisting of seven senior Scientologists, had been formed. It would guarantee Scientology's obligations towards the terms of the agreement with the IRS.

For a payment of 12.5 million dollars by CSI towards the IRS, all litigation matters between the two parties were settled. At the same time the IRS recognized the Scientology corporations, who had submitted their applications during that summer, as tax-exempt. Specifically the document stated:

"The parties have entered into this Agreement in order to put the past controversy behind them, to extinguish all potential claims and liabilities arising as a result of action or inaction prior to the date of this Agreement and to structure their relationship into the future. While complex, there are certain basic principles underlying the Agreement that will aid in its comprehension.
"First, under section II of the Agreement the Church will make a single payment that is intended to extinguish any potential tax liability that may be due and unpaid by any Scientology-related entity for all tax years up to and including the tax year ending in 1992. Thus, as of December 31, 1992, the Church will be current with respect to all income, employment and estate tax liability.
"Second, under section II of the Agreement, the Church and the Service will withdraw from virtually all existing controversy, including ongoing examinations of Church entities, ongoing litigation by the Service to enforce summonses for Church records, and all litigation by the Church against the Service and its current or former personnel. In addition, because the parties intend that the relationship between them begin anew, and in light of the other provisions contained in this Agreement, including the payment with respect to potential past tax liability, the Service and the Church agree under this section II of the Agreement that the Service will not examine the Church for any year ending prior to January 1, 1993. Similarly, no Scientology-related entity may initiate or support any legal action against the Service or any Service employee for any claim arising prior to the date of this Agreement.
"Third, it is the view of the Service that certain Church entities are entitled to recognition of tax-exempt status as entities described in section 501(c) (3) of the Internal Revenue Code. Thus, section III of the Agreement contains a list of entities that will be recognized as tax-exempt entities, including certain entities that will receive group exemption letters covering their subordinate organizations.
"Notwithstanding the above, in light of, inter alia, the size and complexity of the Church and the Service, certain concerns of the Service and the Church remain. In addition, there is a need for improved communication between the parties. Thus, under section IV, a Church Tax Compliance Committee (CTCC) has been created to undertake certain obligations during a seven-year transition period. The CTCC is to be comprised of the largest United States Church entities, as well as those individuals who are the highest ecclesiastical or corporate authorities within the Church. The Service, through the Assistant Commissioner, has agreed to meet with the CTCC upon their request during the transition period to address any questions arising from the ongoing performance of the parties' obligations under this Agreement.
"The CTCC is in a position to monitor and effect the operations of the group entities that are defined as ‘Scientology-related entities' under this Agreement. Under section IV, the CTCC is responsible for certain reports produced and provided annually to the Service. These reports will include a report on the application of certain agreed-upon procedures by an independent certified public accounting firms, as well as certain other information collected and reported by the CTCC. These reports, and the information the CTCC collects from Scientology-related entities in order to prepare them, are intended solely for the purposes of administration of the tax laws and not for any other purpose.
"In light of the CTCC and its relationship to the whole of Scientology, the CTCC has agreed under section IV to guarantee the collection of taxes (including interest and penalties) from any Scientology-related entity for tax liability arising during the first three years of the seven-year transition period. The parties have agreed under section V to keep confidential both this Agreement and all underlying information that is not part of the public record under Code section 6104 except to the extent that disclosure is necessary to interpret or apply this agreement or is permitted under the authority of law. In addition, the CTCC has agreed under section VI to certain consensual penalties intended to provide the Service intermediate sanctions for activities or conduct not in accordance with the Code or with this Agreement.
"Finally, under section VII, the Service and the Church have come to an agreement with respect to the treatment of contribution by Church parishioners and the extent to which those contributions are deductible under section 170 of the Internal Revenue Code, as well as the Service's acknowledgment of its obligation to interpret and apply the "gift or contribution" requirement of Code section 170 (c) equally and consistently to the fundraising practices of all religious organizations that receive fixed donations from parishioners in connection with participation in worship and similar religious rituals or services."

On the same day, when the settlement was signed by the parties, recognition letters were issued by the IRS and sent to the corporations, informing them that they had been found tax-exempt [Exh. No. 147].

One week later, on October 8th, the Scientologists held its annual event of the "International Association of Scientologists" in Los Angeles and celebrated the tax recognition under the motto "The War is over" [Exh. No. 148, Excerpt]. At this occasion David Miscavige held a lengthy speech in which he recapitulated the events that had led to the final tax-exempt recognition. While most of his speech was filled with unsubstantiated ramblings about a great conspiracy the IRS and "the Psychs" had allegedly been involved in "to destroy the Church," Miscavige revealed some details about the final settlement talks with the IRS (see above) and also talked about the number of suits that individual public members of Scientology had initiated against the IRS within the previous years:

"As of this week, there were over 2,500 cases pending in the courts with the IRS challenging tax deductions for donations to the church. In fact, I have the full list – with everyone of your name on it and the amount at issue was over 29 million dollars. Others of you around the country are being audited and have had your deductions challenged, even if this hasn't made it to the courts. And others still have only gotten as far as receiving notice that a donation was disallowed. I told you the war is over, and it is for you too.
"There are no more tax court cases, there are no more disallowed deductions – it is all over and your deductions are allowed."

The tax-exemption meant a huge propaganda victory for Scientology inside the United States, but the Scientologists were determined to exploit it for all their foreign organizations too, as they had to face the same scrutiny by their respective governments and tax authorities as the American organizations had in the past. As required by the settlement agreement, the IRS sent letters to all the tax agencies of its treaty partners, informing them about the tax exemption decision [Exh. No. 149]. The letter was accompanied by a booklet on Scientology, which had been produced by CSI.

With the tax matter settled, the legal climate for Scientology within the United States changed considerably. In November of 1993 the U.S. State Department informed its Immigration Officers about the tax-exemption decision of the IRS and advised them to regard "U. S. based Scientology branches ... as bona fide religious organizations." [Exh. No. 150].

While the Church of Scientology had resolved a lot of problems on the home front, it began to face more and more scrutiny in Europe during the 1990s. As in the United States in the past, European governments had begun to challenge the tax status of Scientology organizations and had started to investigate their activities. But unlike as in the previous years, the Scientology-organization had now an important ally in the U.S. State Department. Beginning in 1995, the State Department criticized in its annual "Human Rights Reports," under the Chapter "Freedom of Religion," not only foreign government measures against the organizations but even individual court decisions that were negative for Scientologists or the organizations in these countries.

The first report, issued in February 1995, stated:

"Members of the Church of Scientology continue to complain of harassment such as being fired from a job or expelled from (or not permitted to join) a political party. Scientologists continued to take such grievances to court. Musician Chick Corea, a Scientologist, was permitted to appear in a government-subsidized concert hall in the state of Hessen only after an agreement with local officials that he would not proselytize during his performance."

During that year, Greek police raided the Scientology headquarters in Athens, acting on several complaints by Greek citizens. A truckload of material was seized, among it several floppy discs from the local Office of Special Affairs. When the police searched them for their contents, it found a document that raised the suspicion that the Scientologists have found another ally for their foreign activities, next to the State Department. The document was written by the Greek "Director of Special Affairs" Ilias Gratsias and sent to Marlis De Rjick, OSA-executive at Scientology's European headquarters in Copenhagen [Exh. No. 151]. It stated:

"The good news are [sic] that with the intervention of CIA the Greek Intell Dept regarding NRMS (new religious movements) is closed down and the employees fired!!"

In 1996 the State Department repeated its allegations against Germany in its "Human Rights Report" about its alleged discriminating treatment of Scientologists. From the report, issued in March 1996:

"Members of the Church of Scientology continue to allege both social and government-condoned harassment, such as being fired from a job or expelled from (or not permitted to join) a political party. Major German political parties exclude Scientologists from membership, arguing that Scientology is not a religion but a for-profit organization, whose goals and principles are inconsistent with those of the political parties. Business firms whose owners or executives belong to the Church of Scientology may face boycotts and discrimination, sometimes with governmental approval. Artists have been prevented from performing or displaying their works because of their Scientology membership. Public criticism of Scientologists by leading political figures increased during the year, with one Cabinet member publicly stating that Scientologists were unfit to serve as teachers, police officers, or professors. Scientologists continued to take such grievances to court, and the courts have frequently ruled in their favor."

The following year, the "Human Rights Report" of the State Department sounded not only more critical on the "treatment" of Scientologists in Germany, but it also included France, due to a, for Scientology, negative court decision in a fraud and homicide-trial.

The report, published on January 30th, 1997 stated:


"In November a former leader of the Scientologists in Lyon was convicted of involuntary homicide and fraud, sentenced to 18 months in prison, and fined about $100,000. The charges stemmed from a 1988 suicide of one of the church's members. The court found that the psychological pressure by the Scientologists caused the member's suicide, but specifically avoided ruling on the issue of whether Scientology is a religion. Other Scientologists were also convicted of fraud related to this incident, fined, and given suspended sentences. The convictions are being appealed.


"Groups of a religious character, which are not granted special legal status, do not benefit from the privileges granted by the State. A sharp debate surrounds the activities of the Church of Scientology, whose members allege both government-condoned and societal harassment, including expulsion from (or denial of permission to join) a political party and loss of employment. Business firms whose owners or executives are Scientologists may face boycotts and discrimination, sometimes with government approval. Scientologists continued to take such grievances to the courts. Legal rulings have been mixed.
"During the year, the Church of Scientology came under increasing scrutiny by both federal and state officials, who claim that its activities do not fall within the legal definition of a religious organization. Several cabinet officials criticized the organization. In January Claudia Nolte, the Minister of Family Policy, described the Church as ‘one of the most aggressive groups in our society' and said she would oppose the organization ‘with all the means at my disposal.' The Parliament created a special commission to investigate Scientology's activities and social impact. The press reported that the federal chancellery and state minister-presidents decided on December 19 to create an interministerial group to study Scientology.
"Major political parties exclude Scientologists from membership, arguing that the Church is not a religion but a for-profit organization whose goals and principles are antidemocratic and thus inconsistent with those of the political parties. In late summer, the governing Christian Democratic Union (CDU) party approved a resolution saying that membership ‘in the Scientology organization is not compatible with employment in the public service,' and urging that the Church be put under surveillance. The resolution also urged the banning of federal funding for cultural and artistic events featuring Scientologists. In December a state organization of the CDU confirmed the expulsion of three members for belonging to the Church. ...
"The past year has also seen some positive developments. A former Minister of Justice editorialized that the Government should be more restrained in its dealings with Scientology. In an October report, the Ministry of Interior concluded that there was insufficient evidence to justify surveillance of Scientology by the Offices for the Protection of the Constitution (OPC). In response to the CDU's call for the organization to be placed under OPC observation, the report concluded that ‘no concrete facts exist currently to substantiate the suspicion of criminal acts.' In closing the report reminded states requesting a ban on Scientology that ‘only economic considerations may be taken into account' when awarding public contracts."

The controversy over the Scientologists in Germany and the report on Germany became the subject in discussions between the then Secretary of State Madeleine Albright and German Foreign Minister Klaus Kinkel in early 1997 [Exh. No. 152]. At the same time the Office of Special Affairs in Los Angeles tried to fuel the fire with fully paged advertisements, comparing present-day Germany with the 3rd Reich [Exh. No. 153].

Meanwhile in Sweden copies of Scientology's "secret scriptures" ("NOTs") found its way as court exhibits into the parliament of Sweden and became there part of the public record. As Scientology's "Religious Technology Center" claimed that the "scriptures" were trade secrets, the NOTs-documents became the subject of another controversy between the United States and a European country. The U. S. finally forced Sweden to retract NOTs from the parliamentary public record, as it claimed that Sweden had violated trade treaties between the United States and Sweden by doing that. A driving force in that matter was Senator and Scientologist Sonny Bono who urged the U.S. trade representative Charlene Barshefsky "to get tough" with Sweden at the heat fo the debate [Exh. No. 154].

In November of 1997 several members of the U.S. Congress initiated a vote for condemning Germany through a resolution for its alleged discrimination of the Scientologists. The Congress voted with 318:101 against a condemnation.

The next "Human Rights Report" of the State Department for the year 1997, which was issued on January, 30th, 1998, again included the controversy over Scientology in France and Germany:


"In 1996 a former leader of the Scientologists in Lyon was convicted of involuntary homicide and fraud, sentenced to 3 years in prison, and fined approximately $100,000. The charges stemmed from a 1988 suicide of one of the church's members. The court found that psychological pressure by the leaders of the Lyon Scientologists caused the member's suicide but avoided ruling on the issue of whether Scientology is a religion. Other Scientologists were also convicted of fraud related to this incident, fined, and given suspended sentences. In July a court of appeals in Lyon upheld the leader's conviction, but commuted his jail term to a suspended sentence. Five members were fined and given suspended jail terms of between 8 months and 1 year, lighter sentences than those previously handed down, while seven were acquitted of being accessories to fraud. The court, in its written decision, recognized the Church of Scientology as a religion. In response the Minister of Interior stated that the court exceeded its authority and declared that the Government does not recognize Scientology as a religion.


"The Church of Scientology continued to be the focus of debate. Scientology has come under increasing scrutiny by both federal and state officials who contend that it is not a religion but an economic enterprise. Authorities have sometimes sought to deregister Scientology organizations previously registered as nonprofit associations and require them to register as commercial enterprises. In November the Federal Administrative Court in Berlin, in sending an appeal concerning the deregistration of a Scientology organization in the state of Baden Wuerttemberg back to a lower level for further review, declared that a registered nonprofit association, religious or otherwise, could engage in entrepreneurial activities as long as these were only supplementary and collateral to its nonprofit goals. The case continues in the lower court.
"Some government officials allege that Scientology's goals and methods are antidemocratic and call for further restrictions on Scientology-affiliated organizations and individuals. In June authorities of the federal and state Offices for the Protection of the Constitution (OPC) agreed to place the Church of Scientology under observation for 1 year because of concerns raised by some offices that there were indications that Scientology may pose a threat to democracy. Under the observation decision, OPC officials will seek to collect information mostly from written materials and first hand accounts to assess whether a ‘threat' exists. More intrusive methods would be subject to legal checks and would require evidence of involvement in treasonous or terrorist activity. One State, Schleswig-Holstein, announced in August it had decided not to implement such observation, on the grounds that the situation did not appear to justify such measures. While Federal Interior Minister Manfred Kanther supported the decision on observation, in a written response to an inquiry from the Bavarian state government, Kanther indicated that he did not see sufficient evidence to support a ban on Scientology. ...
"Scientologists continued to take grievances to the courts. Legal rulings have been mixed. In April the European Commission on Human Rights decided not to pass on to the European Court of Human Rights a discrimination case brought by the Church of Scientology against Germany, on the grounds that the Church had not exhausted domestic legal channels. ... "

At this time it was evident that Scientology's influence on Washington's foreign policy had dramatically grown within the previous years. A newspaper article in the "Saint Petersburg Times" described the various lobbying activities that were conducted by either paid lobbyists or Scientology's celebrities that had connection to the Clinton-administration [Exh. No. 155].

During that year the Washington-based "Commission on Security and Cooperation in Europe" started talks in Europe in order to influence and pressure European countries for a more favorable treatment of "minor religions," that of course would include the "Church of Scientology" [Exh. No. 156]. Its activities included also some cooperation with the representatives of such groups. In case of the Scientologists, CSCE coordinated its actions with OSA-officials Leisa Goodman from Los Angeles and Martin Weightman, who represented OSA's "Human Rights Office" in Brussels.

On February 26th, 1999 the United States issued its newest "Human Rights Report." Among Germany and France, it also included Greece, with respect to unfavorable treatment of Scientology:


"The trial of 15 members of the boards of Scientologist associations charged by the Government with "unprovoked factual insult" is scheduled for February 1999. The board members were charged in October 1996 following a police search of Scientology headquarters that revealed a file of press clippings (emphasis added) on Greek opposition to Scientology.


"The authorities previously took similar action against the Church of Scientology. Tax claims asserted in 1994-95 against several Scientology churches forced them into bankruptcy. In the case of the Paris church the Ministry of Finance refused to grant the church authorization to import funds to pay the claimed taxes even though the church offered to pay the total amount of all taxes assessed, a percentage of which would have come from outside the country. Subsequently, in December 1997, the Government filed a legal action for the claimed amount against the former officers of the Paris church and against the Church of Scientology International, a California nonprofit religious organization.
"Hearings in this legal action have been deferred pending a decision on an underlying administrative claim by the Paris church that the Ministry of Finance acted improperly in refusing to allow the church to import the funds needed to pay the assessed taxes.


"In April officials in Baden-Wuerttemberg posted bail and apologized to Swiss authorities when one of their police investigators gathering information on Scientology's activities in Baden-Wuerttemberg was arrested by Swiss police after interviewing a contact in Basel. The investigator was charged with espionage and violating Swiss neutrality. ...
"In June the commission established in 1996 to investigate ‘so-called sects and psycho-groups,' including Scientology, presented its final report to Parliament. The report concluded that these groups did not pose a threat to society and state and underlined the constitutional principle of religious freedom and the state's obligation to observe strict neutrality in these matters. However, it called upon the Government to introduce legislation for consumer protection in the ‘psycho-market' and highlighted the need for the Government to inform the public about dangers to health and property posed by psycho-cults and groups. Particular emphasis was placed on Scientology because it allegedly pursued policies of ‘misinformation and intimidation' of its critics, according to the report. The report did not classify Scientology as a religion, but as a profit-oriented psycho-group with totalitarian internal structures and undemocratic goals. The commission contended that there were concrete indications that Scientology was a political extremist organization, in German, a ‘combine with totalitarian tendencies.' The commission also recommended to Parliament that observation of Scientology continue. The report also recommended that because of its derogatory connotation the term ‘sect' should be avoided, and that instead the designation ‘new religious and ideological communities and psycho-groups' be used. The report referred to psycho-groups as ‘commercial cults' that offered their services in a fast-growing psycho-market. ...
"On June 4, Bavarian interior minister Guenther Beckstein released two new brochures warning against the Church of Scientology. ‘The Scientology System' and ‘Scientology: An Anti-Constitutional Movement' warned about alleged hard-sell methods by the church and asserted that Scientology was striving for world power. Beckstein asserted that the Church was even ordering the commission of criminal acts and compared its psychological methods to those of the former East German secret police. He added that due to government measures, membership in Germany had dropped to an estimated 10,000 persons. ...
"A United Nations report in April agreed that individuals were discriminated against because of their affiliation with Scientology. However, it rejected Scientology's comparison of the treatment of its members with that of Jews during the Nazi era."

During that year a trial against several Scientology officials for fraud was about to begin in Madrid, Spain. The investigations had begun as early as 1984 and culminated in a massive police raid in November 1988, when several Spanish and foreign Scientology staff members, including CSI-President Heber Jentzsch, had been arrested. Jentzsch and others had later been released on bail.

In 1998 the Spanish authorities apparently issued a summons for Jentzsch's appearance before court to the American embassy in Madrid. This summons was followed by discussions between embassy officials and lawyers for Scientology's Official of Special Affairs. On March 29th, the consulate official Romero issued an internal recommendation to avoid trial by delaying the serving of summons to Jentzsch long enough to give the defense and the prosecution time to reach a settlement [Exh. No. 157]."

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