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SUBJECT: Adverse Claims Court ruling regarding tax exemption sought by the corporation known as "Church of Spiritual Technology" (CST)
PARTIES: Church of Spiritual Technology, Plaintiff; the United States (specifically IRS), Defendants; Meade Emory, Leon Misterek, Sherman Lenske, and Lyman Spurlock, "co-founders" of CST; Norman F. Starkey as Trustee of Author's Family Trust-B; Meade Emory and Sherman Lenske, architects of the entire probate and corporate restructuring; Sherman Lenske, Stephen Lenske, and Lawrence E. Heller, Special Directors of CST at the time of this ruling, and "consultants" to Starkey (Trustee of both Author's Family Trust-A and Author's Family Trust-B), and as "Trust Protectors"


This is a ruling by Judge Bruggink in United States Claims Court No. 581-88T, dated 29 June 1992. This document establishes much that was not priorly known about CST.

As Bruggink states herein, CST is not a church; it is a corporation:

"CST is not a church...CST represents that it is a religious corporation organized to accomplish the activities of a church. Despite its name, CST is not itself a church... ."

The Bylaws of CST also establish plainly that CST is a corporation and not a church.

This is the document that identifies former Assistant Commissioner of IRS Meade Emory as "a" (really "the") founder of CST. But perhaps far more damaging, it establishes that Emory had been involved prior to CST "as counsel to other Scientology groups," all covered fully in our special profile of IRS's main man Meade Emory, the boy who restructured all of Scientology for them.

Emory was Assistant to IRS Commissioner Donald C. Alexander between 1975 and 1977, some of the same years in which IRS documents were covertly being passed to members of the Guardian's Office (GO) by an IRS employee who was purportedly a GO agent. (In light of all that is known now, it seems that knife could have been cutting either way.)

This document also establishes that all three of the "Special Directors" of CST are non-Scientologists, yet they have veto and directive power over all other directors of CST, as is proven in the Bylaws of CST.

This ruling also establishes that CST has the power to take over all the trademarks currently assigned to RTC, a reflection of the option discussed in the 10 May 1982 trademarks Assignment Agreement. What the ruling doesn't reflect is CST's complete controlling interest in key trademarks, covered in our report on the trademarks.

Unfortunately, Bruggink does much to actually advance the fraud created by Emory and IRS, asserting the Emory/Lenske lie that the "assignments" to RTC were part of L. Ron Hubbard's "estate planning," and describing these licenses as though they were meaningful instead of the empty frauds that the documents on this site prove them to be. He does admit that CST has options to take over the marks and Advanced Technology, but soft-pedals even that with blowsy qualifications that are, in the final analysis, meaningless. CST's power and ownership and control over all of Scientology is absolute, as thoroughly proven by a study of all the documents on this site. And IRS has utter control, through the Special Directors, over CST.

Finally, it must be said that this Claims Court case now appears to have been nothing more than an elaborate dog-and-pony show, largely at taxpayer expense, to create a public illusion that IRS and CST were at odds. The cumulative content of the documents on this site prove beyond any reasonable doubt that Meade Emory was acting as an agent of IRS, and completely restructured the Scientology corporations--including the creation of CST--and drafted all of the related probate documents, particularly "Author's Family Trust-B," specifically so CST could be granted tax exemption and thereby come into ownership and control of all the intellectual property. In fact no other rational interpretation of or conclusion from the accumulated facts is even possible. And it is a moral certainty that L. Ron Hubbard had nothing to do with any of it.

Here is the document:

STATES Defendant.

                                  No. 581-88T

                           UNITED STATES CLAIMS COURT

          26 Cl. Ct. 713; 70 A.F.T.R.2d (P-H) 5233; 1992 U.S. Cl. Ct.
                                   LEXIS 282

                           June 29, 1992, n1 Reissued

n1 The opinion of May 26, 1992, was vacated and corrections were made
pursuant to the Order on Reconsideration of June 29, 1992.
June 29, 1992, Filed

COUNSEL:   [**1]   Monique E. Yingling, Washington, D.C., for
plaintiff. Thomas C. Spring, of counsel.

W.C. Rapp, with whom were Assistant Attorney General Shirley D.
Peterson and David Gustafson, for defendant.


   This is an appeal from a decision rendered by the Commissioner of
the Internal Revenue Service ("IRS"). The Church of Spiritual
Technology ("CST"), n2 plaintiff, applied for tax-exempt status under
I.R.C. @ 501(c)(3) (1982) as a religious organization. n3 On July 8,
1988, the IRS issued its final adverse ruling denying CST's bid for
tax exemption. CST appealed that administrative decision to the court
pursuant to I.R.C. @ 7428(a), resulting in the instant case.

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   n2 A list of the acronyms used throughout this opinion is attached
as an appendix.

   n3 Treasury Regulation @ 1.501(c)(3)-1(d)(1)(i) states that an
organization may be exempt if its exclusive purpose is religious,
charitable, scientific, testing for public safety, literary,
educational or prevention of cruelty to children or animals.

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   The IRS denied CST's application because the organization failed to
establish that it was operated exclusively for exempt purposes. The
IRS found that CST was operated for the benefit of the private
interests of the founder of the religion of Scientology, L. Ron
Hubbard, up until his death, and that subsequently it was operated for
the substantial non-exempt purpose of aiding other Scientology
organizations in their marketing of Scientology services and

   After consideration of the issues presented, and for the reasons
that follow, the court concludes that the CST has not carried its
burden of establishing that the Commissioner's decision was incorrect.
It has not demonstrated that it is operated exclusively for tax-exempt
purposes. The administrative record persuades the court that CST was
founded for the primary purpose of gaining tax-exempt status to serve
the financial goals of other, non-exempt entities, and that CST's
archiving activities are secondary to its obtaining a tax exemption
and would not of themselves qualify CST as a tax-exempt organization
under I.R.C. @ 501(c)(3).


   A. History and Tenets of Scientology

   In 1950, L. Ron Hubbard ("LRH") founded  [**3]   the church of
Scientology based on a new science he had created that he termed
"Dianetics." The first Scientology church was incorporated in 1954.
Since its founding, Scientology has grown and expanded into a complex
hierarchy of related churches and organizations. Each entity has a
specific place in the ecclesiastical scheme of Scientology as a whole.
LRH died in 1986, but his writings and other recorded words are still
considered to be scripture by adherents of Scientology.

   [*715]   Scientology is based on a belief that man is an immortal
spirit who has lived through previous lifetimes. Plaintiff describes
the goal of Scientology as "a civilization without insanity, without
criminals and without war, where the able can prosper and honest
beings can have rights, and where Man is free to rise to greater
heights." Defendant's Proposed Finding of Fact ("DPFF") 6.

   Scientology hopes to achieve this goal through its sacrament of
"auditing."  Through this process the person or "pre-clear" is
"cleared" of problems and behaviors caused by his "reactive mind." The
reactive mind is the term used by Scientologists to describe a force
that causes a person to act irrationally or against his own best
interest. [**4]   Scientology seeks to allow a person to overcome his
unknowing obedience to the reactive mind, help him to clear himself of
its influence, and make him responsible for his actions. When a person
becomes clear, he achieves freedom from unwanted burdens, and becomes
certain of immortality. The concept of immortality and previous lives
is behind Scientologists' desire to preserve the words of LRH for
billions of years.

   Providing auditing services is the chief function of "Class IV"
churches. n4  It is the responsibility of these churches to bring new
members into Scientology, and to provide them with basic Scientology
services. As a person moves along in the auditing process, he becomes
eligible to receive services from the higher level churches. Higher
level services must be provided by a church higher up in the hierarchy
because they involve the "Advanced Technology" of Scientology.
Plaintiff describes this as "the portion of the Scientology scriptures
that constitutes the upper levels of spiritual awareness in the
Scientology faith." Plaintiff's Proposed Finding of Fact ("PPFF") 8.
The Advanced Technology is what might be thought of as the revealed
wisdom of Scientology. Access to it  [**5] is heavily guarded and is
granted only to those parishioners who have completed a specified
number of auditing courses and progressed to a certain level in
Scientology training. Before one is allowed access to Advanced
Technology, one must agree not to share it with anyone still in the
lower levels of Scientology.

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   n4 See discussion infra p. 5.

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   All auditing services, of whatever level, must be purchased for
cash by the recipient according to a scale of "fixed donations," or
"fixed contributions."  Scientology scriptures discuss the "Doctrine
of Exchange" or the need to "balance inflow with outflow." Payment for
auditing is explained as a requirement of this doctrine. Although
characterized by taxpayers as a religious contribution, the Supreme
Court has held that payments for Scientology auditing services do not
generate a tax deduction for the individual taxpayer. n5

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   n5 Hernandez v. Commissioner, 490 U.S. 680 (1989).

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    Scientology scriptures also discuss at length the error of
allowing the public to pay on credit, or of selling auditing for less
than full price.  In Hubbard Communications Office ("HCO") Policy
letter of April 27, 1965, LRH cautions, "The tendency then against
which we must guard is covert lowering of prices once set."

   B. Organization of Scientology Hierarchy

   For reasons discussed below, the court concludes that the
Commissioner properly viewed CST's petition in the context of
Scientology as a whole. It is necessary, therefore, to describe that
wider structure from a organizational standpoint.

   Scientology has undergone almost constant corporate metamorphosis
since its creation. In order to try to untangle the current structure
and put it in proper perspective, we begin with the state of affairs
prior to 1981, when the latest reorganization impetus arose. Before
1981, the Church of Scientology of California ("CSC") acted as the
mother church for all of Scientology. It was organized as a non-profit
corporation in California, and was responsible for running all aspects
of Scientology with the exception of some specialized [*716]
financial arrangements. It had ultimate ecclesiastical   [**7]
authority, provided all levels of Scientology services, and was the
center of management for all other Scientology organizations. CSC was
founded in 1954 and was recognized, for a time, as tax-exempt by the
IRS. The IRS issued a letter revoking the tax-exempt status of CSC in
1967. Thus began a lengthy investigation of CSC and other affiliated
organizations. The IRS issued a notice of deficiency in 1977, CSC
appealed this decision to the Tax Court and the mailer was tried.
Although the Tax Court did not issue its ruling until 1984, Church of
Scientology of California v. Commissioner, 83 T.C. 381 (1984), aff'd,
823 F.2d 1310, (9th Cir. 1987), and cert. denied, 486 U.S. 1015
(1988), by 1981, CSC would certainly have realized that its tax-exempt
status was in doubt.

   In 1981, several high-ranking Scientology officials undertook a
Mission Corporate Category Sort-out ("MCCS") to develop a new
corporate structure for Scientology. The court does not know exactly
what was discussed at the meetings although the meetings were recorded
on audiotape. During the administrative process, the IRS requested on
at least three occasions that CST  [**8]   produce the tapes.  CST
refused on the grounds that it did not have access to them, and that
the tapes were in any case irrelevant to CST's tax-exempt status. The
tapes had been put under a protective order by the Superior Court for
the County for Los Angeles in a case involving CSC and a former
Scientology employee. n6  The IRS issued a summons to the Clerk of the
Los Angeles court to produce the tapes in connection with the
investigation of CSC.  CSC intervened in the suit asserting that the
tapes were protected by the attorney-client privilege. The Ninth
Circuit, which heard the case on appeal, reviewed the tapes and held
that they contained evidence of intent to defraud the IRS, and thus
were not protected by the attorney-client privilege. n7  This decision
was issued during the present action.  CST still did not produce the
tapes claiming the MCCS discussions were abandoned in June of 1981,
and that no action was taken with regard to anything the committee
discussed. n8

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   n6 Church of Scientology of California v. Armstrong, No. 420153,
(Super. Ct. Los Angeles 1984).

   n7 United States v. Zolin, 905 F.2d 1344 (9th Cir. 1990), cert.
denied, Church of Scientology v. United States, 111 S. Ct. 1309
(1991).  [**9]

   n8 CST opposed the court's suggestion that the tapes be made part
of the record here, but finally agreed, one month after oral argument,
to make a transcript available to the court.  Before CST would produce
the transcript, however, the court had to agree that the transcript
would be kept under seal, and further, that neither the transcript,
nor any "commentary about it . . .[would] become part of the public
record." The court declines the offer, but makes two observations
about it. First, it shows that CST has access to the tapes. Second, if
the court were to comment on the transcript in this opinion, the offer
contemplates that this opinion itself would not be accessible to the

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   Nonetheless, shortly after the talks ended in 1981, Scientology
underwent a reorganization. The goal of the new structure was for
Scientology to "simplify its corporate structure." n9  CSC was broken
up and   [*717]   replaced by several new higher level entities.
Church of Scientology International ("CSI"),  Religious Technology
Center ("RTC"), Church of Scientology San Francisco, and Church of
Scientology Los Angeles were  [**10]   all products of the
reorganization.  CSI, RTC and CST, which was created in 1982, n10 are
all what the court will refer to as "management churches." n11  The
management churches collect money sent to them from the missions and
Class IV churches. CSI became the new mother church of Scientology. It
sits at the top of a complex corporate hierarchy.  RTC is the entity
charged with maintaining doctrinal purity in the church.  CSI along
with RTC form the top-level ecclesiastical management of Scientology,
although there are numerous other churches and other entities that
have a role in management, finance or spiritual affairs. The Church of
Scientology Flag Service Organization, another of the management
churches, delivers the highest level of Scientology services,
training, and auditing.  Ecclesiastical oversight is accomplished by
CSI through the Watchdog Committee ("WDC"). This committee is
responsible for oversight of the international ecclesiastical
management structure of Scientology organizations.

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   n9 After the church was "simplified," the record suggests that at
least the following organizations constitute the church of
Scientology: Founding Church of Scientology; Church of Scientology
International; Religious Technology Center [including the
Authorization, Verification and Correction Unit]; Church of Spiritual
Technology; 129 Missions of Scientology, governed by Scientology
Missions International; Church of Scientology Celebrity Centre
International; 141 Class IV churches [local organizations such as the
Church of Scientology of Portland or the Church of Scientology of San
Francisco]; Continental Liaison Offices [known as CLOs]; Saint Hill
Organizations; Church of Scientology Flag Service Organization; Flag
Land Base; Flag Estates Org; Flag Command Bureaux [including
Compilations Unit, LRH Artist, International Training School, New
World Corps, Strategic Book Marketing Unit]; International Hubbard
Ecclesiastic League of Pastors [known as IHELP]; Sea Organization
Officer Council; the American Saint Hill Organization; Advanced
Organization Los Angeles; Golden Era Studios; Watchdog Committee; the
Commodore's Messenger Organization International; the Executive
Director International; the Senior Executive Strata; the International
Network of Computer Organized Management; World Institute of
Scientology Enterprises; Golden Era Productions; Office of Special
Affairs International; Bridge Publications; URN Public Relations
International; Household Unit; Inspector General Network [comprised of
the Trademark Integrity Division and the Qualifications Division]; the
United States Scientology Films Trust; International Scientology Films
Trust; Author Services Inc., Cancorp, Religious Research Foundation;
International Association of Scientologists; Church of Scientology
Religious Trust.  [**11]

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   n10 For a discussion of CST's place in Scientology hierarchy, see
infra pp. 8-9.

   n11 Scientology materials refer to the organizations which are in
charge of ecclesiastical and administrative affairs as "Advanced
Organizations" and explains that "Advanced Organizations deal in the
upper level of [Operating Thetans]. They are staffed with Sea Org
members. They have direct lines to Flag."  L. Ron Hubbard, Modern
Management Technology Defined 12 (1976).

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   The four Saint Hill n12 Organizations are the first step down from
the management level churches in the Scientology hierarchy. They
primarily train auditors. Next are the 141 Class IV Churches which
deliver lower and intermediate level church services and are
authorized to ordain ministers. Class IV churches are so called
because the most advanced auditors there have progressed to Class IV
of auditor training. n13  Class IV churches are subordinate to
Continental Liaison Officers ("CLOs").  CLOs answer to the
ecclesiastical authority of RTC and CSI.

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   n12 Saint Hill was the name used for the English manor house
purchased by LRH in 1959 which served as Scientology's headquarters.
The Hubbard Communications Office was moved there in 1959 from its
previous location in London. The office was the source of all Policy
letters issued by LRH. Policy letters, considered part of the
Scientology scriptures, covered subjects ranging from proper
management technique, to dealing with government agencies, to
maintaining a sufficient level of income in all Scientology
organizations. LRH also used Saint Hill as a place where those
training to become Scientology ministers could live while receiving
training.  LRH sold the Saint Hill facility to the Church of
Scientology of California in 1966. Church of Scientology of California
v. Commissioner, 83 T.C. 381, 494 (1984).  [**12]

   n13 The Class levels extend up to Class XII. L. Ron Hubbard, Modern
Management Technology Defined 82 (1976).

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   The base of the church is formed by the Missions of Scientology, of
which there are 129. These only provide the lower levels of
Scientology services.  Missions do not have the authority to ordain
ministers. Scientology Missions have no ecclesiastical authority and
are under the total control of Scientology Missions International.

   The multiple layers of hierarchy thus create two different
operational levels. The first is the management churches, which make
all organizational decisions. The second is made up of Scientology
Missions and the Class IV churches, which deal with the public and
deliver Scientology's religious services. It is this second level
which the public would perceive as the "church" of Scientology. It
carries out the work and fulfills the spiritual purpose discussed in
Scientology scriptures. With one exception, all of the 14 Scientology
churches that have received tax-exempt status have been this type of
local, Class   [*718]   IV church. n14   In contrast to the Class IV
churches, [**13]   these management churches and the original head
church, CSC, have often had on-going conflicts with the IRS.  Either
their tax-exempt status has been revoked, or it has been denied in the
first instance.

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   n14 IRS Publication 78, Cumulative List of Organizations described
in Section 170(c) of the Internal Revenue Code, is updated and
published annually by the IRS. The List as revised to September 30,
1989, lists the Churches of Scientology for Boston, Florida, Hawaii,
Michigan, Minnesota, Missouri, Nevada, New York, Portland (Oregon),
Sacramento, Texas, Washington State, and Western United States (Los
Angeles) as being exempt organizations to which people can make tax
deductible contributions. The last named is apparently the successor
organization to the Church of Scientology of San Diego, and is not a
Class IV church but conducts the activities of The American Saint Hill
Church Organization, the Advanced Organization Los Angeles, and the
Continental Liaison Office. Appendix to Plaintiff's brief of October
15, 1990, p. 355. It is not clear to the court how these latter
entities operate.

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   After carefully examining the record and attempting to understand
the nominal corporate structure of Scientology it is apparent to the
court that it is something of a deceptis visus.  Real control is
exercised less formally, but more tangibly, through an unincorporated
association, the Sea Organization, more commonly referred to as the
Sea Org. This group, in the nature of a fraternity or clan, began with
Scientologists who pledged themselves eternally to Scientology and who
accompanied LRH in his sea-going spiritual research in the
Mediterranean.  In 1967, LRH and other Scientology staff moved onto a
yacht, the Apollo, "to pursue [LRH's] research of the upper levels of
spiritual awareness."  LRH and his Apollo staff performed Scientology
services, managed the Scientology organization, and conducted
spiritual research.  If LRH could have been compared to Achilles,
members of the Sea Org would have been his Myrmidons.

   The Sea Org appellation survives in Scientology as a distinction
afforded to those Scientologists who have dedicated themselves to
serving Scientology for the next billion years.  It is described by
CST as a way to distinguish Scientologists worthy of great deference
[**15]   and respect. Sea Org members are initiates into the highest
levels of Scientology, and bear concomitant responsibilities.

   CST staff and officers are required to be members of the Sea Org,
which gives CST the distinction of being a Sea Org Church. CSI, RTC,
the Flag Service Org (which employs over 900 Sea Org members), the
Saint Hill Churches, in short, all high ranking organizations are Sea
Org Churches. Being a "Sea Org church" means that the church's
function is important enough to Scientology to warrant the attention
of a significant number of Sea Org members.

   Sea Org rank nominally carries with it no ecclesiastical authority
in the sense that Sea Org members still take orders from the
ecclesiastical leaders of whichever Scientology organization they
join. Upon closer analysis, however, this appears to be a distinction
without a difference because in a Sea Org church the ecclesiastical
authority necessarily resides in a Sea Org member.

   Furthermore, the Sea Org appears to have considerable financial
importance.  HCO Policy letter of 16 June 1969 instructs the Flag
Banking Officer International n15 that his duties include "seeing
Ships, Bases and Missions adhere to Sea Org finance   [**16]    policy
.. . ." (emphasis added). HCO Policy letter of 20 April 1969 states
that due to the "current advent of Sea Org expansion and the recent
establishment of an AO-SH [Advanced Organizations-Saint Hill]," the
following "firm policy," inter alia, is established:

   3. Proposals relating to tax, leases, purchase or rental of
buildings, long term financial commitments, major changes in the Sea
Org financial set-up must be approved by the FBO INT and forwarded to
the 2nd Deputy Guardian for Finance WW [World Wide] for final okay
before such can be activated.
   . . . .

   9. In the event of an FBO's failure to do his duty thereby bringing
Sea Org [*719]   monies to risk, the FBO INT has the authority to
remove him/her from post. . . .
Sea Org members also exercise considerable control over Scientology
money through SOR Management Services, Ltd. n16

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   n15 The Flag Banking Officer is a high-ranking official in the
financial hierarchy of Scientology organizations.

   n16 See discussion infra p. 14, n.23.

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   C. Testamentary   [**17]    Structure of LRH and the Genesis of CST

   LRH died in January 1986. As part of his estate planning, he had
made three gifts to the Scientology.  The first two were inter vivos,
and a third was testamentary.  All three transfers were made, or in
the case of the will, designated, in May 1982.

   First, LRH gave use of the Advanced Technology and religious marks
to RTC. n17  These Scientology religious marks include the terms
"Dianetics," "Scientology" and Mr. Hubbard's name, initials and
signature. RTC is charged with the duty to oversee lower-ranking
churches to ensure they practice Scientology in an orthodox manner.
RTC gave CSI a license to use the marks with any Scientology services
sold by CSI on condition that CSI recognize RTC as the final word on
matters of theological orthodoxy. n18  As required by Mr. Hubbard's
gifts, RTC delegates rights to use the Advanced Technology and
religious marks to qualified churches in the ecclesiastical hierarchy
and then supervises their activities to ensure compliance with
Scriptural requirements. In exchange for use of the marks, churches
that minister the Advanced Technology pay RTC six percent of the
Contributions they receive.

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   n17 The Scientology Marks are trademarks which appear on all
Scientology materials, and serve as guarantee of orthodoxy. The
Advanced Technology is the advanced scriptures, literature and
materials of Scientology.  [**18]

   n18 Scientology services are required to be orthodox. This means
that they must be provided under the "imprimatur of certain marks
associated with the religion." PPFF 9 Although orthodoxy is not
clearly defined in the record, the court notes it has at least the
result of requiring all churches to buy materials licensed through
CSI, the current mother church.  See discussion infra at pp. 14-16.
All of LRH's works are copyrighted with formal licensing arrangements
made between LRH and the distributing churches.

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   LRH's gift to RTC was conditioned on RTC obtaining exemption under
I.R.C. @501(c)(3). Thus far, RTC has been found non-exempt by the

   CST was created in 1982 in order to receive the second gift.  LRH
gave CST two options over the marks and technology which he had given
to RTC. The first option is to take control of the trademarks on
published LRH works and the insignia of various organizations. The
second option is over the Advanced Technology.  CST has the option,
exercisable at its sole discretion, to take over use and authority of
the marks from RTC
if RTC allows their  [**19]   use in an unorthodox

   The third gift was designated in LRH's will of 1982.  In it, CST
was made the conditional beneficiary of the remainder interest of
LRH's personal estate, after certain bequests to family members. The
CST bequest included the copyrights to LRH's Scientology works, and
certain limited rights over the marks and technology that he had
retained at the time of his gift to RTC. n19  It also included all of
LRH's non-Scientology works of fiction which continue to produce
royalties. The publishing rights and copyrights alone carry with them
the rights to receive the substantial royalties which flow from sales
of Scientology books and tapes to the public. These rights will
provide CST with a sizable annual income, but only if it achieves
tax-exempt status. These assets have not yet been distributed to CST,
and they are accumulating income as part of the residual estate, which
is being held by a pour-over trust.

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   n19 The following copyrighted materials were included in LRH's
bequest to CST: a) HCO Policy letters; b) HCO Bulletins; c)
Miscellaneous  directives and orders concerning ecclesiastical
matters; d) Tapes of lectures on Scientology and the rendering of
Scientology services, e) Instructional films on Scientology.

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   D. Creation of the Church of Spiritual Technology

   As part of LRH's estate planning, CST was founded in 1982 by Lyman
Spurlock, [*720]   Meade Emory, Esq., Leon Misterek, Esq., and Sherman
, Esq.  CST was incorporated as a non-profit corporation under
California law, and subsequently sought tax-exempt status under the
Internal Revenue Code.

   CST's Articles of Incorporation describe the purpose of the
organization as follows: "The corporation shall espouse, present,
propagate, practice, ensure and maintain the purity and integrity of
the religion of Scientology . . . ."  Article III, By-laws of Church
of Spiritual Technology.

   One of CST's specific duties, unique among Scientology churches, is
to create and maintain an archive of scriptures for future
generations. It is important to Scientology that its scriptures be
preserved for at least the next billion years, in order that future
generations have available to them the words of LRH.

   The other stated purpose behind CST was to provide LRH, then still
living, with a depository for the bulk of his testamentary estate, as
explained above. CST's founders wanted to accomplish "the creation of
an organization to which Mr. Hubbard would be  [**21]   willing to
(and did) bequeath the bulk of his estate, and most importantly his
copyrights and patents (which include copyrights to scriptures of the
religion and patents on the E-Meter)." n20

- - - - - - - - - - - - - - - - - - -Footnotes- - - - - - - - - - - -

   n20 Letter from Lyman Spurlock, President of CST to IRS of
September 10, 1984, at 5. The E-Meter, as described by LRH, is "an
electronic instrument for measuring mental state and change of state
in individuals, as an aid to precision and speed in auditing." L. Ron
Hubbard, Understanding the E-Meter 104 (1982).

- - - - - - - - - - - - - - - - - -End Footnotes- - - - - - - - - - -

   CST's operating funds thus far have come exclusively from other
Scientology management churches.  In 1983, CST received what was
described as a "one-time start-up grant" of $ 17,959,745 from the
Church of Scientology Flag ServiceOrganization. In addition, CST has
received annual unrestricted grants from RTC ranging from $ 623,000 to
$ 2.8 million.

   None of the founders of CST, with the exception of Mr. Spurlock,
has any stated religious connection to Scientology. Messrs. Emory,
Misterek and Lenske have served as counsel
  [**22]   to other
Scientology groups
, but nothing in the record indicates that any of
them has ever been a member of any Scientology organization. Mr.
Lenske and two other non-Scientologists have the status of Special
Directors of CST. The Articles of Incorporation require that CST have
three such Special Directors, and further requires that they be
lawyers in order to ensure that CST takes no action to jeopardize its
tax-exempt status.

   The General Directors and staff of CST are, however, closely linked
to other Scientology organizations. The General Directors (the
governing body) must be in good standing with the mother church. Staff
members are required to be members of the Sea Org. Trustees of the
organization are required to have been Scientologists for at least
eight years, and must be highly trained in the teachings and
technology of Scientology. CST trustees are also required to remain
actively involved in giving and receiving Scientology services. They
must also participate in at least twelve and one half hours of
training per week.

   Many of the staff have held positions of authority in other
Scientology organizations. Three of the four trustees of CST worked
previously for CSC, which  [**23]   was dismantled in 1981. Terri
Gamboa is a trustee of CST. She was also at the same time a Director,
the President, and a shareholder of Author Services, Inc. ("ASI"), a
Scientology organization. She had formerly been an employee of CSC and
of LRH personally. Gregory Wilhere, a trustee of CST, was also
formerly an employee of the Founding Church of Scientology, CSC, the
Church of Scientology Flag Service Organization and an Australian
Scientology organization.

   Marion Meisler is a trustee of CST. She was at the same time an
employee of ASI, and had previously been employed by CSC, a United
Kingdom Scientology organization, and a Australian Scientology
organization. Lyman Spurlock is the President of CST, one of its
directors, and one of its Trustees. He is also a trustee of RTC. As
[*721]   trustee, Spurlock has authority to elect and remove the
directors who run RTC.  Thus, Spurlock has the ability to influence
RTC's activities. Spurlock was given a general power of attorney by
LRH on March 12, 1984, as his personal employee. Dan Przybylski is
Vice President of CST and one of its Directors. He has been a employee
of CSC, CSI, and RTC.  Leo Johnson is Secretary of CST. Previously he
had been an  [**24]   employee of CSC.  Nancy O'Meara is the Treasurer
of CST. She had been successively employed by various Scientology

   E. Activities of the Church of Spiritual Technology

   CST is in the process of creating an archive of Scientology
scriptures. These consist of the written and spoken word of LRH, as
well as films concerning religious training and the administration of
Scientology services. In pursuing this goal, CST has outlined its
ambitious program of research into archival methods and technology.
The purpose of the archive is to ensure that Scientology scriptures
are available for billions of years. CST has thus been motivated to
research long-term storage and preservation methods and to try to
develop new technologies.

   In order to complete its archiving mission, CST has purchased
several large parcels of land. The organization's administrative
offices and main preservation facility are in San Bernardino,
California. The existing buildings at the San Bernardino facility were
in serious disrepair when purchased. CST was required to pay large
sums of money to repair enough of the buildings to house the resident
staff. A number of the buildings remain in need of extensive  [**25]
renovations. The 6,000 square foot reservation building was fitted
with multiple layers of sheet rock in the ceiling and floor and also
with two-hour fire doors to provide a storage space safe from fire.
Another storage facility will be built in San
Bernardino to house original Scientology scriptures.

   CST has purchased other sites for storage facilities. On these it
has built or intends to build vaults with specially constructed doors.
Currently, CST owns archive sites in Northern California and New
Mexico and has plans to acquire additional sites. The site in New
Mexico was purchased for $ 250,976. The Northern California site cost
$ 1.5 million. Vault construction in New Mexico was begun in 1986
after the construction of staff living quarters, access roads, and
water supply. CST also reinforced the face of the site, installed a
hoist, and built a work pad, all of which cost $ 260,000. Other
construction costs have included $ 90,000 to overcome rock fissure
impediments encountered in the drilling of the underground tunnels in
New Mexico, and $ 120,000 for maintenance-free doors to he placed at
the mouths of the tunnels. Vault construction at San Bernardino and
Northern California  [**26]   is predicted to cost over $ 5 million.

   To accomplish its archiving mission, CST employs a staff of from 15
to 63 "highly dedicated" Scientologists who are under the control of
CST management. All CST staff members must be trained in Scientology.
They live at the preservation site, are paid a subsistence wage, and
are required to improve continually their knowledge of Scientology and
its teachings. They must spend a specified minimum amount of time each
day in Scientology training and teaching pursuits.

   CST intends to preserve Scientology scriptures in all of the forms
in which they currently exist. Among the technologies that CST is
trying to adapt or develop for this purpose are microfilm, color
separation for film tape, durable paper and ink for the production of
durable masters, digital audio recording, gold and glass laser discs,
respooling equipment, soundscriber discs, environmental conditions
with respect to creating better storage conditions for archived
materials, archival xerography, binding, deacidification of paper used
to preserve all written originals, encapsulation in mylar plastics,
time capsules filled with inert gas, and construction of vault doors
built to be maintenance-free  [**27]   for at least 1,000 years.
Because it cannot find equipment and technology that meet its
standards, CST has become active in developing   [*722]   new
preservation techniques. CST is also involved in developing new
E-Meter technology.

   The stages of archiving are elaborate. First, CST must obtain the
original Scientology work. Originals have been found in the possession
of individuals in many different countries. In most cases, the
possessors of the documents have donated them to CST for preservation.
CST also obtains originals from RTC.   CST makes seven copies of each
original: two copies on microfilm, and five on acid-free paper. The
microfilm copies reportedly have a lifespan of at least 100 years,
while CST expects the paper copies to last 1,000 years. These
de-acidified paper copies are known as "durable masters." The original
is then encapsulated in mylar and placed in a gas-filled time capsule.
Some of the durable masters are placed in fire-proof containers and
kept in one of the storage facilities, others are kept available for
study purposes.

   CST also has begun the process of collecting Scientology films
written or directed by LRH. In order to preserve them for a longer
period of time, [**28]   CST plans to process the color out of the
film. CST has begun the process of restoring some of the original
films. When all of the original films have been obtained, CST intends
to make copies to store in each of the planned storage facilities. CST
predicts that keeping, storing, copying, and processing the films will
be a costly undertaking. Particularly with respect to the
color-removal process, CST believes archiving the films will cost $
350,000 for the equipment to perform the color-removal process, and $
150,000 actually to remove the color from each of the 42 films. To
have this work done by an outside professional laboratory would cost
over $ 1,000,000.

   CST's archiving activities will include preservation of audio tapes
of lectures given by LRH. There are reportedly over 6,500 master reels
of original recordings to be copied and preserved. Some of the earlier
lectures exist on small "Soundscriber" discs which apparently are a
challenging medium to preserve. CST has completed the process of
making seven magnetic tape copies of each of the master tapes. This
has cost $ 1.3 million dollars in tape and equipment costs. Of these
seven copies, four are archival quality reel to reel [**29]   tapes
destined for storage in the underground storage centers. Two are to be
kept for research purposes, and one, of non-archival quality, is to be
provided to CSI.  CSI will then prepare a transcript of the tapes
which it will furnish to CST.

   Since magnetic tape cannot be preserved as long as CST would like,
it has been investigating other media such as digital sound
technology. CST now plans to convert its analog magnetic tape
recordings into digital signals which it will then transfer onto
special video tape. CST intends to make video tapes of each of the
6,500 master tapes that constitute the library of LRH recorded
lectures. This project is expected to cost $ 200,000. The production
of these video tapes will not add to the life of the recorded words,
however. Thus, CST eventually plans to transfer the video tapes onto
laser discs. Gold-plated glass discs currently seem to have the
longest life of all materials, but a full set of such discs would cost
more than $ 6 million, which CST considers excessive.

   F. Financial Structure of Scientology

   CST states that it does not participate in any of the hierarchical
church's financial accounts. In a literal sense this may be true.
[**30]   However, given the fact that CST currently gets all its
operating funds from other Scientology churches, that courts have
found commercialism and financial inurement throughout Scientology,
and given the close links to other Scientology organizations forged by
the LRH will and by overlapping personnel, the overall finances of
Scientology are highly relevant to CST's application.

   Procedures for handling money in Scientology are remarkably
complex. Income is generated chiefly by the Class IV churches and by
the Missions, although income is also generated by the higher level
churches. All Scientology services or "auditing" must be paid for,
thus the Class IV   [*723] churches and missions take in a
considerable amount of money from
individuals and independent ministers who purchase books, auditing
services, and E-Meters from the local church or mission. Payments are
made by the lower churches to CSI for ecclesiastical services, and as
noted below, all lower level churches are expected to contribute to
Central Reserves.

   According to CST, each local church keeps several bank accounts,
but all money initially is deposited into the "FBO" No. 1 Account. -
From that account, money can be placed into at  [**31]   least one of
nine accounts. These include accounts for money to be paid as attorney
fees in the event of litigation, money to be paid to parishioners as a
reward for completing a specified course of study, for refunding the
fixed donation of a parishioner who is not satisfied with the
materials or auditing services, and monies held "in reserve" in
accordance with Scientology policy to be used for local purposes. In
addition, each church keeps a separate account from which to pay its
Field Staff Members' commissions and to cover the local expenses of
higher level churches. Finally, each church keeps an account for
miscellaneous expenditures that do not fall into any of the previous
categories. In addition, some disbursements, such as the required
payments to the United States Scientology Films Trust are made
directly from FBO No. 1. These are license payments for the films
provided to the local churches by the Films Trust.

   The court notes that earlier policy letters refer to the
requirement adopted in 1965 that all Scientology organizations create
"Reserved Payment Accounts."  These serve as temporary repositories
for monies that may be disbursed to general creditors.  Instructions
associated  [**32]   with operation of these accounts make it clear
that LRH discouraged prompt payment of bills, a policy he referred to
as dateline paying. HCO Policy Letters of March 4, 1965 and March 28,
1965. "We aren't interested in bills as bills. We're interested in
'all bills earlier than a certain date.'" HCO Policy Letter of 28
January, 1965.  LRH instructs accounts personnel to take the following
approach with tradesmen demanding full payment: "Just
say to tradesmen who dun you, 'Oh, really? We'll send you a cheque.'
Never say how much." HCO Policy Letter of 28 March, 1965.

   Some Scientology corporations are made up of more than one church
organization. For example, the Church of Scientology Western United
States is made up of the American Saint Hill Organization, the
Advanced Organization of Los Angeles, the Continental Liaison Office
for the Western United States, and its Estates Org which maintains the
physical plant of the Western United States church. Where this is the
case, the smaller organizations maintain each of the above accounts
independently from the others. There are sometimes transfers between
the parallel accounts of the different churches.

   Before it can spend any of its money,   [**33]   each of the 141
local churches is required to submit a weekly proposed Financial
Planning ("FP") report, which is the proposed budget for the church
for that week. The report must be negotiated and approved by two
committees composed of church executives (the Advisory Council and the
Executive Counsel) both of which have line item veto power. The FP
report is further subject to final approval of the local Flag Banking
Officer ("FBO").

   The FBO is charged with maintaining the financial prosperity and
expansion of the church. The FBO prepares the FBO Weekly Report which
contains the allocations a church has made to each of its bank
accounts, as well as any amount the church will contribute to Central
Reserves to benefit Scientology as a whole. The FBO has a high level
of ecclesiastical authority with which he or she ensures that all
money is allocated and spent properly. The FBO is, in turn, ruled by
the local Finance Enforcement Officer ("FEO"), who has higher
ecclesiastical rank. n21

- - - - - - - - - - - - - - - - - - -Footnotes- - - - - - - - - - - -

   n21 FBOs and FEOs are themselves subject to the authority of their
respective networks. The FBO Network is comprised of staff members of
the Continental Liaison Office. The FEO Network is comprised of
Continental Finance Ethics Officers, staff members of the Continental
Liaison offices. These officers are in turn supervised by the Flag
Finance Ethics Officer, who is an employee of CSI.

- - - - - - - - - - - - - - - - - -End Footnotes- - - - - - - - - - -

[*724]   1. The Central Reserves

   Each local church, mission, and higher level church is required to
contribute to the Central Reserves of Scientology. n22 These play an
important part in the structure of Scientology finances. Central
Reserves are kept in accounts called, variously, central accounts,
central bank accounts, SOR accounts or central reserve accounts. The
actual money in the account, as distinct from the account itself, is
identified as Sea Org reserves, So reserves, or SOR. n23 The Central
Reserves are the responsibility of the individual holding the office
of WDC Reserves. The WDC Reserves is a high-ranking member of the
Watchdog Committee, and also a member of the Sea Org. n24 The WDC
Reserves' immediate juniors are the International Finance Director and
the Flag Finance Director. All three of these officers are employed by
CSI, and are Sea Org members.

- - - - - - - - - - - - - - - - - - -Footnotes- - - - - - - - - - - -

   n22 CST apparently maintains its own Central Reserve account.

   n23 This money is managed by Sea Org members through SOR Management
Services, Ltd., a for-profit corporation in the United Kingdom, which
acts as an agent for U.S. churches and trusts which hold Central
Reserve Accounts: CSI, CSFSO, CSC and the Churches of Scientology of
New York, Boston, Las Vegas, and Portland. [**35]

   n24 See discussion supra at 6-7.

- - - - - - - - - - - - - - - - - -End Footnotes- - - - - - - - - - -

   The total amount of central reserves held by Scientology at any
given time is difficult to calculate. There are the several Central
Reserve accounts maintained by different management-level churches. In
addition, there is the account into which the local churches pay their
share of the reserves managed by WDC Reserves. In addition, all of the
trusts formed by Scientology are considered part of Central Reserves.
The Central Reserve account may also carry loans made by it to any of
the local churches who may have needed to borrow money following, for
example, a drop in auditing sales. Money reported as previously spent
out of Central Reserves conservatively totals over $ 94 million.

2. Scientology Trusts

   In addition to its many bank accounts, Scientology stores money in
at least ten separate trusts. These trusts are considered part of the
church's central reserve, and include the International SOR Trust,
International Publications Trust, SOR Management Services, the Church
of Scientology Religious Trust, the Scientology Endowment Trust, the
Church of Scientology  [**36]   Expansion Trust, the Buildings Trust,
the Dissemination Trust, the International Missions Trust, and the
Films Trust. The trusts own and/or control publication and
distribution channels for religious books and products, and provide
investment and financial management services. Some of them have been
granted tax-exempt status by the IRS as religious trusts. Each of them
has a specific place in the financial organization of the church and
is supervised directly by its own Board of Trustees. As part of the
central reserve system, the trusts are also subject to the
ecclesiastical supervision of CSI. CSI ensures that trust monies are
spent in accordance with orthodox Scientology policy.

3. Bridge Publications

   Bridge Publications, Inc. ('BPI') is:

   . . . a California for profit corporation. BPI publishes and
distributes the Scientology Scriptures (including books and recorded
tapes), manufactures, repairs and distributes E-Meters, and publishes
and distributes fiction works written by L.Ron Hubbard.

   Sea Org members hold all of the upper level management positions in
BPI, and many of its employees are Sea Org members. BPI is organized
and operates (to the extent consistent with its status  [**37]   as a
for profit business corporation) in accordance with the Scriptures.

   Prior to the incorporation of BPI in 1981, the publication and
distribution of the Scriptures and the manufacture and distribution of
E-Meters in the United States were activities of Church of Scientology
[*725] of California. Upon incorporation of BPI, Church of Scientology
of California (CSC) transferred the assets used in those activities to
BPI in exchange for all of its capital stock.  In 1982, CSC sold all
of the shares of BPI to International SOR Trust, a non-U.S. religious
trust. In 1985, International SOR Trust transferred the shares of BPI
to International Publications Trust (IPT), which continues to own all
of the shares.

   IPT is a Scientology religious trust governed by three trustees. .
Two of the trustees of IPT are non-resident aliens. The third is a
United States citizen and resident and a staff member of CSI, holding
the position of WDC Pubs, i.e., the member of the Watchdog Committee
concerned with ecclesiastical matters relating to the publication,
manufacture, distribution and sale of the Scriptures and of the

   In addition to the shares of BPI, IPT owns all of the capital
shares of a for [**38]   profit holding company (a United Kingdom
corporation) which in turn owns all of the capital shares of New Era
Publications (NEP), the Danish for-profit publisher which publishes
and distributes the Scriptures outside the United States. NEP is
managed and primarily staffed by Sea Org members.

   BPI has the right to publish the Scriptures and to manufacture
E-Meters pursuant to agreements with NEP. NEP in turn has the right to
produce these items and to license their production pursuant to
agreements entered into with L. Ron Hubbard. Under these agreements,
BPI pays royalties to NEP with respect to the copyrighted and patented
articles, and NEP in turn pays royalties to Mr. Hubbard and his
successors in interest, with respect to royalties received from BPI
and with respect to items published directly by NEP.

P App. pp. 376-77. Thus BPI is ultimately controlled by three
trustees, one of whom is a CSI staffer, the WDC Pubs. The WDC, a
function of CSI, in turn is more generally responsible for
oversee[ing] the entire international ecclesiastical management
structure of the Church," including publication activities of BPI and
NEP. P App. pp. 336-38, 375-80. BPI and NEP hold the requisite  [**39]
licenses to sell Scientology materials, and any payment made to BPI or
NEP eventually devolves to the Financial benefit of "Mr. Hubbard and
his successors," which includes RTC and CST. Furthermore, all
religious materials must be orthodox, and only materials licensed by
CSI are orthodox. Although it is apparently the pour-over trust that
currently receives royalties from the publication rights, it is CST
that, under the will, stands to move into the position of ownership of
those rights.

   Thus, CST not only is positioned to support BPI's for-profit
activities by furnishing authentic copies of archived materials, n25
it stands to receive royalties from the for-profit publishing
companies, and, if it exercises its options over RTC, will receive
royalties from use of the advanced technology. As to the supplying of
Scientology services, in view of CSI's receipt from RTC of the license
to use the trademarks, it would appear to have stepped into Mr.
Hubbard's shoes to the extent of receiving payments for use of the
marks.  Presumably if CST exercises its option over RTC, it would be
[*726]   able to control those marks as well, thereby completing its
ownership of the publishing rights, the advanced  [**40]   technology,
and the marks.

- - - - - - - - - - - - - - - - - - -Footnotes- - - - - - - - - - - -

   n25 CST has two roles with respect to films and tapes as well.
Under LRH's will, CST stands to take ownership of those assets. It is
also responsible for archiving such materials. Nevertheless, until
CST's rights are clarified, BPI and CSI will be involved with the
receipt of proceeds from the production and distribution of films and
tapes. LRH licensed his
copyrights in the films to CSC in 1982 for distribution in the United
States. Outside-the-United States distribution was to be done by an
entity designated by LRH. Golden Era Studios was set up by CSC to
reproduce audio tapes and to produce motion pictures. CST represented
to the Commissioner that "in 1985, CSC sold the assets of Gold to CSI,
and since then all activities of Gold have been conducted by CSI." The
United States Scientology Films Trust was created to distribute the
films to churches in the United States, "to receive license fees from
them, to pay over to CSC its costs of production and thereafter to
retain and expend the amounts received from the churches for religious
purposes." After having paid for the films, the trust has collected
"in excess of $ 3 million." As to tapes, BPI "is licensed to copy the
tapes," presumably under a prior arrangement with LRH.

- - - - - - - - - - - - - - - - - -End Footnotes- - - - - - - - - - -

4. The Doctrine of Exchange

   During the administrative process, the IRS questioned CST regarding
the doctrine of exchange. The doctrine of exchange requires that in
order to receive, it is also necessary to give.  A Scientologist is
obligated to exchange something he values for anything he acquires.
Thus, he must exchange cash for auditing services.  He must exchange
cash for Scientology books.  He must exchange any original LRH
documents he possesses for the satisfaction of advancing the
Scientology cause. The doctrine was described as a fundamental belief
of the religion, yet at other times, CST insists it is a minor part of
Scientology.  It has, however, consistently been cited as the
explanation for why all Scientology religious services must be paid
for by those receiving them.  CST explains the doctrine as being based
on early writings of LRH which discuss the importance of balancing
inflow of money or services, for example, with outflow.

G. Prior Litigation Involving Scientology

   The instant litigation is not the first time a Scientology
organization has been in court.  At the administrative level, the
Government relied in part on findings made by other courts in earlier
[**42]   litigation involving Scientology churches. CST opposed making
such use of prior litigation, arguing that it occurred largely before
CST even existed.

   To the extent findings or conclusions in other cases are
inconsistent with the record developed exclusively for CST, the record
here controls.  The court will, nevertheless, consider non-conflicting
evidence introduced into the record from other litigation, and will
take judicial notice of reported opinions dealing with Scientology
organizations. n26 The court finds below that CST is inextricably
linked to Scientology as a whole. It would have been naive for the
Commissioner, and it would be equally naive for the court, to ignore
the implications of the genesis of CST and its links to other
Scientology organizations.

- - - - - - - - - - - - - - - - - - -Footnotes- - - - - - - - - - - -

   n26 See United States v. Estep, 760 F.2d 1060, 1063 (10th Cir.
1985); see also E.I. Du Pont De Nemours & Co. v. Cullen, 791 F.2d 5, 7
(1st Cir. 1986) (court took notice of complaint filed in state court
proceeding which dealt specifically with matters at issue in federal
proceeding and where neither party disputed document's authenticity.);
St. Louis Baptist Temple, Inc. v. FDIC, 605 F.2d 1169, 1172 (10th Cir.
1979) (federal court may take notice of proceedings in other courts
which have a direct relationship to matters at issue). See generally,
IX Wigmore on Evidence @@ 2578-2579 (Chadbourn rev. 1981).

- - - - - - - - - - - - - - - - - -End Footnotes- - - - - - - - - - -

   Courts that have examined the affairs of the other Scientology
management churches have been persuaded that the way in which
Scientology operates is often indistinguishable from any commercial
activity, and that church resources have been used for private
benefit. In Church of Scientology of California v. Commissioner, 83
T.C. 381 (1984) ("CSC"), the court held that the Church of Scientology
of California was no longer being operated in accordance with I.R.C. @
501(c)(3) and therefore the IRS was entitled to revoke its tax-exempt
status.  The court in CSC found substantial evidence of private
inurement to LRH and his family, including salaries, management fees,
complete support of LRH's family, and royalty
payments on LRH's writings. CSC, 83 T.C. at 492. Additionally, the CSC
court found "covert indicia of benefit" to LRH including repayment of
unspecified debts, and LRH's absolute control over the millions of
dollars resting in Operation Transport Corporation, Ltd. n27 and the
United States Churches of Scientology Trust. Id.

- - - - - - - - - - - - - - - - - - -Footnotes- - - - - - - - - - - -

   n27 Operation Transport Corporation, Ltd. ("OTC"), is a
non-charitable Panamanian corporation, found by the court in CSC to be
run by the Flag Banking Organization ("FBO"). CSC, 83 T.C. at 387. OTC
was found to be a sham corporation for which FBO created financial
records to give the false impression of a legitimate, independent
existence. Id. at 505.

- - - - - - - - - - - - - - - - - -End Footnotes- - - - - - - - - - -

   The court in CSC also found that the church had failed to carry its
burden of proving that it was organized and operated   [*727]
exclusively for exempt purposes, and had failed to produce financial
information, or had denied the IRS access to many financial records.
The documents it did provide were turned over in a confused,
disorderly fashion with no index and no assistance or explanation of
what was contained in them. This lack of cooperation, on which the
court remarked throughout the opinion, led it to hold that it could
draw negative inferences from the evidence not produced. "The failure
of a party to produce relevant evidence within its possession or
control gives rise to the presumption that, if produced, it would be
unfavorable." CSC, 83 T.C. at 502 (citations omitted). Based on the
lack of information provided, the court found the United States
Churches of Scientology Trust and the Operation Transport Corporation
were run for the private benefit of LRH and his family.  CSC, 83 T.C.
at 500.  The CSC court further found that the church of Scientology
was operated for the substantial commercial purposes of tax evasion,
making money, and
[**45] criminally manipulating the IRS as a method of financial
planning. Id. at 504.

   In litigation, Scientologists continually have accused the IRS of
singling them out for a unique kind of religious persecution. In CSC,
the court examined the history of IRS actions against various
Scientology churches and found that Scientology organizations have
indeed been frequently investigated by the IRS.  Many of the
investigations were lengthy and far-reaching. The IRS expounded
special instructions in a "Manual Supplement" issued to its
investigators and attorneys specifically regarding the treatment of
Scientology churches.  Upon specific examination of the IRS's behavior
in CSC, the court found no support for the Scientologists' claims of
harassment. It found instead that the IRS had in fact been deliberate
in its investigation of CSC, and had followed the same procedures used
in investigations of other churches. The court also found that the
Scientology churches' own behavior had more than justified the
IRS's attention.  CSC, 83 T.C. at 453.

   Litigation involving Scientology organizations has often been
protracted and combative. For example, even though  [**46]   the IRS
revoked CSC's tax-exempt status in 1967, CSC continued to file
informational Form 990's and no other forms, even though it had been
told to begin filing annual returns. n28 CSC, 83 T.C. at 382, 405. CSC
ignored the IRS revocation, which it claimed it was entitled to do,
since its tax-exempt status had been improperly revoked and was thus
ineffective. n29

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   n28 Form 990 is a form filed by non-profit organizations.

   n29 The proper procedure, of which CSC had been notified by the
IRS, would have been for CSC to have filed the forms appropriate for
an organization no longer exempt, pay the tax then assessed, and then
apply for a refund. I.R.C. @6011(a); CSC, 83 T.C. at 404. The right of
CSC to pursue an administrative review of the revocation does not
change the fact that revocation letters are effective upon their
issuance. Treas. Reg. @ 601.201(n)(6).

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   In Founding Church of Scientology v. United States, 188 Ct. Cl.
490, 412 F.2d 1197 (1969),  [**47]   cert. denied, 397 U.S. 1009
(1970), members of the Founding Church of Scientology filed a refund
suit. Plaintiffs claimed that they were a religious organization under
I.R.C. @ 501(c)(3), and therefore were entitled to have money
previously paid in taxes refunded to them. The Court of Claims denied
the claim. The court found that some of Founding Church's money inured
to the individual benefit of LRH, his wife and son. This included a
house maintained by the church, a percentage of the church's income,
and other royalties and commissions. The court based
its finding of inurement on informal loans made to LRH that were never
sufficiently explained or documented.

  In Founding Church of Scientology, Inc. v. Webster, 802 F.2d 1448
(1986), cert. denied, 484 U.S. 871 (1987), the plaintiff initiated a
suit against William Webster, Director of the FBI. Founding Church
members alleged that the FBI was harassing Scientologists for no
permissible reason. The district court dismissed the litigation [*728]
after the Founding Church of Scientology defied a court order to
produce LRH for deposition. The case came to a standstill at the
church's  [**48]   continued refusal to cooperate with a request to
produce LRH for a deposition. The church took the position that LRH
was no longer a "managing agent" of the church and therefore was not a
party to the litigation. The FBI had submitted prima facie evidence
that LRH was still a managing agent of the Founding Church and should
appear for deposition. The Founding Church merely repeated its
assertion that LRH was not a managing agent, and that in fact he had
severed nearly all contact with the church management.  The district
court ordered the Founding Church to produce LRH for the limited
purpose of countering the FBI's prima facie evidence. The court found
that despite LRH's formal resignation from all management positions in
Scientology, in fact he maintained control of Scientology's finances
and policies through his position in the Sea Org and other covert
means. "Ultimate control, we have no doubt, he possessed until his
death." Webster, 802 F.2d at 1456.  After eight years of pretrial
discovery, the district court dismissed the case.

   In affirming, the circuit court noted that the Founding Church
filed its complaint in the same year (1978) in which Mary Sue Hubbard
[**49]   and eight other high-ranking officials of the church admitted
in a plea agreement that "the network of Scientology organizations had
conducted a broad campaign against U.S. Government entities
particularly the Internal Revenue Service." Webster, 802 F.2d at 1450.
In fact, the Webster court noted that the same government
investigations the Founding Church complained about were justified by,
and a result of, the church's own illegal behavior. Webster, 802 F.2d
at 1450 n.3.

   In United States v. Zolin, 905 F.2d 1344 (9th Cir. 1990), cert.
denied, Church of Scientology v. United States, 111 S. Ct. 1309
(1991), the Ninth Circuit found that the tapes of the MCCS conference,
held in 1981, reveal that "the figures involved in MCCS admit on the
tapes that they are attempting to confuse and defraud the government."
Zolin, 905 F.2d at 1345. The tapes were therefore not protected by the
attorney-client privilege because they fell within the crime-fraud
exception to the privilege.

   H. Proceedings Before the Commissioner

   The administrative process in this case began in 1983, when CST
filed [**50]   its initial petition for tax-exempt status. The process
occupied nearly five years, ending on July 8, 1988, when the IRS
issued its final adverse ruling. In the process, the parties put
together one of the largest tax records ever accumulated. The
Government complains, however, that on numerous occasions critical
inquiries went unanswered, and that, despite its heft, the record is
light on explanations. The court's examination of the record supports
the Government's critique.  Although CST frequently inundated the IRS
with material, numerous key points were not candidly
addressed. CST responded to some of the IRS's questions, but it
refused to respond to others, claiming it did not understand the
question, or chose merely to refer to previous responses.

   CST, CSI, and RTC all applied for tax-exempt status at the same
time. The IRS requested information about the circumstances
surrounding the founding of these three organizations.  The IRS
specifically asked who initiated and oversaw the reorganization of the
Scientology hierarchy.  The IRS also enumerated the connections it saw
among the three applicants and the existing Scientology hierarchy and
asked for comment. The IRS did not say   [**51]   it would never
consider CST's application separately, only that until the apparent
connections were explained, it could not.  CST continually refused to
answer these questions, demanding that the IRS treat CST's application
independently of RTC and CSI.  At one point, CST informed the IRS that
"it did not agree" that the IRS could not rule on CST's application
without information about other Scientology organizations. In that
same letter, rather than provide information   [*729] to explain why
the IRS's reservations about CST's tax-exempt status were groundless,
CST simply stated that it rejected assertions made by the IRS, and
that the reservations were insignificant anyway.

   When pressed for additional information on its relationship to
other Scientology organizations, CST merely repeated its initial
inadequate answer that it did not voluntarily recognize the
hierarchical church. The IRS found that answer inadequate, and asked
the question again. CST gave a similar answer:  "This assertion
implies that [CST] is a part of the Scientology hierarchy.
It is not. See our letter to you dated 10 September 1984." n30

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   n30 Letter from CST to IRS of November 7, 1984.

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   Rather than offer an explanation of the option agreements it held
under LRH's gift, CST stated instead, "We do not consider [the
options] to be as you characterize them.  However, the agreements
speak for themselves." n31  On another occasion, CST refused to
respond to allegations in affidavits from former church members that
the MCCS conference was tasked with devising a new structure which
would mask LRH's actual control of Scientology and make it appear that
he no longer took an active role in running the church. CST replied
that the IRS "had no business" relying on information from such

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   n31 Letter from CST to IRS of September 10, 1984.

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   On April 22, the IRS again wrote to CST for additional information.
CST's response contained nothing new.  For example, the IRS inquired
about Sherman Lenske, Stephen Lenske and Lawrence Keller [sic: "Heller"]
and their role as CST's "special directors." Instead of providing a
meaningful answer to the question, CST replied, "We commented upon your
position in our earlier correspondence  [**53]   . . we request that you
inform us of the relevance of their other associations to the exempt
status of this organization. n32

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   n32 Letter from CST to IRS of June 26, 1985.

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   The final stage of the administrative process began in March 1988.
The IRS sent agents to CST's headquarters to conduct an on-site review
of the organization's financial activities and operations. CST had
agreed to allow the investigation. The process came to an end in June
1988 when, according to the IRS, CST refused to cooperate with the
agents' requests for records. CST denies that it refused to cooperate,
but agrees that it sent a letter in protest to the IRS on June 24,
1988, because an IRS agent had interviewed Vicki Aznaran, formerly the
Inspector General of RTC, n33 without first informing anyone from CST.
Although CST vehemently protests that it did not refuse to cooperate
further with the on-site review, the June 24, 1988 letter states,
"With that, we informed Mr. Joseph that Applicants were suspending the
review until we resolved the   [**54]   matter with the National [IRS]
Office." n34

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   n33 The post of Inspector General of RTC is described by CST as
"the highest ecclesiastical position within RTC." [P App. p. 361]

   n34 Despite CST's objections, the IRS agents were well within the
law in contacting Ms. Aznaran. The IRS is authorized to contact any
person and take testimony from that person "as may be relevant or
material." I.R.C. @ 7602(a).

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   Following the issue of a Final Adverse Ruling letter on July 8,
1988, counsel for CST sent several letters to the IRS attempting to
continue the administrative process and challenging the IRS's position
that it had been uncooperative. The IRS did not re-open the record,
and the Final Adverse Ruling remained as issued. CST brought the
instant action to challenge that ruling.


   Income tax exemptions must be strictly construed, with any doubts
to be resolved in favor of the taxing entity. Harding Hospital, Inc.
v. United States, 505 F.2d 1068, 1071 (6th Cir. 1974).  Consequently,
determinations  [**55]   of the Commissioner are presumed correct.
Welch v. Helvering, 290 U.S. 111, 115 (1933).  To the extent that the
Government   [*730]   relies on the grounds stated in the
Commissioner's final decision, plaintiff thus bears the burden of
proving its entitlement to an exemption. Bubbling Well Church of
Universal Love, Inc. v. Commissioner, 670 F.2d 104, 106 (9th Cir.
1981); Freedom Church of Revelation v. United States, 588 F. Supp.
693, 696 (D.D.C. 1984). The court's review is based on the record
below. Church of Spiritual Technology v. United States, 18 Ct. Ct.
247, 249 (1989).  We accept as true statements in the record made by
CST that were not challenged by the IRS.  This does not obligate the
court otherwise to accept conclusory statements contradicted elsewhere
in the record. n35

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   n35 World Family Corp. v. Commissioner, 81 T.C. 958, 965 (1983).

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   In order to qualify as a tax-exempt organization under I.R.C. @
501(c)(3), CST must prove that it   [**56]   is both organized and
operated exclusively for tax-exempt purposes. Treas. Reg. @
1.501(c)(3)-1(d)(1)(i)(a).  To meet the organizational test, CST must
show that its Articles of Incorporation do not authorize it to
undertake any non-exempt activity. I.R.C. @501(c)(3)-1(b)(i)(iii).
Further, in the event of dissolution, all of its assets must be
directed to exempt organizations. Id. @ 501(c)(3)-1(b)(4). This is
chiefly a matter of careful drafting, and the court finds that CST has
met this test.

   To meet the operational test, CST must show that it operates
exclusively for exempt purposes, that it has no substantial non-exempt
purpose, and that no benefits inure from it to private individuals.
See Treas. Reg. @1.501(c)(3)-1(c).  The mere fact that an organization
has a tax-exempt purpose or activity does not mean that it does not
also have a purpose or activity that is non-exempt.  One substantial
non-exempt purpose will make an organization ineligible for tax-exempt
status, even if all of its other purposes are exempt.  Better Business
Bureau v. United States, 326 U.S. 279, 283 (1945); Freedom Church of
Revelation, 588 F. Supp. at 696.  If   [**57]   CST devotes "more than
an insubstantial part of its activities" in support of a non-exempt
purpose it would still fail the operational test.  Treas. Reg. @

   A. CST's Application Must Be Viewed in Light of Other Scientology
Activities and Organizations CST has attempted to disassociate itself
from any negative inferences to be drawn from other aspects of
Scientology.  For that reason, CST maintains that its status as an
exempt organization must
stand or fall upon its own documents and activities, not those of
other Scientology organizations.   Parshall Christian Order v.
Commissioner, 45 T.C.M. (CCH) 488, 491 (1983). As a general
proposition, this is correct.  Where there is in fact no meaningful
separation between the entities in question, however, the connections
between the organizations can at a minimum be considered to see if
they bear on the merits of the application for exemption. In this
case, there are a number of reasons that CST's tax-exempt status
cannot be considered independently of other Scientology organizations.
One is shown in the web of personnel links between CST and other
Scientology groups, discussed above at pages 9-10, [**58] but there
are at least three other connections.

   CST is not a church, n36 therefore it must try [*731] to qualify as
a religious organization. n37 Compare Treas. Reg. @ 1.501(c)(3)-1(d)
with Treas. Reg. @ 1.511-2.  Congress intended that the term
"religious organization" have a less restrictive meaning in the tax
code than the term "church." Foundation of Understanding v.
Commissioner, 88 T.C. 1341, 1356 (1987). But the only religious aspect
of CST is its connection to Scientology.  CST has no exempt purpose
absent the religious patina it draws from Scientology.  Simply
archiving a man's words is not inherently an exempt purpose.  See,
e.g., Senior Citizens Stores, Inc. v. United States, 602 F.2d 711 (5th
Cir. 1979); Miedaner v. Commissioner, 81 T.C. 272 (1983); Western
Catholic Church v. Commissioner, 73 T.C. 196 (1979), aff'd, 631 F.2d
736 (7th Cir. 1980).  CST therefore derives its religious character,
not from its activities per se, but from Scientology.  CST recognizes
this in its Articles of Incorporation: "The corporation is formed . .
to serve as a means of promulgating . . .   [**59]   the religious
faith of Scientology around the World . . . ."  If the documents CST
is preserving are religious, it is because they are the scriptures of
the Scientology religion.  If CST has a religious purpose it is to
further the interests of Scientology by creating a durable record of
its founder's teachings.  This inextricably links CST to other
Scientology organizations.

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   n36 CST represents that it is a religious corporation organized to
accomplish the activities of a church.  Despite its name, CST is not
itself a church
as defined in the tax laws.  It is not "a coherent
group of individuals and families that join together to accomplish the
religious purposes of mutually held beliefs," which the Tax Court has
identified as a defining characteristic of a church. Church of Eternal
Life v. Commissioner, 86 T.C. 916, 924 (1986).  Nor does it have a
sufficient amount of the characteristics of a church specified by this
court in Church of the Visible Intelligence that Governs the Universe
v. United States, 4 Cl. Ct. 55, 64 (1983).  The only characteristic of
a church that CST does have is independent legal existence.  That
alone does not suffice for CST to qualify as a church under the tax
code.  As an archiving body, CST does not assemble parishioners
regularly to worship see American Guidance Found., Inc. v. United
States, 490 F. Supp. 304, 306 (D.D.C. 1980). It
provides Scientology services to its staff members, but this is
incidental to its chief stated function of making an archive.  The
incidental provision of religious services is not sufficient to
qualify a organization as a church. Foundation of Understanding, 88
T.C. at 1357 (citing De La Salle Inst. v. United States, 195 F. Supp.
891, 901 (N.D. Cal. 1961)).  [**60]

   n37 The distinction matters because churches receive more favorable
treatment under the Internal Revenue Code than do religious
organizations.  For example, churches may be investigated by the IRS
only in accordance with strict and specific procedures specified in
I.R.C. @ 7611.

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   CST is also linked to Scientology through its authority to control
the religion's income-producing property. CST has the power to
dismantle RTC by taking over the religious trademarks and use of the
Advanced Technology, thereby gaining direct control over all
Scientology organizations that purchase trademarked material. n38

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   n38 This really means all organizations, because only trademarked
materials are considered orthodox in the religion.

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    CST claims that it does not and will not monitor RTC's use of the
religious marks and technology.  CST explains that there is no need to
do so because any unorthodox use would be immediately obvious.
Regardless of how  [**61]   it arrived at the conclusion, however, the
point is that one of its obligations is to prevent misuse of the marks
and technology.  CST's present confidence in RTC has no significance.
If CST ignored that element of its charter, one of the assumptions
built into LRH's gift would be missing.  Monitoring for a misuse by
RTC is a form of ongoing oversight.  The decision to exercise the
option is an ecclesiastical one which would not be readily susceptible
to judicial review.  Upon exercise of the option, CST would inherit
RTC's role as the final voice on Scientology orthodoxy.  This would
give CST ecclesiastical authority over even CSI, since "CSI itself is
ecclesiastically subordinate to RTC." PPFF 17.  The conclusion which
the court must necessarily draw from LRH's property distribution
scheme is that CST has the absolute authority to take control of the
bulk of the income-producing property of Scientology.

   Indeed, the need for CST to take even the intermediate step of
exercising its options may have been obviated. The Commissioner found
RTC to be non-exempt.  The gift to RTC was conditioned on its
obtaining tax-exempt status.  If the gift fails, as it appears to
have, there is nothing over  [**62]   which to exercise an option.
Assuming CST secures tax-exempt status, it would appear destined, as
beneficiary of LRH's residual estate, to collect the balance of the
income-producing property. n39

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   n39 CST represented to the Commissioner in 1985 that it understood
its rights to include the following: "In the event it is determined
that Religious Technology Center is not exempt, this corporation will
exercise it options and acquire the marks and materials. . . ."
(Emphasis supplied.) In its 1987 Supplemental Submission, CST
attempted to back away from this interpretation, but still conceded if
[the IRS] recognizes CST's exemption, CST would have the power to
acquire RTC's rights in the marks and Advanced Technology if RTC's
exemption were denied.  When its exemption is recognized, CST will
receive Mr. Hubbard's estate and become owner of the limited powers of
appointment over the marks and the Advanced Technology that Mr.
Hubbard retained.  As owner of these interests, CST will have the
legal right to designate the section 501(c)(3) transferee of RTC's
rights in the marks and the Advanced Technology.  In the event RTC
cannot obtain exemption. As a section 501(c)(3) organization, CST
itself would qualify to receive these rights. (Emphasis supplied.)

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    [*732]   The religious trademarks and rights to the Advanced
Technology constitute most of the income-producing property owned by
any of the Scientology organizations. The remainder of LRH's
income-producing property is already designated for CST.  Upon its
qualification for tax-exempt status, CST could, therefore, obtain, by
operation of LRH's will, all of the rights LRH reserved when he made
his gift to RTC, as well as the copyrights to Scientology scriptures,
which presumably constitute the very heart of Scientology.  The
copyrights to LRH's science fiction works will also devolve to CST
under the will.  This intellectual property alone was valued at $
25,000,000 by the trustee appointed by the court to administer LRH's

   In these circumstances, it is at best disingenuous for CST to
maintain that it is "independent" of Scientology's ecclesiastical
hierarchy.  LRH certainly succeeded in creating an entity that is not
nominally subject to the ecclesiastical control of other Scientology
organizations.  Rather, the potential control runs in the opposite
direction. CST stands poised to assume a position at the apex of a
pyramid of both ecclesiastical authority and financial control over
Scientology.   [**64]

   Finally, the converse of CST's control in the area of orthodoxy is
that until it obtains tax-exempt status, CST will be as it has been,
entirely dependent on payments from other Scientology organizations.
Indeed, CST's Articles of Incorporation specifically state that it
does not solicit any funds itself, nor does it have any plans to do
so. n40 CST states that it alone controls its financial matters.
Possibly this is true with respect how money is spent once held by
CST.  It has not been true, however, with respect to obtaining the
money that CST spends.  All of this has come from other Scientology
organizations, and could, presumably, be cut off.

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   n40 The fact that CST does not raise its own funds is itself
unusual for a would-be I.R.C. @ 501(c)(3) organization, and limits its
ability to be independent. In B.S.W., 70 T.C. at 359 the court denied
a tax-exemption and stated, "its financing does not resemble that of
the typical I.R.C. @ 501(c)(3) organization.  Petitioner has not
solicited, nor has it received, voluntary contributions from the

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   In sum, there is a strong link, in fact an identity of purpose,
between CST and other Scientology organizations.  CST was created to
serve LRH as a personal estate-planning device and to support the work
of Scientology. CST would not exist without the rest of Scientology.
Its activities and purpose must, therefore, be considered in light of
its connection to Scientology as a whole.  Although CST has repeatedly
declared that it does not "voluntarily" recognize the authority of the
Scientology hierarchy and thus is ecclesiastically independent of it,
the statement is virtually meaningless in the context of this
litigation.  CST, therefore, has the burden of dispelling concerns
raised by its association with other non-exempt entities.

   B. Substantial Non-Exempt Purpose of Scientology

   1. Activity Cannot be Confused with Purpose

   CST has assiduously developed a record which demonstrates that
most, if not all, of its prior activities are directed at preserving
scripture.  CST does not sell or market archived material, or make any
profit on its activities  But even if CST could show that 95 per cent
of its employees did nothing but archive Scientology documents, and
only the remaining five  [**66]   percent were in charge of CST's
property interests and finances, that alone would not be enough to
secure tax-exempt status.  Congress did not intend for mere quantity
of dedicated resources to be the deciding   [*733]   factor in whether
an organization is operated for exclusively exempt purposes.  Section
501(c)(3) contemplates that the IRS (and the court, if necessary) will
inquire into the reality of an organization.  "The bare fact that
approximately half of each group is composed of
not-for-profit organizations does not compel the conclusion that there
is absent a substantial nonexempt purpose."  Copyright Clearance Ctr.
v. Commissioner, 79 T.C. 793, 809 (1982);  See also Better Business
Bureau, 326 U.S. at 283.

   CST confuses activity with purpose. The law does not. As the Tax
Court has held, "The operational test focuses on the purpose and not
on the nature of the activity." Goldsboro Art League v. Commissioner,
75 T.C.
337, 343 (1980).  The Commissioner, and the court, are permitted to
consider not just an organization's activities, but also to inquire
into its purposes.  The fact that an organization's activities have
religious overtones  [**67]   and do not produce profits is no
assurance those activities will be tax-exempt. "The critical inquiry
is whether petitioner's primary purpose for engaging in its sole
activity is an exempt purpose, or whether its primary purpose is the
non-exempt one of operating a commercial business producing net
profits for petitioner." B.S.W. Group, Inc. v. Commissioner, 70 T.C.
352, 359 (1978); accord Christian Manner Int'l, Inc. v. Commissioner,
71 T.C. 661, 668 (1979).

   In evaluating the real purpose of a transaction, the Supreme Court
has cautioned against uncritical reliance on form as against function.
Gregory v. Helvering, 293 U.S. 465, 470 (1935), involved a scheme to
avoid taxation of corporate distributions by invoking a code provision
applicable to reorganizations:

The whole undertaking, though conducted according to the terms of
subdivision (B), was in fact an elaborate and devious form of
conveyance masquerading as a corporate reorganization, and nothing
else.  The rule which excludes from consideration the motive of tax
avoidance is not pertinent to the situation, because the transaction
upon its face lies outside the plain  [**68]   intent of the statute.
To hold otherwise would be to exalt artifice above reality and to
deprive the statutory provision in question of all serious purpose.

   In like fashion here, CST must demonstrate that it was organized
for an independent and bona fide purpose.  Given the prior history of
Scientology and the peculiar circumstances of CST's birth, it is
appropriate to look beyond the flurry of archiving activity and
inquire into whether the very existence of CST was brought about
primarily to serve the non-exempt ends of other Scientology
organizations.  Although CST is entitled to minimize its own taxes, it
would be a misuse of I.R.C. @ 501(c)(3) if its primary raison d'etre
was to shield the income of other organizations from tax.

   2. Scientology's Preoccupation with Finances

   The court has attempted above to describe Scientology's Byzantine
management structure and financial arrangements. The task is
difficult, due to the proliferation of entities and accounts and the
overlap of personnel.  Scriptural emphasis on taking in money as well
as passive resistance to tax inquiries has been described above. n41
Other courts have encountered   [*734]   this same phenomenon.  The
commercial character  [**69]   of the scriptures is manifest:

Scientology income is high in most orgs. But it IS high due to the
investment of time and money in earlier years.  So if the balance
sheets omit all the money that was invested and show only the money
that was made, they are false balance sheets.  And that is what the
government wants us to turn in --a false balance sheet that shows all
income as profit with no repayment or retirement of debt.

HCO Policy letter of 25 June, 1967.

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   n41 Examples of LRH's interest in maximizing income and minimizing
taxes, such as the following, are legion:

   Make lots of money.  Spend it frugally.  So it gives a tax problem.
So what?  Your accountants should be capable of avoiding tax problems.
Whether you do or don't have money, you will always have a tax problem
because governments are crazy.  The way to solve tax problems is to
have money, not to be broke.

   Taxes exist only to destroy businesses. Be impudent. Get rich and
to hell with them. Governments are just a reactive bank we have to
live with for a while. learn to handle them. But not by refusing to
make money or have it.

HCO Policy Letter of 28 January, 1965.

   Now as to TAX why this is mainly anybody's game of what is a
PROFIT.  The thing to do is to assign a significance to the figures
before the government can.  The whole thing is a mess only because
arithmetic figures are symbols open to ANY significance.  So I
normally think of a better significance than the government can.  I
always put enough errors on a return to satisfy their bloodsucking
appetite and STILL come out zero.

HCO Policy Letter of 25 June, 1967.

- - - - - - - - - - - - - - - - - -End Footnotes- - - - - - - - - - -
- -  [**70]

   The Doctrine of Exchange discussed previously is another indication
of Scientology's preoccupation with money.  While the parishioner may
believe the exchange to be spiritually beneficial, it still has the
hallmarks of a commercial exchange.  The Supreme Court also came to
this conclusion in Hernandez, 490 U.S. at 684, where the Court held
that individuals who make auditing payments to Scientology are not
entitled to take a tax deduction for them.

   Moreover, the doctrine is abandoned in circumstances where LRH
deemed it expedient for "rapid dissemination" of Scientology doctrine.
In HCO Policy letter of 1 January AD13,  Central Orgs are instructed
to process selected celebrities "who are just beyond or just
approaching their prime."  The scripture goes on to say, "The pay is
to be 'Any contribution you would care to make if we have helped.' No
other pay is demanded."  This desertion of the presumably fundamental
Doctrine of Exchange appears to be theologically unprincipled, but it
is not unlike a commercial business strategically giving away services
in an effort to increase sales by obtaining a celebrity endorsement.

   A great deal of money is realized from the sale   [**71]   of
auditing services and LRH's books.  CSI fixes the retail price of
LRH's books, in conjunction with the for-profit publisher, Bridge
Publications, Inc.  The prices are set with an eye to maximizing
dissemination of the works as well as to maintaining a profit margin
for the church bookstores.  A minimum inventory is mandated by church
policy.  Further, Scientologists who work in the bookstores are
entitled to earn commissions on the books they sell.  There is little,
if any, difference between such an arrangement and that maintained by
any commercial bookstore.  Indeed in the HCO Policy letter of 14 May,
1959, LRH describes an even less charitable pricing policy for books:
"Establish fully the printing cost. Multiply by five.  This is the
cost of the book to usual buyers.  However, a book price can be
further increased so that when one gets a 20% discount reduction he
pays a whole figure."

   The administrative record contains no figures as to the amount of
money realized through the sale of LRH books.  A court appointed
appraiser, however, in valuing LRH's estate for purposes of probate,
valued the entire estate at $ 26,305,706, of which $ 25,000,000 was
the value of LRH's intellectual property, [**72]   i.e., the
copyrights and trademarks of his Scientology publications. That
figure, even discounting the value of the E-meter patents and other
non-publication elements, does nothing to dispel the appearance of
commercial profitability.  See Goldsboro Art League, 75 T.C. at 344;
B.S.W. Group, 70 T.C. at 357.

   The complexity of Scientology's financial procedures, its dizzying
array of reticules, and the potential for virtually constant transfers
of funds, inevitably raise questions about the propriety of a tax
exemption for CST, due to its links to that system, which will be
permanently forged upon a declaration of CST's exempt status.  In that
event, the assets of the pour-over trust devolve on CST --namely the
right to the books, tapes, films and E-meters, along with the
accumulated income therefrom.  These, in turn, are licensed in part to
for-profit entities for distribution.  This arrangement simply does
not resonate with the image of a tax exempt organization.   [*735]
Instead, it calls to mind Werner Heisenberg's uncertainty principle.
n42  In Scientology's case, the  opacity is so pronounced as to
approach wilfulness.  Organizations adjudged exempt simply  [**73] do
not exhibit the financial complexity or the phenomenal preoccupation
with money displayed by Scientology's management churches and
organizers.  See, e.g., Universal Life Church, Inc. v. United States,
372 F. Supp. 770 (E.D. Cal. 1974) (finding that organization that
offered religious course of study and accepted, but did not require,
payment for its materials was tax-exempt); National Found., Inc. v.
United States, 13 Cl. Ct. 486 (1987) (holding that foundation that
supported other exempt organizations with money it collected from
public was exempt because it gave away bulk of money taken in);
Goldsboro Art League, 75 T.C. at 345 (finding that art league's sale
of a few paintings of various local artists unrelated to League's
exhibits was incidental to overall exempt educational

- - - - - - - - - - - - - - - - - - -Footnotes- - - - - - - - - - - -

   n42 Heisenberg postulated that it is impossible to determine at the
same time both the position and velocity of an electron.

- - - - - - - - - - - - - - - - - -End Footnotes- - - - - - - - - - -

3. CST's Overriding Rationale is to be a [**74] Tax-exempt

   If CST is to be found tax-exempt, it must be because archiving is
its primary purpose and archiving LRH's words is an exempt activity.
Further, the court must find that holding the options and receiving
LRH's estate are merely incidental to CST's existence.  Instead, the
court finds that the impetus behind CST was not archiving, charity, or
even religious education, but rather was tax planning.  Nothing about
CST is consistent with its adopted posture as a simple document
repository.  A number of inevitable inferences from the record,
unanswered by CST, lead to this conclusion.

   First, there is the plain linkage between CST and the dissolution
of CSC, as well as the difficulties Scientology as a whole was having
in 1982 with the IRS.  Before the creation of CST, CSC served
Scientology as a tax-exempt entity.   When it became apparent that CSC
was likely to lose this status, LRH and the Scientology management
restructured both the financial and the ecclesiastical organization of
Scientology.   CST was created in 1982, during the CSC litigation. It
was founded by four non-Scientologist lawyers and Lyman Spurlock,
President of CST and former personal employee of LRH, in  [**75]   the
wake of CSC's dissolution.

   Sartre wrote that "Man is not the sum of what he has but the
totality of what he does not yet have, of what he might be." In like
fashion, the court is struck by the centripetal force that will be
generated should CST obtain tax-exempt status, and should it choose to
exercise its option to take over assets from RTC.  Armed with the
trademarks and publishing rights, and with tax-exempt status, CST will
be poised in the center of all of Scientology's financial resources,
in position to exert a strong gravitational force on Scientology's
income-producing assets. n43 If CST were exempt as a church, it would
be virtually insulated from public view, since it would not be
required to file an annual return. I.R.C. @ 6033(a)(2)(A)(i). If CST
were to qualify as a religious organization, it would be responsible
for filing only an informational return.  I.R.C. @ 6033(a).

- - - - - - - - - - - - - - - - - - -Footnotes- - - - - - - - - - - -

   n43 CST states that it would never seek to control these assets, or
use them in any way inconsistent with the stated religious purposes of
Scientology.  CST has provided only conclusory statements of its own
officers as evidence of CST's intentions.  The court in People of God
Community v. Commissioner, 75 T.C. 127, 132 (1980), found similar
conclusory assertions unpersuasive and insufficient to carry
petitioner's burden of proof.  Moreover, CST has stated on at least
one occasion that "it will exercise its options and acquire the marks
and materials." DPFF 61.

- - - - - - - - - - - - - - - - - -End Footnotes- - - - - - - - - - -

   If CST succeeds in its quest for exempt status, it will control the
trademark and publishing rights to all of LRH's works. n44 Those
rights constitute most of Scientology's   [*736]   income-producing
property.  The trademarks and publishing rights are the source of the
Advanced Technology from which all income production ultimately flows.
Books and tapes must be orthodox.  Provision of auditing services is
impossible without authorized books, tapes, and E-Meters.  These
materials produce money in sufficient quantities to allow CSI to hold
millions of surplus dollars in its central reserve account.  The
potential for abuse of the options and copyrights therefore is
considerable.  CST would not be obligated to donate the money to other
non-profit groups, or even to contribute it to Scientology's own
central reserves.  In fact, once CST has built its archiving
facilities, its expenses should decline dramatically, but it will
still control millions of dollars worth of income-producing assets.

- - - - - - - - - - - - - - - - - - -Footnotes- - - - - - - - - - - -

   n44 It is no answer to say that the court's concern is with
potential developments --that the court is merely speculating.  There
is nothing speculative about LRH's will, the denial of RTC's
exemption, and the value of the marks and copyrights.  The culmination
of the events set in motion by LRH lacks only the court's sanction.

- - - - - - - - - - - - - - - - - -End Footnotes- - - - - - - - - - -

   Next there is the dissonance between the stated, limited purposes
of CST on the one hand, with the far reaching implications of the
potential financial control over Scientology built into LRH's tax
planning.  CST has already demonstrated that it can perform its
archiving activities on the largesse of other Scientology
organizations.  Thus, the argument that CST must be self-sustaining is
without merit. Its insistence that it was intended to be independent
is unpersuasive because, as currently structured, it is not.  If the
true motivation behind CST were to build an archive, it would have
been a simple matter to incorporate an organization and arrange for
financing through the central reserves, or to have all
Scientology  churches contribute to funding the archive, or to have
some other straightforward financing scheme.

   What other possible purpose could there have been for funneling
LRH's estate to an organization with such a nominally limited and
innocuous function unless it was the hope that Scientology had
achieved the holy grail --an organization with unassailable
tax-exempt credentials, yet in control of the income from the myriad
sources within Scientology? n45

- - - - - - - - - - - - - - - - - - -Footnotes- - - - - - - - - - - -

   n45 Plaintiff has argued that the intention of CST's founders is
irrelevant to the determination of CST's status.  That is, as long as
CST's primary purpose was religious, and it otherwise met the
requirements of I.R.C. @ 501(c)(3), private motives, in this case the
advancement of interests of other non-exempt organizations, would not
be relevant.  Just as genuinely charitable intentions will not save a
commercial undertaking from being commercial, CST argues that
commercial intentions will not transform a charitable undertaking into
an uncharitable one.  Scripture Press Found. v. United States, 152 Ct.
Cl. 463, 469-470, 285 F.2d 800, 804 (1961), cert. denied, 368 U.S. 985
(1962).  This argument is flawed because it assumes CST's primary
purpose was religious.  Lacking this premise the argument is
irrelevant.  The motives of the founders will be considered to the
extent they illuminate CST's function and purpose.

- - - - - - - - - - - - - - - - - -End Footnotes- - - - - - - - - - -

   This concern is exacerbated by the fact that CST will receive
nothing from LRH's estate if it is not deemed tax-exempt.  Thus, it
appears that despite the stated importance of its archives to the
Scientology religion, they were apparently not worth supporting unless
they generated a tax exemption.  Protecting the use of Scientology
trademarks and copyrights is also apparently not worth doing if it
will not be done by a tax-exempt organization.

   Conditioning the receipt of property on obtaining tax-exempt status
is "an element that indicates the possibility, if not the likelihood,
that the for-profit corporations were trading on such status.  Est of
Hawaii v. Commissioner, 71 T.C. 1067, 1080 (1979), aff'd, 647 F.2d 170
(9th Cir. 1981); see also McGahen v. Commissioner, 76 T.C. 468, 480
(1981), aff'd, 720 F.2d 664 (3d Cir. 1983); Basic Bible Church v.
Commissioner, 74 T.C. 846, 850 (1980), aff'd, Granzow v. Commissioner,
739 F.2d 265 (7th Cir. 1984).  It becomes apparent that "the sole
reason for incorporating the Church and transferring the royalty
rights to the book   [**79]   was an attempt to avoid taxes whereby
royalty income would be exempt and any contributions would generate a
deduction." Miedaner, 81 T.C. at 280 (footnote omitted).

   CST is linked by a cat's cradle of connections to RTC, CSI, and
through them, to the rest of Scientology, thereby belying its claim of
disinterest in the activities of other organizations.  This fact,
coupled with the commercial character of much of Scientology, [*737]
the difficulty that its management churches have had with tax
exemption, Scientology's virtually incomprehensible financial
procedures, n46 its scripturally-based hostility to taxation, the
timing of CST's genesis and finally plaintiff's enormous potential for
both accumulating wealth and bestowing shelter from taxation,
inevitably lead to the conclusion that archiving is not plaintiff's
"exclusive" or even chief purpose.  The inference is inescapable that
CST is merely the latest incarnation of the on-going effort of
Scientology as a whole to shelter income from taxation. Consciously or
not, CST's organizers reflected an awareness of the truth of Goethe's
maxim that "one must be something to be able to do something." The
court concludes that CST's  [**80]   real function was to be rather
than to do.

- - - - - - - - - - - - - - - - - - -Footnotes- - - - - - - - - - - -

   n46 The court notes that HCO Policy Letter of 15 May, 1968 gives
the following instructions regarding explanations of an org's general
liability fund: "Refuse to breakdown the calculations on how the fund
is computed if demanded by an insurance inspector or tax collector,
instead obtain an estimate of coverage costs from brokers recommended
by Legal WW, to confirm our cost assignment to fund."

- - - - - - - - - - - - - - - - - -End Footnotes- - - - - - - - - - -

   C. CST's Lack of Cooperation with the IRS

   The court notes an independent basis for rejecting the application.
The plaintiff had to demonstrate to the Commissioner, and bears a
related burden of proof here, that it is entitled to be exempt from
paying taxes.  In that connection, it has to be observed that CST's
participation in the administrative process reflects a level of
hostility and uncooperativeness that is inconsistent with removing
doubts. Numerous courts have upheld the denial of an exemption on the
basis of an organization failing to provide information requested by
the [**81]   IRS.  In denying an exemption to the Founding Church of
Scientology, the court noted, "Nothing we have found in the record
dispels the substantial doubts the court entertains concerning [the
plaintiff].  Since plaintiff has failed to meet its burden of proof,
we hold therefore that a part of the corporate net earnings was a
source of benefit to private individuals." Founding Church, 188 Ct.
Cl. at 500; Basic Unit Ministry of Alma Karl Schurig v. United States,
511 F. Supp. 166 (D.D.C. 1981), aff'd, 670 F.2d 1210 (D.C. Cir. 1982);
see also National Ass'n of American Churches v. Commissioner, 82 T.C.
18 (1984); World Family Corp. v. Commissioner, 81 T.C. 958 (1983);
People of God Community v. Commissioner, 75 T.C. 127 (1980).

   The court has referred above to a number of instances in which CST
was less than forthright in its dealings with the IRS. Its refusal to
provide information even when repeatedly requested, combined with the
IRS's experience with other Scientology organizations, made it
reasonable for the IRS not simply to accept at face value CST's
contentions  [**82]   that it was independent of the Scientology
hierarchy, and to probe further.  CST failed to respond substantively
to the IRS's questions on a sufficient number of occasions during the
administrative proceeding.

   This behavior is not only understandable from a Scientologist's
viewpoint, it is "scripturally" mandated.  In HCO Policy Letter of 26
December, 1966, LRH instructed his executives (high church officials)
in "Methods of Balking" when faced with a tax investigation. This
includes the advice, "Never give such persons access to persons high
up in the org - or unit.  Turn such over to special personnel who can
get the business over with at once and get the agent off the premises
soon."  HCO Policy Letter of 18 February, 1966 deals with "Attacks on
Scientology," and LRH states "Groups that attack us are to say the
least not sane . . . These people who attack have secrets.  And hidden
crimes.  They are afraid."  Thus, concludes the scripture, the way to
deal with these "mad" people is by attacking first, and blankly
refusing to cooperate.  Finally, HCO Policy Letter of 3 February 1966
states, "ALL OUTGOING MAIL to attorneys, tax cruds, the alleged
government, the Council, etc. . . . must be  [**83] [*738]   sent to
the Legal Officer BEFORE MAILING . . . ." n47

- - - - - - - - - - - - - - - - - - -Footnotes- - - - - - - - - - - -

   n47 See also, HCO Policy Letter, 25 June 1967, states "the real
stable datum in handling tax people is NEVER VOLUNTEER ANY
INFORMATION."  And from the same letter, "Right now there is a lot of
tax yap.  And it is being set up to clobber Scientology with huge tax
bills in England and the U.S."

- - - - - - - - - - - - - - - - - -End Footnotes- - - - - - - - - - -

    The theological hostility to paying taxes evident in the
scriptures also supports the close attention of the IRS.  Although CST
is fully entitled under the Constitution to believe that paying taxes
is spiritually wrong, it cannot then be surprised that its position
invites scrutiny. n48  Just as a group which advocates violence will
attract police observation, a group which has historically displayed
reluctance to pay taxes can expect the watchful eye of the IRS.
Furthermore, CST's right to oppose and resent the IRS does not change
the fact that helping non-exempt groups avoid paying taxes is not the
basis for an exemption.  Religious belief cannot be used as a magic
wand to   [**84] transform tax avoidance into a tax exemption.
Ecclesiastical Order of ISM of AM, Inc. v. Commissioner, 80 T.C. 833
(1983), aff'd, 740 F.2d 967 (6th Cir. 1984), and cert. denied, 471
U.S. 1015 (1985).  Nor does it excuse CST from dispelling the
Commissioner's doubts about it.  The IRS was thus justified in finding
that CST had failed to carry its burden of proving its exempt status.

- - - - - - - - - - - - - - - - - - -Footnotes- - - - - - - - - - - -

   n48 Tax exemptions are a matter of legislative grace, and
organizations seeking a tax exemption "are expected to follow the
reasonable standards enacted by Congress and devote themselves
exclusively to the pursuit of religious purposes."Parker v.
Commissioner, 365 F.2d 792, 795 (8th Cir. 1966), cert. denied, 385
U.S. 1026 (1967).

- - - - - - - - - - - - - - - - - -End Footnotes- - - - - - - - - - -


   The court does not question the sincerity of the beliefs of those
who practice Scientology.  Nor does the court hold that Scientology is
not a  religion.  Plainly it is.  The limited issue before the court,
[**85]   however, is whether CST has met its obligation of
demonstrating that the Commissioner's decision was erroneous. It has
not. There was sufficient evidence in the administrative record to
support the Commissioner's finding that CST has not shown itself to be
an exempt organization under @ 501(c)(3).  The Clerk is directed to
dismiss the complaint.




AO-SH - Advanced Organizations - Saint Hill
ASI - Author Services, Inc.

BPI - Bridge Publications, Inc.

CLO - Continental Liaison Office
CSC - Church of Scientology of California
CSFSO - Church of Scientology Flag Service Organization
CSI - Church of Scientology International
CST Church of Spiritual Technology

DPFF - Defendant's Proposed Finding of Fact

E-Meter - Electro Meter

FBO - Flag Banking Officer
FBO INT - Flag Banking Officer International
FEO - Finance Enforcement Officer
FP - Financial Planning

HCO - Hubbard Communications Office
HCO PL - Hubbard Communications Office Policy Letter

IPT - International Publications Trust
IRS - Internal Revenue Service

LRH - L. Ron Hubbard

[*739]   M
MCCS -   [**86]   Mission Corporate Category Sort-out

NEP - New Era Publications

OTC - Operation Transport Corporation, Ltd.

PPFF - Plaintiff's Proposed Finding of Fact

RTC - Religious Technology Center

SOR - Sea Organization Reserves

WDC - Watchdog Committee - World Wide

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