LOS ANGELES -- A federal appeals court decision this week upholding the revocation of the Church of Scientology's tax-exempt status is being closely watched by a number of religious organizations for its larger implications.
Concluding that L. Ron Hubbard, founder of the Church of Scientology of California, had "unfettered control" over millions of dollars in church assets, the U.S. 9th Circuit Court of Appeals in San Francisco said there is evidence that the late church founder held millions of dollars of church funds in private trust funds, in Swiss bank accounts and in a file cabinet on his yacht.
The court also concluded that a profit-making Panamanian company created by Hubbard and his wife in 1968 was a "sham corporation" that received more than $3.5 million in church funds in 1971 and 1972.
As a result of the decision, the church will be required to pay $1.43 million in back taxes and penalties accrued during its long-running tax feud with the government.
The case has been monitored by a number of religious organizations that fear the Internal Revenue Service clampdown on the church's revenue-raising activities -- including books, pamphlets and services for its members -- could spell trouble for other churches.
The American Council of Unregistered Churches, the American Forum for Jewish Christian Cooperation, the Protestant Council for Churches and Clergy, the Freedom Defense Council and the World Council on Religious Liberty all filed briefs on behalf of Scientology.
Attorney Gerald McNally Jr., representing the church organizations, said, "As congregations shrink, churches have to turn to more innovative ways of raising donations, and if the only way that's permitted for a church to raise donations is to pass the plate on Sunday mornings, its hands are tied."
The court found "unpersuasive" Scientology arguments that Hubbard's handling of the group's funds was comparable to practices of conventional churches.
"Unlike the typical Saturday or Sunday when parishioners donate their money to the church, here the church transferred millions of dollars to bank accounts controlled by a private individual who had no official responsibility for managing church assets," the court concluded, adding that there was "little documentation" to show the money was spent on bona fide church activities.
Hubbard, who died last year, resigned as head of the church in 1966, but the U.S. Tax Court, in its findings in 1968, found that he continued to exert "significant control" over the church by setting policy and approving financial planning.
From 1970 to 1972, the three tax years at issue in the case, the court found that Hubbard and his wife received a total of $185,577 in salary from the church.
While that amount was not excessive enough to invalidate the church's tax-exempt status, the court did raise questions about an additional $104,618 in royalty payments to Hubbard in 1972 on all church publications, even those that he did not write.
To win tax-exempt status, churches must prove that no part of their net earnings benefits any private individual.
The court noted the money the church spent to maintain Hubbard and his wife on the church's yacht in the Mediterranean and an estimated $2 million that was transferred from the Panamanian corporation to a file cabinet on the yacht to which Hubbard's wife held the only keys.
"The court concluded that these indicia, when viewed in light of the self-dealing associated with them, coupled with the church's failure to carry its burden of proof and disclose the facts candidly, proved conclusively that the church was operated for the benefit of L. Ron Hubbard and his family," the appeals panel said of the tax court's initial decision, which it upheld.
In a finding that could be important for other churches watching the case, the court held that financing church operations through the sale of religious literature does not necessarily violate the requirements for tax exemption.
But in this case, where there is evidence that Hubbard used the church to generate copyrighted literature and market his products, "the payments . . . cross the line between reasonable and excessive," the court ruled.