Scientology's Crushing Defeat

A previously unpublished saga of an $8 million check

One of the most damning accounts came from one of Scientology’s own attorneys, a man named Joseph Yanny, who was hired in 1984 and left in disgust three years later. In his court declaration, Yanny testified that the lead Scientology attorney in the Wollersheim case, Earle Cooley, had “personally ordered the destruction of evidence relating to Cult litigation in my presence.” Yanny also witnessed the gathering of information from parishioners’ confidential files for use by the legal team. He was told that using such confidential files to prepare for court was standard practice. And Yanny also was present when a blackmail campaign was planned against Wollersheim’s original attorney, Charles O’Reilly. “The medical records of O’Reilly were to be stolen from the ‘Betty Ford Center’ and another location in Santa Barbara, to show that he was using cocaine, discredit him, and possibly blackmail him into easing off on his 30 million dollar verdict now on appeal. I objected to this as illegal and an alternative plan was quickly arrived at to ‘settle my nerves.’”

These declarations and other documents, Wollersheim’s attorney say, painted a clear picture: the jumble of organizations—CSC, RTC, CSI and many, many others—meant little when it came to defending Scientology against claims that its technology was harmful. Miscavige, they claimed, was in firm control, which ignored corporate and legal niceties.


“If it had been shown in court that the 350 organizations of the church of Scientology were all controlled by David Miscavige, it doesn’t look like a legitimate religion but the authoritative cult that it is. It would have been terrible public relations, and they still would have had to pay the money. And that’s why they paid the money when they did, to avoid the bad PR,” says longtime Wollersheim attorney Ford Greene.

But Dan Leipold, another Wollersheim lawyer, says that Scientology had even more to worry about than bad PR from the documents and testimony they had gathered.

“I think all of the evidence could have threatened the church of scientology’s tax exempt status,” he says.

Hubbard organized Scientology as a religion in 1954. But in 1967, it was stripped of its tax exempt status by the IRS. For the next 25 years, the U.S. government repeatedly turned down Scientology’s appeals to regain its exemption on the grounds that Scientology was not so much a religion as a money-making venture benefiting one man, Hubbard.

Scientology retaliated in an extraordinary way. With Hubbard’s knowledge and direction, agents of his intelligence unit, the Guardian’s Office, began infiltrating IRS and other government offices in the mid 1970s. Dubbed Operation Snow White by Hubbard, the illegal operation netted stolen government documents by the yard, and went undiscovered until a 1977 raid of Scientology offices by the FBI. Eleven Scientologists, including Hubbard’s wife Mary Sue, were sentenced to prison. Hubbard himself was named an unindicted co-conspirator.

Scientology subsequently disbanded the Guardian’s Office, claiming that it was a rogue outfit. But its war with the IRS did not stop.

Even after Hubbard’s death in 1986, the IRS continued to deny the organization tax-exempt status, and Scientology fought back by siccing personal investigators on individual IRS employees and filing more than 2,000 separate lawsuits against the agency.

Despite the harassment, however, the IRS continued to win victories against Scientology in court. In 1992, A United States Claims Court upheld the IRS denial, citing “the commercial character of much of Scientology” and its “scripturally based hostility to taxation.” Tax exempt organizations, the claims court wrote, “simply do not exhibit the financial complexity or the phenomenal preoccupation with money displayed by Scientology’s management churches and organizers.”


By then, however, the IRS had already, secretly, caved. In 1991, under the first George Bush presidency, the IRS had reversed itself and began a process that wasn’t made public until 1993, under the Clinton administration, when the IRS revealed that it was giving nearly every Scientology entity the tax exempt status it coveted.

It was a stunning turnaround and one that, [more than] a decade later, still has tax experts shaking their heads.

Former IRS exempt organizations specialist and tax journalist Paul Streckfus says that the IRS simply cracked from the pressure Scientology had been applying for so many years.

“The IRS found that Scientology was more than they could handle,” Streckfus says. “We think of the IRS as so powerful, but by 1991, the commissioner of the time, Fred Goldberg, decided that the case was tying up the IRS. Scientology seemed to have limitless money, so I think Goldberg decided he wanted to get rid of the case and to hell with it. He directed his people to get the best deal that they could.”

Miscavige, announcing the victory to his flock at a gathering in Los Angeles, bragged that in 1991 he had simply dropped by the IRS headquarters and, without an appointment, asked to speak to Goldberg. (After this was first reported, Scientology took out a full-page ad in the New York Times denying that Miscavige had said it.) Soon after the impromptu meeting, Goldberg established a special committee to examine the Scientology cases—a move that tax experts say all but assured that the exemptions would eventually be awarded. In court testimony, IRS officials have admitted that during the process of granting the exemptions, they were instructed not to look into Scientology’s business-like ventures. The final agreement called for Scientology to pay $12.5 million.

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