Church of Scientology of California v. Commissioner

The Church of Scientology (the church) (plaintiff) was a nonprofit organization founded by L. Ron Hubbard. Hubbard and his wife had sole control over the church’s key bank accounts, and Hubbard was the trustee of the church’s trust into which the church put substantial funds. Hubbard was also the sole signatory on all church financial planning. Over one million dollars were withdrawn from the trust and kept on a yacht that Hubbard and his wife used as a residence. Similarly, the church made millions of dollars of payments to OTC, an independent, private organization controlled by key figures in the church, and ultimately sent that money to the yacht. In addition, church policy required any church literature produced to be copyrighted in Hubbard’s name, regardless of whether he wrote it. Hubbard was paid a 10 percent royalty on all such literature. Finally, the church required all Scientology organizations around the world to pay Hubbard 10 percent of their income as “debt repayments” to repay Hubbard for his efforts establishing the church. The Internal Revenue Service (IRS) (defendant) revoked the church’s tax-exempt status, finding that part of the church’s revenues inured to the benefit of Hubbard and his family as opposed to a public interest. The IRS also assessed tax deficiencies due to the revocation. The church appealed the revocation in the United States Tax Court. The tax court upheld the IRS’s determination. The church appealed.