CST Legal Papers 07 US Claims Court Excerpts

3. The Bylaws of CST also establish plainly that CST is a CORPORATION and NOT a church. (See "CST Legal Papers 03 Bylaws")

4. This is the document that verifies Meade Emory as a FOUNDER of CST. Although it is not contained in this document, it has been elsewhere proven that Meade Emory was Assistant to the Commissioner of IRS between 1975 and 1977, the same years that IRS documents were being passed to members of the Guardian's Office.

5. This document also establishes that ALL of the "Special Directors" of CST are non-Scientologists, yet have veto power over all other directors and officers of CST. (See "CST Legal Papers 03 Bylaws")

6. This document also establishes that CST has the power to take over all the trademarks currently assigned to RTC.

Here are the relevant excerpts from the document:

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EXCERPTS FROM:

CHURCH OF SPIRITUAL TECHNOLOGY Plaintiff, v. THE UNITED STATES Defendant.

No. 581-88T, UNITED STATES CLAIMS COURT June 29, 1992, Reissued June 29, 1992, Filed

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

COUNSEL: 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.

OPINION BY: ERIC G. BRUGGINK

BRUGGINK, Judge.

This is an appeal from a decision rendered by the Commissioner of the Internal Revenue Service ("IRS"). The Church of Spiritual Technology ("CST"), plaintiff, applied for tax-exempt status under I.R.C. @ 501(c)(3) (1982) as a religious organization. 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. ... C. Testamentary 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. 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. 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.

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 Commissioner.

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 use in an unorthodox manner.

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. 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. [Starkey, Author's Family Trust-B]

...

D. Creation of the Church of Spiritual Technology

As part of LRH's estate planning, CST was founded in 1982 by Lyman Spurlock, Meade Emory, Esq., Leon Misterek, Esq., and Sherman Lenske, 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 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)."

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 Service Organization. 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 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.

...

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 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 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 employee of CSC. Nancy O'Meara is the Treasurer of CST. She had been successively employed by various Scientology organizations.

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 renovations. The 6,000 square foot preservation 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 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.

...

[A]ny payment made to BPI [Bridge Publications, Inc.] eventually devolves to the Financial benefit of "Mr. Hubbard and his successors," which includes RTC and CST. ...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, 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 able to control those marks as well, thereby completing its ownership of the publishing rights, the advanced technology, and the marks.

...

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.

...

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.

...

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 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."

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."

...

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 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 ...we request that you inform us of the relevance of their other associations to the exempt status of this organization."

...

CST is not a church, therefore it must try to qualify as a religious organization. ...[T]he only religious aspect of CST is its connection to Scientology. CST has no exempt purpose absent the religious patina it draws from Scientology. ...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. ...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.

...

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

...[O]ne of its [CST's] obligations is to prevent misuse of the marks and technology. ...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." 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 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.

...

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 estate.

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.

...

In sum, there is a strong link, in fact an identity of purpose, between CST and other Scientology organizations. ...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.

...

[T]he 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.

...

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 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. 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).

...

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."

If CST succeeds in its quest for exempt status, it will control the trademark and publishing rights to all of LRH's works. Those rights constitute most of Scientology's income-producing property. The trademarks and publishing rights are the source of the Advanced Technology from which all income production ultimately flows. ...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.

...

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. ...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?

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.

...

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, the difficulty that its management churches have had with tax exemption, Scientology's virtually incomprehensible financial procedures, 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.

...

CONCLUSION

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, 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.

ERIC G. BRUGGINK Judge

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