In October 1993, the IRS issued a closing agreement granting tax-exempt status to the Church of Scientology and dozens of related entities, ending a forty-year war between the church and the United States government. The reversal was so abrupt that even seasoned tax journalists couldn’t explain it at the time. The story of how it happened reveals as much about IRS settlement practice as it does about Scientology itself.
The case remains a touchstone in religious tax law and a case study in what aggressive litigation can extract from a federal agency.
The decades of denial
The IRS first revoked the church’s tax exemption in 1967, holding that founder L. Ron Hubbard had used the entity for personal benefit and that auditing fees looked more like commercial transactions than religious activity. That position survived multiple court challenges, including a 1989 Supreme Court ruling, Hernandez v. Commissioner, which denied tax deductions for auditing payments on the grounds that they were quid pro quo exchanges. By the early 1990s, the church and its members had been on the losing side of major tax cases for over two decades, and the legal trajectory pointed toward continued denial, not reversal.
The litigation strategy that changed the outcome
What changed wasn’t the underlying doctrine. It was the volume of pressure the church directed at the IRS itself. Documented through later FOIA disclosures and reporting by The New York Times in 1997, the church filed thousands of lawsuits against the IRS and individual agents, hired private investigators to surveil officials, and sued for disclosure of internal IRS records. By 1991, the church’s litigation campaign had reportedly become a significant operational burden on the agency. Then-commissioner Fred Goldberg met privately with church leadership without bringing the IRS exempt-organizations specialists who had been handling the case. The closing agreement that followed sidestepped normal channels and included terms that were never publicly disclosed.
The aftermath and the precedent question
The 1993 agreement granted exemption to Scientology entities, dropped pending audits, and reportedly resolved tax liabilities for individual members. The full text remained sealed until parts leaked years later. Legal scholars have argued the deal effectively nullified Hernandez for Scientology specifically without overturning it as precedent, creating a strange asymmetry where one religion’s payments became deductible while the same Supreme Court ruling continued to apply to others. The IRS has consistently declined to explain the reasoning behind the reversal beyond stating that the church met statutory requirements. Multiple subsequent lawsuits by other groups seeking parity have failed.
The takeaway
The 1993 settlement is rarely discussed in religion coverage because it sounds like a conspiracy theory, but the documentary record is unusually solid. The church mounted a litigation and pressure campaign of remarkable scale, and the agency settled rather than continue absorbing the cost. Whether that settlement was correct on the law remains genuinely contested. What’s not contested is that it happened outside the IRS’s normal review processes and produced terms that have never been fully released. For tax law observers, the case is a reminder that settlement is its own kind of policymaking, and that institutional fatigue is sometimes a more powerful force than doctrine.
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