A Risky Story: IRS and Scientology's Extortion/Blackmail

A Risky Story: IRS and Scientology's Extortion/Blackmail

A Risky Story

Scientology's Puzzling Journey From Tax Rebel to Tax Exempt

New York Times
March 9, 1997
By Douglas Frantz

The Church of Scientology was founded in 1954 by a writer named L. Ron Hubbard. For years Scientology sought to persuade the Internal Revenue Service that it was a religion and deserved the same tax deduction given to traditional religious groups. Scientology took in hundreds of millions of dollars, and for decades the IRS insisted that it was a business, not a religion. In October 1993 the IRS reversed course and gave Scientology the tax status of a church. Just a year before the IRS reversal, the U.S. Court of Federal Claims had upheld an earlier IRS decision to deny tax-exempt status to Scientology's Church of Spiritual Technology, citing, among other things, "the commercial character of much of Scientology."

The IRS's decision, announced in 1993, was a one-day story at the time. Following its normal policy and laws protecting taxpayers' privacy, the IRS did not explain why it had changed course on Scientology. It didn't even reveal the terms of its final agreement with the newly blessed church, though it could have done that. Scientology itself has always been aggressive about protecting itself from public scrutiny, and it too disclosed very little information.

Three years later, in 1996, Doug Frantz was looking for a story to investigate. Frantz, then forty-six, was a newcomer to the New York Times national staff, whose editor at the time was Dean Baquet, then forty (in 2000 Baquet became managing editor of the Los Angeles Times). The two men were old friends; they had worked together in the 1980s at the Chicago Tribune. Frantz, an ordinary-looking man with close-cropped hair, and Baquet, a compactly built African American with a steady gaze and an easy manner, could be mistaken for a pair of FBI agents or police detectives. But they were ambitious journalists, eager to make a mark.

"Doug and I sat down and said, let's find something . . . that's big and that's compelling and that's risky, with an emphasis on risky," Baquet recounted four years later. "In an odd way I think newspapers have moved away from taking risks. . . . So I told him to just go take some time and scout around and come back with something."

Frantz did. A lunch with an old friend produced a tip. "He mentioned that he had heard a story about a private investigator who worked for Scientology going after some IRS officials," says Frantz. "And I thought it sounded really interesting. He sort of dropped it in passing. And so I came back and talked it over with Dean and said you know I'd like to just . . . take a few weeks and see if there is anything here. . . . The context right away was that these private investigators might have played some role in the IRS reversal over the church's tax-exempt status."

Reading "the clips" -- earlier stories about the Scientology tax deduction, which these days are in electronic databases rather than the old files of paper clippings--Frantz found a mystery. "We actually had it on the front page of the New York Times back in October of '93, when the IRS issued its decision. But nobody had explained it in any way that I could find what really happened, I mean, why the IRS would abandon a position it had held steadfastly for twenty-five years.

"The first thing I did after [reading] the clips is the first thing I always do, just to see what documents are available. You often start out with a story that will turn out to be unprovable or unwritable, and nobody wants to go too far down that road. So I went down to the IRS library, where they have a place set aside in the reading room specifically for Scientology documents and there are about twelve linear feet of these documents there, and I spent a week going through those documents. . . . I also gathered some court opinions that had upheld the agency's denial of this [tax-exempt] status [to Scientology]."

Frantz's friend who had given him the original tip also gave him the name of a private investigator who had worked for Scientology, Michael Shomers. "I had a devil of a time tracking him down," Frantz recalled. "He was in Maryland when he worked for Scientology, but he had given up his license as a PI and he had moved out of state somewhere. I found somebody who had worked with him in Maryland, who thought he'd gone to Florida, and then, by looking through publicly available phone records, I found a couple of Michael Shomerses in Florida, and I tracked this guy down in Jacksonville."

After a couple of conversations on the phone, Frantz flew to Jacksonville to take Shomers to dinner. The private detective turned out to be an excellent source, direct and forthcoming about what he had done for the Scientologists. He said he had gathered personal information about IRS agents who might be vulnerable to pressure in 1990 and 1991, taken IRS documents from a conference the agency held in California and investigated conditions at apartment houses owned by IRS officials to see if they violated the local housing codes. He said he later developed second thoughts about the Scientologists and how they might be using the information he had acquired. Most helpful of all, he had kept documents that Frantz could use to double-check what Shomers told him.

"Corroboration is essential when dealing with any source, but particularly when you're dealing with a source who's making allegations involving both the IRS and the Church of Scientology," said Frantz. "Corroboration is better than gold."

He began meticulously to assemble a picture of Scientology's efforts to put pressure on the IRS. He had Shomers's account of efforts to find exploitable weaknesses in the lives of various IRS agents. With the help of former church officials, who spoke on the record, and participants in these efforts, Frantz established that Scientology had created and funded an organization called the National Coalition of IRS Whistle-blowers, which was active "for nearly a decade," beginning in 1984. Its greatest success was to provoke a 1989 congressional investigation of IRS enforcement activities.

Altogether Frantz spent several months looking for and talking to private investigators and others who had worked for Scientology on IRS-related matters, and then checking out their stories independently. He even found residents of apartments owned by IRS officials who confirmed that a man had visited their homes looking for housing-code violations.

Not every lead produced new facts. Frantz had difficulty tracking down another private investigator who had worked with Shomers for Scientology. When Frantz finally got him on the telephone, the investigator said he would have to check with his client and call back. He never did.

"By that time," Frantz recounted, "I'd figured out where he lived, so I drove out to his house late one afternoon out in Rockville [a Maryland suburb of Washington, D.C.], and it was a very nondescript tract house. And I went up and knocked on the door and nobody was home. So I sat out in my car for a couple of hours in front of the house waiting for him to come home. And a next-door neighbor came out and was angry that I was sitting on their street and wondered what in the hell I was doing there. I apologized and said I was waiting for [the private investigator] to come home and he said, 'Well, he's never here.' I don't know whether that's true or not, but I figured it was a long shot that I would catch him at home anyway. So I left."

A dramatic moment in Frantz's reporting came about four months into his investigation, when he felt ready to talk to officials of the Church of Scientology. This is an important step in most investigative reporting projects, when the reporter confronts his subject with questions that have arisen during the investigation. It gives the subject an opportunity to respond to the reporter's findings. For good reporters, this is important both to ensure accuracy and fairness and to demonstrate open-mindedness.

Baquet did not want Frantz to go alone to Scientology headquarters in Los Angeles, because of Scientology's reputation as a highly litigious organization, so he took along a colleague from the paper's Los Angeles bureau. Throughout the reporting project, Frantz and his editors did all they could to minimize the risk of lawsuit.

When they arrived, Frantz recounted, "We announced ourselves and were taken to a very small upper-floor conference room, fifteen by twenty [feet] at the most, with a big table surrounded by nine people. That made me realize right away-- if I was ever naive enough to think it was going to be just another interview-- that it wasn't. . . . It remains the most difficult interview I've ever had."

The meeting began with a forty-five-minute attack on him, Frantz recalled, with the Scientologists and their lawyers working from a stack of his past stories. Frantz said the Scientologists had concluded he was hostile to them "before I had written a word." One Scientology lawyer, Gerard E. Feffer, a partner in the big Washington law firm of Williams and Connolly, told Frantz the questions he was asking demonstrated that he was practicing yellow journalism.

Scientology officials and lawyers emphasized that the IRS decision to change course and declare Scientology a tax-exempt religion represented nothing more than the end of an unfair IRS campaign of harassment against Scientology. "To say our relations started off on the wrong foot is an understatement," Frantz recalled.

Eventually Frantz established that Scientology had indeed made extensive use of private investigators to scrutinize the IRS and its officials. In his story he quoted Feffer: "The IRS uses investigators, too." Feffer said the IRS had used its Criminal Investigation Division "to put this church under intense scrutiny for years with a mission to destroy the church." Scientology was responding in kind.

Scientology had also used the courts to pressure the IRS. At one time, Frantz found, it had more than fifty suits pending against the IRS and individual IRS employees.

Frantz was also reporting on a second track to find out what had happened in the direct dealings between Scientology and the IRS that led to the sudden reversal of IRS policy in 1993. He found considerable information about this in published statements of Scientology officials, particularly the group's leader, David Miscavige. But he got very little help from the IRS.

According to Miscavige's account in a Scientology publication, he and another church official were walking past IRS headquarters in Washington in October 1991 when they decided to drop in on Fred Goldberg, the IRS commissioner. They told a guard at the door they did not have an appointment but they were certain Goldberg would want to see them. According to Miscavige, the commissioner did indeed meet with them. Soon Goldberg had appointed a special committee of IRS officials to negotiate a final settlement with Scientology.

Miscavige and Scientology also provided some details of the two-year negotiation that ensued, ending with the IRS announcement in October 1993 that it would grant Scientology tax-exempt status. Miscavige announced the final agreement five days before the IRS did in a speech to thousands of Scientologists in Los Angeles. He called it a victory in "the war to end all wars" between Scientology and the IRS. A subsequent article in a Scientology magazine elaborated: "Our attack was impinging on their [the IRS's] resources in a major way and our exposés of their crimes were beginning to have serious political reverberations. It was becoming a costly war of attrition, with no clear-cut winner in sight."

The IRS was less contentious in its dealings with Frantz, but it offered him few facts for his story. Invoking laws and rules requiring it to protect the privacy of taxpayers, the IRS provided no explanation for its policy reversal on Scientology, and no details of its final agreement. Frantz noted that the IRS, in other disputes with religious organizations, including the Reverend Jerry Falwell's Old Time Gospel Hour, had required public disclosure of a negotiated settlement of tax disputes. There was no similar requirement for the Church of Scientology.

Using the federal Freedom of Information Act (FOIA), which requires government agencies to make much information about their activities public, Frantz petitioned the IRS for Director Goldberg's office calendar. He got it, but found no reference to the meeting Miscavige had described between himself and Goldberg that led to the final settlement with Scientology. Goldberg, by then a partner in the Washington office of the giant law firm Skadden Arps Slate Meagher & Flom, refused to talk to Frantz.

Frantz did find a lawsuit filed by William Lehrfeld, a Washington tax lawyer, on behalf of a nonprofit group called Tax Analysts that publishes material for tax lawyers and accountants. The suit sought the texts of the IRS's agreements with Scientology and other organizations that had been granted tax-exempt status. The Tax Analysts lawyers were able to take depositions from IRS officials, a helpful source of information for Frantz, as court depositions often are for investigative reporters.

As Frantz neared the end of his reporting, the IRS finally made available two officials for interviews, but Frantz had to accept "ground rules" that prevented him from identifying the officials by name. These "background" conversations helped Frantz confirm that Goldberg had created an unusual special committee -- bypassing his agency's tax-exempt-organizations branch-- [Blackmail, perhaps?] to negotiate with Scientology. A retired IRS official named Paul Streckfus, who had worked in the exempt-organizations division, told Frantz that Goldberg's creation of this committee signaled the IRS's willingness to change its policy toward Scientology.

Ultimately Frantz's meetings with the IRS were more frustrating than illuminating. Frantz recalled the most substantive background meeting he had with an IRS official who was involved in the Scientology negotiations. "He was a nice guy, [but] there were just more questions he couldn't answer than he could answer," Frantz said, "and I left that meeting still convinced that I didn't understand the logic behind the IRS decision."

Frantz decided it was time to talk through the story with an editor. This is another requirement of good investigative reporting that can be satisfied only in news organizations with the staff, time, experience and culture that can support accountability journalism.

"[When] the first images of the picture begin to form, then I'm lucky to have somebody like Dean [Baquet] to sit down with," Frantz said. "By 'somebody like Dean' I mean not only that he's my friend, and therefore I trust him, but because he's somebody who's done this before, he was an investigative reporter. Even the smartest editor I think has difficulty understanding how the investigative process works unless they've done it before. The danger of working [by] yourself on a long, complex project is that you get lost and you miss the forest for the trees."

Baquet usually asked his reporters to begin the writing process by composing a long memo, a narrative describing what the reporting had uncovered. Frantz liked this approach: "It is a very good process, it clarifies the story in my mind as well as providing him with a progress report. It also buys me some more freedom and some more time if I need it."

A narrative memo also fit Frantz's habit of keeping a detailed chronology as he reports a story. This is a tool used by many investigative reporters as a way to see how the bits and pieces fit together.

The biggest question in this case, Baquet said, was "How much [reporting] is enough?" Baquet used a test of his own, developed when he was an investigative reporter, to decide whether a reporter had finished doing the research. "When you start to hear the same stories over and over again, when there are no new incidents of what I would call harassment, when there were no new documents that we were going to get, when Doug felt comfortable and I felt comfortable that we had gone up and down the chain of former Scientology people . . .

"As an investigative reporter," Baquet continued, drawing on his own experience, "you make yourself a list . . . of like twenty things that you've got to do for a story-- eight people inside, former Scientologists, defectors, the last four or five IRS commissioners who are now retired, my freedom-of-information requests for these ten documents-- once all that stuff is exhausted, which was the case . . . there wasn't anything outstanding, then to me that's nut-cutting time."

The memo Frantz wrote in narrative form was at least 8,000 words long-- enough to fill two full pages of the Times without any pictures or headlines. Baquet read it. So did Joseph Lelyveld, then executive editor of the Times, and Gene Roberts, then the managing editor. Baquet collected their thoughts on the memo and conveyed them, with his own, to Frantz. They talked about how to make the memo into a story, and Frantz began to write it into his computer.

"I do what I always do. I sit down and I write it all. I have to write the lead first"-- a reference to the first paragraph of the story, which can occupy a reporter's mind for a long time. Frantz thought he had "the lead from heaven" in the anecdote of Miscavige, the leader of Scientology, telling thousands of cheering Scientologists that "the war is over" with the IRS. "Then," said Frantz, "you go back and review how they won the war."

Frantz's story began:

On October 8, 1993, 10,000 cheering Scientologists thronged the Los Angeles Sports Arena to celebrate the most important milestone in the church's recent history: victory in its all-out war against the Internal Revenue Service.

For twenty-five years, IRS agents had branded Scientology a commercial enterprise and refused to give it the tax exemption granted to churches. The refusals had been upheld in every court. But that night the crowd learned of an astonishing turnaround. The IRS had granted tax exemptions to every Scientology entity in the United States.

"The war is over," David Miscavige, the church's leader, declared to tumultuous applause. Frantz then told us how he wrote the story, describing a classic investigative reporter's view of his work. "Before I showed it to anybody else, I would go back through and take an adjective out of every paragraph. Then I'd go back through again and take another adjective out of every paragraph, until I get out most of the adjectives, because I don't like them. Sometimes my stories may read a little flat, but I'd rather be flat than not, I guess, in these stories."

Good investigative reporters often pride themselves on finding the cleanest possible language to tell their stories-- no flourishes, just the story, clean and crisp, with the facts speaking for themselves, and without hint of opinion or argument.

"Then," said Frantz, "the last thing that I'd do is make a printout and sit down and check the facts of every single paragraph against the documents and the interview notes that I had and the notes that I'd taken, because I don't want to have to turn a story in to my editor and have him say, 'Boy, this is great stuff, where'd you get this paragraph?' and have to say to him, 'Oh, shit, I got that wrong, it wasn't quite like that.' Because that sets up doubt in the editor's mind, and you don't want the editor to doubt your story, and I don't want to get something that's not exactly right in any form going to anybody outside of myself. And invariably . . . on a story that long . . . you're going to have some nuances that are wrong, and maybe some quote that's wrong. . . .

"And then I would probably turn it in to Dean. And later in the process, after we figured out which quotes were going to go in, I would call back almost everybody, or everybody who's quoted, and run the quotes past them, to make sure that they're accurate. That doesn't mean I'm going to change every quote, because if somebody says, Well, I didn't mean to say that, or That's not really what I said, or I couldn't have said that, I'll go back to my notes and see, and we may have an argument."

Baquet read Frantz's draft story carefully, inserting questions into the text, suggesting language changes and looking for ways to shorten it. After that, the story got more polishing from other editors and careful scrutiny from the Times's top editors, and from the paper's lawyers. Frantz was impressed and delighted by the attention that Lelyveld paid to his story. He said Lelyveld had good suggestions for strengthening it and insisted the story contain two references, one near the beginning and one near the end, to the fact that granting the tax exemption overturned twenty-five years of precedent for the IRS. Frantz said he complained that this was repetitive, "and Joe said--I'll never forget--he said, 'Repetition for the sake of emphasis is acceptable.' Because really, that was an important element of the story, no doubt about it."

And it was a reminder that Frantz, despite months of hard work, had failed to find out why Goldberg decided to reverse that twenty-five-year IRS position on Scientology, or what the terms of the final agreement were. So Frantz's story, published on March 9, 1997, beginning on the Times's front page and continuing on two inside pages, gave readers a detailed narrative from which they could draw their own conclusions. After a summary of his principal findings, Frantz quoted Goldberg's predecessor as director of Internal Revenue, Lawrence B. Gibbs, who called the IRS reversal on Scientology "a very surprising decision. When you have as much litigation over as much time, with the general uniformity of results that the Service had with Scientology, it is surprising to have the ultimate decision be favorable [to Scientology]. It was even more surprising that the Service made the decision without full disclosure, in light of the prior background." Obviously, this is an unusual way for a former government official to talk about a decision made by his successor.

Nine months after the Times published Frantz's story, more details of the agreement between the IRS and Scientology did appear-- in the Wall Street Journal. The Journal posted the text of the seventy-six-page agreement on its Internet site. Frantz said he also obtained a copy from his own sources, after its disclosure by the Journal, and wrote another story about the agreement that appeared in the Times on the last day of 1997. Frantz wouldn't say where he got the document or why he thought it finally came out. He speculated that the Journal might have gotten it on Capitol Hill, where a congressional committee had recently subpoenaed a great many IRS documents.

The IRS-Scientology agreement required Scientology to pay the agency $12.5 million and make an annual report for the next three years showing that Scientology remained in compliance with the tax laws. The IRS appeared to be concerned that Scientology's revenues go to religious or charitable purposes, not to church officials.

For Scientology $12.5 million was a lot less than the IRS had been claiming it owed in back taxes. Miscavige once said the total could have reached $1 billion. In addition, by granting Scientology tax-exempt status, the U.S. government gave it the legal standing it had been seeking for years-- as a "church."

In the end the Times's investigative reporting had proved compelling and enlightening, but it had no dramatic impact on Scientology or the IRS. Frantz's largely solo effort was relatively inexpensive for investigative reporting, costing the Times less than $150,000 in reporting hours and expenses. Was the Scientology story worth the expense and effort that went into it? Why work so hard on a project that leads to an ambiguous result?

Baquet responded that the story did prove that Scientology "had launched an aggressive campaign against the IRS." And, he said, the IRS secrecy had to be challenged. "I think that when decisions like this get made by a big government agency and they're done in a very secretive fashion, they involve hundreds of millions of dollars, affect lots of people--it affected the IRS bureaucrats who were working on it, it affected the church and its future and its standing around the world. I think when something like that happens and nobody wants to talk about the details, you're almost obligated to try to figure out the details." Because the Times pursued this story, Baquet said, "I have a feeling that the next time the IRS does one like this, they're going to be aware of this in the back of their minds, that there might be a big look at it, and they ought not do it in secret." How does the Times pick a target like this for a major investigation? Lelyveld said it isn't as though the Times has some kind of "hit list."

"It's typically more a balancing of targets of opportunity," Lelyveld said. "I mean, it wasn't that anybody thought that . . . it was time to do the Scientologists, nobody had done it for a decade or something. It was that here was something that had never been explained and had happened rather suddenly and had never been much remarked upon, and it cost the federal treasury a considerable amount of money. So it was easy to say, Yes, it was big enough and important enough to do it. But you always have to balance it against the stuff you know that's going to need to be done."

Asked if he thought ordinary newspaper readers understood how investigative reporters worked, Frantz said, "I think people don't understand the difficulty in getting information. They really think that the press conferences they see on TV are the way everybody gets every story. But nobody's ever held a press conference for investigative reporters. People really don't know--and there's no reason they should. . . . People don't understand the lengths to which we go to get stories. And I'm not just talking about readers. I think there are editors at this newspaper and other newspapers who don't understand how very hard it is to really get at reporting that answers questions and doesn't just raise questions.

"My definition of an investigative reporter," Frantz continued, "is not somebody who charms sources into leaking. To me an investigative reporter is the person who gets someone to say something that they don't want to say. To get somebody to tell you something that they don't want to tell you . . . takes a lot of spadework, a lot of hard work, and too many people in this business and out of this business don't understand that difference."

Good as Frantz's story was, it had no visible consequences. No congressional committee called hearings to explore what had happened inside the IRS, or why Goldberg made the decision he made. No politician or official suggested the issue of Scientology's tax status be reopened. Journalism can take an issue like this only so far. The New York Times had no way to compel Goldberg or the other IRS officials involved in the case to explain why they did what they did. That does not undermine the value of Frantz's work. The journalist's job is to find out and explain what took place, not to make things happen. It is up to those who hold power to follow up with appropriate action.

[.... another article, ommitted ....]

Projects like this one and Frantz's on Scientology are rarer than they should be. Yet when a news organization can do this kind of work, it makes a powerful impression. The best accountability reporting reverberates through the culture, reminding malefactors everywhere that they may get caught and exposed. This is what freedom of the press should inspire. It is no coincidence that these two projects were conducted by two of the country's best newspapers. With few exceptions--Frontline on PBS television is perhaps the most prominent, the best work on CBS's 60 Minutes is another--television doesn't do this kind of work. Some television journalists (usually off-camera producers, not the "talent" that appears on the air) do investigative reporting, but usually on a much more modest scale. The most intensive investigative journalism is generally produced by the most ambitious, best-staffed and best-edited news organizations. Those belong to newspapers.

Excerpted from The News About the News by Leonard Downie, Jr., and Robert G. Kaiser. Copyright 2002 by Leonard Downie, Jr., and Robert G. Kaiser.

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