83 T.C. 381 (1984)
CHURCH OF SCIENTOLOGY OF CALIFORNIA, Petitioner
COMMISSIONER OF INTERNAL REVENUE, Respondent
United States Tax Court
September 24, 1984
Petitioner, a Church incorporated in the State of California, was granted tax-exempt status in 1957 under sec. 501(c)(3), I.R.C. 1954. In 1967 respondent sent petitioner a letter revoking its exemption following audit of petitioner's records which was in part sparked by litigation involving the tax-exempt status of an affiliated Church of Scientology. Subsequent to issuing the letter of revocation, respondent conducted several audits of petitioner's records for various tax years and also reviewed the tax status of several affiliated churches. Petitioner was also investigated by several intelligence groups which respondent specially formed during 1969 through 1975 to investigate taxpayers allegedly selected by essentially political criteria. During the period that petitioner's taxes were under administrative review, petitioner conspired to prevent the IRS from determining and collecting taxes due from petitioner and affiliated churches. Petitioner sold religious services, books, and artifacts according to a fixed fee schedule through its branch churches and franchises. Petitioner's profits from these sales were not less than $1,494,617.53 in 1970, $881,131.18 in 1971, and $1,707,287.17 in 1972. Petitioner maintained large cash reserves in a sham corporation and in a bogus trust controlled by key church officials including petitioner's founder. HELD, petitioner was not the victim of selective enforcement of the tax laws since the notice of deficiency was based on valid regulatory considerations. HELD FURTHER, various other asserted constitutional rights of petitioner not violated. HELD FURTHER, petitioner was not operated exclusively for an exempt purpose under sec. 501(c)(3), I.R.C. 1954, since petitioner had a substantial commercial purpose, since its net earnings benefited key Scientology officials, and since it had the illegal purpose of conspiring to impede the IRS from collecting taxes due from petitioner and affiliated churches and thus its activities, dictated at the highest level, violated well-defined public policy.
ROBERT H. HARRIS, CHRISTOPHER COBB, MICHAEL WELLS, and PETER YOUNG, specially recognized, for the petitioner.
MARTIN D. COHEN, for the respondent.
Petitioner, the Church of Scientology of California (California Church or Church), was incorporated as a non-profit corporation in the State of California in 1954. In 1957 respondent recognized petitioner as an organization described in section 501(c)(3) exempt from Federal income taxes under section 501(a). In 1967 respondent revoked petitioner's tax-exempt status. Following an extensive audit of petitioner's records for the years 1971-1974, respondent, by notice of deficiency dated December 28, 1977, determined deficiencies in petitioner's Federal income taxes and additions to tax as follows:
| Taxable year
|| under sec. 6651(a)
The controversy in this case is simply stated: Petitioner claims it is exempt from taxation and respondent claims it is not. Subsumed within this simple controversy, however, are numerous and complex subsidiary issues including several challenges to the constitutionality of section 501(c)(3). The questions presented for resolution in this case are: 1) Is the notice of deficiency null and void because respondent never issued a final letter of revocation of exempt status? 2) Is the notice of deficiency or the letter revoking petitioner's tax-exempt status based upon political animus or hostility to the religion of Scientology in violation of the First and Fifth Amendments? 3) To the express conditions in section 501(c)(3) for exempting religious organizations from taxation violate the First Amendment because they tax religious income? 4) Do the express conditions in section 501(c)(3) for exempting religious organizations from taxation violate the First Amendment because the Government has no compelling interest in taxing religious income? 5) Are the express conditions in section 501(c)(3) for exempting religious organizations overbroad provisions because they restrict commercial activity in aid of religion which is affirmatively protected by the free exercise clause? 6) Are the express and implied statutory conditions for exempting religious organizations from taxation unduly vague in violation of the First and Fifth Amendments? 7) Does section 501(c)(3) violate the establishment clause of the First Amendment because its enforcement advances some religions and inhibits others? 8) Does section 501(c)(3) violate the establishment clause because its enforcement results in excessive Government entanglement in church affairs? 9) Does the First Amendment's protection for religious organizations relieve petitioner of the burden of proof in this case and require respondent to assume it? Page 384
10) Is the statutory scheme prohibiting some tax-exempt organizations but not others from using their net earning to benefit private interests arbitrary and capricious? 11) Does the application of common law charitable trust doctrine to churches, requiring their conformity to fundamental public policy standards evidenced by criminal or civil statutes, violate the free exercise clause of the First Amendment because there are less restrictive ways of regulating church-sponsored misconduct? 12) Does the retroactive application of public policy standards derived from the common law of charitable trusts to petitioner's operations deprive petitioner of due process of law in violation of the Fifth Amendment? 13) May respondent, consistent with fairness, be heard to argue after the start of trial the new position that the United Kingdom Church of Scientology (United Kingdom Church) is a branch of petitioner? 14) During the years 1970, 1971 and 1972 did petitioner's activities include a substantial commercial purpose? 15) During the taxable years in issue, did any part of petitioner's net earnings inure to the benefit of any private shareholder or individual? 16) During the taxable years in issue, did petitioner's activities violate common law standards of public policy applicable to charities and incorporated in section 501(c)(3)? 17) If petitioner is not exempt from taxation, can the determinations in respondent's notice of deficiency be upheld? 18) Is petitioner liable for additions to tax under section 6651(a) for willfully failing without reasonable cause to file corporate income tax returns (Forms 1120) in 1970, 1971 and 1972? FINDINGS OF FACT Some of the facts have been stipulated. They represent a miniscule part of the record. In some instances, the stipulated facts were contradicted by the remainder of the record. We, therefore, decline to incorporate in toto the stipulations of fact in our findings. Instead we have made our own findings giving weight to the stipulations only where their trustworthiness was not discredited by the remainder of the record. Page 385
Petitioner, the Church of Scientology of California, was incorporated on February 18, 1954, as a non-profit corporation in the State of California. When the petition herein was filed, petitioner's principal place of business was located at 5930 Franklin Avenue, Los Angeles, California. Petitioner was one of many Churches of Scientology organized worldwide. During the tax years at issue, 1970-1972, it was considered the ‘ Mother Church‘ of all Churches of Scientology in the United States. The parties have stipulated that petitioner was organized exclusively for religious purposes and that petitioner has satisfied the organizational requirements found in section 1.501(c)(3)-1(b), Income Tax Regs. The Court adopts this stipulation and finds that petitioner was organized to propagate the faith of Scientology, a religion founded by L. Ron Hubbard, through such means as the indoctrination of the laity, the training and ordination of ministers, the creation of congregations and the provision of support to affiliates and similar organizations. THE RELIGION Scientology teaches that the individual is a spiritual being having a mind and a body. Part of the mind, called the ‘ reactive mind‘ is unconscious. It is filled with mental images that are frequently the source of irrational behavior. Through the administration of a Scientology process known as ‘ auditing,‘ an individual, called a ‘ preclear,‘ is helped to erase his reactive mind and gain spiritual competence. A trained Scientologist known as an ‘ auditor‘ administers the auditing. He is aided by an electronic device called an ‘ E-meter‘ which helps the auditor identify areas of spiritual difficulty for the preclear by measuring skin responses during a question and answer session. Scientology teaches that spiritual awareness is achieved in stages. The religion defines different levels of awareness and prescribes the requisite auditing to achieve each level. L. Ron Hubbard researched and developed the spiritual awareness levels and the courses to train auditors. During the docketed years L. Ron Hubbard continued this research. A chart entitled ‘ Classification Gradation and Awareness Chart of Levels and Certificates ‘ depicts levels of spiritual awareness Page 386
and corresponding auditor training requirements in effect in 1970. One of the tenets of Scientology is that anytime a person receives...