Application of The CHURCH OF SCIENTOLOGY OF NEW YORK, Petitioner-Appellant-
Respondent,
For a Judgment etc.,
v.
The TAX COMMISSION OF the CITY OF NEW YORK, Respondent-Respondent-Appellant.
Supreme Court, Appellate Division,
First Department.
May 13, 1986.
Article 78 proceeding was brought to vacate and annul determination of Tax
Commission, which denied taxpayer's application for tax exemption as religious
institution on three parcels of real estate. The Supreme Court, Special Term,
New York County, Price, J., 124 Misc.2d 720, 477 N.Y.S.2d 263, remanded
matter to Tax Commission for rehearing in that record was inadequate to
determine whether Commission acted arbitrarily or capriciously, and Commission
appealed. The Supreme Court, Appellate Division, held that trial court erred
in not ordering evidentiary plenary hearing.
Vacated and remanded.
[1] TAXATION
Trial court should have ordered evidentiary plenary hearing, rather than
remanding case for full adversarial hearing before Tax Commission, in that
judicial review, through Article 78 proceeding, was sufficient to determine
whether Tax Commission acted arbitrarily or capriciously in denying tax exempt
status to property of church of scientology. McKinney's CPLR 7801 et seq.,
7804(h).
[2] TAXATION
Full evidentiary hearing was necessary and should have been ordered by trial
court in that issues of whether taxpayer was organized and conducted for bona
fide religious purposes, whether taxpayer's income inured to benefit of its
founder through royalty arrangements or otherwise, and whether premises were
being used exclusively for taxpayer's religious purposes, were not adequately
developed in record so as to permit determination as to whether Tax Commission
acted arbitrarily or capriciously in denying applications for real estate tax
exemptions. McKinney's RPTL s 420-a, subd. 1; McKinney's CPLR 7804(h).
**864 B.R. St. Clair, New York City, for petitioner-appellant-respondent.
R.G. Schneider, for respondent-respondent-appellant.
Before KUPFERMAN, J.P., and SANDLER, CARRO, LYNCH and KASSAL, JJ.
MEMORANDUM DECISION.
Order and judgment (one paper), Supreme Court, New York County, entered June
27, 1984, granting the petition to the extent of remanding the matter to the
Tax Commission for a rehearing, in accordance with Special Term's decision
(124 Misc.2d 720, 477 N.Y.S.2d 263), on the question of whether petitioner is a
bona fide religious organization and to determine whether three specific
parcels of real property owned by it are entitled to real property tax
exemptions, unanimously modified, on the law, without costs, the judgment
vacated and the matter remanded to the Supreme Court for a hearing, either
before a justice of the Supreme Court or a special referee, pursuant to CPLR
7804(h), on the factual issues consistent and in *377 accordance with this
memorandum. The appeal from the order (same court), entered February 1, 1985,
denying respondent Tax Commission's motion for reargument is dismissed as
nonappealable, without costs.
This Article 78 proceeding was brought to vacate and annul a determination of
the Tax Commission, which denied petitioner's application for tax exemption as
a religious institution on three parcels of real estate. Initially, petitioner
had applied for an exemption with respect to its property at 28 West 74th
Street, which it sold in 1980. Thereafter, it purchased 349 West 48th
Street and 227 West 46th Street and applied to exempt those properties. The
application sought exemption under Real Property Tax Law s 420-a(1), which
provides:
(a) Real property owned by a corporation or association organized or
conducted exclusively for religious * * * purposes, and used exclusively for
carrying out thereupon * * * such purposes * * * shall be exempt from taxation
as provided in this section.
(b) Real property such as specified in paragraph (a) of this subdivision
shall not be exempt if any officer, member or employee of the owning
corporation or association shall receive or may be lawfully entitled to receive
any pecuniary profit from the operations thereof, except reasonable
compensation for services in effecting one or more of such purposes, or as
proper beneficiaries of its strictly charitable purposes; or if the
organization thereof for any such avowed purposes be a guise or pretense for
directly or indirectly making any other pecuniary profit for such corporation
or association or for any of its members or employees; or if it be not in good
faith **865 organized or conducted exclusively for one or more of such
purposes.
Petitioner is one of several New York branches of an international Scientology
organization, which, it is alleged, licenses 33 churches and missions in the
United States. It was incorporated in New York in 1955 as a religious
corporation under Article 8 of the Religious Corporations Law. Its founder,
the late L. Ron Hubbard, was a noted mystery and science fiction author.
After a one day, actually a one hour, hearing held on June 14, 1978, at which
one witness (petitioner's president) testified, the Tax Commission embarked
upon an information-gathering project which lasted four years, including
extensive correspondence and the submission of detailed exhibits. In a written
*378 decision, dated January 20, 1983--four and one half years after the
"hearing"--respondent denied the application for tax exemptions on the three
properties for the tax years 19 78/79 through 19 82/83 , concluding that "we do
not recognize the applicant as having any real religious purpose nor do we find
that its doctrines, and teachings constitute a religion. We don't deny that
applicant asserts that its purposes and activities are religious, however, we
conclude that such assertion is merely tendentious and not in good faith."
In challenging petitioner's good faith, the decision referred to the
inconsistency between material submitted by petitioner and that obtained
through the Commission's own investigation. These consisted of (1)
petitioner's claim that, since September 1, 1966, Hubbard did not "personally"
direct the activities of the Scientology organizations, in contrast to
statements in Scientology literature that Hubbard had copyrighted material
relating to policy matters, such as recruitment, auditing and donations
expected from members; and (2) discrepancies in the proof as to the percentage
of income, generated from weekly donations, used for salaries and benefits.
Respondent found that petitioner was a self-help group, designed to enhance the
mental well-being of its members through application of a philosophy known as
Dianetics, but that this purpose, the search for the true meaning of life, was
not a proper basis for entitlement to real estate tax exemption. In
questioning petitioner's status as a bona fide religion, the determination
referred to a quotation by petitioner's founder, Hubbard: "Writing for a penny
a word is ridiculous. If a man really wants to make a million dollars, the
best way would be to start his own religion."
Further, it was observed that an organization "which is a guise for directly
or indirectly making pecuniary profit or which is not organized in good faith
for an exempt purpose" is not entitled to a tax exemption. Concluding that
petitioner exhibited "a pattern of conduct by which beliefs were originally
labelled non-religious and, subsequently, after challenges by regulatory
agencies, were labelled religious," it was decided that petitioner had not
satisfied its burden of demonstrating that it was conducted "exclusively" for
religious purposes and the properties were used for petitioner's general
purposes. Accordingly, it was found petitioner was not entitled to an
exemption.
Special Term, critical of certain findings made and the procedure employed by
the Commission in its "brief hearing", remanded the matter to the Commission
for a rehearing to *379 examine, inter alia, the profit-making character of
the church, the alleged use of coercion and other tactics against followers who
wished to leave or outsiders who opposed its practices, and other factors which
may be relevant on the tax exemption issue. The court found respondent had
improperly considered matter outside the record in concluding that petitioner
was not a bona fide religion and directed the Commission, on remand, to set
forth the objective tests used and to determine whether petitioner met the
standard or, alternatively, set forth the manner by which it failed to meet the
standard.
While we agree with Special Term that the present record is inadequate to
determine whether the Commission acted arbitrarily or capriciously, it erred in
remanding **866 the matter to the Commission for a further hearing. In this
respect, we find our holding in Matter of Holy Spirit Assn. for the
Unification of World Christianity v Tax Commission, 62 A.D.2d 188, 404 N.Y.S.2d
93, dispositive on the issue. [FN1] In that case, where an Article 78
proceeding had been transferred to this Court, albeit improperly, we retained
jurisdiction but, since the record was "not sufficient to permit an informed
judgment as to whether the administrative body had acted arbitrarily or
capriciously" in denying the tax exemption, we held the proceeding in abeyance
and remanded the matter to the Supreme Court for a hearing. In doing so, we
cited "the inadequacy of the record as to the dominant purposes of petitioner
and the actual use of the properties in question" (id. at 196) and, in terms
of the nature of the hearing to be held, directed:
FN1. For subsequent history, see, 55 N.Y.2d 512, 450 N.Y.S.2d 292, 435
N.E.2d 662, revg. 81 A.D.2d 64, 438 N.Y.S.2d 521.
The hearing will be plenary and, unlike the one conducted by the Tax
Commission, adversarial as well. Because of the obscurity of the
administrative hearing record, we have concluded to direct a full examination
of the facts and a broad inquiry into petitioner's predominant purpose
especially since that was the sole basis on which the Tax Commissioners
attempted to concentrate in deciding the exemption applications, and also into
the actual uses to which the subject properties are being devoted. (id. at
198, 404 N.Y.S.2d 93) (footnote omitted).
[1] Contrary to petitioner's argument, in order to satisfy requisite due
process standards, it was not necessary that there be a full adversarial
hearing before the Commission. Generally, administrative proceedings need not
conform to all of the requisites and evidentiary rules adhered to in judicial
tribunals. Judicial review, through an Article 78 proceeding, is sufficient
for that purpose, particularly bearing in mind the power of the court to order
a trial where there is a factual *380 issue relating to the ultimate
question--whether the administrative tribunal acted in an arbitrary or
capricious manner (CPLR 7804[h]). This was directed in Holy Spirit
Assn., supra, although, there, we retained jurisdiction and held the proceeding
in abeyance pending remand for a hearing before a special referee, as required
under CPLR 7804(h), since the proceeding had been transferred to us. In
doing so, we followed established authority permitting us to decide the
proceeding on the merits in spite of the improper transfer. (See, Holy
Spirit Assn., supra at 193, 404 N.Y.S.2d 93 and cases cited). Unlike the
situation in Holy Spirit Assn., however, here, Special Term passed upon the
merits of the petition but erred in not ordering an evidentiary plenary
hearing. It had the power to do so and, in the face of the inadequacy of the
present record, should have so directed.
[2] Essentially, there are three factual issues which are not adequately
developed in the record so as to permit us to make a reasoned determination as
to whether respondent acted arbitrarily or capriciously in denying the
applications for a real estate tax exemption. These pertain to the statutory
standard for an exemption contained in RPTL s 420-a(1).
First, it is contended that petitioner is not an organization which, within
the terms of the statute, is "organized or conducted exclusively for
religious * * * purposes". Instead, it is claimed that petitioner's primary
purpose is the conduct of a commercial enterprise to generate profit, as
evidenced by the substantial profit which results from the sale of auditing
services and products, its aggressive promotional activity, payment of
commissions on the sale of services and accumulation of large cash reserves.
Reference is made to Scientology's own policy order issued in 1972 to "make
money" and, as an illustration, respondent points to the alleged profit-making
motive underlying the sale of E-meters, the large sums realized, and the
abusive tactics and coercion claimed to be employed **867 against members who
seek to leave the church. Petitioner, on the other hand, denies that there has
been any coercion and, to the extent there were any tortious acts, claims that
this was not by petitioner but by individuals acting in a private capacity and
that there are available judicial remedies. Clearly, a full exploration of the
facts is needed to determine whether petitioner is organized or conducted for
bona fide religious purposes.
The second factual issue, which cannot be resolved on the insufficient record,
is whether petitioner's income inured to the benefit of its founder through
royalty arrangements or *381 otherwise. It is charged that there was a
long-standing arrangement of self-dealing, by which certain practices of
petitioner were designed to generate an income for the benefit of Mr. Hubbard.
Thus, it is urged that books and artifacts were purchased by petitioner, resold
at higher prices to its own members and that Hubbard had a royalty arrangement
which gave him 10% of the retail price. Further, while it has been claimed
that petitioner counselled members without charge, this is inconsistent with
and counter to its practice of selling auditing services. Petitioner, on the
other hand, denies that there was any inurement of profit to the benefit of
Hubbard and no royalty arrangement. While the Tax Commission did not make an
express finding on this issue, nevertheless, it does have a direct bearing upon
the application for real estate tax exemption under RPTL s 420-a(1).
This issue, as well as that pertaining to whether petitioner, in good faith,
is organized or conducted "exclusively" for religious purposes and not as "a
guise or pretense for directly or indirectly making any other pecuniary
profit" (RPTL s 420-a[1][b]), cannot be resolved on the inadequate record
before us. A full evidentiary hearing is necessary and should have been
ordered by Special Term. This is the central purpose underlying CPLR
7804(h).
At such hearing, there should be an additional inquiry relating to the third
factual issue, which, under the statute, must be decided on an application for
real estate tax exemption, namely, whether the premises were being used
exclusively for petitioner's religious purposes. This issue is critical in
that the statute expressly provides that, in order to qualify for an exemption,
the property must be "used exclusively" for such religious purposes.
(RPTL s 420-a[1][a]; see, Holy Spirit Assn., supra at 198, 404 N.Y.S.2d
93).
These and any other factual issues bearing upon the statutory standard for
real estate tax exemption may be fully explored at the Supreme Court hearing,
which, as we observed in Holy Spirit Assn., supra at 198, 404 N.Y.S.2d 93,
shall be "a full examination of the facts and a broad inquiry into petitioner's
predominant purpose * * * and also into the actual uses to which the subject
properties are being devoted". The findings will be critical in determining
whether respondent acted arbitrarily or capriciously in denying the exemption.
All concur.