Courtesy of Ron Newman...thanks Ron
Form 906
Rev. January 1987
Department of the Treasury -- Internal Revenue Service
Closing Agreement On Final Determination Covering Specific Matters
Under section 7121 of the Internal Revenue Code, the parties named
herein and the Commissioner of Internal Revenue make the following
closing agreement:
WHEREAS, the Church of Scientology and its constituent entities
(the "Church") and the Internal Revenue Service (the "Service")
have a long history of controversy spanning over 30 years;
WHEREAS, the Church has pending with the Service applications on
Form 1023 requesting that the Service recognize certain constituent
entities within the Church as exempt from income taxation pursuant
to section 501(a) of the Internal Revenue Service Code, as
exclusively charitable organizations described in section 501 (c)
(3) of the Code;
WHEREAS, the controversy between the parties includes litigation
(hereinafter "the section 170 litigation") in which the
deductibility under Code section 170 of parishioners' payments to
the Church in connection with their participation in religious
services of the Scientology faith is at issue;
WHEREAS, the Church signatories and individual Scientologists have
initiated, supported and/or otherwise participated in litigation
under the Freedom of Information Act (FOIA) to compel the Service
to disclose information withheld by the Service in response to FOIA
requests about its treatment of Scientologists and Churches of
Scientology (hereinafter "FOIA litigation");
WHEREAS, in October of 1991, the key officials of the Church,
David Miscavige and Mark Rathbun, approached the Service seeking to
negotiate the resolution of the above-described matters, and met
with the then Commissioner;
WHEREAS, at this meeting, the Commissioner indicated his desire to
resolve all outstanding issues between the Church and the Service
and appointed the Assistant Commissioner to negotiate and conclude
a settlement with the Church on behalf of the Service;
WHEREAS, the Church and the Service intend this closing agreement
to be final and conclusive with respect to all matters but, while
also final and conclusive, that its provisions relating to the
continuing duties and obligations of both parties during the
transition period shall generally be effective until December 31,
1999;
NOW IT IS HEREBY DETERMINED AND AGREED, for purposes the Internal
Revenue laws of the United States, and in consideration of the
provisions contained herein that:
TABLE OF CONTENTS
I. Introduction
II. Resolution of Outstanding Issues
A. In General
B. Payment in Consideration of Resolution of Outstanding Issues
C. Effect of Agreement on Prior Tax Years and Waiver of Rights
of Action
D. Effect of Outstanding Administrative Matters
1. Church tax inquiries under Code section 7611
2. Other examinations of Scientology-related entities
3. Outstanding tax assessments
4. Trust fund recovery penalties
5. Time period in which to effectuate paragraph D
E. Effect on Outstanding Litigation Matters
1. In general
2. Zolin
3. Stipulations
4. Certain pending cases requiring coordination
F. After-Discovered Cases of Examinations in Existence as of the
Date of this Agreement
G. Finality
III. Service Determinations Regarding Scientology-Related
Entities
A. Issuance of Determination Letters
B. Individual Determination Letters
C. Group Determination Letters
IV. Obligations and Undertakings During the Transaction Period
A. Establishment of Church and Tax Compliance Committee
1. Purpose of Church Tax Compliance Committee
2. Membership of Church Tax Compliance Committee
a. Corporate CTCC members
b. At-large members of CTCC
c. Individual CTCC members
3. Responsibilities of CTCC
a. Annual report
b. Communications
c. Meetings
d. Guaranty
e. Liability for penalties
4. Actions of CTCC
B. Financial Reporting Requirements
1. Special accounting procedures
a. In general
b. Special Accounting Procedures --Operational aspects
c. CPA's reports -- In general
d. CTCC responsibilities
e. Selection of a qualified CPA
f. Definition of qualified CPA
g. CTCC's approval of selection
h. Notification of selection
i. First Qualified CPA
j. Special Purpose Report agreement
k. Special Purpose Report scope limitation
l. Access to Special Purpose Report - related to documents
m. Required disclosures to CPA
n. Submission of Special Purpose Reports
o. Submission of plan of corrective action
2. Internal financial reports
3. Report on central reserves transactions and balances
4. Tax returns
5. Term
C. Fiduciary Reporting Requirements
1. Compensation information
2. Modifications of organizational documents
3. Reporting of any dividend payment with respect to any entity
4. Reporting of any ownership change with respect to any entity
5. Reporting on creation of new entities
6. Reporting of any ecclesiastical modification or the
restructuring of any entity
7. Reporting of certain asset transfers and expenditures
8. Reporting of certain asset transfers that diminish the
assets of the corporate members of the CTCC
9. Reporting of any amendment of any directive concerning the
treatment of funds
10. Activity or inaction in contravention of this Agreement
11. Update on operational modifications
12. Education and training issues under Code section 170
F. Term of fiduciary reporting under section IV C
D. Certifications
1. In general
2. Section 501 (c) (3)
3. Continuing certifications
E. Operational modifications
F. Treatment of Information Exchanges
V. Treatment of the Code Section 6104 Public Inspection
File and Certain Other Materials
A. Code section 6104 Public Inspection File
B. Disclosure of Information by the Service
C. Disclosure of Information by the CTCC
D. Proceeding Under Agreement
E. Disclosure Following Inquiries
F. Correction of Misstatements
G. Term of Undertaking
VI. Penalty Provisions During Transition Period and Other
Procedural Matters
A. Introduction: Purpose and Scope of Sanctions
B. Self-Dealing Transactions
1. First-tier penalties
a. On Individual CTCC member who is a self-dealer or who is
related to
a self-dealer
b. On Individual CTCC member with
knowledge of transaction
2 . Second-tier penalties
a. On Individual CTCC member who is a
a self-dealer or who is related to
a self-dealer
b. On Individual CTCC member refusing to correct
3. Self-dealing
a. In general
b. Special rules
c. Exceptions
d. Amount involved
C. Noncharitable Expenditures First-tier penalties
a. On Corporate CTCC members
b. On Individual CTCC members
2. Second-tier penalties
a. On Corporate CTCC members
b. On Individual CTCC members
3. Noncharitable expenditure
a. Noncharitable expenditure
b. Expenditure responsibility
c. Governing principles
4. Special noncharitable expenditure
5. Amount involved
D. Reporting Obligations
1. Penalty on Corporate CTCC members
2. Penalty on Individual CTCC members
a. Failure to comply with demand
b. Application of penalties for failure
to provide information
3. Exception for reasonable cause
4. Exception for inability to certify
specific information
E. Joint and Several Liability and Certain
Penalty Limitations for Individual CTCC members
F. Additional Penalty
G. Third-Tier Penalty
H. Procedures for Penalty Determinations
1. a. First-tier penalty
b. Second-tier penalties
c. Other penalties
2. Interest
3. Non-assertion of penalties
VII. Treatment of Parishioner's Contributions
VIII. Definitions
A. Code
B. Entity
C. Scientology-related entity
D. Scientology-related individual
E. Qualified Written Material
F. Service
G. Taxable Year
H. Transition Period
I. Agreement
J. CTCC
K. Church Signatories
L. Settlement Agreement
M. Annual Report
N. Disqualified Person
O. Willful
P. Sanction Period
Q. First-Tier Penalty
R. Second-tier Penalty
S. Correction
T. Correction Period
U. Church
V. Commissioner
W. Assistant Commissioner
X. Knowing
Y. Reasonable cause
IX. Other Matters
A. Representations
B. Notices
C. Rules of Construction
D. Entire Agreement
E. Survival of Agreement
F. Cost of Compliance with Agreement
G. Counterparts
H. Finality
I. Date of Agreement
Signatures
List of Exhibits
I. Introduction.
The parties have entered into this Agreement in order to put the
past controversy behind them, to extinguish all potential claims
and liabilities arising as a result of action or inaction prior to
the date of this Agreement and to structure their relationship into
the future. While complex, there are certain basic principles
underlying the Agreement that will aid in its comprehension.
First, under section II of the Agreement the Church will make a
single payment that is intended to extinguish any potential tax
liability that may be due and unpaid by any Scientology-related
entity for all tax years up to and including the tax year ending in
1992. Thus, as of December 31, 1992, the Church will be current
with respect to all income, employment and estate tax liability.
Second, under section II of the Agreement, the Church and the
Service will withdraw from virtually all existing controversy,
including ongoing examinations of Church entities, ongoing
litigation by the Service to enforce summonses for Church records,
and all litigation by the Church against the Service and its
current or former personnel. In addition, because the parties
intend that the relationship between them begin anew, and in light
of the other provisions contained in this Agreement, including the
payment with respect to potential past tax liability, the Service
and the Church agree under this section II of the Agreement that
the Service will not examine the Church for any year ending prior
to January 1, 1993. Similarly, no Scientology-related entity may
initiate or support any legal action against the Service or any
Service employee for any claim arising prior to the date of this
Agreement.
Third, it is the view of the Service that certain Church entities
are entitled to recognition of tax-exempt status as entities
described in section 501(c) (3) of the Internal Revenue Code. Thus,
section III of the Agreement contains a list of entities that will
be recognized as tax exempt entities, including certain entities
that will receive group exemption letters covering their
subordinate organizations.
Notwithstanding the above, in light of, inter alia, the size and
complexity of the Church and the Service, certain concerns of the
Service and the Church remain. In addition, there is a need for
improved communication between the parties. Thus, under section IV,
a Church Tax Compliance Committee (CTCC) has been created to
undertake certain obligations during a seven-year transition
period. The CTCC is to be comprised of the largest United States
Church entities, as well as those individuals who are the highest
ecclesiastical or corporate authorities within the Church. The
Service, through the Assistant Commissioner, has agreed to meet
with the CTCC upon their request during the transition period to
address any questions arising from the ongoing performance of the
parties' obligations under this Agreement.
The CTCC is in a position to monitor and effect the operations of
the group entities that are defined as "Scientology-related
entities" under this Agreement. Under section IV, the CTCC is
responsible for certain reports produced and provided annually to
the Service. These reports will include a report on the application
of certain agreed-upon procedures by an independent certified
public accounting firms, as well as certain other information
collected and reported by the CTCC. These reports, and the
information the CTCC collects from Scientology-related entities in
order to prepare them, are intended solely for the purposes of
administration of the tax laws and not for any other purpose.
In light of the CTCC and its relationship to the whole of
Scientology, the CTCC has agreed under section IV to guarantee the
collection of taxes (including interest and penalties) from any
Scientology-related entity for tax liability arising during the
first three years of the seven-year transition period. The parties
have agreed under section V to keep confidential both this
Agreement and all underlying information that is not part of the
public record under Code section 6104 except to the extent that
disclosure is necessary to interpret or apply this agreement or is
permitted under the authority of law. In addition, the CTCC has
agreed under section VI to certain consensual penalties intended to
provide the Service intermediate sanctions for activities or
conduct not in accordance with the Code or with this Agreement.
Finally, under section VII, the Service and the Church have come
to an agreement with respect to the treatment of contribution by
Church parishioners and the extent to which those contributions are
deductible under section 170 of the Internal Revenue Code, as well
as the Service's acknowledgment of its obligation to interpret and
apply the "gift or contribution" requirement of Code section 170
(c) equally and consistently to the fundraising practices of all
religious organizations that receive fixed donations from
parishioners in connection with participation in worship and
similar religious rituals or services.
II. Resolution of Outstanding Issues.
A. In General. In general, the parties to the Agreement intend
that the below-described issues be finally and conclusively
resolved under this Agreement.
B. Payment in Consideration of Resolution of Outstanding Issues.
1. At the same time this Agreement is executed, Church of
Scientology International is paying by banker's draft the sum of
Twelve and One-Half Million United States Dollars
(US$12,500,000.00), receipt of which the Service hereby
acknowledges, as consideration for the settlement of outstanding
issues with the Service as set forth in this Agreement.
2.The amount paid under this Agreement includes recognition that
the Church will not collect the attorneys' fees awarded to the
Church in the Church of Scientology of Boston, Inc. litigation
referred to in Exhibit II-2, thus extinguishing the Service's
liability under that decision.
3. The amount paid under this Agreement is not considered part of,
or attributable to, the federal tax liability of any
Scientology-related individual or Scientology parishioner, and is
not deductible, refundable or creditable to any such individual for
any purpose, nor may the amount be the subject of any other offset
of liability under this Agreement.
4. If, after application of the provisions of paragraph IX.H., the
Service assesses a tax liability for a taxable year ending before
January 1, 1993 against any Scientology-related entity, the amount
paid under this Agreement shall be treated as a payment of the
taxes so assessed against such entity as of the date of this
Agreement in the manner designated by the CTCC. Otherwise, such
amount shall not be considered part of, or attributable to, the
federal tax liabilities of any Scientology-related entity and is
not deductible, refundable or creditable to any such entity for any
purpose, nor may the amount be the subject of any other offset of
liability under this Agreement.
5. The amount paid under this Agreement may be designated as the
Service provides (including penalties or liquidated damages) so as
to avoid characterization as a refundable or creditable amount.
6. The amount paid under this Agreement shall not be deductible in
computing the taxable income of any Scientology-related entity or
Scientology parishioner and shall not be treated as compensation of
either income to any Scientology-related entity or Scientology
parishioner.
7. The performance of the various obligations under this Agreement
by the CTCC or by any Scientology-related entity, including (but
not limited to) the payment under paragraph II.B.1. hereof, shall
not in and of itself be considered by the Service to constitute the
conferring of substantial private benefits by any
Scientology-related entity, the private inurement of the net
earnings of any Scientology-related entity, nor shall such
performance adversely affect in any other way the tax exempt status
under Code section 501 (c) (3) of any Scientology-related entity.
8. No inference shall be drawn from the fact that the payment
provided in paragraph II.B.1 has been made with respect to whether
any Scientology-related entity agrees that any tax liability was
actually due or owing for any pre-1993 period.
C. Effect of Agreement on Prior Tax Years and Waiver of Rights of
Action.
1. The Service agrees not to commence an examination or assess any
tax liability under subtitles A, B, or C of the Code or under
Chapter 42 of subtitle D of the Code for any taxable period ending
on or before December 31, 1992, with respect to any
Scientology-related entity. Similarly, no Scientology-related
entity shall have any right to refund or offset with respect to any
payment made for any taxable period ending prior to the date this
Agreement is executed. Notwithstanding the previous sentence, any
amounts held in accounts under the joint signatory authority of any
Scientology-related entity and a representative of the Service, and
any other amounts otherwise in the nature of bond, to defer
collection action by the Service with respect to any liability
assessed against a Scientology-related entity for the a pre-
taxable period (including, but not limited to, joint signature
accounts at Sumitomo Bank to serve as collateral for FICA
assessments against CSI, RTC, CSWUS, and CST) shall be released or
otherwise returned to the Scientology-related entity. The Service
and the CTCC shall jointly draft notice to the bank (s) to
effectuate release of such funds.
2. To the extent any payments have been made and/or claims for
refund filed for any taxable period prior to the date of this
Agreement by a Scientology- related entity, the Church and Service
agree that such payments are not subject to refund and will not be
refunded. The CTCC certifies that no Scientology-related entity
will continue to pursue such claim for refund or file any new claim
for refund for any pre-1993 period.
3. The Service and the Church agree that no inference is to be
drawn from any provision of the Agreement as to the tax treatment
of any activity or item relating to any liability under the Code
for any post-1992 periods unless expressly provided herein. For
example, the fact that the Service has not assessed any unrelated
business income tax for past years may not be construed to mean
that activities that occurred in those years did not give rise to
such liability and that if such activities continue into post-1992
taxable years, that they will not give rise to such income. For
further example, the fact that the Church has made the payment
provided in paragraph B.1. shall not be construed as an admission,
or otherwise used in any way as evidence, that any
Scientology-related entity was not exempt from federal tax for any
taxable period before 1993.
4. In reliance upon the covenant of good faith and fair dealing
that underlies this Agreement, the Church signatories, as well as
the Individual At-large members of the CTCC agree to relinquish all
claims arising out of any action or inaction of the Service of
current or former Service employees that occurred prior to the date
of this Agreement, including, but not limited to, any claims of
continued conspiracy having a genesis prior to the date of this
Agreement. In addition, the Church signatories, and the Individual
and At-large members of the CTCC certify that no
Scientology-related entity or Scientology-related individual shall
assist (directly or indirectly) any party in any suit against the
United States, the Service or current or former Service employees
based upon any claim arising out of any action or inaction of the
Service or former or current employees that occurred prior to the
date of this Agreement including, but not limited to, any claims of
continued conspiracy having its genesis prior to the date of this
Agreement. If any Scientology-related entity or Scientology-related
individual commences any such action or provides any such
assistance, then section VI shall apply.
5. The CTCC shall indemnify and hold the United States, the
Service or any Service employee (former or present) harmless with
respect to any litigation filed or pursued in contravention of the
Agreement, that is, any litigation filed or pursued by or with the
assistance of any Scientology-related entity or Scientology-related
individual. For purposes of this paragraph C.5, direct or indirect
assistance includes, but is not limited to, financial aid,
litigation support, or the use in connection with litigation of
documents obtained from the Service by any Scientology-related
entity or Scientology-related individual prior to the date of this
Agreement or under the Inspection provisions of the Settlement
Agreement entered into by the parties on even date herewith.
6. Subject to the requirements of section VII, paragraph G.,
nothing in the preceding two paragraphs shall be construed to
prevent any Scientology-related entity from conducting, supporting,
or participating in, directly or indirectly, any judicial
proceeding to construe or enforce the obligation under this
Agreement, nor to impose any sanction or require indemnification to
the Service as a result of such proceeding.
D. Effect on Outstanding Administrative Matters.
1. Church tax inquiries under Code section 7611. The Service shall
close the following church tax inquiries on a no-change basis:
Church of Scientology International
Church of Scientology Flag Service Organization, Inc. (two
outstanding inquiries)
Church of Scientology Western United States
2. Other examinations of Scientology-related entities The Service
shall close the following income or employment tax examinations on
a no-change basis:
Church of Scientology Expansion Trust
Church of Scientology Religious Trust
Scientology Endowment Trust
Bridge Publications, Inc.
Applied Scholastics International
Author's Family Trust B
International Association of Scientologists
Religious Technology Center
Church of Scientology International
Church of Spiritual Technology
Church of Scientology Flag Service Organization, Inc.
Church of Scientology Western United States
Church of Scientology of California (employment)
3. Outstanding tax assessments. The Service shall abate in their
entirety the following unpaid tax assessments:
Church of Scientology of California, FICA and FUTA for all
quarters of the years 1976 through 1986.
Religious Technology Center, FICA for all quarters of the years
1986 and 1987.
Church of Scientology International, FICA for all quarters of the
years 1986 and 1987.
Church of Spiritual Technology, FICA for all quarters of the years
1986 and 1987.
Church of Scientology Western United States, FICA for all quarters
of the years 1986 and 1987.
Religious Technology Center, Form 1120 Corporate Income Taxes,
interest and penalties for the years 1982 to 1988.
Church of Scientology International, Form 1120 Corporate Income
Taxes, interest and penalties for the years 1981 to 1988.
With respect to the foregoing tax assessments, the Service agrees
to withdraw any notices of levy and to release any notices of tax
lien filed or made prior to the date of this Agreement.
4. Trust fund recovery penalties. The Service shall abate in their
entirety assessments made under Code section 6672 with respect to
certain FICA assessments against Church of Scientology of
California (1985-1986), Church of Scientology International (1988),
Church of Spiritual Technology (1988), Religious Technology Center
(1988), and Church of Scientology Western United States (1988),
against the following individuals: David Miscavige, Norman F.
Starkey, Marc Yager, Mark Ingber, Lyman Spurlock, Patrick Broeker,
and Ann Marie Tidman (Broeker). In addition, with respect to the
foregoing penalty assessments, the service shall (1) refund upon
proper claim any amounts collected, along with interest as
permitted by law, (2) withdraw any notices of levy, and (3) release
any notices of tax lien filed.
5. Time period in which to effectuate paragraph D. The Service
shall take the actions required under this paragraph D. by April 1,
1994.
E. Effect on Outstanding Litigation Matters.
1. In general. The Service and the CTCC agree that all litigation
set forth in Exhibits II-1 and II-2 shall be dismissed with
prejudice by stipulation of the parties (or, where appropriate, the
pending appeal shall be withdrawn) with all litigation costs (e.g.,
attorney fees) to be borne by the respective parties. The parties
agree that no damages, costs, attorney fees, or any other amounts
of relief shall be sought by any Scientology-related entity or
Scientology-related individual, the United States, the Service or
any individual plaintiff in any suit contained in Exhibits II-1 or
II-2.
2. Zolin. The Service further agrees that following dismissal of
the litigation listed on Exhibit II-2 as Zolin, it shall use its
best efforts to return to the CTCC all materials and all copies
thereof produced to the Service in response to the summons at issue
in that litigation by no later than April 1, 1994. The CTCC hereby
certifies that CSI shall retain all such materials during the
transition period. No inference shall be drawn from the fact the
Service is returning these materials that they were summonsed for
an improper law enforcement purpose and the CTCC agrees not to
assert such an inference in any future litigation.
3. Stipulations. At Exhibit II-3, are copies of stipulations to
dismiss the cases discussed at paragraph E.1. executed by counsel
of record for the non-governmental parties thereto. The parties
agree that, to the extent practicable, these stipulations shall be
used to cause the dismissal of these cases and will provide a
complete resolution of all issues arising out of the same subject
matter. The parties agree that these stipulations shall be executed
by counsel of record for the government and returned to the CTCC.
The CTCC will file the fully executed stipulations with the
appropriate court within 30 days of its receipt of the executed
stipulations. The parties further agree not to undertake any
further actions to prosecute or defend any such litigation during
the period of time following execution of this Agreement until the
court has acted on the parties' dismissal stipulations. In
addition, the parties agree to file as necessary requests to stay
any action on such cases pending dismissal.
4. Certain pending cases requiring coordination. Recognizing that
carrying out the provisions of this paragraph E. shall require
coordination with persons and agencies not parties to this
Agreement, the parties further agree as follows:
a. The Service shall use its best efforts to secure the voluntary
dismissal with prejudice of all litigation listed in Exhibits II-1
and II-2 in which the Commissioner, the Service and /or Service
employees are represented by the United States Department of
Justice.
b. The CTCC shall use its best efforts to secure the voluntary
dismissal with prejudice of all litigation listed in Exhibits II-1
and II-2 insofar as it involves litigants who are not
Scientology-related entities or individual members of the CTCC.
Following execution of this agreement, the Church signatories, and
the Individual and At-large members of the CTCC certify that no
Scientology-related entity nor Scientology-related individual shall
provide any further support or assistance (directly or indirectly)
in such litigation.
F. After-Discovered Cases or Examinations in Existence as of the
Date of this Agreement. It is the intention of the parties to cease
activity and dismiss with prejudice all existing cases in
controversy between the Service and any Scientology-related entity
or Scientology-related individual, costs to be borne by each party
(e.g., attorney fees), as well as all existing current examinations
of Scientology-related entities for years prior to 1993. Thus, if
there exists other civil actions that are not contained in Exhibits
II-1 and II-2 or in the Settlement Agreement, Exhibit IV-6, or an
examination of a Scientology-related entity is not listed in
paragraphs D.1 and D.2, and the exclusion of such suit was
inadvertent (i.e., not specifically discussed and intentionally
excluded by the parties during their negotiations), the parties
agree to dismiss such suit or cease such examination as soon as
administratively feasible.
G. Finality. The provisions of this section II. are final and
conclusive, except as provided in section IX, paragraph H.,
notwithstanding the seven-year transition period set forth in other
provisions of this agreement.
III. Service Determinations Regarding Scientology-Related
Entities.
A. Issuance of Determination Letters.
Having received and reviewed the completed Forms 1023,
Applications For Recognition of Exemption and the attachments
thereto for the entities described in paragraphs B.1, B.2, B.3,
B.4, B.5, B.6, B.7, B.8, and B.9 together with requests for group
exemption letters and the attachments thereto described in
paragraphs in paragraphs C.1, C.2, C.3 and C.4, on the basis of
that information, the Service is issuing the individual
determination letters and group determination letters described
below and copies of which are attached at Exhibits III-1 through
III-30.
B. Individual Determination Letters.
1. The Service hereby issues individual determination letters
(copies attached as Exhibits III-1 through III-5, respectively)
that the following entities are organizations described in Code
sections 501(c) (3), 170(c) (2), 509(a) (1), and 170 (b)(1)(A)(i):
Religious Technology Center ("RTC")
Church of Scientology International ("CSI")
Scientology Missions International ("SMI")
Church of Spiritual Technology ("CST")
Church of Scientology Flag Service Organization, Inc. ("CSFSO")
2. The Service hereby issues an individual determination letter
(copies attached as Exhibit III-6) that Foundation Church of
Scientology Flag Ship Service Organization ("CSFSSO") is an
organization described in Code sections 501(c) (3), 509(a) (1), and
170(b)(1) (A) (i). CSFSSO is not described in Code section 170 (c)
(2) because it is a foreign entity.
3. The Service hereby issues individual determination letters
(copies attached as Exhibits III-7 through III-14, respectively)
that the following Scientology-related entities are organizations
described in Code sections 501(c) (3), 170(c) (2), and 509(a) (3):
Inspector General Network ("IGN")
International Hubbard Ecclesiastical League of Pastors ("IHELP")
Building Management Services ("BMS")
Bridge Publications, inc. ("BPI")
Dianetics Centers International ("DCI")
Dianetics Foundation International ("DFI")
Hubbard Dianetics Foundations ("HDF")
U.S. IAS Members' Trust
4. The Service hereby issues individual determination letters
(copies attached as Exhibits III-15 and III-16, respectively) that
the following Scientology-related entities are organizations
described in Code sections 501 (c) (3), 170 (c) (2), 509 (a) (1)
and, 170 (b) (1) (A) (vi):
The Way to Happiness Foundation ("TWTH")
Association for Better Living and Education ("ABLE")
5. The Service hereby issues individual determination letters
(copies attached as Exhibits III-17 and III-19, respectively) that
the following Scientology-related entities are organizations
described in Code sections 501 (c) (3) and 509 (a) (3):
Scientology International Reserves Trust ("SIRT")
Flag Ship Trust ("FST")
New Era Publications International ApS ("NEP")
However, these organizations are not describe in Code section 170
(c) (2) because they are foreign entities.
6. Pursuant to a ruling request, the Service hereby modifies the
individual determination letter (copy attached as Exhibit III-20)
that the Church of Scientology Religious Trust ("CSRT") is an
organization described in Code sections 501(c) (3), 170 (c) (2),
and 509(a) (3).
7. The Service hereby issues individual determination letters
(copies attached as Exhibits III-21 through III-23, respectively)
that the International Association of Scientologists ("IAS") and
its operating arms: Membership Services Administration, Ltd., and
Foundation International Membership Services Administration d/b/a
IAS Administrations, are organizations described in Code sections
501(c) (3), and 509(a) (3). IAS and its operating arms are not
described in Code section 170(c) (2) because they are foreign
entities.
8. The Service hereby issues an individual determination letter
(copy attached as Exhibit III-24) that the Hubbard College of
Administration ("HCA") is an organization described in Code
sections 501(c) (3), 170 (c) (2), 509 (a) (1), and 170 (b) (1) (A)
(ii).
9. Having previously issued a determination letter to the Church
of Scientology Western United States ("CSWUS") (under the name
Church of Scientology of San Diego) recognizing CSWUS as an
organization described in Code sections 501(c) (3), 170 (c) (2),
509 (a) (1), and 170 (b) (1) (A) (i), and having received and
reviewed an updated Form 1023 and attachments thereto (dated August
30, 1993), the Service hereby issues a revised determination letter
(copy attached as Exhibit III-25) recognizing CSWUS as an
organization described in Code sections 501(c) (3), 170 (c) (2),
509 (a) (1), and 170 (b)(1) (A) (i).
10. The Service agrees that the organizations listed in paragraphs
B.1, B.2. and B.9. are churches described in Code section 6033 (a)
(2) (A) (i). Pursuant to Code section 6033(a) (2), Treas. Reg.
[Section] 1.6033-2(g) (6), and Rev. Proc. 86-23, 1986-1 C.B. 564,
the service determines that the organizations described in
paragraphs B.3, B.5, B.6, B.7, and B.8. are church-affiliated
organizations that need not file annual Forms 990. However, nothing
in this Agreement relieves any Scientology-related entity from any
requirement to file a return (e.g., filing the Form 990-T in the
event of unrelated business taxable income).
C. Group Determination Letters.
1. The Service hereby issues a group determination letter (as
described in Rev. Proc. 80-27, 1980-1 C.B. 677 and Treas. Reg.
[Section] 601.201 (n) (8) (copy attached as Exhibit III-26)) that
the subordinate organizations of the Church of Scientology
International are organizations described in Code sections 501(c)
(3), 170 (c) (2), 509 (a) (1), 170 (b) (1) (A) (i), and 6033 (a)
(2) (A) (i).
2. The Service hereby issues a group determination letter (as
described in Rev. Proc. 80-27, 1980-1 C.B. 677 and Treas. Reg.
[Section] 601.201(n)(8) (copy attached as Exhibit III-27)) that the
subordinate organizations of Scientology Missions International are
organizations described in Code sections 501(a) (2) (A) (I), 170
(c)(2), 509(a)(1), 170(b) (1)(A)(i), and 6033 (a)(2)(A)(i).
3. The Service hereby issues a group determination letter (as
described in Rev. Proc. 80-27, 1980-1 C.B. 677 and Treas. Reg.
[Section] 601.201(n)(8) (copies attached as Exhibit III-28 and
III-29, respectively)) that the subordinate organizations of the
following Scientology-related entities, are organizations described
in Code sections 501 (c) (3), 170 (c) (2), 509 (a) (1), 170 (b) (1)
(A) (ii) (but are not described in Code section 6033 (a) (2) (A)
(I):
Applied Scholastics Inc.
Hubbard College of Administration ("HCA")
4. The Service hereby issues a group determination letter (as
described in Rev. Proc. 80-27, 1980-1 C.B. 677 and Treas. Reg.
Section 601.201(n)(8) (copy attached as Exhibit III-30)) that the
subordinate organizations of the Citizens Commission on Human
Rights ("CCHR") are described in Code sections 501 (c) (3), 170 (c)
(2), 509 (a) (1), 170 (b) (1) (A) (vi) (but are not described in
Code section 6033(a) (2) (A) (i)).
5. Subordinate organizations initially covered by the group
exemptions recognized under paragraphs C.1, C.2, C.3 and C.4 are
set forth in the following respective Exhibits:
Church of Scientology International Exhibit III-31
Scientology Missions International Exhibit III-32
Applied Scholastics Inc. Exhibit III-33
Citizens Commission on Human Rights Exhibit III-34
Hubbard College of Administration Exhibit III-35
IV. Obligations and Undertakings During the Transition Period.
A. Establishment of Church Tax Compliance Committee
1. Purpose of Church Tax Compliance Committee. The Church
Signatories and others as described below shall form a Church Tax
Compliance Committee (the "CTCC"). The purpose of the CTCC is to
ensure that Scientology-related entities, including those
recognized under section III of this Agreement as tax-exempt
continue to be organized and operated in conformity with the
requirements of Code section 501 (c) (3) and the provisions of this
Agreement. Further, the CTCC is to ensure that no
Scientology-related entity, regardless of whether the entity is
described in Code section 501 (c) (3), engages in any conduct that
may endanger the tax-exempt status of any other Scientology-related
entity or that would otherwise be in contravention of this
Agreement. The membership of the CTCC shall guarantee the
obligations of any Scientology-related entity as to necessary
compliance with the Code and the requirements of this Agreement. In
addition, the CTCC will facilitate communication between the
parties to this Agreement.
2. Membership of Church Tax Compliance Committee. The CTCC shall
consist of Corporate, At-large and Individual members.
a. Corporate CTCC members. The Corporate CTCC members are RTC,
CST, CSFSO, CSWUS, BMS, and CSRT (hereinafter "Corporate CTCC
members"). The Church of Scientology Religious Trust is also a
Corporate member, to be represented by one CSRT trustee designated
for this purpose. The Presidents of RTC, CSI, CST, CSFSO, CSWUS and
BMS shall serve as representatives of their respective entities on
the CTCC. No Corporate CTCC member many withdraw from the CTCC.
b. At-large members of CTCC. The Watchdog Committee (as described
in the Qualified Written Material) shall be an At-large member of
the CTCC and shall be represented on the CTCC by the Chairman of
the WDC. In addition, the International Finance Director and the
Chief Accountant International shall serve as At-large
representatives on the CTCC. The At-large members of the CTCC may
not withdraw from the CTCC, although the individuals representing
WDC or serving as Finance Director or Chief Accounting
International may be replaced by reason of the prior office holder
no longer serving in that capacity. The CTCC shall give prompt
notice to the Service of any replacement of these individuals on
the CTCC.
c. Individual CTCC members. The individual members of the CTCC are
David Miscavige, Norman Starkey, Mark Rathbun and Heber Jentzsch.
No individual member of the CTCC shall be permitted to withdraw
from service on the CTCC, except by reason of death, being
adjudicated an incompetent, or by mutual agreement of the parties
to this Agreement.
3. Responsibilities of CTCC. In general, the CTCC is responsible
for overall implementation of the duties and obligations imposed
with respect to the Scientology-related entities by this Agreement
during the transition period. Specific responsibilities and duties
of the CTCC shall include the following:
a. Annual Report. The CTCC is responsible for submission of the
Annual Report transmitting the information required under section
IV. paragraphs B., C., D.2 and D.3 of this Agreement (the Annual
Report). The CTCC is also responsible for engaging the certified
public accounting firm that is required to perform and report on
certain agreed-upon accounting procedures under section IV.
paragraph B. of this Agreement. Information required to be reported
shall be contained in the Annual Report relating to the taxable
year at issue and due no later than July 15 following the end of
such year. This date may be extended by written agreement between
the Service and the CTCC. No extensions beyond November 15 shall be
granted, absent extraordinary circumstances . The Annual Report,
any supplements thereto, and any responses to inquiries under
paragraphs B. and C. shall be submitted under penalties of perjury
in a manner similar to that set out in the form 990 (hence subject
to prosecution under Code section 7206(1)). This report will be
signed by all members of the CTCC.
b. Communications. i. If the CTCC determines that it needs to
communicate with the Service regarding any issue related to the
Church and the Service, the CTCC may so notify the Service in
writing. Included within the notice will be specific information
regarding the issue the CTCC wishes to raise. Such disclosure is
intended to provide the Service with sufficient information to
determine if waivers under Code section 6103 may be required. If
the Service determines that it needs to communicate with the CTCC
regarding any issues related to the Church, the Assistant
Commissioner may so notify the CTCC in writing.
ii. The CTCC shall submit waivers in favor of CTCC members and
their counsel as required under Code section 6103 on behalf of all
Scientology-related entities recognized as described in Code
section 501(c)(3) under section III of this Agreement as soon as
practicable but in no event later than 120 days after execution of
this Agreement. Every such waiver also shall be submitted to the
Service not more than 60 days after its execution by the relevant
Scientology-related entity.
iii. Not withstanding the provisions for written notice in
subparagraph i., nothing shall prohibit the parties from other,
less formal modes of communication, such as the telephone. It is
contemplated that there will be regular and frequent informal
communications with respect to matters arising under this
Agreement.
c. Meetings. i. The CTCC and the Assistant Commissioner shall meet
no less than once each year during the transition period, such
meeting to be held no later than 90 days following the Service's
receipt of the CTCC's annual report under subparagraph a.
ii. If the CTCC submits a written request for a meeting, then a
meeting with the Assistant Commissioner shall be held within 15
working days after the receipt of such written request.
iii. All meetings under this subparagraph c. shall be held at a
mutually agreeable time at the National Office of the Service or
other mutually agreeable location.
d. Guaranty.
i. In general. The Corporate CTCC members absolutely and
unconditionally, jointly and severally, guarantee to the Service
the full and prompt payment of all U.S. tax liabilities under the
Code (including but not limited to income tax (including tax
imposed under Code section 511) and employment tax), together with
all interest and penalties, accruing or arising during the first
three years of the transition period with respect to all
Scientology-related entities. This guaranty is for the sole benefit
of the Service and is for purposes of collection of the tax. The
specific Scientology-related entity that is allegedly liable for
the tax may contest the liability as permitted under the Code and
regulations, and any final adjudication thereof, after exhaustion
of all appeals, shall be binding and conclusive on the CTCC. If the
liability is assessed against the specific Scientology-related
entity without judicial review, the CTCC may dispute the underlying
liability in any suit by the Service under paragraph A.3.d.ii. of
this section IV. to collect on the guaranty. In addition, the
guaranty shall not be operative to the extent that the
Scientology-related entity satisfies the underlying liability or is
successful in disputing the fact or amount of such liability.
ii. Procedure for collection. At the time such liability is due
and owing (i.e., the Scientology-related entity has exhausted its
remedies), the Service may, at its sole option, present the CTCC
with a notice substantially in the form of a Revenue Agent's Report
detailing the unpaid tax, interest and penalty. The CTCC shall have
180 days from such notice to make the payment, with interest, or to
arrange for installment payments, with interest, to be made over a
period not to exceed three years, which will provide the Service
the present value of the liability. If no payment (and no
arrangement for installment payments) is timely made, the Service
may enforce the guaranty provisions of this Agreement.
iii. Term of guaranty. This guaranty will apply only to tax
liabilities of Scientology-related entities for taxable years 1993
through 1995. The Service must present the CTCC with notice for
payment in accordance with subparagraph ii., no more than two years
following its receipt of the CTCC's report under paragraph A.3.a
for the year 1997 or be forever barred from collecting on this
guaranty. For purposes of this subparagraph d.iii, the notice under
subparagraph d.ii may be given the CTCC prior to such time as the
Scientology-related entity has exhausted its judicial remedies.
iv. Example. A Class V church is determined by the Service to have
engaged in an activity giving rise to unrelated business taxable
income. The Class V Church disputes that the activity was a trade
or business and the Class V Church brings suit in Tax Court. The
Tax Court upholds the Service's position and the decision becomes
final (including completion of appeal thereof or expiration of the
time for bringing an appeal). At this time, the Service may collect
the UBIT along with any applicable interest or penalties, upon
notice, from the CTCC.
v. Certain events not impairing guaranty. Without in any way
limiting the generality of the absolute and unconditional guaranty
in paragraph A.3.d, the obligations of the Corporate CTCC members
under this Agreement shall not be affected or impaired by reason of
the happening from time to time of any of the following events with
respect to this Agreement, even if any such events happen without
the giving of notice to, or obtaining the consent of, the Corporate
CTCC member:
a. any compromise, settlement, release, renewal, extension,
indulgence, modification or termination of any or all of the
obligations, covenants or agreements of any Church signatory,
Scientology-related entity, or any Corporate CTCC member under this
Agreement, including but not limited to any modification or
amendment (whether material or otherwise) of any obligation,
covenant, or agreement set forth in this Agreement;
b. any waiver of the performance or observance by the Service or
any Church signatory or Scientology-related entity, as the case may
be, of any of the obligations, covenants, agreements, duties, terms
or conditions in this Agreement;
c. any extension of time for the filing of any tax return, payment
of all or any part of any U.S. tax liability or the extension of
the time for payment of any sums of money due under this Agreement
or of the time for performance of any obligation under or arising
out of this Agreement;
d. any change in the composition of the CTCC, whether by the
addition of any Individual, At-large or Corporate member, or the
substitution, admission, withdrawal or removal of any CTCC member;
e. any voluntary or involuntary liquidation, dissolution, merger,
sale or other disposition of all or substantially all of the
assets, marshaling of assets and liabilities, receivership,
insolvency, bankruptcy, assignment for the benefit of creditors,
reorganization, arrangement, composition, readjustment of debt, or
other similar proceeding affecting any Church signatory,
Scientology-related entity, any member of the CTCC or any of their
assets, any say of the enforcement by the Service of any remedies
against any Church signatory, Scientology-related entity or any
member of the CTCC, in connection with any of the foregoing;
f. the taking of any actions referred to in the Agreement or any
failure, omission, delay, or deficiency on the part of the Service
in enforcing, asserting or exercising any right, power, sanction or
remedy pursuant to the Code or this Agreement;
g. any release or discharge of any Church signatory,
Scientology-related entity, or CTCC member from the performance or
observance of any obligation, covenant, agreement, duty, term or
condition herein, respectively, by operation of law;
h. any merger, consolidation or sale, transfer, gift or other
disposition of assets by any Church signatory, Scientology-related
entity or CTCC member; or
i. any default or failure by any member of the CTCC fully to
perform the obligations, agreements, covenants, or duties under
this Agreement.
vi. No set-off. No set-off, counterclaim, reduction or diminution
of obligation, claim for refund, abatement, or any defense of any
kind or nature which any member of the CTCC has or may have against
the Service shall be available to any member of the CTCC against
the Service with respect to the guaranty set forth in this section
IV. paragraph A.3.d.
vii. Right to proceed directly against Corporate CTCC members. The
Service, in its sole discretion, shall have the right to proceed
first and directly against any one or all Corporate CTCC members
under this Agreement, without proceeding against or exhausting its
remedies against any other Corporate CTCC member of any other
Scientology-related entity.
viii. Agreement by CTCC not to diminish assets during transition
period. The CTCC agrees that it shall not allow the material
diminution of the assets of the Corporate members of the CTCC
during the transition period. Diminution of assets will be deemed
to be material to the extent that there has been in any year during
the transition period, the transfer, grant, contribution, loan,
payment for services, gift, voluntary or involuntary conversion,
exchange, sale or any other disposition of assets (including but
not limited to trademarks, copyrights, cash, securities, mortgages,
etc.) by one or more Corporate CTCC members within the taxable year
at issue resulting in the reduction in aggregate value, reflecting
the greater of cost or market, of ten-percent or more of the
aggregate total value (reflecting the greater of cost or market) of
all Corporate CTCC members as of the beginning of the taxable year
at issue. At no time during the transition period may the aggregate
value of gross assets of the Corporate CTCC members be reduced by
over fifty percent from the aggregate net value of their assets on
December 31, 1993 through the disposition of assets as defined in
this subparagraph. Transfers, etc., within the Corporate membership
of the CTCC shall be disregarded for purposes of determining
whether there has been a material diminution of assets, as will
transfers between a Corporate CTCC member and a party that is not
a Scientology-related entity for which the Corporate CTCC member
receives fair market value in exchange. The involuntary loss or
diminution in value of assets not attributable to the action or
conduct of any Scientology-related entity shall not be considered
in determining whether there has been a diminution of assets to
which this subparagraph applies.
ix. Discharge of guaranty. Upon a material breach by the Service
of any of its obligations under this Agreement, the guaranty under
this paragraph A.3.d. shall be null and void as to amounts not yet
collected, and no amounts may be collected that would otherwise
have been due under the guaranty prior to such material breach. For
purposes of this subparagraph, only the following actions will be
considered to be a material breach by the Service:
a. the filing of suit to collect sanctions under section VI. from
any corporate or individual CTCC member without engaging in
substantive discussion with the CTCC of the parties' respective
positions as required by paragraph H.3.a.iii of section VI;
b. the issuance of a Regulation, Revenue Ruling or other
pronouncement of general applicability providing that fixed
donations to a religious organization other than a church of
Scientology are fully deductible unless the Service has issued
previously or issues contemporaneously a similar pronouncement that
provides for consistent and uniform principles for determining the
deductibility of fixed donations for all churches including the
Church of Scientology;
c. the knowing, negligent or willfull disclosure of information
described in section V. paragraph A.4 of this Agreement in
violation of any provision of section 6103, to the extent such
disclosure is not the result of a good faith but erroneous
interpretation of section 6103; or
d. the knowing, negligent or willful failure to disseminate the
Church Fact Sheet as required by paragraph 5 of the Settlement
Agreement attached hereto as Exhibit IV-5; or
e. examining, assessing or seeking to collect any tax liability of
any Scientology-related entity for any taxable year ending before
January 1, 1993, unless the Service terminates such action and
refunds or credits any amounts collected within 90 days of notice
from the CTCC, or unless section IX, paragraph H. applies.
e. Liability for penalties. The CTCC shall be liable for the
penalties set forth in section VI. of this Agreement.
4. Actions of CTCC. David Miscavige will act as the initial
Chairman of the CTCC. He may be removed from this office and
replaced by another individual CTCC member by majority vote of the
CTCC members. The CTCC shall promptly notify the Service of any
change in the Chairmanship. The Chairman may act on behalf of the
CTCC, and bind the CTCC, except where a specific provision of this
Agreement requires the action of more than one CTCC member.
B. Financial Reporting Requirements.
1. Special Accounting Procedures.
a. In general. The special accounting procedures of this section
IV. paragraph B. apply to each corporate member of the CTCC,
CSFSSO, NEP, BPI, Church of Scientology Celebrity Centre
International, and to (i) any other Scientology-related entity
formed under the laws of, and operating primarily in, a country
other than the United States for any year in which such entity has
United States source gross receipts (including contributions) in
excess of $1,000,000 in value, and to (ii) any Scientology-related
entity formed under the laws of, and operating primarily in, the
United States for any year in which it has either (a) gross assets,
or (b) gross receipts in excess of $10,000,000 in value. The
entities with respect to which special accounting procedures apply
are collectively called the "reporting entities."
b. Special accounting procedures -- operational aspects.
i. Required procedures. The CTCC shall retain a qualified CPA
(defined below) to perform the agreed-upon procedures enumerated in
Exhibit IV-2 of this Agreement with respect to each of the
reporting entities. Following its performance of these procedures,
the qualified CPA so selected shall report to the CTCC and to the
Service in the form prescribed by the American Institute of
Certified Public Accountants for engagements to apply Agreed-Upon
Procedures (SAS No. 35, Special Reports -- Applying Agreed-upon
Procedures to Specified Elements, Accounts, or Items of a Financial
Statement) (hereinafter referred to as "Special Purpose Reports").
These Special Purpose Reports shall include a summary of any
exceptions the qualified CPA discovers through the agreed-upon
procedures.
ii. Foreign entities. To the extent that the particular reporting
entity is required under the laws of a foreign jurisdiction to have
certified financial statements or an accountant's review prepared
annually, those reports (converted to the English language and to
United States dollars) may, in general, be substituted for the
special purpose reports enumerated in Exhibit IV-2. However, the
special purpose reports relating to fundraising and overseas cash
flows must be performed for all reporting entities. In addition,
this section IV. paragraph B.1.b.ii. shall not apply unless: (a)
the financial statements are prepared by an accountant that
otherwise meets the definition of Qualified CPA under this
Agreement (or their equivalent under the laws of the foreign
jurisdiction in which the accountant is admitted to practice); (b)
the financial statements include a balance sheet, income statement
accountants' report, and accountants' notes to the financial
statements, (statements of cash flows and management letters shall
be included to the extent they are prepared); and, (c) the foreign
entity remains a reporting entity for purposes of special
procedures to be performed in connection with other reporting
entities.
c. CPA's reports--In general. The CTCC shall also deliver to the
Service two (2) copies of the special purpose reports and
management letter (described below) for all reporting entities for
each year during the Reporting Period. The Special Purpose Report
must state that the Special Purpose Report was conducted in
accordance with SAS no. 35, Special Reports--Applying Agreed-upon
Procedures to Specified Elements, Accounts, or Items of a Financial
Statement and this Agreement.
d. CTCC responsibilities. The CTCC shall cause all reporting
entities to fully and timely cooperate with the Qualified CPA in
the preparation and submission of the Special Purpose Reports.
e. Selection of a qualified CPA. The CTCC shall be responsible for
the selection of a qualified CPA that meets the requirements set
forth below. When selecting a CPA, the CTCC should consider, among
other matters:
i. The qualification of CPAs available to do the work;
ii. The CPA's experience in performing audits of churches and
other nonprofit organizations; and
iii. The CPA's ability to timely complete and submit the Special
Purpose Report.
f. Definition of a qualified CPA.
i. In general. For the first two taxable years to which this
section IV. paragraph B. applies (i.e., for calendar years 1993 and
1994), the CPA must be a Big Six firm or, in the alternative,
another firm agreed to by the Service. For the last taxable year to
which this paragraph B. applies (i.e., 1995), the CPA may be
designated by the CTCC, provided that the firm or CPA is (i) a
qualified CPA and (ii) is acceptable to the Service. The Service
consents to the designation of Richard D. Clark for the last year,
provided that, at that time, he otherwise meets the requirements of
being a qualified CPA.
ii. Requirements for qualified CPA. For purposes of this
Agreement, any CPA that meets the qualifications criteria of this
section IV. paragraph B.1.f. and enters into a Special Purpose
Report agreement with the CTCC, Corporate CTCC members and all
reporting entities, and that complies with the provisions of this
Agreement, will be considered a qualified CPA and acceptable to the
Service.
(a) Certification. The CPA must be a CPA in good standing in a
state or the District of Columbia. The CPA does not have to be
licensed by the state in which the Corporate CTCC members are
located; however, the CPA must abide by the rules and regulations
of professional conduct promulgated by the accountancy board of the
state in which the Corporate CTCC members are located.
(b) Practice before the Service. The CPA (or any accountant
working for such CPA who is participating in the required reporting
process under this Agreement) may not be, or have been, under
suspension from practice before the Service.
(c) Independence. The CPA must be independent. A CPA will be
considered independent if the CPA meets the standards for
independence contained in the AICPA Code of Professional Conduct in
effect at the time the CPA's independence is under review. In
addition, the CPA may not, at the time engaged (or at any time
prior to that time), be a Scientology-related individual, a
Scientology-related entity or a WISE sublicensee.
(d) Peer review requirement. The CPA must belong to and
participate in a peer review program, and must have undergone a
satisfactory peer review conducted by the AICPA's Division for CPA
Firms. After the initial peer review has been performed, the CPA
must submit to a peer review of the accounting and audit practice
every three years or at such additional times as designated by the
peer review executive committee.
g. CTCC's approval of selection. The CTCC's approval of a CPA must
be recorded in writing and state the following:
i. The CPA meets the Service's qualifications to perform the
Special Purpose Report required by this Agreement; and
ii. The CTCC, the Corporate CTCC members and all reporting
entities and CPA will enter into a Special Purpose Report agreement
in accordance with the provisions of this Agreement.
h. Notification of selection. When the selection of a CPA by the
CTCC has been made, the CTCC must notify the Service, in writing,
prior to the execution of the Special Purpose Report agreement (as
defined below) and in no event less than 90 days prior to the end
of the taxable year for which the change of CPA is effective. The
Service will notify the CTCC, in writing, within 30 days of the
date of receipt of such notice, if the selection of a CPA is not
satisfactory. A copy of the Special Purpose Report agreement, or
any amendment to such agreement, is to be provided to the Service
as soon as feasible after the execution thereof. One copy of the
current Special Purpose Report agreement must be maintained in the
CPA's workpapers or permanent file.
i. First qualified CPA. The Service has been notified that the
CTCC has selected Nanas, Stern, Biers, Neinstein and Co., 9454
Wilshire Boulevard, Beverly Hills, California, 90212 as its first
qualified CPA. The Service approves of such selection.
Notwithstanding paragraph h., the Special Purpose Report Agreement
with Nanas, Stern, Biers, Neinstein and Co. shall be provided to
the Service no later than with the First Annual Report due under
this Agreement.
j. Special Purpose Report agreement. The CTCC, Corporate CTCC
members and all reporting entities shall enter into a Special
Purpose Report agreement with the CPA that specifically complies
with all of the following:
i. The CTCC, Corporate CTCC members, all reporting entities and
CPA acknowledge that the agreed-upon procedures are being performed
and the Special Purpose Report is being issued in order to enable
the CTCC, the Corporate CTCC members and the reporting entities to
comply with the provisions of the Code and this Agreement.
ii. The CTCC, Corporate CTCC members and all reporting entities
acknowledge that this Agreement provides that if the CTCC fails to
have a Special Purpose Report performed and documented in
compliance with this Agreement, the CTCC and Corporate CTCC members
are in violation of the provisions of this Agreement.
iii. The CPA represents that he meets the requirements under this
Agreement satisfactory to the Service.
iv. The CPA will perform the agreed upon procedures in Exhibit
IV-1 and will prepare the Special Purpose Report in accordance with
the requirements of this Agreement.
v. The CPA will document the Special Purpose Report work performed
in accordance with the professional standards of the AICPA and the
requirements of this Agreement.
k. Special Purpose Report scope limitation. The CTCC, Corporate
CTCC members and reporting entities shall not limit the scope of
the Special Purpose Report, nor suffer or permit the Special
Purpose Report scope to be limited, to the extent that the CPA is
unable to meet the Service's Special Purpose Report requirements.
l. Access to Special Purpose Report-related documents. Pursuant to
the terms of the Special Purpose Report agreement, the CPA must (at
no charge to the Service):
i. retain all Special Purpose Report-related documents (including
but not limited to CPA's reports, workpapers, and management
letters) for a period of four years after the close of the taxable
year for which each Special Purpose Report was prepared; and
ii. following the Service's request of, and the consent by, the
CTCC,
(a) make all Special Purpose Report-related documents available to
the Service, and
(b) permit the Service to photocopy all Special Purpose
Report-related documents.
m. Required disclosures to CPA. Prior to commencing the agreed
upon procedures, the CTCC shall provide to the CPA a copy of all
Scientology scripture concerning finances and accounting (e.g. the
Treasury Division volumes) and any other written material relating
to or involving the handling of funds by Church personnel in effect
at that time. The CTCC also shall promptly provide to the CPA
copies of any newly-issued materials on these subjects or any
modification, amendment, or rescission of any existing material on
the subject. In addition, the CPA is to be given a copy of the
Agreement and any future amendments to the Agreement.
n. Submission of Special Purpose Reports. The Annual Report shall
include separate Special Purpose Reports for each reporting entity.
These Special Purpose Reports are for the use of only the CTCC and
the Service.
o. Submission of plan of corrective action. The CTCC shall submit
written comments to the Service on the exceptions and
recommendations in the Special Purpose Reports and shall also
submit to the Service: (i) a written plan for any corrective action
taken or planned; and, (ii) comments on the status of any
corrective action taken on previously reported exceptions and
recommendations.
2. Internal financial reports.
a. As part of the Annual Report, the CTCC shall deliver a copy of
the internally generated annual financial statements (either (i)
income and expense statement, balance sheet, and all notes to
financial statements or (ii) if such records are not generated in
the normal course of church operations, then the adjusted trial
balance and all adjusting journal entries) prepared for the
internal use of the particular entity or other Scientology-related
entity for the following entities.
Church of Scientology International
Religious Technology Center
Church of Spiritual Technology
Foundation Church of Scientology Flag Ship Service Organization
Church of Scientology Flag Service Organization, Inc.
Church of Scientology Western United States
Church of Scientology Religious Education College, Inc.
Church of Scientology Celebrity Centre International
Scientology Missions International
International Hubbard Ecclesiastical League of Pastors
Church of Scientology Religious Trust
Scientology International Reserves Trust
Flag Ship Trust
New Era Publications International ApS (including subsidiaries)
Bridge Publications, Inc.
Building Management Services
FSO Oklahoma Investments Corporation
World Institute of Scientology Enterprises
Church of Scientology Advanced Organization Saint Hill, Europe and
Africa (CS AOSH EU&AF)
Church of Scientology, Inc. (CS AOSH ANZO)
SOR Services (UK) Ltd.
SOR Services Ltd. (Cyprus)
Transcorp Services S.A.
San Donato Properties Corporation
In addition, internal annual financial statements as required
above are to be provided for any Scientology-related entity not
designated above (or in paragraph B.1.a. above) for any year in
which it has either (a) gross assets (based on the greater of cost
or fair market value) in excess of $15,000,000 in value, or (b)
gross receipts in excess of $15,000,000 in value.
b. As part of each Annual Report, the CTCC also shall include a
consolidation of the above internal reports in a master balance
sheet, and income and expense statement prepared in the same manner
as the consolidated financial data submitted with the Qualified
Written Materials. These consolidations are to be done in
accordance with reasonable accounting practices and consistently
year to year. The Annual Report also shall include a separate
consolidated balance sheet for the corporate CTCC members.
Consolidating adjustments shall include, but are not limited to,
liabilities and corresponding receivables between Corporate members
of the CTCC. The nature of consolidating adjustments will be
explained in the Annual Report. All amounts shall be reported in
United States dollars.
c. As part of each Annual Report, the CTCC also shall include
copies of audited financial statements (in the English language and
U.S. dollars) for the International Association of Scientologists,
Foundation International Membership Services Administrations,
Membership Services Administration (U.K.), Ltd., and the U.S. IAS
Members' Trust.
3. Report on central reserves transactions and balances. As part
of the Annual Report, the CTCC shall deliver to the Service a
summary of central reserves transactions containing information in
similar format to the summary information that was provided as part
of the Qualified Written Material, with the exception that the
information included in the Annual Report need not contain a list
of reserves transfers to non-reserves accounts of the same
Scientology-related entity. In this regard, for each year that this
subparagraph applies, the Annual Report should contain a list of
all expenditures (as described below) that have been made from the
Church's central reserves system as described in the Qualified
Written Material, or from the central reserves account of one
Scientology-related entity into the central reserves account of
another such entity. The list should include (i) the date of the
expenditure, (ii) to whom the payment was made, (iii) by whom the
payment was received, (iv) the purpose of the expenditure, and
whether, and if so, why, in the opinion of the CTCC, this transfer
furthers Code section 501(c) (3) purposes. For this purpose, the
term "expenditure" includes, but is not limited to, grants,
purchases, transfers, loans or repayments of loans, or other
expenditures of assets under the control of the central reserves
committee. In addition, the Annual Report shall include a beginning
balance and a year-end balance showing the amount of cash and other
assets in the Central Reserves.
4. Tax returns. As part of the Annual Report, the CTCC shall
provide a copy of each United States tax return (including
information returns) and all United States tax forms filed by any
Scientology-related entity. These returns may not be included in
the Annual Report in electronic form unless agreed to by the
parties. Forms W-2, 1099, 940, 941 and 941E need not be submitted
under this paragraph. The Annual Report shall also include copies
of the annual update on the group exemptions required by Rev. Proc.
80-27, 1980-1 C.B. 677 and Treas. Reg. Section 601.201(n) (8).
5. Term. Reporting under this section IV. paragraph B. is required
for three taxable years, beginning with the 1993 Annual Report.
C. Fiduciary Reporting Requirements.
1. Compensation information. For each calendar year in issue, the
Annual Report shall contain the following information with respect
to compensation paid certain individuals by Scientology-related
entities:
a. The names and total compensation (as more fully described
below) paid to each of the twenty natural persons with the highest
amount of compensation during the calendar year in issue. For
purposes of determining the highest paid individuals, the
compensation of an individual includes amounts received from
Scientology-related entities by the spouse of that individual.
Where a spouse has such compensation, the spouse's name and the
nature and amount of the compensation are to be separately listed.
To determine those individuals for whom this paragraph requires
disclosure, all compensation from all Scientology-related entities
is to be aggregated. A husband and wife are to be treated as a
single entry on this list (i.e., not as two highly paid
individuals). In addition, any individual who is included in the
list required in paragraph C.1.b. below is not to be included in
this list.
b. The total compensation paid to each Individual CTCC member, as
well as natural persons serving on the CTCC in a representative or
At-Large capacity, and to (i) each such person's spouse, (ii)
siblings of each such individual CTCC member (including
compensation of each sibling's spouse), (iii) with respect to
Individual CTCC members, each Individual CTCC member's parents, and
(iv) with respect to Individual CTCC members, each Individual
member's children. The Annual report shall separately list the name
and compensation of each such family member.
c. The Annual Report also shall include (i) copies of Forms W-2
and 1099 for each natural person listed whose compensation must be
reported under paragraphs C.1.a. or C.1.b. and (ii) a description
of any relationship (direct or indirect) between any
Scientology-related entity and a natural person whose compensation
must be reported under paragraphs C.1.a. or C.1.b. in which
anything of value is exchanged. Thus, for example, if an individual
or any member of that individual's family is a shareholder or holds
another ownership interest in an entity that does business, or
receives anything of value from any Scientology-related entity, the
existence of such relationship and the facts relating to it are
required to be disclosed in the Annual report. Under subparagraph
(ii) of this paragraph c., reporting is not required if the stock
or ownership interest is less than five percent.
d. For purposes of the Annual Report, the term "compensation"
includes anything of value provided (directly or otherwise) by, or
attributable to, any Scientology-related entity. Whether an item is
considered "compensation" is determined without regard to whether
that item of value is includible in the individual's gross income
for purposes of reporting or taxation. "Compensation" includes, but
is not limited to, the following: (i) wages or salary (including
any bonus or overtime pay); (ii) other payments (as an independent
contractor, provider of goods or services, or otherwise), including
but not limited to any interest, dividend or other corporate
distribution; (iii) gross commissions; (iv) the value of any
deferred compensation (qualified or non-qualified and valued
without regard to any risk of forfeiture, vesting or other
restriction); (v) the value of any beneficial interest in any trust
attributable in any fashion to contributions made by or on behalf
of any Scientology-related entity (valued without regard to any
risk of forfeiture, vesting or other restrictions); (vi) any fringe
benefit (other than de minimis fringes excludible under sections
132 (a) (4) and 132 (e) of the Code; (vii) the highest balance of
any loan or loans outstanding from any Scientology-related entity
to the individual at any time during the year in question; (viii)
any personage or rental allowance; and, (ix) the amount of any
reimbursed expenses (business or otherwise). For the purposes of
(ix), compensation from this source may be ignored if the
individual received in the aggregate less than $10,000 for all
reimbursements in the year.
To the extent compensation is provided in a form other than wages
or salary, such compensation is to be listed separately with a
short description of which category it falls within. If a fair
market value is not available, the type of compensation should be
listed along with an explanation that will be helpful to understand
its nature and possible worth.
Finally, if compensation is received from more than one
Scientology-related entity, compensation should be listed
separately for each such entity.
2. Modifications of organizational documents. The Annual Report
shall describe any amendment or other change in any organizational
document of any of the following organizations: (i) any
organization whose tax-exempt status is recognized under this
Agreement, other than subordinate entities under the group
exemptions provided in section III. paragraph C.; (ii) those
entities described in paragraph B.2 or D.2, below. For purposes of
this paragraph, an organizational document includes any document
that is necessary for inclusion in a Form 1023. Thus, articles of
incorporation, articles of association, constitution, bylaws, trust
instrument or indenture or similar document, including any board or
trustee resolution interpreting such document are organizational
documents.
3. Reporting of any dividend payment with respect to any entity.
The Annual Report shall disclose any dividend or other distribution
with respect to its stock (including, but not limited to any
distribution in liquidation or reorganization of the company) paid
during the year by any Scientology-related entity formed as a
company or corporation. This report will include the facts
surrounding the distribution. Reporting under this paragraph shall
also occur if a payment is made in the nature of a dividend or a
return of capital by any other Scientology-related entity (e.g., a
partnership distribution).
4. Reporting of any ownership change with respect to any entity.
The Annual Report shall disclose any change in ownership or control
of any Scientology-related entity. Thus, if such entity is a stock
company or trust, any changes in the legal or beneficial ownership
of the stock or trust must be reported. With respect to trusts,
nonstock or nonprofit organizations, any change in the ability to
any other entity or individual to appoint the board or trustees
must be reported.
5. Reporting on creation of new entities. The Annual Report shall
include an update disclosing the existence of any entity meeting
the definition of Scientology-related entity that has not been
previously disclose to the Service. The report must include, for
example, every new entity formed after December 31 of the prior
taxable year (or with respect to the first Annual Report, after
November 1, 1992) other than a subordinate entity included under
one of the group exemptions provided in section III. paragraph C.
The following information must be included for purposes of
disclosure in the Annual Report: (i) name and address; (ii)
employer identification number, if applicable; (iii) the nature of
its purposes and activities; (iv) the officers, trustees and/or
directors of the entity; (v) a balance sheet as of the end of the
taxable year; (vi) an income and expense statement as of the end of
the taxable year; (vii) the ownership of the entity; (viii) the
relationship of the entity to any other Scientology-related entity,
and, (ix) an explanation of whether, and to what extent, the new
entity or any of its operations has, or may have, an effect on the
tax-exempt status of any other Scientology-related entity, or, in
the alternative, the specific reasons the CTCC believes that the
creation and operation of the new entity have no such effect.
6. Reporting of any ecclesiastical modification or the
restructuring of any entity. The Annual Report shall include any
changes to the ownership (e.g., corporate organization) of any
Scientology-related entity or to the ecclesiastical management
structure of the Church, including, but not limited to, any changes
in the structure outlined in the booklet entitled "The Command
Channels of Scientology" as submitted in the Qualified Written
Material. Changes in the personnel who hold positions within the
ecclesiastical structure need not be included within the report
required under this paragraph, other than those who serve on the
CTCC.
7. Reporting of certain asset transfers and expenditures.
a. The Annual Report shall disclose the transfer, grant,
contribution, loan, payment for services, gift, voluntary or
involuntary conversion, exchange, sale or any other disposition of
assets (hereinafter an "expenditure") by one Scientology-related
entity to another Scientology-related entity within the taxable
year at issue, if the transfer involved assets (including
trademarks, copyrights, cash, securities, mortgages, etc.) with an
aggregate value, reflecting the greater of cost or market, of
$1,000,000 or more.
b. The Annual Report shall contain the fact of and the steps taken
to ensure expenditure responsibility with respect to a specific
expenditure if that expenditure is made by one or more
Scientology-related entities recognized as tax-exempt under section
III of this Agreement to a noncharitable beneficiary and if, in any
single taxable year, such payments to the specific noncharitable
recipient exceed $25,000. For purposes of this paragraph, the term
expenditures does not include a transaction with a person other
than a Scientology-related entity or a Scientology-related
individual for which fair market value is received in return.
c. The Annual Report disclosure required under section IV.
paragraph C.7.a. and C.7.b. is to contain the following
information: (i) the name and address of both transferor and
transferee; (ii) the amount and nature of the assets transferred;
(iii) the purpose of the transfer; and, (iv) whether, and if so,
why, in the opinion of the CTCC, this transfer furthers Code
section 501(c)(3) purposes.
d. Reserves transaction reported under paragraph B.3. need not be
reported again under this paragraph C.7.
8. Reporting of certain asset transfers that diminish the assets
of the corporate members of the CTCC. The Annual Report shall
disclose the transfer, grant, contribution, loan, payment for
services, gift, voluntary or involuntary conversion, exchange, sale
or any other disposition of assets by one or more Corporate CTCC
members where within the calendar year at issue, the transfer
involved assets (including but not limited to trademarks,
copyrights, cash, securities, mortgages, etc.) with an aggregate
value of ten-percent or more of the aggregate total value
(reflecting the greater of cost or market) of all Corporate CTCC
members as of the beginning of the taxable year at issue. The
report is to contain the following information: (i) the name and
address of both transferor and transferee; (ii) the amount and
nature of the assets transferred; (iii) the purpose of the
transfer; and, (iv) whether, and if so, why, in the opinion of the
CTCC, this transfer furthers Code section 501(c)(3) purposes.
Transfers, etc. within the Corporate membership of the CTCC shall
be disregarded for reporting purposes under this paragraph C.8.
9. Reporting of any amendment of any directive concerning the
treatment of funds. The Annual Report shall disclose the issuance,
modification, amendment, or rescission of any written material
relating to or involving the handling of funds by Church personnel.
The Annual Report also shall include copies of relevant materials
and an explanation of the reasons for change. Under this paragraph,
disclosure is required with respect to all directives, including
but not limited to HCO Policy Letters, Executive Directives and
similar items. Thus, for example, disclosure under this paragraph
would be required in the event of any modification to the book
entitled Treasury Division, Volume 3 of the Organization Executive
Course (by L. Ron Hubbard).
10. Activity or inaction in contravention of this Agreement. The
CTCC shall use its best efforts to include with the Annual Report
information relating to any action or inaction by any
Scientology-related entity or individual that occurred during the
year that is in contravention of, or inconsistent with, any
provision of the Code, Treasury regulations or this Agreement,
including the recognition of exemption for certain entities
contained in section III. paragraphs B. and C. and the
certifications contained in section IV. paragraph D. Information
disclosed under this paragraph shall include an explanation of the
action or inaction involved, the name of the individual or entities
involved, the date of the act or inaction, and whether, and to what
extent, the CTCC has investigated, including any findings and any
actual or planned corrective action with respect thereto.
11. Update on operational modifications. The Annual Report is also
to contain an update on the operational modifications that are
required to be undertaken under section IV. paragraph E.
12. Education and training issues under Code section 170. The
Annual Report shall disclose any modifications to the training side
of the "Scientology Classification, Gradation and Awareness Chart".
Such disclosure shall contain sufficient information to enable the
Service to determine whether the new or modified training courses
should be afforded the same treatment as that set forth in section
VII., paragraph B.
13. Term of fiduciary reporting under section IV.c. The term of
the fiduciary reporting required under this paragraph C. is three
taxable years, beginning with 1993.
D. Certifications.
1. In general. by executing this Agreement, the Church signatories
in their trust or corporate capacities, and their subscribing
officers or trustees individually, certify under penalty of perjury
the following to the best of their knowledge, information and
belief:
a. that all Scientology-related entities are in compliance with
the Code, Treasury regulations and other Service pronouncements of
general guidance and applicability;
b. that the Church signatories and CTCC will use their best
efforts to educate Scientology parishioners as to the
nondeductibilty of donations to foreign organizations and the
provisions of section VII. paragraph B.;
c. that no Scientology-related entity or Scientology-related
individual (in his or her capacity as such) has, after 1986,
knowingly committed any act of fraud or criminal conduct that might
constitute a violation of public policy endangering the tax-exempt
status of any Scientology-related entity (assuming for the limited
purpose of this paragraph that all Scientology-related entities are
otherwise described in Code section 501(c)(3)); and
d. that all Qualified Written Material submitted in connection
with this Agreement was correct and truthful as of the date
submitted through the date of signature of this Agreement, as
supplemented by the Forms 1023 filed in August and September 1993.
2. Section 501(c)(3). The Annual Report shall include a
certification to the Service from CTCC members, in their Corporate,
At-large, or Individual status, that Scientology-related entities
recognized as described in Code section 501(c)(3) under section
III, paragraphs B. or C. will operate in conformity with Code
section 501(c)(3) and the regulations thereunder and that other
Scientology-related entities will operate in a manner that does not
jeopardize the tax-exempt status of any Scientology-related entity
so recognized. Specifically, but not by way of limitation, such
certification shall include the following Scientology-related
entities: Church of Scientology Religious Education College Inc.,
Church of Scientology Advanced Organization Saint Hill Europe and
Africa, Church of Scientology, Inc. (Advanced Organization Saint
Hill Australia, New Zealand and Oceania), RTC Australia, San Donato
Properties Corporation, Transcorp Services, S.A., MCL Services,
N.V., Media Storage, Inc, Mile High, Inc., Galaxy Productions,
Inc., Mastertech, Inc., Nesta Investments, Ltd., and FSO Oklahoma
Investments Corporation.
3. Continuing certifications. The CTCC must certify in the Annual
Report that the certifications described in this paragraph D.
continue to be correct, to the best of their knowledge and belief.
Such certification shall be substantially in the form of Exhibit
IV-3 hereto. In addition, the CTCC must certify as part of the
Annual Report that nothing has occurred that would significantly
impair (directly or indirectly) the efficacy of the guaranty
contained in section IV. paragraph A.3.d.
E. Operational modifications. The Church signatories and the CTCC
will assure the following:
1. All payments or tithes for ecclesiastical management services
to Scientology-related entities, including but not limited to
parishioner contributions in connection with the ministry of
religious services, payments or tithes for purchase of religious
materials, payments or tithes for ecclesiastical management
services, and transfers to reserve entities, are to be invoiced by
the Scientology-related entity actually intended to perform the
services and that receives such payment or tithe, irrespective of
whether such payments or tithes are initially deposited into the
performing entity's bank account.
2. Deposit of Funds.
a. U.S. dollar-denominated checks drawn on U.S. banks and credit
card advices payable to Scientology-related entities for serves or
goods to be provided within the United States shall first be
deposited within the United States.
b. Checks and credit card advices payable to Scientology-related
entities in currencies other than U.S. dollars may be couriered
overseas prior to deposit, provided that there are in place
appropriate financial controls to ensure the processing, handling
and tracing of such deposits to the account of the
Scientology-related organization to which such payment is drawn.
c. To the extent U.S. dollar-denominated checks drawn on non-U.S.
banks payable to Scientology-related entities for services or goods
to be provided within the United States are physically received
outside the United States, they may be first deposited outside the
United States. To the extent such payments are physically received
inside the United States they may be couriered overseas prior to
deposit, provided that there are in place appropriate financial
controls to ensure the processing, handling and tracing of such
deposits to the account of the Scientology-related organization to
which such payment is drawn.
d. U.S. dollar-denominated checks and credit card advices payable
to Scientology-related entities for goods and services provided
outside the United States may be deposited outside of the United
States.
e. Any other funds of a Scientology-related entity received from
sources within the United States may be couriered overseas for
deposit only if, and only to the extent, there are in place
appropriate financial controls to ensure the processing, handling
and tracing to such deposits to the account of the
Scientology-related organization to which such payment is drawn.
3. Management and accounting procedures (whose material provisions
are attached to this Agreement as Exhibit IV-3) are to be
implemented to assure that all commissions or similar payments from
Scientology-related entities to individual fundraisers are properly
reported to the Service by the payor, and that contributions
collected by individual fundraisers are not commingled with other
funds held by such individual. Further, no payments from one
Scientology-related entity shall be made to another such entity by
way of being made to an individual , whether that individual is an
agent of either Scientology-related entity or otherwise.
4. As of the date of this Agreement, parishioner advance donations
to CSFSO and CSWUS shall no longer be transferred to United States
Parishioners Trust and/or the Trust for Scientologists. Nor shall
USPT or TFS receive any such payments directly from parishioners.
5. United States Parishioners Trust and the Trust for
Scientologists shall be dissolved as soon as practicable consistent
with the terms of their respective trust instruments. The assets
(including mortgages) contained in such trusts as of the date of
this Agreement shall, along with earnings thereon, be transferred
to one or more corporate members of the CTCC in accordance with
their documents of dissolution, except that the ship mortgage on
the M/V Freewinds presently held by the Trust for Scientologists
may be distributed to Flag Ship Trust. Documents to effectuate the
dissolution are attached as Exhibit IV-4. Dissolution shall be
completed within 12 months of the date of this Agreement.
6. Norman F. Starkey, as Trustee of Author's Family Trust B,
shall, no later than December 31, 1993, effectuate the transfer of
substantially all of the corpus and income in Author's Family Trust
B, including all the shares of Author Services, Inc. ("ASI") as
permitted under the will of L. Ron Hubbard to the Church of
Spiritual Technology ("CST") without consideration. Mr. Starkey, as
trustee, may retain sufficient cash and securities to cover any
remaining actual or contingent liabilities of the Trust until those
liabilities have been resolved or satisfied. The members of the
CTCC shall use their best efforts to assure that such transfer is
accomplished.
7. The members of the CTCC shall use their best efforts to
effectuate, by no later than December 31, 1993, the dissolution of
Theta Management Limited. All property and functions of Theta will
be transferred without consideration to IASA.
8. The members of the CTCC shall, no later than December 31, 1993,
effectuate the dissolution of the Church of Scientology Freewinds
Relay Office, Inc., FSS Organization N.V., and majestic Cruise
Lines, Inc., and the transfer of all of their assets and functions
to the Foundation Church of Scientology Flag Ship Service
Organization.
9. The members of the CTCC shall, no later than December 31, 1993,
effectuate the dissolution of International Publications Trust. The
shares of New Era Publications International, ApS shall be
transferred without consideration to Church of Scientology
International.
10. The members of the CTCC shall, no later than December 31,
1995, effectuate the dissolution of WISE, Inc. and the transfer of
all of its assets, including but not limited to its rights to the
Scientology religious marks, to the Inspector General Network.
F. Treatment of Information Exchanges.
1. All information provided by the CTCC under this section IV.
shall constitute return information for purposes of Code section
6103. No information constituting Code section 6103 information,
separately or collectively, shall constitute a return or other
information for purposes of Code section 6104 (a)(1)(A) and 6104
(b).
2. The Service may seek further information regarding the
application of any provision of the Code, this Agreement or the
Settlement Agreement attached as Exhibit IV-5, to any
Scientology-related entity (whether or not such inquiry is raised
by reason of information contained in the Annual Report) from the
CTCC. Because the Service is obtaining information from the CTCC,
as opposed to one or more churches, the provisions of Code section
7611 do not apply. However, if at any time the CTCC believes that
the Service is seeking information that should be obtained under
the provisions of Code section 7611, then the CTCC shall so notify
the Service, in writing, of its views and unless the pending
request for additional information from the Service otherwise meets
the definition of routine request or other exception under Code
section 7611 and the regulations thereunder, the provisions of that
section shall apply as of the date the Service contacts the
specific taxpayer involved.
3. The Annual Report or other information request under this
Agreement including follow-up questions under paragraph F.2., or
any other contacts with the CTCC do not constitute an examination
under Code section 7611 or an inquiry or examination under any
other section of the Code (including sections 7602 and 7605),
unless such contact is either (i) designated by the Service
specifically as a Church Tax Inquiry letter under section 7611 or
a notice of examination under section 7602, or (ii) the CTCC
notifies the Service that it considers the contact to be subject to
section 7611 or section 7602.
V. Treatment of the Code Section 6104 Public Inspection File and
Certain Other Materials.
A. Code section 6104 Public Inspection File.
1. The Code section 6104 public inspection file for Church of
Scientology International shall include a Form 1023 with
information and financial data for taxable years 1989, 1990, and
1991. In addition, the Code section 6104 public inspection file for
CSI shall include agreed upon portions of the Qualified Written
Material. These documents and the resulting determination letter
shall be the only materials considered as the application,
supporting papers and determination information described in Code
section 6104(a)(1)(A) with respect to Church of Scientology
International.
2. The Code section 6104 public inspection file of each
Scientology-related entity (other than Church of Scientology
International) to be recognized as exempt under section III.
paragraph B. hereof shall include the individual Form 1023 with
information and financial data for taxable years 1989, 1990, and
1991, previously submitted by the Church. With respect to the
parent Scientology-related entities listed in section III.
paragraph C., the Code section 6104 public inspection file shall
include a group exemption request with information for taxable
years 1989, 1990, and 1991, as previously submitted by the Church.
Each such application shall incorporate by cross-reference the
application and Code section 6104 public inspection file of Church
of Scientology International as described in paragraph A.1. These
documents, including Church of Scientology International's Code
section 6104 public inspection file incorporated by reference and
the resulting determination and ruling letters, shall be the only
materials considered as the application, supporting papers and
determination information described in Code section 6104(a)(1)(A)
for each remaining Scientology-related entity to be recognized as
exempt pursuant to this Agreement.
3. The Service shall close without action exemption determination
applications by the following Scientology-related entities:
Religious Technology Center ("RTC")
Church of Scientology International ("CSI")
International Hubbard Ecclesiastical League of Pastors ("IHELP")
The Way to Happiness Foundation ("TWTH")
Association for Better Living and Education ("ABLE")
Church of Scientology Celebrity Centre Dallas
Church of Scientology of Georgia
Church of Scientology Mission of New Jersey
RTC, CSI, IHELP, TWTH and ABLE submitted revised and updated Forms
1023 and are being recognized as exempt under paragraph B. of
section III. of this Agreement. The remaining three entities are
being recognized as subordinate entities under group exemptions
being recognized under paragraph C. of section III. of this
Agreement.
4. All information submitted in connection with the closed
applications as described in paragraph A.3., and all information
submitted in connection with this Agreement other than that listed
in paragraph A.1. and A.2., including but not limited to (i) all
Qualified Written Material information not specifically included as
part of the Code section 6104 public inspection file of Church of
Scientology International pursuant to paragraph A.1., and (ii) this
Agreement itself, shall be considered to be return information
described in Code section 6103(b)(2).
B. Disclosure of Information by the Service.
1. The Service shall maintain the information described in section
V. paragraph A.4. of this Agreement in the office of the Assistant
Commissioner and shall disseminate such information within the
Service only to the extent the Assistant Commissioner determines it
necessary for the administration of the Code (including actions
taken in administering this Agreement).
2. The Service shall not disclose any information described in
section V. paragraph A.4. of this Agreement, including but not
limited to this Agreement itself, to any third party other than as
permitted under Code section 6103 or otherwise as permitted under
applicable law or under this Agreement.
3. The Service agrees to use its best efforts to notify the CTCC
of any litigation against the Service by a third party to compel
production of information described in section V. paragraph A.4. of
this Agreement.
C. Disclosure of Information by the CTCC.
1. The CTCC may use information described in section V. paragraph
A.4. only to the extent necessary to carry out its obligations
hereunder to inform Church parishioners of the provisions of
section VII of this Agreement.
2. The CTCC may use information described in section V. paragraph
A.4. only to the extent it determines it is necessary in connection
with any tax matter by any state or local governmental body in the
United States or by any foreign governmental body. To minimize the
extent of such disclosure, the Service agrees to certify the effect
of relevant provisions of this Agreement to any other governmental
taxing authority upon request by the CTCC and following
consultation with the CTCC concerning the text of such
certification. This paragraph C.2. of this section V in no way
limits the obligations or discretion of the Service with the
respect to governmental taxing authorities under section 6103.
3. The CTCC shall not produce information described in section V.
paragraph A.4. of this Agreement, including but not limited to this
Agreement itself, except to the extent allowed under this section
V. It is the specific intent of the Parties that such materials,
including but not limited to this Agreement itself, shall not be
the subject of discovery in any civil litigation between a third
party and any Scientology-related entity or individual, and the
CTCC agrees not to produce such information in such circumstances
except to the extent disclosure is compelled by a court of
competent jurisdiction after exhaustion of all available judicial
review. The parties agree that the provisions of this paragraph C.
of this section V. are the result of shared concerns regarding
confidentiality. Except in carrying out the provisions of paragraph
C. of this section V., the CTCC agrees not to assert or otherwise
publicly characterize this Agreement in a manner that would
indicate that the Service has required that information under this
Agreement be kept confidential.
D. Proceeding Under Agreement. Notwithstanding any other paragraph
of this section V, information described in section V. paragraph
A.4. of this Agreement may be disclosed in any proceeding to
construe or enforce any provision of this Agreement or in any
proceeding relating to the federal tax liability of any
Scientology-related entity. In the event disclosure becomes
necessary under this paragraph D., the parties agree to use their
best efforts to file all information described in section V.
paragraph A.4. under seal so that it does not become part of the
public judicial or administrative record.
E. Disclosure Following Inquiries. The CTCC agrees that the
Service, in response to inquiries, may characterize the information
in the section 6104 public inspection files and may acknowledge the
existence of an agreement that has settled a variety of
longstanding issues between the Church and the Service, including
exemptions from tax as well as a variety of outstanding tax and
litigation matters. In addition, in response to such inquiries, the
Service may disclose that there is a Closing Agreement concerning
the nature and extent of permissible disclosure by the Service in
light of the requirements of Code section 6103 and acknowledge the
existence and extent of tax information authorizations submitted
pursuant to this Agreement and the Settlement Agreement.
F. Correction of Misstatements. Either the Service or the CTCC may
disclose information described in section V. paragraph A.4. of this
Agreement in the event of a misstatement of fact or
mischaracterization published or disclosed about the contents of,
the effects of, or reasons for, this Agreement or matters related
thereto. Information described in section V. paragraph A.4. may be
disclosed for this purpose only to the extent necessary to correct
the misstatement or mischaracterization and only if the Assistant
Commissioner and the CTCC have consulted prior to such disclosure.
G. Term of Undertaking. Paragraph A. of this section V. applies as
long as the Service retains any of the information described in
paragraph A. The remaining paragraphs of this section V. apply only
through December 31, 1999.
VI. Penalty Provisions During Transition Period and Other
Procedural Matters.
A. Introduction: Purpose and Scope of Sanctions.
This section VI sets forth sanctions to provide assurance to the
Service that the Church Tax Compliance Committee will ensure that
all Scientology-related entities will operate in a manner
consistent with Code section 501(c)(3) and will carry out specified
obligations under this Agreement during the transition period. The
provisions of this section are in addition to, and not in lieu of,
any other enforcement measures available to the Service under this
Agreement, the Code, at law or in equity. Thus, notwithstanding any
provisions of this section or this Agreement in its entirety, the
Service may question its recognition or exemption of any
Scientology-related entity for any taxable year subsequent to 1992
(and for previous years if this Agreement is not final by reason of
section IX. paragraph H.) or take any other action permitted under
the Code, without regard to whether the Service has asserted
(successfully or otherwise) any penalty under this section VI.
Nevertheless, it is intended that the consensual sanctions set
forth in this section are to provide the Service with intermediate
sanctions for activities or conduct not in accordance with the
provisions of Code section 501(c)(3) for which revocation of
recognition of exemption may be too harsh or otherwise
inappropriate as a sanction, and that the Service will notify and
consult with the CTCC prior to pursuing any sanctions under this
Agreement.
B. Self-Dealing Transactions.
1. First-tier penalties.
a. On Individual CTCC member who is a self-dealer or who is
related to a self-dealer. Under this Agreement, there is a penalty
imposed on each knowing act of self-dealing between a disqualified
person and a Scientology-related entity. The penalty shall equal 5
percent of the amount involved with respect to the act of
self-dealing for each taxable year (or part thereof) in the
sanction period (defined below). The penalty imposed by this
paragraph shall be paid by each Individual CTCC member: (i) who is
the disqualified person who engaged in such act of self-dealing; or
(ii) who is related (as described in section VIII. paragraph N.2.
through 9., including the attribution rules contained therein) to
any person that participates in the act of self-dealing. No penalty
shall be due under this paragraph B.1.a. if and to the extent that
an act of self-dealing has been corrected within the correction
period.
b. On Individual CTCC members with knowledge of transaction. In
any case in which a penalty is imposed by section VI. paragraph
B.1.a., there is an additional penalty imposed on the participation
of any Individual CTCC member in an act of self-dealing between any
disqualified person and a Scientology-related entity, knowing that
it is such an act, equal to 2 1/2 percent of the amount involved
with respect to the act of self-dealing for each taxable year (or
part thereof) in the sanction period, unless such participation is
not willful and is due to reasonable cause. The penalty imposed by
this paragraph shall be paid by any Individual CTCC member who
participated in the act of self-dealing. No penalty shall be due
under this paragraph B.1.b. if and to the extent that an act of
self-dealing has been corrected within the correction period.
2. Second-tier penalties.
a. On Individual CTCC member who is a self-dealer or who is
related to a self-dealer. In any case in which a first tier penalty
is imposed by section VI. paragraph B.1. on an act of self-dealing
by a disqualified person with a Scientology-related entity and the
act is not corrected within the sanction period, there is hereby
imposed a penalty equal to 200 percent of the amount involved. The
penalty imposed by this paragraph shall be paid by each Individual
CTCC member: (i) who is the disqualified person who engaged in such
act of self-dealing; or (ii) who is related (as described in
section VIII. paragraph N.2 through 9., including the attribution
rules contained therein) to any person that participates in the act
of self-dealing. No penalty shall be due under this paragraph
B.2.a. if and to the extent that an act of self-dealing has been
corrected within the correction period.
b. On Individual CTCC member refusing to correct.
i. In any case in which a second tier penalty is imposed under
section VI. paragraph B.2.a., if any Individual CTCC member refuses
to agree to part or all of the correction, a penalty is imposed
equal to 50 percent of the amount involved. The penalty imposed by
this paragraph shall be paid by each Individual CTCC member who
refused to agree to part or all of the correction.
ii. In addition, in the event that correction does not occur by
reason of any officer or director of any Scientology-related entity
refusing to agree to part or all of the correction, there is a
penalty equal to 50 percent of the amount involved. The penalty
imposed under this paragraph shall be paid by each Individual CTCC
member.
iii. No penalty shall be due under this paragraph B.2.b. if and to
the extent that an act of self-dealing has been corrected within
the correction period.
3. Self-dealing.
a. In general. For purposes of this section VI., the term
"self-dealing" means any direct or indirect:
i. sale or exchange, or leasing, of property between a
Scientology-related entity and a disqualified person;
ii. lending of money or other extension of credit between a
Scientology-related entity and a disqualified person;
iii. furnishing of goods, services, or facilities between a
Scientology-related entity and a disqualified person;
iv. payment of compensation (or payment or reimbursement of
expenses) by a Scientology-related entity to a disqualified person;
v. transfer to, or use by or for the benefit of, a disqualified
person of the income or assets of a Scientology-related entity; and
vi. payment by any Scientology-related entity of any penalty
imposed under this section VI. upon any Individual CTCC member.
b. Special rules. For purposes of section VI. paragraph B.3.a.--
i. the transfer of real or personal property by a disqualified
person to a Scientology-related entity shall be treated as a sale
or exchange if the property is subject to a mortgage or similar
lien which the Scientology-related entity assumes or if it is
subject to a mortgage or similar lien which a disqualified person
placed on the property within the 10-year period ending on the date
of the transfer;
ii. the lending of money by a disqualified person to a
Scientology-related entity shall not be an act of self-dealing if
the loan is without interest or other charge (determined without
regard to Code section 7872) and if the proceeds of the loan are
used exclusively for purposes specified in Code section 501(c) (3);
iii. the furnishing of goods, services, or facilities by a
disqualified person to a Scientology-related entity shall not be an
act of self-dealing if the furnishing is without charge and if the
goods, services, or facilities so furnished are used exclusively
for purposes specified in Code section 501(c) (3);
iv. the furnishing of goods, services, or facilities by a
Scientology-related entity to a disqualified persona shall not be
an act of self-dealing if such furnishing is made on a basis no
more favorable than that on which such goods, services, or
facilities are made available to the general public; and
v. the payment of compensation (and the payment of reimbursement
of expenses) by a Scientology-related entity to a disqualified
person for personal services which are reasonable and necessary to
carrying out the exempt purpose of Scientology-related entities
shall not be an act of self-dealing if the compensation (or payment
or reimbursement) is not excessive.
c. Exceptions. Notwithstanding section VI. paragraphs B.3.a. and
B.3.b., the following shall not be treated as an act of
self-dealing:
i. The provision to a disqualified person of goods, services and
facilities by a Scientology-related entity on the same basis as
generally provided to other members of the Sea Organization, with
commensurate adjustments for the ecclesiastical rank and
responsibilities of the disqualified person. The goods, services
and facilities described in this section VI. paragraph B.3.c.i.
include all benefits generally provided by Scientology-related
entities to members of the Sea Organization, including but not
limited to room and board, medical care, uniforms, child care and
education, use of corporate vehicles and ministry of religious
services.
ii. The provision of insurance coverage by any Scientology-related
entity to any disqualified person against a claim of misconduct in
his or her capacity as an executive of any Scientology-related
entity (but not including any penalty imposed under this section
VI. paragraph B. upon any Individual CTCC member), as well as
reasonable litigation costs and attorneys' fees incurred in
defending any such claim.
iii. The direct payment, without the use of insurance, by any
Scientology-related entity of a disqualified person's personal
liability arising from any claim of misconduct in his or her
capacity as an executive of any Scientology-related entity
(excluding a penalty imposed under this section VI. upon any
Individual CTCC member), as well as payment or reimbursement of
reasonable litigation costs and attorney's fees incurred in
defending against any such claim (including defense against a
penalty imposed under this section VI. upon any Individual CTCC
member), provided that the board of the Scientology-related entity
that is making the expenditure and the other Individual CTCC
members determine, upon appropriate review of the circumstances and
consultation with outside legal counsel, that the Individual CTCC
member acted reasonably under the circumstances, in the best
interest of the relevant Scientology-related entity or entities,
and without knowledge or reason to believe that such action would
be in violation of any applicable law or of this Agreement.
iv. Any transaction for which the disqualified person and the
affected Scientology-related entity have obtained guidance in
advance from the Service that the proposed transaction would be in
the best interest of the continued operation of the affected
Scientology-related entity and will not be penalized under this
Agreement. Any request for such guidance shall be sent to the
Assistant Commissioner as provided in section IX of the Agreement.
If after 120 days no response to the request has been received, the
transaction described in the ruling request shall be deemed not to
create a situation in which the penalties of this section VI will
be applied.
v. Theft, embezzlement or other misappropriation of property or
funds from a Scientology-related entity is an act of self-dealing
only if, and only to the extent, that a disqualified person
participates in such misconduct.
d. Amount involved. For purposes of this section VI., paragraph
B., the term "amount involved" means, with respect to any act of
self-dealing, the greatest of (i) the amount of money and the fair
market value of the other property given; (ii) the amount of money
and the fair market value of the other property received; or (iii)
the sum of $100,000. Notwithstanding the preceding sentence, in the
case of services described in section VI. paragraph B.3.iv., the
amount involved shall be the greater of $100,000 or the excess
compensation. In addition, in the case of a lease or loan, the
amount involved shall be the greatest of (i) the fair market
interest rate or rental, (ii) the amount actually charged, or (iii)
$100,000. For purposes of determining the amount involved, the fair
market value in the case of the penalties imposed by section VI.
paragraph B.1.a., shall be determined as of the date on which the
act of self-dealing occurs; and in the case of the penalties
imposed by section VI. paragraph B.1.b., shall be the highest fair
market value during the sanction period.
C. Noncharitable Expenditures.
1. First-tier penalties.
a. On Corporate CTCC members. Under this section VI. paragraph C.,
a penalty is imposed on each noncharitable expenditure (as defined
in section VI. paragraph C.3.) of any Scientology-related entity
described in the Code section 501(c) (3). The penalty shall be
equal to 10 percent of the amount involved as defined in paragraph
C.5.. The penalty imposed by this paragraph shall be paid on a
joint and several basis by the CTCC Corporate members. No penalty
shall be due under this paragraph C.1.a. if and to the extent that
a taxable expenditure has been corrected within the correction
period.
b. On Individual CTCC members. There is hereby imposed on the
agreement of any Individual CTCC member to the making of an
expenditure or undertaking an activity, knowing that it is a
noncharitable expenditure, a penalty equal to 2 1/2 percent of the
amount involved, unless such an agreement is not willful and is due
to reasonable cause. The penalty imposed by this paragraph shall be
paid by any Individual CTCC member who agreed to the making of the
expenditure of undertaking the activity. No penalty shall be due
under this paragraph C.1.b. if and to the extent that a taxable
expenditure has been corrected within the correction period.
2. Second-tier penalties.
a. On Corporate CTCC members. In any case in which a first tier
penalty is imposed by section VI. paragraph C.1.a. by reason of a
noncharitable expenditure and such expenditure or activity is not
corrected within the sanction period, there is hereby imposed a
penalty equal to 100 percent of the amount involved. The penalty
imposed by this paragraph shall be paid on a joint and several
basis by the CTCC Corporate members. No penalty shall be due under
this paragraph C.2.a. if and to the extent that a taxable
expenditure has been corrected within the correction period.
b. On Individual CTCC members.
i. In any case in which an additional penalty is imposed by
paragraph C.2.a., if an Individual CTCC member refused to agree to
part or all of the correction, there is hereby imposed a penalty
equal to 50 percent of the amount involved. The penalty imposed by
this paragraph shall be paid by each Individual CTCC member who
refused to agree to part or all of the correction.
ii. In addition, in the event that correction does not occur by
reason of any officer or director of any Scientology-related entity
refusing to agree to part or all of the correction, there is a
penalty equal to 50 percent of the amount involved. The penalty
imposed under this paragraph shall be paid by each Individual CTCC
member.
iii. No penalty shall be due under this paragraph C.2.b. if and to
the extent that a taxable expenditure has been corrected within the
correction period.
3. a. Noncharitable expenditure. For purposes of this section VI.,
the term "noncharitable expenditure" means:
i. any amount paid or incurred by a Scientology-related entity
described in Code section 501 (c) (3):
(a) to an entity or individual unless:
(1) the recipient entity is described in Code section 501 (c) (3),
or
(2) the payment will directly further a charitable purpose and the
Scientology-related entity exercises expenditure responsibility
with respect to such payment as required and in accordance with
paragraph C.3.b.
(b) any amount paid or incurred by a Scientology-related entity
for any purpose other than one specified in Code section 170 (c)
(2) (B).
ii. any amount paid or incurred by a Scientology-related entity as
a special noncharitable expenditure as defined in paragraph C.4.
b. Expenditure responsibility. The expenditure responsibility
referred to in section VI. paragraph C.3.a.i. (a) (1) means that
the Scientology-related entity is responsible to exert all
reasonable efforts and to establish adequate procedures during the
transition period:
i. to see that the payment is spent solely for the charitable
purpose for which made,
ii. to obtain full and complete reports from the recipient on how
the funds are spent, and
iii. to make full and detailed reports on such expenditures to
the Service as part of the Annual Report described in section IV
paragraph C.7.
Expenditure responsibility is required under this section VI.
paragraph C.3.b. only to the extent the CTCC is required to report
with respect to its expenditure responsibility as part of the
Annual Report under section IV., paragraph C.7.
c. Governing principles. In determining whether a particular
expenditure is a noncharitable expenditure, the Service shall be
guided by principles of section 53.4945-6 (b) (2) of the Treasury
Regulation (regardless of whether the expenditure involves an
administrative expense), under which it is neither the policy nor
the prerogative of the Service to substitute its judgment for the
reasonable exercise of business judgment by executives of the
affected Scientology-related entity.
4. Special noncharitable expenditure. For purposes of this section
VI., the term "special noncharitable expenditure" means any amount
paid or incurred by a Scientology-related entity or
Scientology-related individual in connection with the following:
a. Any act or omission that any CTCC member knew would impair the
efficacy of the guaranty of collection set forth in section IV.
paragraph A.3.d. of this Agreement.
b. The diminution of assets in violation of section IV. paragraph
A.3.d.viii.
c. Any expenditure by a Scientology-related entity that has not
been recognized as tax exempt under section III. of this Agreement
or by any Scientology-related individual, if such expenditure
jeopardizes the tax-exempt status of any Scientology-related entity
recognized under section III. of this Agreement as described in
Code section 501 (c) (3).
d. The conduct or support of litigation by a Scientology-related
entity or a Scientology-related individual against the Service or
any present or former Service employee in violation of section II.
paragraph C.4. or C.5. of this Agreement.
e. The financial support by a Scientology-related entity or
Scientology-related individual of a tax refund claim against the
Service in violation of section VII., paragraph G..
5. Amount involved. For purposes of this section VI. paragraph C.,
the term "amount involved" as it relates to the penalties provided
under this section imposed on a noncharitable expenditure means:
a. For the penalties imposed under this section VI. paragraph C.
(except as provided below with respect to certain of the special
noncharitable expenditures and noncharitable activities described
in paragraph C.4.), the "amount involved" shall be the greater of
(1) the amount paid or incurred in connection with a noncharitable
expenditure or (2) the sum of $25,000.
b. For the penalties imposed by reason of special noncharitable
expenditure defined in paragraph C.4.a., the "amount involved" is
equal to the greater of (1) the difference between the assets of
the CTCC Corporate members before the impairment of the guaranty
and the assets of the CTCC Corporate members subsequent to the
impairment, or (2) the sum of $25,000.
c. For the penalties imposed by reason of special noncharitable
expenditure defined in paragraph C.4.b., the "amount involved" is
equal to the greater of (1) the excess value of the assets over
10-percent of the difference between the assets of the CTCC
Corporate members before the transfer and the assets of the CTCC
Corporate members subsequent to the transfer, or (2) the sum of
$25,000.
d. For the penalties imposed by reason of special noncharitable
expenditure or noncharitable activity defined in paragraphs C.4.d.
and C.4.e., the "amount involved" is equal to the greatest of (1)
the number of staff hours of Service or Department of Justice
attorneys required for the year to respond to any litigation,
multiplied by $100, (2) the cost to indemnify the Service and the
United States in any litigation for the year and for all costs
including any damages, or (3) the sum of $25,000.
D. Reporting Obligations.
1. Penalty on Corporate CTCC members. A penalty is imposed jointly
and severally on the Corporate CTCC members in the event of certain
failures in providing the Annual report.
a. In the case of a failure to submit the Annual Report required
under section IV. paragraph A.3.a. of this Agreement by the date
and in the manner prescribed therefor (determined with regard to
any extension of time for filing), there shall be paid $250 for
each day until the submission of such report.
b. In the case of a failure to include within the Annual Report
any of the information required to be shown under this Agreement or
to show information that is materially correct, there shall be paid
by the Corporate CTCC members $250 for each day during which such
failure continues.
The maximum penalty under this section VI. paragraph D.1. with
respect to any one Annual Report shall not exceed $75,000.
2. Penalty on Individual CTCC members. Upon a failure to submit an
Annual Report in a timely and complete fashion, the Service may
make a written demand on the CTCC specifying therein a reasonable
future date by which the Annual Report shall be submitted (or the
missing or correct information furnished) for purposes of this
paragraph.
a. Failure to comply with demand. If the CTCC fails to comply with
any demand under paragraph D. 2. on or before the date specified in
such demand, there shall be paid by each Individual CTCC member
$250 for each day after the expiration of the time specified in
such demand during which such failure continues. The maximum
penalty imposed under this paragraph on all Individual CTCC members
for failures with respect to any one Annual Report shall not exceed
$75,000 per Individual member.
b. Application of penalties for failure to provide information.
Each failure to include with the Annual Report information required
under any single subparagraph of section IV. paragraph B. or
section IV. paragraph C. of this Agreement shall be treated as a
separate failure to provide information and shall be subject to a
separate penalty or penalties under this section VI., except that
the $75,000 maximum applies to the Annual Report as a whole and,
therefore, is not increased by reason of multiple failures to
comply within the same Annual Report.
3. Exception for reasonable cause. No penalty shall be imposed
under this section VI. paragraph D. with respect to any failure if
the CTCC shows that such failure is due to reasonable cause.
4. Exception for inability to certify specific information. If the
CTCC is unable to certify any matter as required under this
Agreement due to an actual or potentially noncompliant act or acts
or failure to act, no penalty shall be imposed under this section
VI. paragraph D. with respect to the failure to provide such
certification, provided that:
a. the CTCC makes the required certifications with respect to all
but those actual or potentially noncompliant acts,
b. the CTCC takes appropriate and timely steps to determine
whether a potentially noncompliant act is in fact noncompliant,
c. the CTCC discloses all noncompliant acts as soon as possible
under the circumstances, and currently discloses that it is
investigating a particular act or acts that may be noncompliant,
d. the CTCC takes appropriate and timely steps to correct all
noncompliant acts, and
e. the CTCC reports to the Service with respect to the correction
of noncompliant acts as soon as possible under the circumstances.
E. Joint and Several Liability and Certain Penalty Limitations for
Individual CTCC Members.
1. The Corporate CTCC members shall be jointly and severally
liable for payment of the penalties imposed by section VI.
paragraphs C.1.a., C.2.a., and D.1. The penalties on the Individual
CTCC members are to be paid by the specific Individual CTCC member
subject to the penalty.
2. The maximum amount of any penalty imposed on any Individual
CTCC member under section VI. with respect to (1) any one act of
self-dealing under paragraph B., (2) any one noncharitable
expenditure under section VI. paragraph C., or (3) deficiencies in
the Annual Report under section VI., paragraph D., shall not exceed
the lesser of (i) the individual CTCC member's total compensation
for the taxable year from all Scientology-related entities, or (ii)
the sum of $50,000 each taxable year, except that the maximum
penalty on an individual CTCC member charged with an act of
self-dealing in no event shall be less than the sanction imposed
for that act.
3. No single act or expenditure by a Scientology-related entity
shall be subject to multiple penalties under paragraphs B.1.b,
C.1.b, and/or D.2, or multiple penalties under paragraphs B.2.b,
C.2.b, and/or D.2. (for example, an expenditure constituting both
an act of self-dealing under paragraph B. and a noncharitable
expenditure under paragraph C.). Such an act or expenditure shall
be subject to the applicable penalty in paragraph B., C., or D.
that results in the highest penalty amount.
F. Additional Penalty. If any person or entity becomes liable for
any penalty under paragraphs B. or D. of this section VI. by reason
of any act or failure to act which is not due to reasonable cause
and either:
1. such person has theretofore been liable for a penalty under any
of such paragraphs; or
2. such act or failure to act was both willful and flagrant;
then such person shall be liable for an additional penalty equal
to the amount of the applicable first tier penalty.
G. Third-Tier Penalty.
1. If there has been (i) willful, repeated and flagrant
misconduct, and (ii) a failure to correct such misconduct, giving
rise to penalties under paragraphs B. and/or C. of this section
VI., there is imposed on the Corporate members of the CTCC a
penalty equal to $50,000,000.
2. For purposes of this section VI., various terms are defined as
follows:
a. the phrase "flagrant misconduct" means:
(i) For any act of self-dealing under section VI. paragraph B.,
the intentional diversion of assets from one or more
Scientology-related entities that is not corrected within the
correction period.
(ii) For any noncharitable expenditure under paragraph C., the
intentional use of assets from one or more Scientology-related
entities for any purpose other than one specified in Code section
170 (c) (2) (B) that is not corrected within the correction period.
b. The phrase "diversion" means the transfer of assets by a
Scientology-related entity that constitutes the private inurement
of its net earnings to the benefit of a private shareholder or
similarly-situated individual.
c. The phrase "repeated," with respect to misconduct, means more
than two occurrences of conduct resulting in the imposition of
second-tier sanctions under this Agreement.
H. Procedures for Penalty Determinations
1. a. First-tier Penalty
i. With respect to a claimed penalty arising from information in
the Annual Report, the Service shall notify the CTCC in writing of
its belief than an event subject to penalty under paragraphs B.1.,
C.1. or D. of this section VI. has occurred within 180 days of
receipt of the Annual Report. Such notice (hereinafter the "initial
notice") shall identify the expenditure, act (or failure to act) or
transaction the Service believes warrants the imposition of
penalties and an explanation of its reasons for this conclusion.
The notice shall specify the exact provisions of the applicable law
or of this Agreement the Service believes has been violated and
shall, subject to the requirements of Code section 6103, cite and
append evidence in its possession that supports its belief.
ii. Upon receipt of the initial notice, the CTCC shall investigate
the matter and report its conclusions back to the Service within 90
days of receipt of the initial notice.
iii. If, following receipt of the CTCC's report under section VI.
paragraph H.1.a.(ii), or in the event of a failure to respond, the
Service still believes that an event warranting imposition of a
penalty has occurred and has not been corrected, the Service will
provide a conference of right with the Assistant Commissioner to
undertake a discussion on the merits of the respective positions of
the CTCC and the Service.
iv. If, following the conference of right under paragraph
H.1.a.(iii) of this Section VI., the Service still believes that an
event warranting imposition of a penalty has occurred and is not in
the process of being corrected, the Service will issue a final
determination of penalty and send notice thereof to the CTCC. Such
notice shall specify the exact provisions of applicable law or of
this Agreement the Service believes have been violated and shall,
subject to the requirements of Code section 6103, cite and append
evidence in its possession that supports its belief, including its
reasons for not accepting the arguments and evidence submitted by
the CTCC in support of its position that no violation has occurred.
v. With respect to a claimed penalty arising from information in
the Annual Report, the Service must issue a final determination of
first-tier penalty to the CTCC no later than one year from the date
the Service receives the CTCC report described in section VI.
paragraph H.1.a.(2).
vi. If the CTCC continues to disagree with the Service's
determination of a first-tier penalty notice, it shall so notify
the Service in writing. Upon receipt of such notice, the Service
may sue under paragraph H.1.e. to collect the first-tier penalty.
Until the completion of such suit, including the exhaustion of any
appeals or other proceedings for appellate review, the CTCC need
not pay any first-tier penalty determined by the Service.
b. Second-tier penalties. If an event subject to a first-tier
penalty under this Agreement has not been corrected with the
sanction period as defined in section VIII. P., the Service may
issue a notice of final determination of second-tier penalty. The
Service must issue any notice of final determination of second-tier
penalty no later than 90 days after expiration of the sanction
period. No second-tier penalty shall be due under this Agreement if
and to the extent that a taxable expenditure has been corrected
within the correction period.
c. Other penalties. In the case of penalties other than those
described in paragraphs H.1.a. or H.1.b. of this determination of
penalty to the CTCC.
d. No notice of determination, initial or final, may be made under
this Agreement if the notice is not sent by certified mail to the
CTCC by the 120th day after the end of the transition period. In
addition, no penalty may accrue for any period after December 31,
1999. However, provided that the initial notice was mailed prior to
this date, the penalty asserted may be collected and enforced
notwithstanding the expiration of the transition period.
e. Any penalty imposed under this section VI. is payable upon
notice and demand, and may be collected by the Service through
suit. The Service and the Corporate, Individual and At-large CTCC
members agree that all parties shall have the right to specific
performance (in addition to all other remedies available under the
Code, at law, in equity or under this Agreement).
f. Should correction, as defined in section VIII., paragraph S.,
occur within the correction period, as defined in section VIII.
paragraph T., no penalty shall be collected under this section VI.
2. Interest. In the event that any penalty under this section VI.
is asserted by the Service and the CTCC fails to make payment
within 90 days of the final notice of penalty, interest on the
amount of such penalty shall accrue from the date of issuance of
such final notice to the date of payment at the Federal short-term
applicable rate (as set forth and applied in Code sections 6621(b)
and 6622).
3. Non-assertion of penalties.
a. If it is established to the satisfaction of the Service, in the
exercise of its reasonable discretion, that any event subject to
penalty has been correction during the correction period for such
event, then any penalty imposed with respect to such event
(including interest) shall not be asserted, and if asserted, shall
not be collected, and, if collected, shall be promptly credited or
refunded to the extent permitted by law.
b. The Service shall not assert any penalty under this section VI.
when the CTCC has established to the Service's satisfaction in the
exercise of its reasonable discretion, that:
i. what would otherwise constitute a transaction or event
warranting imposition of penalties caused no financial detriment to
charitable interests;
ii. the transaction of expenditure has been corrected;
iii. the CTCC has acted promptly and in good faith to correct any
such transaction or expenditure and prevent its recurrence; or
iv. the penalty is disproportionate to the severity of the
transaction or expenditure.
VII. Treatment of Parishioners' Contributions
A. The Service acknowledges its obligation to interpret and apply
the "gift or contribution" requirement of Code section 170(c)
equally and consistently to the fundraising practices of all
religious organizations that receive fixed donations from
parishioners in connection with participation in worship and
similar religious rituals or services.
B. Until the earlier of (i) December 31, 1999, (ii) the issuance
or adoption by the Service of audit policies or practices in the
examination of tax returns utilizing uniform and consistent
principles for determining the deductibility of fixed donations to
all churches, or (iii) until legislation is enacted which affects
the deductibility of such fixed donations, the Service agrees not
to contest the deductibility of Church of Scientology fixed
donations in connection with qualified religious services. The
phrase "qualified religious services" means those appearing on the
"Scientology Classification, Gradation and Awareness Chart." If the
taxpayer produces an accurate receipt or other documentation from
the donee Church of Scientology substantiating (1) the amount of
the taxpayer's fixed donation and (2) the qualified religious
services with respect to which the donation was made, then, for as
long as this paragraph B. of this section VII. applies, as set
forth in paragraph F., the full amount of the fixed donation for
these services shall be treated as a charitable contribution under
Code section 170 and shall not be challenged on that basis. Nothing
in the preceding sentence affects other requirements, including
substantiation, as provided by law. In the absence of such
documentation, the Service also may independently determine the
amount of and the extent to which the taxpayer's fixed donations
were made in connection with qualified religious services.
Individual taxpayers' contributions to churches of Scientology not
in connection with religious services or any substantial return
benefit remain fully deductible if other requirements under the law
are met. Payments to churches of Scientology for books or other
religious articles are not deductible except to the extend that a
dual payment exists.
C. To apply paragraph B. for taxable years before 1993, and in
consideration of the other provisions of this agreement, the
Service will settle all outstanding controversies with individual
Church of Scientology parishioners involving the deductibility of
their fixed donations under Code section 170 on a no-change basis
(subject to substantiation of payment for qualified religious
services and compliance with other requirements of the Code). Any
future deficiency controversies with individual taxpayers involving
the deductibility of Church of Scientology fixed donations for
taxable years beginning before 1993 also will be resolved on a
no-change basis on the section 170 issue subject to substantiation
of payment for qualified religious services and compliance with
other requirements of the Code. This process will be implemented as
follows:
1. The Office of Chief Counsel, Internal Revenue Service will
enter into stipulated decision documents with the taxpayers listed
on Exhibit VII-I (or authorized representatives) to carry out this
paragraph in the cases pending before the United States Tax Court.
Upon notice and request of the CTCC, the office of Chief Counsel
will enter into a similar stipulated decision document in any
future case that becomes docketed in the Tax Court with respect to
a taxable year beginning before 1993. The stipulated decision
documents will reflect an allowance of charitable contribution
deductions for Church of Scientology fixed donations in the full
amount of the payments substantiated as being paid for qualified
religious services as provided in paragraph B. above. The
stipulated decision documents also will identify as overpayments
any credible or refundable amounts paid by the taxpayers for the
years at issue, provided that the Tax Court has jurisdiction to
determine the existence and amount of such overpayment.
2. The Service will issue administrative refunds for the full
amount of the tax that is attributable to the fixed donations to
churches of Scientology for qualified religious services, plus
interest, to the taxpayers in the following cases:
Powell v. United States, No. CV 90-8271 (S.D. Fla.) Nieves v.
United States, No. CV 90-4211 (S.D. N.Y.)
Following the issuance of the administrative refund, the taxpayers
will dismiss with prejudice their respective cases.
3. In the case of a refund claim for a taxable year beginning
before 1993 that is not barred by the statute of limitations and is
not the subject of a docketed deficiency cases before the Tax Court
or a refund cases before a District Court or the Court of Federal
Claims at the time of the execution of this Agreement, the
taxpayers shall be entitled to an allowance of 80 percent of his or
her fixed donations in connection with qualified religious
services, as provided in paragraph B. and the claim shall be
treated accordingly. The Office of Chief Counsel shall request the
Untied States Department of Justice to enter into a stipulation
with taxpayer's counsel (or taxpayer) in any future case seeking a
refund of income taxes for taxable years beginning before 1993
based on the Service's disallowance of charitable contribution
deductions for Church of Scientology fixed donations for which the
statute of limitations has nor expired, in accordance with the
preceding sentence. See, however, the CTCC's obligation not to
promote such claims as provided in paragraph G.
4. For any refund controversy described in subparagraph 3., above,
the provisions of paragraph B. shall remain open until the Service
mails a notice of final disallowance of such refund claim.
5. If the Service is in compliance with the provisions of
subparagraphs 1-3, above, and the taxpayer refuses the Service's
offer to provide a stipulation or settlement in resolution of the
fixed donation issue of the taxpayer/parishioner to the Church of
Scientology as provided herein, then, notwithstanding any other
provision of his section VII., the Service shall not be bound by
this paragraph as to that taxpayer (and that year for which there
is no agreement) and shall not thereafter be bound to the 80/20
dual payment percentage as to that taxpayer for that tax year.
Nothing in this paragraph prevents the Service, at its election,
from stipulating or settling on any other basis (or proceeding in
any manner) with any taxpayer if the taxpayer declines to settle in
accordance with this section VII.
6. This paragraph C. shall apply to all pending and future
administrative cases in examination, appeals, or collection for
taxable years beginning before 1993.
7. All overpayments resulting from the stipulations or judgments
provided in subparagraphs 1. through 3., above, shall be promptly
credited or refunded under applicable provisions of the Code
(including section 6611) and regulations.
D. To apply paragraph B. for taxable years after 1992, the Service
shall prepare and transmit instructions to all appropriate IRS
functions and Offices at the National, Regional and District level
and to IRS Service Center explaining their obligations to carry out
paragraph B. of this section VII. In particular, those instructions
shall direct the various Service functions not to disallow any
portion of deductions for Church of Scientology fixed donations in
connection with qualified religious services on the ground that the
payments are not charitable contributions, until the earliest of
(i) December 31, 1999, (ii) the issuance by Service of the audit
policies or practices described in paragraph B. (ii) or (iii) until
legislation is enacted which affects the deductibility of such
fixed donations. Nothing in the paragraph prevents the Service, at
its election, from stipulating or settling on any other basis (or
preceding in any manner) with any taxpayer of the taxpayer declines
to settle in accordance with this section VII.
E. The Service also agrees to withdraw, obsolete or supersede,
Rev. Rul. 78-189 no later than April 1, 1994, irrespective of
whether the audit policies or practices described in paragraph B.
(ii) are ever issued.
F. 1. Except as provided in subparagraph 2., below, the Service
shall apply paragraph B. to all pending and future administrative
cases in examination, appeals, or collection for taxable years
beginning after 1992 through taxable years ending before January 1,
2000.
2. If the Service implements the audit policies or practices
described in paragraph B. (ii) for a taxable year ending before
January 1, 2000, then the service shall allow individual taxpayers
charitable contribution deductions for no less than 80 percent of
their Church of Scientology fixed donations in connection with
qualified religious services, as defined in paragraph B., to the
extend substantiated as provided in paragraph B., for taxable years
ending before January 1, 2000.
3. If, prior to January 1, 2000, the Service has not issued or
adopted audit policies or practices described in paragraph B. (ii),
the parties agree to meet to discuss further agreements or actions
that nay be undertaken to implement paragraph A. in the spirit of
this entire Agreement.
G. While recognizing that all individual Scientologists not barred
by law or agreement are entitled to file claims for refund to
recover amounts covered by this settlement and that the CTCC may
inform Church parishioners of the provisions of section VII of this
Agreement, the CTCC agrees not to promote or encourage individual
Scientologists to file claims for refund of taxes for the taxable
year 1993.
H. Individual taxpayers making fixed donations to churches of
Scientology shall be considered to be third-party beneficiaries of
this section VII. and shall be entitled to enforce its terms in any
administrative or judicial proceeding. Such individual taxpayers
shall not be charged with the receipt of taxable income by virtue
of any of the provisions of this agreement.
I. The CTCC shall use its best efforts to have Scientology
parishioners agree to the stipulations and settlements as provided
in this section VII.
J. If the Service either holds a meeting regarding the
deductibility of fixed donations to religious organizations and
invites religious organizations to participate or solicits comments
from religious organizations on the subject, the Service shall
invite the Church of Scientology to participate or to supply
comments on the same basis as the other religious organizations.
VIII. Definitions.
For purposes of this Agreement:
A. "Code" means the Internal Revenue Code of 1986 and the
regulations thereunder, as amended from time to time.
B. "Entity" includes any corporation, limited liability company,
trust, association, committee, partnership, or unincorporated
organization, as well as any "person" (other than an individual),
as defined in Treas. Reg. sec. 301.7701-1 through -4.
C. An entity is a "Scientology-related entity" if that entity is
described in one or more of the paragraphs set forth below:
1. An entity is a Scientology-related entity if it is a signatory
to this Agreement or is identified in section III., paragraphs B.
or C. or section IV., paragraph D.2. of this Agreement or Exhibits
III-1 through III-35 of this Agreement.
2. An entity is a Scientology-related entity if it delivers
religious services to parishioners in a manner prescribed by the
works of L. Ron Hubbard and as authorized (directly or indirectly)
by Religious Technology Center, Church of Scientology International
or other entity described in another paragraph as a
Scientology-related entity. Thus, for example, all Class V
churches, Continental organizations, CSFSSO, CSFSO, CSWUS, Saint
Hill or other advanced organizations and missions are
Scientology-related entities.
3. The publications organizations discussed at page 1-21 through
1-27 of the letter to John Burke, Monique Yingling dated June 29,
1992, (the "June Submission") and part of the Qualified Written
Material are Scientology-related entities. Thus, for example,
Bridge Publications, Inc., and New Era Publications International
ApS, as well as their related subsidiaries or affiliates, are
Scientology-related entities. Pages 1-21 through 1-27 are attached
as Exhibit VIII-1 to this Agreement.
4. The social benefit and other public benefit entities discussed
at pages 1-28 through 1-42 of the June submission along with all
subsidiaries, subordinate chapters, subordinate organizations, or
sublicensees thereof (e.g., organizations that are permitted to use
particular names, copyrights, service marks, and/or technologies)
are Scientology-related entities. Thus, for example, Citizens
Commission on Human Rights, National Commission on Law Enforcement
and Social Justice, Scientology Defense Fund Trust, Association for
the Better Living and Education, Applied Scholastics Incorporated,
Narconon International, The Way to Happiness Foundation, and the
Foundation for Religious Freedom are Scientology-related entities.
Pages 1-28 through 1-42 are attached as Exhibit VIII-2 to this
Agreement.
5. Any entities subject to the ecclesiastical direction or general
guidance of Church of Scientology International or Religious
Technology Center, directly or indirectly, including but not
limited to any trusts, that hold assets (including but not limited
to intellectual property and mortgages) for any other
Scientology-related entity or for the advancement or protection of
the Scientology religion whether or not those entities were
discussed at pages 1-43 through 1-56 of the June submission are
Scientology-related entities. This definition does not include the
trust or estate of any parishioner who has made an intervivos or
testamentary transfer of assets to the Church. This definition does
not include financial institutions that are not owned (directly or
indirectly) in whole or in part by any entity that otherwise meets
the definition of Scientology-related entity under another
subparagraph of this paragraph VIII. C. This definition does not
include (i) any fiduciary that is not a Scientology-related entity
or a Scientology-related individual (ii) the employee of any such
fiduciary, (iii) any escrow agent holding assets of a
Scientology-related entity under and escrow arrangement of a
strictly temporary nature, (iv) any trustee under a deed of trust
upon real property to secure the debt of a Scientology-related
entity (v) any person acting under the power of attorney to
Scientology-related entity, provided that any such fiduciary
described in (i) through (v) above, and is nor otherwise a
Scientology-related entity under paragraph of this section VIII,
paragraph C. Pages 1-43 through 1-56 are attached as Exhibit VIII-3
to this Agreement.
6. Any entity directly or indirectly involved in, or related to,
the ownership and /or operation of the M.V. Freewinds including
those listed at pages 1-57 through 1-59 of the June submission are
Scientology-related entities. Thus, for example, the Foundation
Church of Scientology Flag Ship Service Organization, Flag Ship
Trust, Transcorp Services S.A., San Donato Properties Corporation
and MCL Services N.V. are Scientology-related entities. Pages 1-57
thorough 1-59 are attached as Exhibit VIII-4 to this Agreement.
7. Any membership entity primarily composed of Scientologists,
whether or not listed on pages 1-60 through 1-62 of the June
submission, including but not limited to the International
Association of Scientologists, Danish Association of
Scientologists, and European Association for Scientology, along
with any entities performing the operations of (or holding the
assents of ) such organizations (including Foundation of
International Membership Services Administration N.V., Membership
Services administration (UK) Ltd and U.S. IAS Members' Trust), are
Scientology-related entities. Pages 1-60 through 1-62 are attached
as Exhibit VIII-5 to this Agreement.
8. Any entity that owns, (including, but not limited to, those
entities listed below in this subparagraph C.8.), (sub) licenses to
others to use, and/or has rights to (sub) license others to use
what has been described in the Qualified Written Material as the
Scriptures (the written and spoken words of L. Ron Hubbard on
Scientology and Dianetics) or any technology, copyright, trademark
or service mark held by RTC, CSI, CST, any publications
organization (described in paragraph C.3 above), the Estate of L.
Ron Hubbard or Author's Family Trust B, is a Scientology-related
entity.
9. Any other entity licensed to use, or otherwise granted
permission to use or employ, any copyright, service mark, or
trademark that has been, is now (or shall in the future) be held or
owned, directly or indirectly, by Religious Technology Center,
Church of Scientology International, the Estate of L. Ron Hubbard,
Author's Family Trust B or Church of Spiritual Technology, is a
Scientology-related entity.
10. Any taxable or for-profit entity of which one or more
Scientology-related entities and/or any of the trustees, directors
and/or officers of any entity defined as a Scientology-related
entity under this section VIII. paragraph C, separately or
together, owned or had a beneficial interest of more than
twenty-five percent is a Scientology-related entity. In addition,
any non-profit entity of which one or more Scientology-related
entities and/or any of the trustees, directors and/or offices of
any entity defined as a Scientology-related entity under this
section VIII. paragraph C, separately or together, control the
voting power of, or have a beneficial interest of, more than
twenty-five percent, is a Scientology, related entity. For purposes
of this definition, any Individual or At-Large member of the CTCC
shall be considered an officer of a Scientology-related entity.
11. For purposes of subparagraphs 4, 8, or 9, the term
Scientology-related entity includes only those entities that are
under the ecclesiastical direction or general guidance of CSI,
directly or indirectly, and that are not owned in whole or in part
by any entity that otherwise meets the definition of
Scientology-related entity under another subparagraph of this
section VIII. paragraph C.. Thus, by the way of example, the term
Scientology-related entity generally does not include (I)
sublicensees of the World Institute of Scientology Enterprises
(hereinafter "WISE"), (ii) any entity that would not otherwise be
described above, except that it has been licensed to publish or
disseminate solely the fictional works of L. Ron Hubbard, and (iii)
licenses of Applied Scholastics, Inc. that are not included as
subordinate entities under its group exemption, as provided in
section III., paragraph 3.c and listed on Exhibit III-28 (or will
be subordinate entities in the future) .
12. a. In general. The term Scientology-related entity generally
includes an entity whether formed under the laws of the United
States or of a country other than the United States, except to the
extent other provisions of this Agreement expressly include only
U.S. entities or expressly exclude non-U.S. entities.
b. Exception.
i. With respect to certain provisions of this Agreement, the term
Scientology-related entity does not include an Excluded Foreign
Scientology-related Entity. A Scientology-related entity is an
Excluded Foreign Scientology-related Entity if it is formed under
the laws of, and substantially all of its operations are in, a
country other than the United States and it (a) is described in
section VIII, paragraph C.2 and is a Mission or Class V church; (b)
is described in Section VIII, paragraph C.4; (c) is described in
Section VIII, paragraph C.5, provided that it is not an entity that
has as its primary function the holding of assets for the Church of
Scientology; or (d) is described in Section VIII, paragraph C.9 but
has neither annual gross receipts not gross assets in excess of $15
million.
ii. To the extent a Scientology-related entity is otherwise
specifically included in a provision (notwithstanding the fact that
is an Excluded Foreign Scientology-related Entity), it is a
Scientology-related entity for the specified purposes of the
affected provision. Specifically, but not by the way of limitation,
an Excluded Foreign Scientology-related entity with respect to the
following provisions of this Agreement:
Section II.: paragraphs B.5., B.7 through B.9, C.1. through C.6,
E.1., E.4.b. and F.
Section III.: Paragraph B.10
Section IV.: paragraphs A.3.d., B.1.a., B.1.f.ii. B.2.a., B.3.,
B.4., C.1., C.3., C.4., C.5., C.6., C.7.a.,C.7.b., C.10.,E.1.,
E.2.,E.3., and F.2.
Section V.: all
Section VI.: paragraph B.
iii. An Excluded Foreign Scientology-related Entity is excluded
from the definition of Scientology-related entity with respect to
the following provisions of this Agreement:
Section IV.: paragraphs A.3. (other than A.3.d.), D.1., D.2., D.3.
Section VI: paragraph A, C (unless paragraph C.10. of section IV
applies) and G.
Section IX: paragraph A.
iv. With respect to other provisions of this agreement concerning
procedural matters (such as reporting term limitations) that relate
to the specific provisions referred to in Section VIII, paragraph
C. 12.b.ii., Scientology-related entity also includes Excluded
Foreign Scientology-related entity.
c. Limitation. paragraph 12.b. shall not apply to exclude from
treatment as a Scientology-related entity any entity that otherwise
meets the definition of Scientology-related entity under a
subparagraph of this section VIII. paragraph C. other than
subparagraphs 2.,4.,5., or 9.
13. If an entity is treated as a Scientology-related entity by
reason of paragraph C.1. of this section VIII., then such entity
shall be treated as a Scientology-related entity notwithstanding
that one or more of the other subparagraphs of paragraph C. of this
section VIII might otherwise apply to exclude such entity from
being treated as a Scientology-related entity.
14. The term Scientology-related entity is not limited to those
entities that are in existence as of the date of this Agreement but
also includes those described in paragraph C. created after this
Agreement is signed.
D. "Scientology-related Individual" means an individual rendering
services to or on behalf of a Scientology-related entity as a staff
member, agent officer, trustee, or attorney in fact of that
Scientology-related entity. The term "Scientology-related
individual" includes, without limiting the generality of the
foregoing, Individual CTCC members, At-Large CTCC members and
individuals serving on the CTCC as representatives of Corporate
CTCC members. The term "Scientology-related individual" applies
only to the extent that such individual is acting in his capacity
as staff member or other service-provider to or on behalf of the
Scientology-related entity.
E. "Qualified Written Material" means any information designated
as "Qualified Written Material" pursuant to paragraph 4 of the
agreement between Church of Scientology International and the
Service, executed on behalf of the CSI on May 5, 1992. This
material was obtained as part of the discussions in which the
Service requested information relating to the organizational
structure and operations of the Church mostly by written requests
dated May 4, 1992 and October 16, 1992, to which the Church
responded in June and November of 1992, respectively, and in
various other written responses.
F. "Service" means the Internal Revenue Service, including but not
limited to the Office of Chief Counsel. References to officers or
employees (present or former) of the Service shall include, but not
limited to, officers or employees (present or former) of the
Officer of Chief Counsel.
G. "Taxable year" means calendar year.
H. "Transition period" means taxable years 1993, 1994, 1995, 1996,
1997, 1998 and 1999.
I. "Agreement" means this closing agreement.
J. "CTCC" means the Church Tax Compliance Committee.
K. "Church Signatories" means the following entities: Church of
Scientology International, Religious Technology Center, Church of
Spiritual Technology, Church of Scientology Religious Trust,
Building Management Services, Church of Scientology Flag Service
Organization, Inc. and the Church of Scientology Western United
States.
L. "Settlement Agreement" means an agreement entered into between
the Church Signatories and the Service on even date herewith
relating to the disposition of certain other matters between the
parties attached hereto as Exhibit IV-5.
M. "Annual Report" means the report complied and submitted during
the transition period by the CTCC as required under section IV of
this Agreement.
N. Disqualified Person. In General. The term "disqualified person"
means with respect to a Scientology-related entity, any of the
following persons:
1. an Individual CTCC member (within the meaning of section IV.
paragraph A.2.c. of this Agreement);
2.A member of the family (as defined in paragraph 9) of an
Individual CTCC member;
3. a corporation not recognized as exempt under Code section 501
(c) (3) of which any person described in section VIII. paragraph
N.1. or N.2. owns more than 35 percent of the total combined voting
stock or stock value;
4. a limited liability company not recognized as exempt under Code
section 501 (c) (3) in which any person described in section VIII.
paragraph N.1. or N.2. owns more than 35 percent of the membership
interests;
5. a partnership not recognized as exempt under Code section 501
(c) (3) in which any person described in section VIII. paragraph 1.
or 2. owns more than 35 percent of the profits interests or capital
interests; or
6. an estate or a trust not recognized as exempt under Code
section 501 (c) (3) in which any person described in section VIII.
paragraph N.1. or N.2. holds more than 35 percent of the beneficial
interest.
7. Stockholdings; Membership Interests. For purposes of paragraphs
3. and 4., there shall be taken into account indirect stockholdings
and membership interests which would be taken into account under
section 267 (c) and 318 (a) (4), except that, for purposes of this
paragraph, Code section 267 (c) (4) shall be treated as providing
that the members of the family of an individual are the members
within the meaning of section VIII. paragraph N.9.
8. Partnerships, Trusts, Estates. For the purposes of paragraphs
4. and 5. the ownership of profits interest, capital interest or
beneficial interest shall be determined in accordance with the
rules for constructive ownership of stock provided in Code section
267 (c) (other than paragraph (3) thereof), except that Code
section 267 (c) (4) shall be treated as providing that the members
of the family of an individual are the members within the meaning
of paragraph 9.
9. Members of Family. For purposes of this definition, the family
of any individual shall include on the individual's parents,
children, spouse, siblings and the spouses of the individual's
siblings.
10. Time of determination. A person is a disqualified person, if,
at any time during the transition period that a person is described
in this definition.
O. Willful. There term "willful" means a knowing, voluntary,
intentional violation of a known legal duty.
P. Sanction Period. The term "sanction period" means, with respect
to any act of self-dealing under section VI. paragraph B or
noncharitable expenditure under section VI. paragraph C, the period
beginning on the date on which the act of self-dealing or
noncharitable expenditure occurs and ending on the earliest of :
1. the date on which the penalty imposed by section VI. paragraph
B.a.1. or C.a.1 is paid;
2. the date on which correction of the act of self-dealing or
noncharitable expenditure is completed; or
3. 180 days after the final judicial decision sustaining the
Service's final determination with respect to a penalty imposed by
section VI. paragraph B.1. or C.1. hereof under section VI.
paragraph H.1..
Q. First-Tier Penalty. For purposes of this paragraph P., the term
"first tier penalty" means any penalty imposed by section VI.
paragraph B.1. or C.1.
R. Second-Tier Penalty. For purposes of this paragraph P., the
term "first tier penalty" means any penalty imposed by section VI.
paragraph B.1. or C.2.
S. Correction. The terms "correction" and "correct" mean:
1. for any act of self-dealing, undoing the transaction to the
extent possible, but in any case placing the Scientology-related
entity in a financial position not worse than that in which it
would be if the disqualified person were dealing under the highest
fiduciary standards;
2. for any noncharitable expenditure (A) recovering part of all of
the expenditure to the extent recovery is possible, and where full
recovery is not possible such additional corrective action as is
prescribed by the Service or (B) in the case of a failure to comply
with paragraph D making or correcting the report in question, and
3. for any failure to report under paragraph IV.D., the filing
with the Service of an annual Report or corrected Annual Report 9
(or relevant part thereof), meeting the requirements of this
Agreement.
T. Correction Period. The term, "correction period" means, with
respect to any event that is subject to penalty under the
Agreement, the period beginning on the date on which such events
occurs and ending 180 days after the date of the mailing under
section VI. paragraph H.1.b. of a final notice of determination
with respect to the second tier penalty imposed on such event,
extended by any other period the Service determines is reasonable
and necessary to bring about correction of the event.
U. Church. The term "Church" when used in a descriptive sense
refers to all Scientology-related entities. When used in connection
with specific obligations under this Agreement, however, the term
"Church" shall generally mean the CTCC.
V. Commissioner. The term "Commissioner" means the Commissioner of
the Internal Revenue Service.
W. Assistant Commissioner. The term "Assistant Commissioner" means
the Assistant Commissioner of the Internal Revenue Service for
Employee Plans and Exempt organizations (or the successor to his or
her function in any reorganization of the Service).
X. Knowing. An individual shall be considered to have participated
in a transaction "knowing" that it is either an act of self-dealing
under section VI., paragraph B. or a noncharitable expenditure
under section VI., paragraph C. only if
1. He has actual knowledge of sufficient facts so that, based
solely upon such facts, such transaction would be an act of
self-dealing or a noncharitable expenditure, and
2. He is aware that such an act under these circumstances may
violate the relevant provisions of this Agreement, and
3. He negligently fails to make reasonable attempts to ascertain
whether the transaction is an act of self-dealing or a
noncharitable expenditure, or he is in fact aware that it is such
an act.
The term knowing does not mean "having reason to know," but
evidence that a person had reason to know of a particular fact or
of a provision of this Agreement can be circumstantial proof of
actual knowledge.
Y. Reasonable cause. The term "reasonable cause" means the
exercise of responsibility by a CTCC member on behalf of the CTCC
and Scientology-related entities with ordinary business care and
prudence.
IX. Other Matters.
A. Representations. The Church signatories represent that all are
duly organized, validly existing and in good standing under the
laws of the jurisdiction in which they are organized and that all
have the power and authority to execute and deliver this Agreement,
to perform their duties and obligations and to exercise their
rights under this Agreement, to cause Scientology-related entities
to comply with the terms of this Agreement, and further represent
that the execution of this Agreement by the officers or trustees
has duly and properly authorized by each Church signatory and that
upon execution, this Agreement constitutes a valid and legally
binding obligation of each Church signatory.
B. Notices.
1. All notices and reports hereunder shall be in writing and sent
by certified mail, return receipt requested.
2. Notice to the Service shall be sent as follows:
Assistant Commissioner Employee Plans and Exempt Organizations
Internal Revenue Service Room 3408E 1111 Constitution Avenue, N.W.
Washington, D.C. 20224
In the event of a reorganization of functions within the Service
in which the office of Assistant Commissioner (Employee Plans and
Exempt Organizations) is eliminated, notices hereunder to the
Service shall be sent to the Service official succeeding to the
functions now served by the Assistant Commissioner (Employee Plans
and Exempt Organization), as determined by the Service and sent to
the CTCC in accordance with paragraph B. 4. hereof.
3. Notice to the CTCC shall be sent as follows:
Church Tax Compliance Committee c/o Church of Scientology
International 6331 Hollywood Blvd., Suite 1200 Los Angeles,
California 90028-6329
4. Either party may change the address designated for future
notices hereunder by notice in the manner provided in paragraph B.
1. to the other party to the existing address of record as provided
in paragraph B. 2. or B. 3..
C. Rules of Construction.
1. This Agreement has been prepared by the combined efforts of the
parties and their respective attorneys.
2. The parties may by written agreement extend the time for
performance of any obligation under this Agreement, except and only
to the extent that another provision of this Agreement precludes
such an extension of time.
3. Unless otherwise expressly provided herein, no remedy conferred
on or reserved to a party to this Agreement is intended to be
exclusive of any other available remedy or remedies, but each and
every such remedy shall be cumulative and shall be in addition to
every other remedy given under this Agreement or now or hereafter
existing pursuant to the Code, at law or in equity. No delay or
omission to exercise any right or power accruing upon any default,
omission or failure of performance hereunder shall impair any such
right or power or shall be construed to be a waiver thereof, but
any such right or power may be exercised from time to time and as
often as may be deemed expedient. In the event any provision of
this Agreement should be breached by any party, and thereafter duly
waived by the other party so empowered to act, such waiver shall be
limited to the particular breach so waived and shall not be deemed
to waive any other breach hereunder.
4. The words "hereof," "herein," "hereunder," "hereto" and other
words of similar import refer to this Agreement in its entirety.
5. The words "agree" and "agreements" contained herein are
intended to include and mean "covenant" and "covenants."
6. References to section headings and other subdivisions of this
Agreement are for convenience only and shall not define or limit
the provisions hereof.
7. All references made in (i) the neuter, masculine or feminine
gender shall be deemed to have been made in all such genders, and
(ii) in the singular or plural number shall be deemed to have been
made, respectively, in the plural or singular number as well.
D. Entire Agreement. This Agreement constitutes the entire
agreement between the Service and the Church and supersedes all
prior agreements and understanding, both written and oral, between
the Service and the Individual CTCC members, Corporate CTCC
members, At-large CTCC members, Church Signatories,
Scientology-related entities and Scientology-related individuals
with respect to the subject matter hereof. However, nothing
contained herein shall affect the Settlement Agreement, executed on
even date herewith.
E. Survival of Agreement. All covenants, agreements,
representations, and warranties made herein and in all reports
(including any Annual Report under section IV.), certificates, tax
returns prepared and delivered pursuant hereto shall continue in
full force and effect so long as any of the provisions of this
Agreement remain unperformed.
F. Costs of Compliance with Agreement. The Church Signatories,
Individual CTCC members, Corporate CTCC members, and At-large CTCC
members shall, solely at their own cost, perform and discharge all
of the obligations and duties and exercise all rights under this
Agreement, For example, no set off is available against any penalty
asserted under section VI. paragraph C. 1. by reason of such costs.
The Service shall at its own cost perform and discharge all of the
obligations and duties and exercise all rights under this
Agreement.
G. Counterparts. This Agreement shall be executed in counterparts,
each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
H. Finality. This Agreement is final and conclusive except:
1. The matter it relates to may be reopened in the event of fraud,
malfeasance, or misrepresentation of material fact;
2. It is subject to the Internal Revenue Code sections that
expressly provide that effect be given to their provisions
(including any stated exception for Code section 7122)
notwithstanding any other law or rule of law; and
3. If it related to a tax period ending after the date of this
Agreement, it is subject to any law, enacted after the Agreement
date, that applied to that tax period.
I. Date of Agreement.
The date of this Agreement is October 1, 1993.
Dated: October 1, 1993
[Signature]
DAVID MISCAVIGE,
Individual Member of CTCC
Dated: October 1, 1993
[Signature]
NORMAN F. STARKEY,
Individual Member of CTCC
Dated: October 1, 1993
[Signature]
MARK RATHBUN,
Individual Member of CTCC
Dated: October 1, 1993
[Signature]
HEBER JENTZSCH,
Individual Member of CTCC
Dated: October 1, 1993
[Signature] (POA)
MARC YAGER,
Chairman, WatchDog Committee,
At-Large Member of CTCC
Dated: October 1, 1993
[Signature] (POA)
JONATHAN EPSTEIN,
International Finance Director,
At-Large Member of CTCC
Dated: October 1, 1993
[Signature] (POA)
NIGEL OAKES,
Chief Accountant International,
At-Large Member of CTCC
Dated: October 1, 1993
RELIGIOUS TECHNOLOGY CENTER
By: [Signature]
Mark Rathbun
Title: President
Dated: October 1, 1993 CHURCH OF SCIENTOLOGY
INTERNATIONAL
By: [Signature]
Heber Jentzsch
Title: President
Dated: October 1, 1993
CHURCH OF SPIRITUAL TECHNOLOGY
By: [Signature]
Title: POA
Dated: October 1, 1993
CHURCH OF SCIENTOLOGY FLAG
SERVICE ORGANIZATION, INC.
By: [Signature]
Title: POA
Dated: October 1, 1993
CHURCH OF SCIENTOLOGY
WESTERN UNITED STATES
By: [Signature]
Title: POA
Dated: October 1, 1993
BUILDING MANAGEMENT SERVICES
By: [Signature]
Title: POA
Dated: October 1, 1993
CHURCH OF SCIENTOLOGY
RELIGIOUS TRUST
By: [Signature]
Title: POA
Dated: October 1, 1993
COMMISSIONER OF INTERNAL
REVENUE SERVICE
By: [Signature]
John E. Burke, Assistant Commissioner,
Employee Plans and Exempt Organizations
Dated: October 1, 1993
COMMISSIONER OF INTERNAL
REVENUE SERVICE
By: [Signature]
James J. McGovern,
Associate Chief Counsel,
Employee Benefits and Exempt Organizations