| 
The Wall Street Journal Interactive Edition
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
[ISMAP]-Links to Tools
Copyright © 1997 Dow Jones & Company, Inc. All Rights Reserved.
|
