individual GO members.' The public record at the IRS shows that the misconduct was attributable tb individuals in the GO, a secretive body which had developed a high degree of autonomy from Church management. The record further shows that these activities were eliminated when the GO was disbanded in 1983 and all individuals who were in any way culpable for the GO's misconduct (including those who knew of the misconduct but did nothing to stop it) were dismissed and forever employ. barred from Church During the final /RS settlement negotiations, the IRS inquired at length about the circumstances of the GO's disbandment and the disposition of its personnel. The IRS asked whether the GO was still in existence, the identity of any former GO member still on staff, and whether there is "any entity that performs functions or operates in a manner similar to the former GO." The IRS sought specific assurances that the public policy violations found in the CSC case were not continuing and that those individuals responsible for the misconduct were no longer employed by the Church in any capacity. CSI's responses discussed the history and purpose of the GO and the changes in Church organization through which the GO had become an autonomous entity, unaccountable to regular Church management. CS/ described the bitter and protracted struggle first to prevent the GO from taking over the entire Church and then to disband the GO.
CSI established to the IRS's satisfaction that the GO office had boon disbanded and that the Church had dismissed not only the eleven GO defendants but also over two hundred others that Church leadership held accountable for improper conduct occurring at the GO. CSI also established to the IRS's satisfaction that these individuals currently do not serve on Church staff and in fact are absolutely precluded from over serving on the staff of any Church organisation. CSI showed that the legitisate functions the GO was initially formed to carry out are now carried out by other church organisations and entities -- legal affairs (by the Office of Special Affairs International in =I), proper financial recordkemping and accounting (by the International Finance Network in CSI), public relations (by the Church's LRN Personal Public Relations Network in CSI), and community outreach social betterment programs (by the Association for Better Living and Education through Narconon for drug rehabilitation and Applied
. 1 The Church itself was never prosecuted, much less convicted.
2
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• Scholastics for education). CSI also showed that it instituted strict procedures to prevent these organizations,had or any church management division, from attaining any meaningful level of autonomy from senior Church management. Other Actions
As part of the negotiations leading up to the October L. 1993 exemption rulings, the IRS also required CSI to whether there have been any governmental actions againstdetermine any u.s. sinceChurch entities alleging a willful violation of any criminal 1983. After an extensive investigation, CSI certified tolaws the IRS that to its knowledge there were no such actions or any pending state or local governmental criminal investigations of any Church entity or employee.
Based on this information, the IRS was satisfied that there were no violations of public policy that would affect the Church's qualification for exemption. Canadian Case
CSI also responded to specific IRS questions regarding ongoing criminal proceedings in Canada involving the Church of Scientology of Toronto (the "TorontO Church"). Although the proceedings took place in the early 1990s, the actual conduct involved took place over 15 years earlier, in the early to mid-1970s, and, in fact, was pert of tho same misconduct of old GO staff that led to the criminal prosecution of eleven GO members in the United States in the late 1970s. The submissions also showed that the Toronto Church was initially charged with 19 counts, of which only 12 vont to trial, resulting in on only two minor counts of breach conviction essence directed of trust. The court in a verdict againet the Toronto Church, instructing the jury it was irrelevant whether or not -- • the GO was separate and autonomous; • the Toronto Church and its officers and directors what the GO was doing; even knew * the Church had cleaned house long before the government began contemplating a criminal investigation. The Toronto Church has appealed its conviction, and the case has not yet been resolved. However, the IRS vas satisfied with the information the Church provided concerning the case and determined that the acts of the GO back in the 1970s that prompted the Canadian criminal proceedings had long since been corrected and were not a bar to tax exemption. 3 QiYil_kklia1t1211 The IRS also asked the Church to provide it with information about all civil litigation involving Church entities since in which there have been claims of fraud or other inteniional1980 misconduct. The purpose of this question was to identify all allegations of possible misconduct to determine whether there may be any other basis to bar exemption on provided the such grounds. CSI each IRS with dozens of pages identifying such case, including the case name, and describing the factual baCkground, the legal allegations,court andand thedocket number; or status of the case or claim. However, since these resolution cases were provided to the IRS in Juno and November of lists1992, of of the cases have been resolved. many The Church showed that most of the early coordinated by a !Boston lawyer who made his livinglitigation suing was Scientology, and that most of the more recent litigation has been instigated or supported by the Cult Awareness Network ("cAN virulently anti-religious hate group that supports and 6, ), a deprogramming of individuals it encourages CAN- claims are "cultists.f supported agents , (of whom many have been convictod of criminal acts) have kidnapped and deprOgrammed aembere of other religions such as the Roman Catholic Church and Jehovahs• Witnesses, but their principal target has been Scientologists. Again, after an extensive review and investigation the IRS barrierconcluded to thatexemption. these allegations against the church were not a
noteworthy:A fundamental point about the public policy question is AI stated above, under the second component public policy lieitation, the IRS may examine the religiousof the rituals or practices of a church to deteraine whether they comport with fundamental public policy without violating the United States COnstitution. However, both the specific misconduct by individuals identified in the Church of Scientology of California case as well as the IRS's detailed examination of the Church's activities since 19416 inVolved only the first component of the public policy limitation -- the question of violation of criminal or civil laws of general applicability, certain biropean countries, various Scientology religious rn practices have been challenged as unlawful or contrary to public policy in and Of themselves. The Church has found that those positions invariably are based on a plethora of grossly pejorative"pseudo characterisations of Scientology practices (of vhich -scientific quackery° was one of the mildest) that had atbeen no banteredtime about the world in the 19601 and 19705. HoVever, during it4 30-year investigation of Scientology did the IRS over suggest that Scientology religious practices themselves are contrary to public policy.
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• •-• SCOL/T7 &RASENE3E:=."::::=.
FINANCIAL . INTEGRITY
Another fundamental requirement of tax exemptio under section 501(c)(3) is that the organization's assets DO held and used exclusively for exempt purposes. The IRS must ze satIsfled that the organization's internal financial controls Insure its assets are dedicated exclusively to exempt purposes and are not diverted to some improper purpose. The IRS also mus t be satisfied that the flow of funds between affiliated prganizations accomplishes exempt purposes and is not a guise thro agh which assets are being diverted to nonexempt entities. The Scone of /RS Examinations of the Church The IRS satisfied itself on these points on the basis of a wealth of information it developed over a period of . sloven years, from 1982 to 1993, through exemption application pro :eedings and collateral examinations undertaken on all top Church entities and several lesser entities. These proceedings included the exemption applicotions of Church of Scientology International ("CSI") and other Scientology churches and their related organizations filed in 1912, including the on-sito review of books and records of Church of Spiritual Technology ("CST") and Religious Technology Center ('RTC"), as well as the exemption applications CSI and RTC filed in 1990. The proceedings also involved the ten-year examination of Church of Scientology of California ("CSC"), the two-year eAamination of the Founding Church in Washington, D.C., the separato examinations of Bridge, Church of Scientology Religious Trust, Scientology Endowment Trust, IMU Services, Mr. Hubbard and mr. Hubbard's estate and testamentary trust, Author Servlces, Inc. and the examination of CSI and Church of Scientology Western United States during the negotiations leading to the October 1, 1993 exemption rulings. The IRS left no stone unturned in its •xamination of the books and financial records maintained by those entii:ies. For example, the CST on-site examination in 1988 alone ultimately involved a total of eight agents, plus supervisors, and took over two months to complete. CST provided the examining agents all of its financial records for its fiscal year ending Apra 30, 1967, including CST's bank statements, canceled checks, diabursomont vouchers, invoices, receipts, bills, purchase orders, internal audits, payroll records and staff disbursements accountings for the entire year. The agents also personally inspectod CST facilities in California and New Mexico. During the examination, the agents issued 65 domment requests asking more than 400 detailed questions. In response. CST provided the agents approximately 240 pages of narrative
' cx.rq , BCOuT" & RASENBEqGEq
answers and more than 9,000 pages of exhibits, schedules and supporting documentation. The level of detail often bordered on the minute: For example, the agents required CST to substantiate numerous trivial expenditures, including travel expenses of less than 55.00 and individual telephone charges over 51.00; the agents asked CST to "describe the rationale" for reporting expenditures for "paper towels" and "Galley supplies" in a disbursement account designated "repairs"; and the agents even asked CST to "fully describe" the kitchen and bathro:ms at one of its facilities. The /RS agents who actually conducted the examinations were intimately familiar with Scientology financial policf and therefore easily could have detected any abusive finAncial practice had such existed. Obviously, after spending five entire years examining just one Scientology organization (in the case ( CSC) tho agents know vhat they were looking for. Indeed, througn 1981 (or six of the ten years under examination), CS: housed essentially all of the •cclesiastical functions now •.performed by the most senior churches and church organizations in the Scientology ecclesiastical hierarchy, including CSI, RTC, CSTSO, CSWUS, Bridge and ABLE. Initially, the agents examining CSC reviewed numerous individual transactions, including the original docuaents, confirmed them by cross-references to bank account statements (and in some cases vith the banks themselves), and traced them through CSC's interim summaries and annual internal financial statements. Well before the end of the exanination 'Una agents were sufficiently satisfied with the integrity of thm accounting system that they generally were relying on CSC's periodic summaries and annual internal statem•nts without the need to go back through original transaction records. Nevertheless, at all times during the later exaninations, the Churches made every effort to ensure that the agonts understood what they were looking at. For example, In December of 1917, prior to on-site examinations of CST, and RTC, senior audit partners from a major international public accounting firs spent two days introducing IRS National Office personnel to the Church's .system of financial accounting and internal controls. The accountants described the original entry records (invoices and disbursement vouchers ("DVi0)), their periodic roconciliation to bank account statements, and their tabulation into weekly and/or monthly and annual financial statements. They then identified the basic financial controls that assure Integrity and accountability -- th• requirement that all income be invoiced and banked, the requirement that all disbursements be by check and corresponding purchase order after approval by mania: church executives through the weekly financial plan, the separate 2
2.,*"44. 1z4.;:APOi;'1Z,P ,w.glpir*wilTwmAprt7pr777rT e • g7M.PT7T .- 73...m5375 ;7774 - • . , consecutively numbered invoices and OVs to serve as a cross-check, the strict segregation of responsibility for invoicing, deposit, disbursement and accounting for funds through different staff positions held by different individuals, and the requirement of two signatures for all checks. The Church provided a similar presentation to the agents in Los Angeles prior to the start of the actual examination. Additional Information Provided to the rRs
During the final two-year period culminating in the October 1, 1993 exemption rulings, CSI provided even more information on the integrity of the Church's accounting system and financial records. CSI began, of course, by summarizing the detailed information the IRS already had amassed on this subject and its extensive testing of the accounting system and records. CSI then specifically described the Church's internal accounting and financial audit procedures -- the various original entry records, reconciliations to bank statements, periodic income and disbursement summaries through the annual financial statements. CSI once again identified the basic financial controls -- all receipts invoiced and banked, all disbursements by chick, OV and purchase order, and the strict segregation of personnel involved at various stages of receipt, deposit, disbursement and accounting.
At the IRS's request, CSI provided copies of all applicable financial and management policies, ultimately to include an entire eight-volume set of the Organization Executive Course, which sets forth all applicable Scriptural directives on church management, including finance. CS1 provided the IRS with copies of internal annual financial statements for the ten-year period 1981 through 1990 for C3I, RTC, CST and 26 other major Church organizations, including the following: Church of Scientology Flag Service Organization, Inc., 1981-1990 Church of Scientology Flag Ship Service Organization, 1988-1990 Church of Scientology Western United States, 1981-1990 (including Church of Scientology of San Diego, 1981-1984) New Ira Publications ApS, 1981-1990 Bridge Publications, Inc., 1981-1990 United States Parishioners Trust, 1988-1990 Trust for Scientologists, 1987-1990 Church of Scientology Expansion Trust, 19821988 Scientology Endowment Trust, 1981-1988 Church of Scientology Religious Trust, 1981-1990 Flag Ship Trust, 1985-1990
3 SCOUTT &RASENBE;GER
Church of Scientology Religious Education College 1981-1990 Scientology Missions International, 1982-1990 International Hubbard League of Ecclesiastical
Pastors, 1981 - 1990 Scientology International Reserves Trust, 1989-1990 Author Services, /nc., 1982-1990 Building Management Services, 1981-1990 Church of Scientology Freawinds Relay Office, 1988-1990 World Institute of Scientology Enterprises, 1981-1990 United States Scientology Films Trust, 1982-1988 Scientology International Reserves Trust, 1986-1988 Scientology Dissemination Trust, 1982-1988 Church of Scientology Buildings Trust, 1982-1988 CSI provided copies of financial statements of certain non-U.s. Church organizations prepared by certified public accounting firms. CSI also provided the IRS representatives copies of the two most important financial reports of a church organization -- the F30 Weekly Report (which breaks down receipts and disbursements by category), and the Income Sources Summary -- actual financial planning, and monthly bank statoment(s) for four specific months for churches the IRS selected at random. Finally, CSI responded to a number of specific questions the IRS had about particular financial arrangements, structures, or controls. For example, CSI explained in detail how a typical church would discover a hypothetical act of embezzlement by its FS0 (through discrepancies in internal audits), identified the other church officials whose collusion would be necessary for the esbezzlomont, and described what disciplinary action would follow from such an act. CS! showed the XRS how the same controls that prevent improper diversion of funds from douestic accounts also prevent improper diversion from overseas accounts -- that all receipts, be invoiced and all disbursements be by DV, even inter-account transfers, that all invoices and DVs are reconciled to bank statements, and that all disbursesents require more than one signature. CSX also demonstrated to the IRS's satisfaction that the ownership rights of all stock corporations that had boon formed to support Church functions (such as Author Services, Inc. and certain Church publishing companies) were owned by Churches or their nominees (when required by local law) and that their receipts and assets were irrevocably dedicated to Scientology
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7q,7•-,' 7...:CKEP7 SCOUTT &RASENIBEGEP
religious purposes. In this process the IRS also assured itself that no individuals or non-exempt entities were deriving personal benefit or profit from those corporations.
csI also provided the /RS with detailed information concerning new accounting software that it is developing for tne Church's computer network. CSI explained how this software will incorporate the Church's longstanding accounting system. CSI also showed how the software will facilitate the conduct of regular internal audits and reconciliations and the preparation of internal financial statements. In the extensive examinations of the various Scientology - organizations that the IRS conducted over the past two decades the IRS had ample opportunity to review in detail every type of payment between and among Scientology organizations. These payments included amounts lower Churches pay to CSI for its ecclesiastical support services, payments certain churches make to RTC when they minister Scientology's advanced religious service' to their congregations, transfers to reserves, payments for assistance in training staff, rent and mortgage payments, interest payments and loans, payments for the use of Scientology religious films, and the purchase of Scientology religiouabooks and other forms of the Scripture, payments for fundraising commissions, staff compensation, and payments of all kinds to third-party vendors and professionals. In this prOcess the IRS examined the details of literally hundreds of thousands of separate, specific transactions. Through those separate examinations, the IRS could trace every expenditure from an organization to a corresponding receipt of the organization receiving the payment. In this vay the IRS confirmed that payments made from one Scientology organization to another Scientology organization in fact vont to that organization and that the funds paid were actually applied to Scientology religious purposes. At the completion of these examinations the rRs concluded that the financial reports Scientology organisations prepare are complete, verifiable and accurately reflect the underlying transactions. Rased on this extensive information about specific payment arrangements, and its satisfaction that the payments were accurately reflected in church financial records, the IRS determined that all the inter-Church transfers of funds wore consistent with the requirements for tax exemption. TAX EXEMPTION -- TEE PROCEDURAL BACKGROUND
The Church of Scientology's October 1, 1993 exemption rulings were not issued in a vacuum. Rather, they represent :he culmination of the most extensive fact-gathering process the :RS has ever engaged in. This process encompassed every means the IRS's power to develop information, from litigation in --",. to exemption application proceedings to actual tax audits. understanding of this extensive procedural background is An essential to place in context the full import.of the October 1, 1993 rulings and the factual information on which they were based.
The goals, purposes and religious practices of the Scientology religion have not fundamentally changed. The activities of a Church of Scientology today are essentially the same as they were more than 30 years ago when the first Churches of Scientology were recognized by the IRS as exempt. The Church of Scientology of New York was recognized as exempt in 1957 and has been so recognized continuously since that time. Over the years other Churches of Scientology also have been recognized as exempt. All Churches of Scientology in the United States have operated as exempt organization throughout the Church's history. Because of false informatsion that the IRS was given and which was maintained in /RS files, however, and because of the prejudices of isolated IRS personnel, the Church's exempt status was challenged many times throughout its history. As a result, Churches of Scientology have been examined, audited and scrutinized by the IRS more thoroughly than any other exempt organization in the IRS's history -- challenges they survived. The first adverse ruling the IRS issued with respect to Scientology dates back to tho late 1950s and involved the then Mother Church of the Scientology religion, the Founding Church c Scientology of Washington D.C. Although initially recognizing the Founding Church as exempt, the IRS subsequently ruled.that the Founding Church no longer qualified for tax-exempt status. In 1969, the United States Court of Claims upheld the IRS's determination.
However, the rRs chose to limit its challenge of the Church's tax-exempt status only to the Founding Church. In mid-1975, subsequent to the decision in the Founding Church case, the IRS conducted an intensive examination of a representative Class rt.? church of Scientology and on the basis of its findings, issusd favorable exemption rulings to all 11 Class TV churches in existence at that time. Class IV churches ministered religious services to Scientology parishioners, and represent Class v Churches as they exist today.
717-r:3 M777417- EMITL 77,7771.7qWWW7mm 1177.1:45 - -- - - Subsequent to this favorable action at the level of sutcrdinate churches, the IRS then mounted another major challenge to Scientology against Church of Scientology of California ("CSC"), the then Mother Church of the religion, examining its records for the years 1970 through 1974. Following a year-long examination of CSC's financial records CSC went to the United States Tax Court concerning its exempt status. The trial of this case took place in 1980 and 1981 and resulted in the 1984 Tax Court ruling that CSC had failed to prove that various direct and indirect payment arrangements to Mr. Hubbard did not constitute private inurement to Mr. Hubbard. The Tax Court, however, also sustained the /RS's position oh two alternative grounds: that CSC was operated for a substantial nonexempt commercial purpose and that the Church did not qualify for exemption under the "public policy" requirement. In 1987, the United States Court of Appeals affirmed the Tax Court's decision solely upon CSC's failure of proof on the private inurement question; it specifically declined to address the Tax Court's alternative holdings on commerCialism and public policy. Both the Founding ChUrch case and the CSC case specifically recognized that Mr. Hubbard was entitled to be reasonably coMpensated for hie personal services rendered to the Church and for the Church's use of the religious properties he created. However, 'each case hold that the respective Church had failed to prove that the specific financial arrangements in question constituted reasonable compensation to Mr. Hubbard. In 1981 the Scientology ecclesiastical hierarchy vas reorganized in a way that directly addressed the IRS's concerns as to Kr. Hubbard's continuing financial relationship with the Church. As part of this reorganization Church of Scientology International (SCSI") vas formed to succeed CSC as the Mother Church; Religious Technology Center ("RTC") was formed to supervise the use of the Scientology religious marks and advanced technology by the hierarchy (which Mr. Hubbard gave to RTC); Church of Scientology Flag Service Organisation ( 0CSFSO") vas formed to tiike over the ministry of the most advanced religious services that C$C had previously ministered, and Bridge Publications Inc. vas formed to take over the publishing activities CSC had previously conducted. Further, Church of Spiritual Technology ("CST") was formed with the aission to preserve the Scientology Scripture for all time against any conceivable catastrophe and to serve as the primary beneficiary to Mk. Hubbard's estate, including all of his religious intellectual properties. Finally, a for-profit corporation, Author Services, Inc. ("ASI")4 was formed to administer Mr. Hubbard's publishing and other business affairs. With these changes the Church believed that the issue of private inurement to Mr. Hubbard had been eliminated. The next step was to 2
gm77777,17 formally notify the IRS of these changes, which the Church planned to do through the exemption application process. A. The 1982 Exemption Applications In 1982 the senior churches in the Scientology ecclesiastical hierarchy filed applications for recognition of exemption under section 501(c)(3). The applicants included cS:, RTC and CST (which applied in 1983). All applications were assigned to the IRS's Exempt Organization Technical Division located at the IRS National Office in Washington, D.C.
From then until early 1986 the IRS asked the applicants a series of questions and received answers concerning their activities and financial affairs. Eventually, on January 7, 1986, the IRS issued three substantially identical adverse ruling letters to CSI, RTC and CST that proposed denying exemption on two primary grounds: inurement to Mr. Hubbard, and operation for a commercial purpose. On January 24, 1986, subsequent to the issuance,of the initial adverse letters, Mr. Hubbard died, leaving the bulk of his estate to CST on the condition CST obtained recognition of its exempt status. Mr. Hubbard's bequest included all his copyrights to the Scientology Scripture and religious materials and his patents to the E-Meters. Although as noted above the Church took the position that the 1982 reorganization had eliminated any question of inurement to Kr. Hubbard, his death and ensuing bequest to CST obviously •nded the matter once and for all.
• In response to the initial adverse letter, on July 3, 1986 CSI, RTC and CST filed a joint protest containing their legal analysis of the two issues the IRS had raised and extensive factual information concerning the activities of the entire Scientology ecclesiastical hierarchy. The joint protest consisted of over 30,000 pages of vital information concerning the religion, much of which the IRS had not considered before. The joint protest took into account the fact that the officials in the rots who had issued the initial adverse letter did not understand the Scientology religion, the structure of the Church and its activities. The joint protest undertook to educate the IRS about the true purposes and activities of the Church to dispel their fundamental misconceptions with respect to the Church's ecclesiastical structure, activities and financial affairs, and it directly addressed issues the IRS had reislad In the initial adverse _letter with respect to inurement and commercial purpose.
3 Six months later, on January 14, 1987, representatives from the three churches and the IRS met to discuss the initial letters and adverse the joint protest. The conference lasted six days and focused on the two issues of inurement and commercial purpose and also whether CST's exempt status should be determined separately from the other Scientology churches since it operated outside of the Scientology ecclesiastical hierarchy. At the conclusion of the conference, the IRS agreed to reconsider the initial adverse letters in light of the information the three churches had provided. In addition, it was agreed that the churches would provide the IRS with additional information to meet concerns the IRS had raised during the conference with respect to the issues of commercialism and inurement and with respect to CST's status as a separate organization. This information was to be provided sequentially in three major submissions: the first to address CST's separate status, the second to address commercial purpose, and the third to address inurement. Accordingly, on May 5, 1987 CST provided the IRS the first submission concerning 'its right to have its exempt status determined on the basis of its own activities rather than in connection with the hierarchical church. This submission included an 80-page narrative description of its formation, governance, financial affairs and preservation program, as well as a 45-minute videotape presentation of its facilities and activities. The submission also included a legal analysis as to why CST's exempt status should be based solely on CST's activities. On August 3, 1987, the churches submitted an extensive written submission on the issue of commercialism (the "Commercialism Submission") that addressed the four remaining areas of concern the IRS had raised with respect to the issue during the conference: (1) whether the Church's promotional materials employed methods used by commercial business; (2) whether certain of the Church's fundraising practices, such as componsat fundraisers on a commission basis, wore consistent with ex en?on; (3) whether prices for Scientology books and other rel ious material and fixed contributions for religious services are set to maximize profits (like a commercial business) or to accomplish a tax-exempt religious purpose; and (4) whether reserves are unreasonably high or are reasonable in light of the anticipated needs of the religion. The Commercialism Subsission provided the IRS with uncontradicted evidence that there was no foundation for their concerns and that Scientology promotional materials, prices and reserves all align with the requirements of section 501(0)(3).
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, •'.• • The submission consisted of over 4,300 pages, including affidavits of experts in publishing and related areas of the nonprofit community, Church policy concerning the setting of prices and details of the size, management, expenditure and planned purpose of Church reserves. Two months later IRS officials informed the churches that the Commercialism Submission had "fully satisfied" them on the issue and that they had no further questions as to commercial purpose. The /RS stated that it would grant exemption to the churches if they agreed to undergo a review of their financial records by IRS agents located in Los Angeles. The purpose of this review was to satisfy the IRS that the churches' funds were not benefiting private individuals and that their books and records have financial integrity. The IRS agreed that if the churches underwent this review, they would not have to file the third planned submission on the issue of inurement. B. The 1988 Settlement Aareement Eventually, the IRS and the churches signed a written agreement as to the terms of the proposed limited review and the overall settlement of the proceedings (the "Settlement - Agreement"). The 1988 Settlement Agreement provided that if a review of CSI, RTC and CST's books and records showed no inurement or other disqualifying activity, the three churches would be recognized as tax-exempt. CST's review began on March 23, 1988 and consisted of a team ranging from four to eight full-time IRS agents. For the next ten weeks, these agents examined all of CST's financial records, inspected its facilities, and interviewed its staff. They also asked CST more than 400 specific questions for more information about its activities and financial affairs. When the agents conCluded their examination, they reported that they found no indication of inureeent whatsoever and could not fault CST's records on any grounds. The agents then began their review of RTC. Within a month the agents reported the same favorable conclusions they had reported with respect to their review of CST, and they began their review of CU. However, at that time Church officials learned that the reviewing agents had violated important IRS procedural rules and the terms of the Settlement Agreement by interviewing and encouraging individuals to litigate against the Church. CSI, RTC and CST expressed their concerns to officials at the IRS National Office, but they refused to intervene and instead, the matter reached an impasse.. 5
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•••,• 7>:7-01 , • C. Collateral IRS Examinations
Before, during and after the 1982 exemption proceedings :he IRS undertook examinations of various Scientology churches and their related organizations throughout the United States. These collateral examinations also provided the IRS with very extensIve information concerning the Church's financial affairs.
In 1984, for example, the 1R$ undertook an examination of Bridge Publications' books and financial records for its 1982, 1983 and 1984 years. When the IRS completed its examination in November 1987, three years later, it had reviewed Bridge Publications' original source financial documents and literally tens of thousands of transactions with individual church bookstores. In 1987 the IRS began an examination of L. Ron Hubbard's
personal income tax returns for the seven - year period 1979 - 1985. This exaaination encompassed all items of Mr. Hubbard's income and deductions, including amounts he received from Bridge Publications, Scientology churches and their related organizations. As in all income tax examinations, the exaaining agents searched for items of income Mr. Hubbard aay have failed to report. On completion of their examination, the agents reported that they could trace to the source every penny Mr. Hubbard received in those years. The IRS also examined Mr. Hubbard's Estate Tax return, which vas filed subsequent to his death in January 1986. This examination began in July 1967 and ended tvo years later in June 1989. The IRS asserted one primary issue as a result of its examination -- whether mr. Hubbard's bequest of the bulk of his estate to CST qualified for the charitable contribution deduction. However, the IRS conceded this issue, allowing a full deduction to the Estate, at the time that it issued the favorable exemption rulings on October 1, 1993. In 1944 the DM instituted an examination of the financial books and records maintained by Church of Scientology of Californi& (aCiCe), which had served as the Mother Church prior to CSI's formation in 1962. CSC's examination encompassed all of its receipts and expenditures from 1975 through 1985 and involved several thousand boxes of financial documents. The examination continued without interruption for five years, from 1988 to 1993, when it vas coupletod. Following the impasse in the negotiations with CSI, RTC and CST in 1988, the IRS atteapted to commence examinations pursuant to the Church Audit Procedures Act of CSI and four other churches of Scientology -- Church of Scientology Flag Service Orq, Church 6
ITATMTWIPT7m77 ,- JP.MMTRW of Scientology Western United States, Church of Scientology cf Boston, and Founding Church of Scientology Washington, D.C. ("FC0C"). (The earlier decision against the Founding Church was limited to tax years 1956-1958; therefore the Founding Church continued to claim tax-exeipt status in the years following the decision.) Each of the examinations was conducted by separate teams of IRS agents. All five churches initially cooperated with the IRS, providing it extensive information in response to specific questions it asked. Eventually the IRS issued a series of extremely detailed questions to each of the five churches. The Boston Church challenged the propriety of the questions since that Church had been recognized as exempt by the IRS in 1975 following an extensive examination and had made no changes in its operations since that date. The United States District Court ' Boston agreed and refused to allow the IRS examination to go forward, a decision uphold by the U.S. Court of Appeals. The eximinations of CSI and Church of Scientology Western United States were supplanted by further negotiations with the IRS, culminating in the October 1, 1993 exemption rulings. The Founding Church successfully completed its examination and received written confirmation supporting its claim of tax-exempt status. The IRS issued this confirmation only after a rigorous review of the church's activities and financial affairs that included more than 20 specific requests for information requiring extensive narrative responses and actual inspections of its books, financial records and facilities. The IRS also initiated a series of examinations against church support organizations between 1988 and 1990. In February 1988, the IRS undertook an examination of the 1984 and 1985 taxable years Of ASI, which administered Xr. Hubbardls publishing and other related agreements and served as a buffer between hie and the ChUrches and their publishing organisations in those years. This examination was favorably resolved with only ono minor adjustment. In 1990, the IRS started an examination of the 1986, 1987 and 1988 taxable years of IMF Services, which functioned as a support organisation for the International Association of Scientologists (gIAS6 ) by administering IAA's membership matters (i.e., corresponding with LAS members, publishing the LAS membership magazine, etc.). (IXII Services has long since dissolved.) When the IRS closed its examination, its only criticism vas that IX13 Services had not charged LAS the full value of the services it was performing.)
7 In 1990 the IRS also initiated examinations of :hurch of Scientology Religious Trust ("CSRT") and Scientology Endowment Trust ("SET") for their 1987-1989 and 1986-1988 years, respectively. Both trusts functioned as Scientology reserves trusts, administering central reserves funds on beha:1 ok csi's. Central Reserves Committee. Both had been recognized by the IRS as tax exempt under section 501(c)(3) in 1983. Neittler examination resulted in any challenge*to the trusts' exempt status. The IRS issued CSRT a letter confirming its exempt status on October 1, 1993 when it - issued the Church's: exemption rulings. SET had dissolved in 1988 so it did not have to receive a ruling. D. The 1990 Xxemption Application* On March 15, 1990, CST and RTC filed new applicatiohs for recognition of their tax-exempt status directly vith the Technical Division of the IRS National Office. 'Thalia applications contained information the IRS had prevented csI and RTC from including in their prior exemption proceedings, which they believed was essential for determining their •xampt status. Over the next 18 months the IRS issued a series of questions to CSI and RTC, to which they provided appropriate respcnses. In-late 1991, Church leaders approached the then Commissioner of the IRS, Fred Goldberg, to initiate a new round of negotiations aimed at resolving once and for all any questions concerning the ChUrch's status. Following this meeting, Commissioner Goldberg recognized that the Church representatives were sincere in this endeavor and assigned the IRS Assistant Commissioner (Employee Plans and Exempt Organizations), John E. Burke, to personally supervise the exemption proceedings in an effort to settle all outstanding tax controversies with the Church of Scientology. Re assembled a wOrking group of some of the most senior officials at the IRS National Office, including the IRS Associate Chief Counsel, Employe. Benefits and Exempt Organisations (his counterpart in the IRS Office of Chief Counsel), the Special Assistant to the Assistant Commissioner, and three senior staff attorneys from the Office of Chief Counsel.
Bxtensive negotiations then began to address ways to resolve the exemption proceedings. As an initial matter, the rRs working group reviewed all prior exemption proceedings involving the Church and conferred with agents in Los Angeles and elsewhere who had participated in prior exasinations of the Church. . The negotiations under Assistant Commissioner Burke's jurisdiction soon developed into the most vigorous ani focused examination of the Church ot Scientology that the IRS had ever conducted -- indeed, of any organization ever examined by te for purpoSeS of determining exemption. The negotiations involved:RS dozens of face-to-face meetings . between the IRS working group and Church representatives over more than two years, with most running for a full day and many extending for two t3 three days at a tine. C:lurch lawyers and accountants worked iltensively to provide responses to questions and to prepare information for finan.:ial the IRS to review. Top IRS specialLsts attended some of the meetings and reviewed the Church's submissions. The IRS asked hundreds of specific questions for detailed factual information with respect to the areas of thoir concerns. The Church provided complete responses to every quention asked. These responses -- which amount to more than 11,000 pages of information and constitute 12 linear feet of stacked paper -- are contained in the administrative record of CSI's exemption proceeding available to the general public at the IILS National Office in Washington, O.C. This information included balance sheets for all of the major organizations in the Cturch, all expenditures from Church reserves for a three-year period, all planned expenditure. from Church reserves for the next five years and a report on the expenditures for the five previous years, compensation information for Church executives and the highest-paid individu'als in the Church, financial information concerning the highest paid vendors that the Church dealt with, answers .to many other specific financial questions and extensive information concerning the Church's structure and ozganizations and the integrity of its financial records. Relevant portions this record are attached to the individual write-ups which aro of part of this package, addressing specific exemption issues. In addition to asking for this oral and written information. the /RS conducted its awn examination of C3I's financial records. In December 1992, with Kr. Burke in the lead, five mambers of the working team traveled to Los Angeles, where they and tvo other IRS agents frOm the Los Angeles area had unfettered access to more than 640 boxes of original entry documents, canceled chocks bank statements, payroll records and other financial records fa. both CS! and Church of Scientology Western United Stites.
Finally, in conjunction vith a second team of five agents from the Individual Income Tax Division of the IRS's National Office, the working team also conducted a thorough •camination of Scientology religious services, including specific alditing services and religious training courses, the Church'l fixed contribution method for raising funds, and the natur4 of the benefits Scientology parishioners receive when they :participate in these services.
9
-77,4q7.574F4,7„7.0pAiR7- 7. 1.71, 14; '
At the conclusion of his two-year review, the Assistant Commissioner agreed not only to grant exempt status but also -o resolve all existing tax controversies with the Church. Accordingly, the IRS issued 25 favorable individual exemption rulings and 5 favorable group exemption rulings to the churches of Scientology and their related religious, charitable and educational organizations. In total, more than 150 churches and charitable and religious organizations were recognized, including the organizations that conduct the Church's drug rehabilitation activities, literacy and educational programs, criminal rehabilitation and various social- reform activities. (These organizations aro described in a separate write-up.) The IRS and the Department of Justice joined with the Church to dismiss all pending tax-related litigation. IRS offices around the country favorably closed their examinations of Scientology organizations, Church officials and parishioners. And the IRS publicly withdrew a ruling that it had issued to deny income tax deductions to individual Scientologists for their fixed contributions, and it agreed to start allowing them to deduct their fixed contributions in full.
The magnitude of the IRS's inquiry . into Scientology over the past four decades is without parallel in the history of.United States internal revenue law. There simply was no aspect of th* activities and financial . affairs of the Church and its personnel, nor any aspect of Scientology religious practice, that the IRS did not examine in groat detail. At no time during this extensive examination did the IRS find a single instance of inurement or reason to criticize the integrity of tho Church's books and financial records. Indeed, this governmental investigation of awesome proportion •nded with but ono unassailable conclusion: that the Church of Scientology operates exclusively for tax-exempt religious purposes.
1 0
kr4_, 4TIFWITITIT7rqFffl7Wgi, / t Se ies o uestionsfla cb 991
whether1. A complete by ownership, list of all entities associated or affiliated, contractual agreement, or otherwise, within the Church of Scientology organizational structure (whether or not the word "Scientology" appears in the •ntity's name). This trusts,list should associations, include all and domestic and foreign corporations, (including unincorporated all reserve accounts), whether •ntitiesreligious, or secular,accounts exempt, non-exempt, non-profit or profit-making. Each entry should include a description of the extent (in terms of and expenses, staff time employed in its activities, etc.)income of stockholders.operations, and a list of its officers, directors, trustees, its and 2. each Anentity organizational in the structure. chart showing the place and relationship t 3. An explanation of how operational and financial authority is exercised in the organizational structure, including a complete description of the authority organizations at the highest level have over mid-level and lower-level organizations, irrespective of the actual activities performed. This should also include a controldescription a flag of the flag banking office system and the amount of assigned organization.banking officer has with respect to his or her 4. An explanation of who exercises control over the entities. Specifically, what individual or individuals have decision authority for ecclesiastical, corporate, legal, or financialmaking matters affecting all or some entities in structure. This •xplanation should describethe how Scientology current decision-making authority differs from Hubbard in the time he controlled the church.that exercised by L. Ron A description ot tne riow or tunas or otner assets between and among entities (including reserve or other accounts), whe-her. secular or religious, domestic or foreign. This should show the path and ultimate destination of funds sent overseas. "Funds or other assets" includes intangibles and all financial instruments, whether or not they are considered cash or cash equivalents. For example, the term includes nonnegotiable notes, unendorsed personal checks, and securities transferred between entities, whether physically or electronically. 6. An explanation of the distribution of the assets of the United States Churches of Scientology Trust, which we understand was dissolved in 1988. This should include a description of all recipients and the use to which the assets have been put. The explanation should identify any entity or entities that have taken over functions formerly performed by the United States Churches of Scientology Trust. 7. An explanation of any commission compensation systems used by Scientology entities. This should include a description of internal controls, if any, to insure that all income tax reporting requirements are met for commissions paid. 8. A description of all services or products offered. This includes all auditing, training, motivational courser,' publications, and business courses, whether secular or religious. Include price lists, a description of tho method of pricing, and a description of the entities through which each service is offered. 9. An explanation of the financial reporting system used to maintain control and prevent private benefit or inurement at any organizational level. This should include an explanation of how the service could, with as little intrusion as possible, examine the accounts to ensure that concerns about inurement, commerciality, public policy, and integrity of records are addressed. 10. In responding to the questions herein, and particularly question 5, please provide your best estimate as to actual dollar amounts.
- 2 - Second Series of Ouestions (Mav 1992)
1. Please provide a list of all organizations described below, including each organization's address, principal place of business, jurisdiction in which organized or incorporated, form (e.g., trust or corporation) and employer identification number (if any). This list should include all organizations regardless of form. Please include all ecclesiastical organizations and indicate in which legal entities (e.g., corporations) the ecclesiastical organizations are housed. The list should contain information as of December 31, 1989 as well as any changes up to the date of your response. To the extent that there are currently anticipated or planned actions that would modify this list over the next five years, please also describe those anticipated modifications. Please label each organization as to the category (or categories) in which it fits. (i) Any mission in the United States that provided Scientology Missions International with tithes or other forms of financial i support in excess of $10,000 in 1989 or in any calendar year thereafter. (ii) Class V churches operating in the United States. (iii)The publications organizations, depicted in the chart on the first page of Exhibit 1-5, along with any sublicensees or subsidiaries thereof (hereinafter "Publications Organizations"). (iv) The social benefit and other public benefit organizations depicted in the chart on the first page of Exhibit 1-6, along with all sublicensets thereof (e.g., organizations that are permitted to user particular names, copyrights, service marks, and/ or technologies) (hereinafter "Social Betterment Organizations"). (v) Any organizations, including but not limited to any trusts, that hold assets (including but not limited to intellectual property and mortgages) for any other Scientology-related organizations or for the advancement or protection of the Scientology religion. This does not include financial institutions (as defined below in question 6). (vi) Any organizations directly or indirectly involved in or related to the ownership and/or operation of the M.V. Freewinds. You need not list wholly unrelated commercial vendors.
7 - - 3 - (vii) Any membership organizations, including but not limited to the Sea Organization, IAS, DAS, and EAS, along with any service corporations performing the such organizations (hereinafter "Membership operations of Organizations"). (viii) Any organization that owns (including, but not limited to, those entities listed below in this clause (viii)), (sub)licenses, and/or has rights or a (sub)license to use what has been described as the scriptures written or stated by Mr. L. Ron Hubbard) or any technology,(anything copyright, trademark or service mark held by RTC, CSI, CST, any publications organization or the Estate of L. Ron Hubbard. For purposes of this clause (viii), you need not list for-profit sublicensees of the World Institute of Scientology Enterprises (hereinafter "WISE"). (ix) Any.taxable or for-profit organization of which Scientology-related organizations, IAS, DAS, EAS and any of the individuals (trustees, directors and officers), listed in Exhibit 1-2, separately or together, owned or has a beneficial interest of more than ten percent. You need not list any entity of which Scientology-related organizations or IAS, DAS or EAS, separately or together, did .not at any time own or have. a beneficial interest of percent. more than one
(x) Any organization that has or had a Flag Banking Officer and/or a Finance Director and also had either: (1) gross revenues of more than $250,000; or (2) assets of more than $1,000,000. Are sublicensees of WISE required to have a Flag Banking Officer and/ or Finance Director on staff? Regardless of your response you need not list any WISE Sublicense. as part of your response to this clause (x). 2. Please provide the articles of incorporation and adopted and bylaws as this request,in for effect on December 31, 1989, and on the date of Bridge Publications, Inc. Please provide the same for New Era Publications International ApS, as well as the "special Rules of Procedure that effectively dedicate its activities to the furtherance of section 501(c)(3) purposes." 3(a) Is the attached copy of "Command :hannels" up-to-data respect with to the current hierarchical management structure? If not, please provide either an up-to-date version or an explanation how this copy differs from the hierarchical management of as of the date of this letter. structure
To the extent that there aro currently anticipated or planned corporate actions that would modify this hierarchical management structure over the next 5 years, please also describe these modifications (except to the extent already described in response to question 1).
- 4 3(b) Describe the management structure of the following erlt:.tle s or organizations and list the names of all the individuals involved in the management of such entity or organization. Where the organization or entity is a committee, please list all members thereof. This list should be as of December 31, 1989, and should include any changes that have occurred up to the date of your response. In addition, please name the organization(s) to which these individuals report or are immediately responsible to. The list provided under this question 3(b) should include the following entities or organizations: (i) Sea Organization (ii)Watchdog Committee (iii)Central Reserves Committee (iv) Inspector General Network (v) Authorization, Verification and Correction International. (vi) International Finance Office (vii) International Management Executive Committee (viii)Flag Network Coordination Committee (ix) Commodore's Messenger Organization International (x) Office of Special Affairs International 3(c) Name the individuals who held the following offices as of December 31, 1989, and include any changes up to the date of your response: (i) International Finance Director; (ii) International Finance Ethics Officer; (iii) International Landlord; (iv) Commanding Officer OSA International; (iv) Commanding Officer Flag Command Bureaux; and (v) Executive Director International. 3(d) Did the Guardian's Office exist on December 31, 1989, or any date since then? During that period, has there been a Guardian? If the answer is yes to either or both of these questions, please list the name(s) of the Guardian(s) and describe the role of the Guardian and tho Guardian's Office. If no, is there any entity that performs functions or operates in a manner similar to the former Guardian's Office?
c
.4.,,.;- 1; • `jf •-•" 'r •ir -7=rwweirri MPRO7 -; ?,..!„*".,•Fey/A7;,. 4(a) Is there any difference between a Finance Director and a Flag Banking Officer other than their titles and the fact that one serves at a church organization (i.e. are their functions, duties, operating instructions, and guidelines otherwise identical)? 4(b) Please describe any internal financial auditing procedures used in the Finance or Ilag Banking Network. Provide an explanation of any guidelines governing the Flag Banking officers (hereinafter "FBOs") and Finance Directors with respect to acCounting for, allocating, or distributing funds that are -received by the organization at which the F80 or Finance Director is posted. Include in your response representative documents given to the FBOs and/or Finance Directors containing such guidelines. Please describe any internal audit procedures by which CSI or any other entity determines compliance with these guidelines. This description should include those procedures and guidelines in effect as of December 31, 1989, 4s well as any changes to the date of your response. 4(c) Please describe the operations and functions of International Network of Computer Organized Management (hereinafter "INCOMM"). Please describe any other centralized reporting system(s), computerized or otherwise, to acCount for income, expenses, assets or reserves of Scientology-related organizations (for example, any document used by management to indicate income or expense trends of Scientology-related organizations). With respect to this request, you need not describe any such reporting system that ceased to exist prior to 1986. Please submit three representative samples of actual reports under each system described, including INCOMM, for three different years. 4(d) Please describe the method by which funds payable to CSI were directed from CSI to CSRT, including the amounts and the reasons therefor. Who ordered this direction and who carried it out? Please provide copies of any documents relating to this matter. Has any similar direction involving any Scientology related organization occurred since 1986? If so, please describe in detail, including dates, amounts, entities involved, and the reasons(s) therefor. 4(o) Please describe whether, and, if so, the extent to which, payments for services rendered at Church of Scientology Flag Service Orq, Inc. (hereinafter "CSFSO") and Church of Scientology Flag Ship Service Organization (hereinafter "CSFSS0°) were and are not deposited or held in a United States bank account prior to being deposited abroad as of December 31, 1986 and since then. Does this vary depending upon either the form of payment (e.g. check, cash, credit card) or the domicile of tho individual paying such amounts? Please describe in detail the treatment of such funds (i.e. the path of such payments) as of - 6 -
" •vii • 1,p ,X4111-e- .1 16:1,4c, •
December 31, 1986 as well. as any changes 1- 07 etter. Please desdribe in detail the mechanismby which payments by United States residents and funds for performed in the United States services by any other Scientology-related organizations in calendar year 1989 were deposited in overseas accounts (e.g., describe the physical transfer of funds including the mode of transmittal, etc.). Did this vary overseas, depending upon the form of payment? Please describe any changes since then up the present time? 4(f) In the previous paragraph, please modify the question by substituting the term "donations and/or contributions" for the word "payments" or "funds". Is the answer different? If so, please explain.
4(g) Please provide all trust instruments for all "advance payment trusts" (including the Trust for Scientologists and the United States Parishioners Trust). Please describe the mechanism by which funds. were directed to and released from such trusts, and to whom such funds were released during calendar year 1989. Please describe any changes since then up to present time. 4(h) Please expand the information set forth in Exhibit I-9 to encompaSs all of the Scientology-related organizations for which the information was not already provided in Exhibit r9. You.may exclude the following entities from your response to this question: Social Betterment Organization, any Class V any Mission. The Church, and data contained in your response should be calendar year 1989 and should include the gross dollar the set forth in Exhibit I-17. Please update existing amounts as information to the extent that it is not now representativeExhibit I - 9 the Current flow of funds. of
4(1) Please clarify whether the receipts and disbursements listed in Exhibit 1-9 include the receipts and disbursements of all the organizations or divisions housed within the listed entity? For Church of example, do the receipts and disbursement* listed for Scientology Western United States include the receipts and disbursements og all the organizations housed therein, including Advanced Organization Los Angeles which is listed separately as part of Exhibit 179? 4(j) Please nano the organizations listed as the sample Class v Church and sample Mission for which receipts and disbursements are included in Exhibit 1-9? Are the respective examples fair representations of Class V Churches and Missions? 4(k) Please explain whether and how the advance payments to the advance payments trusts listed in your response to 4(g) above are reflected in Exhibit 179. To the extent the Exhibit does not reflect such payments in the receipts and disbursements of the service-providing entities, please provide revised figures - 7 -
x.77.7 T77 = —7- Indicating sucn receipts and disbursements of such entities. Please include the advance payment trusts in your response question 4(h). to
4(1) Please provide an explanation of the term "commercial vendors" as used in Exhibit 1-9. Does this term include any entity that would not be a "wholly unrelated commercial as described in question 1? vendor" 5. Does the Church have specific and definite planned uses for its reserves over the next few years? 6-1. Extent of Holdings - Central Reserves Please describe which, if any, organizations listed in question 1 are not participants in the central reserves system. In addition, please provide the amount of assets under the jurisdiction or control (i.e. with respect to which the committee may, in conjunction with another organization or otherwise, deposit, disburse or transfer funds) of the central reserves committee as of December 31, 1989 along with a reasonable estimate of such reserves as of the date of your response of the letter. 6-2(a) Expenditure Responsibility--Central Reserves For calendar year 1990, list all expenditures (as described below) that have been made from central reserves. The list should include the data of the expenditures, to whom the payment was made, by whom the payment was received, and the purpose of the expenditure. For this purpose, the term "expenditure" includes, but is not limited to, grants, purchases transfers or other expenditures of assets under the control of ihe central reserves committee. The list need not contain expenditures that were less than $10,000. Th• $10,000 cutoff is to be disregarded if the aggregate payments made to the same individual or organization are $10,000 or more during calendar year 1990. 6-2(b) Expenditure responsibility - Central Reserves Please provide certified minutes of all central reserves committee meetings that occurred during calendar year 1990. 6-2(c) Describe whether, and to what extent, the central reserves committee monitors its grants in order to ensure that any amounts disbursed are actually used exclusively for charitable purposes. As part of your response, please provide information and documentation regarding the grant making process and follow-up involved in one representative grant of an average amount that was approved and with respect to which assets were distributed in calendar year 1990. Please only provide
- 8 -
mrlimpplwRmrmr- *1-7FRT.FRWMIP7 -T,MT information with respect to grants that are fair representations of grants that have been made in the past.
6-3(a) Are there any assets under the jurisdiction and control of central reserves committee other than reserve bank accounts? If so, please list the location and fair market value of . each such asset as 3/31/92. Please designate what organization owns each such asset, on whose books each such asset is found, and in which organization's physical control the assets are held. Please explain the method by which fair market value was determined.
If any entity holds more than $50,000 of assets on behalf of one or more Scientology-related entities, and you do not believe that the entity comes within that above-described definition of financial institution, please disclose the fact and the entity's name in your response if that entity's holdings are not otherwise disclosed under this questions. 6-3(b) On an aggregate basis, please give a classified statement of receipts or deposits to the central reserves for calendar year 1989, 1990 and 1991. 7. To the extent not already answered in responses tb the previous questions in this letter, please describe the method by which the funds held overseas are managed and controlled, with particular emphasis on safeguards against inurement to private individuals. 8(a) What does the acronym "IMU" stand for? In addition, what, if anything, do the terms "logistics" and "tours" mean with respect to operations at IMU? 8(b) Please describe in detail the activities, operations and places of business of IIKU during the period of its existence. In particular, please describe the method by which funds within the care of IMU at its location in Clearwater, Florida were handled, transported and deposited into the accounts maintained at financial institutions (within the meaning given financial institution in question 6 above). 6(c) Did EMO at any time during its existence perform any services, directly or otherwise, for any Scientology-related organization? For example, did IMU handle funds for any entity other than LAS? If so, please specify and provide copies of any written agreements (or descriptions of oral agreements, if that is the case). 8(d) Were there any payments to or from Scientology-related organizations and IMU, including any payment directly or indirectly) of expenses relating to the operation of IMU? If so, please describe.
9 -
:74- 17.V5WINWA‘UBMI 7777,7F, • -.-•"; 8(e) Is any organization currently performing any of the activities and functions that had been performed by IMU? In this regard, please include a description of the activities and functions of IAS Administrations, and the extent to which it differs from IMU. 9. Relationship to Scientology-related organizations a. Please describe the relationship between IAS and Scientology-related organizations, as well as the relationship of IAS parishioners. For example, please include in this description the benefits of membership in IAS, including any discount or other benefit available with respect to the receipt and/or purchase of services or products from Scientology-related organizations including all Class V Churches and Missions, regardless of whether the entity was listed in question 1. Please include representative documentation of the relationships described in your response to this question. b. Is there any written or oral agreement regarding the benefits of membership in IAS? If yes, and unless already provided under a. above, please provide documentation and a description. If any oral agreement exists, please describe the agreement including who has knowledge of such agreements. c. IS membership in IAS solicited at or through the auspices of any Scientology-related organizations? if so, please describe the method of solicitation, any documentation regarding the solicitation, and the period of time during which such solicitations have occurred. d. Are donations to or for the benefit of IAS solicited at or through the auspices of any Scientology-related organizations? If so, please describe the method of solicitation, provide documentation regarding the solicitation, and describe the period of time during which such solicitations occurred. •. Does any Scientology-related organization provide (or in the past provided) office space or staff for, or directly or indirectly pay expenses (or subsidiZe the costs) of, any solicitations for membership in or donations to IAS? f. Does LAS have (at present or in the past) any direct or indirect relationship, financial or otherwise, to the ownership or operation of the M.V. Freewinds, or any entity related to the ownership or operation of the ship? Please include in your response the role, if any, of IAS in purchasing or financing of the M.V. Freevinds. g. Please describe the management structure of IAS, including the names of those who manage the affairs of IAS or sit on the governing body or bodies of the entity. To what extent
- 10 - are Scientology-related oraanizati (:)/ invnlyari in IAS? Please describe the selection of delegates and officers in IAS. Please include in your response the governing documents of IAS as in effect on the date of this letter.
h. Please describe CSI's recognition of IAS as the sole worldwide membership organization for Scientology parishioners. Is there any written agreement or other document regarding this recognition? If so, please provide a copy. Otherwise, please provide a description regarding such recognition, including the terms of any oral agreement. Has CSI or any other Scientology-related organization recognized any membership organization, e.g. country-wide or continent-wide membership organizations (other than DAS or EAS)? If so, please list and describe. i. Does IAS use any intangible or intellectual property, including any trademarks, service marks, logos, copyrights, patents, or other property that is owned by any Scientology-related organization? Please separately indicate which, if any of this property is owned by the Estate of L. Ron Hubbard, Authors Family Trust or Author Services, Inc. If IAS uses property, does IAS pay for such use? 9. Receipts and Expenditures a. Please list all transfers of funds, property (of whatever kind) or other assets from any Scientology-related organization to IAS. This list should include the amount or fair market value transferred, the purpose, the date and the transferor's name.
b. Pleas, list all expenditures after December 31, 1986, by IAS, or at the direction of IAS, to any individual affiliated with a Scientology-related organization or for any facility or asset, where the use or proceeds of such facility or asset are of benefit to any Scientology-related organization. Th• following expenditures need not be listed: (i) expenditures to individuals of the aggregate payment to the individual and his or her family members does not exceed $10,000 over the entire period under discussion; and (ii) expenditures to a particular Scientology-related organization if the aggregate payment to the organization does not exceed 850,000 over the entire period under discussion. C. Describe the role, if any, that Scientology-related organizations played in the creation and start-up of LAS, including but not limited to, any financial or facility support.
f 9. Operating Entities
Please describe in detail the ownership of the three operating arms of IAS.
10(a) The Service has expressed its concerns relatilg to violations of public policy committed in the past by certain individuals affiliated with Scientology and by varials Scientology-related organizations. What assurances •.:an the Service be provided that these violations are not coltinuing as of December 31, 1989, and thatsthose who were involvld in the commission of the acts described in the QC case are no longer affiliated in any capacity or employed by the Church of Scientology, including any Scientology-related organization? I0(b) The term "Snow White" referred in the 1970s to a covert operation carried out by the Guardian's Office under which illegal acts were perpetrated, including burglarizing the National Office of the Internal Revenue Service. Is any operation known as "Snow White" still in existence? If not, plaase describe and document the method by which it ceased operationa. If an operation under the name still exists, please descrthe the operation and provide supporting documentation. In addition, please describe any operation of whatever name that nay be designed to achieve goals similar to the "Snow White" operation that existed in the 1970s.
10(c) Please state whether, to the best of your knouledge and belief, there are any pending United States or state or local governmental investigations regarding possible criminal law violations by a Scientology-related organization or by any individual alleged to have been acting under the diroction of (as agent or otherwise), or in conjunction with, any such organization. For purposes of this question, please include any information relating to any Class V Church or Mission without regard to whether such Church or Mission is required to be listed in your response to question 1. Please include any pending criminal charges (and/or any pending court action including relevant docket number(s) against such entity or indiNidual. Include in the description the investigating agency cnd any knowledge and/or documents known by you, or in your imosession, or known by a Scientology-related organization or in the possession of such an organization regarding the invcstigation (e.g., what the allegations are and the date the actv were allegedly committed). In addition, please list all positions held by the individual listed in response to this qucstion in any Scientology-related organizations at the present timc and at the time the activity in question allegedly occurred.
10(d) Please provide a list of all civil or criminal litigation commenced on or after January 1, 1980 in which it is alleged that any Scientology-related organization (as that definition has been
- 12 - modified in c. above) or any individual alleged to hive Ingsi=n acting under the direction of (as agent or otherwise), or in conjunction with, any such organization, has violates any criminal:law or has committed an intentional tort. rhe list should contain parties' names, the docket number(s) ,f the litigation, the court in which the matter is or was :pending, a short description of all claims (and any counterclaims) by the parties, including any additional facts you believe qould be relevant to allow us to understand the bases of the auit, and the status of the action. The list need not contain litigation in which the Commissioner of Internal Revenue is a named party.
4.
- 13 • Third Series of Questions (October 1992)
1(a) On page 1-4 of your prior response, you state that you "exclude unrelated commercial licensees from (certain) subparts..." Do all members of this excluded class meet the definition of "wholly unrelated commercial vendor." 1(b) Do all United States Missions have substantially identical organizing documents? Please provide representative samples of two Missions' organizing documents. • 1(c) As part of the response to Question 1 and elsewhere, entities are listed about which the Service has little or no information. Have any of the following entities had, at 'any time after December 31, 1988, gross assets in excess of $1,000,000 or annual gross receipts/contributions in excess of $250,000? If so, please provide for each such entity the information contained at Exhibit 1-9 and Exhibit 1-17. Where possible, data should be for 1989 and 1990. The entities are as follows: (i) the publications organizations that were first described in your June 29 4 1992 response; (ii) Resta Investments, Ltd.; (iii) C.W. Properties, Inc.; (iv) Dexter Development Company; (v) Graymoss, Inc.; and (vi) Northstar Publishing (disclosed on CSI,Form 1120 for 1987). If the entity dissolved or otherwise wound up its operations, please state when and to whom all assets were distributed. 1(d)(i) We are concerned with the private ownership of Author Services, Inc. ("ASIw). This concern is based on an understanding that the corporation has private shareholders and that no other Scientology-related organization appears to retain an ownership interest in this corporation. Please provide all currently in force shareholder agreements related to ASI, including any buy-sell agreements, redemption agreements, voting trusts, or other similar interests in control or ownership. In addition, please provide all management or other service-provider -agreements currently in force between ASI and other Scientology-related organizations. After resolution of issues relating to Mr. Hubbard's estate (including distribution of the residual assets), does the Church intend to continue to use the services of ASI? •(d)(ii) An individual owned stock in New Era Publications International ApS Tokyo prior to its acquisition by NEP. Please identify the individual and describe the sale or transfer of the stock to NEP. 1(d)(iii) Please describe the transfer of stock in SOR Management Services, Ltd. between MS Beryl Garside and CSREC. In addition, who or what entity owns SOR Services U.K., Ltd. as of the date of this letter.
- 14 - 1( s ) Why is CSC liqt-Pri Aa " irA7'"VZ," delin-e- "inactive" and "dormant". 'tile terms
1(f) What does the term "N/A" imply concerning the jurisdiction of certain trusts, including SIRT, TFS, and FST. 1(g) At various places you refer to one entity as "owned by" or as a "subsidiary of" another entity. Do both terms mean that the first entity is "owned" entirely by the second entity or is the 100-percent subsidiary of such entity. 1(h) Are you aware of the existence of a Florida corporation named Majestic Cruise Lines, Inc.? Is that corporation related, directly or otherwise, with any Scientology-related organization, including Majestic Cruise Lines, Inc., the Panamanian corporation? If so, please explain. 1(i) According to the information you provided, San Donato Properties ("SDP") is the registered owner of the M.V. Freewinds, and is in turn wholly owned by Transcorp Services, which is in turn wholly owned by Flag Ship Trust. However, the Service has information that SDP is owned by a Venezuelan company named Consolidada de Forrys. Please provide any ihformation that will enable us to clarify this issue. 1(j) In Exhibit 1-2, the directors of SDP, Transcorp Services, S.A. and Majestic Cruise Lines, Inc. are described as "compensated and unaffiliated Panamanian individuals." Please identify all directors of these corporations as of December 31, 1989, and as of the date of this letter. Please provide the same information for the director of MCL Services, N.V. who is described as an "unaffiliated Netherlands Antilles individual." 2. Previously, we asked about the statement that certain entities are organized and operated exclusively for charitable purposes despite the entity being formed under the laws of a foreign jurisdiction. As part of your response, you included bylaws and other corporate documents. Are all these documents currently in effect? More generally, may we assume that any documents provided to us are currently in effect and complete unless explicitly stated otherwise? 3(a) We have sought to identify individuals within the Church hierarchy with fiduciary responsibility to prevent asset diversions and who would be most likely to benefit if, in fact, inurement exists. Therefore, we are asking certain follow-up questions, particularly about certain individuals' compensation. For ease of reference, ve have designated these compensation questions as Question 3A. We have several follow-up questions which will allow us to better understand the Sea Organization's ("Sea Org's") role in the ecclesiastical management of the Church. (i) Please describe the Sea Org's system of rank including a complete explanation of the promotional board system, and how (and by whom) one is appointed or removed from the board. Please list the 10 highest ranking individuals in the Sea Org, as of the date of this letter. Please include all relevant documents relating to the Sea Org's system of rank, organization and structure. 3(b) The Service seeks to understand the method by which the Church hierarchy ensures that funds are not diverted to private interests in the lower level organizations. Towards this end, please assume that an F80 at a Class V Church embezzled funds. Please describe who would be likely to detect such embezzlement, by what means, and the likely subsequent course of events upon discovery of such embezzlement. 3(c) Who has the authority to select or remove members of the following committees or organizations: (i) WDC; (ii) International Management FBO; (iii) International Management Executive Committee; (iv) Flag Network Coordination Committee; (v) Commodore's Messenger Organization; and (vi) Central Reserves Committee? 3(d) In your prior response you state that "...as a routine matter, the full [Central Reserves] Committee meets only when there is a need for everyone's input and participation." Please describe the process by which funds are approved for disbursement (including any transfer of funds to other organizations) when no meeting is held. In your response, please indicate on whose authority a disbursement may be made and provide actual representative examples of any such authorization after December 31, 1989. 3(e) We appreciate your efforts to address the Service's concerns about the Guardian's Office and the activities of the persons associated vith that Office. Have any of those persons who have at any time been barred from serving with/for any Scientology-related organization by reason of their service or actions on behalf - of the Guardian's Office at any time since being barred, become re-affiliated with any Scientology-related organization, including for purposes of this question, any Mission or Class V Church, either as a staff member or in any other capacity? Your prior response refers to the deposition of a government prosecutor. Please provide a complete copy of the testimony. 3(f) As required on Part II of the Schedule A, Form 990, please name the 5 highest paid service providers and list the amounts - 16 - paid to them by Scientology-related organizations, in calendar years 1989, 1990 and 1991. "Service Providers," for purposes of this Question 3(f), excludes all Scientology-related organizations and individuals (including but not limited to individuals listed in response to Question 3A-c (i)-(iii) below). To identify the service providers to be listed, please aggregate all payments from all Scientology-related organizations. Please explain the services and purposes for which payment was made separately list each payor and the amount it paid. and 3A(a) Please describe all forms of compensation that are designated staff welfare under the Church's system of accounting. In addition, please describe the-method of reporting all such staff welfare to the employee (or independent contractor) and to the Service. If such compensation is not reported to the SerVice, please provide the rationale for such practice. 3A(b) Please describe the class or classes of individuals who receive a parsonage or rental allowance from any Scientology-related organization, what elements of compensation or staff welfare constitute a parsonage or rental allowance, and the process for designating any amounts as rental allowance. Please provide a copy of a representative sample of any designations (in effect during 1990) of amounts as rental allowances. 3A(c) For the purposes of this Question 3A, the term "compensation" includes anything of value provided (directly or
otherwise) by, or attributable to, any Scientology - related organization. Whether an item is considered "compensation" under this question 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 or otherwise), including any interest, dividend or other corporate distribution; (iii) gross commissions; (iv) the value of any deferred compensation (qualified or nonqualified 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 organization (valued without regard to any risk of forfeiture, vesting or other restriction); (vi) any fringe benefit (other than de minimus fringes excludible under sections 132 (a) (4) and 132 (e) of the Internal Revenue Code); (vii) the highest balance of any loan or loans outstanding from any Scientology related organization to the individual at any time during the year in question; (viii) any parsonage or rental allowance; and, (ix) the amount of any reimbursed expenses (business or otherwise). For the purposes of (ix), you may ignore compensation from this
- 17 - source 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, please list such compensation separately with a short description of which category it falls within. We recognize the potential difficulty in valuing certain items included within this definition. If a fair market value is not available, please merely list the type of compensation with any explanation that will be helpful to understand its nature and possible worth. For purposes of this Question 3A, the term Scientology-related organization is expanded to include all Class V Churches and Missions, all WISE sublicensees, and IAS (including its "operating arms") and the other membership organizations. In addition, the compensation of an individual includes amounts received by the spouse of that individual. Where a • spouse has compensation, please separately list the spouse's name and the nature and amount of the compensation. Finally, if compensation is received from more than ono Scientology-related organization, compensation should be listed separately for each such entity. 3A(c)(i) Please name the twenty natural persons with the highest level of compensation in each of the last 3 years (i.e., in calendar years 1989, 1990, and 1991). To determine those individuals for whom this question requires disclosure, please aggregate all compensation from all Scientology-related organizations. Please treat a husband and wife as a single entry on this list (separately listing the name of each spouse and the compensation of each). 3A(c)(ii) Please provide the compensation from all Scientology-related organizations in each of the last 3 years (i.e., in calendar years 1989, 1990 and 1991) for David Miscavige and Norman Starkey. In addition, please include the compensation of each individual's spouse, siblings (including compensation of each sibling's spouse), parents and children (separately listing the name of the family member and the compensation of each). 3A(c)(iii) Unless the individual or his or her spouse appears on the list provided in (1) above, please provide the compensation from all Scientology-related organizations in each of the last 3 years (i.e., in calendar years 1989, 1990 and 1991) for the following individuals: (a) Maureen Brigatti; (b) Pauline Chatterton; (c) Jonathan Epstein; (d) Terri Gamboa: (e) Carl Heldt; (f) Diana Hubbard; (g) Mark Ingbor; (h) Guillaume Losevre; (i) Janet Light; (j) Warren McShane; (k) Ray Mithoff; (1) Sabine Peshkin; (m) Mark (Marty) Rathbun; (n) Michael Rinder; (o) Lyman - 18 -
7., - Spurlock, (p) Mary Story; (q) Helen Wehl; (r) Kurt Weiland; (5) Greg Wilhere; and, (t) Marc Yager. 4(a) Please provide all directives (including HCO Policy Letters, Executive Directives and similar items) that set forth the amount and method by which the following entities' income is allocated to expenses (i.e. retained for its own uses) or is paid/contributed to CSI or other Scientology-reIated organization: (i) CSFSSO; (ii) CSFSO; (iii) CSKIS; (iv) CSREC; (v) all celebrity centers not included in (i) - (iv) above; (vi) IPT; (vii) NEP; (viii) BPI; and (ix) any Advanced or Saint Hill organization not already included in a category described above. Please include all ecclesiastical organizations within the above entities. Where you have provided a directive in response to another question a citation thereto is sufficient response. 4(b) You have described how income is recorded on invoices and immediately deposited. Please describe any circumstance where a Scientology-related organization's receipts are handled in any other manner. 4(c) Pleas* provide a list and explanation of the income and expense categories, as well as balance sheet accounts. 4(d) Please explain the following terms: (i) Ad Counicil; (ii) Department 21; (iii) Data Bureaux Flag; (iv) Div 3; (v) Div 6; (vi) ITO; (vii) PPU stats; (ix) Allocation to CHO CW; (x) Flag External Expenses; (xi) FSC; and, (xiii) management expenses incurred locally. 4(e) Please provide an executed copy of a representative contract now in force between CSI and a Class V Church. 4(f) The Service has seen references to "6-wook trend reports" and "12-week trend reports." Please identify and describe these documents and provide representative samples of such documents for any period after December 31, 1989, including any supporting information that may bo useful in interpreting these reports. 4(q) To understand the accounting system of the Church, tho Service needs a complete sot of the given Church's records and reports for the given time period. Accordingly, to the extent not already provided, pleas. provide for the month indicated all FB0 AC3 Meekly Reports; Income Sources Summaries; Financial Plannings; and the monthly bank statemont(s) for all bank accounts for the following organizations. In addition, please identify the name of the organization where the name is unclear. The months and entities requested are as follows: (i) for October of 1989, the Boston organization referenced in the ?BO AC3 Weekly Report of October 1989; (ii) for November of 1990, the "SNC" org referenced in the FB0 AC3 Weekly Report of 1/11/90; (iii) for November of 1991, the organization referenced in the FB0 AC3 - 19 -
rrY: gm4,77, 757- 74.:71r* 2117PUS IMATI": ,
ere: --• 4" weekly Report of 7/11/91; (iv) for October of 1991, the organization referenced in the financial planning for the week of 10/31/91; and, (v) for October of 1991, the Church of Scientology of Colorado, Inc.
4(h) On certain of your submissions, payments have been made to the "main" accounts. Please describe this account.
4(i) Please state where credit card payments and checks drawn on United States Banks are first deposited. 4(j) Please answer the following questions on the advance payment trusts: (i) Has any individual or entity other than CSFSO and cSwUS ever deposited/contributed money to either trust? (ii) The revised financial statements provided for TFS and USPT reflect the transfer of advance payments to and from both trusts and CSFSO and/or CSWUS. You describe the netting process by which those payments are periodically made to and from the trusts. Are the amounts included in the revised financial statements the nit payments made to and from the trusts? If so, please provide for 1989 and 1990 the gross amounts that would have been received by the trusts and the gross amounti that would have been paid by the trusts but for the netting process. (iii) It is our preliminary view that if the various entities comprising the Church are to be recognized as tax-exempt, we must similarly ensure that the advance payment trust are organized and operated in a manner consistent with the requirements of section 501(c)(3). To meet these requirements, however, it appears that the trust instruments would need to be modified to conform to the organizational requirements of section 501(c)(3), (e.g., appropriate dissolution clause for TFS). Please indicate whether the Church would be willing to make such modifications. 4(k) There is variance between the disbursements reflected on the Author's Family Trust 8 information provided in your prior response (showing $1,800,000 in management fees paid to Author Services) and the receipts information for ASI (showing all of ASI's receipts as consisting of $2,000,015 in management fees from Author's Family Trust 8). The same information for ASI also appears to vary from the disbursement information for CSI, which shows royalties of $468,000 paid by CSI to ASI. . . . Please explain. A. similar (if smaller) variance . occurs with respect to contributions in 1990 by USPT to CSRT. Please explain. 4(1) Please explain the scope of organizations within the Finance Network. For example, are there any entities within the
- 20 - network with no FBO. Are the social betterment organizations or publishing organizations part of the Finance Network? 4(m) Under the new system of allocations described at page 4-15, the Class V Churches pay 12.5 percent of corrected gross income to CSI. How is this amount reflected on CSI's books (i.e., what income category includes these amounts)? Are all amounts forwarded to CSI received and processed by Flag Command Bureaux? If this is not the case, please clarify. 4(n) Please provide information (including dollar amounts), as Iprovided for other entities in Exhibits 1-9 and 1-17, for 1989 and 1990 for: Church of Scientology Religious Education College; Church of Scientology Advanced Organization Saint Hill Europe and Africa; and Church of Scientology, Inc. 4A(a) Do tour or fundraising commissions differ from FSM commissions? If so, please explain. 4A(b) Please dosCribe how Church fundraisers, FSMI and "tours" operate. In this regard, please provide documentation containing all Church policiet on FSMA, tours, and fundraising activities (e.g., how individual FSM4 and fundraisers handle cash contributed to a Scientology-related organization through such individuals' efforts). Who is responsible for expenses of the tours or other individual FSMS and fundraisers? Specifically, is Commingling of the organization's funds and the individual's * funds permitted? 4A(c) Do any individual FSMs or fundraisers receive funds from one Scientology-related organization for payment to another such organization? If so, plots* explain the reasons for such transfers and how it is ensured that such transferred amounts are received by the recipient organization. 4A(d) PloaSe describe the method by which Scientology-related organizations report commissions paid to fundraisers or FSMs to both those individuals and to the Service. To the extent difficulties have existed in the past, please describe these difficulties. To the extent difficulties cOntinue, is the Church willing tO adopt alternative procedures as part of any closing agreement? 5(a) Th0-0burdh uses the "modified cash" method of accounting. Please define this method of accOunting and describe all adjustments necessary tO change from the cash mothOd to the modified cash method - of accounting. 5(b) The submissions contain numerous references to HCO Policy Letters and other portions of the Scriptures relating to the Church's financial activities. To facilitate our understanding
. of the Church's accounting and financial systems, please provide - 21 -
7JTT,MMTI-
, •-, a current and complete set of the Organization Executive course volumes, excluding the HCO Technical Bulletin volumes. 6(a) It appears that the central reserves system controls, directly or otherwise, the accounts of certain for-profit entities, (e.g., BPI, BMS, FSO OIC, SDP). If so, please explain such control, including how control is exercised, how disbursements from such accounts are approved, and any internal controls or reporting. /n particular, please explain whether the funds of the for-profit entities are segregated to avoid problems inherent in commingling and any possible diversion of funds to or from the for-profit entities. In . this regard, we note that the entries indicate loans to BPI from CSWUS. Please explain the purpose, amount and terms of these loans. 6(b) Please explain the difference between primary contributors and entities that participate in the central reserves through CSI. Is the difference that primary contributors maintain an account in their own name in the central reserves system? 6(c)(i) In reviewing Exhibit II-6-A, it appears that some DVs within a giVen series break numerical sequence and that gaps occur in the numerical sequence (i.e. intervening DVs in a sequence are not listed). Please explain this in theicontext of the function of DVs in the Church's accounting system and the process for central reserves financial planning. 6(c)(ii) An entry indicates that CSRT expended $900,000 for "operating expenses". Pleas. describe how this expenditure is reflected on Exhibit II-4-H. 6(c)(iii) A transfer from CSFSSO to FST for parishioners' bounced checks is shown. Please explain this transaction and, more generally, the flow of money between those entities. 7. As part of the response regarding expenditures from central reserves, the term "ecclesiastical guidance" is used. Please define this term, and describe the activities performed that come within this definition. Please provide a copy of written agreements regarding the provision of such services, and state how the charges for such services are determined. In this regard, please describe the ecclesiastical guidance provided to BPI by CU. 8. Who owned EKU Admin., ApS, while that organization was still in existence? 9. In our prior Question 9 we asked a number of questions to help us better understand the relationship between LAS and the church hierarchy. We are still reviewing that information. While we undarstand that the church may have reservations about the Inclusion of IAS and its operating arms in this process, it - 22 - is our view that we need the following information to help complete our consideration.
a. One of the benefits of IAS membership you described is the right to keep certificates in force. We assume that the right to keep certificates in force means, at least as a practical matter, the right to receive services at Churches of Scientology. Please state whether or not this is correct. If incorrect, please explain and provide all relevant documentation. 6. Please list those individuals who hold the position of Chairman and Secretary of IAS as of the date of this letter. c. Please provide a copy of the "Welcome to the Association" pack described in Exhibit 9-A."
d. It is our preliminary view that if th• various entities coMprising the Church are to be recognized as tax-exempt, it may be necessary that IAS be organized and operating in a manner consistent with the requirements, however, it appears that minor - modifications may be necessary to IAS' governing instrument to conform to the organization requirements of section 501 (c)(3) (e.g., revised statement of limitations). Please indicate whether such modifications could be worked out with IAS and the Church.
41‘.
- 23 -
Irj.4.0M". Final Series of Qu•stions (January 1993)
1. Please describe how parishioner donations for rei.igious services are accounted for. 2. Please describe the new computer software system that is being developed for use in all churches of Scientolocy and Scientology-related organizations.
3. Please provide Exhibit 1-9 and 1-17 information or Church of Scientology Religious Education College for 1989 and 1990. 4. Please describe Assisco, S.A. What are its funct lon? What happened to its assets when it was dissolved? S. Please deseribo Tesla Resources, Inc. What was its function? Does any Scientology-related entity own any interest in the company? 6. Please describe the formation and corporate structure of IAS and its "service arms." Please provide Exhibit 1-9 information for IAS and its service arms.
4 7. Please describe IAS's grant-making procedures. 8. Pleas, explain why you believe Bridge Publications, Inc. and New Era Publications International ApS qualify for tax exemption under Section 501(c)(3). 9. Will the advance donation trusts continue to exist if the United States churches of Scientology are recognized as tax- exempt? 10. Please explain how the organizations you believe qualify as integrated auxiliaries for purposes of sections 508 and 6033 meet the requirements of Revenue Procedure 86-23. 11. Please identify the for-profit corporations that participate in the Church of Scientology's central reserves system. 12. Plume oxplain why you believe Church of Spiritual Technology qualifies as a "church" described in Code section 170(b)(1)(A)(i)
- 24 -
•
Summary of informanation provided to the IRS
2. Page 2: IRS specific findings A. Page 2: "religious mark" - insignia testifying to orthodoxy in religious practice A. Page 6: "Missions" - like bookstalls - attract new members; SMI - provides promotional materials to support missions A. Page 8: "Celebrity Centres" - celebrities do not receive different treatment A. Page 11: Pricing of publications etc A. Page 13: Social work A. Page 17: Churches: local community and social work B: Page 1: Criteria for recognition as a "church" - IRS and courts B. Page 5: Preparation of Ministers: para. 14 (and para. 8, p.4) B. Page 6: "religion": legal authorities D. Page 1: "Commercial purposes" D. Page 7: Comparison of pricing with other religions D. Page 13: Deductability of fixed contributions for 'services' D. Page 15: A young religion - no endowment to draw upon; refunds - free services D. Page 16: "in which the ony exceptions to payment are 'financial' = exceptions for those who cannot afford to pay E. Page 1: Public policy: GO
"677717:-W'ZWARAWrigc. ' M`g,774117.-,i First Series of Ouestions (March 1991)
1. A complete list of all entities associated or affiliated, whether by ownership, contractual agreement, or otherwise, within the Church of Scientology organizational structure (whether or not the word "Scientology" appears in the entity's name). This list should include all domestic and foreign corporations, trusts, associations, and unincorporated entities or accounts (including all reserve accounts), whether religious, secular, exempt, non-exempt, non-profit or profit-making. Each entry should include a description of the extent (in terms of income and expenses, staff time employed in its activities, etc.) of its operations, and a list of its officers, directors, trustees, and stockholders.
2. An organizational chart showing the place and relationship of each entity in the structure.
3. An explanation of how operational and financial authority is exercised in the organizational structure, including a complete description of the authority organizations at the highest level have over mid-level and lower-level organizations, irrespective of the actual activities performed. This should also include a description of the flag banking office system and the amount of control a flag banking officer has with respect to his or her assigned organization.
4. An explanation of who exercises control over the entities. Specifically, what individual or individuals have decision making authority for ecclesiastical, corporate, legal, or financial matters affecting all or some entities in the Scientology structure. This explanation should describe how current decision-making authority differs from that exercised by L. Ron Hubbard in the time he controlled the church.
• ''•.- 7 ,: - ;4.,,vd4iti;',0-Ai5' ' %.10..MMgrR- r-sr cth acce51-= and among entities (including reserve or other accounts), whether secular or religious, domestic or foreign. This should show the path and ultimate destination of funds sent overseas. "Funds or other assets" includes intangibles and all financial instruments, whether or not they are considered cash or cash equivalents. For example, the term includes nonnegotiable notes, unendorsed personal checks, and securities transferred between entities, whether physically or electronically. 6. An explanation of the distribution of the assets of the United States Churches of Scientology Trust, which we understand was dissolved in 1988. This should include a description of all recipients and the use to which the assets have been put. The explanation should identify any entity or entities that have taken over functions formerly performed by the United States Churches of Scientology Trust.
7. An explanation of any commission compensation systems used by Scientology entities. This should include a description of internal controls, if any, to insure that all income tax reporting requirements are met for commissions paid.
8. A description of all services or products offered. • This includes all auditing, training, motivational courses, publications, and business courses, whether secular or religious. Include price lists, a description of the method of pricing, and a description of the entities through which each service is offered. 9. An explanation of the financial reporting system used to maintain control and prevent private benefit or inurement at any organizational level. This should include an explanation of how the service could, with as little intrusion as possible, examine the accounts to ensure that concerns about inurement, commerciality, public policy, and integrity of records are addressed. 10. In responding to the questions herein, and particularly question 5, please provide your best estimate as to actual dollar amounts.
- 2 -
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• •
Second Series of Questions (may 1992)
1. Please provide a list of all organizations described below, including each organization's address, principal place of business, jurisdiction in which organized or incorporated, form (e.g., trust or corporation) and employer identification number (if any). This list should include all organizations regardless of form. Please include all ecclesiastical organizations and indicate in which legal entities (e.g., corporations) the ecclesiastical organizations are housed. The list should contain information as of December 31, 1989 as well as any changes up to the date of your response. To the extent that there are currently anticipated or planned actions that would modify this list over the next five years, please also describe those anticipated modifications. Please label each organization as to the category (or categories) in which it fits.
(i) Any mission in the United States that provided Scientology Missions International with tithes or other forms of financial support in excess of $10,000 in 1989 or in any calendar year thereafter.
(ii) Class V churches operating in the United States. (iii) The publications organizations, depicted in the chart on the first page of Exhibit 1-5, along with any sublicensees or subsidiaries thereof (hereinafter "Publications Organizations").
(iv) The social benefit and other public benefit organizations depicted in the chart on the first page of Exhibit 1-6, along with all sublicensees thereof (e.g., organizations that are permitted to use particular names, copyrights, service marks, and/ or technologies) (hereinafter "Social Betterment Organizations"). (v) Any organizations, including but not limited to any trusts, that held assets (including but not limited to intellectual property and mortgages) for any other Scientology-related organizations or for the advancement or protection of the Scientology religion. This does not include financial institutions (as defined below in question 6).
(vi) Any organizations directly or indirectly involved in or related to the ownership and/or operation of the M.V. Freewinds. You need not list wholly unrelated commercial vendors.
- 3 -
4. ...0e.;.•„1. • ggP.,79 (vii) Any membership organizations, including but not limited to the Sea Organization, IAS, DAS, and EAS, along with any service corporations performing the operations of such organizations (hereinafter "Membership Organizations"). (viii) Any organization that owns (including, but not limited to, those entities listed below in this clause (viii)), (sub)licenses, and/or has rights or a (sub)license to use what has been described as the scriptures (anything written or stated by Mr. L. Ron Hubbard) or any technology, copyright, trademark or service mark held by RTC, CSI, CST, any publications organization or the Estate of L. Ron Hubbard. For purposes of this clause (viii), you need not list for-profit sublicensees of the World Institute of Scientology Enterprises (hereinafter "WISE"). (ix) Any taxable or for-profit organization of which Scientology-related organizations, IAS, DAS, EAS and any of the individuals (trustees, directors and officers), listed in Exhibit 1-2, separately or together, owned or has a beneficial interest of more than ten percent. You need not list any entity of which Scientology-related organizations or IAS, DAS or EAS, separately or together, did not at any time own or have a beneficial interest of more than one percent. (x) Any organization that has or had a Flag Banking Officer and/or a Finance Director and also had either: (1) gross revenues of more than $250,000; or (2) assets of more than $1,000,000. Are sublicensees of WISE required to have a Flag Banking Officer and/ or Finance Director on staff? Regardless of your response you need not list any WISE Sublicensee as part of your response to this clause (x). 2. Please provide the articles of incorporation and bylaws as adopted and in effect on December 31, 1989, and on the date of this request, for Bridge Publications, Inc. Please provide the same for New Era Publications International ApS, as well as the "special Rules of Procedure that effectively dedicate its activities to the furtherance of section 501(c)(3) purposes." 3(a). Is the attached copy of "Command Channels" up-to-date with respect to the current hierarchical management structure? If not, please provide either an up-to-date version or an explanation of how this copy differs from the hierarchical management structure as of the date of this letter. To the extent that there are currently anticipated or planned corporate actions that would modify this hierarchical management structure over the next 5 years, please also describe these modifications (except to the extent already described in response to question 1).
4 3(b) Describe the management structure of the followina entitip or organizations ana list tne names of all the individuals involved in the management of such entity or organization. Where the organization or entity is a committee, please list all members thereof.
This list should be as of December 31, 1989, and should include any changes that have occurred up to the date of your response. In addition, please name the organization(s) to which these individuals report or are immediately responsible to. The list provided under this question 3(b) should include the following entities or organizations: (i) Sea Organization (ii) Watchdog Committee (iii) Central Reserves Committee (iv) Inspector General Network (v) Authorization, Verification and Correction International. (vi) International Finance Office (vii) International Management Executive Committee (viii) Flag Network Coordination Committee (ix) Commodore's Messenger Organization International (x) Office of Special Affairs International 3(c) Name the individuals who held the following offices as of December 31, 1989, and include any changes up to the date of your response: (i) International Finance Director; (ii) International Finance Ethics Officer; (iii) International Landlord; (iv) Commanding Officer OSA International; (iv) Commanding Officer Flag Command Bureaux; and (v) Executive Director International. 3(d) Did the Guardian's Office exist on December 31, 1989, or any date since then? During that period, has there been a Guardian? If the answer is yes to either or both of these questions, please list the name(s) of the Guardian(s) and describe the role of the Guardian and the Guardian's Office. If no, is there any entity that performs functions or operates in a manner similar to the former Guardian's Office?
5
4(a) Is there any difference between a Finance Director and a Flag Banking Officer other than their titles and the fact that one serves at a church organization (i.e. are their functions, duties, operating instructions, and guidelines otherwise identical)? 4(b) Please describe any internal financial auditing procedures used in the Finance or Flag Banking Network. Provide an explanation of any guidelines governing the Flag Banking Officers (hereinafter "FBOs") and Finance Directors with respect to accounting for, allocating, or distributing funds that are received by the organization at which the FBO or Finance Director is posted. Include in your response representative dccuments given to the FBOs and/or Finance Directors containing such guidelines. Please describe any internal audit procedures by which CSI or any other entity determines compliance with these guidelines. This description should include those prccedures and guidelines in effect as of December 31, 1989, as well as any changes to the date of your response. 4(c) Please describe the operations and functions of International Network of Computer Organized Management (hereinafter "INCOMM"). Please describe any other cer tralized reporting system(s), computerized or otherwise, to acc ount for income, expenses, assets or reserves of Scientology-re lated organizations (for example, any document used by manag ement to indicate income or expense trends of Scientology-relat ed organizations). With respect to this request, you nee d not describe any such reporting system that ceased to exis t prior to 1986. Please submit three representative samples of a ctual reports under each system described, including INCOMM, for three different years. 4(d) Please describe the method by which funds payabl e to CSI were directed from CSI to CSRT, including the amounts and the reasons therefor. Who ordered this direction and who carried it out? Please provide copies of any documents relating t o this matter. Has any similar direction involving any Scier tology related organization occurred since 1986? If so, pleas e describe in detail, including dates, amounts, entities involved , and the reasons(s) therefor. 4(e) Please describe whether, and, if so, the extent to which, payments for services rendered at Church of Scientology Flag Service Org, Inc. (hereinafter "CSFSO") and Church of Scientology Flag Ship Service Organization (hereinafter "CSFSSO") were and are not deposited or held in a United States bank account prior to being deposited abroad as of December 31, 1986 and since then. Does this vary depending upon either the form of payment (e.g. check, cash, credit card) or the domicile of the individual paying such amounts? Please describe in detail the treatment of such funds (i.e. the path of such payments) as of - 6 -
- ' December 31, 1986 as well as any (-1-1An..T cuzh aate of this letter. Please describe in detail thetfierit nechanism to bythe which payments by United States residents and funds for services performed in the United States by any other Scientology-related organizations in calendar year 1989 were deposited in overseas accounts (e.g., describe the physical transfer of funds overseas, including the mode of transmittal, etc.). Did this vary depending upon the form of payment? Please describe aly changes since then up the present time?
4(f) In the previous paragraph, please modify the question by substituting the term "donations and/or contributions" for the word "payments" or "funds". Is the answer different? If so, please explain.
4(g) Please provide all trust instruments for all "advance payment trusts" (including the Trust for Scientologists and the United States Parishioners Trust). Please describe the mechanism by which funds were directed to and released from such trusts, and to whom such funds were released during calendar year 1989. Please describe any changes since then up to present time. 4(h) Please expand the information set forth in Exhitit 1-9 to encompass all of the Scientology-related organizations for which the information was not already provided in Exhibit 1-9. You may exclude the following entities from your response to this question: Social Betterment Organization, any Class V Church, and any Mission. The data contained in your response should be the calendar year 1989 and should include the gross dollar amounts as set forth in Exhibit 1-17. Please update existing Exhibit 1-9 information to the extent that it is not now representative of the current flow of funds.
4(1) Please clarify whether the receipts and disbursements listed in Exhibit 1-9 include the receipts and disburs ,aments of all the organizations or divisions housed within the listed entity? For example, do the receipts and disbursements listed for Church of Scientology Western United States include tha receipts and disbursements of all the organizations housed therain, including Advanced Organization Los Angeles which is Listed separately as part of Exhibit 1-9?
4(j) Please name the organizations listed as the sampLe Class V Church and sample Mission for which receipts and disbursements are included in Exhibit 1-9? Are the respective examples fair representations of Class V Churches and Missions? 4(k) Please explain whether and how the advance payments to the advance payments trusts listed in your response to 4(g) above are reflected in Exhibit 1-9. To the extent the Exhibit dces not reflect such payments in the receipts and disbursements of the service-providing entities, please provide revised figures - 7 -
771ET=T. indicating such receipts and disbursements of such entities. Please include the advance payment trusts in your response to question 4(h). 4(1) Please provide an explanation of the term "commercial vendors" as used in Exhibit 1-9. Does this term include any entity that would not be a "wholly unrelated commercial vendor" as described in question 1? 5. Does the Church have specific and definite planned uses for its reserves over the next few years? 6-1. Extent of Holdings - Central Reserves Please describe which, if any, organizations listed in question 1 are not participants in the central reserves system. In addition, please provide the amount of assets under the jurisdiction or control (i.e. with respect to which the committee may, in conjunction with another organization or otherwise, deposit, disburse or transfer funds) of the central reserves committee as of December 31, 1989 along with a reasonable estimate of such reserves as of the date of your response of the letter. 6-2(a) Expenditure Responsibility--Central Reserves For calendar year 1990, list all expenditures (as described below) that have been made from central reserves. The list should include the date of the expenditures, to whom the payment was made, by whom the payment was received, and the purpose of the expenditure. For this purpose, the term "expenditure" includes, but is not limited to, grants, purchases, transfers or other expenditures of assets under the control of the central reserves committee. The list need not contain expenditures that were less than $10,000. The $10,000 cutoff is to be disregarded if the aggregate payments made to the same individual or organization are $10,000 or more during calendar year 1990. 6-2(b) Expenditure responsibility - Central Reserves Please provide certified minutes of all central reserves committee meetings that occurred during calendar year 1990. 6-2(c) Describe whether, and to what extent, the central reserves committee monitors its grants in order to ensure that any amounts disbursed are actually used exclusively for charitable purposes. As part of your response, please provide information and documentation regarding the grant making process and follow-up involved in one representative grant of an average amount that was approved and with respect to which assets were distributed in calendar year 1990. Please only provide
- 8
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information with respect to grants that are fair representations or. grants i" 6-3(a) Are there any assets under the jurisdiction and control of central reserves committee other than reserve bank accounts? If so, please list the location and fair market value of each such asset as 3/31/92. Please designate what organization owns each such asset, on whose books each such asset is found, and in which organization's physical control the assets are held. Please explain the method by which fair market value was determined. If any entity holds more than $50,000 of assets on behalf of one or more Scientology-related entities, and you do not believe that the entity comes within that above-described definition of financial institution, please disclose the fact and the entity's name in your response if that entity's holdings are not otherwise disclosed under this questions. 6-3(b) On an aggregate basis, please give a classified statement of receipts or deposits to the central reserves for calendar year 1989, 1990 and 1991. 7. To the extent not already answered in responses to the previous questions in this letter, please describe the method by which the funds held overseas are managed and controlled, with particular emphasis on safeguards against inurement to private individuals. 8(a) What does the acronym "IMU" stand for? In addition, what, if anything, do the terms "logistics" and "tours" mean with respect to operations at IMU? 8(b) Please describe in detail the activities, operations and places of business of IMU during the period of its existence. In particular, please describe the method by which funds within the care of IMU at its location in Clearwater, Florida were handled, transported and deposited into the accounts maintained at financial institutions (within the meaning given financial institution in question 6 above). 8(c) Did IMU at any time during its existence perform any services, directly or otherwise, for any Scientology-related organization? For example, did IMU handle funds for any entity other than IAS? If so, please specify and provide copies of any written agreements (or descriptions of oral agreements, if that is the case). 8(d) Were there any payments to or from Scientology-related organizations and IMU, including any payment directly or indirectly) of expenses relating to the operation of IMU? If so, please describe. - 9 -
- g , 7 17, 44•71.- t 7:5W.1 75r M794r, '`•-,."-=',"o-5••• • • . „ Qfml r_YrrLfani7 4-4 -r cur rr . t1 k, rforming any or tne activities and functions that had been performed by IMU? In this regard, please include a description of the activities and functions of IAS Administrations, and the extent to which it differs from IMU.
9. Relationship to Scientology-related organizations a. Please describe the relationship between IAS and Scientology-related organizations, as well as the relationship of IAS parishioners. For example, please include in this description the benefits of membership in IAS, including any discount or other benefit available with respect to the receipt and/or purchase of services or products from Scientology-related organizations including all Class V Churches and Missions, regardless of whether the entity was listed in question 1. Please include representative documentation of the relationships described in your response to this question.
b. Is there any written or oral agreement regarding the benefits of membership in IAS? If yes, and unless already provided under a. above, please provide documentation and a description. If any oral agreement exists, please describe the agreement including who has knowledge of such agreements. c. Is membership in IAS solicited at or through the auspices of any Scientology-related organizations? If so, please describe the method of solicitation, any documentation regarding the solicitation, and the period of time during which such solicitations have occurred.
d. Are donations to or for the benefit of IAS solicited at or through the auspices of any Scientology-related organizations? If so, please describe the method of solicitation, provide documentation regarding the solicitation, and describe the period of time during which such solicitations occurred.
e. Does any Scientology-related organization provide (or in the past provided) office space or staff for, or directly or indirectly, pay expenses (or subsidize the costs) of, any solicitations for membership in or donations to IAS?
f. Does IAS have (at present or in the past) any direct or indirect relationship, financial or otherwise, to the ownership • or operation of the M.V. Freewinds, or any entity related to the ownership or operation of the ship? Please include in your response the role, if any, of IAS in purchasing or financing of the M.V. Freewinds.
g. Please describe the management structure of IAS, including the names of those who manage the affairs of IAS or sit on the governing body or bodies of the entity. To what extent
- 10 - Cr“ ,=. 7-1 4- ninelAr—T- alAtOri inlreN 1 A in IAS? Please describe the selection of delegates and officers in IAS. Please include in your response the governing documents of IAS as in effect on the date of this letter. h. Please describe CSI's recognition of IAS as the sole worldwide membership organization for Scientology parishioners. Is there any written agreement or other document regarding this recognition? If so, please provide a copy. Otherwise, please provide a description regarding such recognition, including the terms of any oral agreement. Has CSI or any other Scientology-related organization recognized any membership organization, e.g. country-wide or continent-wide membership organizations (other than DAS or EAS)? If so, please list and describe. i. Does IAS use any intangible or intellectual property, including any trademarks, service marks, logos, copyrights, patents, or other property that is owned by any Scientology-related organization? Please separately indicate which, if any of this property is owned by the Estate of L. Ron Hubbard, Authors Family Trust or Author Services, Inc. If IAS uses property, does IAS pay for such use? 9. Receipts and Expenditures a. Please list all transfers of funds, property (of whatever kind) or other assets from any Scientology-related organization to IAS. This list should include the amount or fair market value transferred, the purpose, the date and the transferor's name. b. Please list all expenditures after December 31, 1986, by IAS, or at the direction of IAS, to any individual affiliated with a Scientology-related organization or for any facility or asset, where the use or proceeds of such facility or asset are of benefit to any Scientology-related organization. The following expenditures need not be listed: (i) expenditures to individuals of the aggregate payment to the individual and his or her family members does not exceed $10,000 over the entire period under discussion; and (ii) expenditures to a particular Scientology-related organization if the aggregate payment to the organization does not exceed $50,000 over the entire period under discussion. c. Describe the role, if any, that Scientology-related organizations played in the creation and start-up of IAS, including but not limited to, any financial or facility support. 9. Operating Entities Please describe in detail the ownership of the three operating arms of IAS. 10(a) The Service has expressed its concerns relating to violations of public policy committed in the past by certain individuals affiliated with Scientology and by various Scientology-related organizations. What assurances can the Service be provided that these violations are not continuing as of December 31, 1989, and that those who were involved in the commission of the acts described in the CSC case are no longer affiliated in any capacity or employed by the Church of Scientology, including any Scientology-related organization? 10(b) The term "Snow White" referred in the 1970s to a covert operation carried out by the Guardian's Office under which illegal acts were perpetrated, including burglarizing the National Office of the Internal Revenue Service. Is any operation known as "Snow White" still in existence? If not, please describe and document the method by which it ceased operations. If an operation under the name still exists, please describe the operation and provide supporting documentation. In addition, please describe any operation of whatever name that may be designed to achieve goals similar to the "Snow White" operation that existed in the 1970s. 10(c) Please state whether, to the best of your knowledge and belief, there are any pending United States or state or local governmental investigations regarding possible criminal law violations by a Scientology-related organization or by any individual alleged to have been acting under the direction of (as agent or otherwise), or in conjunction with, any such organization. For purposes of this question, please include any information relating to any Class V Church or Mission without regard to whether such Church or Mission is required to be listed in your response to question 1. Please include any pending criminal charges (and/or any pending court action including relevant docket number(s) against such entity or individual. Include in the description the investigating agency and any knowledge and/or documents known by you, or in your possession, or known by a Scientology-related organization or in the possession of such an organization regarding the investigation (e.g., what the allegations are and the date the acts were allegedly committed). In addition, please list all positions held by the individual listed in response to this question in any Scientology-related organizations at the present time and at the time the activity in question allegedly occurred. 10(d) Please provide a list of all civil or criminal litigation commenced on or after January 1, 1980 in which it is alleged that any Scientology-related organization (as that definition has been - 12 -
77R-TVP7W-WT771'PTMM cr =ny ■ acting under the direction of (as agent or otherwise), or in conjunction with, any such organization, has violated any criminal law or has committed an intentional tort. The list should contain parties' names, the docket number(s) of the litigation, the court in which the matter is or was pending, a short description of all claims (and any counterclaims) by the parties, including any additional facts you believe would be relevant to allow us to understand the bases of the suit, and the status of the action. The list need not contain litigation in which the Commissioner of Internal Revenue is a named party.
- 13 - Third Series of Questions (October 1992)
1(a) On page 1-4 of your prior response, you state that you "exclude unrelated commercial licensees from [certain] subparts..." Do all members of this excluded class meet the definition of "wholly unrelated commercial vendor." 1(b) Do all United States Missions have substantially identical organizing documents? Please provide representative samples of two Missions' organizing documents. 1(c) As part of the response to Question 1 and elsewhere, entities are listed about which the Service has little or no information. Have any of the following entities had, at any time after December 31, 1988, gross assets in excess of $1,000,000 or annual gross receipts/contributions in excess of $250,000? If so, please provide for each such entity the information contained at Exhibit 1-9 and Exhibit 1-17. Where possible, data should be for 1989 and 1990. The entities are as follows: (i) the publications organizations that were first described in your June 29, 1992 response; (ii) Nesta Investments, Ltd.; (iii) C.W. Properties, Inc.; (iv) Dexter Development Company; (v) Graymoss, Inc.; and (vi) Northstar Publishing (disclosed on CSI Form 1120 for 1987). If the entity dissolved or otherwise wound up its operations, please state when and to whom all assets were distributed. 1(d)(i) We are concerned with the private ownership of Author Services, Inc. ("ASI"). This concern is based on an understanding that the corporation has private shareholders and that no other Scientology-related organization appears to retain an ownership interest in this corporation. Please provide all currently in force shareholder agreements related to ASI, including any buy-sell agreements, redemption agreements, voting trusts, or other similar interests in control or ownership. In addition, please provide all management or other service-provider agreements currently in force between ASI and other Scientology-related organizations. After resolution of issues relating to Mr. Hubbard's estate (including distribution of the residual assets), does the Church intend to continue to use the services of ASI? 1(d)(ii) An individual owned stock in New Era Publications International ApS Tokyo prior to its acquisition by NEP. Please identify the individual and describe the sale or transfer of the stock to NEP. 1(d)(iii) Please describe the transfer of stock in SOR Management Services, Ltd. between Ms Beryl Garside and CSREC. In addition, who or what entity owns SOR Services U.K., Ltd. as of the date of this letter. - 14 -
77-17W3ggEw.,, 51-,. 1WIM
. .r. . • • - 1(e) Why is CSC listed as "inactive." Please define the terms "inactive" and "dormant". 1(f) What does the term "N/A" imply concerning the jurisdiction of certain trusts, including SIRT, TFS, and FST. 1(g) At various places you refer to one entity as "owned by" or as a "subsidiary of" another entity. Do both terms mean that the first entity is "owned" entirely by the second entity or is the 100-percent subsidiary of such entity. 1(h) Are you aware of the existence of a Florida corporation named Majestic Cruise Lines, Inc.? Is that corporation related, directly or otherwise, with any Scientology-related organization, including Majestic Cruise Lines, Inc., the Panamanian corporation? If so, please explain. 1(i) According to the information you provided, San Donato Properties ("SDP") is the registered owner of the M.V. Freewinds, and is in turn wholly owned by Transcorp Services, which is in turn wholly owned by Flag Ship Trust. However, the Service has information that SDP is owned by a Venezuelan company named Consolidada de Ferrys. Please provide any information that will enable us to clarify this issue. 1(j) In Exhibit 1-2, the directors of SDP, Transcorp Services, S.A. and Majestic Cruise Lines, Inc. are described as "compensated and unaffiliated Panamanian individuals." Please identify all directors of these corporations as of December 31, 1989, and as of the date of this letter. Please provide the same information for the director of MCL Services, N.V. who is described as an "unaffiliated Netherlands Antilles individual." 2. Previously, we asked about the statement that certain entities are organized and operated exclusively for charitable purposes despite the entity being formed under the laws of a foreign jurisdiction. As part of your response, you included bylaws and other corporate documents. Are all these documents currently in effect? More generally, may we assume that any documents provided to us are currently in effect and complete unless explicitly stated otherwise? 3(a) We have sought to identify individuals within the Church hierarchy with fiduciary responsibility to prevent asset diversions and who would be most likely to benefit if, in fact, inurement exists. Therefore, we are asking certain follow-up questions, particularly about certain individuals' compensation. For ease of reference, we have designated these compensation questions as Question 3A.
- 15 - We have several follow-up questions which will allow us to better understand the Sea Organization's ("Sea Org's") role in the ecclesiastical management of the Church. (i) Please describe the Sea Org's system of rank including a complete explanation of the promotional board system, and how (and by whom) one is appointed or removed from the board. Please list the 10 highest ranking individuals in the Sea Org, as of the date of this letter. Please include all relevant documents relating to the Sea Org's system of rank, organization and /3"'Cilfu, structure. lar <>pa/ 1 9-- ;-u, 12c=r, 5, 3(b) The Service seeks to understand the method by which the Church hierarchy ensures that funds are not diverted to private interests in the lower level organizations. Towards this end, please assume that an FB0 at a Class V Church embezzled funds. Please describe who would be likely to detect such embezzlement, by what means, and the likely subsequent course of events upon discovery of such embezzlement. 3(c) Who has the authority to select or remove members of the following committees or organizations: (i) WDC; (ii) International Management FBO; (iii) International Management Executive Committee; (iv) Flag Network Coordination Cominittee; (v) Commodore's Messenger Organization; and (vi) Central Reserves Committee? 3(d) In your prior response you state that "...as a routine matter, the full [Central Reserves] Committee meets only when there is a need for everyone's input and participation." Please describe the process by which funds are approved for disbursement (including any transfer of funds to other organizations) when no meeting is held. In your response, please indicate on whose authority a disbursement may be made and provide actual representative examples of any such authorization after December 31, 1989. 3(e) We appreciate your efforts to address the Service's concerns about the Guardian's Office and the activities of the persons associated with that Office. Have any of those persons who have at any time been barred from serving with/for any Scientology-related organization by reason of their service or actions on behalf of the Guardian's Office at any time since being barred, become re-affiliated with any Scientology-related organization, including for purposes of this question, any Mission or Class V Church, either as a staff member or in any other capacity? Your prior response refers to the deposition of a government prosecutor. Please provide a complete copy of the testimony. 3(f) As required on Part II of the Schedule A, Form 990, please name the 5 highest paid service providers and list the amounts - 16 - paid to them by Scientology-related organizations, in calendar years 1989, 1990 and 1991. -service Providers," for purposes of this Question 3(f), excludes all Scientology-related organizations and individuals (including but not limited to individuals listed in response to Question 3A-c (i)-(iii) below). To identify the service providers to be listed, please aggregate all payments from all Scientology-related organizations. Please explain the services and purposes for which payment was made and separately list each payor and the amount it paid. 3A(a) Please describe all forms of compensation that are designated staff welfare under the Church's system of accounting. In addition, please describe the method of reporting all such staff welfare to the employee (or independent contractor) and to the Service. If such compensation is not reported to the Service, please provide the rationale for such practice. 3A(b) Please describe the class or classes of individuals who receive a parsonage or rental allowance from any Scientology-related organization, what elements of compensation or staff welfare constitute a parsonage or rental allowance, and the.process for designating any amounts as rental allowance. Please provide a copy of a representative sample of any designations (in effect during 1990) of amounts as rental allowances. 3A(c) For the purposes of this Question 3A, the term "compensation" includes anything of value provided (directly or otherwise) by, or attributable to, any Scientology-related organization. Whether an item is considered Hcompensation" under this question 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 or otherwise), including any interest, dividend or other corporate distribution; (iii) gross commissions; (iv) the value of any deferred compensation (qualified or nonqualified 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 organization (valued without regard to any risk of forfeiture, vesting or other restriction); (vi) any fringe benefit (other than de minimus fringes excludible under sections 132 (a) (4) and 132 (e) of the Internal Revenue Code); (vii) the highest balance of any loan or loans outstanding from any Scientology related organization to the individual at any time during the year in question; (viii) any parsonage or rental allowance; and, (ix) the amount of any reimbursed expenses (business or otherwise). For the purposes of (ix), you may ignore compensation from this
- 17 - source 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, please list such compensation separately with a short description of which category it falls within. We recognize the potential difficulty in valuing certain items included within this definition. If a fair market value is not available,,please merely list the type of compensation with any explanation that will be helpful to understand its natare and possible worth. For purposes of this Question 3A, the term Scientology-related organization is expanded to include all Class V Churches and Missions, all WISE sublicensees, and IAS (including its "operating arms") and the other membership organizations. In addition, the compensation of an individual includes amounts received by the spouse of that individual. Where a spouse has compensation, please separately list the spouse's name and the nature and amount of the compensation. Finally, if compensation is received from more than one Scientology-related organization, compensation should be listed separately Ior each such entity. 3A(c)(i) Please name the twenty natural persons with the highest level of compensation in each of the last 3 years (i.e., in calendar years 1989, 1990, and 1991). To determine those individuals for whom this question requires disclosure, please aggregate all compensation from all Scientology-related organizations. Please treat a husband and wife as a single entry on this list (separately listing the name of each spouse and the compensation of each). 3A(c)(ii) Please provide the compensation from all Scientology-related organizations in each of the last 3 years (i.e., in calendar years 1989, 1990 and 1991) for David Miscavige and Norman Starkey. In addition, please include the compensation of each individual's spouse, siblings (including compensation of each sibling's spouse), parents and children (separately listing the name of the family member and the compensation of each). 3A(c)(iii) Unless the individual or his or her spouse appears on the list provided in (1) above, please provide the compensation from all Scientology-related organizations in each of the last 3 years (i.e., in calendar years 1989, 1990 and 1991) fcr the following individuals: (a) Maureen Brigatti; (b) Pauline Chatterton; (c) Jonathan Epstein; (d) Terri Gamboa: (e) Carl Heldt; (f) Diana Hubbard; (g) Mark Ingber; (h) Guillaume Lesevre; (i) Janet Light; (j) Warren McShane; (k) Ray Mithoff; (1) Sabine Peshkin; (m) Mark (Marty) Rathbun; (n) Michael Rinder; (o) Lyman - 18 -
IAIrmiTimmgmws qmmmmr.- •
•
Spurlock, (p) Mary Story; (q) Helen Wehl; (r) Kurt Weiland; (s) glaiU IdyeLe 4(a) Please provide all directives (including HCO Policy Letters, Executive Directives and similar items) that set forth the amount and method by which the following entities' income is allocated to expenses (i.e. retained for its own uses) or is paid/contributed to CSI or other Scientology-related organization: (i) CSFSSO; (ii) CSFSO; (iii) CSWUS; (iv) CSREC; (v) all celebrity centers not included in (i) - (iv) above; (vi) IPT; (vii) NEP; (viii) BPI; and (ix) any Advanced or Saint Hill organization not already included in a category described above. Please include all ecclesiastical organizations withir the above entities. Where you have provided a directive in response to another question a citation thereto is sufficient response. 4(b) You have described how income is recorded on invoices and immediately deposited. Please describe any circumstarce where a Scientology-related organization's receipts are handled in any other manner. 4(c) Please provide a list and explanation of the income and expense categories, as well as balance sheet accounts. 4(d) Please explain the following terms: (i) Ad Council; (ii) Department 21; (iii) Data Bureaux Flag; (iv) Div 3; (v) Div 6; (vi) ITO; (vii) PPU stats; (ix) Allocation to CMO CW; (x) Flag External Expenses; (xi) FSC; and, (xiii) management e)venses incurred locally.
4(e) Please provide an executed copy of a representative contract now in force between CSI and a Class V Church. 4(f) The Service has seen references to "6-week trend reports" and "12-week trend reports." Please identify and describe these documents and provide representative samples of such documents for any period after December 31, 1989, including any supporting information that may be useful in interpreting these reports. 4(g) To understand the accounting system of the Church, the Service needs a complete set of the given Church's records and reports for the given time period. Accordingly, to the extent not already provided, please provide for the month indicated all FBO AC3 Weekly Reports; Income Sources Summaries; Financial Plannings; and the monthly bank statement(s) for all hank accounts for the following organizations. In addition, please identify the name of the organization where the name J.s unclear. The months and entities requested are as follows: (i) for October of 1989, the Boston organization referenced in the FB0 AC3 Weekly Report of October 1989; (ii) for November of 1990, tho "SNC" org referenced in the FB0 AC3 Weekly Report of 1/11/90; for November of 1991, the organization referenced in the FBO AC3 - 19 -
:777;77: Weekly Report of 7/11/91; (iv) for October of 1991, the organization referenced in the financial planning for the week of 10/31/91; and, (v) for October of 1991, the Church of Scientology of Colorado, Inc.
4(h) On certain of your submissions, payments have been made to the "main" accounts. Please describe this account. 4(i) Please state where credit card payments and checks drawn on United States Banks are first deposited. 4(j) Please answer the following questions on the advance payment trusts:
(i) Has any individual or entity other than CSFSO and CSWUS ever deposited/contributed money to either trust? (ii) The revised financial statements provided for TFS and USPT reflect the transfer of advance payments to and from both trusts and CSFSO and/or CSWUS. You describe the netting process by which those payments are periodically made to and from the trusts. Are the amounts included in the revised financial statements the net payments made to and from the trusts? If so, please provide for 1989 and 1990 the gross amounts that would have been received by the trusts and the gross amounts that would have been paid by the trusts but for the netting process. (iii) It is our preliminary view that if the various entities comprising the Church are to be recognized as tax-exempt, we must similarly ensure that the advance payment trust are organized and operated in a manner consistent with the requirements of section 501(c)(3). To meet these requirements, however, it appears that the trust instruments would need to be modified to conform to the organizational requirements of section 501(c)(3), (e.g., appropriate dissolution clause for TFS). Please indicate whether the Church would be willing to make such modifications.
4(k) There is variance between the disbursements reflected on the Author's Family Trust B information provided in your prior response (showing $1,800,000 in management fees paid to Author Services) and the receipts information for ASI (showing all of ASI's receipts as consisting of $2,000,015 in management fees from Author's Family Trust B). The same information for ASI also appears to vary from the disbursement information for CSI, which shows royalties of $468,000 paid by CSI to ASI. . . . Please explain. A similar (if smaller) variance'occurs with respect to contributions in 1990 by USPT to CSRT. Please explain. 4(1) Please explain the scope of organizations within the Finance Network. For example, are there any entities within the
- 20 - n454-TanrIr t.rilh nn rsn_ Ara 1h rirL1 hattarmant nrriani7Atinn -r publishing organizations part of the Finance Network? 4(m) Under the new system of allocations described at page 4-15, the Class V Churches pay 12.5 percent of corrected gross income to CSI. How is this amount reflected on CSI's books (i.e., what income category includes these amounts)? Are all amounts forwarded to CSI received and processed by Flag Command Bureaux? If this is not the case, please clarify. 4(n) Please provide information (including dollar amounts), as provided for other entities in Exhibits 1-9 and 1-17, for 1989 and 1990 for: Church of Scientology Religious Education College; Church of Scientology Advanced Organization Saint Hill Europe and Africa; and Church of Scientology, Inc. 4A(a) Do tour or fundraising commissions differ from FSM commissions? If so, please explain. 4A(b) Please describe how Church fundraisers, FSMs and "tours" operate. In this regard, please provide documentation containing all Church policies on FSMs, tours, and fundraising activities (e.g., how individual FSMs and fundraisers handle cash contributed to a Scientology-related organization through such individuals' efforts). Who is responsible for expenses of the tours or other individual FSMs and fundraisers? Specifically, is commingling of the organization's funds and the individual's funds permitted? 4A(c) Do any individual FSMs or fundraisers receive funds from one Scientology-related organization for payment to another such organization? If so, please explain the reasons for such transfers and how it is ensured that such transferred amounts are received by the recipient organization. 4A(d) Please describe the method by which Scientology-related organizations report commissions paid to fundraisers or FSMs to both those individuals and to the Service. To the extent difficulties have existed in the past, please describe these difficulties. To the extent difficulties continue, is the Church willing to adopt alternative procedures as part of any closing agreement? 5(a) The Church uses the "modified cash" method of accounting. Please define this method of accounting and describe all adjustments necessary to change from the cash method to the modified cash method of accounting. 5(b) The submissions contain numerous references to HCO Policy Letters and other portions of the Scriptures relating to the Church's financial activities. To facilitate our understanding
- of the Church's accounting and financial systems, please provide - 21 -
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a current and complete set of the Organization Executive Course volumes, excluding the HCO Technical Bulletin volumes. 6(a) It appears that the central reserves system controls, directly or otherwise, the accounts of certain for-profit entities, (e.g., BPI, BMS, FSO OIC, SDP). If so, please explain such control, including how control is exercised, how disbursements from such accounts are approved, and any internal controls or reporting. In particular, please explain whether the funds of the for-profit entities are segregated to avoid problems inherent in commingling and any possible diversion of funds to or from the for-profit entities. In this regard, we note that the entries indicate loans to BPI from CSWUS. Please explain the purpose, amount and terms of these loans. 6(b) Please explain the difference between primary contributors and entities that participate in the central reserves through CSI. Is the difference that primary contributors maintain an account in their own name in the central reserves system? 6(c)(i) In reviewing Exhibit II-6-A, it appears that some DVs within a given series break numerical sequence and that gaps occur in the numerical sequence (i.e. intervening DVs in a sequence are not listed). Please explain this in the Context of the function of DVs in the Church's accounting system and the process for central reserves financial planning. 6(c)(ii) An entry indicates that CSRT expended $900,000 for "operating expenses". Please describe how this expenditure is reflected on Exhibit II-4-H. 6(c)(iii) A transfer from CSFSSO to FST for parishioners' bounced checks is shown. Please explain this transaction and, more generally, the flow of money between these entities. 7. As part of the response regarding expenditures from central reserves, t40 term "ecclesiastical guidance" is used. Please define this term, and describe the activities performed that come within this definition. Please provide a copy of written agreements regarding the provision of such services, and state how the charges for such services are determined. In this regard, please describe the ecclesiastical guidance provided to BPI by CSI. 8. Who owned IMU Admin., ApS, while that organization was still in existence? 9. In our prior Question 9 we asked a number of questions to help us better understand the relationship between IAS and the church hierarchy. We are still reviewing that information. While we understand that the church may have reservations about the inclusion of IAS and its operating arms in this process, it - 22 -
g31.--r-W7YA 'WW11-7.77117:- ,1WW •IN is our view that we need the following information to help t.:yluidic -%.e %Jul. %.....nolcs.1,-.44. a. One of the benefits of IAS membership you described is the right to keep certificates in force. We assume that the right to keep certificates in force means, at least as a practical matter, the right to receive services at Churches of Scientology. Please state whether or not this is correct. If incorrect, please explain and provide all relevant documentation. b. Please list those individuals who hold the position of Chairman and Secretary of IAS as of the date of this letter. c. Please provide a copy of the "Welcome to the Association" pack described in Exhibit 9-A." d. It is our preliminary view that if the various entities comprising the Church are to be recognized as tax-exempt, it may be necessary that IAS be organized and operating in a manner consistent with the requirements, however, it appears that minor modifications may be necessary to IAS' governing instrument to conform to the organization requirements of section 501 (c)(3) (e.g., revised statement of limitations). Please indicate whether such modifications could be worked out with IAS.and the Church.
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1. Please describe how parishioner donations for religious services are accounted for. 2. Please describe the new computer software system that is being developed for use in all churches of Scientology and Scientology-related organizations. 3. Please provide Exhibit 1-9 and I-17 information for Church of Scientology Religious Education College for 1989 and 1990. 4. Please describe Assisco, S.A. What are its function? What happened to its assets when it was dissolved? 5. Please describe Tesla Resources, Inc. What was its function? Does any Scientology-related entity own any interest in the company? 6. Please describe the formation and corporate structure of IAS and its "service arms." Please provide Exhibit 1-9 information for IAS and its service arms. 7. Please describe IAS's grant-making procedures. 8. Please explain why you believe Bridge Publications, Inc. and New Era Publications International ApS qualify for tax exemption under Section 501(c)(3). 9. Will the advance donation trusts continue to exist if the United States churches of Scientology are recognized as tax- exempt?
10. Please explain how the organizations you believe qualify as integrated auxiliaries for purposes of sections 508 and 6033 meet the requirements of Revenue Procedure 86-23. 11. Please identify the for-profit corporations that participate in the Church of Scientology's central reserves system. 12. Please explain why you believe Church of Spiritual Technology qualifies as a "church" described in Code section 170(b)(1)(A)(i)
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MEMORANDUM September 23, 1994
This memorandum and attached exhibits address the: process leading to the October 1, 1993 rulings by the United States Internal Revenue Service ("IRS") recognizing the tax cxempt status of Churches and affiliated organizations of Scientology. The significance of these rulings cannot be overstated: The October 1, 1993 determinations mean that the IRS, the largest tax agency in the world, has determined that the Mother Church of the Scientology religion and all other United States Churches of Scientology and related charitable organizations, more! than 150 Churches and organizations in all, are tax exempt under . section 501(c)(3) of the United State Internal Revenue Code (tCode"). That statute accords tax exemption to those organizatjons organized and operated exclusively for religious, charitable or educational purposes. In addition, the IRS issued "group" ruling letters to five individual "parent" churches and charitable organizations authorizing them to extend section 501(c)(3) exempt status to their subordinate churches and charitable organizations in the United States. The individual exemptions issued by the IRS also included certain entities outside the United States: Church of Scientology Flag Ship Service Organization ("CSFSSO"), a Netherlands Antilles Foundation; New Era Publications, ApS, a Danish corporation; and Scientology International Reserves Trust, Flag Ship Trust and the International Association of Scientologists.
In its rulings, the IRS specifically recognized a number of Scientology entities as churches: Religious Technology Center ("RTC"); Church of Scientology International ("CSI") and all of its subordinate churches; Scientology Missions International ("SMI") and all of its subordinate missions; CSFSSO; Church of Scientology Flag Service Organization; and Church of Spiritual Technology. Church status under the Code confers a number of special benefits and privileges on the organization and also means that the IRS recognizes certain denominational 2nd associational elements necessary for "church" status, in contrast to other religious organizations. To obtain these determinations, each Scientology Church and organization was required to fulfill stringent requirements demonstrating their religious purpose and charitable nature. These exemption rulings were made only after the most comprehensive examination of an exemption application in United
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„ ZUCKERT. SCOUTT & RASENBERGER
States history. The exemption letters resulted from an administrative proceeding in which the IRS had unrestricted access to records reflecting the policies, structure, operations, and finances of every Scientology Church and organization both in the United States and around the world. The Church's documentary support for the rulings extend over twelve linear feet, and encompasses tens of thousands of pages, all of which is in the public record here in Washington, D.C. Every financial record of all the churches and other organizations was made available for IRS review. IRS personnel were given carte blanche tc examine any and all records at their discretion.
The IRS also examined all financial dealings between Church entities and the 22 most senior Church staff members and their families during a three-year period to be certain there was no private inurement of earnings or other financial irregularities with Church insiders. Finally, before issuing the exemption rulings, the IRS investigated every allegation of civil and criminal wrongdoing made against any Church and anyone associated with any U.S. Scientology Church or organization since 1981. By issuing the exemption rulings, the IRS determined that these allegations have no bearing on the Churches' entitlement to exemption. The exemption determinations mean the IRS concluded that the Churches and affiliated charitable organizations operate exclusively for religious and charitable purposes and that their activities are fully in accord with fundamental public policy of the United States, as set forth in its criminal and civil laws.
In summary, these exemption rulings signify that, after an unprecedented examination of the Church, the IRS -- in the words of its own public spokesman -- was able "to make the legal determination they were entitled to exemption -- that they were organizations operated exclusively for religious and charitable purposes." In reaching this conclusion, the IRS necessarily made the following specific findings:
1. Scientology is a bona fide religion in all respects.
2. Churches of Scientology are bona fide churches in all respects.
3. Churches of Scientology operate exclusively for religious purposes.
4. Churches of Scientology are not commercial enterprises. 5. The books and financial records maintained by Churches of Scientology are complete, accurate and can be audited.
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6. No part of the net earnings of Churches of Scientology benefit private individuals.
7. Churches of Scientology and their representatives do not commit illegal acts or otherwise violate fundamental public policy.
8. No substantial part of the activities of Churches of Scientology consists of lobbying. In addition to the exemption rulings, the IRS also officially recognized that the fixed contributions which Scientology parishioners make in order to participate in Scientology religious services qualify as charitable contributions that parishioners may deduct on their personal federal income tax returns to the same extent as similar fixed donations by parishioners of Protestant, Roman Catholic and Jewish faiths. The IRS took this position only after it had conducted a detailed examination into the nature of the Church's religious services and its system of fixed contributiohs. In concluding that these fixed contributions qualify as charitable contributions, the IRS necessarily made the following specific findings:
1. The Church's system of fixed contributions is a method of fundraising that is indistinguishable in any material respect from the fundraising practices of other religions.
2. The only benefit from the religious services that Scientology parishioners receive in exchange for their fixed contributions is of a spiritual, intangible nature of benefit to society as a whole.
The IRS's action is not limited to the U.S., but affects every Scientology organization in the world. The Church of Scientology is a hierarchical church, and all of the senior-most churches of the ecclesiastical hierarchy are located in the United States. The IRS review of the records of non-U.S. churches and organizations as part of the exemption examination means that those entities, too, meet the stringent requirements set forth by the IRS. For example, if U.S group exemption procedures were not limited to U.S. entities, all Churches and Missions of Scientology outside the U.S. also would qualify for exemption under the group rulings issued to CSI and SMI.
It is important to note, however, that the October 1 determinations do not reflect a change in the operations of Scientology Churches and organizations. Scientology itself has
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not changed in a meaningful way since its beginning -- the basic core of religious beliefs and practices and the structure of organizations for their practice and propagation is essentially unchanged. What has changed is the IRS's view of the bona fides of Scientology as a religious faith and the integrity of its financial, corporate and ecclesiastical structures. Exemption was the culmination of decades of disputes and confrontations between the IRS and the Church of Scientology.
The attached exhibits A-G provide a description of the process leading up to the IRS's issuance of the exemption rulings and the nature and extent of the IRS's in-depth examination. These materials include summaries explaining specific issues addressed by the IRS as part of the exemption process: Exhibit A - Church of Scientology Organizational Structure;
Exhibit B - Church and Religious Status; Exhibit C - Inurement/Private Benefit;
Exhibit D - Operation for a Commercial Purpose; Exhibit E - Public Policy; Exhibit F - Financial Integrity;
Exhibit G - Tax Exemption -- The Procedural Background.
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CEURCH OF SCIENTOLOGY ORGANIZATIONAL STRUCTURE
On October 1, 1993, the IRS issued ruling letters to 25 individual Scientology churches and related charitable and educational organizations recognizing their exempt status under section 501(c)(3) of the United States Internal Revenue Code, which accords tax exemption to organizations organized and operated exclusively for religious, charitable or educational purposes. In addition, the IRS issued "group" ruling letters to 5 individual "parent" churches and charitable organizations authorizing them to extend their section 501(c)(3) exempt status to their subordinate churches and charitable organizations in the United States. (Non U.S. organizations are not eligible for inclusion under a group exemption). All told, more than 150 Scientology churches and related charitable organizations now have tax-exempt status as a result of this action. The IRS's action was wide-ranging, and it affects every Scientology organization in the world, not just those in the United States. The Church of Scientology is a hierarchical church, and all of the senior-most churches of the ecclesiastical hierarchy are located in the United States. These churches and the other related organizations which received tax exempt status are described below along with an explanation of how they fit within the hierarchical structure.
A. Uppermost Scientology Churches p Two churches -- Church of Scientology International and Religious Technology Center -- stand at the apex of the Scientology religion. Each serves a specific purpose with respect to the practice of the faith, both now and for the future. The IRS has issued letters recognizing that each of these two churches is a tax-exempt church under section 501(c)(3) of the Internal Revenue Code. Church of Scientology International ("CSI") is a California t _ nonprofit corporation that serves as the Mother Church of the Scientology faith. As discussed below, CSI guides, supports and coordinates the activities of Scientology churches, missions and related organizations throughout the world on matters relating to the ministration of religious services, training of clergy, dissemination and propagation of the faith, ecclesiastical administration and social-betterment activities. Religious Technology Center ("RTC") is a California nonprofit religious corporation that owns the Scientology religious marks and the rights to use the advanced technology. RTC's specific purpose is to ensure the orthodox practice of the Scientology faith. RTC accomplishes its purpose by authorizing churches in the Scientology religious hierarchy to use the
EXHIB: ZUCKERT SCOUTT &RASENSERGER
advanced technology and religious marks and then by supervising their activities to ensure compliance with Scriptural requirements. Another church, Church of Spiritual Technology ("CST") stands outside the hierarchy to serve a unique and essential role. CST is a California nonprofit corporation formed for the specific purpose of preserving the Scientology Scripture. In furtherance of its religious purpose, CST conducts an extensive program of preservation activities to protect the Scientology Scripture against all exigencies, whether natural or man-made. CST also owns all copyrights to the Scientology Scripture and patents to the E-Meter. Since CST neither ministers religious services to individual Scientologists (other than to its own staff) nor is involved in the supervision or management of other church or religious organizations in the ecclesiastical hierarchy, it is not viewed as operating within the Scientology ecclesiastical hierarchy. The IRS has issued a ruling letter recognizing CST as a tax-exempt church under Section 501(c)(3). ( C). CSI, the Mother Church of the Scientology religion, is the largest of the three senior churches of Scientology. CSI's primary function is to coordinate the activities of all churches of Scientology and their related organizations located throughout the world to ensure they are working in harmony and in accordance with Scientology Scripture. CSI carries out this function by providing ecclesiastical guidance and program support to the various churches of Scientology and their related organizations. For example, CSI oversees the ministration of Scientology religious services to ensure orthodoxy. It organizes and produces the written and spoken Scientology Scriptural materials into books, recordings, transcripts, course materials and other usable forms and disseminates them where needed. It translates these religious materials into languages other than English such as French, Italian, German, Spanish, Danish, Hebrew, Swedish, Portuguese, Russian, Chinese, Japanese, Hungarian, Greek and Dutch. CSI helps establish and staff new churches and expand existing ones. /t helps train staff in Scientology religious technology and ecclesiastical administration. It provides needed assistance on financial planning and management and on capital acquisitions and development. It provides direct financial assistance when necessary. It also directs broad-scale proselytization campaigns throughout the world on television and radio and in magazines. CSI organizes community service programs, missionary programs and social reform programs for Churches of Scientology and related organizations to carry out. In short, CSI is the one entity to which Scientology 2 ZUCKERT. SCOUTT & RASENBERGER
organizations throughout the world can look to for advice, guidance and support. Specific examples of a few of the many forms of assistance CSI provides other churches include: Technical Bulletins of Scientology: CSI compiled all of the technical bulletins and other technical issues by L. Ron Hubbard -- a total of over 2,600 issues -- into an encyclopedia of the Scientology religious technology. The full set includes 13 chronological volumes, four subject volumes and a master index for a total of 18 volumes. This information is invaluable to churches of Scientology, individual Scientology ministers and all Scientologists in having the full Scriptural materials of Mr. Hubbard readily available and easy to reference. Organization Executive Course ( 10EC"): CSI compiled the new OEC course volumes, comprising the encyclopedia of Scientology administrative technology, including all of the policy letters written by L. Ron Hubbard. The set includes over 2,000 policy letters for a total of over 10,000 pages in twelve volumes. Technical Course Materials: Over the last several years, CSI has researched, compiled and published new textual materials for religious training courses containing issues that have been confirmed as Mr. Hubbard's original writings. These materials include the full Saint Hill Special Briefing Course, the most comprehensive religious training course in Scientology. Staff Training Courses: CSI compiles course materials to train staff of churches of Scientology in the exact policies and other materials Mr. Hubbard wrote on the administrative policy that applies to their respective duties. Tape Series: L. Ron Hubbard gave nearly 3,000 lectures on Dianetics and Scientology. CSI is producing a substantial number of these tape recordings on cassette (along with full transcripts), making much of this original material by Mr. Hubbard available to the public for the first time. Technical Training Films: CSI produces training films which are used intensively in technical courses to teach correct application of Scientology religious technology. These films were written and, in many cases, directed and narrated by L. Ron Hubbard, and cover specific technical aspects and their application in auditing.