Department of the Treasury
Internal Revenue Service1
Rev. January 1987
CLOSING AGREEMENT ON FINAL
DETERMINATION COVERING SPECIFIC MATTERS
Under section 7121 of the Internal Revenue Code, the parties named herein and the Commissioner of Internal Revenue make the following closing agreement:
WHEREAS, the Church of Scientology and its constituent entities (the “Church”) and the Internal Revenue Service (the “Service”) have a long history of controversy spanning over 30 years;
WHEREAS, the Church has pending with the Service applications on Form 1023 requesting that the Service recognize certain constituent entities within the Church as exempt from income taxation pursuant to section 501(a) of the Internal Revenue Service Code, as exclusively charitable organizations described in section 501 (c) (3) of the Code;
WHEREAS, the controversy between the parties includes litigation (hereinafter “the section 170 litigation”) in which the deductibility under Code section 170 of parishioners’ payments to the Church in connection with their participation in religious services of the Scientology faith is at issue;
WHEREAS, the Church signatories and individual Scientologists have initiated, supported and/or otherwise participated in litigation under the Freedom of Information Act (FOIA) to compel the Service to disclose information withheld by the Service in response to FOIA requests about its treatment of Scientologists and Churches of Scientology (hereinafter “FOIA litigation”);
WHEREAS, in October of 1991, the key officials of the Church, David Miscavige and Mark Rathbun, approached the Service seeking to negotiate the resolution of the above-described matters, and met with the then Commissioner;
WHEREAS, at this meeting, the Commissioner indicated his desire to resolve all outstanding issues between the Church and the Service and appointed the Assistant Commissioner to negotiate and conclude a settlement with the Church on behalf of the Service;
WHEREAS, the Church and the Service intend this closing agreement to be final and conclusive with respect to all matters but, while also final and conclusive, that its provisions relating to the continuing duties and obligations of both parties during the transition period shall generally be effective until December 31, 1999;
NOW IT IS HEREBY DETERMINED AND AGREED, for purposes the Internal Revenue laws of the United States, and in consideration of the provisions contained herein that:
TABLE OF CONTENTSI. Introduction
List of Exhibits[not included]
I. Introduction.The parties have entered into this Agreement in order to put the past controversy behind them, to extinguish all potential claims and liabilities arising as a result of action or inaction prior to the date of this Agreement and to structure their relationship into the future. While complex, there are certain basic principles underlying the Agreement that will aid in its comprehension.
First, under section II of the Agreement the Church will make a single payment that is intended to extinguish any potential tax liability that may be due and unpaid by any Scientology-related entity for all tax years up to and including the tax year ending in 1992. Thus, as of December 31, 1992, the Church will be current with respect to all income, employment and estate tax liability.
Second, under section II of the Agreement, the Church and the Service will withdraw from virtually all existing controversy, including ongoing examinations of Church entities, ongoing litigation by the Service to enforce summonses for Church records, and all litigation by the Church against the Service and its current or former personnel. In addition, because the parties intend that the relationship between them begin anew, and in light of the other provisions contained in this Agreement, including the payment with respect to potential past tax liability, the Service and the Church agree under this section II of the Agreement that the Service will not examine the Church for any year ending prior to January 1, 1993. Similarly, no Scientology-related entity may initiate or support any legal action against the Service or any Service employee for any claim arising prior to the date of this Agreement.
Third, it is the view of the Service that certain Church entities are entitled to recognition of tax-exempt status as entities described in section 501(c) (3) of the Internal Revenue Code. Thus, section III of the Agreement contains a list of entities that will be recognized as tax exempt entities, including certain entities that will receive group exemption letters covering their subordinate organizations.
Notwithstanding the above, in light of, inter alia, the size and complexity of the Church and the Service, certain concerns of the Service and the Church remain. In addition, there is a need for improved communication between the parties. Thus, under section IV, a Church Tax Compliance Committee (CTCC) has been created to undertake certain obligations during a seven-year transition period. The CTCC is to be comprised of the largest United States Church entities, as well as those individuals who are the highest ecclesiastical or corporate authorities within the Church. The Service, through the Assistant Commissioner, has agreed to meet with the CTCC upon their request during the transition period to address any questions arising from the ongoing performance of the parties’ obligations under this Agreement.
The CTCC is in a position to monitor and effect the operations of the group entities that are defined as “Scientology-related entities” under this Agreement. Under section IV, the CTCC is responsible for certain reports produced and provided annually to the Service. These reports will include a report on the application of certain agreed-upon procedures by an independent certified public accounting firms, as well as certain other information collected and reported by the CTCC. These reports, and the information the CTCC collects from Scientology-related entities in order to prepare them, are intended solely for the purposes of administration of the tax laws and not for any other purpose.
In light of the CTCC and its relationship to the whole of Scientology, the CTCC has agreed under section IV to guarantee the collection of taxes (including interest and penalties) from any Scientology-related entity for tax liability arising during the first three years of the seven-year transition period. The parties have agreed under section V to keep confidential both this Agreement and all underlying information that is not part of the public record under Code section 6104 except to the extent that disclosure is necessary to interpret or apply this agreement or is permitted under the authority of law. In addition, the CTCC has agreed under section VI to certain consensual penalties intended to provide the Service intermediate sanctions for activities or conduct not in accordance with the Code or with this Agreement.
Finally, under section VII, the Service and the Church have come to an agreement with respect to the treatment of contribution by Church parishioners and the extent to which those contributions are deductible under section 170 of the Internal Revenue Code, as well as the Service’s acknowledgment of its obligation to interpret and apply the “gift or contribution” requirement of Code section 170 (c) equally and consistently to the fundraising practices of all religious organizations that receive fixed donations from parishioners in connection with participation in worship and similar religious rituals or services.
II. Resolution of Outstanding Issues.A. In General.
In general, the parties to the Agreement intend that the below-described issues be finally and conclusively resolved under this Agreement.
B. Payment in Consideration of Resolution of Outstanding Issues.
1. At the same time this Agreement is executed, Church of Scientology International is paying by banker’s draft the sum of Twelve and One-Half Million United States Dollars (US$12,500,000.00), receipt of which the Service hereby acknowledges, as consideration for the settlement of outstanding issues with the Service as set forth in this Agreement.
2.The amount paid under this Agreement includes recognition that the Church will not collect the attorneys’ fees awarded to the Church in the Church of Scientology of Boston, Inc. litigation referred to in Exhibit II-2, thus extinguishing the Service’s liability under that decision.
3. The amount paid under this Agreement is not considered part of, or attributable to, the federal tax liability of any Scientology-related individual or Scientology parishioner, and is not deductible, refundable or creditable to any such individual for any purpose, nor may the amount be the subject of any other offset of liability under this Agreement.
4. If, after application of the provisions of paragraph IX.H., the Service assesses a tax liability for a taxable year ending before January 1, 1993 against any Scientology-related entity, the amount paid under this Agreement shall be treated as a payment of the taxes so assessed against such entity as of the date of this Agreement in the manner designated by the CTCC. Otherwise, such amount shall not be considered part of, or attributable to, the federal tax liabilities of any Scientology-related entity and is not deductible, refundable or creditable to any such entity for any purpose, nor may the amount be the subject of any other offset of liability under this Agreement.
5. The amount paid under this Agreement may be designated as the Service provides (including penalties or liquidated damages) so as to avoid characterization as a refundable or creditable amount.
6. The amount paid under this Agreement shall not be deductible in computing the taxable income of any Scientology-related entity or Scientology parishioner and shall not be treated as compensation of either income to any Scientology-related entity or Scientology parishioner.
7. The performance of the various obligations under this Agreement by the CTCC or by any Scientology-related entity, including (but not limited to) the payment under paragraph II.B.1. hereof, shall not in and of itself be considered by the Service to constitute the conferring of substantial private benefits by any Scientology-related entity, the private inurement of the net earnings of any Scientology-related entity, nor shall such performance adversely affect in any other way the tax exempt status under Code section 501 (c) (3) of any Scientology-related entity.
8. No inference shall be drawn from the fact that the payment provided in paragraph II.B.1 has been made with respect to whether any Scientology-related entity agrees that any tax liability was actually due or owing for any pre-1993 period.
C. Effect of Agreement on Prior Tax Years and Waiver of Rights of Action.
1. The Service agrees not to commence an examination or assess any tax liability under subtitles A, B, or C of the Code or under Chapter 42 of subtitle D of the Code for any taxable period ending on or before December 31, 1992, with respect to any Scientology-related entity. Similarly, no Scientology-related entity shall have any right to refund or offset with respect to any payment made for any taxable period ending prior to the date this Agreement is executed. Notwithstanding the previous sentence, any amounts held in accounts under the joint signatory authority of any Scientology-related entity and a representative of the Service, and any other amounts otherwise in the nature of bond, to defer collection action by the Service with respect to any liability assessed against a Scientology-related entity for the a pre- taxable period (including, but not limited to, joint signature accounts at Sumitomo Bank to serve as collateral for FICA assessments against CSI, RTC, CSWUS, and CST) shall be released or otherwise returned to the Scientology-related entity. The Service and the CTCC shall jointly draft notice to the bank (s) to effectuate release of such funds.
2. To the extent any payments have been made and/or claims for refund filed for any taxable period prior to the date of this Agreement by a Scientology- related entity, the Church and Service agree that such payments are not subject to refund and will not be refunded. The CTCC certifies that no Scientology-related entity will continue to pursue such claim for refund or file any new claim for refund for any pre-1993 period.
3. The Service and the Church agree that no inference is to be drawn from any provision of the Agreement as to the tax treatment of any activity or item relating to any liability under the Code for any post-1992 periods unless expressly provided herein. For example, the fact that the Service has not assessed any unrelated business income tax for past years may not be construed to mean that activities that occurred in those years did not give rise to such liability and that if such activities continue into post-1992 taxable years, that they will not give rise to such income. For further example, the fact that the Church has made the payment provided in paragraph B.1. shall not be construed as an admission, or otherwise used in any way as evidence, that any Scientology-related entity was not exempt from federal tax for any taxable period before 1993.
4. In reliance upon the covenant of good faith and fair dealing that underlies this Agreement, the Church signatories, as well as the Individual At-large members of the CTCC agree to relinquish all claims arising out of any action or inaction of the Service of current or former Service employees that occurred prior to the date of this Agreement, including, but not limited to, any claims of continued conspiracy having a genesis prior to the date of this Agreement. In addition, the Church signatories, and the Individual and At-large members of the CTCC certify that no Scientology-related entity or Scientology-related individual shall assist (directly or indirectly) any party in any suit against the United States, the Service or current or former Service employees based upon any claim arising out of any action or inaction of the Service or former or current employees that occurred prior to the date of this Agreement including, but not limited to, any claims of continued conspiracy having its genesis prior to the date of this Agreement. If any Scientology-related entity or Scientology-related individual commences any such action or provides any such assistance, then section VI shall apply.
5. The CTCC shall indemnify and hold the United States, the Service or any Service employee (former or present) harmless with respect to any litigation filed or pursued in contravention of the Agreement, that is, any litigation filed or pursued by or with the assistance of any Scientology-related entity or Scientology-related individual. For purposes of this paragraph C.5, direct or indirect assistance includes, but is not limited to, financial aid, litigation support, or the use in connection with litigation of documents obtained from the Service by any Scientology-related entity or Scientology-related individual prior to the date of this Agreement or under the Inspection provisions of the Settlement Agreement entered into by the parties on even date herewith.
6. Subject to the requirements of section VII, paragraph G., nothing in the preceding two paragraphs shall be construed to prevent any Scientology-related entity from conducting, supporting, or participating in, directly or indirectly, any judicial proceeding to construe or enforce the obligation under this Agreement, nor to impose any sanction or require indemnification to the Service as a result of such proceeding.
D. Effect on Outstanding Administrative Matters.
1. Church tax inquiries under Code section 7611. The Service shall close the following church tax inquiries on a no-change basis:
Church of Scientology InternationalChurch of Scientology Flag Service Organization, Inc. (two outstanding inquiries)
Church of Scientology Western United States
2. Other examinations of Scientology-related entities. The Service shall close the following income or employment tax examinations on a no-change basis:
Church of Scientology Expansion TrustChurch of Scientology Religious Trust
Scientology Endowment Trust
Bridge Publications, Inc.
Applied Scholastics International
Author’s Family Trust B
International Association of Scientologists
Religious Technology Center
Church of Scientology International
Church of Spiritual Technology
Church of Scientology Flag Service Organization, Inc.
Church of Scientology Western United States
Church of Scientology of California (employment)
3. Outstanding tax assessments. The Service shall abate in their entirety the following unpaid tax assessments:
Church of Scientology of California, FICA and FUTA for all quarters of the years 1976 through 1986.Religious Technology Center, FICA for all quarters of the years 1986 and 1987.
Church of Scientology International, FICA for all quarters of the years 1986 and 1987.
Church of Spiritual Technology, FICA for all quarters of the years 1986 and 1987.
Church of Scientology Western United States, FICA for all quarters of the years 1986 and 1987.
Religious Technology Center, Form 1120 Corporate Income Taxes, interest and penalties for the years 1982 to 1988.
Church of Scientology International, Form 1120 Corporate Income Taxes, interest and penalties for the years 1981 to 1988.
With respect to the foregoing tax assessments, the Service agrees to withdraw any notices of levy and to release any notices of tax lien filed or made prior to the date of this Agreement.
4. Trust fund recovery penalties. The Service shall abate in their entirety assessments made under Code section 6672 with respect to certain FICA assessments against Church of Scientology of California (1985-1986), Church of Scientology International (1988), Church of Spiritual Technology (1988), Religious Technology Center (1988), and Church of Scientology Western United States (1988), against the following individuals: David Miscavige, Norman F. Starkey, Marc Yager, Mark Ingber, Lyman Spurlock, Patrick Broeker, and Ann Marie Tidman (Broeker). In addition, with respect to the foregoing penalty assessments, the service shall (1) refund upon proper claim any amounts collected, along with interest as permitted by law, (2) withdraw any notices of levy, and (3) release any notices of tax lien filed.
5. Time period in which to effectuate paragraph D. The Service shall take the actions required under this paragraph D. by April 1, 1994.
E. Effect on Outstanding Litigation Matters.
1. In general. The Service and the CTCC agree that all litigation set forth in Exhibits II-1 and II-2 shall be dismissed with prejudice by stipulation of the parties (or, where appropriate, the pending appeal shall be withdrawn) with all litigation costs (e.g., attorney fees) to be borne by the respective parties. The parties agree that no damages, costs, attorney fees, or any other amounts of relief shall be sought by any Scientology-related entity or Scientology-related individual, the United States, the Service or any individual plaintiff in any suit contained in Exhibits II-1 or II-2.
2. Zolin. The Service further agrees that following dismissal of the litigation listed on Exhibit II-2 as Zolin, it shall use its best efforts to return to the CTCC all materials and all copies thereof produced to the Service in response to the summons at issue in that litigation by no later than April 1, 1994. The CTCC hereby certifies that CSI shall retain all such materials during the transition period. No inference shall be drawn from the fact the Service is returning these materials that they were summonsed for an improper law enforcement purpose and the CTCC agrees not to assert such an inference in any future litigation.
3. Stipulations. At Exhibit II-3, are copies of stipulations to dismiss the cases discussed at paragraph E.1. executed by counsel of record for the non-governmental parties thereto. The parties agree that, to the extent practicable, these stipulations shall be used to cause the dismissal of these cases and will provide a complete resolution of all issues arising out of the same subject matter. The parties agree that these stipulations shall be executed by counsel of record for the government and returned to the CTCC. The CTCC will file the fully executed stipulations with the appropriate court within 30 days of its receipt of the executed stipulations. The parties further agree not to undertake any further actions to prosecute or defend any such litigation during the period of time following execution of this Agreement until the court has acted on the parties’ dismissal stipulations. In addition, the parties agree to file as necessary requests to stay any action on such cases pending dismissal.
4. Certain pending cases requiring coordination. Recognizing that carrying out the provisions of this paragraph E. shall require coordination with persons and agencies not parties to this Agreement, the parties further agree as follows:
a. The Service shall use its best efforts to secure the voluntary dismissal with prejudice of all litigation listed in Exhibits II-1 and II-2 in which the Commissioner, the Service and /or Service employees are represented by the United States Department of Justice.b. The CTCC shall use its best efforts to secure the voluntary dismissal with prejudice of all litigation listed in Exhibits II-1 and II-2 insofar as it involves litigants who are not Scientology-related entities or individual members of the CTCC. Following execution of this agreement, the Church signatories, and the Individual and At-large members of the CTCC certify that no Scientology-related entity nor Scientology-related individual shall provide any further support or assistance (directly or indirectly) in such litigation.
F. After-Discovered Cases or Examinations in Existence as of the Date of this Agreement.
It is the intention of the parties to cease activity and dismiss with prejudice all existing cases in controversy between the Service and any Scientology-related entity or Scientology-related individual, costs to be borne by each party (e.g., attorney fees), as well as all existing current examinations of Scientology-related entities for years prior to 1993. Thus, if there exists other civil actions that are not contained in Exhibits II-1 and II-2 or in the Settlement Agreement, Exhibit IV-6, or an examination of a Scientology-related entity is not listed in paragraphs D.1 and D.2, and the exclusion of such suit was inadvertent (i.e., not specifically discussed and intentionally excluded by the parties during their negotiations), the parties agree to dismiss such suit or cease such examination as soon as administratively feasible.
The provisions of this section II. are final and conclusive, except as provided in section IX, paragraph H., notwithstanding the seven-year transition period set forth in other provisions of this agreement.
III. Service Determinations Regarding Scientology-Related Entities.A. Issuance of Determination Letters.
Having received and reviewed the completed Forms 1023, Applications For Recognition of Exemption and the attachments thereto for the entities described in paragraphs B.1, B.2, B.3, B.4, B.5, B.6, B.7, B.8, and B.9 together with requests for group exemption letters and the attachments thereto described in paragraphs in paragraphs C.1, C.2, C.3 and C.4, on the basis of that information, the Service is issuing the individual determination letters and group determination letters described below and copies of which are attached at Exhibits III-1 through III-30.
B. Individual Determination Letters.
1. The Service hereby issues individual determination letters (copies attached as Exhibits III-1 through III-5, respectively) that the following entities are organizations described in Code sections 501(c) (3), 170(c) (2), 509(a) (1), and 170 (b)(1)(A)(i):
Religious Technology Center (“RTC”)Church of Scientology International (“CSI”)
Scientology Missions International (“SMI”)
Church of Spiritual Technology (“CST”)
Church of Scientology Flag Service Organization, Inc. (“CSFSO”)
2. The Service hereby issues an individual determination letter (copies attached as Exhibit III-6) that Foundation Church of Scientology Flag Ship Service Organization (“CSFSSO”) is an organization described in Code sections 501(c) (3), 509(a) (1), and 170(b)(1) (A) (i). CSFSSO is not described in Code section 170 (c) (2) because it is a foreign entity.
3. The Service hereby issues individual determination letters (copies attached as Exhibits III-7 through III-14, respectively) that the following Scientology-related entities are organizations described in Code sections 501(c) (3), 170(c) (2), and 509(a) (3):
Inspector General Network (“IGN”)International Hubbard Ecclesiastical League of Pastors (“IHELP”)
Building Management Services (“BMS”)
Bridge Publications, inc. (“BPI”)
Dianetics Centers International (“DCI”)
Dianetics Foundation International (“DFI”)
Hubbard Dianetics Foundations (“HDF”)
U.S. IAS Members’ Trust
4. The Service hereby issues individual determination letters (copies attached as Exhibits III-15 and III-16, respectively) that the following Scientology-related entities are organizations described in Code sections 501 (c) (3), 170 (c) (2), 509 (a) (1) and, 170 (b) (1) (A) (vi):
The Way to Happiness Foundation (“TWTH”)Association for Better Living and Education (“ABLE”)
5. The Service hereby issues individual determination letters (copies attached as Exhibits III-17 and III-19, respectively) that the following Scientology-related entities are organizations described in Code sections 501 (c) (3) and 509 (a) (3):
Scientology International Reserves Trust (“SIRT”)Flag Ship Trust (“FST”)
New Era Publications International ApS (“NEP”)
However, these organizations are not describe in Code section 170 (c) (2) because they are foreign entities.
6. Pursuant to a ruling request, the Service hereby modifies the individual determination letter (copy attached as Exhibit III-20) that the Church of Scientology Religious Trust (“CSRT”) is an organization described in Code sections 501(c) (3), 170 (c) (2), and 509(a) (3).
7. The Service hereby issues individual determination letters (copies attached as Exhibits III-21 through III-23, respectively) that the International Association of Scientologists (“IAS”) and its operating arms: Membership Services Administration, Ltd., and Foundation International Membership Services Administration d/b/a IAS Administrations, are organizations described in Code sections 501(c) (3), and 509(a) (3). IAS and its operating arms are not described in Code section 170(c) (2) because they are foreign entities.
8. The Service hereby issues an individual determination letter (copy attached as Exhibit III-24) that the Hubbard College of Administration (“HCA”) is an organization described in Code sections 501(c) (3), 170 (c) (2), 509 (a) (1), and 170 (b) (1) (A) (ii).
9. Having previously issued a determination letter to the Church of Scientology Western United States (“CSWUS”) (under the name Church of Scientology of San Diego) recognizing CSWUS as an organization described in Code sections 501(c) (3), 170 (c) (2), 509 (a) (1), and 170 (b) (1) (A) (i), and having received and reviewed an updated Form 1023 and attachments thereto (dated August 30, 1993), the Service hereby issues a revised determination letter (copy attached as Exhibit III-25) recognizing CSWUS as an organization described in Code sections 501(c) (3), 170 (c) (2), 509 (a) (1), and 170 (b)(1) (A) (i).
10. The Service agrees that the organizations listed in paragraphs B.1, B.2. and B.9. are churches described in Code section 6033 (a) (2) (A) (i). Pursuant to Code section 6033(a) (2), Treas. Reg. [Section] 1.6033-2(g) (6), and Rev. Proc. 86-23, 1986-1 C.B. 564, the service determines that the organizations described in paragraphs B.3, B.5, B.6, B.7, and B.8. are church-affiliated organizations that need not file annual Forms 990. However, nothing in this Agreement relieves any Scientology-related entity from any requirement to file a return (e.g., filing the Form 990-T in the event of unrelated business taxable income).
C. Group Determination Letters.
1. The Service hereby issues a group determination letter (as described in Rev. Proc. 80-27, 1980-1 C.B. 677 and Treas. Reg. [Section] 601.201 (n) (8) (copy attached as Exhibit III-26)) that the subordinate organizations of the Church of Scientology International are organizations described in Code sections 501(c) (3), 170 (c) (2), 509 (a) (1), 170 (b) (1) (A) (i), and 6033 (a) (2) (A) (i).
2. The Service hereby issues a group determination letter (as described in Rev. Proc. 80-27, 1980-1 C.B. 677 and Treas. Reg. [Section] 601.201(n)(8) (copy attached as Exhibit III-27)) that the subordinate organizations of Scientology Missions International are organizations described in Code sections 501(a) (2) (A) (I), 170 (c)(2), 509(a)(1), 170(b) (1)(A)(i), and 6033 (a)(2)(A)(i).
3. The Service hereby issues a group determination letter (as described in Rev. Proc. 80-27, 1980-1 C.B. 677 and Treas. Reg. [Section] 601.201(n)(8) (copies attached as Exhibit III-28 and III-29, respectively)) that the subordinate organizations of the following Scientology-related entities, are organizations described in Code sections 501 (c) (3), 170 (c) (2), 509 (a) (1), 170 (b) (1) (A) (ii) (but are not described in Code section 6033 (a) (2) (A) (I):
Applied Scholastics Inc.Hubbard College of Administration (“HCA”)
4. The Service hereby issues a group determination letter (as described in Rev. Proc. 80-27, 1980-1 C.B. 677 and Treas. Reg. Section 601.201(n)(8) (copy attached as Exhibit III-30)) that the subordinate organizations of the Citizens Commission on Human Rights (“CCHR”) are described in Code sections 501 (c) (3), 170 (c) (2), 509 (a) (1), 170 (b) (1) (A) (vi) (but are not described in Code section 6033(a) (2) (A) (i)).
5. Subordinate organizations initially covered by the group exemptions recognized under paragraphs C.1, C.2, C.3 and C.4 are set forth in the following respective Exhibits:
Church of Scientology International Exhibit III-31Scientology Missions International Exhibit III-32
Applied Scholastics Inc. Exhibit III-33
Citizens Commission on Human Rights Exhibit III-34
Hubbard College of Administration Exhibit III-35
IV. Obligations and Undertakings During the Transition Period.A. Establishment of Church Tax Compliance Committee
1. Purpose of Church Tax Compliance Committee. The Church Signatories and others as described below shall form a Church Tax Compliance Committee (the “CTCC”). The purpose of the CTCC is to ensure that Scientology-related entities, including those recognized under section III of this Agreement as tax-exempt continue to be organized and operated in conformity with the requirements of Code section 501 (c) (3) and the provisions of this Agreement. Further, the CTCC is to ensure that no Scientology-related entity, regardless of whether the entity is described in Code section 501 (c) (3), engages in any conduct that may endanger the tax-exempt status of any other Scientology-related entity or that would otherwise be in contravention of this Agreement. The membership of the CTCC shall guarantee the obligations of any Scientology-related entity as to necessary compliance with the Code and the requirements of this Agreement. In addition, the CTCC will facilitate communication between the parties to this Agreement.
2. Membership of Church Tax Compliance Committee. The CTCC shall consist of Corporate, At-large and Individual members.
a. Corporate CTCC members. The Corporate CTCC members are RTC, CST, CSFSO, CSWUS, BMS, and CSRT (hereinafter “Corporate CTCC members”). The Church of Scientology Religious Trust is also a Corporate member, to be represented by one CSRT trustee designated for this purpose. The Presidents of RTC, CSI, CST, CSFSO, CSWUS and BMS shall serve as representatives of their respective entities on the CTCC. No Corporate CTCC member many withdraw from the CTCC.
b. At-large members of CTCC. The Watchdog Committee (as described in the Qualified Written Material) shall be an At-large member of the CTCC and shall be represented on the CTCC by the Chairman of the WDC. In addition, the International Finance Director and the Chief Accountant International shall serve as At-large representatives on the CTCC. The At-large members of the CTCC may not withdraw from the CTCC, although the individuals representing WDC or serving as Finance Director or Chief Accounting International may be replaced by reason of the prior office holder no longer serving in that capacity. The CTCC shall give prompt notice to the Service of any replacement of these individuals on the CTCC.
c. Individual CTCC members. The individual members of the CTCC are David Miscavige, Norman Starkey, Mark Rathbun and Heber Jentzsch. No individual member of the CTCC shall be permitted to withdraw from service on the CTCC, except by reason of death, being adjudicated an incompetent, or by mutual agreement of the parties to this Agreement.
3. Responsibilities of CTCC. In general, the CTCC is responsible for overall implementation of the duties and obligations imposed with respect to the Scientology-related entities by this Agreement during the transition period. Specific responsibilities and duties of the CTCC shall include the following:
a. Annual Report. The CTCC is responsible for submission of the Annual Report transmitting the information required under section IV. paragraphs B., C., D.2 and D.3 of this Agreement (the Annual Report). The CTCC is also responsible for engaging the certified public accounting firm that is required to perform and report on certain agreed-upon accounting procedures under section IV. paragraph B. of this Agreement. Information required to be reported shall be contained in the Annual Report relating to the taxable year at issue and due no later than July 15 following the end of such year. This date may be extended by written agreement between the Service and the CTCC. No extensions beyond November 15 shall be granted, absent extraordinary circumstances . The Annual Report, any supplements thereto, and any responses to inquiries under paragraphs B. and C. shall be submitted under penalties of perjury in a manner similar to that set out in the form 990 (hence subject to prosecution under Code section 7206(1)). This report will be signed by all members of the CTCC.
i. If the CTCC determines that it needs to communicate with the Service regarding any issue related to the Church and the Service, the CTCC may so notify the Service in writing. Included within the notice will be specific information regarding the issue the CTCC wishes to raise. Such disclosure is intended to provide the Service with sufficient information to determine if waivers under Code section 6103 may be required. If the Service determines that it needs to communicate with the CTCC regarding any issues related to the Church, the Assistant Commissioner may so notify the CTCC in writing.
ii. The CTCC shall submit waivers in favor of CTCC members and their counsel as required under Code section 6103 on behalf of all Scientology-related entities recognized as described in Code section 501(c)(3) under section III of this Agreement as soon as practicable but in no event later than 120 days after execution of this Agreement. Every such waiver also shall be submitted to the Service not more than 60 days after its execution by the relevant Scientology-related entity.
iii. Not withstanding the provisions for written notice in subparagraph i., nothing shall prohibit the parties from other, less formal modes of communication, such as the telephone. It is contemplated that there will be regular and frequent informal communications with respect to matters arising under this Agreement.
i. The CTCC and the Assistant Commissioner shall meet no less than once each year during the transition period, such meeting to be held no later than 90 days following the Service’s receipt of the CTCC’s annual report under subparagraph a.
ii. If the CTCC submits a written request for a meeting, then a meeting with the Assistant Commissioner shall be held within 15 working days after the receipt of such written request.
iii. All meetings under this subparagraph c. shall be held at a mutually agreeable time at the National Office of the Service or other mutually agreeable location.
i. In general. The Corporate CTCC members absolutely and unconditionally, jointly and severally, guarantee to the Service the full and prompt payment of all U.S. tax liabilities under the Code (including but not limited to income tax (including tax imposed under Code section 511) and employment tax), together with all interest and penalties, accruing or arising during the first three years of the transition period with respect to all Scientology-related entities. This guaranty is for the sole benefit of the Service and is for purposes of collection of the tax. The specific Scientology-related entity that is allegedly liable for the tax may contest the liability as permitted under the Code and regulations, and any final adjudication thereof, after exhaustion of all appeals, shall be binding and conclusive on the CTCC. If the liability is assessed against the specific Scientology-related entity without judicial review, the CTCC may dispute the underlying liability in any suit by the Service under paragraph A.3.d.ii. of this section IV. to collect on the guaranty. In addition, the guaranty shall not be operative to the extent that the Scientology-related entity satisfies the underlying liability or is successful in disputing the fact or amount of such liability.
ii. Procedure for collection. At the time such liability is due and owing (i.e., the Scientology-related entity has exhausted its remedies), the Service may, at its sole option, present the CTCC with a notice substantially in the form of a Revenue Agent’s Report detailing the unpaid tax, interest and penalty. The CTCC shall have 180 days from such notice to make the payment, with interest, or to arrange for installment payments, with interest, to be made over a period not to exceed three years, which will provide the Service the present value of the liability. If no payment (and no arrangement for installment payments) is timely made, the Service may enforce the guaranty provisions of this Agreement.
iii. Term of guaranty. This guaranty will apply only to tax liabilities of Scientology-related entities for taxable years 1993 through 1995. The Service must present the CTCC with notice for payment in accordance with subparagraph ii., no more than two years following its receipt of the CTCC’s report under paragraph A.3.a for the year 1997 or be forever barred from collecting on this guaranty. For purposes of this subparagraph d.iii, the notice under subparagraph d.ii may be given the CTCC prior to such time as the Scientology-related entity has exhausted its judicial remedies.
iv. Example. A Class V church is determined by the Service to have engaged in an activity giving rise to unrelated business taxable income. The Class V Church disputes that the activity was a trade or business and the Class V Church brings suit in Tax Court. The Tax Court upholds the Service’s position and the decision becomes final (including completion of appeal thereof or expiration of the time for bringing an appeal). At this time, the Service may collect the UBIT along with any applicable interest or penalties, upon notice, from the CTCC.
v. Certain events not impairing guaranty. Without in any way limiting the generality of the absolute and unconditional guaranty in paragraph A.3.d, the obligations of the Corporate CTCC members under this Agreement shall not be affected or impaired by reason of the happening from time to time of any of the following events with respect to this Agreement, even if any such events happen without the giving of notice to, or obtaining the consent of, the Corporate CTCC member:
a. any compromise, settlement, release, renewal, extension, indulgence, modification or termination of any or all of the obligations, covenants or agreements of any Church signatory, Scientology-related entity, or any Corporate CTCC member under this Agreement, including but not limited to any modification or amendment (whether material or otherwise) of any obligation, covenant, or agreement set forth in this Agreement;b. any waiver of the performance or observance by the Service or any Church signatory or Scientology-related entity, as the case may be, of any of the obligations, covenants, agreements, duties, terms or conditions in this Agreement;
c. any extension of time for the filing of any tax return, payment of all or any part of any U.S. tax liability or the extension of the time for payment of any sums of money due under this Agreement or of the time for performance of any obligation under or arising out of this Agreement;
d. any change in the composition of the CTCC, whether by the addition of any Individual, At-large or Corporate member, or the substitution, admission, withdrawal or removal of any CTCC member;
e. any voluntary or involuntary liquidation, dissolution, merger, sale or other disposition of all or substantially all of the assets, marshaling of assets and liabilities, receivership, insolvency, bankruptcy, assignment for the benefit of creditors, reorganization, arrangement, composition, readjustment of debt, or other similar proceeding affecting any Church signatory, Scientology-related entity, any member of the CTCC or any of their assets, any say of the enforcement by the Service of any remedies against any Church signatory, Scientology-related entity or any member of the CTCC, in connection with any of the foregoing;
f. the taking of any actions referred to in the Agreement or any failure, omission, delay, or deficiency on the part of the Service in enforcing, asserting or exercising any right, power, sanction or remedy pursuant to the Code or this Agreement;
g. any release or discharge of any Church signatory, Scientology-related entity, or CTCC member from the performance or observance of any obligation, covenant, agreement, duty, term or condition herein, respectively, by operation of law;
h. any merger, consolidation or sale, transfer, gift or other disposition of assets by any Church signatory, Scientology-related entity or CTCC member; or
i. any default or failure by any member of the CTCC fully to perform the obligations, agreements, covenants, or duties under this Agreement.
vi. No set-off. No set-off, counterclaim, reduction or diminution of obligation, claim for refund, abatement, or any defense of any kind or nature which any member of the CTCC has or may have against the Service shall be available to any member of the CTCC against the Service with respect to the guaranty set forth in this section IV. paragraph A.3.d.
vii. Right to proceed directly against Corporate CTCC members. The Service, in its sole discretion, shall have the right to proceed first and directly against any one or all Corporate CTCC members under this Agreement, without proceeding against or exhausting its remedies against any other Corporate CTCC member of any other Scientology-related entity.
viii. Agreement by CTCC not to diminish assets during transition period. The CTCC agrees that it shall not allow the material diminution of the assets of the Corporate members of the CTCC during the transition period. Diminution of assets will be deemed to be material to the extent that there has been in any year during the transition period, the transfer, grant, contribution, loan, payment for services, gift, voluntary or involuntary conversion, exchange, sale or any other disposition of assets (including but not limited to trademarks, copyrights, cash, securities, mortgages, etc.) by one or more Corporate CTCC members within the taxable year at issue resulting in the reduction in aggregate value, reflecting the greater of cost or market, of ten-percent or more of the aggregate total value (reflecting the greater of cost or market) of all Corporate CTCC members as of the beginning of the taxable year at issue. At no time during the transition period may the aggregate value of gross assets of the Corporate CTCC members be reduced by over fifty percent from the aggregate net value of their assets on December 31, 1993 through the disposition of assets as defined in this subparagraph. Transfers, etc., within the Corporate membership of the CTCC shall be disregarded for purposes of determining whether there has been a material diminution of assets, as will transfers between a Corporate CTCC member and a party that is not a Scientology-related entity for which the Corporate CTCC member receives fair market value in exchange. The involuntary loss or diminution in value of assets not attributable to the action or conduct of any Scientology-related entity shall not be considered in determining whether there has been a diminution of assets to which this subparagraph applies.
ix. Discharge of guaranty. Upon a material breach by the Service of any of its obligations under this Agreement, the guaranty under this paragraph A.3.d. shall be null and void as to amounts not yet collected, and no amounts may be collected that would otherwise have been due under the guaranty prior to such material breach. For purposes of this subparagraph, only the following actions will be considered to be a material breach by the Service:
a. the filing of suit to collect sanctions under section VI. from any corporate or individual CTCC member without engaging in substantive discussion with the CTCC of the parties’ respective positions as required by paragraph H.3.a.iii of section VI;b. the issuance of a Regulation, Revenue Ruling or other pronouncement of general applicability providing that fixed donations to a religious organization other than a church of Scientology are fully deductible unless the Service has issued previously or issues contemporaneously a similar pronouncement that provides for consistent and uniform principles for determining the deductibility of fixed donations for all churches including the Church of Scientology;c. the knowing, negligent or willful disclosure of information described in section V. paragraph A.4 of this Agreement in violation of any provision of section 6103, to the extent such disclosure is not the result of a good faith but erroneous interpretation of section 6103; or
d. the knowing, negligent or willful failure to disseminate the Church Fact Sheet as required by paragraph 5 of the Settlement Agreement attached hereto as Exhibit IV-5; or
e. examining, assessing or seeking to collect any tax liability of any Scientology-related entity for any taxable year ending before January 1, 1993, unless the Service terminates such action and refunds or credits any amounts collected within 90 days of notice from the CTCC, or unless section IX, paragraph H. applies.
e. Liability for penalties. The CTCC shall be liable for the penalties set forth in section VI. of this Agreement.
4. Actions of CTCC. David Miscavige will act as the initial Chairman of the CTCC. He may be removed from this office and replaced by another individual CTCC member by majority vote of the CTCC members. The CTCC shall promptly notify the Service of any change in the Chairmanship. The Chairman may act on behalf of the CTCC, and bind the CTCC, except where a specific provision of this Agreement requires the action of more than one CTCC member.
B. Financial Reporting Requirements.
1. Special Accounting Procedures.
a. In general. The special accounting procedures of this section IV. paragraph B. apply to each corporate member of the CTCC, CSFSSO, NEP, BPI, Church of Scientology Celebrity Centre International, and to (i) any other Scientology-related entity formed under the laws of, and operating primarily in, a country other than the United States for any year in which such entity has United States source gross receipts (including contributions) in excess of $1,000,000 in value, and to (ii) any Scientology-related entity formed under the laws of, and operating primarily in, the United States for any year in which it has either (a) gross assets, or (b) gross receipts in excess of $10,000,000 in value. The entities with respect to which special accounting procedures apply are collectively called the “reporting entities.”
b. Special accounting procedures — operational aspects.
i. Required procedures. The CTCC shall retain a qualified CPA (defined below) to perform the agreed-upon procedures enumerated in Exhibit IV-2 of this Agreement with respect to each of the reporting entities. Following its performance of these procedures, the qualified CPA so selected shall report to the CTCC and to the Service in the form prescribed by the American Institute of Certified Public Accountants for engagements to apply Agreed-Upon Procedures (SAS No. 35, Special Reports — Applying Agreed-upon Procedures to Specified Elements, Accounts, or Items of a Financial Statement) (hereinafter referred to as “Special Purpose Reports”). These Special Purpose Reports shall include a summary of any exceptions the qualified CPA discovers through the agreed-upon procedures.
ii. Foreign entities. To the extent that the particular reporting entity is required under the laws of a foreign jurisdiction to have certified financial statements or an accountant’s review prepared annually, those reports (converted to the English language and to United States dollars) may, in general, be substituted for the special purpose reports enumerated in Exhibit IV-2. However, the special purpose reports relating to fundraising and overseas cash flows must be performed for all reporting entities. In addition, this section IV. paragraph B.1.b.ii. shall not apply unless: (a) the financial statements are prepared by an accountant that otherwise meets the definition of Qualified CPA under this Agreement (or their equivalent under the laws of the foreign jurisdiction in which the accountant is admitted to practice); (b) the financial statements include a balance sheet, income statement accountants’ report, and accountants’ notes to the financial statements, (statements of cash flows and management letters shall be included to the extent they are prepared); and, (c) the foreign entity remains a reporting entity for purposes of special procedures to be performed in connection with other reporting entities.
c. CPA’s reports–In general. The CTCC shall also deliver to the Service two (2) copies of the special purpose reports and management letter (described below) for all reporting entities for each year during the Reporting Period. The Special Purpose Report must state that the Special Purpose Report was conducted in accordance with SAS no. 35, Special Reports–Applying Agreed-upon Procedures to Specified Elements, Accounts, or Items of a Financial Statement and this Agreement.
d. CTCC responsibilities. The CTCC shall cause all reporting entities to fully and timely cooperate with the Qualified CPA in the preparation and submission of the Special Purpose Reports.
e. Selection of a qualified CPA. The CTCC shall be responsible for the selection of a qualified CPA that meets the requirements set forth below. When selecting a CPA, the CTCC should consider, among other matters:
i. The qualification of CPAs available to do the work;
ii. The CPA’s experience in performing audits of churches and other nonprofit organizations; and
iii. The CPA’s ability to timely complete and submit the Special Purpose Report.
f. Definition of a qualified CPA.
i. In general. For the first two taxable years to which this section IV. paragraph B. applies (i.e., for calendar years 1993 and 1994), the CPA must be a Big Six firm or, in the alternative, another firm agreed to by the Service. For the last taxable year to which this paragraph B. applies (i.e., 1995), the CPA may be designated by the CTCC, provided that the firm or CPA is (i) a qualified CPA and (ii) is acceptable to the Service. The Service consents to the designation of Richard D. Clark for the last year, provided that, at that time, he otherwise meets the requirements of being a qualified CPA.
ii. Requirements for qualified CPA. For purposes of this Agreement, any CPA that meets the qualifications criteria of this section IV. paragraph B.1.f. and enters into a Special Purpose Report agreement with the CTCC, Corporate CTCC members and all reporting entities, and that complies with the provisions of this Agreement, will be considered a qualified CPA and acceptable to the Service.
(a) Certification. The CPA must be a CPA in good standing in a state or the District of Columbia. The CPA does not have to be licensed by the state in which the Corporate CTCC members are located; however, the CPA must abide by the rules and regulations of professional conduct promulgated by the accountancy board of the state in which the Corporate CTCC members are located.(b) Practice before the Service. The CPA (or any accountant working for such CPA who is participating in the required reporting process under this Agreement) may not be, or have been, under suspension from practice before the Service.
(c) Independence. The CPA must be independent. A CPA will be considered independent if the CPA meets the standards for independence contained in the AICPA Code of Professional Conduct in effect at the time the CPA’s independence is under review. In addition, the CPA may not, at the time engaged (or at any time prior to that time), be a Scientology-related individual, a Scientology-related entity or a WISE sublicensee.
(d) Peer review requirement. The CPA must belong to and participate in a peer review program, and must have undergone a satisfactory peer review conducted by the AICPA’s Division for CPA Firms. After the initial peer review has been performed, the CPA must submit to a peer review of the accounting and audit practice every three years or at such additional times as designated by the peer review executive committee.
g. CTCC’s approval of selection. The CTCC’s approval of a CPA must be recorded in writing and state the following:
i. The CPA meets the Service’s qualifications to perform the Special Purpose Report required by this Agreement; and
ii. The CTCC, the Corporate CTCC members and all reporting entities and CPA will enter into a Special Purpose Report agreement in accordance with the provisions of this Agreement.
h. Notification of selection. When the selection of a CPA by the CTCC has been made, the CTCC must notify the Service, in writing, prior to the execution of the Special Purpose Report agreement (as defined below) and in no event less than 90 days prior to the end of the taxable year for which the change of CPA is effective. The Service will notify the CTCC, in writing, within 30 days of the date of receipt of such notice, if the selection of a CPA is not satisfactory. A copy of the Special Purpose Report agreement, or any amendment to such agreement, is to be provided to the Service as soon as feasible after the execution thereof. One copy of the current Special Purpose Report agreement must be maintained in the CPA’s workpapers or permanent file.
i. First qualified CPA. The Service has been notified that the CTCC has selected Nanas, Stern, Biers, Neinstein and Co., 9454 Wilshire Boulevard, Beverly Hills, California, 90212 as its first qualified CPA. The Service approves of such selection. Notwithstanding paragraph h., the Special Purpose Report Agreement with Nanas, Stern, Biers, Neinstein and Co. shall be provided to the Service no later than with the First Annual Report due under this Agreement.
j. Special Purpose Report agreement. The CTCC, Corporate CTCC members and all reporting entities shall enter into a Special Purpose Report agreement with the CPA that specifically complies with all of the following:
i. The CTCC, Corporate CTCC members, all reporting entities and CPA acknowledge that the agreed-upon procedures are being performed and the Special Purpose Report is being issued in order to enable the CTCC, the Corporate CTCC members and the reporting entities to comply with the provisions of the Code and this Agreement.ii. The CTCC, Corporate CTCC members and all reporting entities acknowledge that this Agreement provides that if the CTCC fails to have a Special Purpose Report performed and documented in compliance with this Agreement, the CTCC and Corporate CTCC members are in violation of the provisions of this Agreement.
iii. The CPA represents that he meets the requirements under this Agreement satisfactory to the Service.
iv. The CPA will perform the agreed upon procedures in Exhibit IV-1 and will prepare the Special Purpose Report in accordance with the requirements of this Agreement.
v. The CPA will document the Special Purpose Report work performed in accordance with the professional standards of the AICPA and the requirements of this Agreement.
k. Special Purpose Report scope limitation. The CTCC, Corporate CTCC members and reporting entities shall not limit the scope of the Special Purpose Report, nor suffer or permit the Special Purpose Report scope to be limited, to the extent that the CPA is unable to meet the Service’s Special Purpose Report requirements.
l. Access to Special Purpose Report-related documents. Pursuant to the terms of the Special Purpose Report agreement, the CPA must (at no charge to the Service):
i. retain all Special Purpose Report-related documents (including but not limited to CPA’s reports, workpapers, and management letters) for a period of four years after the close of the taxable year for which each Special Purpose Report was prepared; andii. following the Service’s request of, and the consent by, the CTCC,
(a) make all Special Purpose Report-related documents available to the Service, and
(b) permit the Service to photocopy all Special Purpose Report-related documents.
m. Required disclosures to CPA. Prior to commencing the agreed upon procedures, the CTCC shall provide to the CPA a copy of all Scientology scripture concerning finances and accounting (e.g. the Treasury Division volumes) and any other written material relating to or involving the handling of funds by Church personnel in effect at that time. The CTCC also shall promptly provide to the CPA copies of any newly-issued materials on these subjects or any modification, amendment, or rescission of any existing material on the subject. In addition, the CPA is to be given a copy of the Agreement and any future amendments to the Agreement.
n. Submission of Special Purpose Reports. The Annual Report shall include separate Special Purpose Reports for each reporting entity. These Special Purpose Reports are for the use of only the CTCC and the Service.
o. Submission of plan of corrective action. The CTCC shall submit written comments to the Service on the exceptions and recommendations in the Special Purpose Reports and shall also submit to the Service: (i) a written plan for any corrective action taken or planned; and, (ii) comments on the status of any corrective action taken on previously reported exceptions and recommendations.
2. Internal financial reports.
a. As part of the Annual Report, the CTCC shall deliver a copy of the internally generated annual financial statements (either (i) income and expense statement, balance sheet, and all notes to financial statements or (ii) if such records are not generated in the normal course of church operations, then the adjusted trial balance and all adjusting journal entries) prepared for the internal use of the particular entity or other Scientology-related entity for the following entities.
Church of Scientology InternationalReligious Technology Center
Church of Spiritual Technology
Foundation Church of Scientology Flag Ship Service Organization
Church of Scientology Flag Service Organization, Inc.
Church of Scientology Western United States
Church of Scientology Religious Education College, Inc.
Church of Scientology Celebrity Centre International
Scientology Missions International
International Hubbard Ecclesiastical League of Pastors
Church of Scientology Religious Trust
Scientology International Reserves Trust
Flag Ship Trust
New Era Publications International ApS (including subsidiaries)
Bridge Publications, Inc.
Building Management Services
FSO Oklahoma Investments Corporation
World Institute of Scientology Enterprises
Church of Scientology Advanced Organization Saint Hill, Europe and Africa (CS AOSH EU&AF)
Church of Scientology, Inc. (CS AOSH ANZO)
SOR Services (UK) Ltd.
SOR Services Ltd. (Cyprus)
Transcorp Services S.A.
San Donato Properties Corporation
In addition, internal annual financial statements as required above are to be provided for any Scientology-related entity not designated above (or in paragraph B.1.a. above) for any year in which it has either (a) gross assets (based on the greater of cost or fair market value) in excess of $15,000,000 in value, or (b) gross receipts in excess of $15,000,000 in value.
b. As part of each Annual Report, the CTCC also shall include a consolidation of the above internal reports in a master balance sheet, and income and expense statement prepared in the same manner as the consolidated financial data submitted with the Qualified Written Materials. These consolidations are to be done in accordance with reasonable accounting practices and consistently year to year. The Annual Report also shall include a separate consolidated balance sheet for the corporate CTCC members. Consolidating adjustments shall include, but are not limited to, liabilities and corresponding receivables between Corporate members of the CTCC. The nature of consolidating adjustments will be explained in the Annual Report. All amounts shall be reported in United States dollars.
c. As part of each Annual Report, the CTCC also shall include copies of audited financial statements (in the English language and U.S. dollars) for the International Association of Scientologists, Foundation International Membership Services Administrations, Membership Services Administration (U.K.), Ltd., and the U.S. IAS Members’ Trust.
3. Report on central reserves transactions and balances. As part of the Annual Report, the CTCC shall deliver to the Service a summary of central reserves transactions containing information in similar format to the summary information that was provided as part of the Qualified Written Material, with the exception that the information included in the Annual Report need not contain a list of reserves transfers to non-reserves accounts of the same Scientology-related entity. In this regard, for each year that this subparagraph applies, the Annual Report should contain a list of all expenditures (as described below) that have been made from the Church’s central reserves system as described in the Qualified Written Material, or from the central reserves account of one Scientology-related entity into the central reserves account of another such entity. The list should include (i) the date of the expenditure, (ii) to whom the payment was made, (iii) by whom the payment was received, (iv) the purpose of the expenditure, and whether, and if so, why, in the opinion of the CTCC, this transfer furthers Code section 501(c) (3) purposes. For this purpose, the term “expenditure” includes, but is not limited to, grants, purchases, transfers, loans or repayments of loans, or other expenditures of assets under the control of the central reserves committee. In addition, the Annual Report shall include a beginning balance and a year-end balance showing the amount of cash and other assets in the Central Reserves.
4. Tax returns. As part of the Annual Report, the CTCC shall provide a copy of each United States tax return (including information returns) and all United States tax forms filed by any Scientology-related entity. These returns may not be included in the Annual Report in electronic form unless agreed to by the parties. Forms W-2, 1099, 940, 941 and 941E need not be submitted under this paragraph. The Annual Report shall also include copies of the annual update on the group exemptions required by Rev. Proc. 80-27, 1980-1 C.B. 677 and Treas. Reg. Section 601.201(n) (8).
5. Term. Reporting under this section IV. paragraph B. is required for three taxable years, beginning with the 1993 Annual Report.
C. Fiduciary Reporting Requirements.
1. Compensation information. For each calendar year in issue, the Annual Report shall contain the following information with respect to compensation paid certain individuals by Scientology-related entities:
a. The names and total compensation (as more fully described below) paid to each of the twenty natural persons with the highest amount of compensation during the calendar year in issue. For purposes of determining the highest paid individuals, the compensation of an individual includes amounts received from Scientology-related entities by the spouse of that individual. Where a spouse has such compensation, the spouse’s name and the nature and amount of the compensation are to be separately listed. To determine those individuals for whom this paragraph requires disclosure, all compensation from all Scientology-related entities is to be aggregated. A husband and wife are to be treated as a single entry on this list (i.e., not as two highly paid individuals). In addition, any individual who is included in the list required in paragraph C.1.b. below is not to be included in this list.
b. The total compensation paid to each Individual CTCC member, as well as natural persons serving on the CTCC in a representative or At-Large capacity, and to (i) each such person’s spouse, (ii) siblings of each such individual CTCC member (including compensation of each sibling’s spouse), (iii) with respect to Individual CTCC members, each Individual CTCC member’s parents, and (iv) with respect to Individual CTCC members, each Individual member’s children. The Annual report shall separately list the name and compensation of each such family member.
c. The Annual Report also shall include (i) copies of Forms W-2 and 1099 for each natural person listed whose compensation must be reported under paragraphs C.1.a. or C.1.b. and (ii) a description of any relationship (direct or indirect) between any Scientology-related entity and a natural person whose compensation must be reported under paragraphs C.1.a. or C.1.b. in which anything of value is exchanged. Thus, for example, if an individual or any member of that individual’s family is a shareholder or holds another ownership interest in an entity that does business, or receives anything of value from any Scientology-related entity, the existence of such relationship and the facts relating to it are required to be disclosed in the Annual report. Under subparagraph (ii) of this paragraph c., reporting is not required if the stock or ownership interest is less than five percent.
d. For purposes of the Annual Report, the term “compensation” includes anything of value provided (directly or otherwise) by, or attributable to, any Scientology-related entity. Whether an item is considered “compensation” is determined without regard to whether that item of value is includible in the individual’s gross income for purposes of reporting or taxation. “Compensation” includes, but is not limited to, the following: (i) wages or salary (including any bonus or overtime pay); (ii) other payments (as an independent contractor, provider of goods or services, or otherwise), including but not limited to any interest, dividend or other corporate distribution; (iii) gross commissions; (iv) the value of any deferred compensation (qualified or non-qualified and valued without regard to any risk of forfeiture, vesting or other restriction); (v) the value of any beneficial interest in any trust attributable in any fashion to contributions made by or on behalf of any Scientology-related entity (valued without regard to any risk of forfeiture, vesting or other restrictions); (vi) any fringe benefit (other than de minimis fringes excludible under sections 132 (a) (4) and 132 (e) of the Code; (vii) the highest balance of any loan or loans outstanding from any Scientology-related entity to the individual at any time during the year in question; (viii) any personage or rental allowance; and, (ix) the amount of any reimbursed expenses (business or otherwise). For the purposes of (ix), compensation from this source may be ignored if the individual received in the aggregate less than $10,000 for all reimbursements in the year.
To the extent compensation is provided in a form other than wages or salary, such compensation is to be listed separately with a short description of which category it falls within. If a fair market value is not available, the type of compensation should be listed along with an explanation that will be helpful to understand its nature and possible worth.
Finally, if compensation is received from more than one Scientology-related entity, compensation should be listed separately for each such entity.
2. Modifications of organizational documents. The Annual Report shall describe any amendment or other change in any organizational document of any of the following organizations: (i) any organization whose tax-exempt status is recognized under this Agreement, other than subordinate entities under the group exemptions provided in section III. paragraph C.; (ii) those entities described in paragraph B.2 or D.2, below. For purposes of this paragraph, an organizational document includes any document that is necessary for inclusion in a Form 1023. Thus, articles of incorporation, articles of association, constitution, bylaws, trust instrument or indenture or similar document, including any board or trustee resolution interpreting such document are organizational documents.
3. Reporting of any dividend payment with respect to any entity. The Annual Report shall disclose any dividend or other distribution with respect to its stock (including, but not limited to any distribution in liquidation or reorganization of the company) paid during the year by any Scientology-related entity formed as a company or corporation. This report will include the facts surrounding the distribution. Reporting under this paragraph shall also occur if a payment is made in the nature of a dividend or a return of capital by any other Scientology-related entity (e.g., a partnership distribution).
4. Reporting of any ownership change with respect to any entity. The Annual Report shall disclose any change in ownership or control of any Scientology-related entity. Thus, if such entity is a stock company or trust, any changes in the legal or beneficial ownership of the stock or trust must be reported. With respect to trusts, nonstock or nonprofit organizations, any change in the ability to any other entity or individual to appoint the board or trustees must be reported.
5. Reporting on creation of new entities. The Annual Report shall include an update disclosing the existence of any entity meeting the definition of Scientology-related entity that has not been previously disclose to the Service. The report must include, for example, every new entity formed after December 31 of the prior taxable year (or with respect to the first Annual Report, after November 1, 1992) other than a subordinate entity included under one of the group exemptions provided in section III. paragraph C. The following information must be included for purposes of disclosure in the Annual Report: (i) name and address; (ii) employer identification number, if applicable; (iii) the nature of its purposes and activities; (iv) the officers, trustees and/or directors of the entity; (v) a balance sheet as of the end of the taxable year; (vi) an income and expense statement as of the end of the taxable year; (vii) the ownership of the entity; (viii) the relationship of the entity to any other Scientology-related entity, and, (ix) an explanation of whether, and to what extent, the new entity or any of its operations has, or may have, an effect on the tax-exempt status of any other Scientology-related entity, or, in the alternative, the specific reasons the CTCC believes that the creation and operation of the new entity have no such effect.
6. Reporting of any ecclesiastical modification or the restructuring of any entity. The Annual Report shall include any changes to the ownership (e.g., corporate organization) of any Scientology-related entity or to the ecclesiastical management structure of the Church, including, but not limited to, any changes in the structure outlined in the booklet entitled “The Command Channels of Scientology” as submitted in the Qualified Written Material. Changes in the personnel who hold positions within the ecclesiastical structure need not be included within the report required under this paragraph, other than those who serve on the CTCC.
7. Reporting of certain asset transfers and expenditures.
a. The Annual Report shall disclose the transfer, grant, contribution, loan, payment for services, gift, voluntary or involuntary conversion, exchange, sale or any other disposition of assets (hereinafter an “expenditure”) by one Scientology-related entity to another Scientology-related entity within the taxable year at issue, if the transfer involved assets (including trademarks, copyrights, cash, securities, mortgages, etc.) with an aggregate value, reflecting the greater of cost or market, of $1,000,000 or more.
b. The Annual Report shall contain the fact of and the steps taken to ensure expenditure responsibility with respect to a specific expenditure if that expenditure is made by one or more Scientology-related entities recognized as tax-exempt under section III of this Agreement to a noncharitable beneficiary and if, in any single taxable year, such payments to the specific noncharitable recipient exceed $25,000. For purposes of this paragraph, the term expenditures does not include a transaction with a person other than a Scientology-related entity or a Scientology-related individual for which fair market value is received in return.
c. The Annual Report disclosure required under section IV. paragraph C.7.a. and C.7.b. is to contain the following information: (i) the name and address of both transferor and transferee; (ii) the amount and nature of the assets transferred; (iii) the purpose of the transfer; and, (iv) whether, and if so, why, in the opinion of the CTCC, this transfer furthers Code section 501(c)(3) purposes.
d. Reserves transaction reported under paragraph B.3. need not be reported again under this paragraph C.7.
8. Reporting of certain asset transfers that diminish the assets of the corporate members of the CTCC. The Annual Report shall disclose the transfer, grant, contribution, loan, payment for services, gift, voluntary or involuntary conversion, exchange, sale or any other disposition of assets by one or more Corporate CTCC members where within the calendar year at issue, the transfer involved assets (including but not limited to trademarks, copyrights, cash, securities, mortgages, etc.) with an aggregate value of ten-percent or more of the aggregate total value (reflecting the greater of cost or market) of all Corporate CTCC members as of the beginning of the taxable year at issue. The report is to contain the following information: (i) the name and address of both transferor and transferee; (ii) the amount and nature of the assets transferred; (iii) the purpose of the transfer; and, (iv) whether, and if so, why, in the opinion of the CTCC, this transfer furthers Code section 501(c)(3) purposes. Transfers, etc. within the Corporate membership of the CTCC shall be disregarded for reporting purposes under this paragraph C.8.
9. Reporting of any amendment of any directive concerning the treatment of funds. The Annual Report shall disclose the issuance, modification, amendment, or rescission of any written material relating to or involving the handling of funds by Church personnel. The Annual Report also shall include copies of relevant materials and an explanation of the reasons for change. Under this paragraph, disclosure is required with respect to all directives, including but not limited to HCO Policy Letters, Executive Directives and similar items. Thus, for example, disclosure under this paragraph would be required in the event of any modification to the book entitled Treasury Division, Volume 3 of the Organization Executive Course (by L. Ron Hubbard).
10. Activity or inaction in contravention of this Agreement. The CTCC shall use its best efforts to include with the Annual Report information relating to any action or inaction by any Scientology-related entity or individual that occurred during the year that is in contravention of, or inconsistent with, any provision of the Code, Treasury regulations or this Agreement, including the recognition of exemption for certain entities contained in section III. paragraphs B. and C. and the certifications contained in section IV. paragraph D. Information disclosed under this paragraph shall include an explanation of the action or inaction involved, the name of the individual or entities involved, the date of the act or inaction, and whether, and to what extent, the CTCC has investigated, including any findings and any actual or planned corrective action with respect thereto.
11. Update on operational modifications. The Annual Report is also to contain an update on the operational modifications that are required to be undertaken under section IV. paragraph E.
12. Education and training issues under Code section 170. The Annual Report shall disclose any modifications to the training side of the “Scientology Classification, Gradation and Awareness Chart”. Such disclosure shall contain sufficient information to enable the Service to determine whether the new or modified training courses should be afforded the same treatment as that set forth in section VII., paragraph B.
13. Term of fiduciary reporting under section IV.c. The term of the fiduciary reporting required under this paragraph C. is three taxable years, beginning with 1993.
1. In general. By executing this Agreement, the Church signatories in their trust or corporate capacities, and their subscribing officers or trustees individually, certify under penalty of perjury the following to the best of their knowledge, information and belief:
a. that all Scientology-related entities are in compliance with the Code, Treasury regulations and other Service pronouncements of general guidance and applicability;b. that the Church signatories and CTCC will use their best efforts to educate Scientology parishioners as to the nondeductibilty of donations to foreign organizations and the provisions of section VII. paragraph B.;
c. that no Scientology-related entity or Scientology-related individual (in his or her capacity as such) has, after 1986, knowingly committed any act of fraud or criminal conduct that might constitute a violation of public policy endangering the tax-exempt status of any Scientology-related entity (assuming for the limited purpose of this paragraph that all Scientology-related entities are otherwise described in Code section 501(c)(3)); and
d. that all Qualified Written Material submitted in connection with this Agreement was correct and truthful as of the date submitted through the date of signature of this Agreement, as supplemented by the Forms 1023 filed in August and September 1993.
2. Section 501(c)(3). The Annual Report shall include a certification to the Service from CTCC members, in their Corporate, At-large, or Individual status, that Scientology-related entities recognized as described in Code section 501(c)(3) under section III, paragraphs B. or C. will operate in conformity with Code section 501(c)(3) and the regulations thereunder and that other Scientology-related entities will operate in a manner that does not jeopardize the tax-exempt status of any Scientology-related entity so recognized. Specifically, but not by way of limitation, such certification shall include the following Scientology-related entities: Church of Scientology Religious Education College Inc., Church of Scientology Advanced Organization Saint Hill Europe and Africa, Church of Scientology, Inc. (Advanced Organization Saint Hill Australia, New Zealand and Oceania), RTC Australia, San Donato Properties Corporation, Transcorp Services, S.A., MCL Services, N.V., Media Storage, Inc, Mile High, Inc., Galaxy Productions, Inc., Mastertech, Inc., Nesta Investments, Ltd., and FSO Oklahoma Investments Corporation.
3. Continuing certifications. The CTCC must certify in the Annual Report that the certifications described in this paragraph D. continue to be correct, to the best of their knowledge and belief. Such certification shall be substantially in the form of Exhibit IV-3 hereto. In addition, the CTCC must certify as part of the Annual Report that nothing has occurred that would significantly impair (directly or indirectly) the efficacy of the guaranty contained in section IV. paragraph A.3.d.
E. Operational modifications. The Church signatories and the CTCC will assure the following:
1. All payments or tithes for ecclesiastical management services to Scientology-related entities, including but not limited to parishioner contributions in connection with the ministry of religious services, payments or tithes for purchase of religious materials, payments or tithes for ecclesiastical management services, and transfers to reserve entities, are to be invoiced by the Scientology-related entity actually intended to perform the services and that receives such payment or tithe, irrespective of whether such payments or tithes are initially deposited into the performing entity’s bank account.
2. Deposit of Funds.
a. U.S. dollar-denominated checks drawn on U.S. banks and credit card advices payable to Scientology-related entities for serves or goods to be provided within the United States shall first be deposited within the United States.b. Checks and credit card advices payable to Scientology-related entities in currencies other than U.S. dollars may be couriered overseas prior to deposit, provided that there are in place appropriate financial controls to ensure the processing, handling and tracing of such deposits to the account of the Scientology-related organization to which such payment is drawn.
c. To the extent U.S. dollar-denominated checks drawn on non-U.S. banks payable to Scientology-related entities for services or goods to be provided within the United States are physically received outside the United States, they may be first deposited outside the United States. To the extent such payments are physically received inside the United States they may be couriered overseas prior to deposit, provided that there are in place appropriate financial controls to ensure the processing, handling and tracing of such deposits to the account of the Scientology-related organization to which such payment is drawn.
d. U.S. dollar-denominated checks and credit card advices payable to Scientology-related entities for goods and services provided outside the United States may be deposited outside of the United States.
e. Any other funds of a Scientology-related entity received from sources within the United States may be couriered overseas for deposit only if, and only to the extent, there are in place appropriate financial controls to ensure the processing, handling and tracing to such deposits to the account of the Scientology-related organization to which such payment is drawn.
3. Management and accounting procedures (whose material provisions are attached to this Agreement as Exhibit IV-3) are to be implemented to assure that all commissions or similar payments from Scientology-related entities to individual fundraisers are properly reported to the Service by the payor, and that contributions collected by individual fundraisers are not commingled with other funds held by such individual. Further, no payments from one Scientology-related entity shall be made to another such entity by way of being made to an individual , whether that individual is an agent of either Scientology-related entity or otherwise.
4. As of the date of this Agreement, parishioner advance donations to CSFSO and CSWUS shall no longer be transferred to United States Parishioners Trust and/or the Trust for Scientologists. Nor shall USPT or TFS receive any such payments directly from parishioners.
5. United States Parishioners Trust and the Trust for Scientologists shall be dissolved as soon as practicable consistent with the terms of their respective trust instruments. The assets (including mortgages) contained in such trusts as of the date of this Agreement shall, along with earnings thereon, be transferred to one or more corporate members of the CTCC in accordance with their documents of dissolution, except that the ship mortgage on the M/V Freewinds presently held by the Trust for Scientologists may be distributed to Flag Ship Trust. Documents to effectuate the dissolution are attached as Exhibit IV-4. Dissolution shall be completed within 12 months of the date of this Agreement.
6. Norman F. Starkey, as Trustee of Author’s Family Trust B, shall, no later than December 31, 1993, effectuate the transfer of substantially all of the corpus and income in Author’s Family Trust B, including all the shares of Author Services, Inc. (“ASI”) as permitted under the will of L. Ron Hubbard to the Church of Spiritual Technology (“CST”) without consideration. Mr. Starkey, as trustee, may retain sufficient cash and securities to cover any remaining actual or contingent liabilities of the Trust until those liabilities have been resolved or satisfied. The members of the CTCC shall use their best efforts to assure that such transfer is accomplished.
7. The members of the CTCC shall use their best efforts to effectuate, by no later than December 31, 1993, the dissolution of Theta Management Limited. All property and functions of Theta will be transferred without consideration to IASA.
8. The members of the CTCC shall, no later than December 31, 1993, effectuate the dissolution of the Church of Scientology Freewinds Relay Office, Inc., FSS Organization N.V., and majestic Cruise Lines, Inc., and the transfer of all of their assets and functions to the Foundation Church of Scientology Flag Ship Service Organization.
9. The members of the CTCC shall, no later than December 31, 1993, effectuate the dissolution of International Publications Trust. The shares of New Era Publications International, ApS shall be transferred without consideration to Church of Scientology International.
10. The members of the CTCC shall, no later than December 31, 1995, effectuate the dissolution of WISE, Inc. and the transfer of all of its assets, including but not limited to its rights to the Scientology religious marks, to the Inspector General Network.
F. Treatment of Information Exchanges.
1. All information provided by the CTCC under this section IV. shall constitute return information for purposes of Code section 6103. No information constituting Code section 6103 information, separately or collectively, shall constitute a return or other information for purposes of Code section 6104 (a)(1)(A) and 6104 (b).
2. The Service may seek further information regarding the application of any provision of the Code, this Agreement or the Settlement Agreement attached as Exhibit IV-5, to any Scientology-related entity (whether or not such inquiry is raised by reason of information contained in the Annual Report) from the CTCC. Because the Service is obtaining information from the CTCC, as opposed to one or more churches, the provisions of Code section 7611 do not apply. However, if at any time the CTCC believes that the Service is seeking information that should be obtained under the provisions of Code section 7611, then the CTCC shall so notify the Service, in writing, of its views and unless the pending request for additional information from the Service otherwise meets the definition of routine request or other exception under Code section 7611 and the regulations thereunder, the provisions of that section shall apply as of the date the Service contacts the specific taxpayer involved.
3. The Annual Report or other information request under this Agreement including follow-up questions under paragraph F.2., or any other contacts with the CTCC do not constitute an examination under Code section 7611 or an inquiry or examination under any other section of the Code (including sections 7602 and 7605), unless such contact is either (i) designated by the Service specifically as a Church Tax Inquiry letter under section 7611 or a notice of examination under section 7602, or (ii) the CTCC notifies the Service that it considers the contact to be subject to section 7611 or section 7602.
V. Treatment of the Code Section 6104 Public Inspection File and Certain Other Materials.A. Code section 6104 Public Inspection File.
1. The Code section 6104 public inspection file for Church of Scientology International shall include a Form 1023 with information and financial data for taxable years 1989, 1990, and 1991. In addition, the Code section 6104 public inspection file for CSI shall include agreed upon portions of the Qualified Written Material. These documents and the resulting determination letter shall be the only materials considered as the application, supporting papers and determination information described in Code section 6104(a)(1)(A) with respect to Church of Scientology International.
2. The Code section 6104 public inspection file of each Scientology-related entity (other than Church of Scientology International) to be recognized as exempt under section III. paragraph B. hereof shall include the individual Form 1023 with information and financial data for taxable years 1989, 1990, and 1991, previously submitted by the Church. With respect to the parent Scientology-related entities listed in section III. paragraph C., the Code section 6104 public inspection file shall include a group exemption request with information for taxable years 1989, 1990, and 1991, as previously submitted by the Church. Each such application shall incorporate by cross-reference the application and Code section 6104 public inspection file of Church of Scientology International as described in paragraph A.1. These documents, including Church of Scientology International’s Code section 6104 public inspection file incorporated by reference and the resulting determination and ruling letters, shall be the only materials considered as the application, supporting papers and determination information described in Code section 6104(a)(1)(A) for each remaining Scientology-related entity to be recognized as exempt pursuant to this Agreement.
3. The Service shall close without action exemption determination applications by the following Scientology-related entities:
Religious Technology Center (“RTC”)Church of Scientology International (“CSI”)
International Hubbard Ecclesiastical League of Pastors (“IHELP”)
The Way to Happiness Foundation (“TWTH”)
Association for Better Living and Education (“ABLE”)
Church of Scientology Celebrity Centre Dallas
Church of Scientology of Georgia
Church of Scientology Mission of New Jersey
RTC, CSI, IHELP, TWTH and ABLE submitted revised and updated Forms 1023 and are being recognized as exempt under paragraph B. of section III. of this Agreement. The remaining three entities are being recognized as subordinate entities under group exemptions being recognized under paragraph C. of section III. of this Agreement.
4. All information submitted in connection with the closed applications as described in paragraph A.3., and all information submitted in connection with this Agreement other than that listed in paragraph A.1. and A.2., including but not limited to (i) all Qualified Written Material information not specifically included as part of the Code section 6104 public inspection file of Church of Scientology International pursuant to paragraph A.1., and (ii) this Agreement itself, shall be considered to be return information described in Code section 6103(b)(2).
B. Disclosure of Information by the Service.
1. The Service shall maintain the information described in section V. paragraph A.4. of this Agreement in the office of the Assistant Commissioner and shall disseminate such information within the Service only to the extent the Assistant Commissioner determines it necessary for the administration of the Code (including actions taken in administering this Agreement).
2. The Service shall not disclose any information described in section V. paragraph A.4. of this Agreement, including but not limited to this Agreement itself, to any third party other than as permitted under Code section 6103 or otherwise as permitted under applicable law or under this Agreement.
3. The Service agrees to use its best efforts to notify the CTCC of any litigation against the Service by a third party to compel production of information described in section V. paragraph A.4. of this Agreement.
C. Disclosure of Information by the CTCC.
1. The CTCC may use information described in section V. paragraph A.4. only to the extent necessary to carry out its obligations hereunder to inform Church parishioners of the provisions of section VII of this Agreement.
2. The CTCC may use information described in section V. paragraph A.4. only to the extent it determines it is necessary in connection with any tax matter by any state or local governmental body in the United States or by any foreign governmental body. To minimize the extent of such disclosure, the Service agrees to certify the effect of relevant provisions of this Agreement to any other governmental taxing authority upon request by the CTCC and following consultation with the CTCC concerning the text of such certification. This paragraph C.2. of this section V in no way limits the obligations or discretion of the Service with the respect to governmental taxing authorities under section 6103.
3. The CTCC shall not produce information described in section V. paragraph A.4. of this Agreement, including but not limited to this Agreement itself, except to the extent allowed under this section V. It is the specific intent of the Parties that such materials, including but not limited to this Agreement itself, shall not be the subject of discovery in any civil litigation between a third party and any Scientology-related entity or individual, and the CTCC agrees not to produce such information in such circumstances except to the extent disclosure is compelled by a court of competent jurisdiction after exhaustion of all available judicial review. The parties agree that the provisions of this paragraph C. of this section V. are the result of shared concerns regarding confidentiality. Except in carrying out the provisions of paragraph C. of this section V., the CTCC agrees not to assert or otherwise publicly characterize this Agreement in a manner that would indicate that the Service has required that information under this Agreement be kept confidential.
D. Proceeding Under Agreement. Notwithstanding any other paragraph of this section V, information described in section V. paragraph A.4. of this Agreement may be disclosed in any proceeding to construe or enforce any provision of this Agreement or in any proceeding relating to the federal tax liability of any Scientology-related entity. In the event disclosure becomes necessary under this paragraph D., the parties agree to use their best efforts to file all information described in section V. paragraph A.4. under seal so that it does not become part of the public judicial or administrative record.
E. Disclosure Following Inquiries. The CTCC agrees that the Service, in response to inquiries, may characterize the information in the section 6104 public inspection files and may acknowledge the existence of an agreement that has settled a variety of longstanding issues between the Church and the Service, including exemptions from tax as well as a variety of outstanding tax and litigation matters. In addition, in response to such inquiries, the Service may disclose that there is a Closing Agreement concerning the nature and extent of permissible disclosure by the Service in light of the requirements of Code section 6103 and acknowledge the existence and extent of tax information authorizations submitted pursuant to this Agreement and the Settlement Agreement.
F. Correction of Misstatements. Either the Service or the CTCC may disclose information described in section V. paragraph A.4. of this Agreement in the event of a misstatement of fact or mischaracterization published or disclosed about the contents of, the effects of, or reasons for, this Agreement or matters related thereto. Information described in section V. paragraph A.4. may be disclosed for this purpose only to the extent necessary to correct the misstatement or mischaracterization and only if the Assistant Commissioner and the CTCC have consulted prior to such disclosure.
G. Term of Undertaking. Paragraph A. of this section V. applies as long as the Service retains any of the information described in paragraph A. The remaining paragraphs of this section V. apply only through December 31, 1999.
VI. Penalty Provisions During Transition Period and Other Procedural Matters.A. Introduction: Purpose and Scope of Sanctions.
This section VI sets forth sanctions to provide assurance to the Service that the Church Tax Compliance Committee will ensure that all Scientology-related entities will operate in a manner consistent with Code section 501(c)(3) and will carry out specified obligations under this Agreement during the transition period. The provisions of this section are in addition to, and not in lieu of, any other enforcement measures available to the Service under this Agreement, the Code, at law or in equity. Thus, notwithstanding any provisions of this section or this Agreement in its entirety, the Service may question its recognition or exemption of any Scientology-related entity for any taxable year subsequent to 1992 (and for previous years if this Agreement is not final by reason of section IX. paragraph H.) or take any other action permitted under the Code, without regard to whether the Service has asserted (successfully or otherwise) any penalty under this section VI. Nevertheless, it is intended that the consensual sanctions set forth in this section are to provide the Service with intermediate sanctions for activities or conduct not in accordance with the provisions of Code section 501(c)(3) for which revocation of recognition of exemption may be too harsh or otherwise inappropriate as a sanction, and that the Service will notify and consult with the CTCC prior to pursuing any sanctions under this Agreement.
B. Self-Dealing Transactions.
1. First-tier penalties.
a. On Individual CTCC member who is a self-dealer or who is related to a self-dealer. Under this Agreement, there is a penalty imposed on each knowing act of self-dealing between a disqualified person and a Scientology-related entity. The penalty shall equal 5 percent of the amount involved with respect to the act of self-dealing for each taxable year (or part thereof) in the sanction period (defined below). The penalty imposed by this paragraph shall be paid by each Individual CTCC member: (i) who is the disqualified person who engaged in such act of self-dealing; or (ii) who is related (as described in section VIII. paragraph N.2. through 9., including the attribution rules contained therein) to any person that participates in the act of self-dealing. No penalty shall be due under this paragraph B.1.a. if and to the extent that an act of self-dealing has been corrected within the correction period.
b. On Individual CTCC members with knowledge of transaction. In any case in which a penalty is imposed by section VI. paragraph B.1.a., there is an additional penalty imposed on the participation of any Individual CTCC member in an act of self-dealing between any disqualified person and a Scientology-related entity, knowing that it is such an act, equal to 2 1/2 percent of the amount involved with respect to the act of self-dealing for each taxable year (or part thereof) in the sanction period, unless such participation is not willful and is due to reasonable cause. The penalty imposed by this paragraph shall be paid by any Individual CTCC member who participated in the act of self-dealing. No penalty shall be due under this paragraph B.1.b. if and to the extent that an act of self-dealing has been corrected within the correction period.
2. Second-tier penalties.
a. On Individual CTCC member who is a self-dealer or who is related to a self-dealer. In any case in which a first tier penalty is imposed by section VI. paragraph B.1. on an act of self-dealing by a disqualified person with a Scientology-related entity and the act is not corrected within the sanction period, there is hereby imposed a penalty equal to 200 percent of the amount involved. The penalty imposed by this paragraph shall be paid by each Individual CTCC member: (i) who is the disqualified person who engaged in such act of self-dealing; or (ii) who is related (as described in section VIII. paragraph N.2 through 9., including the attribution rules contained therein) to any person that participates in the act of self-dealing. No penalty shall be due under this paragraph B.2.a. if and to the extent that an act of self-dealing has been corrected within the correction period.
b. On Individual CTCC member refusing to correct.
i. In any case in which a second tier penalty is imposed under section VI. paragraph B.2.a., if any Individual CTCC member refuses to agree to part or all of the correction, a penalty is imposed equal to 50 percent of the amount involved. The penalty imposed by this paragraph shall be paid by each Individual CTCC member who refused to agree to part or all of the correction.
ii. In addition, in the event that correction does not occur by reason of any officer or director of any Scientology-related entity refusing to agree to part or all of the correction, there is a penalty equal to 50 percent of the amount involved. The penalty imposed under this paragraph shall be paid by each Individual CTCC member.
iii. No penalty shall be due under this paragraph B.2.b. if and to the extent that an act of self-dealing has been corrected within the correction period.
a. In general. For purposes of this section VI., the term “self-dealing” means any direct or indirect:
i. sale or exchange, or leasing, of property between a Scientology-related entity and a disqualified person;ii. lending of money or other extension of credit between a Scientology-related entity and a disqualified person;
iii. furnishing of goods, services, or facilities between a Scientology-related entity and a disqualified person;
iv. payment of compensation (or payment or reimbursement of expenses) by a Scientology-related entity to a disqualified person;
v. transfer to, or use by or for the benefit of, a disqualified person of the income or assets of a Scientology-related entity; and
vi. payment by any Scientology-related entity of any penalty imposed under this section VI. upon any Individual CTCC member.
b. Special rules. For purposes of section VI. paragraph B.3.a.–
i. the transfer of real or personal property by a disqualified person to a Scientology-related entity shall be treated as a sale or exchange if the property is subject to a mortgage or similar lien which the Scientology-related entity assumes or if it is subject to a mortgage or similar lien which a disqualified person placed on the property within the 10-year period ending on the date of the transfer;ii. the lending of money by a disqualified person to a Scientology-related entity shall not be an act of self-dealing if the loan is without interest or other charge (determined without regard to Code section 7872) and if the proceeds of the loan are used exclusively for purposes specified in Code section 501(c) (3);
iii. the furnishing of goods, services, or facilities by a disqualified person to a Scientology-related entity shall not be an act of self-dealing if the furnishing is without charge and if the goods, services, or facilities so furnished are used exclusively for purposes specified in Code section 501(c) (3);
iv. the furnishing of goods, services, or facilities by a Scientology-related entity to a disqualified persona shall not be an act of self-dealing if such furnishing is made on a basis no more favorable than that on which such goods, services, or facilities are made available to the general public; and
v. the payment of compensation (and the payment of reimbursement of expenses) by a Scientology-related entity to a disqualified person for personal services which are reasonable and necessary to carrying out the exempt purpose of Scientology-related entities shall not be an act of self-dealing if the compensation (or payment or reimbursement) is not excessive.
c. Exceptions. Notwithstanding section VI. paragraphs B.3.a. and B.3.b., the following shall not be treated as an act of self-dealing:
i. The provision to a disqualified person of goods, services and facilities by a Scientology-related entity on the same basis as generally provided to other members of the Sea Organization, with commensurate adjustments for the ecclesiastical rank and responsibilities of the disqualified person. The goods, services and facilities described in this section VI. paragraph B.3.c.i. include all benefits generally provided by Scientology-related entities to members of the Sea Organization, including but not limited to room and board, medical care, uniforms, child care and education, use of corporate vehicles and ministry of religious services.ii. The provision of insurance coverage by any Scientology-related entity to any disqualified person against a claim of misconduct in his or her capacity as an executive of any Scientology-related entity (but not including any penalty imposed under this section VI. paragraph B. upon any Individual CTCC member), as well as reasonable litigation costs and attorneys’ fees incurred in defending any such claim.
iii. The direct payment, without the use of insurance, by any Scientology-related entity of a disqualified person’s personal liability arising from any claim of misconduct in his or her capacity as an executive of any Scientology-related entity (excluding a penalty imposed under this section VI. upon any Individual CTCC member), as well as payment or reimbursement of reasonable litigation costs and attorney’s fees incurred in defending against any such claim (including defense against a penalty imposed under this section VI. upon any Individual CTCC member), provided that the board of the Scientology-related entity that is making the expenditure and the other Individual CTCC members determine, upon appropriate review of the circumstances and consultation with outside legal counsel, that the Individual CTCC member acted reasonably under the circumstances, in the best interest of the relevant Scientology-related entity or entities, and without knowledge or reason to believe that such action would be in violation of any applicable law or of this Agreement.
iv. Any transaction for which the disqualified person and the affected Scientology-related entity have obtained guidance in advance from the Service that the proposed transaction would be in the best interest of the continued operation of the affected Scientology-related entity and will not be penalized under this Agreement. Any request for such guidance shall be sent to the Assistant Commissioner as provided in section IX of the Agreement. If after 120 days no response to the request has been received, the transaction described in the ruling request shall be deemed not to create a situation in which the penalties of this section VI will be applied.
v. Theft, embezzlement or other misappropriation of property or funds from a Scientology-related entity is an act of self-dealing only if, and only to the extent, that a disqualified person participates in such misconduct.
d. Amount involved. For purposes of this section VI., paragraph B., the term “amount involved” means, with respect to any act of self-dealing, the greatest of (i) the amount of money and the fair market value of the other property given; (ii) the amount of money and the fair market value of the other property received; or (iii) the sum of $100,000. Notwithstanding the preceding sentence, in the case of services described in section VI. paragraph B.3.iv., the amount involved shall be the greater of $100,000 or the excess compensation. In addition, in the case of a lease or loan, the amount involved shall be the greatest of (i) the fair market interest rate or rental, (ii) the amount actually charged, or (iii) $100,000. For purposes of determining the amount involved, the fair market value in the case of the penalties imposed by section VI. paragraph B.1.a., shall be determined as of the date on which the act of self-dealing occurs; and in the case of the penalties imposed by section VI. paragraph B.1.b., shall be the highest fair market value during the sanction period.
C. Noncharitable Expenditures.
1. First-tier penalties.
a. On Corporate CTCC members. Under this section VI. paragraph C., a penalty is imposed on each noncharitable expenditure (as defined in section VI. paragraph C.3.) of any Scientology-related entity described in the Code section 501(c) (3). The penalty shall be equal to 10 percent of the amount involved as defined in paragraph C.5.. The penalty imposed by this paragraph shall be paid on a joint and several basis by the CTCC Corporate members. No penalty shall be due under this paragraph C.1.a. if and to the extent that a taxable expenditure has been corrected within the correction period.
b. On Individual CTCC members. There is hereby imposed on the agreement of any Individual CTCC member to the making of an expenditure or undertaking an activity, knowing that it is a noncharitable expenditure, a penalty equal to 2 1/2 percent of the amount involved, unless such an agreement is not willful and is due to reasonable cause. The penalty imposed by this paragraph shall be paid by any Individual CTCC member who agreed to the making of the expenditure of undertaking the activity. No penalty shall be due under this paragraph C.1.b. if and to the extent that a taxable expenditure has been corrected within the correction period.
2. Second-tier penalties.
a. On Corporate CTCC members. In any case in which a first tier penalty is imposed by section VI. paragraph C.1.a. by reason of a noncharitable expenditure and such expenditure or activity is not corrected within the sanction period, there is hereby imposed a penalty equal to 100 percent of the amount involved. The penalty imposed by this paragraph shall be paid on a joint and several basis by the CTCC Corporate members. No penalty shall be due under this paragraph C.2.a. if and to the extent that a taxable expenditure has been corrected within the correction period.
b. On Individual CTCC members.
i. In any case in which an additional penalty is imposed by paragraph C.2.a., if an Individual CTCC member refused to agree to part or all of the correction, there is hereby imposed a penalty equal to 50 percent of the amount involved. The penalty imposed by this paragraph shall be paid by each Individual CTCC member who refused to agree to part or all of the correction.
ii. In addition, in the event that correction does not occur by reason of any officer or director of any Scientology-related entity refusing to agree to part or all of the correction, there is a penalty equal to 50 percent of the amount involved. The penalty imposed under this paragraph shall be paid by each Individual CTCC member.
iii. No penalty shall be due under this paragraph C.2.b. if and to the extent that a taxable expenditure has been corrected within the correction period.
3. Noncharitable expenditure
a. Noncharitable expenditure. For purposes of this section VI., the term “noncharitable expenditure” means:
i. any amount paid or incurred by a Scientology-related entity described in Code section 501 (c) (3):
(a) to an entity or individual unless:
(1) the recipient entity is described in Code section 501 (c) (3), or(2) the payment will directly further a charitable purpose and the Scientology-related entity exercises expenditure responsibility with respect to such payment as required and in accordance with paragraph C.3.b.
(b) any amount paid or incurred by a Scientology-related entity for any purpose other than one specified in Code section 170 (c) (2) (B).
ii. any amount paid or incurred by a Scientology-related entity as a special noncharitable expenditure as defined in paragraph C.4.b. Expenditure responsibility. The expenditure responsibility referred to in section VI. paragraph C.3.a.i. (a) (1) means that the Scientology-related entity is responsible to exert all reasonable efforts and to establish adequate procedures during the transition period:
i. to see that the payment is spent solely for the charitable purpose for which made,ii. to obtain full and complete reports from the recipient on how the funds are spent, and
iii. to make full and detailed reports on such expenditures to the Service as part of the Annual Report described in section IV paragraph C.7.
Expenditure responsibility is required under this section VI. paragraph C.3.b. only to the extent the CTCC is required to report with respect to its expenditure responsibility as part of the Annual Report under section IV., paragraph C.7.
c. Governing principles. In determining whether a particular expenditure is a noncharitable expenditure, the Service shall be guided by principles of section 53.4945-6 (b) (2) of the Treasury Regulation (regardless of whether the expenditure involves an administrative expense), under which it is neither the policy nor the prerogative of the Service to substitute its judgment for the reasonable exercise of business judgment by executives of the affected Scientology-related entity.
4. Special noncharitable expenditure. For purposes of this section VI., the term “special noncharitable expenditure” means any amount paid or incurred by a Scientology-related entity or Scientology-related individual in connection with the following:
a. Any act or omission that any CTCC member knew would impair the efficacy of the guaranty of collection set forth in section IV. paragraph A.3.d. of this Agreement.b. The diminution of assets in violation of section IV. paragraph A.3.d.viii.
c. Any expenditure by a Scientology-related entity that has not been recognized as tax exempt under section III. of this Agreement or by any Scientology-related individual, if such expenditure jeopardizes the tax-exempt status of any Scientology-related entity recognized under section III. of this Agreement as described in Code section 501 (c) (3).
d. The conduct or support of litigation by a Scientology-related entity or a Scientology-related individual against the Service or any present or former Service employee in violation of section II. paragraph C.4. or C.5. of this Agreement.
e. The financial support by a Scientology-related entity or Scientology-related individual of a tax refund claim against the Service in violation of section VII., paragraph G.
5. Amount involved. For purposes of this section VI. paragraph C., the term “amount involved” as it relates to the penalties provided under this section imposed on a noncharitable expenditure means:
a. For the penalties imposed under this section VI. paragraph C. (except as provided below with respect to certain of the special noncharitable expenditures and noncharitable activities described in paragraph C.4.), the “amount involved” shall be the greater of (1) the amount paid or incurred in connection with a noncharitable expenditure or (2) the sum of $25,000.b. For the penalties imposed by reason of special noncharitable expenditure defined in paragraph C.4.a., the “amount involved” is equal to the greater of (1) the difference between the assets of the CTCC Corporate members before the impairment of the guaranty and the assets of the CTCC Corporate members subsequent to the impairment, or (2) the sum of $25,000.
c. For the penalties imposed by reason of special noncharitable expenditure defined in paragraph C.4.b., the “amount involved” is equal to the greater of (1) the excess value of the assets over 10-percent of the difference between the assets of the CTCC Corporate members before the transfer and the assets of the CTCC Corporate members subsequent to the transfer, or (2) the sum of $25,000.
d. For the penalties imposed by reason of special noncharitable expenditure or noncharitable activity defined in paragraphs C.4.d. and C.4.e., the “amount involved” is equal to the greatest of (1) the number of staff hours of Service or Department of Justice attorneys required for the year to respond to any litigation, multiplied by $100, (2) the cost to indemnify the Service and the United States in any litigation for the year and for all costs including any damages, or (3) the sum of $25,000.
D. Reporting Obligations.
1. Penalty on Corporate CTCC members. A penalty is imposed jointly and severally on the Corporate CTCC members in the event of certain failures in providing the Annual report.
a. In the case of a failure to submit the Annual Report required under section IV. paragraph A.3.a. of this Agreement by the date and in the manner prescribed therefor (determined with regard to any extension of time for filing), there shall be paid $250 for each day until the submission of such report.b. In the case of a failure to include within the Annual Report any of the information required to be shown under this Agreement or to show information that is materially correct, there shall be paid by the Corporate CTCC members $250 for each day during which such failure continues.
The maximum penalty under this section VI. paragraph D.1. with respect to any one Annual Report shall not exceed $75,000.
2. Penalty on Individual CTCC members. Upon a failure to submit an Annual Report in a timely and complete fashion, the Service may make a written demand on the CTCC specifying therein a reasonable future date by which the Annual Report shall be submitted (or the missing or correct information furnished) for purposes of this paragraph.
a. Failure to comply with demand. If the CTCC fails to comply with any demand under paragraph D. 2. on or before the date specified in such demand, there shall be paid by each Individual CTCC member $250 for each day after the expiration of the time specified in such demand during which such failure continues. The maximum penalty imposed under this paragraph on all Individual CTCC members for failures with respect to any one Annual Report shall not exceed $75,000 per Individual member.
b. Application of penalties for failure to provide information. Each failure to include with the Annual Report information required under any single subparagraph of section IV. paragraph B. or section IV. paragraph C. of this Agreement shall be treated as a separate failure to provide information and shall be subject to a separate penalty or penalties under this section VI., except that the $75,000 maximum applies to the Annual Report as a whole and, therefore, is not increased by reason of multiple failures to comply within the same Annual Report.
3. Exception for reasonable cause. No penalty shall be imposed under this section VI. paragraph D. with respect to any failure if the CTCC shows that such failure is due to reasonable cause.
4. Exception for inability to certify specific information. If the CTCC is unable to certify any matter as required under this Agreement due to an actual or potentially noncompliant act or acts or failure to act, no penalty shall be imposed under this section VI. paragraph D. with respect to the failure to provide such certification, provided that:
a. the CTCC makes the required certifications with respect to all but those actual or potentially noncompliant acts,b. the CTCC takes appropriate and timely steps to determine whether a potentially noncompliant act is in fact noncompliant,
c. the CTCC discloses all noncompliant acts as soon as possible under the circumstances, and currently discloses that it is investigating a particular act or acts that may be noncompliant,
d. the CTCC takes appropriate and timely steps to correct all noncompliant acts, and
e. the CTCC reports to the Service with respect to the correction of noncompliant acts as soon as possible under the circumstances.
E. Joint and Several Liability and Certain Penalty Limitations for Individual CTCC Members.
1. The Corporate CTCC members shall be jointly and severally liable for payment of the penalties imposed by section VI. paragraphs C.1.a., C.2.a., and D.1. The penalties on the Individual CTCC members are to be paid by the specific Individual CTCC member subject to the penalty.
2. The maximum amount of any penalty imposed on any Individual CTCC member under section VI. with respect to (1) any one act of self-dealing under paragraph B., (2) any one noncharitable expenditure under section VI. paragraph C., or (3) deficiencies in the Annual Report under section VI., paragraph D., shall not exceed the lesser of (i) the individual CTCC member’s total compensation for the taxable year from all Scientology-related entities, or (ii) the sum of $50,000 each taxable year, except that the maximum penalty on an individual CTCC member charged with an act of self-dealing in no event shall be less than the sanction imposed for that act.
3. No single act or expenditure by a Scientology-related entity shall be subject to multiple penalties under paragraphs B.1.b, C.1.b, and/or D.2, or multiple penalties under paragraphs B.2.b, C.2.b, and/or D.2. (for example, an expenditure constituting both an act of self-dealing under paragraph B. and a noncharitable expenditure under paragraph C.). Such an act or expenditure shall be subject to the applicable penalty in paragraph B., C., or D. that results in the highest penalty amount.
F. Additional Penalty. If any person or entity becomes liable for any penalty under paragraphs B. or D. of this section VI. by reason of any act or failure to act which is not due to reasonable cause and either:
1. such person has theretofore been liable for a penalty under any of such paragraphs; or2. such act or failure to act was both wilful and flagrant;
then such person shall be liable for an additional penalty equal to the amount of the applicable first tier penalty.
G. Third-Tier Penalty.
1. If there has been (i) willful, repeated and flagrant misconduct, and (ii) a failure to correct such misconduct, giving rise to penalties under paragraphs B. and/or C. of this section VI., there is imposed on the Corporate members of the CTCC a penalty equal to $50,000,000.
2. For purposes of this section VI., various terms are defined as follows:
a. the phrase “flagrant misconduct” means:
(i) For any act of self-dealing under section VI. paragraph B., the intentional diversion of assets from one or more Scientology-related entities that is not corrected within the correction period.
(ii) For any noncharitable expenditure under paragraph C., the intentional use of assets from one or more Scientology-related entities for any purpose other than one specified in Code section 170 (c) (2) (B) that is not corrected within the correction period.
b. The phrase “diversion” means the transfer of assets by a Scientology-related entity that constitutes the private inurement of its net earnings to the benefit of a private shareholder or similarly-situated individual.c. The phrase “repeated,” with respect to misconduct, means more than two occurrences of conduct resulting in the imposition of second-tier sanctions under this Agreement.
H. Procedures for Penalty Determinations
1. a. First-tier Penalty
i. With respect to a claimed penalty arising from information in the Annual Report, the Service shall notify the CTCC in writing of its belief than an event subject to penalty under paragraphs B.1., C.1. or D. of this section VI. has occurred within 180 days of receipt of the Annual Report. Such notice (hereinafter the “initial notice”) shall identify the expenditure, act (or failure to act) or transaction the Service believes warrants the imposition of penalties and an explanation of its reasons for this conclusion. The notice shall specify the exact provisions of the applicable law or of this Agreement the Service believes has been violated and shall, subject to the requirements of Code section 6103, cite and append evidence in its possession that supports its belief.
ii. Upon receipt of the initial notice, the CTCC shall investigate the matter and report its conclusions back to the Service within 90 days of receipt of the initial notice.
iii. If, following receipt of the CTCC’s report under section VI. paragraph H.1.a.(ii), or in the event of a failure to respond, the Service still believes that an event warranting imposition of a penalty has occurred and has not been corrected, the Service will provide a conference of right with the Assistant Commissioner to undertake a discussion on the merits of the respective positions of the CTCC and the Service.
iv. If, following the conference of right under paragraph H.1.a.(iii) of this Section VI., the Service still believes that an event warranting imposition of a penalty has occurred and is not in the process of being corrected, the Service will issue a final determination of penalty and send notice thereof to the CTCC. Such notice shall specify the exact provisions of applicable law or of this Agreement the Service believes have been violated and shall, subject to the requirements of Code section 6103, cite and append evidence in its possession that supports its belief, including its reasons for not accepting the arguments and evidence submitted by the CTCC in support of its position that no violation has occurred.
v. With respect to a claimed penalty arising from information in the Annual Report, the Service must issue a final determination of first-tier penalty to the CTCC no later than one year from the date the Service receives the CTCC report described in section VI. paragraph H.1.a.(2).
vi. If the CTCC continues to disagree with the Service’s determination of a first-tier penalty notice, it shall so notify the Service in writing. Upon receipt of such notice, the Service may sue under paragraph H.1.e. to collect the first-tier penalty. Until the completion of such suit, including the exhaustion of any appeals or other proceedings for appellate review, the CTCC need not pay any first-tier penalty determined by the Service.
b. Second-tier penalties. If an event subject to a first-tier penalty under this Agreement has not been corrected with the sanction period as defined in section VIII. P., the Service may issue a notice of final determination of second-tier penalty. The Service must issue any notice of final determination of second-tier penalty no later than 90 days after expiration of the sanction period. No second-tier penalty shall be due under this Agreement if and to the extent that a taxable expenditure has been corrected within the correction period.
c. Other penalties. In the case of penalties other than those described in paragraphs H.1.a. or H.1.b. of this determination of penalty to the CTCC.
d. No notice of determination, initial or final, may be made under this Agreement if the notice is not sent by certified mail to the CTCC by the 120th day after the end of the transition period. In addition, no penalty may accrue for any period after December 31, 1999. However, provided that the initial notice was mailed prior to this date, the penalty asserted may be collected and enforced notwithstanding the expiration of the transition period.
e. Any penalty imposed under this section VI. is payable upon notice and demand, and may be collected by the Service through suit. The Service and the Corporate, Individual and At-large CTCC members agree that all parties shall have the right to specific performance (in addition to all other remedies available under the Code, at law, in equity or under this Agreement).
f. Should correction, as defined in section VIII., paragraph S., occur within the correction period, as defined in section VIII. paragraph T., no penalty shall be collected under this section VI.
2. Interest. In the event that any penalty under this section VI. is asserted by the Service and the CTCC fails to make payment within 90 days of the final notice of penalty, interest on the amount of such penalty shall accrue from the date of issuance of such final notice to the date of payment at the Federal short-term applicable rate (as set forth and applied in Code sections 6621(b) and 6622).
3. Non-assertion of penalties.
a. If it is established to the satisfaction of the Service, in the exercise of its reasonable discretion, that any event subject to penalty has been correction during the correction period for such event, then any penalty imposed with respect to such event (including interest) shall not be asserted, and if asserted, shall not be collected, and, if collected, shall be promptly credited or refunded to the extent permitted by law.
b. The Service shall not assert any penalty under this section VI. when the CTCC has established to the Service’s satisfaction in the exercise of its reasonable discretion, that:
i. what would otherwise constitute a transaction or event warranting imposition of penalties caused no financial detriment to charitable interests;ii. the transaction of expenditure has been corrected;
iii. the CTCC has acted promptly and in good faith to correct any such transaction or expenditure and prevent its recurrence; or
iv. the penalty is disproportionate to the severity of the transaction or expenditure.
VII. Treatment of Parishioners’ ContributionsA. The Service acknowledges its obligation to interpret and apply the “gift or contribution” requirement of Code section 170(c) equally and consistently to the fundraising practices of all religious organizations that receive fixed donations from parishioners in connection with participation in worship and similar religious rituals or services.
B. Until the earlier of (i) December 31, 1999, (ii) the issuance or adoption by the Service of audit policies or practices in the examination of tax returns utilizing uniform and consistent principles for determining the deductibility of fixed donations to all churches, or (iii) until legislation is enacted which affects the deductibility of such fixed donations, the Service agrees not to contest the deductibility of Church of Scientology fixed donations in connection with qualified religious services. The phrase “qualified religious services” means those appearing on the “Scientology Classification, Gradation and Awareness Chart.” If the taxpayer produces an accurate receipt or other documentation from the donee Church of Scientology substantiating (1) the amount of the taxpayer’s fixed donation and (2) the qualified religious services with respect to which the donation was made, then, for as long as this paragraph B. of this section VII. applies, as set forth in paragraph F., the full amount of the fixed donation for these services shall be treated as a charitable contribution under Code section 170 and shall not be challenged on that basis. Nothing in the preceding sentence affects other requirements, including substantiation, as provided by law. In the absence of such documentation, the Service also may independently determine the amount of and the extent to which the taxpayer’s fixed donations were made in connection with qualified religious services. Individual taxpayers’ contributions to churches of Scientology not in connection with religious services or any substantial return benefit remain fully deductible if other requirements under the law are met. Payments to churches of Scientology for books or other religious articles are not deductible except to the extend that a dual payment exists.
C. To apply paragraph B. for taxable years before 1993, and in consideration of the other provisions of this agreement, the Service will settle all outstanding controversies with individual Church of Scientology parishioners involving the deductibility of their fixed donations under Code section 170 on a no-change basis (subject to substantiation of payment for qualified religious services and compliance with other requirements of the Code). Any future deficiency controversies with individual taxpayers involving the deductibility of Church of Scientology fixed donations for taxable years beginning before 1993 also will be resolved on a no-change basis on the section 170 issue subject to substantiation of payment for qualified religious services and compliance with other requirements of the Code. This process will be implemented as follows:
1. The Office of Chief Counsel, Internal Revenue Service will enter into stipulated decision documents with the taxpayers listed on Exhibit VII-I (or authorized representatives) to carry out this paragraph in the cases pending before the United States Tax Court. Upon notice and request of the CTCC, the office of Chief Counsel will enter into a similar stipulated decision document in any future case that becomes docketed in the Tax Court with respect to a taxable year beginning before 1993. The stipulated decision documents will reflect an allowance of charitable contribution deductions for Church of Scientology fixed donations in the full amount of the payments substantiated as being paid for qualified religious services as provided in paragraph B. above. The stipulated decision documents also will identify as overpayments any credible or refundable amounts paid by the taxpayers for the years at issue, provided that the Tax Court has jurisdiction to determine the existence and amount of such overpayment.
2. The Service will issue administrative refunds for the full amount of the tax that is attributable to the fixed donations to churches of Scientology for qualified religious services, plus interest, to the taxpayers in the following cases:
Powell v. United States, No. CV 90-8271 (S.D. Fla.) Nieves v. United States, No. CV 90-4211 (S.D. N.Y.)
Following the issuance of the administrative refund, the taxpayers will dismiss with prejudice their respective cases.
3. In the case of a refund claim for a taxable year beginning before 1993 that is not barred by the statute of limitations and is not the subject of a docketed deficiency cases before the Tax Court or a refund cases before a District Court or the Court of Federal Claims at the time of the execution of this Agreement, the taxpayers shall be entitled to an allowance of 80 percent of his or her fixed donations in connection with qualified religious services, as provided in paragraph B. and the claim shall be treated accordingly. The Office of Chief Counsel shall request the Untied States Department of Justice to enter into a stipulation with taxpayer’s counsel (or taxpayer) in any future case seeking a refund of income taxes for taxable years beginning before 1993 based on the Service’s disallowance of charitable contribution deductions for Church of Scientology fixed donations for which the statute of limitations has nor expired, in accordance with the preceding sentence. See, however, the CTCC’s obligation not to promote such claims as provided in paragraph G.
4. For any refund controversy described in subparagraph 3., above, the provisions of paragraph B. shall remain open until the Service mails a notice of final disallowance of such refund claim.
5. If the Service is in compliance with the provisions of subparagraphs 1-3, above, and the taxpayer refuses the Service’s offer to provide a stipulation or settlement in resolution of the fixed donation issue of the taxpayer/parishioner to the Church of Scientology as provided herein, then, notwithstanding any other provision of his section VII., the Service shall not be bound by this paragraph as to that taxpayer (and that year for which there is no agreement) and shall not thereafter be bound to the 80/20 dual payment percentage as to that taxpayer for that tax year. Nothing in this paragraph prevents the Service, at its election, from stipulating or settling on any other basis (or proceeding in any manner) with any taxpayer if the taxpayer declines to settle in accordance with this section VII.
6. This paragraph C. shall apply to all pending and future administrative cases in examination, appeals, or collection for taxable years beginning before 1993.
7. All overpayments resulting from the stipulations or judgments provided in subparagraphs 1. through 3., above, shall be promptly credited or refunded under applicable provisions of the Code (including section 6611) and regulations.
D. To apply paragraph B. for taxable years after 1992, the Service shall prepare and transmit instructions to all appropriate IRS functions and Offices at the National, Regional and District level and to IRS Service Center explaining their obligations to carry out paragraph B. of this section VII. In particular, those instructions shall direct the various Service functions not to disallow any portion of deductions for Church of Scientology fixed donations in connection with qualified religious services on the ground that the payments are not charitable contributions, until the earliest of (i) December 31, 1999, (ii) the issuance by Service of the audit policies or practices described in paragraph B. (ii) or (iii) until legislation is enacted which affects the deductibility of such fixed donations. Nothing in the paragraph prevents the Service, at its election, from stipulating or settling on any other basis (or preceding in any manner) with any taxpayer of the taxpayer declines to settle in accordance with this section VII.
E. The Service also agrees to withdraw, obsolete or supersede, Rev. Rul. 78-189 no later than April 1, 1994, irrespective of whether the audit policies or practices described in paragraph B. (ii) are ever issued.
F. 1. Except as provided in subparagraph 2., below, the Service shall apply paragraph B. to all pending and future administrative cases in examination, appeals, or collection for taxable years beginning after 1992 through taxable years ending before January 1, 2000.
2. If the Service implements the audit policies or practices described in paragraph B. (ii) for a taxable year ending before January 1, 2000, then the service shall allow individual taxpayers charitable contribution deductions for no less than 80 percent of their Church of Scientology fixed donations in connection with qualified religious services, as defined in paragraph B., to the extend substantiated as provided in paragraph B., for taxable years ending before January 1, 2000.
3. If, prior to January 1, 2000, the Service has not issued or adopted audit policies or practices described in paragraph B. (ii), the parties agree to meet to discuss further agreements or actions that nay be undertaken to implement paragraph A. in the spirit of this entire Agreement.
G. While recognizing that all individual Scientologists not barred by law or agreement are entitled to file claims for refund to recover amounts covered by this settlement and that the CTCC may inform Church parishioners of the provisions of section VII of this Agreement, the CTCC agrees not to promote or encourage individual Scientologists to file claims for refund of taxes for the taxable year 1993.
H. Individual taxpayers making fixed donations to churches of Scientology shall be considered to be third-party beneficiaries of this section VII. and shall be entitled to enforce its terms in any administrative or judicial proceeding. Such individual taxpayers shall not be charged with the receipt of taxable income by virtue of any of the provisions of this agreement.
I. The CTCC shall use its best efforts to have Scientology parishioners agree to the stipulations and settlements as provided in this section VII.
J. If the Service either holds a meeting regarding the deductibility of fixed donations to religious organizations and invites religious organizations to participate or solicits comments from religious organizations on the subject, the Service shall invite the Church of Scientology to participate or to supply comments on the same basis as the other religious organizations.
VIII. Definitions.For purposes of this Agreement:
A. “Code” means the Internal Revenue Code of 1986 and the regulations thereunder, as amended from time to time.
B. “Entity” includes any corporation, limited liability company, trust, association, committee, partnership, or unincorporated organization, as well as any “person” (other than an individual), as defined in Treas. Reg. sec. 301.7701-1 through -4.
C. An entity is a “Scientology-related entity” if that entity is described in one or more of the paragraphs set forth below:
1. An entity is a Scientology-related entity if it is a signatory to this Agreement or is identified in section III., paragraphs B. or C. or section IV., paragraph D.2. of this Agreement or Exhibits III-1 through III-35 of this Agreement.
2. An entity is a Scientology-related entity if it delivers religious services to parishioners in a manner prescribed by the works of L. Ron Hubbard and as authorized (directly or indirectly) by Religious Technology Center, Church of Scientology International or other entity described in another paragraph as a Scientology-related entity. Thus, for example, all Class V churches, Continental organizations, CSFSSO, CSFSO, CSWUS, Saint Hill or other advanced organizations and missions are Scientology-related entities.
3. The publications organizations discussed at page 1-21 through 1-27 of the letter to John Burke, Monique Yingling dated June 29, 1992, (the “June Submission”) and part of the Qualified Written Material are Scientology-related entities. Thus, for example, Bridge Publications, Inc., and New Era Publications International ApS, as well as their related subsidiaries or affiliates, are Scientology-related entities. Pages 1-21 through 1-27 are attached as Exhibit VIII-1 to this Agreement.
4. The social benefit and other public benefit entities discussed at pages 1-28 through 1-42 of the June submission along with all subsidiaries, subordinate chapters, subordinate organizations, or sublicensees thereof (e.g., organizations that are permitted to use particular names, copyrights, service marks, and/or technologies) are Scientology-related entities. Thus, for example, Citizens Commission on Human Rights, National Commission on Law Enforcement and Social Justice, Scientology Defense Fund Trust, Association for the Better Living and Education, Applied Scholastics Incorporated, Narconon International, The Way to Happiness Foundation, and the Foundation for Religious Freedom are Scientology-related entities. Pages 1-28 through 1-42 are attached as Exhibit VIII-2 to this Agreement.
5. Any entities subject to the ecclesiastical direction or general guidance of Church of Scientology International or Religious Technology Center, directly or indirectly, including but not limited to any trusts, that hold assets (including but not limited to intellectual property and mortgages) for any other Scientology-related entity or for the advancement or protection of the Scientology religion whether or not those entities were discussed at pages 1-43 through 1-56 of the June submission are Scientology-related entities. This definition does not include the trust or estate of any parishioner who has made an intervivos or testamentary transfer of assets to the Church. This definition does not include financial institutions that are not owned (directly or indirectly) in whole or in part by any entity that otherwise meets the definition of Scientology-related entity under another subparagraph of this paragraph VIII. C. This definition does not include (i) any fiduciary that is not a Scientology-related entity or a Scientology-related individual (ii) the employee of any such fiduciary, (iii) any escrow agent holding assets of a Scientology-related entity under and escrow arrangement of a strictly temporary nature, (iv) any trustee under a deed of trust upon real property to secure the debt of a Scientology-related entity (v) any person acting under the power of attorney to Scientology-related entity, provided that any such fiduciary described in (i) through (v) above, and is nor otherwise a Scientology-related entity under paragraph of this section VIII, paragraph C. Pages 1-43 through 1-56 are attached as Exhibit VIII-3 to this Agreement.
6. Any entity directly or indirectly involved in, or related to, the ownership and /or operation of the M.V. Freewinds including those listed at pages 1-57 through 1-59 of the June submission are Scientology-related entities. Thus, for example, the Foundation Church of Scientology Flag Ship Service Organization, Flag Ship Trust, Transcorp Services S.A., San Donato Properties Corporation and MCL Services N.V. are Scientology-related entities. Pages 1-57 thorough 1-59 are attached as Exhibit VIII-4 to this Agreement.
7. Any membership entity primarily composed of Scientologists, whether or not listed on pages 1-60 through 1-62 of the June submission, including but not limited to the International Association of Scientologists, Danish Association of Scientologists, and European Association for Scientology, along with any entities performing the operations of (or holding the assents of ) such organizations (including Foundation of International Membership Services Administration N.V., Membership Services administration (UK) Ltd and U.S. IAS Members’ Trust), are Scientology-related entities. Pages 1-60 through 1-62 are attached as Exhibit VIII-5 to this Agreement.
8. Any entity that owns, (including, but not limited to, those entities listed below in this subparagraph C.8.), (sub) licenses to others to use, and/or has rights to (sub) license others to use what has been described in the Qualified Written Material as the Scriptures (the written and spoken words of L. Ron Hubbard on Scientology and Dianetics) or any technology, copyright, trademark or service mark held by RTC, CSI, CST, any publications organization (described in paragraph C.3 above), the Estate of L. Ron Hubbard or Author’s Family Trust B, is a Scientology-related entity.
9. Any other entity licensed to use, or otherwise granted permission to use or employ, any copyright, service mark, or trademark that has been, is now (or shall in the future) be held or owned, directly or indirectly, by Religious Technology Center, Church of Scientology International, the Estate of L. Ron Hubbard, Author’s Family Trust B or Church of Spiritual Technology, is a Scientology-related entity.
10. Any taxable or for-profit entity of which one or more Scientology-related entities and/or any of the trustees, directors and/or officers of any entity defined as a Scientology-related entity under this section VIII. paragraph C, separately or together, owned or had a beneficial interest of more than twenty-five percent is a Scientology-related entity. In addition, any non-profit entity of which one or more Scientology-related entities and/or any of the trustees, directors and/or offices of any entity defined as a Scientology-related entity under this section VIII. paragraph C, separately or together, control the voting power of, or have a beneficial interest of, more than twenty-five percent, is a Scientology, related entity. For purposes of this definition, any Individual or At-Large member of the CTCC shall be considered an officer of a Scientology-related entity.
11. For purposes of subparagraphs 4, 8, or 9, the term Scientology-related entity includes only those entities that are under the ecclesiastical direction or general guidance of CSI, directly or indirectly, and that are not owned in whole or in part by any entity that otherwise meets the definition of Scientology-related entity under another subparagraph of this section VIII. paragraph C.. Thus, by the way of example, the term Scientology-related entity generally does not include (I) sublicensees of the World Institute of Scientology Enterprises (hereinafter “WISE”), (ii) any entity that would not otherwise be described above, except that it has been licensed to publish or disseminate solely the fictional works of L. Ron Hubbard, and (iii) licenses of Applied Scholastics, Inc. that are not included as subordinate entities under its group exemption, as provided in section III., paragraph 3.c and listed on Exhibit III-28 (or will be subordinate entities in the future) .
12. a. In general. The term Scientology-related entity generally includes an entity whether formed under the laws of the United States or of a country other than the United States, except to the extent other provisions of this Agreement expressly include only U.S. entities or expressly exclude non-U.S. entities.
i. With respect to certain provisions of this Agreement, the term Scientology-related entity does not include an Excluded Foreign Scientology-related Entity. A Scientology-related entity is an Excluded Foreign Scientology-related Entity if it is formed under the laws of, and substantially all of its operations are in, a country other than the United States and it (a) is described in section VIII, paragraph C.2 and is a Mission or Class V church; (b) is described in Section VIII, paragraph C.4; (c) is described in Section VIII, paragraph C.5, provided that it is not an entity that has as its primary function the holding of assets for the Church of Scientology; or (d) is described in Section VIII, paragraph C.9 but has neither annual gross receipts not gross assets in excess of $15 million.
ii. To the extent a Scientology-related entity is otherwise specifically included in a provision (notwithstanding the fact that is an Excluded Foreign Scientology-related Entity), it is a Scientology-related entity for the specified purposes of the affected provision. Specifically, but not by the way of limitation, an Excluded Foreign Scientology-related entity with respect to the following provisions of this Agreement:
Section II.: paragraphs B.5., B.7 through B.9, C.1. through C.6, E.1., E.4.b. and F.Section III.: Paragraph B.10
Section IV.: paragraphs A.3.d., B.1.a., B.1.f.ii. B.2.a., B.3., B.4., C.1., C.3., C.4., C.5., C.6., C.7.a.,C.7.b., C.10.,E.1., E.2.,E.3., and F.2.
Section V.: all
Section VI.: paragraph B.
iii. An Excluded Foreign Scientology-related Entity is excluded from the definition of Scientology-related entity with respect to the following provisions of this Agreement:
Section IV.: paragraphs A.3. (other than A.3.d.), D.1., D.2., D.3.
Section VI: paragraph A, C (unless paragraph C.10. of section IV applies) and G.
Section IX: paragraph A.
iv. With respect to other provisions of this agreement concerning procedural matters (such as reporting term limitations) that relate to the specific provisions referred to in Section VIII, paragraph C. 12.b.ii., Scientology-related entity also includes Excluded Foreign Scientology-related entity.
c. Limitation. paragraph 12.b. shall not apply to exclude from treatment as a Scientology-related entity any entity that otherwise meets the definition of Scientology-related entity under a subparagraph of this section VIII. paragraph C. other than subparagraphs 2.,4.,5., or 9.
13. If an entity is treated as a Scientology-related entity by reason of paragraph C.1. of this section VIII., then such entity shall be treated as a Scientology-related entity notwithstanding that one or more of the other subparagraphs of paragraph C. of this section VIII might otherwise apply to exclude such entity from being treated as a Scientology-related entity.
14. The term Scientology-related entity is not limited to those entities that are in existence as of the date of this Agreement but also includes those described in paragraph C. created after this Agreement is signed.
D. “Scientology-related Individual” means an individual rendering services to or on behalf of a Scientology-related entity as a staff member, agent officer, trustee, or attorney in fact of that Scientology-related entity. The term “Scientology-related individual” includes, without limiting the generality of the foregoing, Individual CTCC members, At-Large CTCC members and individuals serving on the CTCC as representatives of Corporate CTCC members. The term “Scientology-related individual” applies only to the extent that such individual is acting in his capacity as staff member or other service-provider to or on behalf of the Scientology-related entity.
E. “Qualified Written Material” means any information designated as “Qualified Written Material” pursuant to paragraph 4 of the agreement between Church of Scientology International and the Service, executed on behalf of the CSI on May 5, 1992. This material was obtained as part of the discussions in which the Service requested information relating to the organizational structure and operations of the Church mostly by written requests dated May 4, 1992 and October 16, 1992, to which the Church responded in June and November of 1992, respectively, and in various other written responses.
F. “Service” means the Internal Revenue Service, including but not limited to the Office of Chief Counsel. References to officers or employees (present or former) of the Service shall include, but not limited to, officers or employees (present or former) of the Officer of Chief Counsel.
G. “Taxable year” means calendar year.
H. “Transition period” means taxable years 1993, 1994, 1995, 1996, 1997, 1998 and 1999.
I. “Agreement” means this closing agreement.
J. “CTCC” means the Church Tax Compliance Committee.
K. “Church Signatories” means the following entities: Church of Scientology International, Religious Technology Center, Church of Spiritual Technology, Church of Scientology Religious Trust, Building Management Services, Church of Scientology Flag Service Organization, Inc. and the Church of Scientology Western United States.
L. “Settlement Agreement” means an agreement entered into between the Church Signatories and the Service on even date herewith relating to the disposition of certain other matters between the parties attached hereto as Exhibit IV-5.
M. “Annual Report” means the report complied and submitted during the transition period by the CTCC as required under section IV of this Agreement.
N. Disqualified Person. In General. The term “disqualified person” means with respect to a Scientology-related entity, any of the following persons:
1. an Individual CTCC member (within the meaning of section IV. paragraph A.2.c. of this Agreement);
2.A member of the family (as defined in paragraph 9) of an Individual CTCC member;
3. a corporation not recognized as exempt under Code section 501 (c) (3) of which any person described in section VIII. paragraph N.1. or N.2. owns more than 35 percent of the total combined voting stock or stock value;
4. a limited liability company not recognized as exempt under Code section 501 (c) (3) in which any person described in section VIII. paragraph N.1. or N.2. owns more than 35 percent of the membership interests;
5. a partnership not recognized as exempt under Code section 501 (c) (3) in which any person described in section VIII. paragraph 1. or 2. owns more than 35 percent of the profits interests or capital interests; or
6. an estate or a trust not recognized as exempt under Code section 501 (c) (3) in which any person described in section VIII. paragraph N.1. or N.2. holds more than 35 percent of the beneficial interest.
7. Stockholdings; Membership Interests. For purposes of paragraphs 3. and 4., there shall be taken into account indirect stockholdings and membership interests which would be taken into account under section 267 (c) and 318 (a) (4), except that, for purposes of this paragraph, Code section 267 (c) (4) shall be treated as providing that the members of the family of an individual are the members within the meaning of section VIII. paragraph N.9.
8. Partnerships, Trusts, Estates. For the purposes of paragraphs 4. and 5. the ownership of profits interest, capital interest or beneficial interest shall be determined in accordance with the rules for constructive ownership of stock provided in Code section 267 (c) (other than paragraph (3) thereof), except that Code section 267 (c) (4) shall be treated as providing that the members of the family of an individual are the members within the meaning of paragraph 9.
9. Members of Family. For purposes of this definition, the family of any individual shall include on the individual’s parents, children, spouse, siblings and the spouses of the individual’s siblings.
10. Time of determination. A person is a disqualified person, if, at any time during the transition period that a person is described in this definition.
O. Wilful. The term “wilful” means a knowing, voluntary, intentional violation of a known legal duty.
P. Sanction Period. The term “sanction period” means, with respect to any act of self-dealing under section VI. paragraph B or noncharitable expenditure under section VI. paragraph C, the period beginning on the date on which the act of self-dealing or noncharitable expenditure occurs and ending on the earliest of :
1. the date on which the penalty imposed by section VI. paragraph B.a.1. or C.a.1 is paid;
2. the date on which correction of the act of self-dealing or noncharitable expenditure is completed; or
3. 180 days after the final judicial decision sustaining the Service’s final determination with respect to a penalty imposed by section VI. paragraph B.1. or C.1. hereof under section VI. paragraph H.1.
Q. First-Tier Penalty. For purposes of this paragraph P., the term “first tier penalty” means any penalty imposed by section VI. paragraph B.1. or C.1.
R. Second-Tier Penalty. For purposes of this paragraph P., the term “first tier penalty” means any penalty imposed by section VI. paragraph B.1. or C.2.
S. Correction. The terms “correction” and “correct” mean:
1. for any act of self-dealing, undoing the transaction to the extent possible, but in any case placing the Scientology-related entity in a financial position not worse than that in which it would be if the disqualified person were dealing under the highest fiduciary standards;
2. for any noncharitable expenditure (A) recovering part of all of the expenditure to the extent recovery is possible, and where full recovery is not possible such additional corrective action as is prescribed by the Service or (B) in the case of a failure to comply with paragraph D making or correcting the report in question, and
3. for any failure to report under paragraph IV.D., the filing with the Service of an annual Report or corrected Annual Report 9 (or relevant part thereof), meeting the requirements of this Agreement.
T. Correction Period. The term, “correction period” means, with respect to any event that is subject to penalty under the Agreement, the period beginning on the date on which such events occurs and ending 180 days after the date of the mailing under section VI. paragraph H.1.b. of a final notice of determination with respect to the second tier penalty imposed on such event, extended by any other period the Service determines is reasonable and necessary to bring about correction of the event.
U. Church. The term “Church” when used in a descriptive sense refers to all Scientology-related entities. When used in connection with specific obligations under this Agreement, however, the term “Church” shall generally mean the CTCC.
V. Commissioner. The term “Commissioner” means the Commissioner of the Internal Revenue Service.
W. Assistant Commissioner. The term “Assistant Commissioner” means the Assistant Commissioner of the Internal Revenue Service for Employee Plans and Exempt organizations (or the successor to his or her function in any reorganization of the Service).
X. Knowing. An individual shall be considered to have participated in a transaction “knowing” that it is either an act of self-dealing under section VI., paragraph B. or a noncharitable expenditure under section VI., paragraph C. only if
1. He has actual knowledge of sufficient facts so that, based solely upon such facts, such transaction would be an act of self-dealing or a noncharitable expenditure, and
2. He is aware that such an act under these circumstances may violate the relevant provisions of this Agreement, and
3. He negligently fails to make reasonable attempts to ascertain whether the transaction is an act of self-dealing or a noncharitable expenditure, or he is in fact aware that it is such an act.
The term knowing does not mean “having reason to know,” but evidence that a person had reason to know of a particular fact or of a provision of this Agreement can be circumstantial proof of actual knowledge.
Y. Reasonable cause. The term “reasonable cause” means the exercise of responsibility by a CTCC member on behalf of the CTCC and Scientology-related entities with ordinary business care and prudence.
IX. Other Matters.A. Representations. The Church signatories represent that all are duly organized, validly existing and in good standing under the laws of the jurisdiction in which they are organized and that all have the power and authority to execute and deliver this Agreement, to perform their duties and obligations and to exercise their rights under this Agreement, to cause Scientology-related entities to comply with the terms of this Agreement, and further represent that the execution of this Agreement by the officers or trustees has duly and properly authorized by each Church signatory and that upon execution, this Agreement constitutes a valid and legally binding obligation of each Church signatory.
1. All notices and reports hereunder shall be in writing and sent by certified mail, return receipt requested.
2. Notice to the Service shall be sent as follows:
Assistant Commissioner Employee Plans and Exempt Organizations
Internal Revenue Service
1111 Constitution Avenue,
N.W. Washington, D.C. 20224In the event of a reorganization of functions within the Service in which the office of Assistant Commissioner (Employee Plans and Exempt Organizations) is eliminated, notices hereunder to the Service shall be sent to the Service official succeeding to the functions now served by the Assistant Commissioner (Employee Plans and Exempt Organization), as determined by the Service and sent to the CTCC in accordance with paragraph B. 4. hereof.
3. Notice to the CTCC shall be sent as follows:
Church Tax Compliance Committee
c/o Church of Scientology International
6331 Hollywood Blvd.,
California 90028-63294. Either party may change the address designated for future notices hereunder by notice in the manner provided in paragraph B. 1. to the other party to the existing address of record as provided in paragraph B. 2. or B. 3..
C. Rules of Construction.
1. This Agreement has been prepared by the combined efforts of the parties and their respective attorneys.
2. The parties may by written agreement extend the time for performance of any obligation under this Agreement, except and only to the extent that another provision of this Agreement precludes such an extension of time.
3. Unless otherwise expressly provided herein, no remedy conferred on or reserved to a party to this Agreement is intended to be exclusive of any other available remedy or remedies, but each and every such remedy shall be cumulative and shall be in addition to every other remedy given under this Agreement or now or hereafter existing pursuant to the Code, at law or in equity. No delay or omission to exercise any right or power accruing upon any default, omission or failure of performance hereunder shall impair any such right or power or shall be construed to be a waiver thereof, but any such right or power may be exercised from time to time and as often as may be deemed expedient. In the event any provision of this Agreement should be breached by any party, and thereafter duly waived by the other party so empowered to act, such waiver shall be limited to the particular breach so waived and shall not be deemed to waive any other breach hereunder.
4. The words “hereof,” “herein,” “hereunder,” “hereto” and other words of similar import refer to this Agreement in its entirety.
5. The words “agree” and “agreements” contained herein are intended to include and mean “covenant” and “covenants.”
6. References to section headings and other subdivisions of this Agreement are for convenience only and shall not define or limit the provisions hereof.
7. All references made in (i) the neuter, masculine or feminine gender shall be deemed to have been made in all such genders, and (ii) in the singular or plural number shall be deemed to have been made, respectively, in the plural or singular number as well.
D. Entire Agreement. This Agreement constitutes the entire agreement between the Service and the Church and supersedes all prior agreements and understanding, both written and oral, between the Service and the Individual CTCC members, Corporate CTCC members, At-large CTCC members, Church Signatories, Scientology-related entities and Scientology-related individuals with respect to the subject matter hereof. However, nothing contained herein shall affect the Settlement Agreement, executed on even date herewith.
E. Survival of Agreement. All covenants, agreements, representations, and warranties made herein and in all reports (including any Annual Report under section IV.), certificates, tax returns prepared and delivered pursuant hereto shall continue in full force and effect so long as any of the provisions of this Agreement remain unperformed.
F. Costs of Compliance with Agreement. The Church Signatories, Individual CTCC members, Corporate CTCC members, and At-large CTCC members shall, solely at their own cost, perform and discharge all of the obligations and duties and exercise all rights under this Agreement, For example, no set off is available against any penalty asserted under section VI. paragraph C. 1. by reason of such costs. The Service shall at its own cost perform and discharge all of the obligations and duties and exercise all rights under this Agreement.
G. Counterparts. This Agreement shall be executed in counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.
H. Finality. This Agreement is final and conclusive except:
1. The matter it relates to may be reopened in the event of fraud, malfeasance, or misrepresentation of material fact;
2. It is subject to the Internal Revenue Code sections that expressly provide that effect be given to their provisions (including any stated exception for Code section 7122) notwithstanding any other law or rule of law; and
3. If it related to a tax period ending after the date of this Agreement, it is subject to any law, enacted after the Agreement date, that applied to that tax period.
I. Date of Agreement.
The date of this Agreement is October 1, 1993.
Dated: October 1, 1993 [Signature] DAVID MISCAVIGE, Individual Member of CTCC
Dated: October 1, 1993 [Signature] NORMAN F. STARKEY, Individual Member of CTCC
Dated: October 1, 1993 [Signature] MARK RATHBUN, Individual Member of CTCC
Dated: October 1, 1993 [Signature] HEBER JENTZSCH, Individual Member of CTCC
Dated: October 1, 1993 [Signature] (POA) MARC YAGER, Chairman, WatchDog Committee, At-Large Member of CTCC
Dated: October 1, 1993 [Signature] (POA) JONATHAN EPSTEIN, International Finance Director, At-Large Member of CTCC
Dated: October 1, 1993 [Signature] (POA) NIGEL OAKES, Chief Accountant International, At-Large Member of CTCC
Dated: October 1, 1993 RELIGIOUS TECHNOLOGY CENTER By: [Signature] Mark Rathbun Title: President
Dated: October 1, 1993 CHURCH OF SCIENTOLOGY INTERNATIONAL By: [Signature] Heber Jentzsch Title: President
Dated: October 1, 1993 CHURCH OF SPIRITUAL TECHNOLOGY By: [Signature] Title: POA
Dated: October 1, 1993 CHURCH OF SCIENTOLOGY FLAG SERVICE ORGANIZATION, INC. By: [Signature] Title: POA
Dated: October 1, 1993 CHURCH OF SCIENTOLOGY WESTERN UNITED STATES By: [Signature] Title: POA
Dated: October 1, 1993 BUILDING MANAGEMENT SERVICES By: [Signature] Title: POA
Dated: October 1, 1993 CHURCH OF SCIENTOLOGY RELIGIOUS TRUST By: [Signature] Title: POA
Dated: October 1, 1993 COMMISSIONER OF INTERNAL REVENUE SERVICE By: [Signature] John E. Burke, Assistant Commissioner, Employee Plans and Exempt Organizations
Dated: October 1, 1993 COMMISSIONER OF INTERNAL REVENUE SERVICE By: [Signature] James J. McGovern, Associate Chief Counsel, Employee Benefits and Exempt Organizations
Declaration of Vicki J. Aznaran 1
I, Vicki J. Aznaran, make the following declarations on personal knowledge except where the context indicates knowledge based upon information and belief.
[…]8. From 1984 through early 1987, I was President of Religious Technology Center (hereinafter “RTC”). As President of RTC and a Sea Organization member, I attended many meetings concerning the numerous legal actions involving Scientology organizations. During this time period, I had personal access to all legal documents having to do with RTC. I received a report every day on my computer that included a synopsis of each ongoing legal case involving Scientology. I received, or so I was told, copies of every major motion filed in cases involving Scientology. I was on the “approval lines” for legal documents dealing with RTC. During this time period, I had the option of attending legal meetings although some were mandatory. I attended many litigation meetings and became generally aware of Scientology’s dirty tricks and legal maneuvers. On specifics, I frequently deferred to in-house and outside counsel, however, at least in theory, I was the head of RTC and had access to any business or litigation secrets” of Scientology.
[…]12. During litigation between Gerald Armstrong and Scientology, which was before Judge Breckenridge of Superior Court for Los Angeles County, the court ordered the production of Armstrong’s pre-clear (“PC”) folders. These are files maintained by Scientology on those who submit to interrogation sessions in a process called auditing. During the course of that litigation it was ordered to go through Armstrong’s folders and destroy or conceal anything that might be damaging to Scientology or helpful to Armstrong’s case. As ordered, I went through the files and destroyed contents that might support Armstrong’s claims against Scientology. This practice is known within Scientology as “culling PC folders” and is a common litigation tactic employed by Scientology.
13. During other litigation in Los Angeles known to me as the Wollersheim case, I was told that the judge had ordered the production of Wollersheim’s folders. As ordered, I “culled” these files. In other words, I removed contents that might have been damaging to Scientology or support Wollersheim’s claims against Scientology. For example, I removed evidence of events involving his family, the anguish this caused him, evidence of disconnection from family and evidence of fair game.
14. I was involved in numerous meetings concerning what is known to me as the Christofferson case in Portland, Oregon. This case was tried twice. In the first case, a Scientology witness by the name of Martin Samuels was coached and drilled for hours on how to lie convincingly or avoid telling the truth. Before or during the second trial he admitted to this course of conduct. In this litigation, a Scientologist by the name of Joan Shriver
produced responsive documents that may have been incriminating. This was a serious breach of policy for which she was punished. These documents were ordered produced on such short notice that apparently files were not thoroughly “culled”. In another case, Mr. Yanny was severely criticized and almost fired for failing to properly coach and feed the desired answers to Heber Jentzsch. Mr. Jentzsch was, for public relations reasons, the purported head of the Church of Scientology International. During his deposition, Mr. Jentzsch was unable to answer fundamental questions concerning the management of Church of Scientology International. This may be what certain defendants are referring to when they say that they were dissatisfied with Mr. Yanny’s services and I protected him. There were those, including McShane, who were outraged by the embarrassing testimony of Mr. Jentzsch. This was blamed on Mr. Yanny. I did not wish to discontinue using Mr. Yanny at RTC for this perceived problem.
15. In November, 1985, I was present at a meeting whereat Earle Cooley, a Scientologist lawyer, Lyman Spurlock and Norman Starkey, all high ranking Scientologists, announced that they were going to contact Judge Mariana Pfaelzer. Earlier that day Judge Pfaelzer had denied a Scientology motion for a temporary restraining order. After losing on the application there was a meeting to determine what to do about the situation. At the
meeting Mr. Cooley had a file that purportedly contained background and personal information on Judge Pfaelzer. During the meeting Mr. Cooley and the others announced that they were going to attempt to meet with Judge Pfaelzer that evening, at her house if necessary, concerning the litigation in which the temporary restraining order had been sought. Thereafter, Mr. Cooley and two others left with their file on Judge Pfaelzer. They returned several hours later at which time I was told that their attempts to contact Judge Pfaelzer had been unsuccessful.
16. In late 1979 and early 1980, there was a massive document destruction program undertaken to destroy any evidence showing that L. Ron Hubbard (“LRH”) controlled Scientology. I participated in this activity in Clearwater, Florida and am informed that there was also intensive document destruction at facilities in Gilman Hot Springs, California. From at least that point onward there was a continuous effort to hide or destroy any
evidence of Hubbard’s control. For example, during an IRS investigation in 1984 and 1985, while in bed with pneumonia, I was ordered out of bed by Norman Starkey who told me that they had received a tip from a Los Angeles Police officer advising them of a pending IRS raid in Los Angeles. Mr. Starkey ordered me to go to a computer facility and insure that all information on the computers in Los Angeles that might show Hubbard’s involvement and control of Scientology’s money was destroyed except for one copy of each document. These copies were to be saved on computer discs which were to be hidden in secure storage places. At the time I was also instructed to destroy anything that would show the control of Mr. Starkey or Mr. Miscavige over Scientology.
17. I have been informed and believe that a an improper affidavit was filed in a case brought by L. Ron Hubbard, Jr. in Riverside, California. The circumstances were as follows: The document purported to be an affidavit of
L. Ron Hubbard. The signature of Hubbard was purportedly notarized by David Miscavige. It is my understanding that this affidavit caused the case to be dismissed. Subsequently, I was told by Pat Broeker, who had been
living with Hubbard at the time, and by Miscavige, that Miscavige had not seen Hubbard between 1980 and Hubbard’s death in 1986. Accordingly, the affidavit was apparently signed, notarized and dated during a time period when Hubbard was in seclusion and not seen by the person who purportedly notarized the signature of Hubbard.
18. In or about 1981, while working in a Scientology organization known as the Guardian’s Office, I had access to and observed various written and oral communications pertaining to illegitimate activities participated in by the Guardian’s Office. The Guardian’s Office attempted to infiltrate both governmental and private agencies including the IRS, the Department of Justice, the American Medical Association and the National Institute of Mental Health. The purpose of this was to steal documents pursuant to Hubbard’s “Snow White” program. The goal of this program was to eliminate any negative reports about Hubbard and Scientology that may have been held by these various agencies.
19. While involved in Scientology I became aware of various operations directed against an author who had written a negative book about Scientology. The author, Paulette Cooper, was subjected to various forms of
harassment. One operation included an attempt to frame her. A false bomb threat was written. A Scientology agent lifted a fingerprint from Cooper’s apartment. These fingerprints were then transferred to the bomb threat
letter. Ms. Cooper was subjected to an investigation and was not cleared until an FBI raid resulted in the seizure of Scientology documents that exposed the operation as a frame-up. There was at least one other operation directed against Ms. Cooper. The substance of it was to plant a boyfriend to reinforce and play upon her suicidal tendencies in the hopes that she would commit suicide.
20. In 1976 and 1977, the then Mayor of Clearwater, Florida, Gabe Cazares was involved with litigation against Scientology. Arrangements were made to have an attorney by the name of Merril Vanniere, a Scientologist, represent Mr. Cazares and sabotage his case. This plot was also exposed by documents obtained in an FBI raid of a Scientology facility. Also, in response to Mr. Cazares’ litigation against Scientology, an attempt was made to implicate Mr. Cazares in a staged hit-and-run accident.
21. During the time period of my involvement with Scientology, I also learned of various attempts to influence judges or force their removal from cases. For example, a private investigator named Dick East obtained a statement from a prostitute concerning involvement with a certain judge in Washington, D.C. who was sitting on a Scientology case. This was then publicized. The judge did not continue on the case. The same investigator, Dick Bast was also hired for the purpose of attempting to force the removal of a judge in Tampa, Florida. This involved what I know as the Burden case, which was civil litigation brought by Michael Flynn. Dick Bast secured a yacht and attempted to get the judge on board for the purpose of filming him under compromising circumstances. The judge declined to go yachting and the operation was unsuccessful. Approximately $250,000.00 was spent on the operation.
22. I have been informed by Mark (Marty) Rathbun, a high ranking Scientologist, that his private investigator, Gene Ingram, “fed” a confession to Ala Tamimi when visiting him in an Italian prison. This false confession was, in substance, that Tamimi had been involved in a bad check scam involving an account of L. Ron Hubbard. This false confession implicated attorney Michael Flynn in the check scam. Michael Flynn was at the time considered a major enemy of Scientology because he represented numerous clients with claims against Scientology. This purported confession was used to slander and attack Michael Flynn. Michael Flynn has also been sued by Scientology as part of its “strategy” for handling enemies.
23. During an IRS criminal investigation in the 1984 to 1985 time period, the IRS ordered production of various communications between Hubbard and Author Services, Inc. (ASI). The ASI staff worked literally day and night for several days reviewing documents so that unfavorable documents could be destroyed or otherwise concealed from the IRS. Lyman Spurlock and Marion M. Dendui, Scientologists involved in this operation, informed me of this operation. Also during this IRS investigation, my husband, Rick Aznaran, was ordered to remove and conceal any incriminating documents from certain locations. He was also directed to make the computer network “raid proof”. This involved creating a system where incriminating documents could be deleted from computer storage rapidly and before the IRS could obtain control over the computers.
24. In 1985, I attended a conference on “squirrels” attended by Miscavige, Starkey, Spurlock, and McShane, members of top management, and others. In Scientology jargon, “squirrels” are people who use or practice some procedures also used by Scientology but who do not submit to the total control of the Scientology organization and, perhaps most importantly, who do not pay a percentage of their auditing or counseling fees to Scientology. At this meeting, David Miscavige ordered that public Scientologists be organized and motivated to physically attack squirrels and disrupt their operations. This was stated to be pursuant to the standard guidelines of Scientology. Pursuant to such directives, efforts were undertaken to intimidate and disrupt these persons and their organizations.
25. In 1981, operation “Juggernaut” was commenced. The purpose of this was to destroy Michael Flynn who, as stated above, was representing various plaintiffs with litigation against Scientology. This operation contemplated the use of infiltration, propaganda and attempts to persuade clients to turn against him.
26. The Guardians’ Office got into so much trouble, and worse yet got caught, that it was decided in the early 1980’s that the Guardians’ Office should be disbanded. This was purely a public relations gimmick. In short, it was decided that the Guardians’ Office and Mary Sue Hubbard, its then leader, were to take the rap for all criticism and improper conduct. This scheme was laid out in various written communications I observed in 1981 and 1982. (Of course, I was not allowed to keep or escape from Scientology with any such incriminating documents.)
I declare under penalty of perjury under the laws of the State of California that the foregoing is true and correct.
Executed this day of August, 1988, in Dallas, Texas.
Vicki J. Aznaran
8. Another example of documents clearly withheld by plaintiff organization is in regards to the program to get the LA DA to bring criminal charges against me — ultimately to have me jailed. This is all part of the “Armstrong Operation.” At p. 23, no. 11 of the April 1986 declaration I showed, from the mouth of CSC, CSI, RTC and Hubbard attorney Earle C. Cooley, the existence of such documentation.1 The organization has produced none of these documents. A letter from the Office of the LA DA dated April 25, 1986, attached hereto as Exhibit [J]2, however, reveals that Mr. Peterson and organization personnel provided a mass of documentation, even more than I knew before then existed, to the DA. Mr. Peterson knows that I know because he got the DA’s letter. To consider that all this was done from no written orders, programs, evaluations or missions is madness. It should be noted that the recipients of the DA letter were all GO staff. Lyman Spurlock’s testimony at trial in 1984 that he (as ASI staff) and others got rid of the 1100 GO staff criminals is untrue. Ken Hoden was GO staff: in fact he was involved in the program on Hubbard’s orders to bring criminal charges against Julie Christofferson. Heber Jentzsch was a GO PR staffer for many years who was used for the organization’s frontal PR attacks on enemies. He continues to perform the same organization function. David Butterworth is a longtime GO staff member. When I knew him in the organization he was an aide to Mary Sue Hubbard in the Controller’s Office. John Peterson has been connected to
the GO from the 1970’s.3
OFFICE OF THE DISTRICT ATTORNEY
COUNTY OF LOS ANGELES
SPECIAL INVESTIGATIONS DIVISION
18000 CRIMINAL COURTS BUILDING
210 WEST TEMPLE STREET
LOS ANGELES. CALIFORNIA 90012 -3275
IRA REINER, DISTRICT ATTORNEY
April 25, 1986
Rev. Ken Hoden
Rev. Kathleen Gorgon
Rev. Heber Jentzsch
Mr. John Peterson
Mr. David Butterworth
Church of Scientology
1301 N. Catalina
Los Angeles, California 90012
In re S.I.D. CASE NO. C85-0054
In your letters dated May 1 and July 19, 1985, you asked that this office investigate your allegations that:
1. Chief Daryl Gates of the Los Angeles Police Department, Agents Al Lipkin and Al Ristuccia of the Internal Revenue Service, Gerald Armstrong, and Michael Flynn have committed the crime of conspiracy to obstruct justice.
2. Internal Revenue Service Agents Al Lipkin and Al Ristuccia additionally “aided and directed” the commission by Gerald Armstrong of violations of Penal Code Sections 182 (Conspiracy), 134 (Preparing False Evidence), and 653f (Solicitation of the commission of certain crimes).
3. Gerald Armstrong additionally prepared false documentary evidence in violation of Penal Code Section 134; committed extortion in violation of Penal Code Section 518; and solicited commission of the crimes of burglary, receiving stolen property, and forgery, in violation of Penal Code Section 653f.
Rev. Ken Hoden,et al.
April 25, 1986
4. Michael Flynn additionally aided Gerald Armstrong in his violations of Penal Code Section 182, conspiracy, and Penal Code Section 653f, solicitation of burglary, receiving stolen property, and forgery.
Following his receipt of your letters, Steven A. Sowders, Head of the Special Investigations Division, met personally with Rev. Jentzsch and Rev. Hoden to discuss your complaint. I have since reviewed the voluminous materials you submitted in support of your charges, and I have spoken at length on the telephone and in person with church members John Peterson and David Butterworth. In our several conversations, I informed both Mr. Butterworth and Mr. Peterson that in order intelligently to evaluate the Church of Scientology’s allegations, I would need further information. In addition to the documents already
provided, I asked them to provide me with:
(1) A complete description of the events to which the submitted documents relate, including:
(a) the time, date, and place of each event;
(b) the names of all persons present;
(c) the circumstances in which the event occurred;
(d) the name of each speaker and identifying information about him.
(2) A description of the manner in which the recording or other source information was obtained.
(3) A statement from the person who obtained the recording or other data, identifying him, describing the manner in which he obtained it, and setting forth the manner in which he could authenticate any recording and any transcript involved.
(4) An explanation of the relevance of the conversations and other materials cited to the allegations of criminal conduct.
I further requested that they furnish any other evidence they might have in support of the Church of Scientology’s allegations. I particularly requested documentation setting forth the specific facts in support of the allegations recited above. I asked that they provide the date, time, and place of each alleged event, and the name, address, and telephone number of each witness.
Rev. Ken Heden, et al.
April 25, 1986
In response, I received from Mr. John Peterson a letter dated September 27, 1985, which letter I discussed on October 3, 1985, with Mr. Butterworth. Thereafter, following many attempts on my part to schedule a meeting with either Mr. Peterson or Mr. Butterworth or both of them, on December 10, 1985, they came to my office and conferred with Investigator Alan Tomich and me.
In that meeting, I reiterated my need to know the date, time, and place of each alleged event, and the name, address, and telephone number of each witness. I further asked whether the Church of Scientology had any additional evidence in support of its allegations. Messrs. Peterson and Butterworth responded that they had submitted to this office all the evidence that they had.
I explained to them that, in order to decide whether a prosecutable crime had been committed, we had to interview those persons who had observed the events that were alleged to constitute the criminal conduct; and that in order to interview those persons we needed to know who they were and where we could find them. In response, Mr. Peterson repeated the suggestion he made in his letter of September 27, 1985, that we interview Eugene Ingram, who had videotaped certain events which, Mr. Peterson said, were the basis of his allegations. He declined, however, to identify, beyond the name “Joey,” the persons other than Gerald Armstrong who appear on the tapes. It was my understanding that Messrs. Peterson and Butterworth intended to review the matter and that they would subsequently forward the requested witness information to me. Their response was a letter dated December 15, 1985, which contained a witness list comprised of the names of the persons the Church of Scientology has accused plus another I.R.S. agent and two police officers. He furnished no further information.
I responded to Mr. Peterson in a letter dated January 16, 1986, in which I summarized our December 10 meeting. In it, I also asked Mr. Peterson to permit Investigator Tomich to interview Mr. Eugene Ingram (whom Mr. Peterson, as an attorney, apparently represents), and I again requested that Mr. Peterson supply us with the information outlined above.
Rev. Ken Hoden, et al.
April 25, 1986
In response, I received from Mr. Peterson a letter dated March 18, 1986. In it, he denied that he and Mr. Butterworth had intended, after the December 10 meeting, to provide further information, and he declared that we had received all the data he felt we needed.
It appears, then, that no further evidence in support of your allegations is forthcoming; and based on Mr. Peterson’s statement on December 10, 1985, that I had understood and accurately summarized the evidence the Church of Scientology had submitted, it appears that the assertions of fact described below constitute in its entirety the evidence in support of your allegations of criminal conduct.
That Chief Daryl Gates conspired to obstruct justice.
The allegation of “planting a ‘wire tap’ on Michael Flynn” was referred to Chief Gates  by Assistant City Attorney Lewis N. Unger on April 17, 1985.  On April 23, 1985, Chief Gates publicly rebuked Officer Phillip Rodriguez and Investigator Eugene Ingram for video taping Gerald Armstrong. Within hours, Investigators Lipkin and Ristuccia were seen, apparently by Rev. Heber Jentzch,  leaving Parker Center. There has allegedly been no effort to do anything about “Mr. Armstrong’s crimes.” Chief Gates also initiated an investigation “into the police officer and private investigator” (July 19 letter, p. 6).
That Internal Revenue Service Agents Al Lipkin and Al Ristuccia conspired with Gates, Armstrong, and Flynn to obstruct justice and that they “aided and directed” Gerald Armstrong in the commission of violations of Penal Code Sections 182, 134, and 653f.
John G. Peterson declared under penalty of perjury  that “Armstrong showed he was being used by the Internal Revenue Service to gather information.” In support of that declaration, Mr. Peterson included “excerpts from the videotape” which indicated that “GA” mentioned Al Ristuccia and gave Al Lipkin’s telephone number to “J”.
Rev. Ken Hoden, et al.
April 25, 1986
Agents Lipkin and Ristuccia visited Officer Phillip Rodriguez and allegedly attempted to “strong arm” him. Agents Lipkin and Ristuccia stated that, on April 18, 1985, they interviewed Rodriguez, who admitted signing an authorization letter. The agents considered Rodriguez evasive and sought police assistance
in obtaining his cooperation. The agents were seen leaving Parker Center on April 23, 1985. 
Armstrong told ” J” that he had told Lipkin some people might want to talk to him,  and that he had told Lipkin to go after Peterson.
That Gerald Armstrong conspired with Michael Flynn, Daryl Gates, Al Lipkin, and Al Ristuccia to obstruct justice; prepared false documentary evidence; committed extortion; and solicited the commission of the crimes of burglary (Penal Code Section 459), receiving stolen property (Penal Code Section 496), and forgery (Penal Code Section 470), in violation of Penal Code Section 653f.
John Peterson declared that Armstrong conspired with a “church…staff member,” was “used by… the Internal Revenue Service to gather information,” “explained to the conspirators plans for attacking the church…and…Hubbard,” and had a videotaped conversation with “J” which demonstrates his involvement with the government. 
“GA” told “J” to type the completed staff work on the policy and bring it in, that “issues can be created,” but he was “not really saying create incrimination (sic) evidence-but just to write about the speculation.” He also said, “They can never tell where the issue came from.” He wanted the lawsuits to end so that he could get his “global settlement.” 
Armstrong told ” J” about a “good-looker” named Carol. He said “the way to the man’s mind is through his cock” and “that’s definitely the way to get to the top.” He wrote a note which reads in part, “Establish available route for holding the cock of someone in ASI/WDC/etc.”
Rev. Ken Hoden, et al.
April 25, 1986
Armstrong allegedly wrote and handed over to someone on November 9, 1984, a “shopping list” of information which he asked a “church member to purloin.” “GA” told “J” “something should be done so that they can capitalize on getting stuff…into writing and…unstabilizing the whole PI, attorney apparatus.” He asked if “J” could get money to Peterson and told “J” to check the finance records. He said, “if we can get anything on Ingram (or) Peterson (or) finance records (or) other PI’s (or) operation ‘X’…, it’s all vital.”
Armstrong asked for specifics on payments to Ingram, and told “J” he should find what payments went to attorneys.
The handwritten list read in part, “1. Plan on Van Schaick…4. Anything on Hubbard or Don/ 5. Anything on upcoming legal battle… 8. Get me an original of an LRH Ed (current) or other issue type which could be from Hubbard. 8a. Same for WDC. Create one, get it distributed and get an assessment. Any partial that gives UP or ORG.”
He also told ” J” he had given one “fanatic” document “to the Feds” and was giving them another. 
Armstrong told ” J” on November 9, 1984, that he could type “things and duplicate them and make them look exactly the same” and that “we could set up a press and…produce issues…” He thought, “shouldn’t I get some I HELP materials (?)”. He wanted to know “how they’re run off, what the type face is like…, – because we can simply create these;… – I can create documents with relative ease ….”
“J” suggested changing some documents. “GA” responded that “a lot of things can be done”, but he did not propose to “be stuffing things into their comm basket.” He later commented that something could be pasted and photocopied. 
That Michael F Flynn conspired to obstruct justice, and aided Gerald Armstrong in the crimes of conspiracy (Penal Code Section 182) and solicitation of burglary, receiving stolen property, and forgery (Penal Code Section 653f).
Rev. Ken Hoden, et al.
April 25, 1986
In April, 1985, Flynn contacted the United States Attorney in Boston, the Internal Revenue Service, and the Los Angeles Police Department. Flynn’s attorney, Raul Martinez then made allegedly false accusations of wire tapping.
Flynn told the Los Angeles Police Department that “Cooley” had had a video recording and a letter signed by Officer Rodriguez authorizing such a recording. By letter, Attorney Raul Martinez, representing Mr. Flynn, asked the City Attorney to investigate. The City Attorney forwarded the letter to Chief Gates. 
John Peterson declared under penalty of perjury that evidence indicated that Michael Flynn was directing Gerald Armstrong in order to steal documents, plot forgeries, steal legal strategies, implement a plot to seduce and blackmail a Scientologist, and conspire to suborn perjury. 
The “Van Schaick” case, referred to in Armstrong’s “shopping list”, was settled by Attorney Flynn.
* * *
As Mr. Peterson has noted, I have spent a considerable amount of time reviewing and comprehending the materials you have submitted to this office. For the reasons set forth below, I do not find that those materials contain sufficient evidence of the commission of any of the alleged crimes to justify the further investigation of those allegations.
At the outset, I should like to point out the following regarding Mr. Peterson’s letter dated September 27, 1985 and my subsequent communications with him. 1) Mr. Peterson told me that “the interviews took place in Griffith Park during… November, 1984.” He has not otherwise responded to my request for a complete description of the events to which the documents related, including times, dates, places, names, circumstances, and identifying information, (See Request #1, above.)
2) Mr. Peterson told me that “tapes are not in dispute” and that details of the taping should be sought from Gene Ingram.
Rev. Ken Hoden, et al.
April 25, 1986
But when Investigator Tomich sought to follow his advice, Mr. Peterson asserted he was Mr. Ingram’s attorney, and he refused to permit Investigator Tomich to interview him.
In his letter of March 18, 1986, Mr. Peterson refused further to respond to my requests for a description of the manner in which recordings and other source information were obtained; and for a statement from the person who obtained the information (some of it apparently recorded, some of it apparently from other sources) identifying that person and describing the acquisition of the information, documents, or tape, and the manner in which it could be authenticated (proved to be what it purports to be). (See Requests Nos. 2 and 3, above.)
3) He submitted ” data on the background of Jerry Armstrong” and the other documents referred to in the footnotes to this letter, in which he highlighted those portions he considered relevant to the allegations. He has not otherwise explained the relevance of the submitted materials to the allegations of criminal conduct. (See Request #4, above.)
4) He told me that the individuals speaking on the video tapes are “responsible witnesses who can be produced if necessary.” Beyond submitting a list of the names of the persons you have accused and three of their associates, he has not otherwise responded to my requests that he document the specific facts which prove the commission of the crimes alleged, including the particular details about each event and the names, addresses, and telephone numbers of the witnesses (See the paragraph following request #4, above).
* * *
A conspiracy to obstruct justice is an agreement between two or more persons to do an act or omit to do an act, as the result of which justice or the due administration of the laws is obstructed or perverted. To convict a person of that crime the prosecution must prove that he made such an agreement with the specific intent to commit or omit the necessary act and that, while he was a member of the conspiracy, he or a co-conspirator committed an overt act in furtherance of the object within the prosecuting jurisdiction (in our case, Los Angeles County).
Rev. Ken Hoden, et al.
April 25, 1986
Assuming that the factual allegations are true, and that Daryl Gates did receive from Michael Flynn a wiretapping complaint; did rebuke Officer Rodriguez and Investigator Ingram; and did initiate an investigation into possible criminal conduct by Rodriguez and Ingram; that Gerald Armstrong did have the above described conversations with “Joey” about Al Lipkin and Al Ristuccia; that Lipkin and Ristuccia did interview Rodriguez, did consider him evasive, did seek Los Angeles Police Department assistance in obtaining Rodriguez’s cooperation, and did visit Parker Center on April 23, 1985; that Armstrong told “Joey” to type staff work in order to create issues and that he did all the other things alleged (talked to “Joey” about “Carol,” told “Joey” that “they” should destablilize the “PI, attorney apparatus,” told “Joey” to check financial records, wrote and delivered the “shopping list,” and gave documents “to the Feds”) and that Michael Flynn both personally and through his attorney contacted the United States Attorney, the Internal Revenue Service, and the Los Angeles Police Department to complain about the tape recording, the actions of Officer Rodriguez, and other matters; and that he settled the “Van Schaick” case; we are unable to find in any of those allegations any evidence which would support an allegation that Chief Gates, Agent Lipkin, Agent Ristuccia, Mr. Armstrong, or Attorney Flynn agreed with anyone to commit or omit any act which might pervert or obstruct justice or the due administration of the laws.
No factual details (time, place circumstances, names of witnesses, etc.) have been submitted to support many of the conclusions that have been alleged. Thus there is no evidence that “there has been no effort to do anything about” crimes allegedly committed by Mr. Armstrong; that the Internal Revenue Service Agents attempted to “strongarm” Officer Rodriguez; that Mr. Armstrong conspired with a church staff member and explained to the conspirators his plans for attacking the church and Mr. Hubbard; that Mr. Armstrong wrote a “shopping list” of information and asked someone to “purloin” it; or that Michael Flynn made false accusations of wiretapping.
Therefore, the evidence of which we have been apprised of a conspiracy to obstruct justice is insufficient to warrant further investigation by this office.
To convict a person of the crime of preparation of false documentary evidence, the prosecution must prove that he in fact
Rev. Ken Hoden, et al.
April 25, 1986
made the document, that it was false, and that he intended it to be produced as true for a deceitful purpose in a proceeding authorized by law.
Even assuming that it can be proved by competent, admissible evidence that Gerald Armstrong told “Joey” to type staff work and that “issues can be created,” that “they can never tell where the issue came from,” and that he wanted the lawsuits to end so that he could get his “global settlement”; that Armstrong wrote and gave to someone the “shopping list”; that he told “Joey” he wanted to get “stuff…into writing” and to “unstabliz(e)” the “apparatus”; that he said getting records was “vital”; that he said he could type and duplicate things and create documents and set up a press and produce issues, that he wanted to know about a type face, that a lot of things could be done and that something could be pasted and photocopied; none of this, taken alone, constitutes evidence that Mr. Armstrong in fact created a single false document or that he intended that such a document be produced for any purpose in any legal proceeding.
Further, in the documents submitted to us, Mr. Armstrong is quoted as stating that he was not advocating the creation of incriminating evidence and that he did not propose to “be stuffing things into their comm baskets.”
We are aware of no other evidence which might lend criminal significance to the statements of Mr. Armstrong. We can find, therefore, no basis for a further investigation of the allegation that Penal Code Section 134 has been violated.
Extortion (Penal Code Section 518) is the obtaining of property from another with his consent, induced by a wrongful use of force or fear. The fear may be induced by a threat to injure a person or property, or to accuse the victim or a relative of crime, or to impute to any of them a deformity, disgrace, or crime, or to expose a secret affecting any of them. Penal Code Section 524 makes it a felony to attempt to commit extortion.
Assuming that it can be proved that Gerald Armstrong expressed the views alleged regarding the “way to the man’s mind” and that he wrote the note referring to “ASI” and “WDC”, that does not appear to us to be evidence that he or anyone obtained or
Rev. Ken Hoden, et al.
April 25, 1986
attempted to obtain property from anyone by means of any threat. We therefore find no basis for further investigation of the allegation that Gerald Armstrong committed extortion.
The solicitation of another person to commit or join in the commission of burglary, receiving stolen property, or forgery is a felony, the proof of whose commission requires the testimony of two witnesses or of one witness plus evidence of corroborating circumstances. To convict a person of solicitation,
the prosecution must prove that he asked another person to commit a crime with the specific intent that it be committed.
The solicitation of burglary requires a request that one enter a building or other specific place (See Penal Code Section 459) intending to commit larceny or a felony; the solicitation of receiving stolen property requires a request that one receive property that one knows has been stolen; the solicitation of forgery, a request that one, with the intent to defraud, sign without authority another’s name or counterfeit his handwriting, or make any of the false documents specified in Penal Code Section 470, or knowingly utter such falsified document, signature, or handwriting.
Assuming that the allegations are true that Gerald Armstrong told “Joey” to type staff work, that “issues can be created.” that “something should be done so that they can capitalize on getting stuff into writing,” that “if we can get anything on Ingram (or) Peterson (or) finance records…, it’s all vital,” and that “Joey” should find what payments went to attorneys; and, further assuming it to be true that Armstrong gave “Joey” a list which specified “plan” or “anything” ” on” certain matters and stated “get me an original …issue type”; that he told “Joey” he had given and would give documents “to the Feds,” that he could duplicate things and create documents, and that something could be pasted and photocopied; these allegations nonetheless do not constitute evidence that Mr. Armstrong, with the requisite intent, asked anyone to commit the crime of burglary, receiving stolen property, or forgery. We therefore find no basis for further investigation of the allegation that Gerald Armstrong violated Penal Code section 653f.
A person aids and abets the commission of a crime if, with knowledge of the perpetrator’s unlawful purpose and with the intent to encourage or facilitate the commission of the crime, he aids, promotes, or instigates its commission.
Rev. Ken Hoden, et al.
April 25, 1986
The documents submitted to us indicate that Gerald Armstrong gave “Joey” Al Lipkin’s telephone number, that he told ” Joey” that he had told Lipkin some people might want to talk to him, that he told “Joey” that he had told Lipkin to go after Peterson, and that he mentioned Al Ristuccia to “Joey”. The allegations regarding Michael Flynn are described above.
None of those allegations is itself evidence of any unlawful connection between those men and Mr. Armstrong. Further, since we have been presented with no significant evidence of any unlawful conduct on the part of Mr. Armstrong, we do not find that there is sufficient evidence to warrant further investigation
of the allegations that Al Lipkin, Al Ristuccia, or Michael Flynn aided and abetted the commission of any crime.
In addition to the lack of evidence set forth above, it must also be noted that, lacking knowledge of the manner in which the video tape recordings were obtained, we do not know whether their acquisition violated either United States or California law. If it violated federal law, material thus acquired even
if relevant – which it does not appear to be -might be inadmissible in evidence.
For all of the reasons described above, we have concluded that there is no evidence in support of the allegations of criminal conduct on the part of Daryl Gates, Al Lipkin, Al Ristuccia , Gerald Armstrong, and Michael Flynn. Accordingly, we shall take no further action in this matter, and our file is closed.
Very truly yours,
IRA REINER District Attorney
Assistant District Attorney
ROBERT N. JORGENSEN
Deputy District Attorney
c: Chief Daryl Gates, L.A.P.D.
Ron Townsend, I.R.S.
Al Lipkin, I.R.S.
Al Ristuccia, I.R.S.
1. This is set forth in a document entitled “6. Obstruction of Justice”.
2. See Exhibit 7 attached to “6. Obstruction of Justice.”
3. See Exhibit 11 attached to “6. Obstruction of Justice.”
4. See Number 1, above.
5. See document entitled “5. Conspiracy.”
6. See Number 1, above.
7. See document entitled “2. Soliciting… .”
8. See document entitled “1. Soliciting… .”
9. See Number 5, above.
10. See document entitled “4. Preparation of False Documentary Evidence.”
11. See document entitled “3. Extortion.”
12. See document entitled “1. Soliciting… .”
13. See Exhibit 1 page 16.
14. See document entitled “2. Soliciting… .”
15. See Number 1, above.
16. See Number 5, above.
17. See Number 8, above.
18. During our December 10 meeting, Messrs. Peterson and Butterworth identified “J” as “Joey”.
by Ron Curran with Jennifer Pratt 1
The most visible non-traditional “religion” in Los Angeles is Scientology. Everybody sees its buildings; few know what goes on inside them. Critics call it a “Moonie-like” cult; devotees such as John Travolta, Chick Corea Al Jarreau and Karen Black swear it has changed their lives for the better. Opponents say it coerces, menaces and manipulates members and critical outsiders alike; supporters say it has merely defended itself against outside assaults. One thing is certain: Scientology is different.
(L. Ron Hubbard) has now moved on to his next level of… research. This level is beyond anything any of us has ever imagined. It is a level, in fact done in an exterior state, completely exterior from the body. In this level . . . … the body is nothing more than an impediment, an encumbrance, to any further gain … Thus, at 2000 hours, Friday, the 24th of January A.D. [1986,] L. Ron Hubbard discarded the body he had used in this lifetime for 74 years, 10 months and 11 days
… -Hubbard protege “Captain” David Miscavige to 1,800 Scientologists at the Hollywood Palladium January 27, 1986
Hubbard’s “Freedom” Army
THE CHURCH OF SCIENTOLOGY’s headquarters on Berendo Street off Sunset Boulevard is the busy mecca, of L.A.’s substantial Scientology community.
Approach the “blue building” and young children scurry up and offer to sell you copies of Scientology magazines. As you enter the lobby and near the reception desk (which bears a banner urging members to “Get Trained”), staffers wearing the naval-motif uniform of the church are quick to greet you, eager to help current members or recruit new members. A steady stream, of non-staff Scientologists floods the lobby around you. Some are on their way to or from counseling sessions, others have just dropped by to peruse, the latest Scientology “technology” for sale (such as a set of taped L. Ron Hubbard lectures, selling for $1,888). The Church of Scientology is indeed a world of bustling activity — and bristling anxiety.
For when the staffers learn that you are a “wog” (Scientology-speak for non-Scientologist) or, worse yet, a wog journalist their warm smiles change instantly to icy defensiveness. “What do you want?” snaps the receptionist, who only seconds earlier wanted to be your best friend. It doesn’t take long to realize that although church literature stresses that ” ‘Love thy neighbor’ is a basic tenet,” unless a Scientologist’s neighbor is a fellow member of the church, Scientologists can be zealously self protective.
A closer look behind the facade of good will offers further evidence of this. Security guards are everywhere. Sophisticated locks (whose combinations are continually changed) seal off the building’s catacomb of offices, files and counseling cubicles. A wanted poster offering a $500 reward for incriminating information on several church “enemies” hangs near one of the corridors. And though Scientology claims to be , a “major religion” encouraging “all man’s inalienable rights . . .” to think freely, to talk freely to write freely their own opinions and to counter or utter or write upon the opinions of others,” its “mother church” seems more like a fortress than a forum to an outsider, its atmosphere more like a city under siege than a citadel of learning.
But to Church of Scientology officials, this hyperprotectionism is a basic necessity if the mission that L. Ron Hubbard has bestowed upon his flock – nothing less than “building a new civilization” – is to be achieved. That the battle lines had been drawn was clear when three of the Scientology leaders most responsible for fulfilling Hubbard’s vision gathered one recent Sunday morning in the office of Church of Scientology International’s 51-year-old president, the Reverend Heber Jentzsch. Seated in front of a wall-size photo of the Andromeda galaxy were Jentzsch, with an ornate Scientology cross hanging from the cleric’s collar of his powder-blue shirt; the Reverend Ken Hoden, the gaunt, intense, president of L.A.’s Scientology flock; and Earle Cooley, a blustery man of considerable girth who serves as the church’s primary attorney. Three well-groomed young aides sat at the ready should the leaders need documents in support their pending points. And above all (literally and figuratively) was L Ron Hubbard, keeping a watchful eye from a portrait hanging high on the south wall. (Though Hubbard officially “resigned” from church leadership in 1966, disappeared from the public eye altogether in 1981 and died last January, the spectre of “Ron” still hangs heavy over every nook and cranny of the Scientology scene.)
The Reverend Jentzsch offered to explain the reason for the Church of Scientology’s history of controversy. “We are the victim of an international assault led by the psychiatric community, Cointelpro, the Rockefellers and governments throughout the world,” said Jentzsch, a former journalist (LA. Free Press) and actor (Paint Your Wagon) who joined the church in 1967 and became president of Church of Scientology International, its management arm, in 1981. “The Church of Scientology is determined to stand up against this attack on First Amendment rights.”(See Sidebar The Government’s War Against Scientology.”)
“I think it goes much deeper,” added Cooley, who has served as the church’s attorney for 16 months, but who has been a church member for only six months. “What we’re dealing with is really a deep underlying problem. Since the dawn of time, mankind has been interested in unlocking the secrets of the mind, of human nature. All religions are engaged in this pursuit, but Scientology focuses on it more intensely. This places Scientology on a collision course with psychiatry, psychology and the forces of government who are committed to behavior modification, thought control and the manipulation of mankind. We are engaged in a war for the human spirit.”
“So we have to protect our church and our freedom to believe in the religion of our choice,” interjected Hoden. “We have been singled out and been the center of so much attention because we have discovered a workable way for man to achieve total freedom. The freedom of mankind is our goal, and we will defend our right to strive for that freedom. ”
L. Ron Hubbard surveyed the scene from his portrait. He seemed pleased.
L.A.’s Most Conspicuous “Cult”?
Scientology is certainly no stranger to attention, and when the reclusive L. Ron Hubbard died of a stroke at his San Lois Obispo, ranch, the bright light of public scrutiny was again cast upon his progeny. But despite the walls of defense evident at Scientology headquarters, the church has, ironically, done everything in its power to keep its product, if not its parishioners, in the public eye. For in the 35 years since Hubbard founded Scientology, basing it on principles propounded in his 1950 bestseller Dianetics: The Modern Science of Mental Health, it has consciously positioned itself as L.A.’s most conspicuous religion. (Some say “cult.”
Just look around. In a city of outlandish architecture, Scientology’s bright blue Berendo Street headquarters (once Cedars of Lebanon hospital) certainly catches the eye, while its 70-foot-tall green neon “SCIENTOLOGY” marquee dominates the Hollywood strip. Celebrities such as John Travolta, Karen Black and Al Jarreau publicly praise Scientology’s role in their success. Glossy newspaper supplements trumpet Scientology as a “major religion … [like] Protestantism, Buddhism, Judaism, Catholicism.” TV commercials show attractive woman scaling mighty cliffs thanks to Scientology principles. Circus like court trials brought by and against Scientology continually grab prominent coverage in the local and national press. (A $100 million fraud suit against the church is currently being tried in federal court here.) Indeed, in Los Angeles, where a high profile is often more important than high standards, the Church of Scientology has made itself a star.
But despite its pervasive presence, Scientology remains an enigma to most people.
The questions are many: What exactly is Scientology? Is it really a religion or is it a business disguised as a religion? How many members does it have? Who wields the power? Why does it generate so much controversy? Has it, as critics have charged, been taken over by a moneyhungry, manipulative and exploitive coterie who deceive and use the members for their own ends, turning them into fanatics, or is it run by a truly conscientious group? Is Scientology “the only road to total freedom,” as its many supporters insist, or a “greedy, brainwashing money machine and vicious cult engaging in sometimes despicable acts,” as detractors claim? Or is it something in between?
To answer these questions, LA Weekly spent the better part of a year tracing Scientology’s history, studying its doctrines and interviewing former members and other critics of the church. Perhaps most important, the Weekly’s editors approached the press-paranoid leader of Scientology with a deal; “Allow us to examine Scientology from the inside – to interview current church members, tour restricted church buildings and experiment with Scientology technology. In return, we promise to print a fair and accurate presentation of our findings.”
Initially, the offer was met with resistance. During a meeting with these reporters early last year at a restaurant across from Scientology headquarters, Ken Hoden made it clear that, because of previous critical articles in the Weekly, “We don’t want anything to do with your story.” Days later, a prominent advertiser who is a Scientologist threatened to pull his ads if an article critical of the church appeared. But a meeting between senior officials of the church and a Weekly editor eventually took place, the deal was, struck (“We’ve taken so many shots from the press, we have to be careful,” apologized Hoden) and the Weekly was granted unprecedented access to the inner workings of the Church of Scientology. (Not without restrictions, however. Church finances were ruled a taboo subject. We were barred from random interviewing of church members and allowed to tour Scientology grounds only with Hoden as our guide. This defensiveness, seems to stem from a combination of justified apprehension resulting from past press fixation on Scientology’s controversial aspects and a paranoia inherited from L. Ron Hubbard, who considered reporters pawns in the global psychiatric conspiracy. Hoden confirmed that all Scientology officials receive instruction on how to deal with reporters.)
Still, Hoden was surprisingly cooperative, spending nearly 50 hours explaining the structure and philosophy of his church, arranging interviews with current Scientologists and rebutting the allegations of some 30 representative former Scientologists. (There is also an official opposition group called FAIR – Freedom for All in Religion – consisting of about 200 former church members, many of whom still practice “auditing” at independent centers; but who oppose the current church hierarchy as “lying, fraudulent, and “Gestapo-like” to quote one FAIR member.)
Both sides had their axes to grind. Hoden and current church members feel Scientology is a ground-breaking religion unfairly persecuted because of its unique effectiveness. Former members, (vastly outnumbered by current members) claim that abusive church policies have left them emotionally, spiritually and financially bankrupt and feel that attacks on the church are justified.
What did we conclude? That Scientology is neither patently good nor patently evil. Rather, there is a curious dichotomy. The majority of Scientologists attest in being perfectly happy with the church, while former members tend to carry with them intense bitterness and resentment. The church criticizes psychiatry while selling pseudo-Freudian counseling. Scientologists accuse its enemies of launching malicious attacks against the church, but the church itself has a history of harassment and of vengeful (and sometimes illegal) clandestine operations against enemies, real or imagined. But above all, Scientology promises total freedom while undermining that noble theory too often with disturbing practices.
Therapy as Religion
Though the Berendo Street headquarters is the hub of Scientology activity in Los Angeles, the church’s showplace is in Celebrity Center at Franklin and Bronson. A grand gothic chateau built for William Randolph Hearst in the 1920s, this complex of Scientology offices and apartments has retained much of its charm, replete with garden grounds and flowing fountains. The idyllic setting is reinforced as you enter the mansion’s foyer. The walls are lined with original art, and music from a grand piano wafts around you. Indeed, it is a serene setting.
That is, until one is confronted in the main lobby by a large advertising display selling a series of taped lectures by L. Ron Hubbard titled “Radiation and Your Survival.” A brochure quotes Hubbard from a lecture: “There is actually such a point where a person’s beingness can be sufficiently great that he becomes practically indestructible.” The inference? With Scientology training, you will survive radiation poisoning. The cost of the lecture tape? Nearly $300. Welcome to the schizophrenic world that is the Church of Scientology: Enlightenment costs money;
It was at the Celebrity Center that we met 39-year old Ken Hoden for the first of several formal interviews. A former electrical engineer who is the son of a Baptist minister, Hoden says he became attracted to Scientology after reading Dianetics in 1973 and realizing he “was not as effective as [he] wanted to be.” He joined the staff the following year and was named titular head of Scientology’s influential L.A. congregation in 1984.
Henceforth, Hoden would be our personal guide through the church’s complex labyrinth of “freedom” and finance. Wearing a traditional priest collar under a well-tailored gray suit, and sipping coffee from a sterling silver service set in one of the Celebrity Center’s conference rooms, Hoden articulated his confidence in the church. “Scientology is the best way I’ve found to help people improve their lives. If Dianetics and Scientology are applied standardly, it will work 100 percent of the time with every single person everywhere. Compared in anything else, it is the only road to total freedom.
According to Hoden, the Church of Scientology currently boasts more than 40,000 members in Los Angeles and 6 million throughout the world. (Church officials concede the world total includes anyone who has taken any Scientology course over the last five years, though of course many of these people now have no affiliation with the church.) Of the L.A. members, 1,500 are full-time staff, 760 of them living and working out of the Berendo complex, earning $24 per week plus minimal room, board and expenses as members of the “Sea Organization,” an elite, almost monastic segment of the Scientology community.
The remainder of Scientology’s L.A. members are those who take courses at any of the five area churches or numerous franchise missions in the L.A. area. (Scientology claims to operate 600 churches and missions worldwide.) L.A. also serves as home to Scientology’s more upper-level Continental and American Saint Hill churches, as well as to “Advanced Org,” at which progressively more sophisticated (and expensive) services are offered.
The day-to-day management of the church is carried out by Heber Jentzsch as president of the Church of Scientology International. Vicki Azneran is head of one of the church’s two major business subsidiaries, Religious Technology Corporation, (RTC), which controls Hubbard’s trade-marks. David Miscavige runs the second subsidiary, the for-profit Author Services Inc. (ASI), which handles Hubbard’s non Scientology literary works (such a the best-selling sci-fi novel, Battlefield Earth). The “ecclesiastical top” of Scientology is in Flag Service Org in Clearwater, Florida. Mark Yeager is the church’s highest ranking ecclesiastic official, assisted by Ray Mithoff. Earle Cooley coordinates all legal affairs, while Lyman Spurlock is church accountant and Norman Starkey serves as its marketing expert.
According to Hoden, these people assumed power “based on their record of production. If you make things go, You’ll move up in the church. It’s based on statistics … on graphs.” (QUOTAS are imposed on Scientologists to encourage the maximum number of new recruits and the highest level of production. Critics claim these quotas often lead to over aggressive recruiting and fraudulent promises of results that warp the church’s altruistic goals. The church’s “Code of Ethics” lists “mistakes resulting in financial loss” as a ‘misdemeanor’ offense.)
Ken Hoden also confirms that same of the church’s most influential advisors come from an inner circle of aides who served Hubbard in his final years. People like Pat and Anne Broeker (who Hoden says serve as “consultants” ) are rumored to have gained substantial power in the church. Miscavige’s role as announcer of Hubbard’s death and host of his annual New Year’s message seem to confirm this special influence.
Obviously, spiritual “enlightenment,” or higher levels getting ‘Clear’ is no requisite for advancement in the church.
Scientology is based on principles Hubbard first expressed in Dianetics – basically that man can achieve “total freedom” by controlling his “reactive mind.” Hubbard later expanded his theories into the more elaborate scenario of human existence and improvement known as Scientology. Upper-level Scientologists are exposed to Hubbard’s theories that abberrant behavior was implanted in humans 75 million years ago by an evil ruler named Xenu, who froze people and dropped them into 10 volcanos, After killing the humans with hydrogen bombs to combat over population, Xenu collected their spirits as they rose in clusters from the volcanos, and implanted the spirits with evil thoughts. Hubbard dubbed these clusters of brainwashed spirits “body thetans.” These thetans according to Hubbard, literally attach themselves to humans as we are reincarnated over the eons and are responsible for all aberrant behavior we commit. (Hubbard collected these and thousands of additional theories into a series of “red books” that serve as the bible of Scientology “technology.” A series of “green books” detail his daily rules and policies for church management.)
It needs to be noted here that Scientologists are not exposed to the “Xenu” theories until they have moved well up through the Scientology courses. These courses deal with more mundane behavioral patterns and relationships, much as any therapy does, and Scientologists insist they are effective aids to human growth, even without acceptance of any of Hubbard’s “higher” principles or theorems.
Hoden and other Scientologists argue that most other churches, at their core, have creation myths that are as strange to outsiders as Scientology’s – “Do you know what Mormons really believe?” one Scientologist asked. (Hoden was so troubled by the impending discussion of the Xenu material that he asked the Weekly not to print it. The material originally appeared in the L.A. Times.) And at any rate, church supporters argue, getting “clear” of psychological trauma is paramount in church practices, not forcing members to accept unusual theories; and members may hold traditional religious beliefs as well.
To eventually rid oneself of the “negative influence, of the mind,” a person must begin by “confronting” memory images of painful experiences accumulated in past and present lives. These negative mental images me called “engrams” and carry with them a negative electric charge. (Scientologists don’t consider the mind to be the brain, but rather a collection of pictures surrounding the person, accumulated throughout one’s present and previous lives. Scientologists consider a person to be a spirit – called a “thetan” that can be affected by these pictures.)
“Close your eyes and think of an apple,,, offers Hoden as proof that these mental pictures exist. “You can see an image of the apple, right? An engram is also a picture. They’re actual images of negative experiences that exist in your mind, and when you address them in auditing you can eliminate their harmful influence.” In an effort to “destimulate” the negative effect of an engram, Scientologists work their way up a “bridge” of increasingly expensive auditing courses until they eventually “clear” themselves of this “source of aberrant behavior and psychosomatic illness” and achieve ” total Freedom “.
“A Scientologist starts a the bottom of the bridge and works his way up to total freedom one course, at a time,” says Hoden. “He or she spends as much time as they need to achieve the results of each level. They decide when they’re ready to move up.”
The bridge is divided into two sections – “processing” and “training.” The lower levels of the processing bridge, according to Hoden, “deal with the mind’s effect on the body, which would include addressing the subject of drug dependencies and self confidence and the psychosomatic source of illness.”Four courses comprise this lower level: “Purification Rundown,” which promises “freedom from residual effects of drug residues and other toxins” ; “Objectives,” which puts the Scientologist “in present time and able to control and put order in the environment”; “Drug Rundown,” which “releases the Scientologist from the harmful effect of drugs, medicine, or alcohol”; and “ARC Straight wire” which assures that the Scientologist “knows he /she wont get any worse.” (Sixty percent of the recruits, according to officials, have drug problems.)
The next level of processing includes seven auditing steps that lead up to the much sought after “clear” stage. Grade 0 provides the subject with “the ability to communicate freely with anyone on any subject”; Grade 1 provides the “ability to recognize the source of problems and make them vanish”; Grade 2 provides “relief from the the hostilities and sufferings of life”; Grade 3 allows ” freedom from the upsets of the past and ability to face the future”; Grade 4 assures that the Scientologist is “moving out of fixed conditions and gaining abilities to do new things”; “New Era Dianetics” proves that the subject is becoming a “clear or well and happy human being”; and “clear” is the stage where the Scientologist is “a being who no longer has his own reactive mind.”
After the Scientologist has achieved the state of “Clear”, he enters the final stages of processing called the Operating Thetan levels. The OTs “address the person as a spirit, improving the abilities of the spirit with the purpose of achieving total spiritual freedom”, according to Hoden. The ability gained in OT courses I through 7 is listed as “confidential” in church literature, but includes such secret teachings of L Ron Hubbard as his “Xenu” theory of man’s beginnings. OT 8 is due out this year, while courses 9 through 15 are scheduled for release in coming years.
“Auditing is a very specific process,” says Hoden, who himself has reached the level of OT 3, though, like many Scientologists encountered, he consumes vast amounts of coffee, adding to a general air of anxiety in the church (chain-smoking seems; de rigueur). “It is a scientific, spiritual technology that must be practiced in a specific manner in be effective in helping people achieve spiritual freedom. If it is carried out uniformly, it will not fail.” The person responsible for conducting auditing sessions at the various levels a called an “auditor” (or “minister”.) Auditors are trained on the “training” side of the bridge in a series of courses titled “Class 0 Auditor” through “Class 12 Auditor” (though an auditor cannot audit anyone, in a processing course higher than he himself has achieved). When conducting an auditing session, the auditor attaches subjects to an instrument called an “electropsychometer” or E-meter) that consists of two small metal cylinders connected by alligator clips to an elementary control board. As the Scientologist holds a cylinder in each hand, a harmless amount of electricity (about one-half volt) is pumped through his body. The auditor then asks questions regarding possible areas of emotional distress.
At the beginning of most anditing sessions (no matter what level the course), the auditor asks the same three questions of the subject Scientologist who is hooked up to the meter: “Do you have an ‘ARC’ break? (Meaning, “Are you upset about anything?”); “Do you have any present time problems?”); and “Has a withold been missed?” (Meaning, “is there any transgression you have witheld from someone?”)
If there are no specific problems, the auditor asks a series of literally hundreds of predetermined questions specific in that auditing level. For instance, in the lower level of “ARC Straightwire”, the auditor asks such questions as, “Can you remember a time when you were happy?~ Or when you had just finished constructing something? Life was cheerful? Somebody had given you something? You ate something good? You had a friend?” After the subject answers each question, the auditor probes him for “sense memory” details ( e.g. sight, smell, touch, color, emotion) that accompany the memory.
As questions are answered the auditor monitors a needle gauge to see if it registers any changes in “mental” electrical charge. Experiences in the past that contain pain or emotional trauma are believed to cause a change in a person’s electrical charge. The auditing minister then notes the E-meter response, in the person’s “PC (preclear) folder.” Case supervisors later examine these notes to assure that the problems will be addressed at later sessions or in more advanced courses. For each type of problem, there is a series of questions intended to neutralize the charge. (The meter will also indicate when the “mental charge” is removed from the traumatic experience, meaning that the engram in question has been adequately dealt with. An engram that is extremely charged is referred to as a “rock slam.”)
“The E-meter and auditing are really quite extraordinary,” says Tony Hitchman, a former South African journalist who now conducts auditing sessions. “They serve as a wonderfully specific guide to what’s troubling a person. Through auditing and the E=meter we cane help that person remove engrams and better his/her life.”
Our brief experience on the E-meter proved inconclusive. Though the needle registered in varying degrees when we were questioned about general emotional topics such as our families and love lives, it seemed little more than an instrument reacting to physical responses (rather than “spiritual pictures”), much like a lie detector.
Regardless of whether E-meter auditing is a scientific probe or purely a placebo, it is certainly popular among Scientologists being shown through the blue building by Hoden, we witnessed literally hundreds of church members auditing and being audited in the deep recesses of the former hospital. Though we were not allowed to question Scientologists as they were auditing, many church members interviewed after the session expressed unqualified raves for the process that is the backbone of Scientology study.
“Scientology auditing has added a lot of meaning to my life,” said Barbara Clarke, a 60-year-old former chemist and teacher who has studied Scientology for 18 years and served as a field auditor since 1975. “I got involved because I knew there had to be more to life than just getting up, working and going back to bed. From the very first lecture I attended, Scientology made so much sense I know auditing works, and I’ve never felt my doubts.”
Phil Gilbert, a 31- year-old plumbing company executive who began Scientology auditing after reading Dianetics in 1974, typically shared Clarke’s enthusiasm. “Scientology is the only logical explanation of how the mind works that I’ve come across,” he says. “Auditing has been invaluable. I studied piano as a kid but had forgotten how to play. My mind had just blocked out that talent. But after just a few auditing sessions I suddenly remembered, and I’ve been playing and writing ever since. It’s really something.”
Jonathan Hawks credited a chance Scientology encounter in 1968 with increasing his communicative abilities. “I was having a lot of problems stemming from my frustrated theater career,” said 52-year-old Hawk, who now works as a computer operator. “One day while my analyst was hospitalized, I happened to see an advertisement for a Scientology lecture and I thought, ‘Why not try it?’ As soon as I started auditing, I turned my problems around. I could finally communicate with people.
Even many former members who claim to have been embittered by their experience with the church … say they believe that they benefited from Scientology auditing. “I achieved some benefits.” remarked Jon Zegel who spent 10 years with the church before leaving to help establish an independent auditing group. “I’m more emotionally stable, and there seem improvements in my life.”
Countering this are, of course, the inevitable failures. While no statistics exist about whether auditing has been perceived by a majority of the participants as beneficial . . the church argues that there are more current members undergoing auditing than ex-members – certainly there is at least a vocal minority professing problems from the process.
More objective analysis of auditing is hard to come by (the Periodical Index lists no scientific studies in medical or psychological journals), and independent psychologists and psychiatric professionals are reluctant to be quoted by name, noting that one colleague who did criticize auditing is being sued by the church, which has built a reputation for litigiousness.
However, one L.A therapist who worked with a former Scientologist said: “A lot of the practices these guys use are very close to the truth, but I suspect it’s very dangerous for the average person because there’s a tendency toward coercive rigid misuse of otherwise good material. In this patient’s case, it was hard for him, to have an individualistic view. He saw everything in terms of ‘Scientology’ world view and jargon. It’s clearly not for everybody.”
Still another L.A. therapist who worked with a former Scientologist noted: “The process of simply having these auditing question, put to him didn’t help him. He had serious self-esteem problems and he needed aggressiveness training and emotional release so he could learn to express himself. The auditing was too passive for that. I suspect it doesn’t work on many people for that reason, and also became it doesn’t truly give them a basis to understand the underlying causes of their behavior.”
“Nancy,” 42, is one such example. She claims she left the church after eight years because “I wasn’t getting out of it what I thought I would. I had a drinking problem and my self-esteem was, low because of it. I’d heard from a friend that auditing was supposed to cure people of alcoholism. But I took courses for seven years, spending $12 000, then left. I went back for another year, a year later to give it a second chance and spent another $1,000, but I still wasn’t making progress. I was still drinking. Then I enrolled in Alcoholics Anonymous and I haven’t had a drink since September 1984 . Auditing just didn’t work for me.”
Yet another former member, “Betty” (who also requested anonymity), says she spent come than $80,000 during her 14 years of auditing. “They kept telling me just a little more auditing would solve my problems”, she says. “But all it did was make them $80,000 and make me feel worse about myself.”
Knowledgeable observers told the Weekly that they believe Scientology does have some positive effect, much of it coming from three sources a) that Scientology tends to attract many young drug-damaged, truly “lost” personalities who benefit from the structure as they would from any rigid-rule behavior systems such as prevail in many drug treatment programs b) that many of Scientology’s subjects have so little intercourse with themselves, self-reflection that even what they can pick up from the auditing process is itself the beginnings of self-awareness and therefore changed behavior; and c) the “placebo” effect — the fact that Scientologists believe themselves to be part of a process that helps them, and so they move through life with more confidence and fewer anxieties, creating their own more positive realities.
So what’s the problem? If even many church critics are satisfied that the auditing process has improved their Iives, why has Scientology been the center of so much controversy”?
Payment Before Enlightenment
“Total Freedom” through Scientology does not come, cheap. With registered trademarks affixed to every Scientology term and title, Hubbard’s religion some times more closely resembles K-mart than, say, Catholicism. Scientology’s policy of payment before enlightenment is perhaps the leading cause of questions concerning the church ‘s credibility as an altruistic institution. Although Ken Hoden initially dragged his feet in supplying a promised list of auditing fees because, as he put it, “when you walk into a Baptist church or any other church, [ finances are] just not something you commonly discuss,” He eventually provided a breakdown of prices for Scientology courses and materials.
Scientology’s “Donation Rate Card” shows that “public” Scientologists — who comprise the vast majority of church members — can spend more than $1,000 per hour of auditing (purchases in 12 1/2-hour blocks called ” intensives”) and between $50,000 and $100,000 (and more) to complete the dozens of Scientology courses.
(According to Hoden staff members of Scientology’s elite group whose members receive only $24 per week allowance plus expenses — receive auditing free of charge, and other members receive substantial discounts Hoden also stressed that “people can get Dianetics from a bookstore or library and audit themselves at home for free (up to the “Clear” level), or get their processing free as they study to be an auditing minister. However, the “Donation Rate Card” does not spell out this option, advising potential members to “contact the Registrar at the nearest Church of Scientology for individual consultation and estimate. ‘It also, mentions only ” Scientology churches, missions and field auditors” as outlets for processing services.
According to Hoden more than 90 percent of Scientologists enter the bridge by reading Dianetics and taking any of several “mini-courses” (such, as ‘Anatomy of the Human Mind’) to see if they find Scientology helpful.
The Scientology rate card lists the cost of the lowest-level course on the actual bridge (“Purification Rundown”) at $2,000 total, while intensives for the next nine courses up through “New Era Dianetics” cost $4,3330. A “clear” level intensive goes for $1,690 while OT intensives range from $1,000 to $8,000. There are literally hundreds of periphery Hubbard teachings that range in price from $5 to $16,500. “Recommended” E-meters are also for sale, ranging from, $873 for the Mark V to $3,493 for the Black Mark VI.
Many Scientologists who work their way up to the top of the bridge eventually spend more because the church historically continues to add “revised” auditing levels, each requiring additional investment before “total freedom” can be achieved.
The recent Scientology brochure announcing the addition of a revised OT 5 level provides a good example. The brochure announces a pending “miracle” auditing technology that promises to answer your “wildest dreams” questions about “Ron’s breakthrough into the ‘SECOND WALL OF FIRE.'” The “donation” required is $7,600 per intensive (Through upwards of five intensives my be needed.)
Ken Hoden is quick to justify Scientology’s rates. “There isn’t a legitimate emphasis in the world that doesn’t put an emphasis on money,” says Hoden “People know how much our courses cost when they sign up. Besides, you can’t put a price on total spiritual freedom.” Hoden added that members who question the adding of new study levels “are people who have given up the quest for total freedom. If you talk to people in the church who are up to that point, they’re waiting on pins and needles for the new levels to come out. People in the church have no complaints. Besides, without money the church could not expand and bring further hope to mankind.”
Current church members also insist that Scientology is worth any price. “I’ve found it’s a great bargain because I’m more in control and therefore able to fulfill my potential and make more money,” volunteered Carol Worthy Corns, a 43-year-old professional composer who joined Scientology 15 years ago while still in college. “I’d undergone two years of psychotherapy after spending the 60’s looking for life’s answers in assorted philosophies and the drug culture. But in my first three auditing sessions, I handled a major problem that would have taken me many years and 20 times more money to solve through psychotherapy. Scientology has saved my life at least 10 times. How can you put a monetary value on that kind of help?”
But Scientology’s high prices have caused many members to question the church’s priorities. One such is “Steve” ( who spoke on condition that his real name not be used.) Steve was introduced to Scientology 13 years ago while still in college. He served as a member of Hubbard’s staff for eight years, bringing home the then standard salary of $17 for each of what he describes as “our average six-day, 80 hour work weeks.) Steve claims he spent more than $30,000 on Scientology before joining staff ( borrowing money from his parents and working door-to-door job on his one day off) before beginning to doubt Scientology’s motives.
“When the prices went really high, I started to feel that if Hubbard really thought Scientology worked, it would make it easier, not harder, for people to experience it,” says Steve. “Total Freedom was available, yet we couldn’t afford it.”
Hana Eltringham Whitfield – ex-D/Commodore for L Ron Hubbard and Jerry Whitfield
Caption: Critical Former church members Hana and Jerry Whitfield
Jerry Whitfield, who is on the steering committee of FAIR, is another former member who became disillusioned by the church’s financial priorities. Whitfield spent eight years, and $20,000 in the church before he realized that “though the technology was helpful, the organization was not set up to let people make full use of it. It was arranged to maximize its profit margin.”
A History of Controversy
As anyone who follows the news knows, Scientology has been involved in a series of controversial cases, many of them involving vengeful church actions against its critics. (More on this below.) Although the church always paints itself as the victim, its critics suggest that Scientology hasn’t been persecuted from the outside, but rather is the victim of warped and misplaced priorities inside the church. The critics, – and there are more than the church is willing to admit – assert that the fundamental problems afflicting the church are a direct reflection of the complex personality of the man who sired it, and of the power structure and money-bent of the church itself, as divorced from Scientology Practices.
Step inside the giant brass doors of Scientology headquarters’ Fountain Avenue entrance and you enter a shrine to the legend of Hubbard. Hundreds of proclamations honoring Hubbard from such luminaries as former L.A. Councilwoman Peggy Stevenson, Massachusetts Governor Michael Dukakis and Colorado Senator Gary Hart line the walls. Several portraits and busts of Hubbard are prominently displayed. Collections of his detective, science fiction and Scientology writings are meticulously preserved. Unfortunately for Scientology, it has often proven difficult for church members to separate manufactured legend from reality in Hubbard’s life. Official church biographies have at various times described Hubbard as a nuclear physicist, an earner of a Ph.D., and a Navy hero who was crippled, blinded and twice declared dead in battle (but who completely healed his wound with Dianetics techniques).
In fact, Navy records show that Hubbard’s war record my have been exaggerated and that he was hospitalized due to minor ulcers and a fall from a ladder. In addition, evidence suggests that Hubbard obtained his Ph.D. from a diploma mill known as Sequoia University after failing class and dropping out of George Washington University.
(Hoden claims Hubbard left school because because “they couldn’t teach him what the human spirit was, so he went elsewhere.)”
Hana Eltringham Whitfield has unique insight into the man who was; Lafayette Ron Hubbard. Before leaving the church in 1983, Eltringham Whitfield served as a senior Scientology official for 18 years (after signing the requisite “billion-year contract” with the church), including a stint a a personal aide aboard Hubbard’s 320-foot yacht, the Apollo. (“Commodore” Hubbard established a naval motif throughout his church, requiring staff members to wear sailorlike uniforms and giving them various “officer” titles.) Says Eltringham Whitfield of Hubbard: “He was a very shrewd man, but he always wanted to be something more than he really was. He wanted to be a nuclear physicist, a war hero. He was an insecure man in that respect, so he felt the need in romanticize his past.”
Ken Hoden dismisses Hubbard’s biographical inconsistencies as “errors by former public relations people who have since been removed.” But whatever the cause of the confusion, there is no question that Hubbard was ambitious. After a prolific and successful career writing pulp science fiction and detective stores, Hubbard published a thin volume of his Dianetics theories in 1948. He expanded those rudimentary principles in 1949 and published his full Dianetics book in May 1950. The book was a run away best seller and a favorite among artists, writers and other intelligentsia of the day. (Dianetics has sold more than 7 million copies. Scientology officials put total sales of Hubbard’s 589 published fiction and non-fiction stories and books at more than 50 million.)
Hubbard took the profits from Dianetics and created the Hubbard Dianetic Research Foundation in Elizabeth, New Jersey. When this initial venture proved unsuccessful, Hubbard moved the foundation first to Kansas, then to Phoenix, where he formed the Hubbard Academy of Scientology in 1954. Later that year, a small group of Hubbard’s followers officially established the Founding Church of Scientology, with headquarters in Washington, D.C., and field offices in L.A. Hubbard was named church director and “founder of the Scientology religion.” Less than five years after reportedly telling a 1949 convention of sci-fi writers that “if a man really wanted to make a million dollars, the best way would be to start his own religion,” Hubbard had taken his own advice. (Although Scientology officials have in the past confirmed the quote but claimed Hubbard was only kidding, others dispute the quote entirely, attributing it instead to George Orwell.)
By then, Hubbard’s philosophy had already come under serious attack. His claim that with Dianetics auditing IQs could be greatly increased, that “arthritis vanishes, myopia gets better, heart illness decreases, asthma disappears, stomachs function properly and the whole catalogue of ills goes away and stays away,” had led to a 1951 New Jersey investigation for fraudulent medical practices. Similar claims attracted the attention of federal officials shortly after Scientology was founded, and ensuing years would see Hubbard’s religion investigated by the governments of Australia, Canada, England, France, New Zealand and South Africa (as well as the U.S.).
Scientology was banned outright in much of Australia from 1965 through 1973. From 1968 through 1980, England barred foreign nationals, including Hubbard, from entering the country to practice Scientology. (Hoden claim that the church received apologies from government officials when the bans were lifted.) French officials in 1978 convicted Hubbard and two Scientology associates ( in absentia ) of fraudulent medical practices and fined them $7,000 before higher courts overturned these decisions. Such claims have also been the basis of several lawsuits, including one last year in which a Portland woman was awarded $39 million in damages before the judge, perhaps influenced by pressure from thousands of Scientologists protesting the decision, overturned his ruling on the grounds that it violated Scientology’s right to freedom of religion.
Ken Hoden confirms that Hubbard’s early claims are still taken as gospel by Scientologists. “We’re not saying that if you lose a leg we can grow another for you,” says Hoden (who stresses that the church “encourages members to see a doctor if they are ill. “Through auditing, the psychosomatic causes of illness can be addressed. Once these are handled, the body is capable of healing itself.” Hoden did, however, reassert that church members – including himself – regularly increase their IQs while studying Scientology.
Another major assertion among Scientologists is that the investigations are not only unwarranted but are part of a global conspiracy to destroy the church, orchestrated in part by the psychiatric establishment. (Hubbard often compared psychiatrists to Hitler, and Genghis Khan.)
“Psychiatry is a self perpetuating fraud that realizes we can do a better job of helping people without shock treatment and pills”, says Hoden, who added that Scientology is now practiced without restriction throughout the world. “The governments who have harassed us are threatened by our investigations into their excesses.”
Scientology’s claims of government harassment may, in fact, have some validity. The church is a leading expert in the intricacies of the Freedom of Information Act and publishes Freedom Magazine of tough investigative reporting that has broken several stories embarrassing to its primary government targets: the FBI, CIA and IRS. (For full conspiracy details, see sidebar.)
Scientology and the IRS have long been particularly bitter opponents. Despite the controversy surrounding Hubbard, the popularity of his philosophy – and Scientology’s bank accounts – grew quickly throughout the ’50s. Money came so fast to Scientology that Hubbard, the pulp author who reportedly said he was tired of writing for a penny a word in 1949 – though Scientology officials deny this attribution – was able just 10 years later to buy a 30-room mansion and 57 acre estate I in England, originally built for the Maharajah of Jaipur.
Soon after, the IRS began examining the relationship between Hubbard and his church. The years of investigations led to a 1984 U.S. Tax Court ruling that the Church of Scientology of California (CSC) had “made a business of selling religion” It had blocked the IRS from collecting taxes by storing large amounts of cash in a trust fund controlled by high-ranking church leaders. “Money that was supposed to be used strictly for church activities was going to individuals, ” says IRS spokesman Rob Giannangeli. “That misuse, combined with other violations of public policies on the part of Scientology officials, led us to determine that the Church of Scientology was not acting as a responsible exempt organization. ”
The 1984 denial of tax exempt status led the IRS to bill Scientology for $1.4 million in back taxes for the target period Of 1970-72, with bills for other years to be forthcoming upon investigation. Scientology has appealed the decision to the U.S. Ninth Circuit Court of Appeals and continues doing business as usual. Ken Hoden insists this policy is fair because we are confident [the court] will overrule the IRS,” though he added that a negative court ruling will “affect the church throughout the country.” But Giannangeli, while confirming that Scientology is technically within the law in still encouraging such donations, questions the practice’s propriety.
“If the courts ultimately uphold the IRS decision, Scientologists will have to pay back taxes on any contributions totaling more than $1,000″ says Gimmangeli. so if a Scientologist wrote off contributions of $50,000 a year, he’s going to have a pretty hefty tax bill.”
Allegations that Hubbard’s immense wealth (estimated at up to $600 million, though Hoden would only put the figure “in the millions, and we’re getting all of it”) was due in large part to funds being illegally transferred from his church’s accounts have dogged Scientology since its inception. Cash flow, certainly, has rarely been a problem for the church. Scientology bought its Berendo headquarters for $5.5 million in cash in 1976 and continues to make major real estate purchases. Former Scientology employees who once held sensitive financial positions within die church have testified that various subsidiaries were used to transfer church funds illegally to Hubbard’s European bank accounts.
But to many Scientology critics, the controversy over financial misappropriation is a secondary concern. To these critics, the true danger of Scientology is the system of “control” used by church officials to keep disgruntled members from reclaiming their money and departing if they feel their funds are being mishandled. Ken Hoden claims that members have that freedom: “If someone says they don’t like the way we do things, we say, “Fine. Leave if you want.”
But critics assert that Scientology policy and practices are designed to manipulate members to stay (and keep their money) in the church, or, if members do leave, to intimidate the “squirrels” (Scientology speak for former members) into not criticizing Scientology.
Juliann Savage is a clinical social worker in the Cult Clinic, six years a non-sectarian affiliate of Jewish Firmly Services operating out of the United Way building in Van Nuys. Savage has treated more than 70 victims of mind control, from Hare Krishnas to Moonies, in her two and a half years on staff. She insists the 10 former Scientologists with whom she has worked, have been her most difficult assignments.
“These people have given their entire lives over to Scientology in exchange for the promise of ‘total freedom,’ ” says Savage. “But what they really get is the exact opposite. Scientology is a textbook example of systematic mind control and totalism.”
To support her assertion that brainwashing techniques are an inextricable part of Scientology practice – especially with staff members — Savage refers to one of the world’s definitive works on mind control, the much heralded “Chapter 22 Ideological Totalism” of Dr. Robert Jay Lifton’s book entitled Thought Reform the Psychology of Totalism. Here, Lifton describes how such psychological tactics as ” milieu control,” “mandatory confession” and “language loading” are used to control masses of people (in his specific case, the Communist Chinese). It is Savage’s contention that Lifton’s theories, although they can be applied to many subcultures, are especially applicable to Scientology.
“What we have with Scientology is a subculture that insists on absolute control of every aspect of a person’s life,” says Savage as she sips herbal tea in her small Van Nuys office. “Adults are greatly discouraged from having relationships with non-Scientologists. They are worked so many hours per week, either doing staff activities or auditing sessions, that they have no time for outside activities. The church encourages an all or nothing, us versus them, everything-outside-the-church-is-bad-everything-inside-is-good idealogy that can be very harmful. And if you question this, you’re Labeled a ‘supressive person’ who doesn’t have the ability to understand. The insular inbreeding in Scientology is incredible.”
(Statistics and statements provided by Scientology seem to lend a least partial credence to Savage’s claim. Church demographics, indicate that nearly half of all Scientologists have family in the church, while Ken Hoden confirms that many Scientology children attend private schools run by Scientologists – such as Delphi in Monrovia – or the Apollo Training Academy, a church-operated afternoon “day-care center” that operates after regular schools let out. “But the church hopes to run its own schools soon,” added Hoden.)
One Scientology practice that critics single out as a form of control is the church’s “ethics” system. Scientologists are subject to a highly detailed code of ethics drafted by L. Ron Hubbard and governed by “ethics officers” and “justice officers.” This ethics code is divided into four categories of “offenses” against the church: “Errors … .. Misdemeanors,” “Crimes” and “High Crimes.”
Errors are defined as “minor, unintentional goofs” in auditing or administration. Misdemeanors include such offences as “mistakes resulting in financial or traffic loss,” “continued association with squirrels,” and “refusing an E-meter check.” Crimes “cover offenses normally considered criminal,” such as “placing Scientology or Scientologists at risk,” “organizing or allowing a gathering or meeting of staff members or field auditors or the public to protest the order of a senior,” and “impersonating Scientologist or staff member when not authorized.” High crimes consist of “publicly departing Scientology” or committing such “supressive acts” as “public statements against Scientology or Scientologists,” “bringing civil suit against any Scientology organization,” and “giving anti-Scientology advice to the press.”
Errors are dealt with by “corrections, reprimand or warnings.” Misdemeanors are “subject to direct punishment,” which for a staff member is “assignment of a personal condition of Emergency for up to three weeks” and up in three months for an executive staff member. If assigned this “condition of Emergency,” a staffer has his or her pay reduced by one-third. If the staffer appeals his or her case to a “Committee of Evidence” and loses, his or her penalty may be increased to even, stiffer penalties, including minor demotion. Punishments for “crimes” against the church must be dictated by a Committee of Evidence (made up of ministers) and can include demotion or “even dismissal or arrest [for theft].” High crimes include cancellation of all auditing achievements and expulsion by the church’s ultimate ethical authority, the “justice minister.”
According to Hoden, “The purpose of ethics is to keep a person living in such a way that auditing can keep them living an ethical life.” But former members claim that its motives are less noble.
Jerry Whitfield claims to have served on “several” Committees of Evidence. They were just a reason to get people out of the church,” says Whitfield. “We were instructed by seniors on how to decide cases. If the higher-ups didn’t like a certain member they were history.”
Another Scientology policy Savage singles out as a control mechanism is known as “Disconnection,” which takes, two forms, Savage argues. First, current church members are often encouraged by auditing ministers to “disconnect” themselves from “suppressive” relatives. Ken Hoden uses an example from The Color Purple to illustrate what he feels is the positive result of such disconnection.
“In The Color Purple, Celie was connected to a suppressive husband,” explains Hoden. “He used to beat her around and treat her mean. But let’s say one day she walked up to the Church of Scientology. We’d tell her, ‘Gelie, you look like you’ve got a problem with your husband. We want you to sit down and communicate with your husband and try to work it out.’ But if that didn’t work, we’d say, ‘If you don’t disconnect from this person, then your life is going to be miserable forever.’ Disconnection is just common sense in some cases. It is left up to the individual, though.”
Critics claim, however, that Scientology encourages far more than disconnection from harmful persons, which every psychologist urges. Instead critics say, Scientologists are often urged to sever ties with loved ones whose only “problem” is their distaste for Scientology – a practice that reinforces the insular, inbred world of “milieu control” criticized by Savage.
“Robert” is a former member who agrees with Savage. Last year, after 16 years, with the church, the 37-year-old departed. He recalls that shortly after he joined the church, his parents sent him news clippings critical of Scientology. Robert claims his “ethics officer” (who determines if Scientologists stay within the ethical guidelines of the church) told him he had to disconnect from his parents if he was to achieve total freedom.
“Here I was, a 20-year-old kid looking for a little meaning in my life,” recalls Robert, “and all of a sudden there’s this ethics officer telling me I should never talk to my parents again. In retrospect, I can see that my folks were trying to look out for me. But I did what the ethics officer said. I wrote my parents a letter telling them I never wanted to hear or speak to them again.”
A second form of disconnection requires church members to sever all ties with Scientologists who leave the church, no matter how close the friendships. This on pain of being labeled “suppressive” themselves. This practice has proved effective in keeping people in the church, since no one wants to lose all their friends. And “disconnection” from the church has been found to be debilitatingly traumatic to a number of people who have left the fold.
“Betty” is one such person. After spending more than 14 years in and $80,000 on the church, she decided “it was just not economically feasible for me to stay.” Interviewing her, her pain was still apparent, as it was with other former members who agreed to talk to us.
“The entire year after I left was the worst one I ever went through,” Betty said. “I had lived for many of my Scientology years with the same, seven people in a small apartment. We did everything together. We loved each other. But when I said I had to leave, none of these people who I’d known and loved for years would even say hello to me. It was absolutely traumatic.
Robert was also disconnected from longtime friends. “I realized a couple years ago that Hubbard was in this whole thing just for the money and power,” he says, adding that he spent $50,000 to reach the highest level of Scientology study (OT-7), only to become disillusioned when the church added “revised” levels. “So I decided to leave. When I officially left the church I tried talking to the friends I had been closest to for years, tried to tell them that I now thought Scientology was a fraud. But they didn’t want to hear it. They started ignoring me. When I sent them Christmas cards this year, I got back several disconnection letters.”
One letter, from a longtime girlfriend, reads: “This is a disconnection letter. I do not wish any [thrice underlined] type of communication from you. You have chosen to be a squirrel and I am a Scientologist. It makes it very black and white. Do not have any comm to [Scientology speak for “communication with”] me until you have handled your scene and am back in good standing with the church and moving on the bridge (in Scientology, not your squirrel group).” The letter noted that copies had been sent to the church’s “International Justice Chief” and the “Advanced Organization Master at Arms”.
“[Sending copies to ethics and justice] is to let her masters know that she is a good little robot who is still properly brainwashed,” says Robert. “If she’d bothered to talk to me, she’d have found out that I’m not in any ‘squirrel group’ [a church term for groups of former members who I practice Scientology without church sanctions] She’s probably scared shitless that her cult-member peers saw her get a card from a suppressive and will file a ‘knowledge report’ on her. [A church member is required to file such a report if he or she witnesses a fellow member commit such an anti-Scientology crime.] But I don’t really blame her – she’s just another victim of Scientology’s brainwashing techniques.”
The church’s answer to this is that the only individuals considered to be “suppressive” when they leave the church are, in Hoden’ s words, “those who are expelled for doing something in violation of the ethical codes and practices of the Church of Scientology. In that case, people from the church should not associate with that person. But if a church member still wants to associate with the expelled person, fine. But he has to leave the church.” Hoden denied that this is an intimidating practice, though obviously members find it just that.
In arguing for the “thought control” vision of Scientology, Savage and other critics point to other church practices such as “Rehabilitation Project Force” (RPF) duty, “Training Routines” and “security checks,” RPF duty, they say, is forced labor intended to help the church minimize costs, and is used frequently as punishment for church members believed to be out of line. Hoden first explained the RPF as little more than “a work force where church members are assigned so they can get five hours of exercise a day while accomplishing something constructive, like repairing Scientology buildings and mowing lawns.” He later conceded that any senior Sea Org member can put any underling on the RPF as punishment for not working up to his ability. “I was RPFed for nine months in 1982,” says Hoden. “I had been slacking off in some of my administrative duties. But I liked the RPF. I could have gotten off earlier, but I asked to stay on.”
“Who wants to scrub floors or cart trash for a year?” says one former church staffer. “The idea is to make you think twice before doing or saying anything that church officials will RPF you for,”
Critics claim also that “training routines” (TRs) are used in control members in a similar fashion. Former Scientologists have testified that in TRs, Scientologists are often made to sit absolutely stiff without moving at all, not even blinking. They claim this drill is often carried out for hours at a time, every day, for weeks.
While being escorted by Hoden through the deep recesses of the basement of the Scientology “mother church,” we inadvertently stumbled upon a TR session. From a distance, we heard a man shouting. When questioned about the source of the scream, Hoden led us to a small room. As we approached, it became clear that the man was shouting “Thank you, thank you” as loudly as he could to a Scientology official. The unusual nature of the scene was not lost on Hoden, who seemed momentarily flustered. “This, is a TR,” Hoden then explained. “Did you ever know someone who was so timid that you could barely hear him speak? This man is being taught to express himself more loudly and clearly. ”
“Security checks” are yet another form of control, disgruntled former members allege. These “sec-checks” are performed while a member is hooked up to an E-meter. One sec-check form submitted as evidence in a recent trial included the following questions:
“Have you ever had any unkind thoughts about LRH [L. Ron Hubbard]?” “Have you ever had anything to do with pornography?” “Have you ever assisted in an abortion?” “Have you ever practiced sodomy?” “Have you ever been a news paper reporter?” “Do you know of any plans to injure a Scientology organization?” “How do you feel about being controlled?” (Hoden confirmed all but the “reporter” and “control” questions, while adding that numbers me asked only if they had “done” anything against Hubbard.)
To outsiders this is obviously a significant invasion of a person’s privacy, but Ken Hoden and many current and former church members insist that the ends justify the means in these practices. “I’ve been in Scientology for 10 years, and I’m here on my own free will,” says Kimberly Nesbig, a non-staff Scientologist who simply takes auditing courses. “These claims [of brainwashing] are ridiculous. Scientology has saved my life. I was on drugs and on my way out. Scientology has given me the technology to do what I want in life.”
“Claims that we’re insulated, isolated and out of touch with the world is just pure propaganda, ” adds Tim Skog, 34, who has served as a Sea Org Public Affairs staff, since 1983. “I read the papers, I listen to the radio, I go outside. More than any other religion, we don’t lead monastic lives.” (Skog added that there is no “us versus the wogs” encouragement in the church. “Definitely us against the psychiatrists, but that’s fine.”)
Says Mike Rinder, a 30-year-old administrative supervisor who’s been with Sea Org since 1973, “I consider [allegations of] cult mind control to be a joke.”
Other Scientologists also add that their practices are not unlike these of more mainstream religions, an assertion that Johanna Savage is quick to rebut. “The difference with Scientology lies in the degree to which these, control practices are carried out and the amount a Scientologist is forced to sacrifice. If a person wants to become a Catholic, they are fully apprised of what they are in for and they are given time to prepare. With Scientology, you are not told that you may have to spend $100,000 or give up your former friends and family.
“The mandatory loss of one’s self into the Church of Scientology is more severe than in my other group I’ve ever dealt with. I don’t know of my group whose members are room fearful and intensely angry after they leave.”
Breach of Faith?
One particular church policy has been partially at the root of the fear and anger: Scientology’s alleged use of personal information in members’ “confidential” PreClear (PC) folders, information confessed during auditing. There is substantial evidence that this information has been culled, perhaps to pressure members either into staying in the church or into, not criticizing the church if they do leave.
Although Hoden denies such practices, (“In all my years here, I have never known of my such action on the part of a church member; the confidentiality of a person’s folder is the most sacred rule of Scientology”), testimony and documents supplied by former church members indicate that, with or without Hoden’s knowledge, there has been abuse of confidential PC folders. According to the testimony of and an interview with one former Scientology intelligence operative, the now defunct church intelligence division known as the Guardian’s Office asked that files be culled for such desirable PC information as “specific things to use for blackmail such in sexual promiscuity, sexual problems, problems with the family, troubles with parents, any alcoholic problem … anything a person would nor want others to know about.”
Several memos from various church offices to the GO seem to confirm claims that PC Code, have been culled for incriminating information. One 1972 memo supplied to the Weekly clearly notes that “the following data was gotten from [name deleted by the Weekly] PC folders.” It then details a female member’s auditing history: “Several self-induced abortions; … two weeks psych treatment … due to alcohol problems … Drug history: Librium, Valium, Miltowns, alcohol, LSD, opium, heroin … Son is in jail … Connected to a suppressive group … probably the IRS … That’s about it. Love, [name deleted by Weekly].”
A second mid-70s memo (which Hoden claims was not culled from a PC folder but from general church files) graphically details the sex life of another female member: “She slept with four or five men during [an early Scientology course] … She has quite a record of promiscuity … She let [three men] touch her genitals during sessions … She masturbated regularly since she was 8 years old, mentioning doing it once with coffee grounds … and once had a puppy lick her.”
Presented with the memos during a recent Sunday morning meeting in the blue building, Hoden was visibly disturbed. “Okay. Fine – Good,” he said after a long pause. “But was there ever my mention that this was used against her? She’s still with the church. She’s testified for us. She knows this exists. I don’t know why someone in the GO would have needed to see this, but I can honestly say that I don’t know of one case in the Church, of Scientology [where] stuff in a person’s folder has been used against them. And this stuff as 10 years old. What I’m saying is very Simply this: Nothing has ever been used against a person out of their folders.”
California Superior Court judge Paul Breckenridge found differently in a 1984 decision in which he agreed with Scientology’s critics that the church has abused the “confidential” folders for unethical purposes. “Each [of the former Scientologists] has broken with the movement for a variety of reasons, but at the same time, each is still bound by the knowledge that the church has in its possession his or her most inner thoughts and confessions, all recorded [in PC folders] or other security files of the organization, and that the church or its minions is fully capable of intimidation and other physical and psychological abuse if it suits their ends,” wrote Breckenridge, siding with several former members – including former church archivist Gerald Armstrong – sued by Scientology The record is repleat with evidence of such abuse … The practice of culling supposedly confidential PC folders or files to obtain information for purposes of intimidation and/or harassment is repugnant and outrageous.”2
The GO was officially disbanded in 1981, and the church now officially disavows its activities, which Hoden insists are not currently being duplicated by other church departments. However, several former church members told the Weekly that abuse of PC folders continues. One former member claims he was contacted as recently as last month by a church operative who warned him that “if I didn’t sign a confession implicating myself and my friends in trumped-up crimes against the church, he would go to authorities with information from my folders that might be incriminating.”
Told this, Hoden again adamantly denied that such abuse of PC folders could happen under the “strict” guidelines in force today. He insisted it was unfair to quote the former member anonymously because the church could not then rebut the allegation. “Maybe the reason they want anonymity is because they are lying to you,”said Hoden and later added, “Get me the name of the person making this allegation and I’ll report it to the police.
“The thing that I find disgusting, Hoden said with an edge to his voice, “is that someone gave those memos to you. Somebody went and dug them up and said, ‘Wow, boy, this will do it . . . ‘ just so they could get some negative article in your paper. And that’s a shame.”
The Minutemen at the Ready
[A ‘suppressive Person’ is ] Fair Game. May be deprived of property or injured by any means by a Scientologist without discipline of the Scientologist [sic] May be tricked, sued or lied to or destroyed
-L. Ron Hubbard
On February 15, six police officers, stood near the door of Lea Baeck Temple, awaiting the confrontation. They had been called by leaders of Freedom for All in Religion (FAIR), a group of former Church of Scientology members who were sponsoring a speech that evening by Boston attorney and anti-Scientology leader Michael Flynn. Flynn, who has represented marry former church members in lawsuits against the church, was appearing to discuss a new, class-action suit intended to compel Scientology to release PC folders of former members. Because of the nature of the evening’s topic, FAIR leaders anticipated a visit from a group of Scientologists who call themselves the “Minutemen” (because of their ability to mobilize quickly).
To members of FAIR and other church critics, they are known as “Scientology’s ‘Fair Game’ Gestapo.” (Though Hoden, stresses that Hubbard’s “Fair Game” doctrine was officially rescinded 20 years ago, it has emerged throughout the years in a rallying cry among former church members.)
Current church members; allegedly had made their presence felt at the temple throughout the week preceding the the speech. A prominent Jewish Scientologist had phoned temple leaders to warn that Michael Flynn attracted troublemakers. Other anonymous calls stressed similar warnings. And according to the temple’s event coordinator, Nancy Lachman, “A group of men came by claiming to be security for the Flynn speech. They asked to check out the auditorium. But since I hire all security, I knew they were not who they said they were.”
Fearing confrontation, FAIR’s leader, refused entry to what they say were 70 known Scientologists. Despite the right security, disruptions began less than a minute into Flynn’s speech to the 200 FAIR members. A man stood up in the audience and shouted, “Isn’t it true, Mr. Flynn, that you are in this for the money?” The heckler was quickly removed from the auditorium amidst a hail of boos, but minutes later another man stood up and shouted at Flynn. Then another. And before the evening’s conclusion, nearly a dozen alleged Minutemen were escorted from the temple.
“The hassle gets frustrating, but I’m used to it,”said Flynn who has been sued by the church more than a dozen times. Flynn asserts he has been followed by Scientology detectives, (including two who took the room next to his at the hotel where he stayed for the speech) and has been set up for the forgery of a $2 million check written on a Hubbard account. “It was actually a quieter evening than I expected”
Hoden dismisses Flynn’s charges with accusations of opportunism, describing Flynn as a major “point man” in the global conspiracy against the church. (See conspiracy sidebar.) Flynn does indeed have a financial stake in his cases against the church. But irrespective of his motives, the Church of Scientology’s history of harassment of its “enemies,” real or imagined, undermines its claims of humanistic priorities.
The seeds for aggressive defense were sown by Hubbard himself in several policy statements, which were fueled by increasing governmental and journalistic attacks. Hubbard was convinced that the “central agency” carrying out the concerted, global conspiracy to destroy Scientology was the World Federation for Mental Health, which he believed controlled the FBI, the CIA, the IRS, the Better Business Bureau, the American Medical Association, the American Psychiatric Association, and the news media.
“Only attacks resolve threats,” wrote Hubbard in 1966. ” . . . Spot [anyone] who is investigating us. Start investigating them promptly for FELONIES or worse using our own professionals, not outside agencies … Start feeding lurid, blood sex crime actual evidence [sic] on the attackers to the press. Don’t ever submit tamely to an investigation of us. Make it rough, rough on the attackers all the way … Remember: Intelligence we do with a whisper. Investigations, we do with a yell.”
To carry out these intelligence and investigative activities, Hubbard formed the Guardian’s Office (GO) in 1966 and named as director, his third wife, Mary Sue. Headquartered in Los Angeles, the GO’s purpose, according to Mrs. Hubbard, was “to sweep, aside opposition sufficiently to create a vacuum into which Scientology could expand.”
“Use all possible lines of approach to obtain files, i.e., job penetration, janitor penetration, suitable guises utilizing covers, etc.,” instructed one GO policy. It wasn’t long before these counterattacks were put into practice. Hoden, a critic of the GO, confirms that the GO soon had agents working in the AMA and California Attorney General’s Office, and breaking into IRS, Justice Department and FBI offices. The World Federation of Mental Health was (coincidentally) burglarized of stationery and a list of delegates for an upcoming conference. Soon after, those delegates received notices on Federation stationery that the location of their conference had been changed from Washington, D.C., to Havana, Cuba.
The AMA was the target of an alleged GO campaign in the mid 1970s. Known as the “Sore Throat” case, it involved the leaking of international AMA memoranda detailing its often unethical political maneuvers and secret attempts to kill a 1970 generic drug bill that it publicly supported. An FBI investigation showed that the memos were most likely leaked by a Scientologist who had recently been hired by the AMA – but who also served as Pacific Secretary of the GO. (The operatives husband had been director of Scientology’s covert activities in Washington, D.C., and was later indicted by a federal grand jury for bugging a high-level IRS meeting in which Scientology’s tax-exempt status was discussed.)
Scientology officially disavowed itself of any knowledge of the “Sore Throat” case and no charges were brought against the Scientologist who had leaked the memoranda. But information made public by the leaks led to IRS, Post Office, Federal Election Commission and congressional investigations into the AMA before the case blew over.
The GO’s covert harassment was not restricted to operations against faceless government agencies. Individuals who church officials claim were “attacking” Scientology were the target of GO efforts as wall. A Hubbard policy released at the GO’s inception offered a blueprint for Scientology operations against individuals:
“As soon as one of these threats starts, you get a Scientologist or Scientologists to investigate noisily. You find out where he or she works or worked, doctor, dentist, friends, neighbors, anyone [sic] and phone up and say, ‘I am investigating Mr./Mrs…. for criminal activities as he/she as been trying to prevent Man’s freedom and is restricting my religious freedom’ just be NOISY – it’s, very odd at first, but makes fantastic sense and WORKS.”
An earlier Hubbard statement was even more explicit: “People who attack Scientology are criminals. Politician A stands up on his hind legs in a parliament and brays for condemnation of Scientology- When we look him over we find crimes – embezzled funds, moral lapses, a thirst for young boys – sordid stuff. ”
Perhaps the most damaging GO operation against an individual had as it’s target one Paulette Cooper, a Near York freelance journalist whose 1971 book “The Scandal of Scientology” examined early Scientology abuses. Upon publication of the book (which Cooper later admitted contained numerous factual inaccuracies), members of the GO initiated a comprehensive campaign, the purpose of which was, according to files uncovered in a 1977 FBI raid of the church’s L.A offices, “getting [Cooper] incarcerated in a mental institution or in jail.” (A file labeled “P.C.’s Personal Diaries” was also found.) Scientology quickly filed several lawsuits, and Cooper’s publisher chose to cease publication.
In 1973, Cooper found herself under federal investigation on bomb threat and perjury charges after a Scientology undercover agent allegedly stole her personal stationery, and used it to forge two threatening letters to a high ranking Scientology official. Only after two years of unsuccessfully defending herself in the courts did Cooper agree to take a “truth serum” test, which she passed. Cooper’s total costs in clearing her name exceeded $28,000. (Hoden says that the church has since paid Cooper’s attorney’s fees under the condition that Cooper not speak to the press regarding the case, and has “mended the fence” for this old GO activity.)
The GO’s most embarrassing operation took place in 1976, when two Scientologists were caught late at night inside the Federal Courthouse in Washington, D.C. One of the insiders turned government witness, and an ensuing investigation led to the conviction of nine top Scientology leaders – among them, Mary Sue Hubbard – on conspiracy and theft charges. Although Mrs. Hubbard appealed the conviction to the U.S. Supreme Court on the grounds that the FBI raid on the Scientology offices that followed her indictment (in which 90,000 documents, burglar tools and electronic, surveillance equipment were confiscated) was unconstitutional”, she was sentenced to five years in prison (of which she served one) and fined $10,000.
Church documents provide startling insight into the detailed nature of the GO’s intelligence and subsequent cover-up operations. One 1975 document (marked at the top, “DO NOT COPY!!! “) notes as its “PURPOSE: To clean … files of legally actionable evidence against the GO and it personel [sic].” After first explaining the legal definition of “evidence” the memo describes the proper way to “vet”(or censor) internal intelligence reports of “illegal evidence.”
“Using a razor blade, cut out all parts of reports written by us that would indicate something illegal was happening, already did happen or was being planned,” reads the memo: “When shredding all the pieces you have to cut out please ensure you put the particle into the shredder so that the teeth of the shredder cut the line and not between the lines (put it in cross-wise.”)
The same memo outlines the types of information that should be vetted: “Evidence that anything was stolen by one of our guys … Implications of posing as a government agent … Evidence of tapping phone lines or illegal taping of conversations … Mentions of harassment of an individual … Any mention of bribery … Wordings like ‘this will get him’ or ‘let’s wipe him out’ . . – Any mentions, of entrapment setting up someone, to commit a crime either directly or indirectly. ”
Hoden is quick to admit that “a handful” of GO members were out of control. But he repeatedly stresses that “we got rid of the GO and all those people in 1981 and restructured the church to make sure those abuses never happen again. It’s unfair to keep criticizing us for things that took place 10 years ago and have since been rectified.”
In fairness, there is another light in which to view all these activities. According to Hoden, “there was not one criminal violation on the part of the church 1950 until 1966” – but then, faced coordinated attack from government agencies (see sidebar story), it had to strike back – and the GO over did it. “The fools cost us a big black eye,” Hoden says.
Scientology president Jentzsch goes even further, claiming the GO was driven to some of its acts by “agent provocateurs” infiltrated into the organization by government agencies under the federal Cointelpro program (for more information, again see sidebar). Although he cites only one person by name -Michael Meisner, a former member who became a key government witness, in the trial against Mary See Hubbard – Jentzsch, notes accurately that there is considerable documentation that U.S. government agencies did mount a Cointelpro operation against the church and that the use of infiltrated agents to drive organizations into acts they would not otherwise commit was standard Cointelpro fare. Jentzsch, however, does not deny that the GO did some ugly things on its own. “So we’ve had some bad people do some bad things. But look at the whole person. Look at who we are now.”
Hoden, confirmed, however, the existence of the Minutemen, describing them as “a loose organization of church people who stay in very close contact with each other and can be instantly called to respond very quickly to a problem.” Hoden stresses, however, that “they rally against court attacks on the church, not against individuals.” One such Minutemen operation, said Hoden, took place last year when thousands of Scientologists converged on a Portland, Oregon courthouse to protest a $39-million penalty against the church. (That decision was subsequently overturned and must be retired.) Another occurred last November, when 3,000 Scientologists jammed three floors of the L.A. County Courthouse to block public access in the OT-3 “Xenu” documents temporarily made public by a judge in the Wollersheim trial.
Nevertheless, Hoden insists that the disruption of the FAIR meeting at the Leo Block Temple was not a church-sanctioned Minutemen effort. “If I had wanted to organize something, we could have put 4,000 people in there,” says Hoden. “But I feel they have a First Amendment right to do what they’re doing, though what they’ve trying to do is create a fight, create a disturbance so it’ll get covered by the Press and make the church look like it’s something it’s not. They sent a mailer to people within the church announcing the meeting. That’s really stupid. That’s like running into a Jewish temple and saying it was great what Hitler did to the Jews. But, no, we didn’t do anything out there.”
Hoden added that he would definitely know of my such harassment operations. However, in a letter to temple Rabbi Leonard Beerman dated February 13, Hoden made it clear that such harassment can take place without his knowledge and that he has no intention of intervening or stopping it. “[Scientologists] are, as a rule, strong-minded, independent and ready to voice their opinions and feelings,” wrote Hoden. “If my of these protests have been distressing to your temple’s staff, I apologize. However, I cannot control the individual lives of members of my congregation, nor would I consider doing so.”
When asked on another occasion about a recent “Stamp Out Squirrel Tech” demonstration at an independent auditing center (the Advanced Ability Center in Santa Barbara) – one of 20 such incidents identified by church critics as alleged Minutemen operations over the past two years – Hoden admitted, “Oh yeah, I heard something about that.”
Church critics adamantly dispute Hoden’s assertion that the Minutemen do not carry out church-sanctioned, GO-like harassment campaigns. David Mayo, who claims he was abducted by Scientology agents and “imprisoned” on ethics charges in Gilman Hot Springs (the Scientology compound near Palm Springs when Hubbard resided before going underground) before “escaping,” as he puts it, to form the Advanced Ability Center, claims that Scientologists and private investigators hired by the church have harassed him.
“They’ve held demonstrations out front, physically attacked members and circulated wanted posters putting a price on our heads,” says Mayo. “I feel Scientology is a religion or philosophy, and I feel people who believe in it should be allowed to practice it … [ The attitude of church leaders is a huge contradiction. The church says it can give you the ability to reach self-determination, yet it handles dissent in exactly the opposite way.”
Three alleged Minutemen incidents involved Fred Stanfield, a disaffected church member who was one of Hubbard’s earliest followers in the mid ’50s- Stansfield claims he received a death threat from a Scientologist “friend” on March 24, 1984 (a threat reported to the FBI). On October 20, 1985, incident allegedly involved a physical attack on Stansfield by four long time church members who also pelted his house with eggs, while a November 11 attack saw Stansfield verbally harassed by several people who identified themselves as Minutemen.
“These Minutemen and Hoden’s office work as the new GO,” says Stansfield. “The harassment is even more prevalent now than it used to be.”
Hoden dismisses the claims of Mayo and Stansfield and, indeed, of most church critics – as a combination of sour grapes, and financial motivation. “We kicked these people out of the church because we didn’t want them anymore,” says Hoden, who notes that a federal court judge recently ruled that Mayo must refrain from using certain religious scriptures until it is determined whether they were stolen from the church. “And many are new involved in lawsuits against the church. But those few people aren’t our problem. They’re just pawns being manipulated. Our actual problem is that we have cut across various plans by psychiatric associations and certain people in government, backed with millions of dollars, to control man with drugs. That’s our real problem.”
None are more hopelessly enslaved than those who falsely believe they are free J.W. von Goethe
The question of who is enslaved and who is free – Scientologists or their critics – is a matter of personal judgment. However, two things seem evident. First, Scientologists should be allowed to practice their religion as long as it operates within the law. The majority of Scientologists seem happy (whether they are, being controlled or not) and the First Amendment guarantees their right to freely choose their beliefs. However, it’s equally clear that if Scientology is to achieve the mantle of “major religion” it insists it deserves, it must set aside its hyperparanoia and consider the constructive criticisms offered by people who obviously care about the Scientology process.
Whether Scientology’s problems are due to a global conspiracy outside the church or misplaced priorities and a “greedy, power hungry” ruling elite inside, as critics charge, or a combination of both, the stubborn insistence of church leaders that, the Church of Scientology is without fault and that everyone who offers criticism is a “wog” pawn of psychiatrists and politicians who most be silenced- betrays, at best, an irresponsible tunnel vision or, at worst a dangerous misunderstanding of the First Amendment and the church’s own putative creed.
As one former member puts it: “‘The Scientology process has done wonderful things for me and can help a lot of people. But the people who run the church have to realize that these problems of high prices and aggressive defense are like engrams blocking Scientology’s road to total freedom. Until they identify these problems and work to solve them, they can’t fault people for questioning their motives.”
The Government’s War Against SCIENTOLOGY
Scientologists say the church is engaged in “a war for the human spirit” against a global conspiracy involving psychiatrists, the Rockefeller family, the International Criminal Police Organization (Interpol) and the U.S. government (including the FBI, CIA and IRS). According to Ken Hoden, Scientologists feel that although each of these diverse entities have different reasons for attacking the church, their enemies have banded together as one to achieve a common end — “destroying the Church of Scientology. ’’
Whether a conspiracy as vast as this exists is problematical, but certainly Scientology has come under unwarranted investigation and unconstitutional attack from most if not all of these agencies, to an extent that might make any organization paranoid and defensive.
Scientology’s adversarial relationship with the psychiatric community doubtless began with L. Ron Hubbard, whose 1950 Dianetics viliﬁed Freudian psychiatry. Hubbard frequently compared psychiatrists to Hitler and Genghis Khan throughout the ﬁnal 35 years of his life. In return, in the early ’50s psychiatrists were quick to accuse Hubbard of quackery for his promises of what auditing could do. As the governmental and journalistic investigations into his controversial new religion multiplied during the mid-’S0s, Hubbard focused his attention on the World Federation for Mental Health, a psychiatric society he claimed orchestrated worldwide criticism of the church.
Scientology ofﬁcials still regard the psychiatric community, fearful of Hubbard’s “bridge to total freedom,” as the driving force behind the church’s problems.
Scientologists believe, in fact, that it was a prominent German psychiatric clinic, one of the Max Planck Institutes, that ﬁrst drew the International Criminal Police Organization (Interpol) into a “conspiracy” against the church. The Max Planck Institutes, named after the Nobel Prize-winning physicist, were organizations reconstituted after World War II from the Kaiser Wilhelm Society for the Advancement of Science and its subsidiary societies. A German Scientology magazine noted the connections between the Max Planck Institute’s psychiatric wing and its predecessor, the Kaiser Wilhelm Institute for Brain Research, believed responsible for the murder of 275,000 people during the Nazi era. Scientologists claim the Planck Institute arranged for Interpol to execute an elaborate smear campaign against the church.
To counter this, one of the church’s “reform” groups, the National Commission on Law Enforcement and Social Justice, soon began an investigation of Interpol. Scientologists say its commission discovered that Interpol, until as recently as 1972, had been led by former Nazis. (Their information was accurate.) The allegation infuriated Interpol leaders, who then turned to the U.S. government. Scientologists say the Nixon administration’s shadowy Counter-Intelligence Program (Cointelpro) devised an international network of “harassment and black propaganda” against the church. (Cointelpro, of course, achieved notoriety the Watergate era for its illegal activities against American citizens exercising their rights to freedom of speech and assembly. Two high-ranking FBI ofﬁcials were ultimately sentenced to prison terms for their roles in Cointelpro.)
According to church ofﬁcials, government operations involving the FBI, CIA and IRS had sought to undermine Scientology’s credibility since the program’s earliest days. “The strength of those government groups lies in control and manipulation,” says Ken Hoden. “We encourage freedom, so there was immediate conﬂict. Cointelpro has since infiltrated and disrupted our church, accused us of selling drugs, and generally slandered our church around the world, just like it did to Martin Luther King.”
Although there is considerable documented evidence that some Cointelpro actions against the church took place (including FBI insertion of undercover agents in the church), their extent is not clear. But certainly government agencies sought to get other agencies involved in a campaign against the church and, as Scientologists charge, its freedoms were not respected.
Whether or not at Interpol’s prompting, the church and the U.S. government have been at each other’s throats for more than 30 years. Scientology’s Founding Church in Washington, D.C., was listed on Richard Nixon’s infamous IRS “enemies list,” along with such groups as the Black Panthers and Students for a Democratic Society. Scientologists claim several key letters between Scientology churches have mysteriously found their ways to IRS ofﬁces in Fresno and Ogden, Utah. And the FBI staged a massive raid on the church’s Berendo headquarters in 1977 after Scientology operatives were caught in federal courthouses trying to steal government ﬁles on Scientology.
The conﬂict has escalated in recent years as the church, desperate to ward off harassing government investigations and illegal government actions, stepped up its counter-investigation against the government. Scientology’s Freedom magazine has broken several major stories embarrassing to its government targets, including a report of the Army’s mid-1960s experiments in which unsuspecting travelers in Washington, D.C. ’s National Airport were exposed to dangerous bacteria in simulation of a germ-warfare attack. Freedom has also printed conﬁdential IRS memos documenting questionable IRS tax auditing practices, and the magazine continues to solicit testimony on IRS abuses through prominent newspaper ads.
According to church leaders; the current point man for the “legal assault” against Scientology is Michael Flynn, a Boston-based attorney who has represented several former church members in lawsuits against the church. Ken Hoden accuses Flynn of carrying out a “premeditated and very exact plan to destroy the church,” backing the claim with alleged notes removed from Flynn’s trash by Scientologists which detail a plan to enlist witnesses against the church, though not beyond what any good lawyer would do to support his case. Scientologists also accuse Flynn of forging a $2 million check against a personal Hubbard account, a charge that is currently being investigated by a Boston grand jury.
Flynn denies these accusations, and in turn accuses the church of hiring private detectives to follow him around the country and harass his family. Hoden concedes that detectives hired by church attorneys have followed Flynn around the country, but claims the act was justiﬁed. “He [Flynn] has worked with the government and taken money to sue the church from the Rockefellers, who feel that Scientology is a threat to their psychiatry and pharmacological interests, in an orchestrated effort to bring down the church.” (Documents show that Flynn has received about $135,000 in grants from a Rockefeller philanthropic trust.)
Critics insist that church leaders have invented this conspiracy scenario to unify members into an “us against them” army ﬁghting for mankind’s freedom. But Ken Hoden and other church leaders express unwavering conﬁdence in their conspiracy theory. “The proof is there,” says Hoden. “Who’s harassing whom?”
“Everybody always points at what the church has done, which was only to defend ourselves,” says church president Heber Jentzsch. “But the real story that nobody wants to look at is what was done to us by government agencies acting illegally. That’s the story.” -R.C.