| IV.
Obligations and Undertakings During the Transition Period.
A.
Establishment of Church Tax Compliance Committee
1.
Purpose of Church Tax Compliance Committee. The Church
Signatories and others as described below shall form
a Church Tax Compliance Committee (the "CTCC"). The
purpose of the CTCC is to ensure that Scientology-related
entities, including those recognized under section III
of this Agreement as tax-exempt continue to be organized
and operated in conformity with the requirements of
Code section 501 (c) (3) and the provisions of this
Agreement. Further, the CTCC is to ensure that no Scientology-related
entity, regardless of whether the entity is described
in Code section 501 (c) (3), engages in any conduct
that may endanger the tax-exempt status of any other
Scientology-related entity or that would otherwise be
in contravention of this Agreement. The membership of
the CTCC shall guarantee the obligations of any Scientology-related
entity as to necessary compliance with the Code and
the requirements of this Agreement. In addition, the
CTCC will facilitate communication between the parties
to this Agreement.
2.
Membership of Church Tax Compliance Committee. The CTCC
shall consist of Corporate, At-large and Individual
members.
a.
Corporate CTCC members. The Corporate CTCC members are
RTC, CST, CSFSO, CSWUS, BMS, and CSRT (hereinafter "Corporate
CTCC members"). The Church of Scientology Religious
Trust is also a Corporate member, to be represented
by one CSRT trustee designated for this purpose. The
Presidents of RTC, CSI, CST, CSFSO, CSWUS and BMS shall
serve as representatives of their respective entities
on the CTCC. No Corporate CTCC member many withdraw
from the CTCC.
b.
At-large members of CTCC. The Watchdog Committee (as
described in the Qualified Written Material) shall be
an At-large member of the CTCC and shall be represented
on the CTCC by the Chairman of the WDC. In addition,
the International Finance Director and the Chief Accountant
International shall serve as At-large representatives
on the CTCC. The At-large members of the CTCC may not
withdraw from the CTCC, although the individuals representing
WDC or serving as Finance Director or Chief Accounting
International may be replaced by reason of the prior
office holder no longer serving in that capacity. The
CTCC shall give prompt notice to the Service of any
replacement of these individuals on the CTCC.
c.
Individual CTCC members. The individual members of the
CTCC are David Miscavige, Norman Starkey, Mark Rathbun
and Heber Jentzsch. No individual member of the CTCC
shall be permitted to withdraw from service on the CTCC,
except by reason of death, being adjudicated an incompetent,
or by mutual agreement of the parties to this Agreement.
3.
Responsibilities of CTCC. In general, the CTCC is responsible
for overall implementation of the duties and obligations
imposed with respect to the Scientology-related entities
by this Agreement during the transition period. Specific
responsibilities and duties of the CTCC shall include
the following:
a.
Annual Report. The CTCC is responsible for submission
of the Annual Report transmitting the information required
under section IV. paragraphs B., C., D.2 and D.3 of
this Agreement (the Annual Report). The CTCC is also
responsible for engaging the certified public accounting
firm that is required to perform and report on certain
agreed-upon accounting procedures under section IV.
paragraph B. of this Agreement. Information required
to be reported shall be contained in the Annual Report
relating to the taxable year at issue and due no later
than July 15 following the end of such year. This date
may be extended by written agreement between the Service
and the CTCC. No extensions beyond November 15 shall
be granted, absent extraordinary circumstances . The
Annual Report, any supplements thereto, and any responses
to inquiries under paragraphs B. and C. shall be submitted
under penalties of perjury in a manner similar to that
set out in the form 990 (hence subject to prosecution
under Code section 7206(1)). This report will be signed
by all members of the CTCC.
b.
Communications. i. If the CTCC determines that it needs
to communicate with the Service regarding any issue
related to the Church and the Service, the CTCC may
so notify the Service in writing. Included within the
notice will be specific information regarding the issue
the CTCC wishes to raise. Such disclosure is intended
to provide the Service with sufficient information to
determine if waivers under Code section 6103 may be
required. If the Service determines that it needs to
communicate with the CTCC regarding any issues related
to the Church, the Assistant Commissioner may so notify
the CTCC in writing.
ii.
The CTCC shall submit waivers in favor of CTCC members
and their counsel as required under Code section 6103
on behalf of all Scientology-related entities recognized
as described in Code section 501(c)(3) under section
III of this Agreement as soon as practicable but in
no event later than 120 days after execution of this
Agreement. Every such waiver also shall be submitted
to the Service not more than 60 days after its execution
by the relevant Scientology-related entity.
iii.
Not withstanding the provisions for written notice in
subparagraph i., nothing shall prohibit the parties
from other, less formal modes of communication, such
as the telephone. It is contemplated that there will
be regular and frequent informal communications with
respect to matters arising under this Agreement.
c.
Meetings. i. The CTCC and the Assistant Commissioner
shall meet no less than once each year during the transition
period, such meeting to be held no later than 90 days
following the Service's receipt of the CTCC's annual
report under subparagraph a.
ii.
If the CTCC submits a written request for a meeting,
then a meeting with the Assistant Commissioner shall
be held within 15 working days after the receipt of
such written request.
iii.
All meetings under this subparagraph c. shall be held
at a mutually agreeable time at the National Office
of the Service or other mutually agreeable location.
d.
Guaranty.
i.
In general. The Corporate CTCC members absolutely and
unconditionally, jointly and severally, guarantee to
the Service the full and prompt payment of all U.S.
tax liabilities under the Code (including but not limited
to income tax (including tax imposed under Code section
511) and employment tax), together with all interest
and penalties, accruing or arising during the first
three years of the transition period with respect to
all Scientology-related entities. This guaranty is for
the sole benefit of the Service and is for purposes
of collection of the tax. The specific Scientology-related
entity that is allegedly liable for the tax may contest
the liability as permitted under the Code and regulations,
and any final adjudication thereof, after exhaustion
of all appeals, shall be binding and conclusive on the
CTCC. If the liability is assessed against the specific
Scientology-related entity without judicial review,
the CTCC may dispute the underlying liability in any
suit by the Service under paragraph A.3.d.ii. of this
section IV. to collect on the guaranty. In addition,
the guaranty shall not be operative to the extent that
the Scientology-related entity satisfies the underlying
liability or is successful in disputing the fact or
amount of such liability.
ii.
Procedure for collection. At the time such liability
is due and owing (i.e., the Scientology-related entity
has exhausted its remedies), the Service may, at its
sole option, present the CTCC with a notice substantially
in the form of a Revenue Agent's Report detailing the
unpaid tax, interest and penalty. The CTCC shall have
180 days from such notice to make the payment, with
interest, or to arrange for installment payments, with
interest, to be made over a period not to exceed three
years, which will provide the Service the present value
of the liability. If no payment (and no arrangement
for installment payments) is timely made, the Service
may enforce the guaranty provisions of this Agreement.
iii.
Term of guaranty. This guaranty will apply only to tax
liabilities of Scientology-related entities for taxable
years 1993 through 1995. The Service must present the
CTCC with notice for payment in accordance with subparagraph
ii., no more than two years following its receipt of
the CTCC's report under paragraph A.3.a for the year
1997 or be forever barred from collecting on this guaranty.
For purposes of this subparagraph d.iii, the notice
under subparagraph d.ii may be given the CTCC prior
to such time as the Scientology-related entity has exhausted
its judicial remedies.
iv.
Example. A Class V church is determined by the Service
to have engaged in an activity giving rise to unrelated
business taxable income. The Class V Church disputes
that the activity was a trade or business and the Class
V Church brings suit in Tax Court. The Tax Court upholds
the Service's position and the decision becomes final
(including completion of appeal thereof or expiration
of the time for bringing an appeal). At this time, the
Service may collect the UBIT along with any applicable
interest or penalties, upon notice, from the CTCC.
v.
Certain events not impairing guaranty. Without in any
way limiting the generality of the absolute and unconditional
guaranty in paragraph A.3.d, the obligations of the
Corporate CTCC members under this Agreement shall not
be affected or impaired by reason of the happening from
time to time of any of the following events with respect
to this Agreement, even if any such events happen without
the giving of notice to, or obtaining the consent of,
the Corporate CTCC member:
a.
any compromise, settlement, release, renewal, extension,
indulgence, modification or termination of any or all
of the obligations, covenants or agreements of any Church
signatory, Scientology-related entity, or any Corporate
CTCC member under this Agreement, including but not
limited to any modification or amendment (whether material
or otherwise) of any obligation, covenant, or agreement
set forth in this Agreement;
b.
any waiver of the performance or observance by the Service
or any Church signatory or Scientology-related entity,
as the case may be, of any of the obligations, covenants,
agreements, duties, terms or conditions in this Agreement;
c.
any extension of time for the filing of any tax return,
payment of all or any part of any U.S. tax liability
or the extension of the time for payment of any sums
of money due under this Agreement or of the time for
performance of any obligation under or arising out of
this Agreement;
d.
any change in the composition of the CTCC, whether by
the addition of any Individual, At-large or Corporate
member, or the substitution, admission, withdrawal or
removal of any CTCC member;
e.
any voluntary or involuntary liquidation, dissolution,
merger, sale or other disposition of all or substantially
all of the assets, marshaling of assets and liabilities,
receivership, insolvency, bankruptcy, assignment for
the benefit of creditors, reorganization, arrangement,
composition, readjustment of debt, or other similar
proceeding affecting any Church signatory, Scientology-related
entity, any member of the CTCC or any of their assets,
any say of the enforcement by the Service of any remedies
against any Church signatory, Scientology-related entity
or any member of the CTCC, in connection with any of
the foregoing;
f.
the taking of any actions referred to in the Agreement
or any failure, omission, delay, or deficiency on the
part of the Service in enforcing, asserting or exercising
any right, power, sanction or remedy pursuant to the
Code or this Agreement;
g.
any release or discharge of any Church signatory, Scientology-related
entity, or CTCC member from the performance or observance
of any obligation, covenant, agreement, duty, term or
condition herein, respectively, by operation of law;
h.
any merger, consolidation or sale, transfer, gift or
other disposition of assets by any Church signatory,
Scientology-related entity or CTCC member; or
i.
any default or failure by any member of the CTCC fully
to perform the obligations, agreements, covenants, or
duties under this Agreement.
vi.
No set-off. No set-off, counterclaim, reduction or diminution
of obligation, claim for refund, abatement, or any defense
of any kind or nature which any member of the CTCC has
or may have against the Service shall be available to
any member of the CTCC against the Service with respect
to the guaranty set forth in this section IV. paragraph
A.3.d.
vii.
Right to proceed directly against Corporate CTCC members.
The Service, in its sole discretion, shall have the
right to proceed first and directly against any one
or all Corporate CTCC members under this Agreement,
without proceeding against or exhausting its remedies
against any other Corporate CTCC member of any other
Scientology-related entity.
viii.
Agreement by CTCC not to diminish assets during transition
period. The CTCC agrees that it shall not allow the
material diminution of the assets of the Corporate members
of the CTCC during the transition period. Diminution
of assets will be deemed to be material to the extent
that there has been in any year during the transition
period, the transfer, grant, contribution, loan, payment
for services, gift, voluntary or involuntary conversion,
exchange, sale or any other disposition of assets (including
but not limited to trademarks, copyrights, cash, securities,
mortgages, etc.) by one or more Corporate CTCC members
within the taxable year at issue resulting in the reduction
in aggregate value, reflecting the greater of cost or
market, of ten-percent or more of the aggregate total
value (reflecting the greater of cost or market) of
all Corporate CTCC members as of the beginning of the
taxable year at issue. At no time during the transition
period may the aggregate value of gross assets of the
Corporate CTCC members be reduced by over fifty percent
from the aggregate net value of their assets on December
31, 1993 through the disposition of assets as defined
in this subparagraph. Transfers, etc., within the Corporate
membership of the CTCC shall be disregarded for purposes
of determining whether there has been a material diminution
of assets, as will transfers between a Corporate CTCC
member and a party that is not a Scientology-related
entity for which the Corporate CTCC member receives
fair market value in exchange. The involuntary loss
or diminution in value of assets not attributable to
the action or conduct of any Scientology-related entity
shall not be considered in determining whether there
has been a diminution of assets to which this subparagraph
applies.
ix.
Discharge of guaranty. Upon a material breach by the
Service of any of its obligations under this Agreement,
the guaranty under this paragraph A.3.d. shall be null
and void as to amounts not yet collected, and no amounts
may be collected that would otherwise have been due
under the guaranty prior to such material breach. For
purposes of this subparagraph, only the following actions
will be considered to be a material breach by the Service:
a.
the filing of suit to collect sanctions under section
VI. from any corporate or individual CTCC member without
engaging in substantive discussion with the CTCC of
the parties' respective positions as required by paragraph
H.3.a.iii of section VI;
b.
the issuance of a Regulation, Revenue Ruling or other
pronouncement of general applicability providing that
fixed donations to a religious organization other than
a church of Scientology are fully deductible unless
the Service has issued previously or issues contemporaneously
a similar pronouncement that provides for consistent
and uniform principles for determining the deductibility
of fixed donations for all churches including the Church
of Scientology;
c.
the knowing, negligent or willfull disclosure of information
described in section V. paragraph A.4 of this Agreement
in violation of any provision of section 6103, to the
extent such disclosure is not the result of a good faith
but erroneous interpretation of section 6103; or
d.
the knowing, negligent or willful failure to disseminate
the Church Fact Sheet as required by paragraph 5 of
the Settlement Agreement attached hereto as Exhibit
IV-5; or
e.
examining, assessing or seeking to collect any tax liability
of any Scientology-related entity for any taxable year
ending before January 1, 1993, unless the Service terminates
such action and refunds or credits any amounts collected
within 90 days of notice from the CTCC, or unless section
IX, paragraph H. applies.
e.
Liability for penalties. The CTCC shall be liable for
the penalties set forth in section VI. of this Agreement.
4.
Actions of CTCC. David Miscavige will act as the initial
Chairman of the CTCC. He may be removed from this office
and replaced by another individual CTCC member by majority
vote of the CTCC members. The CTCC shall promptly notify
the Service of any change in the Chairmanship. The Chairman
may act on behalf of the CTCC, and bind the CTCC, except
where a specific provision of this Agreement requires
the action of more than one CTCC member.
B.
Financial Reporting Requirements.
1.
Special Accounting Procedures.
a.
In general. The special accounting procedures of this
section IV. paragraph B. apply to each corporate member
of the CTCC, CSFSSO, NEP, BPI, Church of Scientology
Celebrity Centre International, and to (i) any other
Scientology-related entity formed under the laws of,
and operating primarily in, a country other than the
United States for any year in which such entity has
United States source gross receipts (including contributions)
in excess of $1,000,000 in value, and to (ii) any Scientology-related
entity formed under the laws of, and operating primarily
in, the United States for any year in which it has either
(a) gross assets, or (b) gross receipts in excess of
$10,000,000 in value. The entities with respect to which
special accounting procedures apply are collectively
called the "reporting entities."
b.
Special accounting procedures -- operational aspects.
i.
Required procedures. The CTCC shall retain a qualified
CPA (defined below) to perform the agreed-upon procedures
enumerated in Exhibit IV-2 of this Agreement with respect
to each of the reporting entities. Following its performance
of these procedures, the qualified CPA so selected shall
report to the CTCC and to the Service in the form prescribed
by the American Institute of Certified Public Accountants
for engagements to apply Agreed-Upon Procedures (SAS
No. 35, Special Reports -- Applying Agreed-upon Procedures
to Specified Elements, Accounts, or Items of a Financial
Statement) (hereinafter referred to as "Special Purpose
Reports"). These Special Purpose Reports shall include
a summary of any exceptions the qualified CPA discovers
through the agreed-upon procedures.
ii.
Foreign entities. To the extent that the particular
reporting entity is required under the laws of a foreign
jurisdiction to have certified financial statements
or an accountant's review prepared annually, those reports
(converted to the English language and to United States
dollars) may, in general, be substituted for the special
purpose reports enumerated in Exhibit IV-2. However,
the special purpose reports relating to fundraising
and overseas cash flows must be performed for all reporting
entities. In addition, this section IV. paragraph B.1.b.ii.
shall not apply unless: (a) the financial statements
are prepared by an accountant that otherwise meets the
definition of Qualified CPA under this Agreement (or
their equivalent under the laws of the foreign jurisdiction
in which the accountant is admitted to practice); (b)
the financial statements include a balance sheet, income
statement accountants' report, and accountants' notes
to the financial statements, (statements of cash flows
and management letters shall be included to the extent
they are prepared); and, (c) the foreign entity remains
a reporting entity for purposes of special procedures
to be performed in connection with other reporting entities.
c.
CPA's reports--In general. The CTCC shall also deliver
to the Service two (2) copies of the special purpose
reports and management letter (described below) for
all reporting entities for each year during the Reporting
Period. The Special Purpose Report must state that the
Special Purpose Report was conducted in accordance with
SAS no. 35, Special Reports--Applying Agreed-upon Procedures
to Specified Elements, Accounts, or Items of a Financial
Statement and this Agreement.
d.
CTCC responsibilities. The CTCC shall cause all reporting
entities to fully and timely cooperate with the Qualified
CPA in the preparation and submission of the Special
Purpose Reports.
e.
Selection of a qualified CPA. The CTCC shall be responsible
for the selection of a qualified CPA that meets the
requirements set forth below. When selecting a CPA,
the CTCC should consider, among other matters:
i.
The qualification of CPAs available to do the work;
ii.
The CPA's experience in performing audits of churches
and other nonprofit organizations; and
iii.
The CPA's ability to timely complete and submit the
Special Purpose Report.
f.
Definition of a qualified CPA.
i.
In general. For the first two taxable years to which
this section IV. paragraph B. applies (i.e., for calendar
years 1993 and 1994), the CPA must be a Big Six firm
or, in the alternative, another firm agreed to by the
Service. For the last taxable year to which this paragraph
B. applies (i.e., 1995), the CPA may be designated by
the CTCC, provided that the firm or CPA is (i) a qualified
CPA and (ii) is acceptable to the Service. The Service
consents to the designation of Richard D. Clark for
the last year, provided that, at that time, he otherwise
meets the requirements of being a qualified CPA.
ii.
Requirements for qualified CPA. For purposes of this
Agreement, any CPA that meets the qualifications criteria
of this section IV. paragraph B.1.f. and enters into
a Special Purpose Report agreement with the CTCC, Corporate
CTCC members and all reporting entities, and that complies
with the provisions of this Agreement, will be considered
a qualified CPA and acceptable to the Service.
(a)
Certification. The CPA must be a CPA in good standing
in a state or the District of Columbia. The CPA does
not have to be licensed by the state in which the Corporate
CTCC members are located; however, the CPA must abide
by the rules and regulations of professional conduct
promulgated by the accountancy board of the state in
which the Corporate CTCC members are located.
(b)
Practice before the Service. The CPA (or any accountant
working for such CPA who is participating in the required
reporting process under this Agreement) may not be,
or have been, under suspension from practice before
the Service.
(c)
Independence. The CPA must be independent. A CPA will
be considered independent if the CPA meets the standards
for independence contained in the AICPA Code of Professional
Conduct in effect at the time the CPA's independence
is under review. In addition, the CPA may not, at the
time engaged (or at any time prior to that time), be
a Scientology-related individual, a Scientology-related
entity or a WISE sublicensee.
(d)
Peer review requirement. The CPA must belong to and
participate in a peer review program, and must have
undergone a satisfactory peer review conducted by the
AICPA's Division for CPA Firms. After the initial peer
review has been performed, the CPA must submit to a
peer review of the accounting and audit practice every
three years or at such additional times as designated
by the peer review executive committee.
g.
CTCC's approval of selection. The CTCC's approval of
a CPA must be recorded in writing and state the following:
i.
The CPA meets the Service's qualifications to perform
the Special Purpose Report required by this Agreement;
and
ii.
The CTCC, the Corporate CTCC members and all reporting
entities and CPA will enter into a Special Purpose Report
agreement in accordance with the provisions of this
Agreement.
h.
Notification of selection. When the selection of a CPA
by the CTCC has been made, the CTCC must notify the
Service, in writing, prior to the execution of the Special
Purpose Report agreement (as defined below) and in no
event less than 90 days prior to the end of the taxable
year for which the change of CPA is effective. The Service
will notify the CTCC, in writing, within 30 days of
the date of receipt of such notice, if the selection
of a CPA is not satisfactory. A copy of the Special
Purpose Report agreement, or any amendment to such agreement,
is to be provided to the Service as soon as feasible
after the execution thereof. One copy of the current
Special Purpose Report agreement must be maintained
in the CPA's workpapers or permanent file.
i.
First qualified CPA. The Service has been notified that
the CTCC has selected Nanas, Stern, Biers, Neinstein
and Co., 9454 Wilshire Boulevard, Beverly Hills, California,
90212 as its first qualified CPA. The Service approves
of such selection. Notwithstanding paragraph h., the
Special Purpose Report Agreement with Nanas, Stern,
Biers, Neinstein and Co. shall be provided to the Service
no later than with the First Annual Report due under
this Agreement.
j.
Special Purpose Report agreement. The CTCC, Corporate
CTCC members and all reporting entities shall enter
into a Special Purpose Report agreement with the CPA
that specifically complies with all of the following:
i.
The CTCC, Corporate CTCC members, all reporting entities
and CPA acknowledge that the agreed-upon procedures
are being performed and the Special Purpose Report is
being issued in order to enable the CTCC, the Corporate
CTCC members and the reporting entities to comply with
the provisions of the Code and this Agreement.
ii.
The CTCC, Corporate CTCC members and all reporting entities
acknowledge that this Agreement provides that if the
CTCC fails to have a Special Purpose Report performed
and documented in compliance with this Agreement, the
CTCC and Corporate CTCC members are in violation of
the provisions of this Agreement.
iii.
The CPA represents that he meets the requirements under
this Agreement satisfactory to the Service.
iv.
The CPA will perform the agreed upon procedures in Exhibit
IV-1 and will prepare the Special Purpose Report in
accordance with the requirements of this Agreement.
v.
The CPA will document the Special Purpose Report work
performed in accordance with the professional standards
of the AICPA and the requirements of this Agreement.
k.
Special Purpose Report scope limitation. The CTCC, Corporate
CTCC members and reporting entities shall not limit
the scope of the Special Purpose Report, nor suffer
or permit the Special Purpose Report scope to be limited,
to the extent that the CPA is unable to meet the Service's
Special Purpose Report requirements.
l.
Access to Special Purpose Report-related documents.
Pursuant to the terms of the Special Purpose Report
agreement, the CPA must (at no charge to the Service):
i.
retain all Special Purpose Report-related documents
(including but not limited to CPA's reports, workpapers,
and management letters) for a period of four years after
the close of the taxable year for which each Special
Purpose Report was prepared; and
ii.
following the Service's request of, and the consent
by, the CTCC,
(a)
make all Special Purpose Report-related documents available
to the Service, and
(b)
permit the Service to photocopy all Special Purpose
Report-related documents.
m.
Required disclosures to CPA. Prior to commencing the
agreed upon procedures, the CTCC shall provide to the
CPA a copy of all Scientology scripture concerning finances
and accounting (e.g. the Treasury Division volumes)
and any other written material relating to or involving
the handling of funds by Church personnel in effect
at that time. The CTCC also shall promptly provide to
the CPA copies of any newly-issued materials on these
subjects or any modification, amendment, or rescission
of any existing material on the subject. In addition,
the CPA is to be given a copy of the Agreement and any
future amendments to the Agreement.
n.
Submission of Special Purpose Reports. The Annual Report
shall include separate Special Purpose Reports for each
reporting entity. These Special Purpose Reports are
for the use of only the CTCC and the Service.
o.
Submission of plan of corrective action. The CTCC shall
submit written comments to the Service on the exceptions
and recommendations in the Special Purpose Reports and
shall also submit to the Service: (i) a written plan
for any corrective action taken or planned; and, (ii)
comments on the status of any corrective action taken
on previously reported exceptions and recommendations.
2.
Internal financial reports.
a.
As part of the Annual Report, the CTCC shall deliver
a copy of the internally generated annual financial
statements (either (i) income and expense statement,
balance sheet, and all notes to financial statements
or (ii) if such records are not generated in the normal
course of church operations, then the adjusted trial
balance and all adjusting journal entries) prepared
for the internal use of the particular entity or other
Scientology-related entity for the following entities.
Church
of Scientology International
Religious
Technology Center
Church
of Spiritual Technology
Foundation
Church of Scientology Flag Ship Service Organization
Church
of Scientology Flag Service Organization, Inc.
Church
of Scientology Western United States
Church
of Scientology Religious Education College, Inc.
Church
of Scientology Celebrity Centre International
Scientology
Missions International
International
Hubbard Ecclesiastical League of Pastors
Church
of Scientology Religious Trust
Scientology
International Reserves Trust
Flag
Ship Trust
New
Era Publications International ApS (including subsidiaries)
Bridge
Publications, Inc.
Building
Management Services
FSO
Oklahoma Investments Corporation
World
Institute of Scientology Enterprises
Church
of Scientology Advanced Organization Saint Hill, Europe
and Africa (CS AOSH EU&AF)
Church
of Scientology, Inc. (CS AOSH ANZO)
SOR
Services (UK) Ltd.
SOR
Services Ltd. (Cyprus)
Transcorp
Services S.A.
San
Donato Properties Corporation
In
addition, internal annual financial statements as required
above are to be provided for any Scientology-related
entity not designated above (or in paragraph B.1.a.
above) for any year in which it has either (a) gross
assets (based on the greater of cost or fair market
value) in excess of $15,000,000 in value, or (b) gross
receipts in excess of $15,000,000 in value.
b.
As part of each Annual Report, the CTCC also shall include
a consolidation of the above internal reports in a master
balance sheet, and income and expense statement prepared
in the same manner as the consolidated financial data
submitted with the Qualified Written Materials. These
consolidations are to be done in accordance with reasonable
accounting practices and consistently year to year.
The Annual Report also shall include a separate consolidated
balance sheet for the corporate CTCC members. Consolidating
adjustments shall include, but are not limited to, liabilities
and corresponding receivables between Corporate members
of the CTCC. The nature of consolidating adjustments
will be explained in the Annual Report. All amounts
shall be reported in United States dollars.
c.
As part of each Annual Report, the CTCC also shall include
copies of audited financial statements (in the English
language and U.S. dollars) for the International Association
of Scientologists, Foundation International Membership
Services Administrations, Membership Services Administration
(U.K.), Ltd., and the U.S. IAS Members' Trust.
3.
Report on central reserves transactions and balances.
As part of the Annual Report, the CTCC shall deliver
to the Service a summary of central reserves transactions
containing information in similar format to the summary
information that was provided as part of the Qualified
Written Material, with the exception that the information
included in the Annual Report need not contain a list
of reserves transfers to non-reserves accounts of the
same Scientology-related entity. In this regard, for
each year that this subparagraph applies, the Annual
Report should contain a list of all expenditures (as
described below) that have been made from the Church's
central reserves system as described in the Qualified
Written Material, or from the central reserves account
of one Scientology-related entity into the central reserves
account of another such entity. The list should include
(i) the date of the expenditure, (ii) to whom the payment
was made, (iii) by whom the payment was received, (iv)
the purpose of the expenditure, and whether, and if
so, why, in the opinion of the CTCC, this transfer furthers
Code section 501(c) (3) purposes. For this purpose,
the term "expenditure" includes, but is not limited
to, grants, purchases, transfers, loans or repayments
of loans, or other expenditures of assets under the
control of the central reserves committee. In addition,
the Annual Report shall include a beginning balance
and a year-end balance showing the amount of cash and
other assets in the Central Reserves.
4.
Tax returns. As part of the Annual Report, the CTCC
shall provide a copy of each United States tax return
(including information returns) and all United States
tax forms filed by any Scientology-related entity. These
returns may not be included in the Annual Report in
electronic form unless agreed to by the parties. Forms
W-2, 1099, 940, 941 and 941E need not be submitted under
this paragraph. The Annual Report shall also include
copies of the annual update on the group exemptions
required by Rev. Proc. 80-27, 1980-1 C.B. 677 and Treas.
Reg. Section 601.201(n) (8).
5.
Term. Reporting under this section IV. paragraph B.
is required for three taxable years, beginning with
the 1993 Annual Report.
C.
Fiduciary Reporting Requirements.
1.
Compensation information. For each calendar year in
issue, the Annual Report shall contain the following
information with respect to compensation paid certain
individuals by Scientology-related entities:
a.
The names and total compensation (as more fully described
below) paid to each of the twenty natural persons with
the highest amount of compensation during the calendar
year in issue. For purposes of determining the highest
paid individuals, the compensation of an individual
includes amounts received from Scientology-related entities
by the spouse of that individual. Where a spouse has
such compensation, the spouse's name and the nature
and amount of the compensation are to be separately
listed. To determine those individuals for whom this
paragraph requires disclosure, all compensation from
all Scientology-related entities is to be aggregated.
A husband and wife are to be treated as a single entry
on this list (i.e., not as two highly paid individuals).
In addition, any individual who is included in the list
required in paragraph C.1.b. below is not to be included
in this list.
b.
The total compensation paid to each Individual CTCC
member, as well as natural persons serving on the CTCC
in a representative or At-Large capacity, and to (i)
each such person's spouse, (ii) siblings of each such
individual CTCC member (including compensation of each
sibling's spouse), (iii) with respect to Individual
CTCC members, each Individual CTCC member's parents,
and (iv) with respect to Individual CTCC members, each
Individual member's children. The Annual report shall
separately list the name and compensation of each such
family member.
c.
The Annual Report also shall include (i) copies of Forms
W-2 and 1099 for each natural person listed whose compensation
must be reported under paragraphs C.1.a. or C.1.b. and
(ii) a description of any relationship (direct or indirect)
between any Scientology-related entity and a natural
person whose compensation must be reported under paragraphs
C.1.a. or C.1.b. in which anything of value is exchanged.
Thus, for example, if an individual or any member of
that individual's family is a shareholder or holds another
ownership interest in an entity that does business,
or receives anything of value from any Scientology-related
entity, the existence of such relationship and the facts
relating to it are required to be disclosed in the Annual
report. Under subparagraph (ii) of this paragraph c.,
reporting is not required if the stock or ownership
interest is less than five percent.
d.
For purposes of the Annual Report, the term "compensation"
includes anything of value provided (directly or otherwise)
by, or attributable to, any Scientology-related entity.
Whether an item is considered "compensation" is determined
without regard to whether that item of value is includible
in the individual's gross income for purposes of reporting
or taxation. "Compensation" includes, but is not limited
to, the following: (i) wages or salary (including any
bonus or overtime pay); (ii) other payments (as an independent
contractor, provider of goods or services, or otherwise),
including but not limited to any interest, dividend
or other corporate distribution; (iii) gross commissions;
(iv) the value of any deferred compensation (qualified
or non-qualified and valued without regard to any risk
of forfeiture, vesting or other restriction); (v) the
value of any beneficial interest in any trust attributable
in any fashion to contributions made by or on behalf
of any Scientology-related entity (valued without regard
to any risk of forfeiture, vesting or other restrictions);
(vi) any fringe benefit (other than de minimis fringes
excludible under sections 132 (a) (4) and 132 (e) of
the Code; (vii) the highest balance of any loan or loans
outstanding from any Scientology-related entity to the
individual at any time during the year in question;
(viii) any personage or rental allowance; and, (ix)
the amount of any reimbursed expenses (business or otherwise).
For the purposes of (ix), compensation from this source
may be ignored if the individual received in the aggregate
less than $10,000 for all reimbursements in the year.
To
the extent compensation is provided in a form other
than wages or salary, such compensation is to be listed
separately with a short description of which category
it falls within. If a fair market value is not available,
the type of compensation should be listed along with
an explanation that will be helpful to understand its
nature and possible worth.
Finally,
if compensation is received from more than one Scientology-related
entity, compensation should be listed separately for
each such entity.
2.
Modifications of organizational documents. The Annual
Report shall describe any amendment or other change
in any organizational document of any of the following
organizations: (i) any organization whose tax-exempt
status is recognized under this Agreement, other than
subordinate entities under the group exemptions provided
in section III. paragraph C.; (ii) those entities described
in paragraph B.2 or D.2, below. For purposes of this
paragraph, an organizational document includes any document
that is necessary for inclusion in a Form 1023. Thus,
articles of incorporation, articles of association,
constitution, bylaws, trust instrument or indenture
or similar document, including any board or trustee
resolution interpreting such document are organizational
documents.
3.
Reporting of any dividend payment with respect to any
entity. The Annual Report shall disclose any dividend
or other distribution with respect to its stock (including,
but not limited to any distribution in liquidation or
reorganization of the company) paid during the year
by any Scientology-related entity formed as a company
or corporation. This report will include the facts surrounding
the distribution. Reporting under this paragraph shall
also occur if a payment is made in the nature of a dividend
or a return of capital by any other Scientology-related
entity (e.g., a partnership distribution).
4.
Reporting of any ownership change with respect to any
entity. The Annual Report shall disclose any change
in ownership or control of any Scientology-related entity.
Thus, if such entity is a stock company or trust, any
changes in the legal or beneficial ownership of the
stock or trust must be reported. With respect to trusts,
nonstock or nonprofit organizations, any change in the
ability to any other entity or individual to appoint
the board or trustees must be reported.
5.
Reporting on creation of new entities. The Annual Report
shall include an update disclosing the existence of
any entity meeting the definition of Scientology-related
entity that has not been previously disclose to the
Service. The report must include, for example, every
new entity formed after December 31 of the prior taxable
year (or with respect to the first Annual Report, after
November 1, 1992) other than a subordinate entity included
under one of the group exemptions provided in section
III. paragraph C. The following information must be
included for purposes of disclosure in the Annual Report:
(i) name and address; (ii) employer identification number,
if applicable; (iii) the nature of its purposes and
activities; (iv) the officers, trustees and/or directors
of the entity; (v) a balance sheet as of the end of
the taxable year; (vi) an income and expense statement
as of the end of the taxable year; (vii) the ownership
of the entity; (viii) the relationship of the entity
to any other Scientology-related entity, and, (ix) an
explanation of whether, and to what extent, the new
entity or any of its operations has, or may have, an
effect on the tax-exempt status of any other Scientology-related
entity, or, in the alternative, the specific reasons
the CTCC believes that the creation and operation of
the new entity have no such effect.
6.
Reporting of any ecclesiastical modification or the
restructuring of any entity. The Annual Report shall
include any changes to the ownership (e.g., corporate
organization) of any Scientology-related entity or to
the ecclesiastical management structure of the Church,
including, but not limited to, any changes in the structure
outlined in the booklet entitled "The Command Channels
of Scientology" as submitted in the Qualified Written
Material. Changes in the personnel who hold positions
within the ecclesiastical structure need not be included
within the report required under this paragraph, other
than those who serve on the CTCC.
7.
Reporting of certain asset transfers and expenditures.
a.
The Annual Report shall disclose the transfer, grant,
contribution, loan, payment for services, gift, voluntary
or involuntary conversion, exchange, sale or any other
disposition of assets (hereinafter an "expenditure")
by one Scientology-related entity to another Scientology-related
entity within the taxable year at issue, if the transfer
involved assets (including trademarks, copyrights, cash,
securities, mortgages, etc.) with an aggregate value,
reflecting the greater of cost or market, of $1,000,000
or more.
b.
The Annual Report shall contain the fact of and the
steps taken to ensure expenditure responsibility with
respect to a specific expenditure if that expenditure
is made by one or more Scientology-related entities
recognized as tax-exempt under section III of this Agreement
to a noncharitable beneficiary and if, in any single
taxable year, such payments to the specific noncharitable
recipient exceed $25,000. For purposes of this paragraph,
the term expenditures does not include a transaction
with a person other than a Scientology-related entity
or a Scientology-related individual for which fair market
value is received in return.
c.
The Annual Report disclosure required under section
IV. paragraph C.7.a. and C.7.b. is to contain the following
information: (i) the name and address of both transferor
and transferee; (ii) the amount and nature of the assets
transferred; (iii) the purpose of the transfer; and,
(iv) whether, and if so, why, in the opinion of the
CTCC, this transfer furthers Code section 501(c)(3)
purposes.
d.
Reserves transaction reported under paragraph B.3. need
not be reported again under this paragraph C.7.
8.
Reporting of certain asset transfers that diminish the
assets of the corporate members of the CTCC. The Annual
Report shall disclose the transfer, grant, contribution,
loan, payment for services, gift, voluntary or involuntary
conversion, exchange, sale or any other disposition
of assets by one or more Corporate CTCC members where
within the calendar year at issue, the transfer involved
assets (including but not limited to trademarks, copyrights,
cash, securities, mortgages, etc.) with an aggregate
value of ten-percent or more of the aggregate total
value (reflecting the greater of cost or market) of
all Corporate CTCC members as of the beginning of the
taxable year at issue. The report is to contain the
following information: (i) the name and address of both
transferor and transferee; (ii) the amount and nature
of the assets transferred; (iii) the purpose of the
transfer; and, (iv) whether, and if so, why, in the
opinion of the CTCC, this transfer furthers Code section
501(c)(3) purposes. Transfers, etc. within the Corporate
membership of the CTCC shall be disregarded for reporting
purposes under this paragraph C.8.
9.
Reporting of any amendment of any directive concerning
the treatment of funds. The Annual Report shall disclose
the issuance, modification, amendment, or rescission
of any written material relating to or involving the
handling of funds by Church personnel. The Annual Report
also shall include copies of relevant materials and
an explanation of the reasons for change. Under this
paragraph, disclosure is required with respect to all
directives, including but not limited to HCO Policy
Letters, Executive Directives and similar items. Thus,
for example, disclosure under this paragraph would be
required in the event of any modification to the book
entitled Treasury Division, Volume 3 of the Organization
Executive Course (by L. Ron Hubbard).
10.
Activity or inaction in contravention of this Agreement.
The CTCC shall use its best efforts to include with
the Annual Report information relating to any action
or inaction by any Scientology-related entity or individual
that occurred during the year that is in contravention
of, or inconsistent with, any provision of the Code,
Treasury regulations or this Agreement, including the
recognition of exemption for certain entities contained
in section III. paragraphs B. and C. and the certifications
contained in section IV. paragraph D. Information disclosed
under this paragraph shall include an explanation of
the action or inaction involved, the name of the individual
or entities involved, the date of the act or inaction,
and whether, and to what extent, the CTCC has investigated,
including any findings and any actual or planned corrective
action with respect thereto.
11.
Update on operational modifications. The Annual Report
is also to contain an update on the operational modifications
that are required to be undertaken under section IV.
paragraph E.
12.
Education and training issues under Code section 170.
The Annual Report shall disclose any modifications to
the training side of the "Scientology Classification,
Gradation and Awareness Chart". Such disclosure shall
contain sufficient information to enable the Service
to determine whether the new or modified training courses
should be afforded the same treatment as that set forth
in section VII., paragraph B.
13.
Term of fiduciary reporting under section IV.c. The
term of the fiduciary reporting required under this
paragraph C. is three taxable years, beginning with
1993.
D.
Certifications.
1.
In general. by executing this Agreement, the Church
signatories in their trust or corporate capacities,
and their subscribing officers or trustees individually,
certify under penalty of perjury the following to the
best of their knowledge, information and belief:
a.
that all Scientology-related entities are in compliance
with the Code, Treasury regulations and other Service
pronouncements of general guidance and applicability;
b.
that the Church signatories and CTCC will use their
best efforts to educate Scientology parishioners as
to the nondeductibilty of donations to foreign organizations
and the provisions of section VII. paragraph B.;
c.
that no Scientology-related entity or Scientology-related
individual (in his or her capacity as such) has, after
1986, knowingly committed any act of fraud or criminal
conduct that might constitute a violation of public
policy endangering the tax-exempt status of any Scientology-related
entity (assuming for the limited purpose of this paragraph
that all Scientology-related entities are otherwise
described in Code section 501(c)(3)); and
d.
that all Qualified Written Material submitted in connection
with this Agreement was correct and truthful as of the
date submitted through the date of signature of this
Agreement, as supplemented by the Forms 1023 filed in
August and September 1993.
2.
Section 501(c)(3). The Annual Report shall include a
certification to the Service from CTCC members, in their
Corporate, At-large, or Individual status, that Scientology-related
entities recognized as described in Code section 501(c)(3)
under section III, paragraphs B. or C. will operate
in conformity with Code section 501(c)(3) and the regulations
thereunder and that other Scientology-related entities
will operate in a manner that does not jeopardize the
tax-exempt status of any Scientology-related entity
so recognized. Specifically, but not by way of limitation,
such certification shall include the following Scientology-related
entities: Church of Scientology Religious Education
College Inc., Church of Scientology Advanced Organization
Saint Hill Europe and Africa, Church of Scientology,
Inc. (Advanced Organization Saint Hill Australia, New
Zealand and Oceania), RTC Australia, San Donato Properties
Corporation, Transcorp Services, S.A., MCL Services,
N.V., Media Storage, Inc, Mile High, Inc., Galaxy Productions,
Inc., Mastertech, Inc., Nesta Investments, Ltd., and
FSO Oklahoma Investments Corporation.
3.
Continuing certifications. The CTCC must certify in
the Annual Report that the certifications described
in this paragraph D. continue to be correct, to the
best of their knowledge and belief. Such certification
shall be substantially in the form of Exhibit IV-3 hereto.
In addition, the CTCC must certify as part of the Annual
Report that nothing has occurred that would significantly
impair (directly or indirectly) the efficacy of the
guaranty contained in section IV. paragraph A.3.d.
E.
Operational modifications. The Church signatories and
the CTCC will assure the following:
1.
All payments or tithes for ecclesiastical management
services to Scientology-related entities, including
but not limited to parishioner contributions in connection
with the ministry of religious services, payments or
tithes for purchase of religious materials, payments
or tithes for ecclesiastical management services, and
transfers to reserve entities, are to be invoiced by
the Scientology-related entity actually intended to
perform the services and that receives such payment
or tithe, irrespective of whether such payments or tithes
are initially deposited into the performing entity's
bank account.
2.
Deposit of Funds.
a.
U.S. dollar-denominated checks drawn on U.S. banks and
credit card advices payable to Scientology-related entities
for serves or goods to be provided within the United
States shall first be deposited within the United States.
b.
Checks and credit card advices payable to Scientology-related
entities in currencies other than U.S. dollars may be
couriered overseas prior to deposit, provided that there
are in place appropriate financial controls to ensure
the processing, handling and tracing of such deposits
to the account of the Scientology-related organization
to which such payment is drawn.
c.
To the extent U.S. dollar-denominated checks drawn on
non-U.S. banks payable to Scientology-related entities
for services or goods to be provided within the United
States are physically received outside the United States,
they may be first deposited outside the United States.
To the extent such payments are physically received
inside the United States they may be couriered overseas
prior to deposit, provided that there are in place appropriate
financial controls to ensure the processing, handling
and tracing of such deposits to the account of the Scientology-related
organization to which such payment is drawn.
d.
U.S. dollar-denominated checks and credit card advices
payable to Scientology-related entities for goods and
services provided outside the United States may be deposited
outside of the United States.
e.
Any other funds of a Scientology-related entity received
from sources within the United States may be couriered
overseas for deposit only if, and only to the extent,
there are in place appropriate financial controls to
ensure the processing, handling and tracing to such
deposits to the account of the Scientology-related organization
to which such payment is drawn.
3.
Management and accounting procedures (whose material
provisions are attached to this Agreement as Exhibit
IV-3) are to be implemented to assure that all commissions
or similar payments from Scientology-related entities
to individual fundraisers are properly reported to the
Service by the payor, and that contributions collected
by individual fundraisers are not commingled with other
funds held by such individual. Further, no payments
from one Scientology-related entity shall be made to
another such entity by way of being made to an individual
, whether that individual is an agent of either Scientology-related
entity or otherwise.
4.
As of the date of this Agreement, parishioner advance
donations to CSFSO and CSWUS shall no longer be transferred
to United States Parishioners Trust and/or the Trust
for Scientologists. Nor shall USPT or TFS receive any
such payments directly from parishioners.
5.
United States Parishioners Trust and the Trust for Scientologists
shall be dissolved as soon as practicable consistent
with the terms of their respective trust instruments.
The assets (including mortgages) contained in such trusts
as of the date of this Agreement shall, along with earnings
thereon, be transferred to one or more corporate members
of the CTCC in accordance with their documents of dissolution,
except that the ship mortgage on the M/V Freewinds presently
held by the Trust for Scientologists may be distributed
to Flag Ship Trust. Documents to effectuate the dissolution
are attached as Exhibit IV-4. Dissolution shall be completed
within 12 months of the date of this Agreement.
6.
Norman F. Starkey, as Trustee of Author's Family Trust
B, shall, no later than December 31, 1993, effectuate
the transfer of substantially all of the corpus and
income in Author's Family Trust B, including all the
shares of Author Services, Inc. ("ASI") as permitted
under the will of L. Ron Hubbard to the Church of Spiritual
Technology ("CST") without consideration. Mr. Starkey,
as trustee, may retain sufficient cash and securities
to cover any remaining actual or contingent liabilities
of the Trust until those liabilities have been resolved
or satisfied. The members of the CTCC shall use their
best efforts to assure that such transfer is accomplished.
7.
The members of the CTCC shall use their best efforts
to effectuate, by no later than December 31, 1993, the
dissolution of Theta Management Limited. All property
and functions of Theta will be transferred without consideration
to IASA.
8.
The members of the CTCC shall, no later than December
31, 1993, effectuate the dissolution of the Church of
Scientology Freewinds Relay Office, Inc., FSS Organization
N.V., and majestic Cruise Lines, Inc., and the transfer
of all of their assets and functions to the Foundation
Church of Scientology Flag Ship Service Organization.
9.
The members of the CTCC shall, no later than December
31, 1993, effectuate the dissolution of International
Publications Trust. The shares of New Era Publications
International, ApS shall be transferred without consideration
to Church of Scientology International.
10.
The members of the CTCC shall, no later than December
31, 1995, effectuate the dissolution of WISE, Inc. and
the transfer of all of its assets, including but not
limited to its rights to the Scientology religious marks,
to the Inspector General Network.
F.
Treatment of Information Exchanges.
1.
All information provided by the CTCC under this section
IV. shall constitute return information for purposes
of Code section 6103. No information constituting Code
section 6103 information, separately or collectively,
shall constitute a return or other information for purposes
of Code section 6104 (a)(1)(A) and 6104 (b).
2.
The Service may seek further information regarding the
application of any provision of the Code, this Agreement
or the Settlement Agreement attached as Exhibit IV-5,
to any Scientology-related entity (whether or not such
inquiry is raised by reason of information contained
in the Annual Report) from the CTCC. Because the Service
is obtaining information from the CTCC, as opposed to
one or more churches, the provisions of Code section
7611 do not apply. However, if at any time the CTCC
believes that the Service is seeking information that
should be obtained under the provisions of Code section
7611, then the CTCC shall so notify the Service, in
writing, of its views and unless the pending request
for additional information from the Service otherwise
meets the definition of routine request or other exception
under Code section 7611 and the regulations thereunder,
the provisions of that section shall apply as of the
date the Service contacts the specific taxpayer involved.
3.
The Annual Report or other information request under
this Agreement including follow-up questions under paragraph
F.2., or any other contacts with the CTCC do not constitute
an examination under Code section 7611 or an inquiry
or examination under any other section of the Code (including
sections 7602 and 7605), unless such contact is either
(i) designated by the Service specifically as a Church
Tax Inquiry letter under section 7611 or a notice of
examination under section 7602, or (ii) the CTCC notifies
the Service that it considers the contact to be subject
to section 7611 or section 7602.
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