Begin Part 2 (2) 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. _ 5. 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. Inthe 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. _ 6. Penalty Provisions During Transition Period and Other Procedural Matters. _ A. Introduction: Purpose and Scope of Sanctions. This section VI sets forth sanctions to provide assurance to the Service that the Church Tax Compliance Committee will ensure that all Scientology-related entities will operate in a manner consistent with Code section 501(c)(3) and will carry out specified obligations under this Agreement during the transition period. The provisions of this section are in addition to, and not in lieu of, any other enforcement measures available to the Service under this Agreement, the Code, at law or in equity. Thus, notwithstanding any provisions of this section or this Agreement in its entirety, the Service may question its recognition or exemption of any Scientology-related entity for any taxable year subsequent to 1992 (and for previous years if this Agreement is not final by reason of section IX. paragraph H.) or take any other action permitted under the Code, without regard to whether the Service has asserted (successfully or otherwise) any penalty under this section VI. Nevertheless, it is intended that the consensual sanctions set forth in this section are to provide the Service with intermediate sanctions for activities or conduct not in accordance with the provisions of Code section 501(c)(3) for which revocation of recognition of exemption may be too harsh or otherwise inappropriate as a sanction, and that the Service will notify and consult with the CTCC prior to pursuing any sanctions under this Agreement. B. Self-Dealing Transactions. 1. First-tier penalties. a. On Individual CTCC member who is a self-dealer or who is related to a self-dealer. Under this Agreement, there is a penalty imposed on each knowing act of self-dealing between a disqualified person and a Scientology-related entity. The penalty shall equal 5 percent of the amount involved with respect to the act of self-dealing for each taxable year (or part thereof) in the sanction period (defined below). The penalty imposed by this paragraph shall be paid by each Individual CTCC member: (i) who is the disqualified person who engaged in such act of self-dealing; or (ii) who is related (as described in section VIII. paragraph N.2. through 9., including the attribution rules contained therein) to any person that participates in the act of self-dealing. No penalty shall be due under this paragraph B.1.a.if and to the extent that an act of self-dealing has been corrected within the correction period. b. On Individual CTCC members with knowledge of transaction. In any case in which a penalty is imposed by section VI. paragraph B.1.a., there is an additional penalty imposed on the participation of any Individual CTCC member in an act of self-dealing between any disqualified person and a Scientology-related entity, knowing that it is such an act, equal to 2 1/2 percent of the amount involved with respect to the act of self-dealing for each taxable year (or part thereof) in the sanction period, unless such participation is not willful and is due to reasonable cause. The penalty imposed by this paragraph shall be paid by any Individual CTCC member who participated in the act of self-dealing. No penalty shall be due under this paragraph B.1.b. if and to the extent that an act of self-dealing has been corrected within the correction period. 2. Second-tier penalties. a. On Individual CTCC member who is a self-dealer or who is related to a self-dealer. In any case in which a first tier penalty is imposed by section VI. paragraph B.1. on an act of self-dealing by a disqualified person with a Scientology-related entity and the act is not corrected within the sanction period, there is hereby imposed a penalty equal to 200 percent of the amount involved. The penalty imposed by this paragraph shall be paid by each Individual CTCC member: (i) who is the disqualified person who engaged in such act of self-dealing; or (ii) who is related (as described in section VIII. paragraph N.2 through 9., including the attribution rules contained therein) to any person that participates in the act of self-dealing. No penalty shall be due under this paragraph B.2.a. if and to the extent that an act of self-dealing has been corrected within the correction period. b. On Individual CTCC member refusing to correct. i. In any case in which a second tier penalty is imposed under section VI. paragraph B.2.a., if any Individual CTCC member refuses to agree to part or all of the correction, a penalty is imposed equal to 50 percent of the amount involved. The penalty imposed by this paragraph shall be paid by each Individual CTCC member who refused to agree to part or all of the correction. ii. In addition, in the event that correction does not occur by reason of any officer or director of any Scientology-related entity refusing to agree to part or all of the correction, there is a penalty equal to 50 percent of the amount involved. The penalty imposed under this paragraph shall be paid by each Individual CTCC member. iii. No penalty shall be due under this paragraph B.2.b. if and to the extent that an act of self-dealing has been corrected within the correction period. 3. Self-dealing. a. In general. For purposes of this section VI., the term "self-dealing" means any direct or indirect: i. sale or exchange, or leasing, of property between a Scientology-related entity and a disqualified person; ii. lending of money or other extension of credit between a Scientology-related entity and a disqualified person; iii. furnishing of goods, services, or facilities between a Scientology-related entity and a disqualified person; iv. payment of compensation (or payment or reimbursement of expenses) by a Scientology-related entity to a disqualified person; v. transfer to, or use by or for the benefit of, a disqualified person of the income or assets of a Scientology-related entity; and vi. payment by any Scientology-related entity of any penalty imposed under this section VI. upon any Individual CTCC member. b. Special rules. For purposes of section VI. paragraph B.3.a.-- i. the transfer of real or personal property by a disqualified person to a Scientology-related entity shall be treated as a sale or exchange if the property is subject to a mortgage or similar lien which the Scientology-related entity assumes or if it is subject to a mortgage or similar lien which a disqualified person placed on the property within the 10-year period ending on the date of the transfer; ii. the lending of money by a disqualified person to a Scientology-related entity shall not be an act of self-dealing if the loan is without interest or other charge (determined without regard to Code section 7872) and if the proceeds of the loan are used exclusively for purposes specified in Code section 501(c) (3); iii. the furnishing of goods, services, or facilities by a disqualified person to a Scientology-related entity shall not be an act of self-dealing if the furnishing is without charge and if the goods, services, or facilities so furnished are used exclusively for purposes specified in Code section 501(c) (3); iv. the furnishing of goods, services, or facilities by a Scientology-related entity to a disqualified persona shall not be an act of self-dealing if such furnishing is made on a basis no more favorable than that on which such goods, services, or facilities are made available to the general public; and v. the payment of compensation (and the payment of reimbursement of expenses) by a Scientology-related entity to a disqualified person for personal services which are reasonable and necessary to carrying out the exempt purpose of Scientology-related entities shall not be an act of self-dealing if the compensation (or payment or reimbursement) is not excessive. c. Exceptions. Notwithstanding section VI. paragraphs B.3.a. and B.3.b., the following shall not be treated as an act of self-dealing: i. The provision to a disqualified person of goods, services and facilities by a Scientology-related entity on the same basis as generally provided to other members of the Sea Organization, with commensurate adjustments for the ecclesiastical rank and responsibilities of the disqualified person. The goods, services and facilities described in this section VI. paragraph B.3.c.i. include all benefits generally provided by Scientology-related entities to members of the Sea Organization, including but not limited to room and board, medical care, uniforms, child care and education, use of corporate vehicles and ministry of religious services. ii. The provision of insurance coverage by any Scientology-related entity to any disqualified person against a claim of misconduct in his or her capacity as an executive of any Scientology-related entity (but not including any penalty imposed under this section VI. paragraph B. upon any Individual CTCC member), as well as reasonable litigation costs and attorneys' fees incurred in defending any such claim. iii. The direct payment, without the use of insurance, by any Scientology-related entity of a disqualified person's personal liability arising from any claim of misconduct in his or her capacity as an executive of any Scientology-related entity (excluding a penalty imposed under this section VI. upon any Individual CTCC member), as well as payment or reimbursement of reasonable litigation costs and attorney's fees incurred in defending against any such claim (including defense against a penalty imposed under this section VI. upon any Individual CTCC member), provided that the board of the Scientology-related entity that is making the expenditure and the other Individual CTCC members determine, upon appropriate review of the circumstances and consultation with outside legal counsel, that the Individual CTCC member acted reasonably under the circumstances, in the best interest of the relevant Scientology-related entity or entities, and without knowledge or reason to believe that such action would be in violation of any applicable law or of this Agreement. iv. Any transaction for which the disqualified person and the affected Scientology-related entity have obtained guidance in advance from the Service that the proposed transaction would be in the best interest of the continued operation of the affected Scientology-related entity and will not be penalized under this Agreement. Any request for such guidance shall be sent to the Assistant Commissioner as provided in section IX of the Agreement. If after 120 days no response to the request has been received, the transaction described in the ruling request shall be deemed not to create a situation in which the penalties of this section VI will be applied. v. Theft, embezzlement or other misappropriation of property or funds from a Scientology-related entity is an act of self-dealing only if, and only to the extent, that a disqualified person participates in such misconduct. d. Amount involved. For purposes of this section VI., paragraph B., the term "amount involved" means, with respect to any act of self-dealing, the greatest of (i) the amount of money and the fair market value of the other property given; (ii) the amount of money and the fair market value of the other property received; or (iii) the sum of $100,000. Notwithstanding the preceding sentence, in the case of services described in section VI. paragraph B.3.iv., the amount involved shall be the greater of $100,000 or the excess compensation. In addition, in the case of a lease or loan, the amount involved shall be the greatest of (i) the fair market interest rate or rental, (ii) the amount actually charged, or (iii) $100,000. For purposes of determining the amount involved, the fair market value in the case of the penalties imposed by section VI. paragraph B.1.a., shall be determined as of the date on which the act of self-dealing occurs; and in the case of the penalties imposed by section VI. paragraph B.1.b., shall be the highest fair market value during the sanction period. C. Noncharitable Expenditures. 1. First-tier penalties. a. On Corporate CTCC members. Under this section VI. paragraph C., a penalty is imposed on each noncharitable expenditure (as defined in section VI. paragraph C.3.) of any Scientology-related entity described in the Code section 501(c) (3). The penalty shall be equal to 10 percent of the amount involved as defined in paragraph C.5.. The penalty imposed by this paragraph shall be paid on a joint and several basis by the CTCC Corporate members. No penalty shall be due under this paragraph C.1.a. if and to the extent that a taxable expenditure has been corrected within the correction period. b. On Individual CTCC members. There is hereby imposed on the agreement of any Individual CTCC member to the making of an expenditure or undertaking an activity, knowing that it is a noncharitable expenditure, a penalty equal to 2 1/2 percent of the amount involved, unless such an agreement is not willful and is due to reasonable cause. The penalty imposed by this paragraph shall be paid by any Individual CTCC member who agreed to the making of the expenditure of undertaking the activity. No penalty shall be due under this paragraph C.1.b. if and to the extent that a taxable expenditure has been corrected within the correction period. 2. Second-tier penalties. a. On Corporate CTCC members. In any case in which a first tier penalty is imposed by section VI. paragraph C.1.a. by reason of a noncharitable expenditure and such expenditure or activity is not corrected within the sanction period, there is hereby imposed a penalty equal to 100 percent of the amount involved. The penalty imposed by this paragraph shall be paid on a joint and several basis by the CTCC Corporate members. No penalty shall be due under this paragraph C.2.a. if and to the extent that a taxable expenditure has been corrected within the correction period. b. On Individual CTCC members. i. In any case in which an additional penalty is imposed by paragraph C.2.a., if an Individual CTCC member refused to agree to part or all of the correction, there is hereby imposed a penalty equal to 50 percent of the amount involved. The penalty imposed by this paragraph shall be paid by each Individual CTCC member who refused to agree to part or all of the correction. ii. In addition, in the event that correction does not occur by reason of any officer or director of any Scientology-related entity refusing to agree to part or all of the correction, there is a penalty equal to 50 percent of the amount involved. The penalty imposed under this paragraph shall be paid by each Individual CTCC member. iii. No penalty shall be due under this paragraph C.2.b. if and to the extent that a taxable expenditure has been corrected within the correction period. 3. a. Noncharitable expenditure. For purposes of this section VI., the term "noncharitable expenditure" means: i. any amount paid or incurred by a Scientology-related entity described in Code section 501 (c) (3): (a) to an entity or individual unless: (1) the recipient entity is described in Code section 501 (c) (3), or (2) the payment will directly further a charitable purpose and the Scientology-related entity exercises expenditure responsibility with respect to such payment as required and in accordance with paragraph C.3.b. (b) any amount paid or incurred by a Scientology-related entity for any purpose other than one specified in Code section 170 (c) (2) (B). ii. any amount paid or incurred by a Scientology-related entity as a special noncharitable expenditure as defined in paragraph C.4. b. Expenditure responsibility. The expenditure responsibility referred to in section VI. paragraph C.3.a.i. (a) (1) means that the Scientology-related entity is responsible to exert all reasonable efforts and to establish adequate procedures during the transition period: i. to see that the payment is spent solely for the charitable purpose for which made, ii. to obtain full and complete reports from the recipient on how the funds are spent, and iii. to make full and detailed reports on such expenditures to the Service as part of the Annual Report described in section IV paragraph C.7. Expenditure responsibility is required under this section VI. paragraph C.3.b. only to the extent the CTCC is required to report with respect to its expenditure responsibility as part of the Annual Report under section IV., paragraph C.7. c. Governing principles. In determining whether a particular expenditure is a noncharitable expenditure, the Service shall be guided by principles of section 53.4945-6 (b) (2) of the Treasury Regulation (regardless of whether the expenditure involves an administrative expense), under which it is neither the policy nor the prerogative of the Service to substitute its judgment for the reasonable exercise of business judgment by executives of the affected Scientology-related entity. 4. Special noncharitable expenditure. For purposes of this section VI., the term "special noncharitable expenditure" means any amount paid or incurred by a Scientology-related entity or Scientology-related individual in connection with the following: a. Any act or omission that any CTCC member knew would impair the efficacy of the guaranty of collection set forth in section IV. paragraph A.3.d. of this Agreement. b. The diminution of assets in violation of section IV. paragraph A.3.d.viii. c. Any expenditure by a Scientology-related entity that has not been recognized as tax exempt under section III. of this Agreement or by any Scientology-related individual, if such expenditure jeopardizes the tax-exempt status of any Scientology-related entity recognized under section III. of this Agreement as described in Code section 501 (c) (3). d. The conduct or support of litigation by a Scientology-related entity or a Scientology-related individual against the Service or any present or former Service employee in violation of section II. paragraph C.4. or C.5. of this Agreement. e. The financial support by a Scientology-related entity or Scientology-related individual of a tax refund claim against the Service in violation of section VII., paragraph G.. 5. Amount involved. For purposes of this section VI. paragraph C., the term "amount involved" as it relates to the penalties provided under this section imposed on a noncharitable expenditure means: a. For the penalties imposed under this section VI. paragraph C. (except as provided below with respect to certain of the special noncharitable expenditures and noncharitable activities described in paragraph C.4.), the "amount involved" shall be the greater of (1) the amount paid or incurred in connection with a noncharitable expenditure or (2) the sum of $25,000. b. For the penalties imposed by reason of special noncharitable expenditure defined in paragraph C.4.a., the "amount involved" is equal to the greater of (1) the difference between the assets of the CTCC Corporate members before the impairment of the guaranty and the assets of the CTCC Corporate members subsequent to the impairment, or (2) the sum of $25,000. c. For the penalties imposed by reason of special noncharitable expenditure defined in paragraph C.4.b., the "amount involved" is equal to the greater of (1) the excess value of the assets over 10-percent of the difference between the assets of the CTCC Corporate members before the transfer and the assets of the CTCC Corporate members subsequent to the transfer, or (2) the sum of $25,000. d. For the penalties imposed by reason of special noncharitable expenditure or noncharitable activity defined in paragraphs C.4.d. and C.4.e., the "amount involved" is equal to the greatest of (1) the number of staff hours of Service or Department of Justice attorneys required for the year to respond to any litigation, multiplied by $100, (2) the cost to indemnify the Service and the United States in any litigation for the year and for all costs including any damages, or (3) the sum of $25,000. D. Reporting Obligations. 1. Penalty on Corporate CTCC members. A penalty is imposed jointly and severally on the Corporate CTCC members in the event of certain failures in providing the Annual report. a. In the case of a failure to submit the Annual Report required under section IV. paragraph A.3.a. of this Agreement by the date and in the manner prescribed therefor (determined with regard to any extension of time for filing), there shall be paid $250 for each day until the submission of such report. b. In the case of a failure to include within the Annual Report any of the information required to be shown under this Agreement or to show information that is materially correct, there shall be paid by the Corporate CTCC members $250 for each day during which such failure continues. The maximum penalty under this section VI. paragraph D.1. with respect to any one Annual Report shall not exceed $75,000. 2. Penalty on Individual CTCC members. Upon a failure to submit an Annual Report in a timely and complete fashion, the Service may make a written demand on the CTCC specifying therein a reasonable future date by which the Annual Report shall be submitted (or the missing or correct information furnished) for purposes of this paragraph. a. Failure to comply with demand. If the CTCC fails to comply with any demand under paragraph D. 2. on or before the date specified in such demand, there shall be paid by each Individual CTCC member $250 for each day after the expiration of the time specified in such demand during which such failure continues. The maximum penalty imposed under this paragraph on all Individual CTCC members for failures with respect to any one Annual Report shall not exceed $75,000 per Individual member. b. Application of penalties for failure to provide information. Each failure to include with the Annual Report information required under any single subparagraph of section IV. paragraph B. or section IV. paragraph C. of this Agreement shall be treated as a separate failure to provide information and shall be subject to a separate penalty or penalties under this section VI., except that the $75,000 maximum applies to the Annual Report as a whole and, therefore, is not increased by reason of multiple failures to comply within the same Annual Report. 3. Exception for reasonable cause. No penalty shall be imposed under this section VI. paragraph D. with respect to any failure if the CTCC shows that such failure is due to reasonable cause. 4. Exception for inability to certify specific information. If the CTCC is unable to certify any matter as required under this Agreement due to an actual or potentially noncompliant act or acts or failure to act, no penalty shall be imposed under this section VI. paragraph D. with respect to the failure to provide such certification, provided that: a. the CTCC makes the required certifications with respect to all but those actual or potentially noncompliant acts, b. the CTCC takes appropriate and timely steps to determine whether a potentially noncompliant act is in fact noncompliant, c. the CTCC discloses all noncompliant acts as soon as possible under the circumstances, and currently discloses that it is investigating a particular act or acts that may be noncompliant, d. the CTCC takes appropriate and timely steps to correct all noncompliant acts, and e. the CTCC reports to the Service with respect to the correction of noncompliant acts as soon as possible under the circumstances. E. Joint and Several Liability and Certain Penalty Limitations for Individual CTCC Members. 1. The Corporate CTCC members shall be jointly and severally liable for payment of the penalties imposed by section VI. paragraphs C.1.a., C.2.a., and D.1. The penalties on the Individual CTCC members are to be paid by the specific Individual CTCC member subject to the penalty. 2. The maximum amount of any penalty imposed on any Individual CTCC member under section VI. with respect to (1) any one act of self-dealing under paragraph B., (2) any one noncharitable expenditure under section VI. paragraph C., or (3) deficiencies in the Annual Report under section VI., paragraph D., shall not exceed the lesser of (i) the individual CTCC member's total compensation for the taxable year from all Scientology-related entities, or (ii) the sum of $50,000 each taxable year, except that the maximum penalty on an individual CTCC member charged with an act of self-dealing in no event shall be less than the sanction imposed for that act. 3. No single act or expenditure by a Scientology-related entity shall be subject to multiple penalties under paragraphs B.1.b, C.1.b, and/or D.2, or multiple penalties under paragraphs B.2.b, C.2.b, and/or D.2. (for example, an expenditure constituting both an act of self-dealing under paragraph B. and a noncharitable expenditure under paragraph C.). Such an act or expenditure shall be subject to the applicable penalty in paragraph B., C., or D. that results in the highest penalty amount. F. Additional Penalty. If any person or entity becomes liable for any penalty under paragraphs B. or D. of this section VI. by reason of any act or failure to act which is not due to reasonable cause and either: 1. such person has theretofore been liable for a penalty under any of such paragraphs; or 2. such act or failure to act was both willful and flagrant; then such person shall be liable for an additional penalty equal to the amount of the applicable first tier penalty. G. Third-Tier Penalty. 1. If there has been (i) willful, repeated and flagrant misconduct, and (ii) a failure to correct such misconduct, giving rise to penalties under paragraphs B. and/or C. of this section VI., there is imposed on the Corporate members of the CTCC a penalty equal to $50,000,000. 2. For purposes of this section VI., various terms are defined as follows: a. the phrase "flagrant misconduct" means: (i) For any act of self-dealing under section VI. paragraph B., the intentional diversion of assets from one or more Scientology-related entities that is not corrected within the correction period. (ii) For any noncharitable expenditure under paragraph C., the intentional use of assets from one or more Scientology-related entities for any purpose other than one specified in Code section 170 (c) (2) (B) that is not corrected within the correction period. b. The phrase "diversion" means the transfer of assets by a Scientology-related entity that constitutes the private inurement of its net earnings to the benefit of a private shareholder or similarly-situated individual. c. The phrase "repeated," with respect to misconduct, means more than two occurrences of conduct resulting in the imposition of second-tier sanctions under this Agreement. H. Procedures for Penalty Determinations 1. a. First-tier Penalty i. With respect to a claimed penalty arising from information in the Annual Report, the Service shall notify the CTCC in writing of its belief than an event subject to penalty under paragraphs B.1., C.1. or D. of this section VI. has occurred within 180 days of receipt of the Annual Report. Such notice (hereinafter the "initial notice") shall identify the expenditure, act (or failure to act) or transaction the Service believes warrants the imposition of penalties and an explanation of its reasons for this conclusion. The notice shall specify the exact provisions of the applicable law or of this Agreement the Service believes has been violated and shall, subject to the requirements of Code section 6103, cite and append evidence in its possession that supports its belief. ii. Upon receipt of the initial notice, the CTCC shall investigate the matter and report its conclusions back to the Service within 90 days of receipt of the initial notice. iii. If, following receipt of the CTCC's report under section VI. paragraph H.1.a.(ii), or in the event of a failure to respond, the Service still believes that an event warranting imposition of a penalty has occurred and has not been corrected, the Service will provide a conference of right with the Assistant Commissioner to undertake a discussion on the merits of the respective positions of the CTCC and the Service. iv. If, following the conference of right under paragraph H.1.a.(iii) of this Section VI., the Service still believes that an event warranting imposition of a penalty has occurred and is not in the process of being corrected, the Service will issue a final determination of penalty and send notice thereof to the CTCC. Such notice shall specify the exact provisions of applicable law or of this Agreement the Service believes have been violated and shall, subject to the requirements of Code section 6103, cite and append evidence in its possession that supports its belief, including its reasons for not accepting the arguments and evidence submitted by the CTCC in support of its position that no violation has occurred. v. With respect to a claimed penalty arising from information in the Annual Report, the Service must issue a final determination of first-tier penalty to the CTCC no later than one year from the date the Service receives the CTCC report described in section VI. paragraph H.1.a.(2). vi. If the CTCC continues to disagree with the Service's determination of a first-tier penalty notice, it shall so notify the Service in writing. Upon receipt of such notice, the Service may sue under paragraph H.1.e. to collect the first-tier penalty. Until the completion of such suit, including the exhaustion of any appeals or other proceedings for appellate review, the CTCC need not pay any first-tier penalty determined by the Service. b. Second-tier penalties. If an event subject to a first-tier penalty under this Agreement has not been corrected with the sanction period as defined in section VIII. P., the Service may issue a notice of final determination of second-tier penalty. The Service must issue any notice of final determination of second-tier penalty no later than 90 days after expiration of the sanction period. No second-tier penalty shall be due under this Agreement if and to the extent that a taxable expenditure has been corrected within the correction period. c. Other penalties. In the case of penalties other than those described in paragraphs H.1.a. or H.1.b. of this determination of penalty to the CTCC. d. No notice of determination, initial or final, may be made under this Agreement if the notice is not sent by certified mail to the CTCC by the 120th day after the end of the transition period. In addition, no penalty may accrue for any period after December 31, 1999. However, provided that the initial notice was mailed prior to this date, the penalty asserted may be collected and enforced notwithstanding the expiration of the transition period. e. Any penalty imposed under this section VI. is payable upon notice and demand, and may be collected by the Service through suit. The Service and the Corporate, Individual and At-large CTCC members agree that all parties shall have the right to specific performance (in addition to all other remedies available under the Code, at law, in equity or under this Agreement). f. Should correction, as defined in section VIII., paragraph S., occur within the correction period, as defined in section VIII. paragraph T., no penalty shall be collected under this section VI. 2. Interest. In the event that any penalty under this section VI. is asserted by the Service and the CTCC fails to make payment within 90 days of the final notice of penalty, interest on the amount of such penalty shall accrue from the date of issuance of such final notice to the date of payment at the Federal short-term applicable rate (as set forth and applied in Code sections 6621(b) and 6622). 3. Non-assertion of penalties. a. If it is established to the satisfaction of the Service, in the exercise of its reasonable discretion, that any event subject to penalty has been correction during the correction period for such event, then any penalty imposed with respect to such event (including interest) shall not be asserted, and if asserted, shall not be collected, and, if collected, shall be promptly credited or refunded to the extent permitted by law. b. The Service shall not assert any penalty under this section VI. when the CTCC has established to the Service's satisfaction in the exercise of its reasonable discretion, that: i. what would otherwise constitute a transaction or event warranting imposition of penalties caused no financial detriment to charitable interests; ii. the transaction of expenditure has been corrected; iii. the CTCC has acted promptly and in good faith to correct any such transaction or expenditure and prevent its recurrence; or iv. the penalty is disproportionate to the severity of the transaction or expenditure. _ 7. Treatment of Parishioners' Contributions_ A. The Service acknowledges its obligation to interpret and apply the "gift or contribution" requirement of Code section 170(c) equally and consistently to the fundraising practices of all religious organizations that receive fixed donations from parishioners in connection with participation in worship and similar religious rituals or services. B. Until the earlier of (i) December 31, 1999, (ii) the issuance or adoption by the Service of audit policies or practices in the examination of tax returns utilizing uniform and consistent principles for determining the deductibility of fixed donations to all churches, or (iii) until legislation is enacted which affects the deductibility of such fixed donations, the Service agrees not to contest the deductibility of Church of Scientology fixed donations in connection with qualified religious services. The phrase "qualified religious services" means those appearing on the "Scientology Classification, Gradation and Awareness Chart." If the taxpayer produces an accurate receipt or other documentation from the donee Church of Scientology substantiating (1) the amount of the taxpayer's fixed donation and (2) the qualified religious services with respect to which the donation was made, then, for as long as this paragraph B. of this section VII. applies, as set forth in paragraph F., the full amount of the fixed donation for these services shall be treated as a charitable contribution under Code section 170 and shall not be challenged on that basis. Nothing in the preceding sentence affects other requirements, including substantiation, as provided by law. In the absence of such documentation, the Service also may independently determine the amount of and the extent to which the taxpayer's fixed donations were made in connection with qualified religious services. Individual taxpayers' contributions to churches of Scientology not in connection with religious services or any substantial return benefit remain fully deductible if other requirements under the law are met. Payments to churches of Scientology for books or other religious articles are not deductible except to the extend that a dual payment exists. C. To apply paragraph B. for taxable years before 1993, and in consideration of the other provisions of this agreement, the Service will settle all outstanding controversies with individual Church of Scientology parishioners involving the deductibility of their fixed donations under Code section 170 on a no-change basis (subject to substantiation of payment for qualified religious services and compliance with other requirements of the Code). Any future deficiency controversies with individual taxpayers involving the deductibility of Church of Scientology fixed donations for taxable years beginning before 1993 also will be resolved on a no-change basis on the section 170 issue subject to substantiation of payment for qualified religious services and compliance with other requirements of the Code. This process will be implemented as follows: 1. The Office of Chief Counsel, Internal Revenue Service will enter into stipulated decision documents with the taxpayers listed on Exhibit VII-I (or authorized representatives) to carry out this paragraph in the cases pending before the United States Tax Court. Upon notice and request of the CTCC, the office of Chief Counsel will enter into a similar stipulated decision document in any future case that becomes docketed in the Tax Court with respect to a taxable year beginning before 1993. The stipulated decision documents will reflect an allowance of charitable contribution deductions for Church of Scientology fixed donations in the full amount of the payments substantiated as being paid for qualified religious services as provided in paragraph B. above. The stipulated decision documents also will identify as overpayments any credible or refundable amounts paid by the taxpayers for the years at issue, provided that the Tax Court has jurisdiction to determine the existence and amount of such overpayment. 2. The Service will issue administrative refunds for the full amount of the tax that is attributable to the fixed donations to churches of Scientology for qualified religious services, plus interest, to the taxpayers in the following cases: Powell v. United States, No. CV 90-8271 (S.D. Fla.) Nieves v. United States, No. CV 90-4211 (S.D. N.Y.) Following the issuance of the administrative refund, the taxpayers will dismiss with prejudice their respective cases. 3. In the case of a refund claim for a taxable year beginning before 1993 that is not barred by the statute of limitations and is not the subject of a docketed deficiency cases before the Tax Court or a refund cases before a District Court or the Court of Federal Claims at the time of the execution of this Agreement, the taxpayers shall be entitled to an allowance of 80 percent of his or her fixed donations in connection with qualified religious services, as provided in paragraph B. and the claim shall be treated accordingly. The Office of Chief Counsel shall request the Untied States Department of Justice to enter into a stipulation with taxpayer's counsel (or taxpayer) in any future case seeking a refund of income taxes for taxable years beginning before 1993 based on the Service's disallowance of charitable contribution deductions for Church of Scientology fixed donations for which the statute of limitations has nor expired, in accordance with the preceding sentence. See, however, the CTCC's obligation not to promote such claims as provided in paragraph G. 4. For any refund controversy described in subparagraph 3., above,the provisions of paragraph B. shall remain open until the Service mails a notice of final disallowance of such refund claim. 5. If the Service is in compliance with the provisions of subparagraphs 1-3, above, and the taxpayer refuses the Service's offer to provide a stipulation or settlement in resolution of the fixed donation issue of the taxpayer/parishioner to the Church of Scientology as provided herein, then, notwithstanding any other provision of his section VII., the Service shall not be bound by this paragraph as to that taxpayer (and that year for which there is no agreement) and shall not thereafter be bound to the 80/20 dual payment percentage as to that taxpayer for that tax year. Nothing in this paragraph prevents the Service, at its election, from stipulating or settling on any other basis (or proceeding in any manner) with any taxpayer if the taxpayer declines to settle in accordance with this section VII. 6. This paragraph C. shall apply to all pending and future administrative cases in examination, appeals, or collection for taxable years beginning before 1993. 7. All overpayments resulting from the stipulations or judgments provided in subparagraphs 1. through 3., above, shall be promptly credited or refunded under applicable provisions of the Code (including section 6611) and regulations. D. To apply paragraph B. for taxable years after 1992, the Service shall prepare and transmit instructions to all appropriate IRS functions and Offices at the National, Regional and District level and to IRS Service Center explaining their obligations to carry out paragraph B. of this section VII. In particular, those instructions shall direct the various Service functions not to disallow any portion of deductions for Church of Scientology fixed donations in connection with qualified religious services on the ground that the payments are not charitable contributions, until the earliest of (i) December 31, 1999, (ii) the issuance by Service of the audit policies or practices described in paragraph B. (ii) or (iii) until legislation is enacted which affects the deductibility of such fixed donations. Nothing in the paragraph prevents the Service, at its election, from stipulating or settling on any other basis (or preceding in any manner) with any taxpayer of the taxpayer declines to settle in accordance with this section VII. E. The Service also agrees to withdraw, obsolete or supersede, Rev. Rul. 78-189 no later than April 1, 1994, irrespective of whether the audit policies or practices described in paragraph B. (ii) are ever issued. F. 1. Except as provided in subparagraph 2., below, the Service shall apply paragraph B. to all pending and future administrative cases in examination, appeals, or collection for taxable years beginning after 1992 through taxable years ending before January 1, 2000. 2. If the Service implements the audit policies or practices described in paragraph B. (ii) for a taxable year ending before January 1, 2000, then the service shall allow individual taxpayers charitable contribution deductions for no less than 80 percent of their Church of Scientology fixed donations in connection with qualified religious services, as defined in paragraph B., to the extend substantiated as provided in paragraph B., for taxable years ending before January 1, 2000. 3. If, prior to January 1, 2000, the Service has not issued or adopted audit policies or practices described in paragraph B. (ii), the parties agree to meet to discuss further agreements or actions that nay be undertaken to implement paragraph A. in the spirit of this entire Agreement. G. While recognizing that all individual Scientologists not barred by law or agreement are entitled to file claims for refund to recover amounts covered by this settlement and that the CTCC may inform Church parishioners of the provisions of section VII of this Agreement, the CTCC agrees not to promote or encourage individual Scientologists to file claims for refund of taxes for the taxable year 1993. H. Individual taxpayers making fixed donations to churches of Scientology shall be considered to be third-party beneficiaries of this section VII. and shall be entitled to enforce its terms in any administrative or judicial proceeding. Such individual taxpayers shall not be charged with the receipt of taxable income by virtue of any of the provisions of this agreement. I. The CTCC shall use its best efforts to have Scientology parishioners agree to the stipulations and settlements as provided in this section VII. J. If the Service either holds a meeting regarding the deductibility of fixed donations to religious organizations and invites religious organizations to participate or solicits comments from religious organizations on the subject, the Service shall invite the Church of Scientology to participate or to supply comments on the same basis as the other religious organizations. _ 8. Definitions._ For purposes of this Agreement: A. "Code" means the Internal Revenue Code of 1986 and the regulations thereunder, as amended from time to time. B. "Entity" includes any corporation, limited liability company, trust, association, committee, partnership, or unincorporated organization, as well as any "person" (other than an individual), as defined in Treas. Reg. sec. 301.7701-1 through -4. C. An entity is a "Scientology-related entity" if that entity is described in one or more of the paragraphs set forth below: 1. An entity is a Scientology-related entity if it is a signatory to this Agreement or is identified in section III., paragraphs B. or C. or section IV., paragraph D.2. of this Agreement or Exhibits III-1 through III-35 of this Agreement. 2. An entity is a Scientology-related entity if it delivers religious services to parishioners in a manner prescribed by the works of L. Ron Hubbard and as authorized (directly or indirectly) by Religious Technology Center, Church of Scientology International or other entity described in another paragraph as a Scientology-related entity. Thus, for example, all Class V churches, Continental organizations, CSFSSO, CSFSO, CSWUS, Saint Hill or other advanced organizations and missions are Scientology-related entities. 3. The publications organizations discussed at page 1-21 through 1-27 of the letter to John Burke, Monique Yingling dated June 29, 1992, (the "June Submission") and part of the Qualified Written Material are Scientology-related entities. Thus, for example, Bridge Publications, Inc., and New Era Publications International ApS, as well as their related subsidiaries or affiliates, are Scientology-related entities. Pages 1-21 through 1-27 are attached as Exhibit VIII-1 to this Agreement. 4. The social benefit and other public benefit entities discussed at pages 1-28 through 1-42 of the June submission along with all subsidiaries, subordinate chapters, subordinate organizations, or sublicensees thereof (e.g., organizations that are permitted to use particular names, copyrights, service marks, and/or technologies) are Scientology-related entities. Thus, for example, Citizens Commission on Human Rights, National Commission on Law Enforcement and Social Justice, Scientology Defense Fund Trust, Association for the Better Living and Education, Applied Scholastics Incorporated, Narconon International, The Way to Happiness Foundation, and the Foundation for Religious Freedom are Scientology-related entities. Pages 1-28 through 1-42 are attached as Exhibit VIII-2 to this Agreement. 5. Any entities subject to the ecclesiastical direction or general guidance of Church of Scientology International or Religious Technology Center, directly or indirectly, including but not limited to any trusts, that hold assets (including but not limited to intellectual property and mortgages) for any other Scientology-related entity or for the advancement or protection of the Scientology religion whether or not those entities were discussed at pages 1-43 through 1-56 of the June submission are Scientology-related entities. This definition does not include the trust or estate of any parishioner who has made an intervivos or testamentary transfer of assets to the Church. This definition does not include financial institutions that are not owned (directly or indirectly) in whole or in part by any entity that otherwise meets the definition of Scientology-related entity under another subparagraph of this paragraph VIII. C. This definition does not include (i) any fiduciary that is not a Scientology-related entity or a Scientology-related individual (ii) the employee of any such fiduciary, (iii) any escrow agent holding assets of a Scientology-related entity under and escrow arrangement of a strictly temporary nature, (iv) any trustee under a deed of trust upon real property to secure the debt of a Scientology-related entity (v) any person acting under the power of attorney to Scientology-related entity, provided that any such fiduciary described in (i) through (v) above, and is nor otherwise a Scientology-related entity under paragraph of this section VIII, paragraph C. Pages 1-43 through 1-56 are attached as Exhibit VIII-3 to this Agreement. 6. Any entity directly or indirectly involved in, or related to, the ownership and /or operation of the M.V. Freewinds including those listed at pages 1-57 through 1-59 of the June submission are Scientology-related entities. Thus, for example, the Foundation Church of Scientology Flag Ship Service Organization, Flag Ship Trust, Transcorp Services S.A., San Donato Properties Corporation and MCL Services N.V. are Scientology-related entities. Pages 1-57 thorough 1-59 are attached as Exhibit VIII-4 to this Agreement. 7. Any membership entity primarily composed of Scientologists, whether or not listed on pages 1-60 through 1-62 of the June submission, including but not limited to the International Association of Scientologists, Danish Association of Scientologists, and European Association for Scientology, along with any entities performing the operations of (or holding the assents of ) such organizations (including Foundation of International Membership Services Administration N.V., Membership Services administration (UK) Ltd and U.S. IAS Members' Trust), are Scientology-related entities. Pages 1-60 through 1-62 are attached as Exhibit VIII-5 to this Agreement. 8. Any entity that owns, (including, but not limited to, those entities listed below in this subparagraph C.8.), (sub) licenses to others to use, and/or has rights to (sub) license others to use what has been described in the Qualified Written Material as the Scriptures (the written and spoken words of L. Ron Hubbard on Scientology and Dianetics) or any technology, copyright, trademark or service mark held by RTC, CSI, CST, any publications organization (described in paragraph C.3 above), the Estate of L. Ron Hubbard or Author's Family Trust B, is a Scientology-related entity. 9. Any other entity licensed to use, or otherwise granted permission to use or employ, any copyright, service mark, or trademark that has been, is now (or shall in the future) be held or owned, directly or indirectly, by Religious Technology Center, Church of Scientology International, the Estate of L. Ron Hubbard, Author's Family Trust B or Church of Spiritual Technology, is a Scientology-related entity. 10. Any taxable or for-profit entity of which one or more Scientology-related entities and/or any of the trustees, directors and/or officers of any entity defined as a Scientology-related entity under this section VIII. paragraph C, separately or together, owned or had a beneficial interest of more than twenty-five percent is a Scientology-related entity. In addition, any non-profit entity of which one or more Scientology-related entities and/or any of the trustees, directors and/or offices of any entity defined as a Scientology-related entity under this section VIII. paragraph C, separately or together, control the voting power of, or have a beneficial interest of, more than twenty-five percent, is a Scientology, related entity. For purposes of this definition, any Individual or At-Large member of the CTCC shall be considered an officer of a Scientology-related entity. 11. For purposes of subparagraphs 4, 8, or 9, the term Scientology-related entity includes only those entities that are under the ecclesiastical direction or general guidance of CSI, directly or indirectly, and that are not owned in whole or in part by any entity that otherwise meets the definition of Scientology-related entity under another subparagraph of this section VIII. paragraph C.. Thus, by the way of example, the term Scientology-related entity generally does not include (I) sublicensees of the World Institute of Scientology Enterprises (hereinafter "WISE"), (ii) any entity that would not otherwise be described above, except that it has been licensed to publish or disseminate solely the fictional works of L. Ron Hubbard, and (iii) licenses of Applied Scholastics, Inc. that are not included as subordinate entities under its group exemption, as provided in section III., paragraph 3.c and listed on Exhibit III-28 (or will be subordinate entities in the future) . 12. a. In general. The term Scientology-related entity generally includes an entity whether formed under the laws of the United States or of a country other than the United States, except to the extent other provisions of this Agreement expressly include only U.S. entities or expressly exclude non-U.S. entities. b. Exception. i. With respect to certain provisions of this Agreement, the term Scientology-related entity does not include an Excluded Foreign Scientology-related Entity. A Scientology-related entity is an Excluded Foreign Scientology-related Entity if it is formed under the laws of, and substantially all of its operations are in, a country other than the United States and it (a) is described in section VIII, paragraph C.2 and is a Mission or Class V church; (b) is described in Section VIII, paragraph C.4; (c) is described in Section VIII, paragraph C.5, provided that it is not an entity that has as its primary function the holding of assets for the Church of Scientology; or (d) is described in Section VIII, paragraph C.9 but has neither annual gross receipts not gross assets in excess of $15 million. ii. To the extent a Scientology-related entity is otherwise specifically included in a provision (notwithstanding the fact that is an Excluded Foreign Scientology-related Entity), it is a Scientology-related entity for the specified purposes of the affected provision. Specifically, but not by the way of limitation, an Excluded Foreign Scientology-related entity with respect to the following provisions of this Agreement: Section II.: paragraphs B.5., B.7 through B.9, C.1. through C.6, E.1., E.4.b. and F. Section III.: Paragraph B.10 Section IV.: paragraphs A.3.d., B.1.a., B.1.f.ii. B.2.a., B.3., B.4., C.1., C.3., C.4., C.5., C.6., C.7.a.,C.7.b., C.10.,E.1., E.2.,E.3., and F.2. Section V.: all Section VI.: paragraph B. iii. An Excluded Foreign Scientology-related Entity is excluded from the definition of Scientology-related entity with respect to the following provisions of this Agreement: Section IV.: paragraphs A.3. (other than A.3.d.), D.1., D.2., D.3. Section VI: paragraph A, C (unless paragraph C.10. of section IV applies) and G. Section IX: paragraph A. iv. With respect to other provisions of this agreement concerning procedural matters (such as reporting term limitations) that relate to the specific provisions referred to in Section VIII, paragraph C. 12.b.ii., Scientology-related entity also includes Excluded Foreign Scientology-related entity. c. Limitation. paragraph 12.b. shall not apply to exclude from treatment as a Scientology-related entity any entity that otherwise meets the definition of Scientology-related entity under a subparagraph of this section VIII. paragraph C. other than subparagraphs 2.,4.,5., or 9. 13. If an entity is treated as a Scientology-related entity by reason of paragraph C.1. of this section VIII., then such entity shall be treated as a Scientology-related entity notwithstanding that one or more of the other subparagraphs of paragraph C. of this section VIII might otherwise apply to exclude such entity from being treated as a Scientology-related entity. 14. The term Scientology-related entity is not limited to those entities that are in existence as of the date of this Agreement but also includes those described in paragraph C. created after this Agreement is signed. D. "Scientology-related Individual" means an individual rendering services to or on behalf of a Scientology-related entity as a staff member, agent officer, trustee, or attorney in fact of that Scientology-related entity. The term "Scientology-related individual" includes, without limiting the generality of the foregoing, Individual CTCC members, At-Large CTCC members and individuals serving on the CTCC as representatives of Corporate CTCC members. The term "Scientology-related individual" applies only to the extent that such individual is acting in his capacity as staff member or other service-provider to or on behalf of the Scientology-related entity. E. "Qualified Written Material" means any information designated as "Qualified Written Material" pursuant to paragraph 4 of the agreement between Church of Scientology International and the Service, executed on behalf of the CSI on May 5, 1992. This material was obtained as part of the discussions in which the Service requested information relating to the organizational structure and operations of the Church mostly by written requests dated May 4, 1992 and October 16, 1992, to which the Church responded in June and November of 1992, respectively, and in various other written responses. F. "Service" means the Internal Revenue Service, including but not limited to the Office of Chief Counsel. References to officers or employees (present or former) of the Service shall include, but not limited to, officers or employees (present or former) of the Officer of Chief Counsel. G. "Taxable year" means calendar year. H. "Transition period" means taxable years 1993, 1994, 1995, 1996, 1997, 1998 and 1999. I. "Agreement" means this closing agreement. J. "CTCC" means the Church Tax Compliance Committee. K. "Church Signatories" means the following entities: Church of Scientology International, Religious Technology Center, Church of Spiritual Technology, Church of Scientology Religious Trust, Building Management Services, Church of Scientology Flag Service Organization, Inc. and the Church of Scientology Western United States. L. "Settlement Agreement" means an agreement entered into between the Church Signatories and the Service on even date herewith relating to the disposition of certain other matters between the parties attached hereto as Exhibit IV-5. M. "Annual Report" means the report complied and submitted during the transition period by the CTCC as required under section IV of this Agreement. N. Disqualified Person. In General. The term "disqualified person" means with respect to a Scientology-related entity, any of the following persons: 1. an Individual CTCC member (within the meaning of section IV. paragraph A.2.c. of this Agreement); 2.A member of the family (as defined in paragraph 9) of an Individual CTCC member; 3. a corporation not recognized as exempt under Code section 501 (c) (3) of which any person described in section VIII. paragraph N.1. or N.2. owns more than 35 percent of the total combined voting stock or stock value; 4. a limited liability company not recognized as exempt under Code section 501 (c) (3) in which any person described in section VIII. paragraph N.1. or N.2. owns more than 35 percent of the membership interests; 5. a partnership not recognized as exempt under Code section 501 (c) (3) in which any person described in section VIII. paragraph 1. or 2. owns more than 35 percent of the profits interests or capital interests; or 6. an estate or a trust not recognized as exempt under Code section 501 (c) (3) in which any person described in section VIII. paragraph N.1. or N.2. holds more than 35 percent of the beneficial interest. 7. Stockholdings; Membership Interests. For purposes of paragraphs 3. and 4., there shall be taken into account indirect stockholdings and membership interests which would be taken into account under section 267 (c) and 318 (a) (4), except that, for purposes of this paragraph, Code section 267 (c) (4) shall be treated as providing that the members of the family of an individual are the members within the meaning of section VIII. paragraph N.9. 8. Partnerships, Trusts, Estates. For the purposes of paragraphs 4. and 5. the ownership of profits interest, capital interest or beneficial interest shall be determined in accordance with the rules for constructive ownership of stock provided in Code section 267 (c) (other than paragraph (3) thereof), except that Code section 267 (c) (4) shall be treated as providing that the members of the family of an individual are the members within the meaning of paragraph 9. 9. Members of Family. For purposes of this definition, the family of any individual shall include on the individual's parents, children, spouse, siblings and the spouses of the individual's siblings. 10. Time of determination. A person is a disqualified person, if, at any time during the transition period that a person is described in this definition. O. Willful. There term "willful" means a knowing, voluntary, intentional violation of a known legal duty. P. Sanction Period. The term "sanction period" means, with respect to any act of self-dealing under section VI. paragraph B or noncharitable expenditure under section VI. paragraph C, the period beginning on the date on which the act of self-dealing or noncharitable expenditure occurs and ending on the earliest of : 1. the date on which the penalty imposed by section VI. paragraph B.a.1. or C.a.1 is paid; 2. the date on which correction of the act of self-dealing or noncharitable expenditure is completed; or 3. 180 days after the final judicial decision sustaining the Service's final determination with respect to a penalty imposed by section VI. paragraph B.1. or C.1. hereof under section VI. paragraph H.1.. Q. First-Tier Penalty. For purposes of this paragraph P., the term "first tier penalty" means any penalty imposed by section VI. paragraph B.1. or C.1. R. Second-Tier Penalty. For purposes of this paragraph P., the term "first tier penalty" means any penalty imposed by section VI. paragraph B.1. or C.2. S. Correction. The terms "correction" and "correct" mean: 1. for any act of self-dealing, undoing the transaction to the extent possible, but in any case placing the Scientology-related entity in a financial position not worse than that in which it would be if the disqualified person were dealing under the highest fiduciary standards; 2. for any noncharitable expenditure (A) recovering part of all of the expenditure to the extent recovery is possible, and where full recovery is not possible such additional corrective action as is prescribed by the Service or (B) in the case of a failure to comply with paragraph D making or correcting the report in question, and 3. for any failure to report under paragraph IV.D., the filing with the Service of an annual Report or corrected Annual Report 9 (or relevant part thereof), meeting the requirements of this Agreement. T. Correction Period. The term, "correction period" means, with respect to any event that is subject to penalty under the Agreement, the period beginning on the date on which such events occurs and ending 180 days after the date of the mailing under section VI. paragraph H.1.b. of a final notice of determination with respect to the second tier penalty imposed on such event, extended by any other period the Service determines is reasonable and necessary to bring about correction of the event. U. Church. The term "Church" when used in a descriptive sense refers to all Scientology-related entities. When used in connection with specific obligations under this Agreement, however, the term "Church" shall generally mean the CTCC. V. Commissioner. The term "Commissioner" means the Commissioner of the Internal Revenue Service. W. Assistant Commissioner. The term "Assistant Commissioner" means the Assistant Commissioner of the Internal Revenue Service for Employee Plans and Exempt organizations (or the successor to his or her function in any reorganization of the Service). X. Knowing. An individual shall be considered to have participated in a transaction "knowing" that it is either an act of self-dealing under section VI., paragraph B. or a noncharitable expenditure under section VI., paragraph C. only if 1. He has actual knowledge of sufficient facts so that, based solely upon such facts, such transaction would be an act of self-dealing or a noncharitable expenditure, and 2. He is aware that such an act under these circumstances may violate the relevant provisions of this Agreement, and 3. He negligently fails to make reasonable attempts to ascertain whether the transaction is an act of self-dealing or a noncharitable expenditure, or he is in fact aware that it is such an act. The term knowing does not mean "having reason to know," but evidence that a person had reason to know of a particular fact or of a provision of this Agreement can be circumstantial proof of actual knowledge. Y. Reasonable cause. The term "reasonable cause" means the exercise of responsibility by a CTCC member on behalf of the CTCC and Scientology-related entities with ordinary business care and prudence. _ 9. Other Matters._ A. Representations. The Church signatories represent that all are duly organized, validly existing and in good standing under the laws of the jurisdiction in which they are organized and that all have the power and authority to execute and deliver this Agreement, to perform their duties and obligations and to exercise their rights under this Agreement, to cause Scientology-related entities to comply with the terms of this Agreement, and further represent that the execution of this Agreement by the officers or trustees has duly and properly authorized by each Church signatory and that upon execution, this Agreement constitutes a valid and legally binding obligation of each Church signatory. B. Notices. 1. All notices and reports hereunder shall be in writing and sent by certified mail, return receipt requested. 2. Notice to the Service shall be sent as follows: Assistant Commissioner Employee Plans and Exempt Organizations Internal Revenue Service Room 3408E 1111 Constitution Avenue, N.W. Washington, D.C. 20224 In the event of a reorganization of functions within the Service in which the office of Assistant Commissioner (Employee Plans and Exempt Organizations) is eliminated, notices hereunder to the Service shall be sent to the Service official succeeding to the functions now served by the Assistant Commissioner (Employee Plans and Exempt Organization), as determined by the Service and sent to the CTCC in accordance with paragraph B. 4. hereof. 3. Notice to the CTCC shall be sent as follows: Church Tax Compliance Committee c/o Church of Scientology International 6331 Hollywood Blvd., Suite 1200 Los Angeles, California 90028-6329 4. Either party may change the address designated for future notices hereunder by notice in the manner provided in paragraph B. 1. to the other party to the existing address of record as provided in paragraph B. 2. or B. 3.. C. Rules of Construction. 1. This Agreement has been prepared by the combined efforts of the parties and their respective attorneys. 2. The parties may by written agreement extend the time for performance of any obligation under this Agreement, except and only to the extent that another provision of this Agreement precludes such an extension of time. 3. Unless otherwise expressly provided herein, no remedy conferred on or reserved to a party to this Agreement is intended to be exclusive of any other available remedy or remedies, but each and every such remedy shall be cumulative and shall be in addition to every other remedy given under this Agreement or now or hereafter existing pursuant to the Code, at law or in equity. No delay or omission to exercise any right or power accruing upon any default, omission or failure of performance hereunder shall impair any such right or power or shall be construed to be a waiver thereof, but any such right or power may be exercised from time to time and as often as may be deemed expedient. In the event any provision of this Agreement should be breached by any party, and thereafter duly waived by the other party so empowered to act, such waiver shall be limited to the particular breach so waived and shall not be deemed to waive any other breach hereunder. 4. The words "hereof," "herein," "hereunder," "hereto" and other words of similar import refer to this Agreement in its entirety. 5. The words "agree" and "agreements" contained herein are intended to include and mean "covenant" and "covenants." 6. References to section headings and other subdivisions of this Agreement are for convenience only and shall not define or limit the provisions hereof. 7. All references made in (i) the neuter, masculine or feminine gender shall be deemed to have been made in all such genders, and (ii) in the singular or plural number shall be deemed to have been made, respectively, in the plural or singular number as well. D. Entire Agreement. This Agreement constitutes the entire agreement between the Service and the Church and supersedes all prior agreements and understanding, both written and oral, between the Service and the Individual CTCC members, Corporate CTCC members, At-large CTCC members, Church Signatories, Scientology-related entities and Scientology-related individuals with respect to the subject matter hereof. However, nothing contained herein shall affect the Settlement Agreement, executed on even date herewith. E. Survival of Agreement. All covenants, agreements, representations, and warranties made herein and in all reports (including any Annual Report under section IV.), certificates, tax returns prepared and delivered pursuant hereto shall continue in full force and effect so long as any of the provisions of this Agreement remain unperformed. F. Costs of Compliance with Agreement. The Church Signatories, Individual CTCC members, Corporate CTCC members, and At-large CTCC members shall, solely at their own cost, perform and discharge all of the obligations and duties and exercise all rights under this Agreement, For example, no set off is available against any penalty asserted under section VI. paragraph C. 1. by reason of such costs. The Service shall at its own cost perform and discharge all of the obligations and duties and exercise all rights under this Agreement. G. Counterparts. This Agreement shall be executed in counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. H. Finality. This Agreement is final and conclusive except: 1. The matter it relates to may be reopened in the event of fraud, malfeasance, or misrepresentation of material fact; 2. It is subject to the Internal Revenue Code sections that expressly provide that effect be given to their provisions (including any stated exception for Code section 7122) notwithstanding any other law or rule of law; and 3. If it related to a tax period ending after the date of this Agreement, it is subject to any law, enacted after the Agreement date, that applied to that tax period. I. Date of Agreement. The date of this Agreement is October 1, 1993. Dated: October 1, 1993 [Signature] DAVID MISCAVIGE, Individual Member of CTCC Dated: October 1, 1993 [Signature] NORMAN F. STARKEY, Individual Member of CTCC Dated: October 1, 1993 [Signature] MARK RATHBUN, Individual Member of CTCC Dated: October 1, 1993 [Signature] HEBER JENTZSCH, Individual Member of CTCC Dated: October 1, 1993 [Signature] (POA) MARC YAGER, Chairman, WatchDog Committee, At-Large Member of CTCC Dated: October 1, 1993 [Signature] (POA) JONATHAN EPSTEIN, International Finance Director, At-Large Member of CTCC Dated: October 1, 1993 [Signature] (POA) NIGEL OAKES, Chief Accountant International, At-Large Member of CTCC Dated: October 1, 1993 RELIGIOUS TECHNOLOGY CENTER By: [Signature] Mark Rathbun Title: President Dated: October 1, 1993 CHURCH OF SCIENTOLOGY INTERNATIONAL By: [Signature] Heber Jentzsch Title: President Dated: October 1, 1993 CHURCH OF SPIRITUAL TECHNOLOGY By: [Signature] Title: POA Dated: October 1, 1993 CHURCH OF SCIENTOLOGY FLAG SERVICE ORGANIZATION, INC. By: [Signature] Title: POA Dated: October 1, 1993 CHURCH OF SCIENTOLOGY WESTERN UNITED STATES By: [Signature] Title: POA Dated: October 1, 1993 BUILDING MANAGEMENT SERVICES By: [Signature] Title: POA Dated: October 1, 1993 CHURCH OF SCIENTOLOGY RELIGIOUS TRUST By: [Signature] Title: POA Dated: October 1, 1993 COMMISSIONER OF INTERNAL REVENUE SERVICE By: [Signature] John E. Burke, Assistant Commissioner, Employee Plans and Exempt Organizations Dated: October 1, 1993 COMMISSIONER OF INTERNAL REVENUE SERVICE By: [Signature] James J. McGovern, Associate Chief Counsel, Employee Benefits and Exempt Organizations ------------------------------------------------------------------------