
    412 F.2d 1197
    THE FOUNDING CHURCH OF SCIENTOLOGY v. THE UNITED STATES
    [No. 226-61.
    Decided July 16, 1969]
    
      
      Ronald Dreier for plaintiff; Bella L. Lmden, attorney of record. David Blasband, Peter 0. dayman, and Lmden <& Deutsoh, of counsel.
    
      Michael I. Banders, with whom was Assistant Attorney General Johnnie M. Walters, for defendant. Philip R. Miller and Norman J. Hoffman, Jr., of counsel.
    Before Cowen, Chief Judge, Laramore, Dureee, Davis, Collins, 'Skelton, and Nichols, Judges.
    
   Collins, Judge,

delivered the opinion of tbe court:

This is a suit to recover Federal income taxes and assessed interest paid by plaintiff to defendant for the fiscal year ended June 30, 1956. Defendant has counterclaimed for taxes assessed but unpaid for the fiscal years ended June 30, 1956, June 30, 1958, and June 30,1959. The central issue presented is whether plaintiff is entitled to an exemption from Federal income taxation. The pertinent statute is section 501(c) (3) of the Internal Revenue Code of 1954, which includes among those organizations exempt from taxation a corporation “organized and operated exclusively for religious * * * or educational purposes, * * * no part of the net earnings of which inures to the benefit of any private shareholder or individual * * *.”

The facts set forth in detail in the findings can be briefly summarized to the extent pertinent here:

Plaintiff is a District of Columbia corporation organized in 1955 with its purpose, as stated in the Certificate of Incorporation, “[t]o act as a parent church for the propagation of the religious faith known as ‘Scientology,’ and to act as a Church for the religious worship of that Faith.” The beliefs of Scientology center around the spirit or “thetan,” which is said to reside within the physical body of every human being. Scientologists believe that the spirit is immortal and that it receives a new body upon the death of the body in which it then resides. They also believe that in the course of its various lives the spirit is inhibited by “detrimental aberrations,” or “engrams,” which result from misdeeds or unpleasant experiences. The objective of Scientology is to counteract this burden through “processing,” also called “auditing.” This objective, which is the principal practice of Scientology, attempts to make the person being audited, called a “preclear,” aware of these aberrations and engrams and thus reduce the burdens and inhibitions affecting his spirit. Processing is performed by ministers of the plaintiff, or persons studying to become ministers, and is done in individual sessions with an auditor processing a single preclear through the use of a Hubbard Electro-Meter or “E-Meter.” The E-Meter is an instrument which indicates changes in electrical resistance in the preclear’s body, and changes in such resistance are viewed as an index of the activity of the spirit. (See finding 10, infra.)

Scientology is derived from the thoughts and writings of one L. Bon Hubbard. Its origin was an article written by Hubbard in the May 1950 issue of Astounding Science Fiction magazine, describing a new “science” called Dianetios. Dianetics, the creation of Hubbard, was offered primarily as a psychotherapeutic technique and was not presented as a religious discipline. Like its successor, Scientology, Dianetics employed a Hubbard E-Meter in its practice. In 1952 Hubbard began to focus bis attention and bis energies upon Scientology. He founded tbe plaintiff organization and completely dominated every aspect of its affairs during tbe relevant period. Ait tbe same time be continued to direct the growth and affairs of Scientology organizations throughout tbe world.

Persons coming to plaintiff for processing were usually required to sign a contract for a stated amount of auditing. Tbe normal contract covered 25 hours of processing at a rate of $20 per hour. Other blocks of processing were available, and tbe per-bour fee was slightly lower for larger amounts. In addition to processing, another department of plaintiff offered various courses or training programs, and such instruction was also performed under contract for comparable fees. Most students enrolled in these courses were studying to become auditors and/or ministers of Scientology. Applicants were often required to contract for processing at the standard fee before being allowed to enroll as students.

During the period in issue, more than 90 percent of plaintiff’s income was received from the sales of processing and training services, including sales of E-Meters. Additional income was realized from the sales of examinations and tests, tapes, and books, from minimal donations, and from various other sources. Plaintiff’s gross receipts were $102,604 for the fiscal year ending June 30,1956; $179,491 for the fiscal year ending June 30,1958; and $247,674 for the fiscal year ending June 30,1959.

For his services to plaintiff, Hubbard was paid a salary of $125 per week from plaintiff’s inception through March 29, 1957; during the period October 26,1956, through March 29, 1957, he also received an additional $125 per week which was designated as a “fee.” On March 29, 1957, plaintiff adopted a compensation scheme (known as the “proportional pay plan”) whereby Hubbard was paid, in lieu of salary, 10 percent of the gross income of plaintiff. Other Scientology congregations, franchises, and organizations also paid Hubbard a portion of their gross income, usually 10 percent. In addition, Hubbard received royalties on his numerous Scientology books, as well as lecture fees and other incidental income.

During the taxable years in issue, Mary Sue Hubbard and L. Non Hubbard, Jr., the wife and son of plaintiff’s founder, were compensated employees of the corporation. Also, from June 1957 through February 1959, plaintiff issued weekly checks to Kay Hubbard, the daughter of L. Kon Hubbard.

Defendant’s position, briefly stated, is that plaintiff fails to qualify for the statutory exemption because (1) its sales of processing and training services constituted a substantial commercial (and hence nonexempt) purpose, and (2) a portion of its net earnings inured to the benefit of private individuals. Plaintiff denies both contentions.

It is our opinion that plaintiff has failed to prove that no part of the corporation’s net earnings inured to the benefit of private individuals, and plaintiff is not entitled to recover. The court finds it unnecessary to decide whether plaintiff is a religious or educational organization as alleged, since, regardless of its character, plaintiff has not met the statutory conditions for exemption from income taxation. In any event, the Government has not raised this issue. Because of the manner in which the second question framed by the parties is resolved, we need not and do not determine whether plaintiff’s operations were exclusively for religious or educational purposes.

Implicit in section 501 is the recognition that certain institutions and organizations exist and function for purposes which Congress deems beneficial to society as a whole. Tn order to foster these aims, funds which would otherwise be acquired and expended for the public good by the Government are left by Congress in the hands of these organizations to be used in furtherance of their beneficial ends. See Duff'y v. Birmingham, 190 F. 2d 738, 740 ( 8th Cir. 1951). For that reason, it has been held that the exemption provisions should be liberally construed. E.g., American Institute for Economic Research v. United States, 157 Ct. Cl. 548, 302 F. 2d 934 (1962), cert. denied, 372 U.S. 976, rehearing denied, 373 U.S. 954 (1963).

The statutory language also makes it eminently clear, however, that Congress intended to extend the exemption only when the sole beneficiary of the institutional operations was the public at large. The substantial import of this express limitation cannot be ignored. See Better Business Bureau of Washington, D.C., Inc. v. United States, 326 U.S. 279, 283 (1945). The congressional intent behind the conditional language of section 501 (c) (3), coupled with the burden of proof placed upon the taxpayer in these circumstances (see, e.g., Kenner, v. Commissioner, 318 F. 2d 632 (7th Cir. 1963); Cleveland Chiropractic College v. Commissioner, 312 F. 2d 203, 206 (8th Cir. 1963)), requires plaintiff to clearly demonstrate its right to exemption. See New Jersey Auto. Club v. United States, 149 Ct. Cl. 344, 181 F. Supp. 259 (1960), cert. denied, 366 U.S. 964 (1961).

The term “net earnings” in the inurement-of-benefit clause, as stated in section 501 and its predecessor, section 101 of the Internal Kevenue Code of 1939, has been construed to permit an organization to incur ordinary and necessary expenditures in the course of its operations without losing its tax-exempt status. Birmingham, Business College, Inc. v. Commissioner, 276 F. 2d 476 (5th Cir. 1960) ; Enterprise Ry. Equip. Co. v. United States, 142 Ct. Cl. 192, 161 F. Supp. 590 (1958); Mabee Petroleum Corp. v. United States, 203 F. 2d 872 (5th Cir. 1953); Broadway Theatre League of Lynchburg, Va., Inc. v. United States, 293 F. Supp. 346, 355 (W.D. Va. 1968).

By analogy to the recurrent tax question in the business sphere, whether corporate officers’ salaries are reasonable and deductible, or are excessive and disguise the distribution of dividends {see, e.g., Jones Bros. Bakery, Inc. v. United States, ante, at 226, 411 F. 2d 1282 (1969)), several decisions indicate that the payment of reasonable salaries by an allegedly tax-exempt organization does not result in the inurement of net earnings to the benefit of private individuals. Birmingham, Business College, Inc. v. Commissioner, supra at 480; Enterprise Ry. Equip. Co. v. United States, supra; Mabee Petroleum Corp. v. United States, supra at 876. Of course, as the Birmingham Business College and Mabee Petroleum cases hold, excessive salaries do result in inurement of benefit. Cf. also Duffy v. Birmingham, supra. As always, whether the salaries paid are reasonable is a question of fact. Compare, e.g., Mabee Petroleum Corp. v. United States, supra at 875, with Jones Bros. Bakery, Inc. v. United States, supra, and cases cited.

It is clear, however, that an organization’s net earnings may inure to the benefit of private individuals in ways other than by the actual distribution of dividends or payment of excessive salaries. General Contractors' Ass'n v. United States, 202 F. 2d 633 (7th Cir. 1953) (reports and surveys furnished to members); Chattanooga Auto. Club v. Commissioner, 182 F. 2d 551 (6th Cir. 1950) (services to members); Underwriters' Laboratories, Inc. v. Commissioner, 135 F. 2d 371 (7th Cir.), cert. denied, 320 U.S. 756 (1943) (reports and studies furnished) ; Spokane Motorcycle Club v. United States, 222 F. Supp. 151 (E.D. Wash. 1963) (goods, services, and refreshments given), and cases cited. That the benefit conveyed may be relatively small does not change the basic fact of inurement. Spokane Motorcycle Club v. United States, supra.

We scrutinize the facts of the instant case in the light 'of these principles. According to the trial commissioner’s findings, L. Non Hubbard received over $108,000 from plaintiff and related Scientology sources during the 4-year period June 1955 through June 1959. This figure represents $77,460 in fees, commissions, royalties, and compensation for services, plus $13,538 in payment for expenses incurred in connection with his services, as well as a total of $17,586 in reimbursement for expenditures made in plaintiff’s 'behalf, in repayment of loans made to plaintiff and the New York organization, and as a loan from plaintiff to Hubbard. As the commissioner found, and we agree, the precise nature of the loans and reimbursed expenditures does not appear in the record. Nor do we find any explanation for most of the expenses paid. The portion of the $77,460 actually paid by plaintiff amounted to approximately $6,000 in 1955-56, more than $11,500 in 1956-57, approximately $18,000 in 1957-58, and over $22,000 in 1958-59.

Hubbard also had the use of an automobile at plaintiff’s expense. During plaintiff’s taxable years ending in 1958 and 1959, the organization provided and maintained a personal residence for Hubbard and his family. Moreover, in addition to all the foregoing, Hubbard received a percentage (usually 10 percent) of the gross income of organizations.

'For purposes of deciding this case, we do not consider the income accruing to Hubbard from the affiliated congregations and organizations as coming from plaintiff. However, under the circumstances here, the fact that Hubbard had income from such closely related sources indicates that Hubbard’s compensation from plaintiff was not for full-time service. During the years in issue these other percentages, fees, and commissions, so far as the record shows, were apparently received or receivable by Hubbard for his personal use. Such an arrangement suggests a franchise network for private profit and, in turn, casts doubt upon the propriety of the payments by plaintiff to Hubbard and the members of his family. The fact that 'Hubbard was the recipient of income from plaintiff in the form of royalties and commissions likewise occasions an inference of personal gain.

In this regard, we note the steady increase in Hubbard’s compensation. Originally salaried at $125 per week, Hubbard received $250 the following year, $125 of which is described merely as a “fee.” In March of 1957, Hubbard began to receive 10 percent of plaintiff’s gross income. Although the organization’s gross receipts in fiscal year 1957-58 were less than in fiscal year 1956-57, Hubbard’s income pattern is still one of growth. Moreover, the record supports the conclusion that plaintiff and 'Scientology generally have consistently grown since the years in issue, while Hubbard, or his communication center in England, has continued to receive a percentage of the income of plaintiff and affiliated organizations.

When, with this general background, we consider that Hubbard, the dominant figure in Scientology, and his wife were two members of plaintiff’s 3-man board of trustees during the relevant period, it is not inappropriate to require plaintiff to justify the payments made to Hubbard and his family in the nature of loans, reimbursements for expenditures in plaintiff’s behalf, for expenses, and other purposes. Not only can these payments, in the absence of explanation, be properly attributable to the individuals as income (of. Parker v. Commissioner, 365 F. 2d 792 ( 8th Cir. 1966), cert. denied, 385 U.S. 1026 (1967); see also Kenner v. Commissioner, 318 F. 2d 632 (7th Cir. 1963)), but the logical inference can be drawn that these payments were disguised and unjustified distributions of plaintiff’s earnings.

In addition to the unexplained amounts received by Hubbard described above, his family received the following additional payments entirely, or almost entirely, from plaintiff:

Mary Sue Hubbard, the wife of plaintiff’s founder, had income from September 1955 through December 1958 by virtue of renting property owned by her to plaintiff. Her total receipts from this venture were $10,685. Payments amounting to $1,450, attributable to the debts of her son, were made in 1956 and 1957. A completely unexplained figure of $250 and loans of $800 were received in 1958-59.

L. Eon Hubbard, Jr., was the recipient of loans in 1955-56 and 1958-59 totaling $1,226. He was reimbursed for expenditures of approximately $200 in behalf of plaintiff in 1957-58 and 1958-59.

In fiscal years 1957-58 and 1958-59, Kay Hubbard, the daughter, received payments, generally designated as salary or wages, totaling $3,242. The record is devoid of any evidence showing services performed by Miss Hubbard for plaintiff. This amount includes loans of $550 made in 1958.

What emerges from these facts is the inference that the Hubbard family was entitled to make ready personal use of the corporate earnings. Cf. Birmingham Business College, Inc. v. Commissioner, supra at 480. We have no evidence that the rental paid by plaintiff for Mrs. Hubbard’s property was reasonable, or that such an arrangement was beneficial or desirable to the corporation. Inflated rental prices can amount to inurement of benefit. See Texas Trade School v. Commissioner, 272 F. 2d 168 (5th Cir. 1959).

Similarly, the purpose of the loans made to the Hubbards is unexplained. We do not know whether the terms were financially advantageous to ¡plaintiff or whether in fact the loans were ever repaid. Indeed, the very existence of a private source of loan credit from an organization’s earnings may itself amount to inurement of benefit. For comparable reasons, the proof concerning the payments for expenses and expenditures in bebalf of plaintiff is also defective.

In substance, then, nothing we have found in the record dispels the substantial doubts the court entertains concerning the receipt of benefit by the Hubbards from plaintiff’s net earnings. Since plaintiff has failed to meet its burden of proof, we hold therefore that a part of the corporate net earnings was a source of benefit to private individuals.

In this regard, we think it immaterial whether the benefit is viewed as inuring to Hubbard — by easing his obligation to support his family — or directly to the respective members of the family. All the Hubbards were persons “having a personal and private interest in the activities of the organization.” Treas. Beg. § 1.501 (a)-l (c).

The extent of the seeming benefit to Hubbard’s family might appear relatively small, but plaintiff has not suggested that it was de minimis, and we cannot so conclude from the evidence before us. It is our opinion, from an examination of the statute and the decided cases, that Congress, when conditioning the exemption upon “no part” of the earnings being of benefit to a private individual, specifically intended that the amount or extent of benefit should not be the determining factor. See Spokane Motorcycle Club v. United States, supra.

With respect to Mr. Hub'bard, plaintiff seeks to bring itself within the doctrine of the cases cited above which hold that reasonable salaries paid by a corporation do not result in inurement of benefit to private individuals. Even had the compensation paid to Hubbard been demonstrably reasonable, however, this showing would not remedy the defects in proof concerning the additional payments to Hubbard or, of course, his family. If in fact a loan or other payment in addition to salary is a disguised distribution or benefit from the net earnings, the character of the payment is not changed by the fact that the recipient’s salary, if increased by the amount of the distribution or benefit, would still have been reasonable.

For all the above' reasons, therefore, the court concludes that plaintiff has failed to prove its entitlement to exemption from income taxation under section 501(c) (3) of the Internal Bevenue Code of 1954. Plaintiff’s claim is denied, and the petition is dismissed. Defendant is entitled to prevail on its counterclaims. In accordance with the stipulation of the parties, as reflected in unchallenged findings of the commissioner, judgment is entered for defendant in the amounts of $3,262.75 for the fiscal year ending June 30,1956, $5,399.03 for the fiscal year ending June 30, 1958, and $7,381.97 for the fiscal year ending June 30,1959. As part of the judgment, defendant is entitled to statutory interest of 6 percent on 'all three sums from the respective appropriate dates.

FINDINGS OF FACT

The court, having considered the evidence, the report of Trial Commissioner Donald E. Lane, and the briefs and argument of counsel, mates findings of fact as follows:

1. Plaintiff is a District of Columbia corporation organized in 1955 under the name of The Founding Church of Man’s Eeligion, of Washington, D.C. Plaintiff’s Certificate of Incorporation has since been amended to change its name to The Founding Church of Scientology.

2. Article Third of plaintiff’s Certificate of 'Incorporation states that its purpose is “To act as a parent church for the propagation of the religious faith known as ‘Scientology,’ and to act as a Church for the religious worship of that Faith.” In addition, the above-mentioned article sets forth in some detail the creed and basic beliefs of Scientology, and enumerates the powers and activities authorized in furtherance of its purpose. In the event of dissolution of plaintiff, the Certificate of Incorporation and the by-laws state that the board of trustees is empowered to dispose of its assets in such manner as they (or a majority of them) deem best suited to further the stated purposes of plaintiff,

L. Eon Hubbard was the founder of both Scientology and the plaintiff church, as well as several related organizations such as the Hubbard Association of Scientologists International, the Congress of Scientologists, and Distribution Center, Inc. (a separate corporation which sells Scientology books and equipment). Hubbard’s views, writings, and instructions respecting Scientology are regarded by plaintiff and its members, ministers, and staff as authoritative. During the pertinent period, Hubbard held various titles and offices in the plaintiff organization; Mary Sue Hubbard, constituted two of the three members of plaintiff’s board of trustees at that time.

4. The basic belief or concerned with the spirit or “thetan,” which is believed to reside within the physical body of every human being. It is believed that the spirit is immortal and that upon the death of th8 physical body it receives another body. As it passes through its various lives, the spirit is often unable to reach its full potential as a spiritual being because of the “detrimental aberrations” or “engrams” which result from misdeeds or unpleasant experiences. Scientology attempts to counteract the burden of these aberrations by means of “auditing,” which is also referred to as “processing.” This objective, which is the principal practice of Scientology, attempts to make the person being audited, called a “preclear,” aware of these aberrations and thereby reduce the burdens and inhibitions affecting the spirit. Processing is performed by ministers of the plaintiff church, or persons studying to become ministers, and is done in individual sessions with the auditor processing a single preclear through the use of a Hubbard Electro-Meter or “E-Meter.” The E-Meter is described in finding 10. This instrument indicates changes in the electrical resistance in the preclear’s body, and changes in such resistance are viewed as an index of the activity of the spirit.

5. In a processing session, the various questions and notes both his answers and the E-Meter readings in an effort to uncover the detrimental aberrations burdening the preclear’s spirit. The goal of Scientology processing is for the individual to advance through various levels of accomplishment leading to the state of “clear,” and ultimately to become an “operating thetan.” Upon attaining the latter state, a person has full understanding and control of himself and is believed to be able to leave his physical body at will. While processing is represented as acting solely upon the spirit, as opposed to the body, adherents of Scientology believe that physical health is also benefited thereby. Such physical improvement, though never actually promised, is often strongly implied in Scientology literature. Likewise, and advertising often expressed a belief that most physical ills were psychosomatic in origin and that an individual would become virtually immune upon attaining complete control of himself through Scientology. In this sense, plaintiff’s literature claimed an ability to improve or eliminate a wide variety of disorders, including arthritis, cancer, thyroid malfunction, cataracts, radiation bums, and ulcers, to name just a few.

6. Adherents of Scientology are not required to abandon any religious affiliation they might have, for a belief in Scientology is not inconsistent with a belief in any religion. This, however, does not mean that its followers regard Scientology as anything less than a religion and it would appear that most practicing Scientologists sincerely believe in Scientology as a religious experience. While ritual and ceremony do not play as significant a role in Scientology, as in most religions, plaintiff did hold Sunday services at various times during the relevant period. Several ministers of plaintiff are licensed by the District of Columbia to perform marriages, and ordained ministers of Scientology also performed funeral and naming ceremonies on various occasions.

through its various departments and related organizations advertised regularly in the yellow pages of the District of Columbia telephone directory under “Personality Development,” “Personnel Consultants,” and “Churches— Various Denominations.” In addition, advertisements were placed in local newspapers. These notices customarily referred to Scientology as a means of increasing “Personal Efficiency,” or the “I.Q.” Three recommended methods of disseminating Scientology are set forth in a guide for auditors prepared by L. Eon Hubbard. These recommended methods are as follows:

(.1) “I will talk to anyone.” The newspaper advertisement states that Eeverend-will “talk to anyone for you about anything.” When calls are received and counseling requested, the minister assures the contact that the problem complained of is indeed significant, and urges him to visit the church. Upon his visit, he is made aware of the processing and literature available.

(2) “Illness researchers.” A newspaper advertisement solicits polio victims (or victims of some other named disease) to volunteer for examination by a “research foundation” or a “charitable organization.” Upon examination, the victim is told that there is a way (via Scientology) to improve his ability to walk or breathe or whatever. Such victims are not to be told that a cure would be effected.

(3) “Casualty contact.” The Scientology representative pays personal calls on persons affected by accident, illness, or bereavement, using names and addresses obtained from the newspapers. After a brief visit to express his compassion and concern, the representative leaves his card and invites the subject to attend services at the church.

8. Persons desiring to be processed were required to sign a contract with plaintiff. Under the usual arrangement, the preclear would contract for a block of 25 hours of processing at a rate of $20 per hour. Other blocks of processing were recommended from time to time, with a slightly lower per-hour fee charged for larger blocks. Hubbard personally determined the rates to be charged for processing. The rates so determined were minimums, and individual Scientologists could charge more. Intensive programs were also available, such as $1,250 for a 3-week intensive course. Professional auditors in good standing received a substantial discount.

9. During the taxable years in issue, preclears who were unable to pay cash were extended credit and, on some occasions, such persons could receive processing free of charge. When credit was extended, the terms were governed by plaintiff’s standard note form. These notes provided for 6 percent annual interest and a 25 percent service charge which was eliminated if the notes were paid when due. Past due notes were sometimes turned over to collection agencies. On at least one occasion plaintiff attempted unsuccessfully to discount promissory notes at a commercial bank. Plaintiff found a substantial number of such notes to be uncollectible. Upon proper application, a preclear who was dissatisfied with his processing could receive a refund of fees paid to the plaintiff. Such refunds were not common, and were made only to persons completely severing their connections with Scientology.

10. The Hubbard E-Meter (also known as Electro-Psycho finding 4, is a battery-powered device for measuring changes in body resistance to electrical current. It consists of a wooden or plastic cabinet measuring about 10"x6"x2", with several control knobs and a dial. Wires connect the instrument to two electrodes, usually small tin cans, which the preclear holds, one in each hand, during processing. The meter dial reflects changes in body resistance, but the readings are not actually quantitative due to uncontrollable variations in skin contact and current. Scientologists regard the E-Meter as essential to the processing operation. Accordingly, auditors were usually urged or required to purchase an E-Meter; such purchases were made through Distribution Center, Inc., at a price of approximately $125 to $144. The components and circuitry comprising an E-Meter are readily available and are not complex. The cost of manufacture during the relevant period was approximately $12.50.

books and pamphlets on Scientology were published and sold by plaintiff and by Distribution Center, Inc. Almost all of these were written by L. Eon Hubbard. Hubbard has also edited and written the major portion of most Scientology magazines and periodicals. Plaintiff considered these writings to be an effective means of disseminating Scientology, as well as a means of raising revenue. Other items offered for sale included tapes and records, car badges, jewelry, and photographs of L. Eon Hubbard.

12. During the years 1956-59, Scientology churches were established in New York, California, Florida, Texas, and Washington State. While plaintiff serves as the head of Scientology in the United States, all Scientology organizations throughout the world are under the leadership and guidance of L. Eon Hubbard. Under the written agreement between plaintiff and other Scientology organizations, plaintiff was to receive 25 percent of all donations received by its affiliates as well as 25 percent (10 percent in certain cases) of the tuition charges for training courses. The record indicates that such payments to plaintiff were rarely made. Several churches of Scientology other than plaintiff have at various times been declared by the Internal Eevenue Service to be tax exempt under section 501(c)(3) of the Internal Eevenue Code of 1954. In every such instance the District Director of Internal Revenue has since served notice of proposed revocation of the exempt status. The following table illustrates these actions.

None of the other Scientology organizations and congregations in the United States have been exempted from Federal income tax liability.

13. In addition to processing, plaintiff offered various courses and training programs under the jurisdiction of the department of plaintiff known as the Academy of Scientology. Most students enrolled at the Academy were studying to become auditors and/or ministers of Scientology. Students were customarily required to sign a “contract and release” covering the period of instruction. A formal certificate was issued upon completion of a course at the Academy. Some additional courses have been offered and some other courses have been modified by the Academy since 1956. The text materials used therein have been added to and modified over the same period. Applicants were frequently required to contract for processing (at a fee) before being allowed to enroll as students at the Academy. Approximately 6 to 8 weeks were required to become an auditor at basic levels of processing. L. Ron Hubbard was constantly engaged in research which often resulted in new processing techniques and obsolescence of former knowledge. When this occurred, auditors would be urged to take new courses on the new subject at a fee.

14. ’Scientology had its earliest origins in an article entitled Dicmetics: The Evolution of A Science which L. Ron Hubbard published in the May 1950 issue of Astounding Science Fiction magazine. Dianetics was described in this article as “an organized science of thought” which offered a therapeutic technique for the treatment of “any and all inorganic mental and organic psychosomatic ills, with assurance of complete cure in unselected cases.” The science of Dianet-ics soon became further developed in subsequent writings by Hubbard and others. This development was solely scientific in nature, and religious aspects were not present. In 1952 Hubbard abandoned Dianetics as such and began to concentrate his energies on Scientology. Scientology was viewed by its followers as a science much broader than Dianetics and concerned with knowledge in general, while Dianetics dealt mainly with psychotherapy and the human mind. Nevertheless, the two were quite similar in practice. Dianetics employed an early form of the E-Meter.

15. As Scientology developed and organizations were formed, religious aspects were introduced. It appears from the record that three factors led to the adoption of this religious approach. First and perhaps most important, Scientology itself was becoming more and more involved with man as a spiritual being; hence religious implications were becoming increasingly significant to its followers. Second, it was hoped to avoid difficulties which Dianetics had encountered with various authorities, particularly those in the medical field. The New Jersey Board of Medical Examiners in 1950 or 1951 instituted proceedings against the Hubbard Dianetic Research Foundation, Inc., on charges of operating an unlicensed medical school. Third, operation as a religious organization might enable affiliates to qualify for income tax exemption.

16. Subsequent to the taxable years in issue, plaintiff instituted a commission program. Plaintiff paid to field auditors who referred individuals to it commissions based upon a percentage of the contracted processing and training fees. The commissions amounted to 10 percent of full cash payment and 6 percent of the combined and credit cash payment. A 10 percent commission was also paid on memberships. However, field auditors could be requested by plaintiff’s department of accounts to collect overdue accounts upon which commissions had previously been paid.

17. During the taxable years in issue, Scientology Consultants for Industrial Efficiency, also known as Scientology Consultants, and the National Academy for American Psy-cbology were also affiliated with plaintiff. Scientology Consultants for Industrial Efficiency was incorporated in 1956 under the laws of the District of Columbia with its designated offices in plaintiff’s headquarters at 1812 19th Street, N.W., Washington, D.C. The incorporators were L. Eon Hubbard, Mary Sue Hubbard, and Richard P. Steves. Its stated purpose was to apply administrative principles derived from a study of Scientology and disseminate them to industry and business in order to improve industrial efficiency.

18. During the taxable years in issue, plaintiff’s principal source of income was from the sale of processing and training services. Plaintiff’s approximate gross receipts for the fiscal years ended June 30,1956, through June 30, 1959, have been summarized as follows by defendant, and plaintiff has not objected:

19. Plaintiff’s total gross receipts for the taxable periods in issue were $758,982. Its gross receipts increased from $102,604 for fiscal year ended June 30, 1956, its first year of operation, to $247,674 for fiscal year ended June 30, 1959. Gross income from processing and training was 93.2 percent, 90.1 percent, 91.6 percent, and 95.7 percent of total gross receipts for each of the 4 years, respectively. Voluntary were approximately 1 percent of total gross receipts during the periods in issue.

20. During tiie fiscal years ending June 30,1956,1957,1958, and 1959, L. Eon Hubbard worked on and bad responsibilities in every aspect of plaintiff’s activities. In addition to bis roles as instructor, minister, and researcher, be was also the financial manager and general overseer of the affairs of plaintiff in all its various departments. From plaintiff’s inception in July 1955 through March 29, 1957, L. Eon Hubbard received, pursuant to agreement, a salary of $125 per week; during the period October 26,1956, through March 29, 1957, he also received an additional $125 per week which was designated as a “fee.” During this period the other personnel on plaintiff1’s staff were compensated on the basis of salaries. On March 29, 1957, plaintiff instituted its “proportional pay plan.” Under this plan L. Eon Hubbard received, in lieu of salary, 10 percent of the gross income of plaintiff. During the 4-year period from June 1955 through June 1959, L. Eon Hubbard received from plaintiff and other Scientology sources (see finding 3 above) at least $108,584, including fees, royalties, and compensation for services in the amount of $77,460; payment for expenses incurred in connection with his services, $13,538; reimbursements for payments made by him on behalf of taxpayer, $10,301; repayment of principal •and payment on loans made by him to taxpayer and to the New York organization, $5,893; and a loan of $1,391 from the taxpayer in June 1959. These figures include $1,050 paid after the years here in issue and designated “back royalties,” and $3,735 paid by the Congress of Scientologists shortly before plaintiff was incorporated. The precise nature of the loans •and reimbursed expenses mentioned above does not appear in the record. Also, plaintiff provided during 1957-58 and 1958-59 a personal residence for the use of L. Eon Hubbard and his family. The household expenses of the residence were paid by plaintiff and, in addition, plaintiff supplied an automobile for the use of Hubbard. Hubbard also received a percentage of the gross income (usually 10 percent) of the affiliated Scientology congregations, franchises, and organizations.

21. L. Eon Hubbard and his wife, Mary Sue Hubbard, resided in Washington, D.C., until 1959 when they moved to England. Since that time, Hubbard has activities throughout the world from his headquarters at Saint Hill Manor, East Grinstead, Sussex, England. Communication between Hubbard and plaintiff has been maintained through the Hubbard Communications Office (HCO). Each Scientology organization has its local HCO. The Hubbard Communications Office — Worldwide (HCO-WW), located at Saint Hill, distributes L. Eon Hubbard’s policies and technical data by means of bulletins, policy letters, and information letters. Since Hubbard moved to Saint Hill, HCO-WW has been designated as payee of L. Eon Hubbard’s 10 percent share of plaintiff’s gross income. L. Eon Hubbard and Mary Sue Hubbard were not called as witnesses during the trial of this case. L. Eon Hubbard, Jr., testified for defendant that he was active in Scientology during 1952-59, that he had seen very little, if any, results from Scientological processing that he would consider to be demonstrable results, and that he resigned from Scientology in 1959 for financial reasons and because he was tired of the Scientology organization and how it operated.

22. During the taxable years in issue plaintiff paid Mary Sue Hubbard a salary of $85 per week until the adoption of the proportional pay plan. Plaintiff also paid Mary Sue Hubbard $250 per month as rental for the use of a house located at 2815 15th Street, N.W., Washington, D.C. During the taxable years in issue plaintiff paid L. Eon Hubbard, Jr., a salary of $85 per week until the adoption of the proportional pay plan. From June 1957 through February 1959, plaintiff issued weekly checks to Kay Hubbard (daughter of L. Eon Hubbard) totaling $3,242. There is no evidence in the record as to any services performed by Kay Hubbard for plaintiff during the years involved. During the 4-year period from June 1955 through June 1959, Mary Sue Hubbard received from all Scientology sources a total of $29,635, including compensation for services, $15,868; rent for property owned by her and leased to plaintiff, $10,685; loan, $800; reimbursement for expenditures on behalf of plaintiff, $204; miscellaneous, $632; and payments attributable bo debts of L. Eon Hubbard, Jr., $1,450. L. Eon Hubbard, Jr., received from all Scientology sources a total of $13,510, including compensation for services, $12,064; reimbursement for expenditures on behalf of plaintiff, $219; and loans, $1,226. Kay Hubbard received from all Scientology sources a total of $3,’242. The precise nature of the loans and reimbursed expenses mentioned above does not appear in the record.

23. Plaintiff paid $631.48 as income tax for its fiscal year ending June 30, 1956. Pursuant to the execution of appropriate and timely waivers, plaintiff filed a timely claim for refund of this amount with interest as provided by law. Defendant issued a formal notice of disallowance of the claim on July 7, 1961. On January 12, 1962, a deficiency in income tax in the amount of $3,262.75, including interest and penalty, was assessed against plaintiff for the fiscal year ending June 30, 1956. No part of this deficiency has been paid. On October 2, 1967, the Internal Revenue Service issued an assessment against plaintiff declaring deficiencies in income taxes, including penalties, for the fiscal year ending June 30, 1958, in the amount of $12,188.53, and for the fiscal year ending June 30, 1959, in the amount of $35,550.69. Thereafter, plaintiff, defendant, and the Internal Revenue Service agreed that the asserted deficiencies should be reduced to $5,399.03 for the fiscal year ending June 30, 1958, plus statutory interest, and $7,381.97 for the fiscal year ending June 30,1959, plus statutory interest.

24. The parties have stipulated and agreed that (1) should judgment be rendered for defendant in this action, in addition to the amount for which defendant has previously counterclaimed, defendant shall be entitled to judgment for the additional amounts of $5,399.03 for fiscal year ending June 30,1958, plus statutory interest, and $7,381.97 for fiscal year ending June 30, 1959, plus statutory interest, and that the additional amounts assessed as set forth in finding 23 shall be abated. The stipulation also provided that (2) should judgment be rendered for plaintiff in this action, defendant shall be entitled to no recovery for income taxes, penalties, and interest in respect of fiscal years ending June 30, 1958, and June 30,1959, and that the entire amount assessed will be abated.

CONCLUSION OP LAW

Upon the foregoing findings of fact, which are made a part of the decision herein, the court concludes as a matter of law that plaintiff is not entitled to recover, and the petition is therefore dismissed. Defendant is entitled to recover on its counterclaims and judgment is entered for defendant in the amounts of three thousand two hundred sixty-two dollars and seventy-five cents ($3,262.75) for the fiscal year ending June 30,1956, five thousand three hundred ninety-nine dollars and three cents ($5,399.03) for the fiscal year ending June 30, 1958, and seven thousand three hundred eighty-one dollars and ninety-seven cents ($7,381.97) for the fiscal year ending June 30, 1959, with statutory interest of six percent on all three sums from the respective appropriate dates.  