HUBBARD COMMUNICATIONS OFFICE Saint Hill Manor, East Grinstead, SussexHCO POLICY LETTER OF 25 JUNE 1967 All Executives of AlIOrgs All Accountants LRH Finance Comm OT Central Committee Treasurer WW SCIENTOLOGY ORGS TAX AND BALANCE SHEETS (This policy letter refers to business practices in setting forth the handling of balance sheets. Churches of Scientology have been officially recognized as religious organizations in every country in which they have been incorporated. Churches are generally not required to produce or provide balance sheets to tax agencies. Nevertheless, the United States Internal Revenue Service and some other suppressive tax agencies have from time to time required these of Scientology orgs as part of their policy of harrassment. As there is no such thing as a church balance sheet or a religious organization balance sheet, it is necessary to understand and apply certain standard methods of business accounting in order to deal with the taxman's harrassment. Indeed, the issue is written in business terms as it is manifestly impossible to write about tax and balance sheets in any other context.-CSI) There is a confusion on the subject of tax and balance sheets as they involve or concern monies owed on balance sheets. Extraordinary solutions are being advanced and the matter should be reviewed. There are certain principles involved here which vitally affect Scientology companies as companies and indeed are basic in any business. 1. If you acquire the profit of an asset without paying for it, all monies received become a false profit and taxable. 2. If you invoice money as your own that is in fact owed to someone else, you wind up with a false profit and get taxed for it. 3. There are certain principles of business having to do with income and debts which cannot be thrown aside even by a tax department. 4. The moment you vary from the exact truth of any transaction you involve yourself in potential confusion that requires extraordinary solutions. 5. When you find yourself being asked for extraordinary solutions you have departed from the truth of the transaction. As tax departments have never to my knowledge accepted without question the year's return or balance sheet of any corporation, efforts to get such departments to accept a return or balance sheet by putting in wild solutions avail nothing. The tax people aren't going to accept anything at all anyway ever without challenge. If you are challenged, you better have the REAL facts right there. This doesn't mean one should tell them all the truth in a geyser and gush. 402 The real stable datum in handling tax people is NEVER VOLUNTEER ANY INFORMATION. It does mean one must not tell them or give them false data. It only means that when you give them data you can't back up or report profit you didn't make, you will get into severe trouble. The basic errors of Scientology corporations in accounting and tax matters lie in 1 to 5 above. Under 1, all existing companies have acquired assets from me without paying for them and therefore show a false profit. They sell books they do not own the copyrights for, acquire technology they never paid for and, in the case of Saint Hill, acquired a business worth upwards of two million pounds and an estate worth £80,000 without ever showing any debt. So the profits then look very large in any Scientology company. And this involves them with tax. Because the government accuses them of paying me (which they don't), they think it must be a crime to pay me anything and so are pushed into a profit situation because they have never paid for their main assets. Of course, a tax department wants to see them with a big profit which can be taxed and so blocks the truthful fact that the companies owe me money. Recently a law in England, passed by the boilermakers playing politician, threatened to call any company a close company which owed any money to an individual and put close company tax at 67%. Well, the loophole is that if they don't owe it to an individual they'd pay tax anyway at high percent. And if they did owe it, they'd have no profit. And 67% of nothing is exactly nothing. So using the close company law to say I can't be owed anything is just bad thinking. And it leaves SH with £2 million of "profit" that CAN be taxed which it doesn't really own as profit at all. Under 2 above, whenever you invoice money as your own income that is owed to somebody else, you wind up with a false profit on which you will then have to pay tax you don't owe. Let us take an Advanced Clinical Course I have given. I paid my fare, often the bulk of expenses and took no fee. The ACC was invoiced in as org income. Yet it wasn't. It was my income. Yet the org not only invoiced it in, it didn't even note on its balance sheets it owed it to me and so wound up with a taxable profit. Take the book Dianetics: The Modern Science of Mental Health as a property. I bought it back from the publishers in New York for $15,000 of my cash. I turned it over to the Distribution Center, Inc. in DC which then sold tons of copies of it, invoiced each one as its own income and never paid me any royalty at all. Further, it never noted on its balance sheets it owed me for it and soon had US tax bills against it for its "profit." In addition to all that, DC, London and notably Saint Hill have taken over bank accounts of mine, have invoiced royalties owed to me only for movies and books, even my veteran's checks, and yet never noted in any balance sheet or return that it owed it. So it wound up with a taxable sum. 403 Of course the government tax offices will say not to put down your debts as then they have a profit to tax!
I looked for the word TAX and found this block at the end of OEC vol 3 1991. It is very important that these are available online and readable. Perhaps their tax accounting system is sufficiently irregular that we need to report it. HCO PL 9 Jan. 1966 III Accounts, Invalidating 399 HCO PL 13 Jan. 1966 II Records of Bank Deposits 400 HCO PL 3 May 1966R Reserve Fund 401 HCO PL 25 June 1967 Scientology Orgs // Tax and Balance Sheets 402 LRH ED 945 WW, 20 Dec. 1967 Taxation 407 HCO PL 6 Feb. 1971 I Transferring Funds 408 I am wondering with the "Tax and Balance Sheets" issue that I have posted the start of above, how that dovetails in with the approved accounting methods of reporting company profits and thus the corporation tax due to be paid.
I am going to comment on this letter one section at a time. First part. As an introduction, the two most common forms of financial statements are balance sheets and income statements. Balance sheets show financial information at a specific moment in time, and income statements report changes in financial information over a period of time. In the context of this letter taken as a whole, it seems clear that Mr. Hubbard is talking about taxes on income rather than other sorts of taxes, such as property taxes. The "Balance Sheets" he is talking about are irrelevant for computing income tax. The main reason a taxing authority would be interested is to examine them for improper classification of items of income or expense (for example recording revenue as a liability) or to compare two "balance sheets" because generally speaking the difference between the two will represent income or loss over the period being compared. To me, the discussion of balance sheets in this first paragraph seems to be setting the stage for the misdirection which follows, because the real purpose of this letter is to discuss income and how not to pay tax on it. In this paragraph he is saying the issue at hand is balance sheets and not income statements, and that balance sheets for churches don't exist. When he says "there is no such thing as a church balance sheet or a religious organization balance sheet" he is making a ludicrously false statement, as any Google search for "church balance sheet" will show. EDIT: After reflection, I think it is possible that Hubbard is using "Balance Sheet" to refer to what nowadays is usually called a "Trial Balance". A true balance sheet only contains assets, liabilities and equity accounts and omits revenue and expense accounts. A trial balance would include all of the accounts.
Comments on these 5 items. 1) . If you acquire the profit of an asset without paying for it, all monies received become a false profit and taxable. He seems to be implying that if you use assets you did not buy to generate income, the income received should not be taxable, although the taxing authorities will disagree. This is a ridiculous theory on its face. If you buy stocks on margin, does that mean the income from the stocks should non-taxable to you? 2) If you invoice money as your own that is in fact owed to someone else, you wind up with a false profit and get taxed for it. A simplified sales transaction would be to debit your Cash account and credit Revenue. He is saying here the proper entry for the transactions in question is to debit Cash and credit Liabilities. This has the effect of moving the credit from the income statement to the balance sheet, resulting in lower income. At some point in the future, when the liability is paid, you would debit Liabilities and credit cash. If both of those events happened, on the churches books there would be no net change in Cash, no net change in Liabilities, and no net change in Revenue. 3) There are certain principles of business having to do with income and debts which cannot be thrown aside even by a tax department. He seeems to be referring to the fact that both Liabilites and Revenue are credits and that when you receive something into your organization the transaction has to be reflected somewhere. 4) The moment you vary from the exact truth of any transaction you involve yourself in potential confusion that requires extraordinary solutions. I am guessing he is saying if you try to falsify the church's records it is easy to get caught. 5) When you find yourself being asked for extraordinary solutions you have departed from the truth of the transaction. No idea what he means except restating item #4.
I can believe that taxing authorities were suspicious of the returns and balance sheets of L. Ron Hubbard's organzations, but there are plenty of corporations and tax-exempt organzations that don't receive much attention from IRS. He is continuing his argument that church's financial statements should be internally consistent, and that they should be complete in and of themselves.
Evidently SH or some other org got dunned for taxes for sales of stuff and LRH is not happy. He is rationalizing that no tax should have been paid by SH because it wasn't the org's income it was really LRH's income. I wonder if he paid taxes on it? If he contributed all those assets, why does he not recommend that it be recorded as owners contributions? There would be no taxable event there. Why was that not done? Maybe he doesn't want to be identified as the owner. But he again is restating his erroneous idea that because the assets did not belong to the org, the income earned from those assets shouldn't be taxed either. But if it wasn't the org's, it was his. The basic argument here is that instead of income, it should have been an accrued liability (as described in his items #1-5), but that it isn't income to LRH either because he never received the money. The organization is using an accrual system of accounting but LRH is on a cash system. The flaw in his theory is the doctrine of Constructive Receipt. http://en.wikipedia.org/wiki/Constructive_receipt A taxpayer is subject to tax in the current year if he or she has unfettered control in determining when items of income will or should be paid.[2] Unlike actual receipt, constructive receipt does not require physical possession of the item of income in question.
LRH seems completely oblivious to the fact that by denying that the org owes tax, he is admitting that he owes it personally. He is actually complaining that the org's are paying taxes on money that was HIS income. He thinks he is off the hook personally, because he didn't receive the money. I believe he is wrong. The fact that he is telling the org's the financial procedures to use in this very HCO policy letter only serves to strengthen the idea that he was really ultimately in charge of the finances, and that he was in a decision making position that meant the doctrine of constructive receipt should apply. EDIT: After reading the entire letter (which I posted below, I think Hubbard was not obvious about these consequences. He seems to be offering it as a ploy to induce compliance, kind of "this is going to hurt me more than it hurts you"
Thanks for that. It was just the start of the document. You can see the full document and the others in the above download. You obviously have expertise in this field. Would it be possible for you to do a full analysis, post it here and to send copies to the taxing authorities in the US and UK? Then somebody could translate your analysis so it can be sent to the taxing authorities of other countries where they operate.
ITT: Armchair accounting. Not exactly. The purpose is to get the org out of paying the income tax, not that the tax itself doesn’t get paid. If, for example, an FSM gets stuck with paying the tax the org doesn’t have to. This is about shoving the tax onto someone else basically. Hubbard is quite clearly saying that tax is due, and you appear to have completely misread this. To me this is simply Hubbard-speak for “declare your new assets as purchases, since if you don’t you’ll have higher tax”. In practice this usually involves the org/mission paying a truck-load of cash for books/training to mother church to reduce the amount of tax to pay. You are misreading again. Hubbard is drawing a distinction between the org and any other involved parties (eg: FSMs or staff members). He is simply shoving a tax bill onto others so the org won’t be liable for the tax. That’s pretty much it in a nutshell. Playing the shell-corporation-game to lower taxes is the name of the game here. This doesn’t make sense. If an owner gives a truck load of assets to a company and that company then sells all those assets off, the company will be liable for a massive tax bill due to having no purchases to set against their sales. This is the extreme of the situation that Flubbard’s letter is trying to prevent.
I don't believe this letter has its main purpose as discussing transactions between organizations and FSMs and staff. He talks almost exclusively about Scientology organizations and he, LRH, himself. I said that Hubbard acknowledged tax would due "the income received should not be taxable, although the taxing authorities will disagree." ie in Hubbard's opinion it should not be a taxable event, although if the offsetting liability entries he talks about are not made, there will in fact be tax owed. In the example you use in your last point, you are conflating two separate transactions into one and imputing the character of the second transaction onto the first. Therefore, you come to an incorrect conclusion. Donating property to a corporation is one transaction, and selling it is another, separate transaction. Donations by owners to corporations are not taxable events. http://www.irs.gov/publications/p542/ar02.html#d0e460 There are five types of accounts. Assets and expenses are debits, and revenue, liabilities and equity are credits. In this letter, Mr. Hubbard is talking about revenue and liability accounts and I was pointing out that he omitted the third type of credit account. It is mathmatically, although not necessarily legally, possible to reduce taxable income by understating assets or overstating liabilities or equity. In this letter Hubbard mentioned the inadvisability of understating assets. His main point involved reclassifying revenue as liabilities. I mentioned equity transactions because to me, it was notable by omission.
The next couple of posts are the continuation of the HCO policy letter mentioned in OP for reference.
Generally IRS provides for taxes to be based on the taxpayers' method of accounting. The policy letter refers to accruing liabilities in such a way that it can be assumed that the "accrual" method is used. (Wikipedia) The following Treasury Regulation therefore applies. http://www.taxalmanac.org/index.php/Treasury_Regulations,_Subchapter_A,_Sec._1.461-1 Note: The use of the word "liability" above is a little different from the meaning of liability as a type of account. Generally Accepted Accounting Principles are a method of accrual accounting acceptable to the IRS. Here is a brief summary of the theory of GAAP. (Wikipedia)
Ok now back to the commentary on the HCO PL. Notice his example of the $10 dress is inconsistent with the Cost Principle above because it is based on fair market value rather acquisition costs as required by GAAP.
That is problem and is leading you to completely miss a key point of the p/l. Adding a bit of bold to one line doesn’t really substantiate your argument, particularly when you immediately follow up with what I have already tried to tell you thusly: “in Hubbard's opinion it should not be a taxable event, although if the offsetting liability entries he talks about are not made, there will in fact be tax owed.” If you are, as it appears, acknowledging that expenses and purchases can be set against sales then you should really be getting Flubbard’s point. I never said such donations where. Had you bothered to actually read what I wrote you might have realised that simply selling a truck load of merchandise with no purchases to set against them will result in a whopping tax bill. Are you really disagreeing with this??? This is simply bullshitting on your part, and is trying to disguise your previous fail. In a business selling shit drives your tax bill up while purchases and expenses can be used to reduce said tax bill. This is accounting 101, and pretty much what Flubbard is describing. Actually, Flubbard is quite correct here. A thief has no purchases to set against his sales, ergo he gets fucked with a large tax bill. Now if he had a mother thief school to charge him for expensive courses he would be able to produce purchases/expenses to reduce that tax bill..... Tl;dr: Business sales = moar tax Business purchases/expenses = less tax Even Flubbard recognised this.
Look at the Expenditure on Page 2 of the following unaudited financial statements. What would this expenditure be on? http://www.xenu-directory.net/documents/corporate/entity.php?ntt=468 Also "Accruals and Other Creditors". Huge amounts. Owed to who for what? When does it get paid?
SOR SERVICES (UK) LIMITED THE EXPLORER BUILDING FLEMING WAY MANOR ROYAL CRAWLEY WEST SUSSEX RH10 9GT Company No. 02681177 Status: Active Date of Incorporation: 27/01/1992 Country of Origin: United Kingdom Company Type: Private Limited Company Nature of Business (SIC(03)): 6523 - Other financial intermediation Accounting Reference Date: 31/12 Last Accounts Made Up To: 31/12/2009 (FULL) Next Accounts Due: 30/09/2011 Last Return Made Up To: 02/01/2011 Next Return Due: 30/01/2012 Last Members List: 02/01/2011 Previous Names: Date of change Previous Name 27/04/1992 RETURNSHINE LIMITED I wonder about this company as SOR is short for Sea Org Reserves. How come it says "Nature of business: Providing bookkeeping services" on page 10 of the following link when it's registered nature of business is "Other financial intermediation"? Are they paying this company for "bookkeeping services" when in fact they are putting this money into the Sea Org Reserves using this company as a financial intermediary? They must have millions of pounds passing through the company each year or there would be no point in it being in the financial intermediation business and if it is wholly owned by COSRECI then whose money might be passing through? This strikes me as being very odd. http://www.xenu-directory.net/documents/corporate/pdfs/cosreci/COSRECI Accounts 2008.pdf
http://www.xenu-directory.net/documents/corporate/pdfs/cosreci/COSRECI Accounts 2008.pdf On page 10 it looks like they own Nesta Investments Limited NESTA INVESTMENTS LIMITED CROWN HOUSE 37 HIGH STREET EAST GRINSTEAD SUSSEX RH19 3AF Company No. 007141 Status: Active Date of Incorporation: 01/02/1962 Country of Origin: United Kingdom Company Type: Private Limited Company Nature of Business (SIC(03)): 7011 - Development & sell real estate Accounting Reference Date: 31/12 Last Accounts Made Up To: 31/12/2009 (FULL) Next Accounts Due: 30/09/2011 Last Return Made Up To: 31/12/2009 Next Return Due: 28/01/2011 OVERDUE Last Members List: 31/12/2009 Previous Names: No previous name information has been recorded over the last 20 years. Not to be confused with another company that invests money in innovation and science in the UK http://www.nesta.org.uk/
http://www.xenu-directory.net/documents/corporate/irs/1993-1023-csi-questions-3-exhibit-iii-4-j.pdf COSRECI Operating Expenses with Commercial Vendors as the recipient at about 50% amounting to about £5,000,000 in a year! What commercial Vendors would they be paying that to? The Electricity Board?
To me, these do not reconcile financially in the description of the flow of funds compared to the figures prepared: http://www.xenu-directory.net/documents/corporate/irs/1993-1023-csi-questions-1.pdf http://www.xenu-directory.net/documents/corporate/irs/1993-1023-csi-questions-2-4.pdf#page=12 Compare with the accounts on this page: http://www.xenu-directory.net/documents/corporate/entity.php?ntt=468 And below those accounts for the links for the analysis of money flow: http://www.xenu-directory.net/documents/corporate/irs/1993-1023-csi-questions-3-exhibit-iii-4-j.pdf My thoughts on this are as follows - if the FBO takes most of the money away and it ends up in Trusts then don't these Scn entities owe COSRECI money rather than the other way round as shown on their accounts? How the hell can they spend £5M a year or thereabouts on Commercial Vendors, as per the last link? What on?
