The FOUNDING CHURCH OF SCIENTOLOGY
                                       v.
                               The UNITED STATES.
                                  No. 226--61.
                         United States Court of Claims.
                                 July 16, 1969.
  Action by church to recover federal income taxes and assessed interest paid.
 The Court of Claims, Collins, J., held that where founder of church was not
 only paid, in addition to his salary, commissions and royalties but he and his
 family received unexplained payments in nature of loans and reimbursements,
 church was not entitled to exemption from federal income taxation under
 statute, which includes among those organizations exempt from taxation a
 corporation organized and operated exclusively for religious or educational
 purposes, no part of net earnings of which inures to benefit of any private
 shareholder or individual.
  Petition dismissed.

 [1] INTERNAL REVENUE
 Congress, when conditioning exemption granted to corporation organized for
 religious purposes upon "no part" of earnings being of benefit to a private
 individual, specifically intended that the amount or extent of benefit should
 not be the determining factor.  26 U.S.C.A. (I.R.C.1954) s 501(c) (3).

 [2] INTERNAL REVENUE
 Where founder of church was not only paid, in addition to his salary,
 commissions and royalties but he and his family received unexplained payments
 in nature of loans and reimbursements, church was not entitled to exemption
 from federal income taxation under statute, which includes among those
 organizations exempt from taxation a corporation organized and operated
 exclusively for religious or educational purposes, no part of net earnings of
 which inures to benefit of any private shareholder or individual.  26
 U.S.C.A. (I.R.C.1954) s 501(c) (3).
  *1197 Ronald Dreier, New York City, for plaintiff, Bella L. Linden,
 New York City, attorney of record. David Blasband, Peter C. Clapman, and
 Linden & Deutsch, New York City, of counsel.
  Michael I. Sanders, Washington, D.C., with whom was Asst. Atty. Gen., Johnnie
 M. Walters, for defendant.  Philip R. Miller and Norman J. Hoffman, Jr.,
 Washington, D.C., of counsel.

  *1198 Before COWEN, Chief Judge, and LARAMORE, DURFEE, DAVIS, COLLINS,
 SKELTON, and NICHOLS, Judges.
                                  OPINION [FN*]

      FN* The court is indebted to Trial Commissioner Donald E. Lane (now Judge,
     U.S. Court of Customs and Patent Appeals) for his opinion, findings of
     fact, and recommended conclusion of law.  Although the court reaches the
     same result, we decide the case on a different ground.

  COLLINS, Judge.
  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. Ron Hubbard.
 Its origin was an article written by Hubbard in the May 1950 issue of
 ASTOUNDING SCIENCE FICTION magazine, describing a new 'science' called
 Dianetics.  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 his attention and his energies
 upon Scientology.  He founded the plaintiff organization and completely
 dominated every aspect of its affairs during the relevant period. At the same
 time he continued to direct the growth and affairs of Scientology organizations
 throughout the world.
  Persons coming to plaintiff for processing were usually required to sign a
 contract for a stated amount of auditing.  The normal contract covered 25 hours
 of processing at a rate of $20 per hour. Other blocks of processing were
 available, and the per-hour fee was slighty lower for larger amounts.  In
 addition to processing, *1199 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. Ron 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. Ron 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.  In 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 Duffy 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, 302 F.2d 934, 157 Ct.Cl. 548 (1962), cert. denied,
 372 U.S. 976, 83 S.Ct. 1109, 10 L.Ed.2d 141, rehearing denied, 373 U.S.
 954, 83 S.Ct. 1677, 10 L.Ed.2d 708 (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.  *1200 See Better Business
 Bureau of Washington, D.C., Inc. v. United States, 326 U.S. 279, 283, 66 S.Ct.
 112, 90 L.Ed. 67 (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 of
 Internal Revenue, 318 F.2d 632 (7th Cir. 1963); Cleveland Chiropractic
 College v. Commissioner of Internal Revenue, 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, 181 F.Supp. 259, 149 Ct.Cl. 344
 (1960), cert. denied, 366 U.S. 964, 81 S.Ct. 1913, 6 L.Ed.2d 1255 (1961).
  The term 'net earnings' in the inurement-of-benefit clause, as stated in
 section 501 and its predecessor, section 101 of the Internal Revenue 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 of Internal
 Revenue, 276 F.2d 476 (5th Cir. 1960); Enterprise Ry. Equip.  Co. v. United
 States, 161 F.Supp. 590, 142 Ct.Cl. 192 (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, 188 Ct.Cl. ---, 411 F.2d 1282 (June 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 of Internal Revenue, supra 276 F.2d at 480; Enterprise Ry.
 Equip.  Co. v. United States, supra; Mabee Petroleum Corp. v. United
 States, supra 203 F.2d 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 203 F.2d 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 of
 Milwaukee v. United States, 202 F.2d 633 (7th Cir. 1953) (reports and surveys
 furnished to members); Chattanooga Auto. Club v. Commissioner of Internal
 Revenue, 182 F.2d 551 (6th Cir. 1950) (services to members); Underwriters'
 Laboratories, Inc. v. Commissioner of Internal Revenue, 135 F.2d 371 (7th
 Cir.), cert. denied, 320 U.S. 756, 64 S.Ct. 63, 88 L.Ed. 450 (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. Ron 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 *1201 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 $11,550 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 affiliated Scientology
 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 (cf.
 Parker v. Commissioner of Internal Revenue, 365 F.2d 792 (8th Cir. 1966),
 cert. denied, 385 U.S. 1026, 87 S.Ct. 752, 17 L.Ed.2d 674 (1967);
 see also Kenner v. Commissioner of Internal Revenue, 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. Ron 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.
  *1202 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 of Internal Revenue,
 supra at 276 F.2d 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 of Internal
 Revenue, 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 behalf 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.Reg. s 1.501(a)--1(c).
  [1] 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. Hubbard, 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.
  [2] 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 Revenue 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.