CHURCH OF SCIENTOLOGY OF CALIFORNIA, Petitioner-Appellant,

                                       v.

             COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.

                                  No. 85-7324.

                         United States Court of Appeals,

                                 Ninth Circuit.

                       Argued and Submitted Aug. 8, 1986.

                             Decided July 28, 1987.

  On appeal from revocation of church's tax exempt status by Internal Revenue

 Service, the Tax Court, 83 T.C. 381, affirmed commissioner's assessment of

 tax deficiencies and late filing penalties and church appealed.  The Court of

 Appeals, Tang, Circuit Judge, held that:  (1) significant sums of church money

 inured to benefit of church's founder and his family thus constituting

 inurement to private individual, and thus, church was not entitled to tax

 exempt status;  (2) notice of deficiency sent by Internal Revenue Service was

 not unconstitutional, though there was some evidence of religious animus, where

 overwhelming weight of evidence indicated that Internal Revenue Service

 determined that church did not conform to requirements for tax exempt status

 based upon exhaustive and responsible investigations;  (3) 1967 revocation

 letter sent by Internal Revenue Service was not constructively revoked;  and

 (4) late filing penalties were valid.

  Affirmed.



 [1] INTERNAL REVENUE

 In order to qualify for tax exemption, church must show that it is organized

 and operated exclusively for religious or charitable purposes.  26

 U.S.C.A. ss 501, 501(c)(3).



 [2] INTERNAL REVENUE

 In order for organization to pass operational test in order to obtain tax

 exempt status, it must engage primarily in activities which accomplish one or

 more of exempt purposes, organization's net earnings may not inure to benefit

 of private shareholders or individuals, organization must not expend

 substantial part of resources attempting to influence legislation or political

 campaigns, and organizations seeking exemption from taxes must serve valid

 public purpose and confer public benefit.  26 U.S.C.A. s 501(c)(3).



 [2] INTERNAL REVENUE

 In order for organization to pass operational test in order to obtain tax

 exempt status, it must engage primarily in activities which accomplish one or

 more of exempt purposes, organization's net earnings may not inure to benefit

 of private shareholders or individuals, organization must not expend

 substantial part of resources attempting to influence legislation or political

 campaigns, and organizations seeking exemption from taxes must serve valid

 public purpose and confer public benefit.  26 U.S.C.A. s 501(c)(3).



 [3] INTERNAL REVENUE

 Organization loses tax exempt status if even small percentage of income inures

 to private individual.  26 U.S.C.A. s 501(c)(3).



 [4] INTERNAL REVENUE

 Organization's net earnings, which may not inure to benefit of private

 individual in order to retain tax exempt status, includes more than gross

 receipts minus disbursements as shown on books of organization;  only those

 ordinary expenses necessary to operation of organization are not included in

 net earnings.  26 U.S.C.A. s 501(c)(3).



 [4] INTERNAL REVENUE

 Organization's net earnings, which may not inure to benefit of private

 individual in order to retain tax exempt status, includes more than gross

 receipts minus disbursements as shown on books of organization;  only those

 ordinary expenses necessary to operation of organization are not included in

 net earnings.  26 U.S.C.A. s 501(c)(3).



 [5] INTERNAL REVENUE

 Payment of reasonable salaries to church officials does not constitute

 inurement so as to defeat church's tax exempt status, but payment of excessive

 salaries will result in finding of inurement as will distributions or

 unaccounted for diversions by one who has complete and unfettered

 control over organization's resources.  26 U.S.C.A. s 501(c)(3).



 [6] INTERNAL REVENUE

 Excessive compensation by organization to private individual and potential for

 abuse, even absent showing of actual abuse, will constitute inurement

 sufficient to destroy tax exempt status of organization.  26 U.S.C.A. s

 501(c)(3).



 [7] INTERNAL REVENUE

 Taxpayer has burden to establish that it is entitled to tax exempt status;

 this is particularly true in situations where there is great potential for

 abuse created by one individual's control of church;  church must come forward

 with candid disclosure of facts bearing on exemption application and doubts

 will be resolved in favor of government.



 [8] INTERNAL REVENUE

 For purposes of determining whether church's net income inured to benefit of

 church's founder and family, combined salaries of $20,249, $49,648 and $115,680

 in three different tax years were not excessive.



 [9] INTERNAL REVENUE

 Financing church operation through sale of religious literature does not

 necessarily violate requirements for tax exemption;  furthermore, church may

 pay author reasonable compensation in form of royalties for literary works.

 26 U.S.C.A. s 501(c)(3).



 [10] INTERNAL REVENUE

 Royalty payments made by church to its founder on sales of books, recordings

 and electronic devices, were excessive, and thus supported determination that

 church's net income inured to benefit of individual, where founder used church

 to generate copyrighted literature and market his products, church policy

 mandated that any book on subject be copyrighted in name of founder, and number

 of publications copyrighted by founder were actually written by church

 employees.



 [11] INTERNAL REVENUE

 Church's founder's control over large amount of church's assets compelled

 finding that church's proceeds inured to benefit of private individual, though

 some evidence was presented that funds were not missing, where fact that funds

 were present was not inconsistent with finding that founder had unfettered

 control over millions of dollars in money which originated with church.



 [12] INTERNAL REVENUE

 "Debt repayments" to church's founder by church, which were based upon

 percentage of church's total receipts inured to personal benefit of founder and

 thus, church's claim to tax exempt status was defeated.



 [13] FEDERAL COURTS

 Normally, determination of party's "actual motive" is type of mixed question of

 law and fact which appellate court reviews for clear error;  however, when

 questions of motive implicate constitutional rights, review is de novo.



 [13] FEDERAL COURTS

 Normally, determination of party's "actual motive" is type of mixed question of

 law and fact which appellate court reviews for clear error;  however, when

 questions of motive implicate constitutional rights, review is de novo.



 [14] CRIMINAL LAW

 Standard applied by Court of Appeals in reviewing cases of alleged

 discriminatory prosecution is that others are not generally prosecuted for same

 conduct and that decision to prosecute this defendant was based upon

 impermissible grounds such as race, religion or exercise of constitutional

 rights.



 [15] INTERNAL REVENUE

 Notice of deficiency sent by Internal Revenue Service to church was not

 unconstitutional, though there was some evidence of religious animus against

 church, where overwhelming weight of evidence indicated that Internal Revenue

 Service concluded that church did not conform to requirements for tax exempt

 status based upon exhaustive and responsible investigation.  26 U.S.C.A. s

 501(c)(3).



 [16] INTERNAL REVENUE

 Revocation letter of 1967 regarding church's tax exempt status was not

 constructively revoked by fact that Internal Revenue Service settled case

 against church pertaining to tax deficiency for 1965 through 1967 by

 stipulation, where although Internal Revenue Service abandoned its attempt to

 collect taxes for those years, it did not abandon its 1967 determination that

 church was no longer eligible for tax exempt status as evidenced by fact that

 stipulation expressly stated that concession was without prejudice with respect

 to any other taxable year.



 [17] INTERNAL REVENUE

 Taxpayer carries burden to show reasonable cause for failing to file required

 tax return.



 [18] INTERNAL REVENUE

 Church's unilateral doubts about effectiveness of revocation letter sent by

 Internal Revenue Service was not reasonable cause for its failure to file

 proper tax return nor was its alleged reliance on advice of tax professionals

 where Internal Revenue Service expressly instructed church to file tax

 return.  26 U.S.C.A. s 6651(a)(1).

  *1312 Christopher Cobb, Pasadena, Cal., Richard Riley, Washington, D.C. and

 Eric Lieberman, New York City, for petitioner-appellant.

  Steven Frahm, Washington, D.C., for respondent-appellee.

  Lee Boothby, Berrien Springs, Mich. and Gerald McNally, Jr., Glendale, Cal.,

 for amicus-curiae.

  Appeal from a Decision of the Tax Court of the United States.



  Before TANG and BRUNETTI, Circuit Judges, and JAMESON, [FN*] District Judge.



      FN* Honorable William J. Jameson, Senior United States District Judge,

     District of Montana, sitting by designation.



  TANG, Circuit Judge:

  The Church of Scientology (Church) appeals a judgment of the Tax Court which

 affirmed the Commissioner's assessment of tax deficiencies and late filing

 penalties against the Church for the years 1970, 1971 and 1972.  At issue is

 whether the Commissioner properly revoked the Church's tax exempt status.

                                       I.

  The Church was incorporated as a nonprofit corporation in the State of

 California in 1954.  In 1957, the Commissioner recognized it as a tax exempt

 organization under s 501(c)(3) of the Internal Revenue Code of 1954. [FN1]

 The Commissioner revoked the Church's tax exempt status in 1967.  The letter of

 revocation stated that the Church was "engaged in a business for profit," and

 was "operated in a manner whereby a portion of [its] earnings inure[d] to the

 benefit of a private individual," and was "serving a private, rather than a

 public interest."  The letter instructed the Church to file federal income tax

 returns.  The IRS subsequently published a notice of revocation in the Internal

 Revenue Service bulletin, and removed the Church from the Service's official

 roster of organizations eligible to receive tax deductible charitable

 donations.  The Church did not file income tax returns for the years 1970

 through 1972, instead, it submitted Form 990, information returns.  On December

 28, 1977, after auditing the Church's records, the IRS sent a Notice of

 Deficiency for the years 1970, 1971, and 1972.  The IRS calculated the

 deficiency to be $1,150,458.87 and imposed an additional $287,614.71 in late

 filing penalties. [FN2]



      FN1. Codified as amended at 26 U.S.C. s 501(c)(3) (1982).



      FN2. The IRS may impose a penalty in addition to the tax for failure to

     file tax returns under 26 U.S.C. s 6651(a).



  On March 28, 1978, the Church filed suit in United States Tax Court

 challenging the Commissioner's determination of tax deficiency.  In an

 extensive opinion, the Tax Court substantially upheld the determination of the

 Commissioner.  83 T.C. 381 (1984).  It held that the Church did not qualify

 for exemption from taxation under ss 501(a) & 501(c)(3) because:  (1) the

 Church was operated for a substantial commercial purpose;  (2) its earnings

 inured to *1313 the benefit of L. Ron Hubbard, his family, and OTC, a

 private non-charitable corporation controlled by key Scientology officials;

 and (3) it violated well defined standards of public policy by conspiring to

 prevent the IRS from assessing and collecting taxes owed by the Church.  The

 Court also upheld the validity of the Notice of Deficiency. [FN3]  Finally, the

 Court upheld the penalties for failure to file tax returns.



      FN3. However, the Court found that the IRS erred in including payments

     from the United Kingdom Church in the Church's income because it found that

     the United Kingdom Church was a branch of the Church, and that the

     payments were internal transfers of funds.



                                         II.

  During the years in question, the Church of Scientology of California was the

 "Mother Church" of the many Scientology churches around the country.  The

 Church propagated the Scientology faith, a religion founded by L. Ron Hubbard,

 through such means as the indoctrination of laity, training and ordination of

 ministers, creation of congregations, and provision of support to affiliated

 organizations.

  Scientology teaches that the individual is a spiritual being having a mind and

 body.  Part of the mind, called the "reactive mind" is unconscious and filled

 with mental images that are frequently the source of irrational behavior.

 Through the administration of a process known as "auditing" a parishioner,

 called a "pre-clear," is helped to erase his or her reactive mind and gain

 spiritual awareness.  Auditing is administered individually by a trained

 "auditor."  The auditor poses questions to the pre-clear and measures the

 latter's response with an electronic device call an "E-Meter" that is attached

 to the skin.  The E-Meter assists in the identification of spiritual

 difficulty.  Scientology teaches that spiritual awareness is achieved in

 stages.  A disciple achieves different levels of awareness through additional

 auditing.  The religion also offers courses to train auditors.

  Scientology teaches that people should pay for whatever of value they

 receive.  This is called the "Doctrine of Exchange."  Toward the realization of

 this doctrine, branch churches exacted a "fixed donation" for training and

 auditing.  Fixed donations were not based on ability to pay and with few

 exceptions, services were not given for free.

  Scientology is an international religion with numerous churches around the

 world.  In the 1970's, these churches were organized along hierarchical lines

 according to the level of services they were authorized to provide.  Churches

 that delivered services at the lowest levels were called "franchises" and

 later "missions."  "Class IV orgs" delivered auditing through "grade IV" and

 training through "level IV."  "St. Hill organizations" and "advanced

 organizations" offered intermediate and higher level services.  The branch

 known as "Flag" offered the highest level of training and auditing.

  The California Church consisted of several divisions.  The San Francisco

 Organization and the Los Angeles Organization were both class IV

 organizations.  The American St. Hill Organization was located in Los Angeles

 and offered intermediate auditing and training.  The Advanced Organization of

 Los Angeles provided high levels of auditing and training to persons who had

 completed services at a class IV organization.  The Flag Operations Liaison

 Office, located in Los Angeles, was an administrative unit of the California

 Church.

  In addition to auditing and training, the Church provided assistance to

 prisoners, ex-offenders, the elderly, the mentally ill and drug addicts.  On

 occasion the Church assisted the poor and the sick.  The Church performed

 christenings, funerals and wedding ceremonies free of charge, and conducted

 regular Sunday services.  The Church's chaplain provided marriage and family

 counseling free of charge.  The Church also provided free, a specialized form

 of auditing geared to help people in crisis.

  Flag was the highest division of the California Church.  It provided spiritual

 leadership.  It also acted as the Church's administrative center.  The Flag

 division was headquartered aboard the ship Apollo, *1314 which cruised the

 Mediterranean Sea and docked in various countries along its shores.  L. Ron

 Hubbard, his wife, Mary Sue, and their family lived aboard the Apollo with

 other members of the ship's crew and staff.  Besides performing the highest

 levels of auditing and training, Flag staff members performed a variety of

 management functions.  The Church's other divisions and other Scientology

 churches sent reports on a regular basis to Flag.  These reports supplied

 information, often in statistical form, about the organization's operations.

 Flag staff, on the basis of the review of these reports, issued policy letters,

 directives, and other kinds of administrative advice geared to improving local

 church operations.  Flag personnel also researched and developed programs for

 improving the administration of local churches.  Flag sent teams of specialists

 to help other units or churches experiencing management difficulties.

  The Church derived income from four sources:  (1) auditing and training;  (2)

 sales of Scientology literature, recordings and E-meters;  (3) franchise

 operations;  and (4) management services.  Franchise operators were required to

 remit ten percent of gross income to the Church.  The Church offered its

 managerial services to branch organizations around the world for a fixed fee.

  One of the policy directives of the Church was to "MAKE MONEY".  The Church

 frequently engaged in aggressive promotion of its products and services.  This

 promotion included market surveys and advertisements.  In addition, the Church

 trained staff members in salesmanship techniques.

  L. Ron Hubbard officially resigned his position as executive head of the

 California and other Scientology churches in 1966.  Despite his official

 resignation, the Tax Court found that he continued to exert significant control

 over the Church by making policy statements, directives, and orders.  In

 addition, his approval was required for all financial planning.  He was the

 sole trustee of a major Scientology trust fund into which the Church made

 substantial payments.  He or Mary Sue Hubbard were signatories on many Church

 bank accounts.

  During the tax years at issue, L. Ron Hubbard and Mary Sue Hubbard received

 salaries from the California Church and its affiliate, the United Kingdom

 Church, in the following amounts:



                         1970     1971      1972



 California Church

 L. Ron Hubbard         $ 4,932  $ 9,368  $ 35,000

 Mary Sue Hubbard       $ 3,017  $ 2,430  $ 25,000



 United Kingdom Church

 L. Ron & Mary Sue

   Hubbard Combined     $12,300  $37,850  $ 55,680

                        --------------------------

 TOTAL                  $20,249  $49,648  $115,680



  During these years, L. Ron Hubbard, Mary Sue Hubbard and their four children

 resided for the most part aboard the Apollo.  While aboard ship, the Church

 provided the Hubbards with free lodging, food, laundry, medical services and

 vitamins.

  The Church made royalty payments to L. Ron Hubbard for sales of his books,

 tapes and E-meters.  The royalties amounted to ten percent of the retail

 price.  The Church, for example, made $104,618.27 in royalty payments to

 Hubbard in 1972.  Additionally, Church policy required that all work pertaining

 to Scientology and Dianetics be copyrighted to L. Ron Hubbard.  As the result

 of this policy, a number of publications copyrighted by L. Ron Hubbard were

 actually written by others.  For example, Ruth Mitchell wrote the book Know

 Your People and Peter Gillum wrote the book How to be Successful.

 Additionally, a series of books called the OEC series contained policy letters,

 some written by L. Ron Hubbard and others written by paid employees of the

 Church.  L. Ron Hubbard received royalty payments on the sale of all of these

 publications.

  During the 1960's, Scientology organizations around the world were required to

 pay directly to L. Ron Hubbard, ten percent of their income.  These payments

 were termed "debt repayments" because they were designed to compensate Hubbard

 for his work in originating the Scientology religion.  The Tax Court concluded

 *1315 that during 1971-1972 the Church continued to make debt repayments to

 Hubbard.

  In 1968, L. Ron Hubbard, Mary Sue Hubbard, and Leon Steinberg incorporated a

 Panamanian corporation called Operation Transport Corp., Ltd. (OTC).  OTC was a

 for-profit corporation.  Shortly after the corporation's formation, Hubbard,

 Mary Sue Hubbard and Steinberg resigned and were replaced by three Flag

 employees.  During the years in question, the new directors performed only one

 function.  In the summer of 1972, they approved L. Ron Hubbard's decision to

 transfer approximately two million dollars from an OTC bank account in

 Switzerland to the Apollo.  The money was stored in a locked file cabinet to

 which Mary Sue Hubbard had the only set of keys.

  Between 1971 and 1972, the Church made payments in excess of three and a half

 million dollars to OTC.  During these years, the Church also made payments

 totaling nearly $175,000 to the Central Defense and Dissemination Fund.

 According to the Church, these payments were placed in the United States Church

 of Scientology Trust of which L. Ron Hubbard was the sole trustee.  The trust

 funds were deposited in several Swiss bank accounts.  L. Ron Hubbard and Mary

 Sue Hubbard were signatories of the accounts and L. Ron Hubbard kept the trust

 checkbooks.

                                      III.

  A. Tax Exemption

  [1] Internal Revenue Code s 501 exempts certain organizations from

 taxation.  Section 501(c)(3) exempts:

   corporations and any community chest, fund, or foundation, organized and

 operated exclusively for religious ... purposes, ... no part of the net

 earnings of which inures to the benefit of any private shareholder or

 individual....

  To qualify for exemption, a church must show that it is (1) organized, and (2)

 operated, exclusively for religious or charitable purposes.  Hall v.

 Commissioner, 729 F.2d 632, 634 (9th Cir.1984).

  The Church strenuously argues that the trial court failed to recognize it as a

 bona fide religion.  This argument goes to whether the Church meets the

 organizational test.  Neither the Commissioner, nor the Tax Court, nor this

 court questions that the Church of Scientology of California was organized for

 a bona fide religious purpose.  The only question before the court, is whether

 the Church met the second requirement for tax exempt status, the operational

 test.

  [2] Four elements compose the operational test.  First, the organization

 must engage primarily in activities which accomplish one or more of the exempt

 purposes specified in s 501(c)(3).  Treas.Reg. s 1.501(c)(3)-

 1(c)(1);  Church by Mail, Inc. v. Commissioner, 765 F.2d 1387, 1391 (9th

 Cir.1985).  Second, the organization's net earnings may not inure to the

 benefit of private shareholders or individuals.  Treas.Reg. s 1.501(c)(3)-

 1(c)(2);  Church by Mail, 765 F.2d at 1391.  Third, the organization must

 not expend a substantial part of its resources attempting to influence

 legislation or political campaigns.  Treas.Reg. s 1.501(c)(3)-1(c)(3);

 Church by Mail, 765 F.2d at 1391.  Courts have imposed a fourth element.

 Organizations seeking exemption from taxes must serve a valid public purpose

 and confer a public benefit.   Bob Jones University v. United States, 461

 U.S. 574, 585-92, 103 S.Ct. 2017, 2025-29, 76 L.Ed.2d 157 (1983).  If an

 organization fails to comply with any one of these four elements, it will fail

 the operational test and lose its eligibility for tax exempt status.

 Harding Hospital, Inc. v. United States, 505 F.2d 1068, 1072 (6th Cir.1974).

  We conclude that the Church failed to establish that "no part of the net

 earnings ... inures to the benefit of any private shareholder or

 individual...."  26 U.S.C. s 501(c)(3).  Because we may affirm the Tax Court

 on this ground, we do not reach the questions of whether the Church operated

 for a substantial commercial purpose or whether it violated public policy.

  B. Inurement

  Congress conferred tax exemption on churches and other organizations in

 recognition *1316 of the benefit society derives from the activities of

 these organizations.  Harding Hospital, 505 F.2d at 1071;  Founding

 Church of Scientology v. United States, 412 F.2d 1197, 1199, 188 Ct.Cl. 490

 (1969), cert. denied, 397 U.S. 1009, 90 S.Ct. 1237, 25 L.Ed.2d 422 (1970).

 The government leaves funds in the hands of charitable organizations rather

 than taxing them and spending the funds on public projects.  Implicit in this

 purpose is that charities must promote the public good to qualify for tax

 exemption.  Presbyterian and Reformed Publishing Co. v. Commissioner, 743

 F.2d 148, 153 (3d Cir.1984).

  [3] Section 501(c)(3) embodies this policy.  Churches are eligible for

 tax exempt status only if no part of their net earnings inure to the benefit of

 private individuals.  Each phrase of the statute has significance.  The term

 "no part" is absolute.  The organization loses tax exempt status if even a

 small percentage of income inures to a private individual.  Founding Church,

 412 F.2d at 1200;  Spokane Motorcycle Club v. United States, 222 F.Supp.

 151, 153 (E.D.Wash.1963).  The sole beneficiary of the church's activities must

 be the public at large.  Founding Church, 412 F.2d at 1199.

  [4] Courts have construed broadly the term "net earnings".  Hall, 729

 F.2d at 634.  "Net earnings" includes more than gross receipts minus

 disbursements as shown on the books of the organization.  Harding Hospital,

 505 F.2d at 1072.  Only those ordinary expenses necessary to the operation of

 the church are not included in net earnings.  Founding Church, 412 F.2d at

 1200.

  [5] The heart of s 501(c)(3) tax exempt status is the phrase "inures to

 the benefit."  Payment of reasonable salaries to church officials does not

 constitute inurement.  Bubbling Well Church of Universal Love v.

 Commissioner, 670 F.2d 104, 105 (9th Cir.1981).  However, payment of excessive

 salaries will result in a finding of inurement.  Id.  Inurement can also

 result from distributions other than the payment of excessive salaries.  See

 Founding Church, 412 F.2d at 1200 (ten percent of gross income of affiliated

 Scientology organizations paid to L. Ron Hubbard);  General Contractors'

 Ass'n of Milwaukee v. United States, 202 F.2d 633 (7th Cir.1953) (reports and

 surveys furnished to members);  Spokane Motorcycle Club, 222 F.Supp. 151

 (goods, services, and refreshments given to members).  Unaccounted for

 diversions of a charitable organization's resources by one who has complete and

 unfettered control can constitute inurement.  Parker v. Commissioner, 365

 F.2d 792, 799 (8th Cir.1966), cert. denied, 385 U.S. 1026, 87 S.Ct. 752, 17

 L.Ed.2d 674 (1967);  Kenner v. Commissioner, 318 F.2d 632 (7th Cir.1963).

  Finally, the regulations define "private shareholder or individual" broadly as

 any person "having a personal and private interest in the activities of the

 organization."  26 C.F.R. 1.501(a)-1(c).

  [6] While we remain solicitous of Congress' intent to confer tax exempt

 status on religious organizations, this court has previously affirmed the

 denial of tax exemption where church income inures to private individuals.  In

 Church by Mail, the Commissioner denied the Church's application for tax

 exempt status.  Two individuals, Reverend Ewing and Reverend McElrath, ran a

 church that mailed printed sermons to several million homes.  They also owned

 Twentieth Century Advertising Agency which provided the Church's printing and

 mailing services.  We found that the salaries paid to Reverend Ewing and

 Reverend McElrath by the Church and Twentieth Century were excessive.  We

 rejected the Church's argument that the income paid by Twentieth Century should

 not be included because Twentieth Century, a for-profit company, simply

 funneled church income to Reverends Ewing and McElrath.  765 F.2d at 1393.

 Similarly, in Hall, we held that William and Lorna Hall were not entitled to

 a charitable donation deduction for money donated to the Church of the United

 Brotherhood (CUB).  CUB failed to qualify as a charitable organization because

 its major purpose was to funnel rental income to the Halls.  729 F.2d at

 634.  In Bubbling Well Church, we upheld the Tax Court's denial of the

 Church's application *1317 for tax exempt status.  Three members of one

 family were the sole employees and voting directors of the Church.  The Church

 paid a substantial portion of its income to the three family members.  We held

 that the Church failed to carry its burden to prove that the salary and

 benefits paid to the family members were reasonable.  670 F.2d at 106.

 These cases emphasize that excessive compensation and potential for abuse, even

 absent a showing of actual abuse, will constitute inurement. [FN4]



      FN4. We recognize that not every instance in which payments are made to

     private individuals will result in inurement.  See e.g., Presbyterian

     and Reformed Publishing Co. v. Commissioner, 743 F.2d 148 (3d Cir.1984).

     In Presbyterian and Reformed Publishing, the Third Circuit reversed the

     Tax Court's denial of tax exempt status because the publishing company paid

     nothing more than reasonable salaries to the founder's family and

     employees.



  The finding of the Tax Court that a portion of the Church's net earnings

 inured to the benefit of L. Ron Hubbard, his family, and OTC, a private for-

 profit corporation, is a factual finding.  See Bubbling Well Church, 670

 F.2d at 106;  cf. Church By Mail, 765 F.2d at 1390 (whether Church is

 operated for a non-exempt purpose is a factual finding).  We review this

 finding for clear error.  Bubbling Well Church, 670 F.2d at 106.

  [7] The taxpayer has the burden to demonstrate that it is entitled to tax

 exempt status.  Church by Mail, 765 F.2d at 1391.  This is especially true

 in situations where there is a great potential for abuse created by one

 individual's control of the church.  See Bubbling Well Church, 670 F.2d at

 105.  The Church must come forward with candid disclosure of the facts bearing

 on the exemption application.  Id.  Doubts will be resolved in favor of the

 government.  Harding Hospital, 505 F.2d at 1071.

  In finding that a portion of the Church's net earnings inured to the benefit

 of L. Ron Hubbard, his family and OTC, the court isolated two indicia of

 inurement, overt and covert.  The overt indicia included salaries, living

 expenses, and royalties.  The covert indicia included "debt repayments" and L.

 Ron Hubbard's unfettered control over millions of dollars of Church assets.

 The court concluded that these indicia, when viewed in light of the self-

 dealing associated with them, coupled with the Church's failure to carry its

 burden of proof and to disclose the facts candidly, proved conclusively that

 the Church was operated for the benefit of L. Ron Hubbard and his family.

  The Church challenges the overt indicia of inurement on the ground that the

 salaries, expenses and royalties, were reasonable.  It notes that the court did

 not find them unreasonable, considered separately.  The Church questions the

 logic of the finding that several reasonable payments add up to inurement.

  [8] The Church paid L. Ron Hubbard and Mary Sue Hubbard combined salaries

 of $20,249 in 1970, $49,648 in 1971 and $115,680 in 1972.  We cannot say that

 these salaries were excessive.

  In addition to Hubbard's salary, the Church paid for all of the Hubbards'

 living and medical expenses aboard the cruise ship Apollo.  These expenses

 amounted to about $30,000 per year.  Because it is unnecessary to our decision,

 we express no opinion on whether supporting a Church's founder and his family

 aboard a yacht cruising the Mediterranean constitutes a reasonable Church

 expense.

  [9][10] The Church also paid substantial royalties to L. Ron Hubbard for his

 books, recordings and E-meters.  Churches, especially less established ones,

 rely on the distribution of church literature to propagate their beliefs.

 Financing church operations through the sale of religious literature does not

 necessarily violate the requirements for tax exemption.  See Presbyterian

 and Reformed Publishing Co., 743 F.2d at 158-59.  Furthermore, a church may pay

 the author reasonable compensation in the form of royalties for his literary

 works.  However, the payments in this case, cross the line between reasonable

 and excessive.  Here, the evidence indicates that Hubbard used the Church to

 generate copyrighted literature and market his products.  Scientology policy

 mandated that *1318 any book on Dianetics and Scientology be copyrighted in

 the name of L. Ron Hubbard.  Pursuant to this policy, a number of publications

 copyrighted by L. Ron Hubbard were actually written by Church employees.

 Furthermore, the Church encouraged its staff members to market aggressively his

 products.  We agree with the Tax Court that the royalty payments support a

 finding of inurement.

  [11] The Church argues that the evidence does not support the Tax Court's

 finding of covert inurement.  However, the record reveals that L. Ron Hubbard

 had unfettered control over millions of dollars in Church assets.  The

 Church transferred several million dollars to OTC during 1970-72.  These

 payments were designated as "charter mission expenses."  L. Ron Hubbard and

 Mary Sue Hubbard controlled OTC funds.  Sometime during 1972, OTC transferred

 approximately two million dollars from OTC bank accounts in Switzerland to the

 Apollo.  The finding that OTC was a sham corporation is sustained.  During the

 tax years in question OTC funneled millions of dollars of Church assets to L.

 Ron Hubbard.   See Church by Mail, Inc., 765 F.2d at 1393;  Hall, 729

 F.2d at 634.

  The record also supports the Tax Court's conclusion that L. Ron Hubbard had

 unfettered control over Church of Scientology Trust Fund assets.  The Church

 deducted payments of $28,930.34 in 1970, $67,892.40 in 1971, and $77,986.62 in

 1972 to the Central Defense and Dissemination Fund.  According to the Church,

 these payments were made to the United States Church of Scientology Trust.  L.

 Ron Hubbard was the sole trustee of the Trust during the years in question.

 Trust funds were deposited in several Swiss bank accounts.  L. Ron Hubbard and

 Mary Sue Hubbard were two of the three signatories on the Trust accounts.  L.

 Ron Hubbard kept the Trust checkbooks.  In 1972, over a million dollars was

 withdrawn from the Trust accounts in Switzerland and brought aboard the Apollo

 where it was kept in a locked file cabinet.  Mary Sue Hubbard had the only keys

 to the cabinet.

  The Church disputes that control over assets compels a finding of inurement.

 It argues that every Sunday morning pastors all over America collect money from

 parishioners and hold that money for Church uses.  It asserts that OTC funds

 were used for expenses associated with operation of the Apollo and in providing

 banking services for Flag.  Witnesses testified that the Church used Trust

 monies to defend Scientology against attack and to propagate the religion.

 Finally, the Church argues that the three million dollars brought aboard the

 Apollo from the OTC and Trust accounts remained on the Apollo during the years

 in question.  It cites the testimony of a Trust accountant who counted the cash

 aboard the Apollo and testified that none of it was missing.

  We find these arguments unpersuasive.  Unlike the typical Saturday or Sunday

 when parishioners donate their money to the church, here the Church transferred

 millions of dollars to bank accounts controlled by a private individual who had

 no official responsibility for managing church assets.  Although witnesses

 testified that the money was used for Church purposes, the Church presented

 little documentation to show that the majority of Trust or OTC money was

 actually spent on bona-fide Church activities.  Finally, the self-serving

 testimony of a Church employee that the three million dollars remained in the

 Apollo safe proves nothing.  The fact that there were three million dollars in

 the safe on the day the Church accountant checked, is not inconsistent with the

 Tax Court's finding that L. Ron Hubbard had unfettered control over millions of

 dollars in money that originated with the Church.  The Church failed to come

 forward with testimony from key individuals such as L. Ron Hubbard and Mary Sue

 Hubbard and failed to present the documentation necessary to trace the source

 and use of OTC and Trust monies.  In sum, the Church failed to carry its burden

 of proof in a situation where "the potential for abuse created by the

 [founder's] control of the Church required open and candid disclosure of facts

 bearing on the exemption application."  Bubbling Well Church, 670 F.2d at

 105.

  *1319 The Tax Court found that Church income inured to the benefit of L.

 Ron Hubbard in a "grand scale" in the form of "debt repayments."  During the

 1950's, Hubbard was paid a portion of the gross income of Scientology

 congregations, franchises and organizations.  Founding Church, 412 F.2d at

 1199.  This compensation scheme was called the "proportional pay plan."  During

 the 1960's these tithes became known as "Founding Debt Payments" (sometimes

 also called "LRH RR" or "LRH 10").

  [12] Although the form changed, the payments continued through the years at

 issue in this case.  Church records indicate that between October 9, 1972 and

 December 28, 1972, it made debt repayments totaling $19,324.41.  A policy

 letter dated September 7, 1972 entitled "Repayment or Due Money Collected for

 LRH Personally" set out a program to reimburse Hubbard for past use of

 Hubbard's personal income and capital;  research and development of the

 technology of Dianetics and Scientology;  and the use of Hubbard's goodwill and

 high credit rating.  The letter establishes the post of "LRH accounts officer"

 to monitor collection of debt repayments.

  The Church argues that the Tax Court's finding of continued debt repayments is

 clearly erroneous.  The policy letter establishing the post of "LRH accounts

 officer" was canceled two days after it was promulgated.  According to the

 Church, the only credible evidence of payments were the checks issued between

 October and December 1972.  It contends that these payments, even though

 invoiced in the Church's records as "Per HCO Policy Letter 7 Sept. 72", "LRH

 Repayments," and "Founding Debt Payment," were actually deposited in an OTC

 bank account for the benefit of the Church.  Finally, even if the evidence is

 believed, argues the Church, it accounts for only a four-month period and is

 insufficient to support revocation of tax exemption for all three years.

  These arguments are unavailing.  Even though the payments were called debt

 repayments, the Church produced no evidence of bona fide indebtedness.  The

 typical indicia of a debt are a sum certain payable over a specific period of

 time at a stipulated rate of interest.  Here, the evidence indicates a

 continuing obligation to make uncertain payments based on a percentage of the

 Church's total receipts.  In enforcing federal tax laws, courts look to the

 substance of a transaction rather than its form.  Commissioner v. Court

 Holding Co., 324 U.S. 331, 334, 65 S.Ct. 707, 708, 89 L.Ed. 981 (1945).  These

 payments more closely resemble tithes to L. Ron Hubbard than debt repayments.

 It makes no difference whether the $19,000 was the tip of the iceberg, as the

 Tax Court concluded, or the total of all debt repayments made by the Church.

 No part of the Church's income could inure to L. Ron Hubbard if it was to

 maintain tax exempt status.  Founding Church, 412 F.2d at 1200.  Even if the

 money went into an OTC account, it inured to the benefit of L. Ron Hubbard

 because he had unrestrained and unaccounted for access to that account.  See

 Parker, 365 F.2d at 799.  The Church failed to come forward with credible

 proof that the funds were actually spent on behalf of the Church.  Bubbling

 Well Church, 670 F.2d at 106.

  In sum, we hold that significant sums of Church money inured to the benefit of

 L. Ron Hubbard and his family during the tax years 1970, 1971 and 1972.

 Although neither the salaries nor the living expenses necessarily constituted

 evidence of inurement, the cumulative effect of Hubbard's use of the Church to

 promote royalty income, Hubbard's unfettered control over millions of dollars

 of church assets, and his receipt of untold thousands of dollars worth of "debt

 repayments" strongly demonstrate inurement.  We find no clear error.

  C. Validity of Notice of Deficiency

  The Church mounts two attacks on the notice of deficiency.  First, it alleges

 that the notice was void because the 1967 revocation letter was

 unconstitutional.  Second, it contends that the notice was void or voidable due

 to administrative defects.

  *1320 1. Constitutional Challenge

  [13] The Church asserts that the IRS was motivated by hostility towards

 Scientology as a religion in issuing the 1967 letter revoking the Church's tax

 exempt status.  The first amendment imposes an obligation of neutrality on the

 government in its dealings with religious organizations.  See Sherbert v.

 Verner, 374 U.S. 398, 402, 83 S.Ct. 1790, 1792, 10 L.Ed.2d 965 (1963).  The

 question of whether the Commissioner was motivated by religious animus turns on

 subjective intent.  Normally, the determination of a party's "actual motive" is

 the type of mixed question of law and fact which we review for clear error.

 United States v. McConney, 728 F.2d 1195, 1203 (9th Cir.) (en banc), cert.

 denied, 469 U.S. 824, 105 S.Ct. 101, 83 L.Ed.2d 46 (1984).  However, when

 questions of motive implicate constitutional rights, we review de novo.  See

 Standard Oil Co. of California v. Arizona, 738 F.2d 1021, 1023 (9th

 Cir.1984), cert. denied, 469 U.S. 1132, 105 S.Ct. 815, 83 L.Ed.2d 807

 (1985);  McConney, 728 F.2d at 1203.

  As proof of the Commissioner's enmity, the Church cites a record of harassment

 dating back to 1958.  Essentially, the Church contends that it was singled out

 for revocation.  In 1959, the IRS revoked the tax exempt status of the Founding

 Church.  In 1963, Food and Drug Administration agents raided the Founding

 Church and seized E-meters and Scientology literature on the grounds of "false

 or misleading labeling."  Founding Church of Scientology v. United States,

 409 F.2d 1146, 1148 (D.C.Cir.1969).  The Church alleged that in the mid-60's

 the Department of Justice targeted all Scientology churches for revocation of

 tax exempt status.  Memoranda and correspondence in IRS files contained

 statements antagonistic to the Church.  IRS agents called Scientology a

 "medical quackery," a "threat to the community, medically, morally and

 socially," a "prey on the public pocketbook," and similar epithets.  Between

 1969 and 1975 the IRS established three special intelligence units to collect

 information about taxpayers and to monitor their compliance with tax laws.  All

 three units collected information on the Church and other groups such as the

 Black United Front, the New Left Movement and the Welfare Rights Organization.

  Despite these facts, the record bears out the trial court's conclusion that

 the IRS revoked the Church's exemption based upon legitimate agency concerns.

 The IRS examined the Church's records in 1965 and again in 1966.  On July 29,

 1966, the IRS sent a letter to the Church stating that it was considering

 revocation of its tax exempt status because:  (1) the Church's income inured to

 the benefit of Scientology practitioners;  (2) the Church's activities were

 commercial;  and (3) the Church was serving the private interest of L. Ron

 Hubbard and Scientology practitioners.  The agency then held two protest

 conferences and finally issued a formal letter of revocation on July 18, 1967

 stating the same three grounds of revocation.  During 1969 and 1970, the IRS

 examined the Church's records for the taxable years 1964-67 and, in a second

 audit, the years 1968 and 1969.  In 1974, the IRS mailed a notice of deficiency

 to the Church for the taxable years 1965 through 1967.  The Church filed the

 petition in the Tax Court for the 1965 deficiency and in late 1976 the IRS

 settled the case by conceding the petitioners' tax exempt status for that year

 without prejudice to any other year.  In 1975 and 1976 the IRS audited the

 California Church for the taxable years 1971 through 1974.  The agents examined

 between 200 and 300 cartons of records containing approximately two million

 documents.  Based on the findings of that audit, the parties attempted

 settlement negotiations.  Finally, in December of 1977, the IRS issued a notice

 of deficiency for the tax years 1970, 1971 and 1972.

  [14] Even examining the IRS's actions under the selective prosecution

 standard--a standard which is arguably too stringent for review of a mere

 revocation of tax exempt status--we cannot hold that there is any impropriety

 in this revocation.  See Karme v. Commissioner, 673 F.2d 1062, 1064 (9th

 Cir.1982).  The standard we apply in cases of alleged discriminatory

 prosecution is:

   *1321 (1) That others are generally not prosecuted for the same conduct;

   (2) The decision to prosecute this defendant was based upon impermissible

 grounds such as race, religion or the exercise of constitutional rights.

  Id.

  [15] The Church has not shown discriminatory selection even under the

 stringent criminal standard.  The IRS has revoked the tax exempt status of many

 other churches.  See e.g., Presbyterian and Reformed Publishing Co., 743

 F.2d 148 (reversing the IRS's revocation);  Bethel Conservative Mennonite

 Church v. Commissioner, 746 F.2d 388 (7th Cir.1984) (reversing IRS's

 revocation);  Church of Gospel Ministry, Inc. v. United States, 640 F.Supp.

 96 (D.D.C.1986) (upholding the IRS's revocation).  Nor has the Church proven

 the second prong.  Although there is evidence of religious animus, the

 overwhelming weight of the evidence indicates that the IRS concluded that the

 Church did not conform to the requirements of section 501(c)(3) based upon

 exhaustive and responsible investigation.  Accordingly, we reject the Church's

 argument that the notice of deficiency was unconstitutional.

  2. Administrative Defects

  The IRS revoked the Church's tax exempt status by letter dated July 18, 1967.

 After fruitless negotiations, the IRS issued a notice of deficiency to the

 Church on June 7, 1974 covering the years 1965 through 1967.  The Church argues

 that, because the IRS settled the case by stipulating that the Church owed no

 deficiency for 1965, the revocation letter was constructively revoked.  Thus,

 argues the Church, the 1977 notice of deficiency, relating to the years 1970

 through 1972, was void because the Church was still a recognized tax exempt

 organization.  The Church cites A. Duda & Sons Cooperative Ass'n v. United

 States, 504 F.2d 970 (5th Cir.1974).

  [16] We disagree with the Church's analysis.  Although the IRS abandoned its

 attempt to collect taxes for the years 1965 through 1967, it never abandoned

 its 1967 determination that the Church was no longer eligible for tax exempt

 status.  In fact, the stipulation expressly stated that the concession was

 "without prejudice to [the Church] or [the Commissioner] with respect to any

 other taxable year...."  A. Duda & Sons is inapposite.  In that case, the

 Commissioner expressly conceded that the grounds for revocation were

 erroneous.  504 F.2d at 975.  In this case, the Commissioner never made such

 a concession;  in fact today we hold that one of the stated grounds, inurement,

 was valid.  In sum, we hold that the 1967 revocation letter was not

 constructively revoked.

  D. Validity of Late Filing Penalties

  The Commissioner imposed an additional penalty on the Church in the amount of

 $287,615 for failing to file a corporate tax return for the years in

 question.  Internal Revenue Code s 6651(a)(1) reads in pertinent part:

   In case of failure ... to file any return ... on the date prescribed

 therefor ..., unless it is shown that such failure is due to reasonable cause

 and not due to willful neglect, there shall be added to the amount required to

 be shown as tax on such return 5 percent of the amount of such tax if the

 failure is for not more than 1 month, with an additional 5 percent for each

 additional month or fraction thereof during which such failure continues, not

 exceeding 25 percent in the aggregate....  (emphasis added)

  The regulations provide that, to demonstrate reasonable cause a taxpayer must

 show that it "exercised ordinary business care and prudence and was

 nevertheless unable to file the return within the prescribed time...." 26

 C.F.R. s 301.6651-1(c)(1).  What elements constitute reasonable cause is a

 question of law which we review de novo.  United States v. Boyle, 469 U.S.

 241, 105 S.Ct. 687, 692 n. 8, 83 L.Ed.2d 622 (1985).

  [17][18] The Church argues that the IRS waived its right to impose the

 penalty because it accepted the Church's Form 990 and even extended the time

 for filing.  This waiver, argues the Church, constitutes *1322 "reasonable

 cause" for failing to file corporate returns.  The taxpayer carries the burden

 to show reasonable cause for failing to file the required return.  Funk v.

 Commissioner, 687 F.2d 264, 266 (8th Cir.1982).  The IRS expressly revoked the

 Church's tax exempt status in the July 18, 1967 letter which instructed the

 Church thereafter to file federal tax returns.  We agree with the Tax Court

 that "[the Church's] unilateral doubts about [the revocation letter's]

 effectiveness are not 'reasonable cause' for its failure to file a proper

 return."  83 T.C. at 526.

  Secondly, the Church argues that its reliance on the advice of tax

 professionals that the Form 990 would be acceptable, constitutes reasonable

 cause.  The Supreme Court recently held that a taxpayer's failure to file a

 timely return, in reliance upon an attorney's advice did not constitute

 "reasonable cause" under s 6651(a)(1).  Boyle, 105 S.Ct. at 693-94.

 Likewise, we hold that a taxpayer's failure to file the proper form, in

 reliance upon an attorney's advice is not "reasonable cause" where the IRS has

 expressly instructed the taxpayer to file a tax return.

                                       IV.

  We affirm the Tax Court decision upholding the Commissioner's revocation of

 the Church of Scientology of California's tax exempt status on the ground that

 a portion of its income inured to the benefit of L. Ron Hubbard and others.  We

 reject the Church's argument that the notice of deficiency was constitutionally

 and administratively defective.  Finally, we uphold the Commissioner's

 imposition of a penalty on the Church for failure to file the proper returns.