United States v. Hartshorn , 751 F.3d 1194 ( 2014 )

FILED
United States Court of Appeals
Tenth Circuit
June 2, 2014
PUBLISH Elisabeth A. Shumaker
Clerk of Court
UNITED STATES COURT OF APPEALS
TENTH CIRCUIT
UNITED STATES OF AMERICA,
Plaintiff - Appellee,
v. No. 12-4104
KEVIN HARTSHORN, conducting
business through the Church of
Compassionate Service,
Defendant - Appellant.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF UTAH
(D.C. No. 2:10-CV-00638-CW)
John J.E. Markham, II, of Markham & Read, Boston, Massachusetts, for Defendant -
Appellant.
Regina S. Moriarty, Attorney, Tax Division, Department of Justice, Washington, D.C.
(David Barlow, United States Attorney, Salt Lake City, Utah, of Counsel; Kathryn
Keneally, Assistant Attorney General, and Teresa E. McLaughlin, Attorney, Tax
Division, Department of Justice, Washington D.C., with her on the brief) for Plaintiff -
Appellee.
Before KELLY, McKAY, and O’BRIEN, Circuit Judges.
McKAY, Circuit Judge.
Defendant Kevin Hartshorn appeals the district court’s issuance of an injunction
against him under 26 U.S.C. § 7408, arguing the court erred in concluding he promoted
an abusive tax shelter in violation of 26 U.S.C. § 6700. The district court agreed with the
government that Defendant was promoting abusive tax shelters through his church, the
Church of Compassionate Service, and particularly through his representations that
individuals who took vows of poverty and obedience and became ministers of his church
would not be required to pay taxes on income they earned and assigned to the church.
The court accordingly granted summary judgment in favor of the government and issued
an injunction prohibiting Defendant from promoting or selling “the use of church-based
tax-fraud schemes.” (Appellant’s App. at 1140.) On appeal, Defendant contends we
should reverse the district court’s summary judgment decision because (1) Defendant’s
statements regarding the tax benefits for vow-of-poverty ministers were correct, and (2) if
any of his statements were false or fraudulent, he did not know or have reason to know of
this fact.
BACKGROUND
Defendant organized and was appointed head minister of the Church of
Compassionate Service in 2004. At the time of the proceedings below, the church had
approximately fifty active ministers.1 To become a minister, an individual is required to
take a vow of obedience and a vow of poverty. Upon taking the vow of poverty,
ministers transfer title to all of their property to the church. They also assign to the
1
It is not clear from the record whether the church has any lay members.
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church all income that is earned as part of their normal employment, either endorsing
their employment checks in favor of the church or directing their employers to deposit
their earnings directly into various church accounts. The ministers’ homes, now owned
by the church, are designated as parsonages, and their mortgages and other expenses are
paid for with church funds. The church issues ministers a debit card on an individual
church account, and each minister’s family submits a regular “Request for Ministry
Funding” to fund their ministry bank accounts.2 (See id. at 606, 756-61.) While the
church formally maintains the right to refuse payment of these requests, Defendant
presented no evidence of any particular request that was refused. According to internal
church documents, “10% will be withheld on all funds flowing through the Order, with
90% being available for local ministry funding.” (Id. at 240.) Defendant testified that the
church’s “policy [of trying] to make 90 percent available to fund ministries for their
compassionate service projects [is] not tied to how much money they make.” (Id. at 153.)
However, ministers who were deposed in the course of this litigation indicated that it was
their understanding they would “get back 90 percent of whatever funds [they] generate[d]
for the church.” (Id. at 109; see also id. at 124.)
2
An individual who did administrative work for the church testified that “a
ministry usually consists of a couple people, a husband and wife and/or a family would be
involved with ministry work in general.” (Id. at 177.) Thus, the church’s approximately
fifty ministers were organized into approximately thirty-four ministries. (Id.) According
to the evidence in the record, when a married couple submitted ministry funding requests
for their family’s ministry, they submitted a single form requesting funding for accounts
in each minister’s name.
-3-
As the head minister of the Church of Compassionate Service, Defendant has
assisted individuals in executing vows of poverty and transferring their property to the
church, and he has made representations to them about the tax consequences of doing so.
He has told ministers they need not pay taxes on money they earn that is assigned to the
church pursuant to a vow of poverty. The Minister’s Handbook, which Defendant
drafted, states:
When ministers of the [Compassionate] Order [of Service] take the Vow of
Poverty, even the IRS recognizes that they have no income and that any
income that they would receive belongs to the religious order. If a minister
under a Vow of Poverty has no income, nor assets, then it would be futile
for someone to sue them. If a minister has no income, then there is no
income tax.
(Id. at 563.) In a section covering “Speaking to Government Authorities,” the Minister’s
Handbook states the government officials “may ask technical legal questions” that should
be referred to church authorities rather than answered by individual ministers. (Id. at
592.) Ministers are “directed” “not [to] chat or discuss anything,” “not [to] volunteer any
information or provide them with any information,” and “not [to] invite them into the
parsonage.” (Id. at 593.) The Minister’s Handbook also contains a table of “Church
Vocabulary” for ministers to use in speaking with others, using, for instance, the phrase
“Church/Order funds” instead of “Income,” the phrase “By assignment, as a Vow of
Poverty Minister” instead of “My Business/My job,” and the phrase “the assigned boat
for use by the ministry” instead of “My Boat.” (Id. at 590.)
In support of its motion for summary judgment, the government provided details
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about various church ministers but relied mainly on one individual, a minister named
Bruce Calkins. On appeal, we likewise focus on Mr. Calkins’ situation. As part of the
process of applying to become a church minister, Mr. Calkins filled out an information
sheet in which he provided Defendant with information about his job, employer, average
income, net worth, bank accounts, and past financial history. The information sheet
included a section asking for the “Company(s) you are involved with and position(s) you
hold: (Please include ALL income-producing activities).” (Id. at 218.) Mr. Calkins filled
out this section with the following information: “Kaiser Permanente Medical Center, San
Diego, CA: Histotechnologist[;] USANA Health Sciences, Salt Lake City, UT:
Independent Associate/Distributor of nutritional supplements and skin care products.
(network marketing business).” (Id.) Mr. Calkins was accepted as a minister and issued
written vows of obedience and poverty, which he signed. He was also issued an “Agency
Assignment” that essentially instructed him to continue doing what he was already doing:
[T]o enable you to fulfill your responsibilities as agent of the Order, you are
hereby instructed to pursue work in histotechnology at Kaiser Permanente
Medical Center, San Diego, CA as a Histotechnologist and as an
Independent Associate/Distributor of nutritional supplements and skin care
products produced by USANA Health Sciences . . . for the financial support
of the Order. Further, funds generated from the results of your labors are
not to be construed as income or financial gain to you personally, yet will
be the financial blessings of the Compassionate Order of Service.
(Id. at 225.)
After becoming a minister, Mr. Calkins assigned his pay from Kaiser Permanente
to the church and directed that his paycheck be deposited directly into a church account.
-5-
Mr. Calkins continues to receive employee benefits from Kaiser Permanente, including
health care, sick leave, and vacation days. Mr. Calkins testified that the church does not
exercise any control over the work he performs for Kaiser Permanente; rather, his work is
directed by Kaiser Permanente employees. He testified that roughly ninety percent of the
money he earns and turns over to the church is available “to provide for expenses of [his]
ministry” (id. at 107) and there “hasn’t been an issue” with him being unable to buy
something he wanted after taking his vow of poverty (id. at 106). Mr. Calkins last filed a
federal income tax return in 2000.
Taking the facts in the light most favorable to Defendant, the district court
concluded that Mr. Calkins’ employment with Kaiser Permanente resulted in taxable
income. The court accordingly concluded that Defendant made false or fraudulent
statements when he told Mr. Calkins he was exempt from income tax obligations due to
his relationship with the church. The court also concluded that Defendant knew or should
have known of the falsity of his statements, given the fact that similar tax avoidance
theories have been consistently rejected by the Internal Revenue Service and federal
courts. The court further concluded Defendant’s false or fraudulent statements were
material and an injunction was necessary to prevent the recurrence of this conduct, and
the court accordingly granted the government’s motion for summary judgment as to the
necessity of an injunction under 26 U.S.C. § 7408.3 The court then issued an injunction
3
The court rejected the government’s request for additional injunctive relief under
26 U.S.C. § 7402, holding that it would entertain such a request only if Defendant
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prohibiting Defendant from promoting or selling “the use of church-based tax-fraud
schemes.” (Id. at 1140.) On appeal, Defendant challenges the district court’s legal
conclusion that an injunction was necessary but does not otherwise challenge the scope of
injunctive relief ordered by the district court. Specifically, Defendant raises two
arguments regarding the district court’s summary judgment order: he argues (1) his
statements to Mr. Calkins and other ministers were not false or fraudulent and (2) even if
they were, he did not know or have reason to know of this fact.
DISCUSSION
While we typically “review a district court’s grant of an injunction for abuse of
discretion,” “[w]e review de novo a summary judgment which serves as a basis for an
injunction.” Law v. Nat’l Collegiate Athletic Ass’n, 134 F.3d 1010, 1016 (10th Cir.
1998).
For injunctive relief to be warranted under § 7408, the government was required to
prove by a preponderance of the evidence that (1) Defendant organized an entity, plan, or
arrangement; (2) he made false or fraudulent statements concerning the tax benefits to be
derived from the entity, plan, or arrangement; (3) he knew or had reason to know that the
statements were false or fraudulent; (4) the false or fraudulent statements pertained to a
material matter; and (5) an injunction was necessary to prevent recurrence of this conduct.
See United States v. Estate Pres. Servs., 202 F.3d 1093, 1098 (9th Cir. 2000). In this
continued to promote the same tax avoidance arrangement following the court’s decision.
The court’s denial of an injunction under § 7402 is not at issue in this appeal.
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appeal, the only elements in dispute are the second and third elements—whether
Defendant’s statements about the tax benefits relating to vow-of-poverty ministers were
false or fraudulent, and whether Defendant knew or had reason to know of this fact.
Thus, the main question we must decide in this case is whether Church of Compassionate
Service ministers like Mr. Calkins are required to pay federal income taxes on income
they earn in normal employment and assign to the Church of Compassionate Service.
To resolve this question, we must first consider whether a minister’s income is tax
exempt only if he receives it as an agent of the church or whether, as Defendant argues, it
is sufficient that a minister assigns earnings to his church pursuant to a vow of poverty.
All of the circuit courts that have considered this issue have concluded a minister must
earn income as an agent of his church in order for his earnings to be tax exempt. See,
e.g., Page v. Comm’r, 823 F.2d 1263, 1270-71 (8th Cir. 1987); Schuster v. Comm’r, 800
F.2d 672, 676-78 (7th Cir. 1986); Pollard v. Comm’r, 786 F.2d 1063, 1065-66 (11th Cir.
1986); Fogarty v. United States, 780 F.2d 1005, 1012 (Fed. Cir. 1986); Mone v. Comm’r,
774 F.2d 570, 573-74 (2d Cir. 1985); see also In re Von Kiel, 461 B.R. 323, 333 (Bankr.
E.D. Penn. 2012) (collecting cases and noting that “[a]ll eight Courts of Appeal . . . to
have addressed the issue are in agreement: Attempts to avoid personal tax liability based
on vows of poverty without proof that some agency relationship exists between the entity
providing the wages and the church or religious order requiring the vow of poverty are
simply unavailing”). As the Eighth Circuit has explained:
A basic principle of tax law is that income is taxable to the one who earns
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it. It is likewise basic that a taxpayer is not relieved of his obligation to pay
income tax on any income he earns when he transfers it or assigns it to
another person or entity. If, however, one receives income as an agent for a
principal, it is the income of the principal and not that of the agent.
Specifically, if a member of a religious order earns income as an agent of
and on behalf of the order, and gives that money to the order pursuant to his
vow of poverty, that sum becomes income to the order and the individual is
not taxed on it. Conversely, if a member of a religious order earns income
in his individual capacity and gives the money to the order pursuant to his
vow of poverty, that sum is income to him and is subject to federal income
tax.
Page, 823 F.2d at 1270 (citations omitted).
Notwithstanding this weight of authority, Defendant argues an agency relationship
is not required based on an IRS publication and a few regulations from Title 26, Part 31
of the Code of Federal Regulations. The publication he cites, IRS Publication 517,
provides:
Earnings—Members of Religious Orders
Your earnings may be exempt from both income tax and [self-employment]
tax if you are a member of a religious order who:
• Has taken a vow of poverty,
• Receives earnings for services performed as an agent of the
order and in the exercise of duties required by the order, and
• Renounces the earnings and gives them to the order.
IRS Pub. No. 517, Social Security and Other Information for Members of the Clergy and
Religious Workers (2012),4 at 9 (emphasis added). This publication is thus in accordance
with the courts’ rulings—it provides tax-exempt status to a minister’s earnings only when
the minister earns the income as an agent of the church and not in his individual capacity.
4
This publication existed in much the same format when Defendant organized the
church in 2004.
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As for the federal regulations Defendant relies on, 26 C.F.R. §§ 31.3121(b)(8)-1 and
31.3401(a)(9)-1, these regulations do not define the federal income tax rules for a
minister’s earnings. Rather, 26 C.F.R. § 31.3121(b)(8)-1 relates only to employee and
employer taxes under the Federal Insurance Contributions Act—i.e., Social Security and
Medicare taxes. See 26 C.F.R. § 31.0-3(a). And 26 C.F.R. § 31.3401(a)(9)-1 only
defines the types of earnings that are “excepted from wages” and thus not subject to
withholding at the source under 26 U.S.C. § 3402. See 26 C.F.R. § 31.3401(a)(9)-1(a).5
As explained in more detail in IRS Publication 517, a minister’s earnings may be subject
to special rules, depending on various circumstances that are not pertinent to this appeal.
Thus, for instance, in some circumstances a minister’s earnings may be covered under the
Self-Employment Contributions Act rather than FICA, or a minister may be required to
make estimated income tax payments throughout the year because his salary is not
withheld at the source. However, regardless of whether or not an agency relationship is
required to trigger the regulations cited by Defendant, these regulations do nothing to
change the general rule that a minister’s earnings are only tax exempt if (1) the minister
5
Defendant contends that if a minister’s earnings are not considered “wages”
under 26 C.F.R. § 31.3401(a)(9)-1, they cannot be considered “income” for federal
income tax purposes, since they do not fall under any of the other specific types of
income mentioned in 26 C.F.R. § 1.61-2(a). We find this argument unpersuasive. First,
we note that Section 31.3401(a)(9)-1 only describes when a minister’s earnings will be
“excepted from wages” for purposes of withholding requirements, not for all taxation
purposes. Second, it is clear that “[g]ross income means all income from whatever source
derived, unless excluded by law. . . . Section 61 lists the more common items of gross
income for purposes of illustration. . . . Gross income, however, is not limited to the
items so enumerated.” 26 C.F.R. § 1.61-1(a).
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has taken a vow of poverty, (2) the minister acts as an agent of the church and in the
exercise of duties required by the church, and (3) the minister renounces the earnings and
gives them to the church.
Although our sister circuits all agree it is necessary for a minister to act as an agent
of the church for his earnings to be tax-exempt, they have applied different tests to
determine when this agency requirement is satisfied. Some courts require taxpayers to
“show that a contractual relationship existed between their secular employers and the
religious order,” Mone, 774 F.2d at 573, while others apply a more flexible test that views
a contractual relationship as only one factor in determining whether there is an agency
relationship, see Fogarty, 780 F.2d at 1012. We conclude the flexible approach is most
appropriate. Under this approach, courts may consider various factors pertinent to the
relationships between the religious order and the minister, between the minister and the
third-party employer, and between the employer and the order. See Fogarty, 780 F.2d at
1012 (explaining that relevant factors may include “the degree of control exercised by the
order over the member”; “ownership rights between member and order”; “the purposes or
mission of the order, and the type of work performed by the member vis-a-vis those
purposes or mission”; “dealings between the member and the third-party employer,”
including “circumstances surrounding job inquiries and interviews, and control or
supervision exercised by the employer”; and “dealings between the employer and order,”
including the possible existence of a contractual arrangement between the third-party
employer and the order). Because this approach is flexible, “[t]he presence of unique
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facts in each case will inevitably lead the court to place more emphasis on one or more
factors and less on others.” Id.6
Applying this flexible test to Mr. Calkins’ employment with Kaiser Permanente,
we first conclude the relationship between the church and Mr. Calkins provides little
evidence to support the conclusion that Mr. Calkins acted as an agent of the church in this
employment. Without providing any specifics, Defendant testified he “direct[ed]” Mr.
Calkins “[i]n his agency assignment and in our meetings together dealing with his
ministry and the needs of the ministry, where he’s at, how are things going.” (Appellant’s
App. at 158.) However, with the exception of Mr. Calkins asking Kaiser Permanente to
transmit his earnings to a church account instead of a personal account, there is no
evidence that Mr. Calkins took any particular actions—much less actions relating to his
employment with Kaiser Permanente—as a result of his relationship with the church. In
arguing that we should treat Mr. Calkins as an agent of the church in his employment
with Kaiser Permanente, Defendant contends we should give conclusive weight to the
6
We note that Fogarty and other cases applying the flexible test, most notably the
Seventh Circuit’s decision in Schuster, have been criticized for disregarding facts
favorable to the minister and for applying a narrow definition of agency that sweeps up
bona fide vow-of-poverty ministers along with bogus ones. See, e.g., J. Timothy Phillips,
But Reverend, Why Does Your Baptismal Font Have a Diving Board? Equitable
Treatment for Vows of Poverty Under the Federal Income Tax, 44 Wash. & Lee L. Rev.
19, 40-41 (1987); Wanda F. Reed, Revenue Ruling 77-290—Recent Interpretations of
Agency Law Inequitably Taxes Members of Religious Orders, 23 Val. U. L. Rev. 179,
199-203 (1988). Although we apply the more flexible Fogarty test here, we do not
necessarily endorse our sister circuits’ application of this test to the facts in the cases
before them.
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purported “agency assignment” the church issued to Mr. Calkins. However, this
document bears little, if any, persuasive weight. As a comparison with Mr. Calkins’ pre-
acceptance information sheet makes clear, the agency assignment simply directed Mr.
Calkins to continue in his present employment, and nothing in the record suggests the
agency assignment should be treated as anything other than illusory. See Page, 823 F.2d
at 1270-71 (rejecting argument that ministers were agents of their church because they
were directed to secure secular employment: “even though appellants were meticulous in
organizing and operating their churches, giving rise to the appearance that their religious
doctrine required them to obtain secular employment, and they did not control the money
purportedly turned over to the churches, the fact remains that appellants have failed to
meet the agency standard”).
Nor does Mr. Calkins’ relationship with the third-party employer weigh in favor of
finding him to be acting as an agent of the church. Mr. Calkins was already employed by
Kaiser Permanente when he became a minister of the church, and there is no evidence
that anything about his employment—with the sole exception of the payee on his
employment checks—changed as a result of his ministry. Mr. Calkins’ testimony reflects
that he simply continued as usual with his employment with Kaiser Permanente and that
the church has never exercised any control over the work he performed there. Rather, his
work at Kaiser Permanente is directed by Kaiser Permanente employees—the “senior or
lead tech” who “does the daily scheduling,” an administrative supervisor, and the
pathologist. (Appellant’s App. at 107); see also Fogarty, 780 F.2d at 1012 (noting that
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factors relevant to the dealings between the member and the third-party employer include
“circumstances surrounding job inquiries and interviews, and control or supervision
exercised by the employer”).
Finally, the relationship between the church and Kaiser Permanente does not
support the conclusion that Mr. Calkins was acting as the church’s agent. At Mr. Calkins’
direction, Kaiser Permanente deposited Mr. Calkins’ earnings into a church-owned
account, but there otherwise were absolutely no dealings between the church and the
third-party employer. Cf. Schuster, 800 F.2d at 682 (Korner, J., dissenting) (arguing that
a nun should have been treated as an agent for her religious order where, among other
things, the order “was intimately involved in negotiating for and approving [her] job”
with a health clinic).
Considering all of these factors as a whole, we are persuaded that Mr. Calkins was
not acting as an agent of the church in his employment with Kaiser Permanente. We
accordingly agree with the district court that Defendant’s representations to Mr. Calkins
regarding the tax consequences of becoming a minister of the church were false or
fraudulent.
We turn then to the question of whether Defendant knew or should have known his
representations were false or fraudulent. Defendant argues he reasonably relied on the
IRS publication and regulations discussed above to determine that vow-of-poverty
ministers of the Church of Compassionate Service did not have to pay income taxes on
earnings they assigned to the church. Defendant dismisses as inapposite all of the circuit
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court cases holding that a true agency relationship is required for a minister’s earnings to
be tax exempt, arguing that (1) these cases involved obvious shams and (2) the ministers
in those cases had more control over their wages because, unlike Mr. Calkins, they
received employment checks and then turned them over to their respective religious
orders, rather than requesting that their salaries be paid directly into church accounts.
We find none of these arguments persuasive. The test for injunctive relief under §
7408 is satisfied if the defendant had reason to know his statements were false or
fraudulent, regardless of what he actually knew or believed. See Estate Pres. Servs., 202
F.3d at 1098; see also 26 U.S.C. § 6700(a)(2)(A). And we conclude that, whether or not
Defendant actually knew his purported interpretation of federal tax law was incorrect, “a
reasonable person in [his] subjective position would have discovered” the falsity of his
representations. Estate Pres. Servs., 202 F.3d at 1103 (internal quotation marks and
alterations omitted).
As discussed above, the IRS publication Defendant relies on is actually in
accordance with the pertinent case law, while the regulations he cites do not address the
question of when a minister’s earnings will be exempted from federal income tax
requirements. Defendant’s attempt to distinguish the pertinent cases is likewise
unavailing. First, while some of the relevant cases involve obvious shams, others do not.
See, e.g., Fogarty, 780 F.2d at 1007, 1013 (holding a Jesuit priest was required to pay
income taxes on the salary he received for teaching religious courses at a university);
Schuster, 800 F.2d at 676-79 (holding a Roman Catholic nun was required to pay income
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taxes on wages she earned at a health clinic). Even legitimate ministers’ earnings are
subject to federal income taxes if the minister was acting in his individual capacity, rather
than as an agent of the church. See Pollard, 786 F.2d at 1066 (“[T]he . . . Church’s
religious bona fides are irrelevant—it is the purported assignment of income here that is a
‘sham,’ and for tax rather than religious reasons.”). Second, we conclude that a
reasonable person in Defendant’s situation would not believe Mr. Calkins’ direction for
his employer to deposit his salary into church accounts was effective to exempt his
earnings from taxation. Under the anticipatory assignment of income doctrine, when
income is assigned to a third party before the moment of receipt, the income is still
considered earned by the assignor if he “retains dominion over the income-generating
asset.” Comm’r v. Banks, 543 U.S. 426, 434 (2005). And here, Mr. Calkins retained
control over the income-generating asset because he had the unfettered ability to direct
Kaiser Permanente to deposit his salary into his own account instead of the church’s.7
7
Defendant appears to argue that the anticipatory assignment of income doctrine
should be inapplicable to cases involving vow-of-poverty ministers. Since ministers
cannot be forced to adhere to religious vows, he argues, then a minister will always have
the legal right to renounce his vow of poverty and begin keeping his money for himself,
and thus “no Vow of Poverty arrangement would ever work” if the anticipatory
assignment of income doctrine is applied. (Appellant’s Reply Br. at 15.) However, the
anticipatory assignment of income doctrine does not hold that a minister’s earnings are
always taxable if the minister has the ultimate power to change his employment or
financial arrangements. If a minister actually earns money as an agent of his church,
these earnings will be tax-exempt regardless of whether the earnings are directly given to
the church or are signed over by the minister. Where, however, a minister earns income
in his individual capacity, the anticipatory assignment of income doctrine prevents him
from avoiding the tax liability he would otherwise incur by preemptively assigning the
income to the religious order before he receives it. In other words, this doctrine targets
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Defendant suggests Mr. Calkins did not actually have control over the disposition of his
salary because he could only stop the assignment of income to his church if he decided to
ignore his vow of poverty. However, the ministers in other cases who received a salary
and then assigned it to their respective religious orders would likewise have needed to
ignore their vows of poverty in order to keep the money. Thus, Defendant has not cited
to a meaningful distinction between Mr. Calkins’ situation and other cases in which
ministers have been required to pay income taxes on their earnings. Based on all of these
pertinent cases, as well as the relevant IRS rulings and publications, we conclude a
reasonable person in Defendant’s position would know that his representations regarding
the tax consequences of Mr. Calkins’ actions were false.
CONCLUSION
For the foregoing reasons, we conclude that Defendant made false representations
to Mr. Calkins about the tax consequences of his actions and that he knew or should have
known of the falsity of his representations. Defendant does not challenge the other
elements for injunctive relief under § 7408. We accordingly AFFIRM the district court’s
summary judgment ruling and order of injunctive relief.
individuals’ attempts to avoid tax liability by bookkeeping arrangements; it does not alter
existing tax rules establishing when earnings will be tax-exempt.
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12-4104, U.S. v. Hartshorn
O’BRIEN, J. concurring in the result and, in part, concurring in the opinion.
Without qualification I concur in the result. I concur in the opinion in all
respects but one. I part company with the majority as to the appropriate test for
determining an agency relationship. The majority has chosen the flexible
approach espoused by Fogarty v. United States, 780 F.2d 1005 (Fed. Cir. 1986);
accord Schuster v. Comm’r, 800 F.2d 672, 678 (7th Cir. 1986). The Fogarty
approach is insufficiently rigorous because it facilitates the manipulations of
charlatans and tax evaders.
The rule announced by the Second Circuit in Mone v. Comm’r, 774 F.2d
570, 573 (2d Cir. 1985) is far superior:
To prove assignment of income on an agency theory, the taxpayers
bear a double burden: they must show that a contractual relationship
existed between their secular employers and the religious order, and
that the religious order controlled or restricted the taxpayers’ use of
the money purportedly turned over to the order. See Stephenson v.
Commissioner, 79 T.C. 995, 1001 (1982), aff’d per curiam, 748 F.2d
331 (6th Cir.1984); White v. Commissioner, 41 T.C.M. (CCH) 1180,
1183 (1981); Kelley v. Commissioner, 62 T.C. 131 (1974).
See also Page v. Comm’r, 823 F.2d 1263, 1270-71 (8th Cir. 1987) (adopting the
Mone test).
Paying income taxes is a statutory duty; some also consider it a civic duty.
Few gladly pay, but most faithfully do. Faithful compliance is tested, sometimes
beyond elastic limits, by the siren’s song of the unscrupulous – pay 10% of your
income to the “church” and completely avoid the much higher extractions
demanded by the taxman AND do so without changing your life circumstances in
any significant manner. Sounds great! To the unprincipled or the naïve, it is
precisely what the doctor ordered. It is also illegal.
The Mone approach to recognizing a claimed agency agreement requires an
explicit agreement between the “minister” and the “church.” Properly done, and
preferably in writing, the agreement would clearly set forth the correlative rights
and duties of the contracting parties, narrowing wriggle room for the charlatans
and foreclosing the “I didn’t know” or “nobody told me” excuses of the
conveniently ignorant. Strict standards facilitate the collection of taxes properly
due without significantly burdening legitimate agency agreements.
The Mone approach to enforceability of such agreements should be
extended by also requiring an explicit agreement, preferably written, between the
“church” and the “minister’s” employer detailing its particulars. At a minimum it
would, of necessity, make clear that the “church,” rather than the employee, would
be responsible for negotiating the employee’s assignments, pay, benefits,
opportunity for advancements, and other conditions of employment. It would also
make clear that the employment agreement could be terminated or changed only
by agreement between the “church” and the employer.
2