Gardner v. Commissioner of Internal Revenue

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
FREDRIC A. GARDNER; No. 13-72699
ELIZABETH A. GARDNER,
Petitioners-Appellants, Tax Ct. No.
12016-06
v.
COMMISSIONER OF INTERNAL OPINION
REVENUE,
Respondent-Appellee.
Appeal from a Decision of the
United States Tax Court
Submitted October 17, 2016*
San Francisco, California
Filed January 12, 2017
Before: Michael Daly Hawkins, Consuelo M. Callahan,
and Andrew D. Hurwitz, Circuit Judges.
Opinion by Judge Callahan
*
The panel unanimously concludes this case is suitable for decision
without oral argument. See Fed. R. App. P. 34(a)(2).
2 GARDNER V. CIR
SUMMARY**
Tax
The panel affirmed the Tax Court’s decision denying a
petition for redetermination of federal income tax deficiencies
that challenged the taxability of alleged maintenance
payments received by taxpayers who have taken vows of
poverty.
Taxpayers contended that they did not earn taxable
income and are exempt from paying taxes because they have
taken vows of poverty. They explained that their
maintenance is provided by Bethel Aram Ministries (BAM),
a church for which taxpayer Elizabeth Gardner is its
corporation sole. The panel explained that substantial
evidence supports the Tax Court’s determinations that the
payments taxpayers received were not contributions to
BAM but were instead quid pro quo payments for taxpayers’
services (in setting up corporations sole and LLCs), and that
taxpayers retained complete dominion and control over the
payments even after they were deposited in BAM’s accounts.
Accordingly, the payments to taxpayers are taxable and
subject to self-employment tax.
**
This summary constitutes no part of the opinion of the court. It has
been prepared by court staff for the convenience of the reader.
GARDNER V. CIR 3
COUNSEL
Fredric A. Gardner and Elizabeth A. Gardner, Dewey,
Arizona, pro se Plaintiffs-Appellants.
Janet A. Bradley and Bridget M. Rowan, Attorneys; Kathryn
Keneally, Assistant Attorney General; Tax Division, United
States Department of Justice, Washington, D.C.; for
Respondent-Appellee.
OPINION
CALLAHAN, Circuit Judge:
Elizabeth and Fredric Gardner assert, in a nutshell, that
Bethel Aram Ministries (BAM) is a church, that Elizabeth is
its corporation sole, and that both Elizabeth and Fredric have
taken vows of poverty (with their maintenance provided by
BAM). They argue that based on these facts they did not earn
taxable income and are exempt from paying taxes.
The Tax Court, however, determined that the payments
received by the Gardners were not contributions to BAM and
that the Gardners had complete control over BAM’s assets.
It concluded that because the Gardners “exercised dominion
and control over BAM’s accounts, all taxable deposits into
those accounts are includable in their gross income.”
We affirm. The Tax Court’s determinations that the
payments were quid pro quo payments for services and not
contributions, and that the Gardners have unfettered control
over BAM, are supported by substantial evidence.
4 GARDNER V. CIR
I
Around 1978, the Gardners received degrees in theology
from Christ for the Nations Bible College. In 1993, the
Gardners formed BAM as “an unincorporated association in
Arizona organized to be an ‘ecclesiastical church ministry.’”
However, they did not file with the IRS a Form 1023,
Application for Recognition of Exemption Under Section
501(c)(3). In 1999, the Gardners signed vows of poverty
declaring their intent to divest themselves from earnings or
wages from BAM and stating that BAM would provide for
their needs as pastors of the church ministry. They then
transferred all of their assets, including title to their home, to
BAM. In 2001, Elizabeth filed articles of incorporation with
the State of Nevada, naming her as the corporation sole of
BAM.1 Fredric held himself out as an “Elder, Teacher,
Certified Estate & Financial Planner of BAM,” and Elizabeth
held herself out as a “Prophetess, Teacher, Pastor and
Certified Paralegal” of BAM. Together they have unfettered
control over BAM’s operations and finances.
From 2002 until August 2004, BAM did not have any
congregation. Rather, the Gardners traveled across the
country offering their services in setting up corporations sole
and limited liability companies (LLCs). Their promotional
literature claimed the benefits of a corporation sole included:
1
The IRS’s tax guide for Churches and Religious Organizations notes
that “religious organizations may be legally organized in a variety of ways
under state law, such as unincorporated associations, non-profit
corporations, corporations sole, and charitable trusts.” The IRS has
defined a “corporation sole” as “a corporate form authorized under certain
state laws to enable bona fide religious leaders to hold property and
conduct business for the benefit of the religious entity.’” Rev. Ru. 2004-
27, 2004-1 C.B. 625, 626, 2004 WL 389673, at *1.
GARDNER V. CIR 5
(1) the government was not able to interfere in any way;
(2) all church workers would be classified as ministers of the
gospel and not as employees; (3) there were no filing
requirements of any kind; and (4) there were no withholding
or self-employment taxes or income tax. The Gardners
advised that if a corporation sole received an inquiry from the
Internal Revenue Service (IRS), it should notify the IRS that
it was a corporation sole and provide no other information.
The Gardners had a “donation” sheet setting forth the
costs of their services. It instructed customers to “please
make separate checks out” according to the following
schedule: “(1) for a corporate sole, BAM for $1,200, Carol
Spackman2 for $80, and the State of Nevada for $85; [and]
(2) for an LLC, BAM for $700, Ms. Spackman for $80, and
the State of Nevada for $235.” The record indicates that the
Gardners established over 300 corporations sole and
approximately 18 LLCs for others.3
The Gardners failed to file tax returns for the years 2002
through 2004, and refused to provide the IRS with BAM’s
2
Ms. Spackman served as the registered agent in Nevada for most of
the corporations sole the Gardners established.
3
In March 2008, the U.S. District Court for the District of Arizona
enjoined the Gardners from “[o]rganizing, promoting, marketing, or
selling corporations sole or any tax shelter, plan or arrangement, that
advises, assists, or encourages taxpayers to attempt to violate the internal
revenue laws or unlawfully evade the assessment or collection of their
federal tax liabilities.” United States v. Gardner, No. CV-05-3073-PCT-
EHC, 2008 WL 906696, at *6 (D. Ariz. Mar. 21, 2008). The district court
found that the Gardners had participated in an abusive tax shelter program
promising unwarranted tax benefits from corporations sole. Id. at *5. The
injunction was affirmed on appeal. United States v. Gardner, 457 F.
App’x 611, 612 (9th Cir. 2011).
6 GARDNER V. CIR
books and records. The IRS obtained bank records from
BAM’s Wells Fargo accounts through a third-party summons
and undertook a bank deposit analysis. The IRS “determined
that petitioners had gross bank deposits of $101,722,
$219,481, and $281,232 and net taxable deposits of $100,070,
$217,973 and $235,679 for 2002, 2003, and 2004,
respectively.” The IRS issued notices of deficiency and the
Gardners petitioned the Tax Court for review.
II
The Tax Court noted that generally the Commissioner’s
determination of a taxpayer’s liability is presumed correct,
and the taxpayer bears the burden of proving that the
determination is improper. Gardner v. Comm’r, 105 T.C.M.
(CCH) 1433, at *3 (2013) (citing Welch v. Helvering,
290 U.S. 111, 115 (1933)). The Tax Court recognized that in
the Ninth Circuit for the presumption of correctness to attach
in a case involving unreported income, the IRS must “first
establish an evidentiary foundation linking the taxpayer to the
alleged income-producing activity.” Id. (citing Weimerskirch
v. Comm’r, 596 F.2d 358, 361–62 (9th Cir. 1979)). The Tax
Court reasonably determined that the IRS had linked the
Gardners to the payments and that therefore the Gardners
bore the burden of proving the deficiencies arbitrary or
erroneous. The Tax Court also determined that the bank
deposit method of reconstructing income was properly used
in this instance. Id. at *4; see Clayton v. Comm’r, 102 T.C.
632, 645 (1994) (holding that the “use of the bank deposit
method for computing unreported income has long been
GARDNER V. CIR 7
sanctioned by the courts” (citing DiLeo v. Comm’r, 96 T.C.
858, 867 (1991), aff’d 959 F.2d 16 (2d Cir. 1992))).4
The Tax Court determined that the payments the Gardners
deposited into BAM’s bank accounts constituted taxable
income to the Gardners. Citing Commissioner v. Glenshaw
Glass Co., 348 U.S. 426, 431 (1955), the Tax Court noted that
the definition of gross income “is construed broadly and
extends to all accessions of wealth, clearly realized, over
which the taxpayer has complete control.” Gardner,
105 T.C.M. (CCH) 1433 at *5. It further held that when the
IRS reconstructs income using the bank deposit method, it
may include gross income deposited into all accounts over
which the taxpayer has dominion and control, even “where a
taxpayer has dominion and control over an account titled in
the name of a church or other religious organization.” Id.; see
Woods v. Comm’r, 58 T.C.M. (CCH) 673 (1989), aff’d,
929 F.2d 702 (6th Cir. 1991).
Relying on its decision in a strikingly similar case, Gunkle
v. Commissioner, 104 T.C.M. (CCH) 527 (2012), aff’d,
753 F.3d 502 (5th Cir. 2014), the Tax Court rejected the
Gardners’ arguments that their deposits were gifts or
donations to a legitimate church, that they had taken vows of
poverty, and that they acted as agents of BAM. The Gunkles,
with the Gardners’ assistance, had established their religious
organization as a corporation sole. The Gunkles then signed
vows of poverty stating that their church would provide for
their support. The Gunkles used funds in the pastoral account
to pay living and personal expenses, but did not report
deposits into the account as income. The Tax Court rejected
4
On appeal, the Gardners do not challenge the use of the bank deposit
method.
8 GARDNER V. CIR
the Gunkles’ arguments that the deposits were nontaxable
gifts and that their vows of poverty insulated them from
taxation on the compensation they received for their services
to their church. In rejecting the Gardners’ similar clams, the
Tax Court cited its holding in Gunkle that “[p]ayments or
benefits received in exchange for services rendered by
individuals and not on behalf of a separate and distinct
principal are taxable to the individuals.” Gardner,
105 T.C.M. (CCH) 1433 at *6.
The Tax Court found that the deposits into BAM’s bank
accounts “were compensation to petitioners for the services
they performed in setting up corporations sole, LLCs, and
trusts,” and “were not gifts or donations [but] represented a
quid pro quo exchange; i.e., the payors were receiving
petitioners’ services in consideration for their payments.” Id.The Tax Court next rejected the Gardners’ arguments
concerning their vows of poverty and that they were acting as
agents of BAM. It noted that the Gardners did not have any
personal bank accounts, used BAM’s accounts as their own
and for their own benefit, deposited the payments they
received from setting up corporations sole and LLCs into
BAM’s accounts, withdrew funds from BAM’s accounts to
pay their personal expenses, and exercised complete
dominion and control over BAM’s accounts. The Tax Court
noted that there was “no evidence that petitioners were
accountable to anyone for the funds in BAM’s accounts.” Id.Accordingly, the Tax Court concluded that the deposits into
the BAM accounts were includable in the Gardners’ gross
income.
In addition, the Tax Court held that the Gardners’ self-
employment income was subject to self-employment tax. It
GARDNER V. CIR 9
rejected the Gardners’ claim that they were exempt from self-
employment tax because they are ordained ministers. Id. at
*7–8. The Tax Court determined that the Gardners failed to
present “any credible evidence that they had submitted a
Form 4361, Application for Exemption From Self-
Employment Tax for Use by Ministers, Members of
Religious Orders and Christian Science Practitioners, for the
years in issue that was approved by the IRS.” Id. at 8. The
Tax Court concluded that the Gardners had “failed to prove
they were exempt from self-employment tax during the years
in issue.” Id.5
III
We review decisions of the Tax Court on the same basis
as decisions in civil bench trials in district court, and
accordingly, we review conclusions of law de novo and
questions of fact for clear error. Johanson v. Comm’r,
541 F.3d 973, 976 (9th Cir. 2008); Millenbach v. Comm’r,
318 F.3d 924, 930 (9th Cir. 2003).
A. The payments were not contributions.
In Hernandez v. Commissioner, 490 U.S. 680 (1989), the
Supreme Court established a quid pro quo test for
determining whether a payment was a contribution. Id. at
690–91 (noting that the sine qua non of a charitable
contribution is a transfer of money or property without
adequate consideration). The Court held that payments to the
Church of Scientology for “auditing” or pastoral counseling
were not contributions as “these payments were part of a
5
The remainder of the Tax Court’s opinion addresses issues not
germane to this appeal.
10 GARDNER V. CIR
quintessential quid pro quo exchange: in return for their
money, petitioners received an identifiable benefit, namely
auditing and training sessions.” Id. at 691.
Similarly, the Gardners, in exchange for money, provided
“identifiable benefits,”—the creation of corporations sole and
LLCs. In addition, as in Hernandez, here the Gardners had a
schedule of set amounts payable for the benefits they offered.
490 U.S. at 685. That the payments were referred to as
suggested donations is not dispositive; it is the quid pro quo
nature of the exchange that controls. Id. at 690–91.6
The Gardners’ First Amendment argument is similarly
foreclosed by Hernandez, which rejected the Church of
Scientology’s argument that declining to treat the payments
as contributions violated the Establishment Clause. Applying
the test from Lemon v. Kurtzman, 403 U.S. 602 (1971), the
Court found that the statute: (1) made no explicit or deliberate
distinction between different religious organizations, but
applied to all religious entities; (2) neither advanced nor
inhibited religion; and (3) threatened no entanglement
between church and state. Hernandez, 490 U.S. at 695–96.
The Court further noted that even if it were necessary “to
ascertain what portion of a payment was a purchase and what
portion was a contribution,” this would “not ineluctably
create entanglement problems.” Id. at 697. Applying the
Lemon test to the Gardners’ case produces the same
6
The Gardners’ argument that witnesses testified that they intended
the payments to be contributions is not persuasive. Although the
witnesses indicated that they referred to the payments as contributions,
none denied that the payments were made in return for the Gardners’
assistance in forming corporations sole. In other words, none denied the
quid pro quo nature of the transactions.
GARDNER V. CIR 11
conclusion. Treating the Gardners’ recompense for setting up
corporations sole and LLCs as taxable income does not
distinguish between religious organizations, neither advances
nor inhibits religion, and threatens no entanglement.
We conclude that the Tax Court properly applied
Hernandez in holding that the payments to the Gardners for
creating corporations sole and LLCs were not donations to
BAM.
B. The Gardners had complete control over the
payments to BAM.
The Tax Court’s determination that the Gardners had
complete control over the payments to BAM is a factual issue
reviewed for clear error. See Nunley v. Comm’r, 758 F.2d
372, 373 (9th Cir. 1985). There is substantial evidence that
the Gardners had complete dominion and control over the
payments deposited in BAM’s accounts and that they used
those funds to cover their personal expenses, including a
veterinarian bill. Indeed, the Gardners do not really deny that
they exercised complete control over BAM and its accounts.
Rather than directly challenge the Tax Court’s factual
findings, the Gardners argue that the IRS and the Tax Court
should have respected BAM’s separate identity. This seems
a little like arguing that Clark Kent is not Superman.
Certainly Superman displays abilities that Clark Kent denies
having, but they are one and the same. Similarly, here, there
is no practical distinction between the Gardners and BAM.
The Gardners’ assertion that their creation of a religious
organization over which they have complete control insulates
them from taxes is contrary to longstanding Supreme Court
12 GARDNER V. CIR
precedent. As early as 1930, the Supreme Court in Corliss v.
Bowers, 281 U.S. 376, 378 (1930), held that “taxation is not
so much concerned with the refinements of title as it is with
actual command over the property taxed—the actual benefit
for which the tax is paid.” The Court concluded that “[t]he
income that is subject to a man’s unfettered command and
that he is free to enjoy at his own opinion may be taxed to
him as his income, whether he sees fit to enjoy it or not.” Id.Over forty years later in United States v. Basye, 410 U.S. 441,
449–50 (1973), the Supreme Court reaffirmed that the
principle “that he who earns income may not avoid taxation
through anticipatory arrangements no matter how clever or
subtle, has been repeatedly invoked by this Court and stands
today as a cornerstone of our graduated income tax system.”7
Here, the Gardners’ vows of poverty attempt to disguise
their enjoyment of their personal income. Pursuant to Corliss
and Basye, as long as the Gardners have complete control
over the funds, it makes no practical difference whether the
funds are titled in their names or in BAM’s.
Our approach is in accord with the Fifth Circuit’s opinion
in Gunkle, which framed the nub of the controversy as
follows:
7
We and our sister circuits have reiterated this position. See George
v. Comm’r, 837 F.3d 79, 85 (1st Cir. 2016); C.M. Thibodaux Co., Ltd. v.
United States, 915 F.2d 992, 994 (5th Cir. 1990); United States v.
Tranakos, 911 F.2d 1422, 1431 (10th Cir. 1990); United States v. Krall,
835 F.2d 711, 714 (8th Cir. 1987); United States v. Russell, 804 F.2d 571,
574 (9th Cir. 1986); Fogarty v. United States, 780 F.2d 1005, 1008 (Fed.
Cir. 1986); O’Donnell v. Comm’r, 726 F.2d 679, 681 (11th Cir. 1984);
Armantrout v. Comm’r, 570 F.2d 210, 212 (7th Cir. 1978).
GARDNER V. CIR 13
Income received by the agent of a principal is
deemed to be the income of the principal and
not the income of the agent. It follows that
income received by a member of a religious
order as the agent of the order, promptly
delivered to the order based on the agent’s
vow of poverty, is deemed to be the income of
the order and not of the agent. Conversely,
however, a member of a religious order who
earns or receives income therefrom in his
individual capacity cannot avoid taxation on
that income merely by taking a vow of
poverty and assigning the income to that
religious order or institution. The same rule
applies to entities organized as corporation
soles. [A]n individual has received income
when he gains complete dominion and control
over money or other property, thereby
realizing an economic benefit.
753 F.3d at 507–08 (footnotes omitted). The Fifth Circuit did
not expressly address the problem it identified: How does a
court determine whether income is received by a member of
a religious order as the agent of the order, or whether the
member of a religious order earns or receives income
therefrom in his individual capacity? However, it determined
that the Gunkles had unrestricted dominion and control over
their pastoral accounts and that their compensation was
taxable. Id. at 508. Thus, the Fifth Circuit implicitly
recognized that there was no real distinction between the
Gunkles and their wholly-controlled religious entity. Clark
Kent is not distinguishable from Superman.
14 GARDNER V. CIR
This was also the holding of the Tax Court in Gunkle,
which underlies the Tax Court decision in the Gardners’ case,
and which we now endorse. In Gunkle, the Tax Court
explained that payments in exchange for services “rendered
by individuals and not on behalf of a separate and distinct
principal are taxable to the individuals.” Gunkle, 104 T.C.M.
(CCH) 527 at * 3 (emphasis added). Thus, consistent with
the Supreme Court’s admonition in Corliss, 281 U.S. at 378,
that taxation is concerned with the “actual command over the
property taxed,” the Tax Court—having determined that the
Gardners retained dominion over the funds—properly
concluded that they had received the payments in their
individual capacities, and not as agents of BAM.
The exercise of complete dominion and control over
the funds at issue was also dispositive in Woods v.
Commissioner, 58 T.C.M. (CCH) 673 (1980). There, the Tax
Court explained that it was “not necessary to disregard the
separate existence of the church or to challenge the tax status
of the church as an entity in order to sustain respondent’s
determinations in this case” because however the petitioners
obtained the funds “petitioners exercised complete dominion
and control over deposits into the various bank accounts.” Id.In Woods, as with the Gardners and the Gunkles, the
taxpayers’ complete control over their “churches” supports
the determination that the taxpayers’ receipts constituted
taxable income for the taxpayers despite the assignment of
those receipts to their churches.
The Gardners attempt to distinguish Gunkle on the ground
that the Gunkles deposited Social Security payments and
retirement pay, which were not earned as part of their
ministry, into their corporation sole’s accounts. In contrast,
the Gardners suggest that creating corporations sole is
GARDNER V. CIR 15
consistent with their church’s mission. But the rulings by the
Fifth Circuit and the Tax Court, and our holding in this case,
focus not on what the taxpayer did to obtain a payment, but
on which party exercised dominion and control over the
funds. As long as the individual taxpayer (the purported
agent) remains, as a practical matter, in complete control over
the income after it is transferred to the church (the purported
principle) it is income to the individual.8
The Tax Court’s ruling that the payments are taxable is
affirmed on the grounds that the Gardners, the purported
agents of BAM, earned the payments as individuals and
retained complete control over the payments even after their
transfer to BAM, the purported principal.
IV
Finally, the Gardners argue that they are exempt from
paying income taxes pursuant to 26 U.S.C. § 1402. They note
that 26 C.F.R. § 1.1402(e)–2A(a)(1) states, in relevant part:
Subject to the limitations set forth in
subparagraphs (2) and (3) of this paragraph,
any individual who is . . . a duly ordained,
8
Of course, certain payments, although income, may not be taxable.
For example, if an individual’s compensation for an injury is not
considered taxable income, it would not become taxable just because the
individual assigned it to his church. Also, if Elizabeth Gardner sells
copies of her book at cost, so that there is no net profit, she would have
gross income, but this might not be taxable income. On the other hand,
any profit from the sale of the books likely would be taxable income
regardless of whether the books were purportedly sold by Elizabeth or
BAM as long as Elizabeth continued to exercise complete dominion and
control over the funds.
16 GARDNER V. CIR
commissioned, or licensed minister of a
church or a member of a religious order (other
than a member of a religious order who has
taken a vow of poverty as a member of such
order) . . . may request an exemption from the
tax on self-employment income (see section
1401 and § 1.1401-1) with respect to services
performed by him in his capacity as a minister
or member . . . as the case may be.
The Gardners contend that this regulation exempts
them—as members of a religious order who have taken vows
of poverty—from having to request an exemption from tax on
self-employment income by filing a Form 4361, Application
for Exemption From Self-Employment Tax for Use by
Ministers, Members of Religious Orders and Christian
Science Practitioners.
Even assuming, however, that the Gardners reasonably
determined that they were not required to file a Form 4361,
it does not follow that they are exempt from self-employment
tax. The exemption from self-employment tax is only
applicable to “services performed by [one] in his capacity as
a minister or member.” 26 C.F.R. § 1.1402(e)-2A(a)(1); see
Wingo v. Comm’r, 89 T.C. 922, 929 (1987). Because the Tax
Court reasonably concluded that the Gardners received
payment in exchange for their work in setting up corporations
sole and LLCs, and not in the exercise of a ministry, this
exception does not apply.9 Accordingly, they have not shown
9
The Gardners do not actually claim that setting up corporations sole
is part of their ministry. Indeed, creating corporations sole does not
appear to have any relationship to BAM’s mission. Its mission statement
reads:
GARDNER V. CIR 17
that they qualify for exemption from self-employment tax
under 26 U.S.C. § 1402.
V
Elizabeth and Fredric Gardner were free to create BAM,
a corporation sole, but this did not exempt their personal
income from taxation. The payments they received were quid
pro quo payments for their services in setting up corporations
sole and LLCs; they were not contributions to BAM.
Moreover, the Gardners retained complete dominion and
control over BAM and its accounts. Because the payments
were made in exchange for the Gardners’ services, and the
Gardners retained complete dominion and control over the
payments even after they were deposited into BAM’s
accounts, the Tax Court properly concluded that the payments
received by the Gardners are taxable and that they are subject
to self-employment tax. The Tax Court’s decision is
AFFIRMED.
The mission of Bethel Aram Ministries an ecclesiastical
church is to manifest Yahshua/Jesus’ glory throughout
the earth; to do the work of the ministry through
religious, charitable, educational and/or humanitarian
purposes for the perfecting of the saints; provide
scriptural education materials, establish congregations,
practice, teach, preach the Good News of Messiah in
order to bring people to a personal relationship with
Yahshua/Jesus the Messiah to obey the Commandments
of the Sovereign Holy Nation of the Most High and the
Good News of the Saviour in congregations through
affiliated fellowships of Saints of Yahshua/Jesus, the
Messiah and King of His Sovereign Kingdom.