Gardner v. Commissioner of Internal Revenue
2017 U.S. App. LEXIS 580
9th Cir.2017Background
- Elizabeth and Fredric Gardner formed Bethel Aram Ministries (BAM), a corporation sole, and transferred personal assets to BAM after signing vows of poverty. They did not obtain IRS recognition under §501(c)(3).
- From 2002–2004 the Gardners ran a business creating corporations sole and LLCs for others, charging set fees and depositing receipts into BAM bank accounts.
- BAM had no congregation during the relevant years; the Gardners exercised day-to-day control over BAM and its accounts and used those accounts to pay personal expenses.
- The IRS reconstructed income via bank-deposit analysis and issued deficiency notices based on large gross deposits into BAM accounts for 2002–2004.
- The Tax Court found the deposits were quid pro quo payments for services (not charitable contributions), that the Gardners retained dominion and control over the funds, and that they were subject to self-employment tax. The Ninth Circuit affirmed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Are payments deposited into BAM taxable income or tax-deductible contributions? | Gardners: payments were donations to BAM and thus not taxable to them. | IRS: payments were quid pro quo compensation for services, not gifts. | Held: Payments were taxable compensation (quid pro quo), not contributions. |
| Do the Gardners’ vows of poverty or status as ministers shield them from tax on receipts? | Gardners: vows of poverty and minister status mean funds belong to BAM, not them. | IRS: vows do not change who has dominion and control; substance controls. | Held: Vows do not avoid tax where individuals retain complete control; taxable to Gardners. |
| Should BAM’s separate legal identity prevent attributing income to the Gardners? | Gardners: BAM is a separate entity; its receipts are not the Gardners’ income. | IRS: Gardners exercised unfettered dominion and control over BAM, so substance equals individuals. | Held: Court disregarded practical separateness; dominion/control makes funds the Gardners’ income. |
| Are the Gardners exempt from self-employment tax under minister/member rules? | Gardners: regulation for ministers and members of religious orders (and their vows) excuses them from filing/Form 4361 obligations and from SE tax. | IRS: exemption applies only to services performed in ministerial capacity; these payments were for commercial services. | Held: Exemption does not apply because payments were for non-ministerial services; self-employment tax applies. |
Key Cases Cited
- Welch v. Helvering, 290 U.S. 111 (establishes taxpayer burden to prove Commissioner's determination incorrect)
- Glenshaw Glass Co. v. Commissioner, 348 U.S. 426 (gross income is construed broadly to include all clearly realized accessions of wealth)
- Hernandez v. Commissioner, 490 U.S. 680 (payments are not charitable contributions where they are quid pro quo for services)
- Corliss v. Bowers, 281 U.S. 376 (taxation looks to actual command over property, not refinements of title)
- United States v. Basye, 410 U.S. 441 (antipreventive principle: taxpayers cannot avoid taxation through anticipatory arrangements)
- Gunkle v. Commissioner, 753 F.3d 502 (payments to a corporation sole are taxable to individuals who retained unrestricted dominion and control)
- Weimerskirch v. Commissioner, 596 F.2d 358 (IRS must establish evidentiary foundation linking taxpayer to income for presumption to attach)
- Woods v. Commissioner, 929 F.2d 702 (taxable income may be attributed to individuals who exercise complete dominion over church accounts)