Gunkle v. Commissioner
2014 U.S. App. LEXIS 9257
5th Cir.2014Background
- Bruce and Sherilyn Gunkle dissolved Bruce’s existing 501(c)(3) nonprofit and formed a Nevada "corporation sole," then executed "vows of poverty" and deeded their residence to the corporation sole while continuing to live there.
- During 2007 Bruce’s Social Security and military retirement were deposited into a Wells Fargo account titled as a "Pastoral Account" controlled and used exclusively by the Gunkles to pay personal expenses.
- The Gunkles’ 2007 joint return reported Social Security and military pension deposits but did not report income they treated as assigned to the corporation sole or as gifts; deductions for charitable contributions to the corporation sole were claimed.
- The IRS issued a notice of deficiency asserting unreported income and an accuracy-related addition; the Tax Court sustained the deficiency and penalty (revised to $13,690 deficiency and $2,738 penalty).
- The Tax Court found the Gunkles had complete dominion and control over the Pastoral Account, that the corporation sole lacked the characteristics required for charitable-deduction treatment or religious-order treatment, and that the vow-of-poverty/assignment scheme lacked substance.
Issues
| Issue | Plaintiff's Argument (Gunkle) | Defendant's Argument (Commissioner) | Held |
|---|---|---|---|
| Whether deposits into the Pastoral Account were taxable income to the Gunkles | Deposits were gifts to the church/corporation sole or received as agents under vows of poverty, so not taxable to them | Funds were controlled and used by the Gunkles personally; deposits are taxable income to them | Deposits were taxable to the Gunkles; they had complete dominion and control over the account |
| Validity/effect of vows of poverty and assignment of income to a corporation sole | Vows of poverty and assignment transferred income to the corporation sole, exempting them from tax on those amounts | Vows and assignments lacked substance; an individual cannot avoid tax by mere assignment or vow when retaining control | Vows/assignments ineffective; substance-over-form applies and assignments did not avoid taxation |
| Entitlement to charitable contribution deductions for transfers to corporation sole | Contributions/donations to the corporation sole qualified under §§ 170/501(c)(3) | Corporation sole did not meet statutory requirements for charitable-deduction treatment | Deductions disallowed; corporation sole did not meet requirements and evidence was not credible |
| Applicability of bank-deposits/indirect-income reconstruction | N/A — plaintiff argued funds were nontaxable gifts/agent receipts | Commissioner reconstructed income from bank deposits and showed taxpayer dominion; burden on taxpayer to rebut | Bank-deposit reconstruction appropriate; taxpayers failed to rebut; rule applies to church/corporation accounts |
Key Cases Cited
- Roman Catholic Bishop of Springfield, A Corp. Sole v. City of Springfield, 724 F.3d 78 (1st Cir. 2013) (defining corporation sole)
- Tex. Mobile Home Ass’n v. Commissioner, 324 F.2d 691 (5th Cir. 1963) (historical discussion of corporation sole)
- Sec. Indus. Ins. Co. v. United States, 702 F.2d 1234 (5th Cir. 1983) (explaining step-transaction doctrine and substance over form)
- Page v. Commissioner, 823 F.2d 1263 (8th Cir. 1987) (vow-of-poverty assignments do not automatically avoid tax)
- Pollard v. Commissioner, 786 F.2d 1063 (11th Cir. 1986) (same principle on assignments/vows)
- Mone v. Commissioner, 774 F.2d 570 (2d Cir. 1985) (noting attempts to avoid income tax via religious claims)
- United States v. Curtis, 782 F.2d 593 (6th Cir. 1986) (defining when an individual has realized income via dominion and control)