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Gardner v. Commissioner of Internal Revenue

United States Court of Appeals, Ninth Circuit

January 12, 2017

Fredric A. Gardner; Elizabeth A. Gardner, Petitioners-Appellants,
v.
Commissioner of Internal Revenue, Respondent-Appellee.

          Submitted October 17, 2016 [*] San Francisco, California

         Appeal from a Decision of the United States Tax Court No. 12016-06

          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.

          Before: Michael Daly Hawkins, Consuelo M. Callahan, and Andrew D. Hurwitz, Circuit Judges.

         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.

          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.

         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 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 Spackman[2] 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 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 ...


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