Bruce Gunkle v. CIR

Citations: 753 F.3d 502; 113 A.F.T.R.2d (RIA) 2133; 2014 U.S. App. LEXIS 9257; 2014 WL 2052751Docket: 13-60245

Court: Court of Appeals for the Fifth Circuit; May 19, 2014; Federal Appellate Court

Original Court Document: View Document

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Bruce and Sherilyn Gunkle appeal a decision from the United States Tax Court regarding their tax liabilities for the year 2007. The Tax Court upheld the Commissioner of Internal Revenue's findings that the Gunkles had an income tax deficiency due to unreported income and disallowed deductions related to charitable contributions. Bruce Gunkle, a former military officer with a theology degree, previously operated a tax-exempt nonprofit corporation, City of Refuge, Inc. In 2002, he attended a conference where he learned about a tax scheme involving a "corporation sole," promoted by Frederick and Elizabeth Gardner, which claimed that individuals could assign their income to such a corporation to deduct it as charitable donations without qualifying under the standard 501(c)(3) tax-exempt criteria. Following this advice, Gunkle dissolved his nonprofit, formed a Nevada-based corporation sole, and ceased his nonprofit operations, fearing government interference. Although the Gunkles are representing themselves in this appeal, they were previously represented by the same attorney as the Gardners, who lost their own tax case related to similar issues. A federal court had previously enjoined the Gardners from promoting the corporation sole concept, stating it misled individuals regarding tax benefits. The Gunkles were required to receive a copy of this injunction as part of the ruling against the Gardners. The Fifth Circuit Court affirmatively upheld the Tax Court's judgment.

The Gunkles signed a "vow of poverty," which required their corporation sole to provide for their needs as church pastors. They established a pastoral account at Wells Fargo Bank for church-related funds, which was primarily funded by Bruce's military retirement, Social Security, and contributions from church members. The Gunkles used this account to cover their personal expenses, including mortgage and utility payments for a residence they deeded to Bruce's corporation sole but continued to occupy rent-free. In addition to the pastoral account, Sherilyn maintained a savings account with deposits from the pastoral account, which earned interest.

For the tax year 2007, the Gunkles filed a joint income tax return that included income from Bruce's benefits but did not report any income from their corporation sole. This led to a Notice of Deficiency from the Commissioner, asserting a tax deficiency of $16,262 and an accuracy-related addition of $3,252.40. The Gunkles challenged this in Tax Court, claiming their organization was a tax-exempt religious entity and that funds deposited into the pastoral account were non-taxable gifts due to their vows of poverty. They also argued that their donations to the corporation sole warranted charitable deductions. The Commissioner countered that their compensation was taxable, arguing that payments for living expenses from the pastoral account constituted taxable income and that the Gunkles had not validly assigned their income to the corporation sole. The Commissioner maintained that the Gunkles had unreported taxable income, were not entitled to deductions, and owed additional taxes assessed by the IRS.

The Tax Court ruled against the Gunkles, rejecting their arguments related to a package purchased from the Gardners and their tax returns. The court found that the Gunkles' treatment of funds deposited into the Pastoral Account as donations and their assignment of income to Bruce’s corporation sole lacked substance and did not support their claims of acting as agents of the corporation sole. The court concluded that the Gunkles had full control over the Pastoral Account funds without restrictions from the City of Refuge. Additionally, the Gunkles failed to demonstrate that the City of Refuge functioned as a religious order, disqualifying them from specific tax rules applicable to religious organizations. The court classified deposits into Sherilyn’s credit union account as income for the Gunkles. It agreed with the Commissioner that the Gunkles did not provide credible evidence to justify tax deductions as charitable contributions, as the corporation sole did not meet the necessary requirements under I.R.C. 170(c)(2) or 501(c)(3). Consequently, the Tax Court determined the Gunkles owed $13,690 in income tax for 2007 and a penalty of $2,738 under I.R.C. 662(a). The Gunkles filed a timely appeal. 

In the appeal analysis, the standard of review involves de novo consideration of legal issues and clear error for factual findings. Taxpayers contesting deficiency determinations carry the burden of proof. The court noted that income received by an agent is considered the principal's income, and members of a religious order cannot avoid taxation on their personal income by merely claiming it belongs to the order. The court emphasized that an individual realizes income when they gain control over it, and the Commissioner may reconstruct a taxpayer's income using indirect methods, such as analyzing bank deposits, assuming that deposits constitute taxable income unless proven otherwise by the taxpayer. This principle applies broadly, including to accounts where the taxpayer has control.

Deposits into church accounts do not require disregarding the church's separate existence or challenging its tax status. The Gunkles exercised unrestricted control over the Pastoral Account, having the authority to withdraw funds and receiving account statements at their residence. Bruce had no other bank account, and his Social Security and retirement payments were directly deposited into this account. Only the Gunkles wrote checks from it, including significant transfers to Sherilyn’s account, which further evidences their control. They used funds from the Pastoral Account for personal expenses such as groceries, utilities, and car loans. The Tax Court determined that the Gunkles were compensated by the City of Refuge and not acting as its agents, affirming the Tax Court’s judgment. The excerpt references a long-standing judicial observation regarding individuals seeking exemption from income taxes under the First Amendment's free exercise clause.