Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca9-13-72699/USCOURTS-ca9-13-72699-0/pdf.json

Parties Involved:
Commissioner of Internal Revenue
Appellee
Elizabeth A. Gardner
Appellant
Fredric A. Gardner
Appellant

Document Text:

FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

FREDRIC A. GARDNER;

ELIZABETH A. GARDNER,

Petitioners-Appellants,

v.

COMMISSIONER OF INTERNAL

REVENUE,

Respondent-Appellee.

No. 13-72699

Tax Ct. No.

12016-06

OPINION

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).

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2 GARDNER V. CIR

SUMMARY**

Tax

The panel affirmed the Tax Court’s decision denying a

petition for redetermination offederal 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.

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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.

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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’stax 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 formauthorized 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.

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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

Spackman2for $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-PCTEHC, 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).

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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 evidentiaryfoundation 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

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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 TaxCourt 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 ofthe bank deposit

method.

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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’ selfemployment income was subject to self-employment tax. It

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GARDNER V. CIR 9

rejected the Gardners’ claim that they were exempt from selfemployment 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 SelfEmployment 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.

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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.

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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

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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).

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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.

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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

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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.

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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 corporationssole

is part of their ministry. Indeed, creating corporations sole does not

appear to have any relationship to BAM’s mission. Its mission statement

reads:

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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 TaxCourt properlyconcluded 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 ofBethel AramMinistries 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/Jesusthe 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.

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