IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

No. 13-60245

Summary Calendar

BRUCE GUNKLE; SHERILYN S. GUNKLE,

Petitioners-Appellants

v.

COMMISSIONER OF INTERNAL REVENUE,

Respondent-Appellee

Appeal from the Decision

of the United States Tax Court

No. 5650-11

Before WIENER, OWEN, and HAYNES, Circuit Judges.

WIENER, Circuit Judge.

Petitioners-Appellants, Bruce and Sherilyn S. Gunkle, husband and wife

(together, “the Gunkles”), appeal the judgment of the United States Tax Court 

(“Tax Court”) rendered pursuant to Section 7483 of the Internal Revenue Code

(“I.R.C.”). They seek reversal of that judgment, which sustained the 

determination of Respondent-Appellee, the Commissioner of Internal Revenue 

(“Commissioner”), that the Gunkles had an income tax deficiency and an 

accuracy-related addition to tax for 2007 as the result of unreported income 

and disallowed deductions for charitable contributions. We affirm. 

United States Court of Appeals

Fifth Circuit

FILED

May 19, 2014

Lyle W. Cayce

Clerk

 Case: 13-60245 Document: 00512634800 Page: 1 Date Filed: 05/19/2014
No. 13-60245

I. FACTS AND PROCEEDINGS

A. Facts

Bruce is a graduate of the United States Naval Academy and holds a 

master’s degree in theology from Antioch University. After he retired from the 

military, he and Sherilyn settled in Texas. Bruce incorporated the City of 

Refuge Christian Fellowship, Inc. (“City of Refuge, Inc.”) in 1990 as a Texas 

non-profit corporation, exempt from federal taxes under I.R.C. § 501(c)(3)

(“501(c)(3)”).

The Gunkles’ income tax debacle began in 2002 when Bruce attended a 

church leadership conference and heard Elizabeth Gardner, wife of Frederick 

“Ric” Gardner (together, “the Gardners”) speak about a religion-related tax 

gimmick that they were marketing, at the core of which was a so-called 

“corporation sole” as an alternative to a customary non-profit entity exempt 

from taxes under 501(c)(3).1 Central to the Gardners’ step-transaction tax 

scheme2 was the proposition that persons like the Gunkles could assign their 

1 “A corporation sole consists of only one person at a time, but the corporation may 

pass from one person to the next without any interruption in its legal status.” Roman 

Catholic Bishop of Springfield, A Corp. Sole v. City of Springfield, 724 F.3d 78, 84 n.1 (1st

Cir. 2013). See also Tex. Mobile Home Ass’n v. Comm’r of Internal Revenue, 324 F.2d 691, 

694-96 (5th Cir. 1963) (quoting Trinidad v. Sagrada Orden, 263 U.S. 578, 581-582 (1923)).

2 “The step transaction doctrine is a corollary of the general tax principle that the 

incidence of taxation depends upon the substance of a transaction rather than its form.” Sec.

Indus. Ins. Co. v. United States, 702 F.2d 1234, 1244 (5th Cir. 1983) (citing Kuper v. Comm’r 

of Internal Revenue, 533 F.2d 152, 155 (5th Cir. 1976)). As we have explained previously:

Under the step transaction doctrine, the tax consequences of an 

interrelated series of transactions are not to be determined by 

viewing each of them in isolation but by considering them 

together as component parts of an overall plan. When considered 

individually, each step in the series may well escape taxation. 

The individual tax significance of each step is irrelevant, 

however, if the steps when viewed as a whole amount to a single 

taxable transaction. Taxpayers cannot compel a court to 

characterize the transaction solely upon the basis of a 

2

 

 Case: 13-60245 Document: 00512634800 Page: 2 Date Filed: 05/19/2014
No. 13-60245

income to a corporation sole and deduct the amounts thus assigned as 

charitable donations without the need to qualify that entity under 501(c)(3),

and would thereby “transform taxable individual income into non-taxable 

income.” The Gardners marketed their packaged “how-to” program to those 

attending the conference, and Bruce was among the purchasers.3

As the first step in implementing the Gardeners’ multi-step plan, Bruce 

dissolved his existing 501(c)(3) non-profit corporation, City of Refuge, Inc.,

through the Texas Secretary of State, thereby terminating its tax-exempt 

status in the process. As his next step, Bruce formed the “Office Of Presiding 

Pastor, Bruce W. Gunkle, And His Successors, A Corporation Sole” as a Nevada 

entity “within the ecclesia of the City of Refuge” (the “corporation sole”). As 

the tax court observed, “Gunkle concluded that he did not wish to continue 

operating as a nonprofit corporation . . . because of concern that such status 

might allow Governmental interference with the organization and that the 

concentration on one facet of it when the totality of 

circumstances determines its tax status.

Id. (internal quotation marks, citations, and brackets omitted); see also United States v. 

Shows, 307 Fed. App’x 818, 821 (5th Cir. Jan. 21, 2009) (unpublished) (citing Sec. Indus. Ins. 

Co., 702 F.2d at 1244).

3 Although the Gunkles are proceeding pro se in this appeal, they were represented in 

the Tax Court by the same counsel who represented the Gardners in their own tax case 

implicating unreported income purportedly shielded by a corporation sole. The Gardners lost 

that case and have appealed to the Ninth Circuit for their tax year 2004, consolidated with 

another Tax Court case involving their tax years 2002 and 2003. In yet another federal case 

involving the Gardners, the district court for the District of Arizona enjoined them from 

promoting, marketing, and selling corporation soles, which promotions, the court stated, had 

“encourage[d] [their vendees’] willful misreading of the [tax] law” by promising unwarranted

tax benefits. Per that district court’s order, the Gardners were required to furnish a copy of 

the injunction to the Gunkles. See United States v. Gardner, 2008 WL 906696, at *6 (D. Ariz.

Mar. 21, 2008), aff’d, 457 F. App’x 611 (9th Cir. 2011).

3

 

 Case: 13-60245 Document: 00512634800 Page: 3 Date Filed: 05/19/2014
No. 13-60245

‘business model’ of a corporation allowed the directors a say in the operations.”4 

The next step in the Gunkles’ series was their signing of a “vow of poverty,” 

which they had the corporation sole accept and agree to provide “all their needs 

as Apostles and as pastors of this church ministry. The check will be placed in 

the church pastoral account every two weeks according to all the needs of the 

pastors.” As their last step down the Gardners’ primrose path, the Gunkles

deeded their residence to Bruce’s corporation sole, all the while continuing to 

reside there.

During 2007, the tax year at issue, the Gunkles performed pastoral 

functions and conducted services. They also performed “sacerdotal functions” 

for their corporation sole. A checking account at Wells Fargo Bank was 

maintained in the name “The City of Refuge Christian Fellowship Pastoral 

Expense Account” (the “Pastoral Account”). The periodic statements for that 

account were mailed to the Gunkles at the residence that they had transferred 

to their corporation sole. Although others had signature authority on that 

bank account, no one except the Gunkles ever signed checks on it, and neither 

Gunkle had signature authority on any other checking account. Deposits into 

the Pastoral Account came from Bruce’s military retirement payments and 

Social Security disbursements, as well as from City of Refuge member and nonmember contributions.

The Gunkles used the funds from the Pastoral Account to pay their

personal expenses, such as purchasing and maintaining automobiles, buying 

food and groceries, paying for household expenses, and the like. They also used 

that account to pay mortgage, utility, and maintenance charges on the 

4 Gunkle, 2012 WL5371425 at *1. The Commissioner and the Tax Court deemed 

significant the fact that Bruce was trying to unload the prior directors “oversight.” Indeed, 

the Gunkles’ vow of poverty might have been effective if they were actually to work for a 

separate entity, possibly even the prior City of Refuge.

4

 

 Case: 13-60245 Document: 00512634800 Page: 4 Date Filed: 05/19/2014
No. 13-60245

corporation sole’s property which they occupied rent-free as their residence. In 

addition to the Pastoral Account, Sherilyn had a savings account at a federal 

credit union into which deposits were made from the Pastoral Account and on 

which interest was earned during 2007. No one else made deposits into that 

savings account.

The Gunkles’ 2007 joint federal income tax return was prepared by none 

other than Ric Gardner. It reported income from Bruce’s Social Security and 

military pension benefits that had been deposited into the Pastoral Account, 

but it reported no income from their corporation sole. The Commissioner’s 

Notice of Deficiency for that tax year asserted an income tax deficiency of 

$16,262 plus a 20% accuracy-related addition of $3,252.40.5

B. Tax Court Proceedings

The Gunkles filed suit in the Tax Court in 2011, challenging the 

Commissioner’s assessments for deficiency and additions to tax on their 2007 

joint income tax return. The Gunkles asserted that the unincorporated City of 

Refuge was a “church” or “legitimate religious organization” exempt under 

501(c)(3), and that it was a religious order as well. Thus, argued the Gunkles, 

deposits to the Pastoral Account were non-taxable gifts, and their vows of 

poverty shielded their compensation for services as its agents. They also 

claimed that their donations to their corporation sole entitled them to 

deductions for charitable contributions.

The Commissioner countered that the Gunkles’ compensation for 

services rendered was taxable, even if, arguendo, their corporation sole were a 

“church” or other exempt organization. The Commissioner also asserted that, 

for tax purposes, the payment of the Gunkles’ living expenses from the Pastoral 

Account was compensation for services, in consequence of which deposits into 

5 These deficiencies were subsequently revised to $13,690 and $2,738, respectively.

5

 

 Case: 13-60245 Document: 00512634800 Page: 5 Date Filed: 05/19/2014
No. 13-60245

the Pastoral Account were taxable to the Gunkles who had exclusive control of

that account at all relevant times. The Commissioner noted further that the 

Gunkles had not validly assigned their income to Bruce’s corporation sole 

pursuant to their vows of poverty. The Commissioner also took the position 

that the Gunkles owed taxes on deposits of cash and dividends into Sherilyn’s 

federal credit union account, but not on transfers to it from the Pastoral 

Account. In sum, the Commissioner insisted that the Gunkles had unreported 

taxable income for 2007, were not entitled to charitable deductions, and were 

liable for the additional taxes that the IRS had assessed, as well as for the 20% 

accuracy-related assessment.

C. Tax Court Disposition

As it and the other courts that had dealt with the Gardners’ own, 

essentially identical tax cases had done previously, the Tax Court rejected the 

Gunkles’ positions that relied on the package they had purchased from the 

Gardners, had been instituted seriatim, and had been taken by the Gunkles on 

their tax returns. The court ruled that the Gunkles’ depositing of funds into

the Pastoral Account as donations and assigning their income to Bruce’s

corporation sole based on their vows of poverty lacked substance and were 

unavailing, as were their contentions that they were acting as agents of the 

corporation sole. 

The Tax Court concluded that “petitioners exercised complete dominion 

and control over all of the funds in the pastoral account without any restriction 

by the City of Refuge or any other person.”6 The court noted that the Gunkles 

had “not shown that the City of Refuge CF has any characteristics of a religious 

order” and concluded they were not entitled to the rules “applicable to payment 

6 Gunkle, 2012 WL 5371425 at *3. 

6

 

 Case: 13-60245 Document: 00512634800 Page: 6 Date Filed: 05/19/2014
No. 13-60245

of expenses on behalf of members of a religious order.”7 Similarly, the court 

ruled that deposits into Sherilyn’s account at the federal credit union 

constituted income to the Gunkles.8 

The Tax Court agreed with the Commissioner that the Gunkles had 

failed to present credible evidence to support treating their deductions as 

charitable contributions, principally because the corporation sole did not meet 

the requirements of I.R.C. §§ 170(c)(2) or 501(c)(3). The court ultimately 

rendered judgment for the Commissioner on the basis of its November 1, 2012 

opinion, holding that the Gunkles’ reported income tax for 2007 was deficient 

in the amount of $13,690 and that they owed a penalty under I.R.C. § 662(a) of 

$2,738. The Gunkles timely filed a notice of appeal to this court.9

II. ANALYSIS

A. Standard of Review

In addressing appeals of cases tried to judgment in the Tax Court, like

those tried to judgment in other courts of first instance, we review issues of 

law de novo10 and findings of fact for clear error.11 This is particularly so when 

7 Id. at *4. The Tax Court commented that the City of Refuge had no resemblance to 

a religious order

8 Id.

9 The Gunkles limit their appeal to the Tax Court’s holding that deposits into the 

Pastoral Account in the name of the City of Refuge constituted unreported taxable income to 

them; they do not challenge—and therefore waive any claim of error regarding—that court’s 

assessment of the additional 20% denial of charitable deduction, and deposits into the savings 

account at the federal credit union.

10 Green v. Comm’r of Internal Revenue, 507 F.3d 857, 866 (5th Cir. 2007).

11 Yoon v. Comm’r of Internal Revenue, 135 F.3d 1007, 1012 (5th Cir. 1998).

7

 

 Case: 13-60245 Document: 00512634800 Page: 7 Date Filed: 05/19/2014
No. 13-60245

we review a holding of the Tax Court that the Commissioner correctly 

determined the amount of a taxpayer’s unreported income.12

B. Burden of Proof

Taxpayers who contest the Commissioner’s determinations of 

deficiencies have the burden of proving that such determinations are 

erroneous.13 Although the Commissioner must adduce some evidence that a 

taxpayer has engaged in activity generating unreported income, the taxpayer 

still must prove that the Commissioner’s determinations are erroneous.14

C. Merits

As both the Commissioner and the Gunkles have expressed a preference 

to dispense with oral argument, we decide this appeal on the basis of their 

briefs and record excerpts and the record on appeal, including the opinion and 

judgment of the Tax Court.

Income received by the agent of a principal is deemed to be the income 

of the principal and not the income of the agent.15 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.16 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 

12 Id. See also Webb v. Comm’r of Internal Revenue, 394 F.2d 366, 372 (5th Cir. 1968).

13 Yoon, 135 F.3d at 1012; Felt v. Comm’r of Internal Revenue, 433 F. App’x 293, 294

(5th Cir. 2011).

14 Carson v. United States, 560 F.2d 693, 697 (5th Cir. 1977).

15 Md. Cas. Co. v. United States, 251 U.S. 342, 345-48 (1920).

16 See Rev. Rule. 77-290, 1977-2 C.B. 26, 1977 WL 43557.

8

 

 Case: 13-60245 Document: 00512634800 Page: 8 Date Filed: 05/19/2014
No. 13-60245

poverty and assigning the income to that religious order or institution.17 The 

same rule applies to entities organized as “corporation soles.”18 “[A]n 

individual has received income when he gains complete dominion and control 

over money or other property, thereby realizing an economic benefit.”19

Moreover, the Commissioner may use indirect methods to reconstruct 

the income of a taxpayer who fails to maintain or produce records adequate to 

allow his correct tax liability to be determined.20 One common method of such 

reconstruction involves analyzing bank deposits.21 Such reconstruction 

assumes that, except for funds from nontaxable sources, money deposited into 

the taxpayer’s bank account constitutes taxable income: The taxpayer has the 

burden of proving otherwise.22 This rule covers deposits into bank accounts 

over which the taxpayer has dominion and control and is not limited to deposits 

made to the taxpayer’s personal account.23 And, deposits into church accounts 

are covered by this rule without the need “to disregard the separate existence 

of the church or to challenge the tax status of the church as an entity.”24

17 See, e.g., Page v. Comm’r of Internal Revenue, 823 F.2d 1263, 1271 (8th Cir. 1987); 

Pollard v. Comm’r of Internal Revenue, 786 F.2d 1063, 1065-66 (11th Cir. 1986).

18 Gardner v. Commissioner, 2013 WL 892963, at *5-6 (T.C. Mar. 11, 2013).

19 United States v. Curtis, 782 F.2d 593, 596 (6th Cir. 1986).

20 Woodall v. Comm’r of Internal Revenue, 964 F.2d 361, 364 (5th Cir. 1992).

21 Cummings v. Comm’r of Internal Revenue, 410 F.2d 675, 678-79 (5th Cir. 1969).

22 Price v. United States, 335 F.2d 671, 677 (5th Cir. 1964).

23 See, e.g., United States v. Goldberg, 330 F.2d 30, 38 (3rd Cir. 1964).

24 See Gardner, 2013 WL 892963, at *5 (applying the rule to deposits into a church 

account set up as a corporation sole) (quoting Woods v. Commissioner, 1989 WL 134222 (T.C. 

Nov. 9, 1989), aff’d without pub. op., 929 F.2d 702 (6th Cir. 1991)).

9

 

 Case: 13-60245 Document: 00512634800 Page: 9 Date Filed: 05/19/2014
No. 13-60245

The Gunkles clearly had unrestricted dominion and control over the 

Pastoral Account. During the tax year at issue, the Gunkles were authorized

to make withdrawals from that account, and the periodic statements on the 

account were mailed to them at their erstwhile home. Bruce had no other bank 

account and, at his direction, his Social Security payments and retirement pay 

were deposited directly into the Pastoral Account. Only the Gunkles wrote 

checks on the Pastoral Account, among which was a relatively large transfer 

to Sherilyn’s account at the federal credit union. The fact that all checks on 

the Pastoral Account were written by one of the Gunkles also confirms their 

dominion and control over it. The same is proved by the use they made of the 

money from that account to pay for essentially all of their personal costs and 

expenses: groceries, utilities, maintenance and repair, car loans, and on and 

on. The Tax Court also concluded correctly that the Gunkles received 

compensation from the City of Refuge and did not, as they claim, receive the 

funds as its agents.25

The Gunkle’s case is best summed up in the words of the Second Circuit 

when it observed almost 30 years ago: 

Every year, with renewed vigor, many citizens seek 

sanctuary in the free exercise clause of the first 

amendment. They desire salvation not from sin or 

temptation, however, but from the most earthly of 

mortal duties—income taxes.26

The judgment of the Tax Court is, in all respects,

AFFIRMED.

25 See, e.g., Gardner, 2013 WL 892963, at *16-17; Page, 823 F.2d at 1271; Pollard, 786

F.2d at 1065-66.

26 Mone v. Comm’r of Internal Revenue, 774 F.2d 570, 571 (2nd Cir. 1985).

10

 

 Case: 13-60245 Document: 00512634800 Page: 10 Date Filed: 05/19/2014