### 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 748 3 of the Internal Revenue Code (“ I.R.C. ”)

. They seek revers al of th at j udgment , which sustain ed the determination of Respondent

- Appellee, the Commissioner of Internal Revenue (“Commissioner”) , that the Gunkles had an income tax d eficiency and an

accuracy
- related a ddition 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: 05/19/2014No. 13

- 60245
I. F ACTS 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
Re fuge 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 Gunkle s ’ income tax debacle began in 2002 when Bruce attended a church leadership conference and hear d 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 th e Gardners’ step

- transaction tax scheme 2 was the p rop osition 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 pe rson 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. Com m ’ 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:

U nder 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 esca pe 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: 05/19/2014No. 13

- 60245 income to a corporation sole and deduct the amounts thus assigned as charitable donations without the need to qualify t hat entity under 501(c)(3) , and would thereby “transform taxable individual inco me into non

- taxable income

. ” The Gardners marketed the ir packaged “how

- to” program to th os e 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 Stat e, 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 Corp oration Sole” as a Nevada entity “within the ecclesia of the City of Refuge ” (the “cor poration 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

concent ration 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) (citin g 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 s hielded by a corporation sole. T he Gardners lost that case and have appealed to the Ninth Circuit for their tax year 2 004, consolidated with another Tax C ourt case involving their tax years 2002 and 2003. In yet another federal case involving the Gardn ers, 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 W L 906696, at *6 (D. Ariz. Mar. 21, 2008) , a ff’d , 457 F. App’x 611 (9th Cir. 2011).

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

- 60245 ‘business model’ of a corporation allowed the directors a sa y in the operations.” 4
T he next step in the Gunkles’ series was their signing of a “vow of poverty , ” which they had the corpo ration sole accept and agree to provide “all their needs as Apostles and as pastors of this church ministry. The check will be pl aced 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, t he 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. The y also performed “sacerdotal functions” for the ir corporation sole

. A checking account at Wells Fargo Bank was maintained in the name “ T he City of R efuge Christian Fellowship Pastoral Expense Account ” (the “Pastoral Account”) . T he periodic statements for that
account were mailed to the Gunkles at the residence that they had transferred
to the ir corporation s ole . Although o thers had signature authority on that bank account , no one except the Gunkles ever signed checks on it , and n either Gunkle ha d signature authority on any other checking account. Deposits into the Pastoral A ccount came from Bruce’s military retirement payments and Social Secu rity disbursements, as well as from City of Refuge memb er and non

member contributions. The Gunkles used the funds from the Pastoral Account to pay the ir personal expenses, such as purchasing and maintaining automobiles, buying food and groceries, paying f or household expenses, and the like. The y also used that account to pay mortgage, utility, and maintenance charges on the

4 Gunk le , 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

se parate entity, possibly even the prior City of Refuge.

4 Case: 13-60245 Document: 00512634800 Page: 4 Date Filed: 05/19/2014No. 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 o n 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 depo sited into the Pastoral Account,
but it reported no income from the ir corporation sole . The Commissioner’s Notice of Deficiency for that tax year assert ed an income tax deficiency of $16,262 plus a 20% accuracy

- related addition of $3,252.40

. 5
B. T ax Court Proceedings The Gunkles filed suit in the Tax Court in 20 1 1, challenging the Commissioner’s assessments for defi ciency and additions t o 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, argue d 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 entitle d them to deductions for charitable contributions

. The Commissio ner countered that the Gunkles’ compensation for
services rendered was taxable , even if , arguendo , the ir corporation sole were a

“ church ” or other exempt organization. The Commissioner also asserted t hat , for tax purposes, the payment of the Gunkles’ living expenses from the Pastoral Account was compensation for services , in consequen ce of which deposits into

5 These deficiencies were subsequently re vised to $13,690 and $2,738 , respectively

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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. T he Commissioner also took the position that the Gunkles owed taxes on deposits of ca sh 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 tax es that the IRS had assessed , as well as for the 20 %

accuracy
- related assessment. C. T ax Court Disposition As it and the other courts that ha d deal t with the Gardners’ own, essentially identical tax cases had done pr eviously, the Tax Court rejected the Gunkles’ position s that relied on the package they had p urchased from the Gardners , had been instituted seriatim , and had been taken by the Gunkles on their tax return s

. The court ruled that the Gunkles’ depositing of funds in to the Pastoral Account as donations and assign ing 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 th e corporation sole

. T he 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 o f Refuge or any other person.” 6 The court noted that the Gunkles had “not shown that the Ci ty 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.

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- 60245 of expenses on behalf of members of a religious order.” 7 Similarly, the court ruled that deposits into Sherilyn’s accoun t at the federal credit union constituted income to the Gunkles. 8 The Tax Court agree d with the Commissioner that the Gunkles had failed to present credible evidence to support treating their deductions as charitable contributions , principally because th e corporation s ole 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, hold ing 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. A NALYSIS 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 novo 10 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 C ourt’s holding that deposits into the Pastoral A ccount in the name of the City of Refuge constituted unreported t axable 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 10 07, 1012 (5th Cir. 1998)

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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 determination s of deficiencies have the burden of proving that suc h 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 determination s are erroneous. 14 C. M erits As both the Commissioner and the Gunk l es have express ed 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 t he a gent of the order , promptly
deliver ed 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 Conv ersely, 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 C arson 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: 05/19/2014No. 13

- 60245 poverty and assigning the income to th at religious order or institution. 17 The

s ame 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 indi rect 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

a ssumes that, except for funds from nontaxable sources, money deposited into the taxpayer’ s bank account constitutes taxable income : T he 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 t o deposits made to the taxpayer’ s personal account. 23 And, deposits into church accounts are covered by this rule without the need “to disreg ard 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 , 8 2 3 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. Comm issione r , 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 , 2 0 13 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) , a ff’d without pub. op. , 929 F.2d 702 ( 6th Cir. 1991) )

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The Gunkles clearly had unrestricted dominion and control over the Pastoral Account . During the tax year at issue , the Gunkles were authorized to make w ithdrawals 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 P astoral Account . Only the Gunkle s 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 check s on the Pastoral Account w ere written by one of the Gunkles als o confirms their dominion and control over it. The same is prove d 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

T he 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 Mon e v. Comm’r of Internal Revenue
, 774 F.2d 570, 571 (2nd Cir. 1985).

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