Originally published on Forbes.com May 23rd, 2014
When you consider what a great tax deal being a church is, you have to really feel sorry for Bruce and Sherilyn Gunkle who gave up church status for something that seemed to be even better. They recently appealed their 2012 Tax Court loss to the Fifth Circuit. Here is the story.
The City of Refuge Christian Fellowship was organized as a corporation exempt under Code Section 501(c)(3). Recognized as a church it would not even have to file Form 990 with the IRS. Pastor Bruce Gunkle could have taken much, possibly all, of his salary as an income-tax-free housing allowance. If he objected to the social security system, he could have elected out of paying self-employment tax – generally not such a hot idea for a career minister, but Reverend Gunkle was already collecting a Navy pension. Frankly taxwise that is really about as good as it gets, but at a church leadership conference Pastor Gunkle learned of something that sounded even better.
Corporation Sole
Corporation Sole is a legal structure that makes sense for hierarchical churches. Property associated with the Catholic Church will often have the title “The Roman Catholic Archbishop of _________, A Corporation Sole”. In organizations like that, there is a clear separation between the office and the person holding the office. When you start your own church and assume an office which no earthly power can remove you from, you are setting yourself up for a tax nightmare.
There are indications that Doctor Dino’s (Kent Hovind) dabbling with Corporation Sole was one of the problems that led him to prison. Nearly three years ago, I wrote about Reverend Thomas Chambers, clearly a legitimate pastor, who managed to innocently stumble onto just about everything that a phony church will try, including corporation sole. He was facing the 75% fraud penalty, which is about as bad as it gets short of forfeiting your liberty.
When you combine corporation sole with no earthly accountability, there is no way to distinguish between what belongs to the church and what belongs to the preacher. That is the problem the Gunkles faced. The IRS taxed them on all the income of the church and the Tax Court upheld the IRS view.
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.
Their appeal to the Fifth Circuit did not go well for them either.
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.
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
Corporation Sole Still Being Promoted
Churchfreedom.org is still out there recommending that churches switch to corporation sole which will “free” them from 501(c)(3) status. The notion is, I believe, to be charitable, based on a misunderstanding. Their Q&A has the following statement
Remember that there are two Tax Exempt Laws in our Country. The first is 26 U.S.C § 508(c)(1)(a) and the other is 26 U.S.C § 501(c)(3).
Section 508 is not a separate exemption section. Section 508 places a requirement that organizations described in 501(c)(3) organized after October 9, 1969, to apply for the status and then goes on to exempt churches from that requirement.
Among the “benefits” that Churchfreedom.org claims for Corporation Sole is simple governance.
This means that a Corporation Sole only has ONE director…the Senior Pastor or Overseer of the Church. Most do not understand how utterly significant this is and why it is such a blessing. You see, most of the headache for Pastors (among other things) is the fact that 501c3 forces Churches to have appropriation committees! It should not take a board to approve whether or not to provide the necessary funds the Church needs to fulfill the Holyspirit led vision of the Senior Pastor. A Church that has a Corporation Sole does not have to deal with this issue. ….
If you cannot trust your Pastor with $5, then you cannot trust them with $5 million and they do not need to be your Pastor or be a leader within the Body of Christ. For those Pastors that are spirit led, this benefit of not having to go through a board, is a tremendous victory for the vision the Lord has laid on their heart. It cuts out any possible confusion and manipulation regarding the Churches finances.
This flies in the face of one of the standards of responsible stewardship laid out by the Evangelical Council for Financial Accountability
Standard 2 – Governance
Every organization shall be governed by a responsible board of not less than five individuals, a majority of whom shall be independent, who shall meet at least semiannually to establish policy and review its accomplishments.
It also introduces the tax risk that the Gunkles, Thomas Chambers, and, for that matter, Kent Hovind ran into – the inability to distinguish between the property of the ministry and the minister. One preacher ministries and Corporation Sole are definitely not a marriage made in heaven.
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