A recent Tax Court case held that amounts deposited into a “pastoral account” maintained by husband-and-wife pastors in the name of their unincorporated church were not deductible as charitable contributions. Gunkle v. Commissioner, TC Memo 2012-305(11/1/12), involved tax deficiencies levied against Bruce and Sherilyn Gunkle, two Texas ministers who formed and operated the City of Refuge Christian Fellowship (“CRCF”).

Bruce was a graduate of the US Naval Academy with a masters degree in theology from Antioch University. He and his wife served as pastors and conducted religious services for CRCF during the taxable year in question. Some 17 years earlier, Bruce had formed, and for a number of years headed, a qualified section 501(c)(3) organization with a similar name.

Acting on the advice of promoters (the Gardners) who were subsequently enjoined by a federal court from participation in an abusive tax shelter program promising unwarranted tax benefits from the use of a device they called a “corporation sole,” Bruce terminated his tax-exempt charity and formed CRCF as a corporation sole. This action was taken to permit the new entity to operate without interference by the government and corporate directors. Bruce and his wife took vows of poverty and CRCF agreed to “provide for all their needs as Apostle and as pastors of the church.” Those needs were to be met through funds placed by CRCF in a bank account known as their pastoral account. Deposits to the account were made by church members and nonmembers, and Bruce’s Social Security checks were also deposited therein.

The Gunkles had full control over that account, and wrote all of the checks drawn on the account, many of which were for groceries, car payments and other personal expenses. On their 2007 income tax returns, they did not report any income from CRCF. They claimed a deduction of $13,917 for charitable contributions, of which $8,926 was claimed for contributions to CRCF. That tax return was prepared and signed by Frederick Gardner, who had apparently masterminded the corporation sole scheme for CRCF.

The arrangement didn’t work out as planned. IRS disallowed the claimed charitable deductions, and charged the Gunkles with $63,000+ in unreported income The Tax Court agreed. Amounts deposited in the pastoral account were held taxable to the Gunkles as income, and the charitable deductions were disallowed because they retained control of those funds and benefited from them. They claimed, but failed to show, that CRCF had characteristics of a religious order. On top of all that, the court upheld the imposition of a penalty of $3,252.40 under Code §6662(a).

The Court noted that in very similar circumstances it held that deposits made into the account of a purported church were includable in the taxpayers' gross income where the taxpayers were the owners of the bank accounts, exercised complete control over the funds in the accounts, and used those funds for personal expenditures.

Source: Charitable Gift Planning News, Issue 2012-17 (Nov. 3, 2012)

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