WASHINGTON – A federal appeals court said Thursday that the owners of an Arizona ministry cannot avoid paying income taxes by claiming they had taken vows of poverty and were merely being supported by donations to their church.
A three-judge panel of the 9th U.S. Circuit Court of Appeals ruled that the “maintenance” payments from Bethel Aram Ministries to Dewey residents Fredric and Elizabeth Gardner should be treated as income, since the Gardners controlled the ministry’s bank accounts.
The court also said that what the Gardners claimed were donations to the ministry were actually quid pro quo payments made in exchange for tax work the couple did for other churches.
Attorneys from the Justice Department who handled the case declined to comment on the ruling Thursday.
But a woman identifying herself as Elizabeth Gardner at the ministry’s phone number called the decision “a bad case.” The Gardners, who represented themselves in the case, plan to fight the appeals court’s decision, she said.
Thursday’s ruling upheld a U.S. Tax Court decision that rejected the Gardners’ claim that they did not have to pay taxes because they support payments from their church did not qualify as taxable income.
The Gardners created Bethel Aram Ministries in 1993, the court said, and they signed vows of poverty in 1999 that said they were divesting themselves from income and earnings from the ministry, which would “provide for their needs as pastors of the church ministry.” The couple signed over all their assets, including the title to their home, to the ministry.
But the courts found that the Gardners held “unfettered control” over the operations and finances of the ministry, and the appeals court called the Gardners’ poverty vows an “attempt to disguise their enjoyment of their personal income.”
The court said that for several years the ministry did not have any congregation. Instead, the Gardners “traveled across the country offering their services in setting up corporations sole and limited liability companies.”
A corporation sole, the couple claimed, was not required to file income taxes as its workers were not employees but ministers of the church.
The ministry provided a donation sheet to other churches it worked with that laid out the costs for its various services, including $1,200 to set up corporations sole and $700 for limited liability corporations.
Court documents said the Gardners established more than 300 corporations sole and about 18 limited liability corporations.
From 2002 to 2004, the couple failed to file tax returns and refused to provide records to the IRS. But the IRS was able to get bank records that showed deposits to the ministry of more than $600,000 during that period, more than $550,000 of which it determined was taxable income.
The tax court found that the payments were taxable income to the Gardners and that the deposits to the ministry “were not gifts or donations” but a payment in exchange for the Gardners’ services.
The circuit court agreed, rejecting the Gardners’ claims on appeal that the lower court ruling violated their First Amendment right to freedom of religion.
The appellate court also rejected the couple’s argument that the tax court should have treated them and their ministry as separate identities. In the opinion for the court, Circuit Judge Consuelo Callahan compared that argument to saying Superman is not Clark Kent.
“Certainly Superman displays abilities that Clark Kent denies having, but they are one and the same,” Callahan wrote. “Similarly, here, there is no practical distinction between the Gardners and BAM.”