Hartshorn - Vow of Poverty Program Enjoined

jcolvin2 · Post by **jcolvin2** » Mon Mar 19, 2012 4:54 am

UNITED STATES OF AMERICA,
Plaintiff,
v.
KEVIN HARTSHORN,
Defendant.

IN THE UNITED STATES DISTRICT COURT
DISTRICT OF UTAH, CENTRAL DIVISION

MEMORANDUM DECISION AND ORDER

Judge Clark Waddoups

INTRODUCTION

In this action, the United States seeks injunctions under 26 U.S.C. §§ 7402 and 7408, alleging that Defendant Kevin Hartshorn violated 26 U.S.C. §§ 6700, 6701 and unlawfully interfered with enforcement of Internal Revenue laws. (Dkt. No. 1, 12-14.) The government now moves for summary judgment on all three counts in the complaint. (Dkt. No. 14.) For the reasons stated below, the motion is GRANTED in part and DENIED in part.

BACKGROUND

The following facts are supported by the evidence submitted by the United States and are undisputed by the Defendant. Kevin Hartshorn currently serves as a senior minister for the Church of Compassionate Service (the "Church"). The Church was organized by Hartshorn in its present form in 2004, at which time he was appointed head minister. Hartshorn created the Church's "Book of Church Order" and the "Minister's Handbook," which is used by and furnished to Church ministers. Hartshorn also drafted, or assisted in drafting, other church documents, including the vows of poverty and obedience and agency assignment.
The Church requires a member who becomes a minister to take vows of poverty and obedience. Presently, there are approximately 50 active ministers. Upon taking the vow of poverty, ministers are required to renounce all their worldly possessions. To comply with this requirement, they transfer title to all personal property to a trust created by the Church and quit-claim their real property to the Church, which the Church then also quit-claims to a trust. In addition, ministers assign to the Church all income that is earned as a part of their normal employment. In some instances, the ministers receive the check from their employer and then endorse it in favor of the Church. In other cases, their earnings, at the direction of the minister, are deposited directly into accounts controlled by the Church. The Church provides the ministers with a debit card from a Church account which they use for their necessary living expenses. The Church also pays the mortgage, if any, on the home and other related home expenses. Although, the Church maintains the right to refuse payment of the minister's expenses, Hartshorn has offered no evidence of any request by a minister for an expense that the Church has denied.

The Church refers to the home in which ministers and their families reside as a "parsonage." The Minister's Handbook declares that the parsonage and its effects, which include all of the home's contents, are held in trust for the benefit of the Church. The ministers also sign a "Stewardship Agreement" agreeing to operate and manage the parsonage and parsonage effects.

Hartshorn has assisted other ministers in executing a vow of poverty and transferring their property to the Church and has discussed with them the tax consequences of taking these actions. In summary, Hartshorn has explained, often with reference to I.R.S. materials, that as ministers of the Church they are not required to pay taxes on income they earn which has been assigned to the Church.

In support of its motion for summary judgment, the United States has provided details as to the practices of several ministers. It relies, however, primarily on the conduct of Bruce Calkins and Hartshorn's interactions with him. Mr. Calkins is a Church minister and has taken a vow of poverty. He earns approximately $60,000 per year as a histotechnologist for Kaiser Permanente where he is a Form W-2 wage employee. Mr. Calkins worked in the same position prior to becoming a Church minister. Upon taking a vow of poverty, Mr. Calkins declared that he was giving all of his possessions to the Church, including his car. He also assigned his pay from Kaiser Permanente to the Church, and directed that his paycheck be deposited directly into a Church account. Nevertheless, Mr. Calkins continues to receive his employee benefits from Kaiser Permanente, including health care, sick leave, and vacation days. Prior to becoming a Church minister, Mr. Calkins had directed Kaiser Permanente to deposit his paycheck into a personal account bearing his name.

Hartshorn acknowledges that the Church did not help Mr. Calkins find his job with Kaiser Permanente, does not exercise any control over the work that he performs for Kaiser Permanente, and has not entered into any contract with Kaiser Permanente for the Church to provide the services performed by Mr. Calkins. Hartshorn does not dispute that the income Mr. Calkins earns as a histotechnologist for Kaiser Permanente would be taxable were he not a minister with the Church. Mr. Calkins last filed a federal income tax return in 2000.

STANDARD OF REVIEW

Summary judgment will be granted "if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(a). "A 'material fact' is one which could have an impact on the outcome of the lawsuit, while a 'genuine issue' of such a material fact exists if a rational jury could find in favor of the non-moving party based on the evidence presented." Chasteen v. UNISIA JECS Corp., 216 F.3d 1212, 1216 (10th Cir. 2000). Although "[t]he movant has the burden of showing that there is no genuine issue of fact," the opposing party "is not thereby relieved of his own burden of producing . . . evidence that would support a jury verdict." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 256 (1986). Likewise, the role of the Court is not to weigh the evidence, but to "determine whether there is a genuine issue for trial." Id. at 249.

DISCUSSION

I. The United States is Entitled to an Injunction under I.R.C. § 7408 to Enjoin Hartshorn's Conduct as Being Subject to Penalty Under § 6700.

Under the Internal Revenue Code, the court "may enjoin [a] person from engaging in . . . activity subject to penalty under this title." I.R.C. § 7408(b). Such activity includes the promotion of abusive tax shelters under I.R.C. § 6700. The courts have listed five requirements for such an injunction to issue:

The government must prove five elements to obtain an injunction under these statutes: (1) the defendants organized or sold, or participated in the organization or sale of, an entity, plan, or arrangement; (2) they made or caused to be made, false or fraudulent statements concerning the tax benefits to be derived from the entity, plan, or arrangement; (3) they knew or had reason to know that the statements were false or fraudulent; (4) the false or fraudulent statements pertained to a material matter; and (5) an injunction is necessary to prevent recurrence of this conduct

United States v. Estate Preservation Servs., 202 F.3d 1093, 1098 (9th Cir. 2000).
The court will consider each of these elements in turn.

A. Hartshorn Organized or Participated in the Organization of a Plan.

The Seventh Circuit has noted that "under § 6700 any 'plan or arrangement' having some connection to taxes can serve as a 'tax shelter.'" United States v. Raymond, 228 F.3d 804, 811 (7th Cir. 2000). The United States argues that it is undisputed that Hartshorn organized the Church in its present form in 2004 and that the Church claims that, under its precepts and practices, the income of its ministers are exempt from income and other taxes. (Dkt. No. 27, 4-5.) Indeed, the Minister's Handbook, written by Hartshorn, states that ministers no longer have taxable income once they have taken the vow of poverty because "[w]hen ministers of the Order take the Vow of Poverty, even the I.R.S. recognizes that they have no income and that any income that they would receive belongs to the religious order." (Dkt. No. 27, 4-5.) The United States further argues that it is undisputed that ministers, following Hartshorn's advice, have not filed tax returns for the years during which they have been ministers. (Dkt. No. 27, 25.) The United States argues that these facts are sufficient to prove that Mr. Hartshorn organized a plan or arrangement that can serve as a tax shelter within the meaning of I.R.C. § 6700. (Dkt. No. 27, 4-5.)

Hartshorn opposes the government's argument by attempting to justify the Church as a legitimate church. (Dkt. No. 18, 50-54.) To satisfy this element, however, it is not necessary for the government to prove the Church is a sham. For purposes of this motion, the court assumes that the Church is legitimate. But even assuming this fact, Hartshorn's opposition fails. He provides no support for the proposition that even a legitimate church is exempted from the requirements of § 6700.1 Hartshorn concedes that he had a hand in the organization of the Church and it is undisputed that ministers following the Church's practices, which were primarily prescribed by Hardshorn, do not pay taxes. This evidence is sufficient to meet the first element for an injunction under § 6700. (Dkt. No. 32, 3.)

B. Hartshorn Made False or Fraudulent Statements about Tax Benefits.

The United States contends that Hartshorn "falsely promises prospective 'church ministers' that they can eliminate their federal income taxes by executing a 'vow of poverty,' refuse to file federal income tax returns, and legally put their income and assets beyond the reach of the I.R.S." (Dkt. No. 27, 6.) The government argues that such statements are false or fraudulent under (1) the anticipatory assignment of income doctrine; and (2) under a nominee fraud theory. The court will first consider whether the United States prevails under the anticipatory assignment of income doctrine.

i. The Anticipatory Assignment of Income Doctrine

The Supreme Court has explained the anticipatory assignment of income doctrine as follows:

A taxpayer cannot exclude an economic gain from gross income by assigning the gain in advance to another party. The rationale for the so-called anticipatory assignment of income doctrine is the principle that gains should be taxed "to those who earned them," a maxim we have called "the first principle of income taxation." The anticipatory assignment doctrine is meant to prevent taxpayers from avoiding taxation through arrangements and contracts however skillfully devised to prevent [income] when paid from vesting even for a second in the man who earned it.

In an ordinary case attribution of income is resolved by asking whether a taxpayer exercises complete dominion over the income in question. In the context of anticipatory assignments, however, the assignor often does not have dominion over the income at the moment of receipt. In that instance the question becomes whether the assignor retains dominion over the income-generating asset, because the taxpayer who owns or controls the source of the income, also controls the disposition of that which he could have received himself and diverts the payment from himself to others as the means of procuring the satisfaction of his wants. Looking to control over the income-generating asset, then, preserves the principle that income should be taxed to the party who earns the income and enjoys the consequent benefits.

Comm'r v. Banks, 543 U.S. 426, 433-435 (U.S. 2005) (citations omitted).

Although the Tenth Circuit has not addressed this precise issue, it has been addressed by other Courts of Appeals.2 The Eighth Circuit has stated, "[t]o prove assignment of income on an agency theory, the taxpayers . . . must show that a contractual relationship existed between their secular employers and the religious order, and that the religious order controlled or restricted the taxpayers' use of the money purportedly turned over to the order." Page v. Commissioner of Internal Revenue, 823 F.2d 1263, 1270 (8th Cir. 1987) (citing Mone v. Commissioner, 774 F.2d 570 (2d Cir. 1985)); see also Pollard v. Commissioner of Internal Revenue Service, 786 F.2d 1063, 1065 (8th Cir. 1986) (noting the agent-principal relationship theory is followed by the Federal Circuit, and the Second, Third, and Sixth Circuits).3 This approach may be referred to as the "agency agreement" approach. Such an approach draws a bright line: absent evidence of a contract between the religious order and the employer, the income is taxable to the employee, no matter the bona fide of his relationship with the order.

Other courts have applied a test that considers the evidence of an agency agreement, but applies a more flexible standard. In Schuster, the Seventh Circuit rejected the Commissioner's argument that without a contract, there could be no assignment. Rather, the court found that "[a] flexible test, allowing consideration of all of those factors, better serves our analysis in attempting to determine whether income is to be taxed against the person or entity who actually earned it or against someone else." Schuster v. Commissioner of Internal Revenue Service, 800 F.2d 672, 678 (7th Cir. 1986). Under this approach, "whether a member of a religious order earns income in an individual capacity, or as an agent of the order, is a question of law based on general rules of agency to be established by considering all the underlying facts." Fogarty. v. United States, 780 F.2d 1005, 1012 (Fed. Cir. 1986). Borrowing from Fogarty, the Schuster court outlined six such factors:

1) [T]he degree of control exercised by the Order over the member; 2) ownership rights between the member and the Order; 3) the purposes or mission of the Order; 4) the type of work performed by the member vis-a-vis the purposes or mission; 5) the dealings between the member and the third-party employer, including the circumstances surrounding inquiries and interviews, and the control or supervision exercised by the employer; and 6) the dealings between the employer and the Order.

Schuster, 800 F.2d at 678.

The court is persuaded that the Schuster approach best serves the objective of taxing income to the appropriate person. To limit the anticipatory assignment of income doctrine to a black and white test that hinges on whether a contract does or does not exist may result in income being taxed to a person who, within the meaning and objectives of the Internal Revenue Code, did not control the income or receive it for his or her own benefit. Such a test may allow possible pitfalls for a legitimate assignor and create an easily navigable course for a clever scammer. The more flexible approach, therefore, better serves the purpose of determining the true intent of the parties -- and the statute -- by looking to the six Schuster factors to determine if the Church "retains dominion over the income-generating asset." That said, the court does not suggest that the facts need only tip the balance slightly in favor of a defendant for him to be successful. If this were the case, gaps and holes would be unintentionally created which could be easily exploited by a crafty scam. Rather, the court holds that to overcome the presumption that income accrues to the person who performs the work, a defendant must demonstrate that the aggregate of these factors weighs substantially in his/her favor. Indeed, even one factor weighing against a defendant could prove dispositive and disqualifying.

a. The Degree of Control Exercised

Under this analysis, the first consideration is the degree of control exercised by a religious organization over its members. In Schuster, the court considered the case of a Roman Catholic nun who was a professed member of the Order of the Adorers of the Blood of Christ. Schuster, 800 F.2d at 673. As a condition of membership, Schuster took perpetual vows of poverty, chastity and obedience. Id. She further agreed to never claim or demand compensation for the work she did. Id. Members of the Order were allowed to secure employment in occupations that related to the Order's general purposes, subject to approval by a Provincial Superior of the Order. Id. at 673-74. Consistent with this policy, Schuster obtained permission from her Order to apply and interview for positions in health manpower shortage areas. Schuster was subsequently offered, and accepted, employment with the National Health Services Corps. Id. at 674. National Health Services wrote Schuster's paychecks payable to her, which she then endorsed in favor of the Order. Id. at 675. The court also found, however, that Schuster "remained free to withdraw from the Order at any time." Id. at 6778. As such, the court ultimately held that, although the Order "retained authority to control Schuster's daily routine, the Order did not in fact exercise such day-to-day control." Id. at 678.
The Schuster dissent disagreed, finding it troubling that the majority's decision implied that a person presumed to remain free to withdraw from their religious affiliation at any time is not, prior to withdrawing, controlled by a church or order for purposes of the anticipatory assignment of income doctrine. Id. at 680. This court is similarly troubled by the implications of the majority's decision. If being free to withdraw from a religious organization is sufficient to preclude a finding that a person is under a church's control, then no person claiming a tax exemption due to a religious vow of poverty could possibly meet the Schuster test in a free religious society. Because of this concern, this court declines to follow this particular application of the Schuster factors.4 Nevertheless, the court recognizes that determining whether an organization has the requisite control over an individual, as a matter of law, will remain difficult. Indeed, each case must be decided on the specific facts and merits unique to it. For example, a personal submission to an organization, such as a vow of poverty, may not in every circumstance be an enforceable contractual obligation. See Order of St. Benedict v. Steinhauser, 234 U.S. 640, 648 (1914) (noting that a priest's obligation to an order pursuant to a vow "runs with his membership and the latter may be terminated at will"). Thus, a contractual legal duty cannot be the determinative standard. Nevertheless, such vows may be as morally binding to the individual as could be enforced under a legal duty. To address such varying situations, a court should determine whether the requisite dominion has been satisfied by looking to the member's own statements about his or her submission to the religious order, the conduct that would evidence the sincerity of those statements, and the religious order's own affirmative acts of control.

When the Schuster factors are applied to this case, the facts fail to persuade that the Church exercised sufficient dominion over Mr. Calkins to satisfy the control requirement. The court recognizes that he has taken a vow of poverty with the Church5 and claims to have assigned to it the approximately $60,000 per year he earns as a histotechnologist for Kaiser Permanente. Nevertheless, he is a Form W-2 employee and, prior to his becoming a Church minister, his employer had deposited his payroll checks into a personal account bearing Mr. Calkins' name. He controlled the funds and how he wanted them disbursed. After he became a minister, he continued to exercise that control by directing Kaiser Permanente to deposit his paychecks directly into a Church account. Significantly, he continues to receive employee benefits from Kaiser Permanente, including health care, sick leave, and vacation days, notwithstanding his claim to have assigned all his compensation to the Church. Furthermore, Mr. Calkins did not seek permission of the Church to apply for the job or its consent prior to accepting the position. Indeed, the Church played no role in his finding or continuing his employment with Kaiser Permanente, and there is no evidence that the Church exercises any direct control over the work that he performs for that employer. (Dkt. No. 27, 8-9.) There is no basis to conclude that Mr. Calkins does not continue to exercise control over his pay and if he chose to do so, could direct his employer to deposit his pay into his personal account.

Furthermore, despite the Church's "agency assignment" instructing Mr. Calkins, after he had already been working for some time in the same position, "to pursue work in histotechnology at Kaiser Permanente Medical Center, San Diego, CA," the court finds that such an assignment is legally illusory. (Dkt. No. 27, 13.) Read in practical terms, the agency assignment says little more than "keep doing what you're doing." In the end, there is no evidence that either the employment relationship with or the personal benefits to Mr. Calkins changed in any material way when he became a Church minister. Indeed, the Church's involvement in the employment relationship appears to serve no purpose but to support an argument that the income is not taxable to Mr. Calkins. All of these factors weigh substantially in favor of a conclusion that the income Mr. Calkins earned from his work for Kaiser Permanente accrued to him and not to the Church.

b. Ownership Rights Between the Member and the Religious Order

The second consideration is whether the taxpayer or the religious order has ownership or entitlement to the compensation at issue. Hartshorn argues that the Church has ownership or entitlement to Mr. Calkins' income because Mr. Calkins assigned his income to the Church by causing his paychecks to be deposited directly by Kaiser Permanente into a Church account. (Dkt. No. 32, 15.) The alleged "assignment" of income, however, begs the question. Under the anticipatory assignment of income doctrine, the fundamental issue is not whether the income was assigned, but rather who owns and controls the income generating asset itself. In this case that asset is Mr. Calkins' employment agreement with Kaiser Permanente.
It is undisputed that the Church was not a party to the original employment agreement. Further, there is no evidence that Kaiser Permanente accepted assignment by Mr. Calkins of his employment contract to the Church. This factor may nevertheless weigh in favor of Hartshorn should he be able to demonstrate that the Church had an interest in the employment contract. The Church may have such an interest if it could show that it were the primary provider of the service and that it provides that service through its members. There is, however, no evidence in this case to support such a conclusion.

In the alternative, Hartshorn may show that this factor weighs in his favor by proof that the Church was a third-party beneficiary of Calkins' employment contract. The Supreme Court of Utah has explained the requirement for proving a third-party beneficiary as follows:

Generally, the rights of a third-party beneficiary are determined by the intentions of the parties to the subject contract. Where it appears from the promise or the contracting situation that the parties intended that a third party receive a benefit, then the third party may enforce his rights in the courts and is deemed a donee beneficiary. Where, however, no intention to make a gift appears and performance of the promise satisfies or recognizes an actual or supposed duty of the promisee to the beneficiary, then the third party may still recover as a creditor beneficiary. But where any benefits to a person are incidental to the performance of the promise and such person is neither a donee nor a creditor beneficiary, he is a stranger to the promise and may assert no rights thereunder.

Tracy Collins Bank & Trust v. Dickamore, 652 P.2d 1314, 1315 (Utah 1982).
Applying the principles stated by the Utah Supreme Court, the court finds no evidence before it to support a conclusion that the Church was an intended third-party beneficiary under Mr. Calkins' employment agreement with Kaiser Permanente. The intent to be determined must be that of both contracting parties -- in this case Mr. Calkins and Kaiser Permanente. See Oxendine v. Overturf, 1999 UT 4, ¶ 14 (Utah 1999) ("The predominant inquiry in any third party beneficiary case is whether the contracting parties clearly intended the third party to receive a separate and distinct benefit from the contract."). Nothing in this record indicates that Kaiser Permanente intended to confer any benefit upon the Church. Indeed, the employment contract was consummated before Mr. Calkins began his affiliation with the Church. Nor is there evidence that suggests that the Church can be presumed to be a creditor beneficiary. Any benefit to the Church was purely incidental based upon a request by Mr. Calkins to which Kaiser Permanente had no objection. It is fair to infer that as long as Mr. Calkins did the required work, Kaiser Permanente was indifferent to what he did with his compensation. Accordingly, the Church is but "a stranger to the [employment contract] and may assert no rights thereunder."

In contrast, Mr. Calkins has received and continues to receive individual financial benefits from his services provided to Kaiser Permanente. He continues to receive health care, sick leave and vacation day benefits. These benefits by contract are owned by Mr. Calkins, are paid to Mr. Calkins, and enjoyed by Mr. Calkins. And, if Mr. Calkins were not granted these benefits under the terms of his employment agreement, he alone would have the right to seek relief against Kaiser Permanente. It is, therefore, apparent that the Church has no contractual right as a third-party beneficiary to Mr. Calkins' income at the moment it is earned. Therefore, as in Schuster, Mr. Calkins' "entitlement to the compensation [is] clearly superior to the Order's." 800 F.2d at 678. The second factor thus also weighs substantially in favor of the United States and against Hartshorn.

c. The Mission of the Order Compared to the Work Performed by the Member

The third and fourth prongs of the Schuster factors require the court to consider the mission of the order and the type of work conducted vis-à-vis that purpose or mission. The stated mission of the Church includes providing compassionate acts to others. Mr. Calkins' employment at Kaiser Permanente in providing healthcare is consistent with this mission. The fact that Mr. Calkins had been working in this same capacity prior to his calling as a minister does not change that conclusion. The third and fourth factors, therefore, weigh in favor of Hartshorn, but only slightly because there is no evidence that Mr. Calkins' motivations were directed or changed as a result of his becoming a minister in the Church.

d. The Dealings between the Member and the Third-Party Employer and Between the Employer and the Order.

The fifth and sixth Schuster factors require the court to consider the dealings between the member and the employer, and between the order and the employer. This factor includes a consideration of how the employee found the employment and the control or supervision exercised by the religious organization. As already noted in this case, the Church was not involved in Mr. Calkins' applying, interviewing or accepting his position at Kaiser Permanente. And as also previously noted, there is no evidence of any communication between the two entities directing Mr. Calkins' work in any legally significant way. Rather, the only role that the Church has ever had in the employment relationship was to instruct Mr. Calkins, after he professed to be a minister, to continue doing what he was doing, and then to accept deposit of his checks. Indeed, if this were a legitimate tax-avoidance structure, the court would expect to find some sort of legally binding relationship between Kaiser Permanente and the Church. None exists. This factor weighs in favor of the United States.

ii. Summary of the Schuster Factors

The court concludes that based upon the undisputed facts, the foregoing factors in the aggregate weigh substantially against Hartshorn as a matter of law. Despite the "skillfully devised" arrangement, the Church was not in any meaningful way involved in Mr. Calkins' employment with Kaiser Permanente. The Church did not participate in Mr. Calkins' obtaining his employment. The Church was not a party to the employment contract or a third-party beneficiary. The Church did not direct Mr. Calkins' work or have responsibility to provide others to perform the work should Mr. Calkins cease doing so. Although the work Mr. Calkins performed was consistent with the stated mission of the Church, he did not undertake that work in pursuit of his ministry. He merely continued to do what he had been doing before becoming a minister. The Church's only substantive connection to Mr. Calkins' employment was its acceptance of his pay check, an arrangement that Mr. Calkins could change at any time. The court, therefore, holds that based upon the facts presented on this motion, the services rendered to Kaiser Permanente by Mr. Calkins resulted in taxable income to Mr. Calkins. Thus, Hartshorn's statements that Mr. Calkin was exempt from certain tax obligations due to his relationship with the Church were false or fraudulent. Because the court has concluded that the United States has proven, as a matter of law, that Hartshorn's statements were false or fraudulent under the anticipatory assignment of income doctrine, the court need not decide if they also satisfy the requirements for nominee fraud.

C. Hartshorn Knew or Had Reason to Know that his Statements Were False or Fraudulent.

To prevail on summary judgment the government must prove, as a matter of law, that Hartshorn knew or should have known that his representations about the tax benefits of being a minister in the Church were false or fraudulent. (Dkt. No. 15, 15.) The government may satisfy this requirement by showing "what a reasonable person in the [defendant's] . . . subjective position would have discovered." Estate Pres. Servs., 202 F.3d at 1103. In making this determination, the court begins with the assumption that the "average citizen knows that the payment of income taxes is legally required." Schiff v. United States, 919 F.2d 830, 834 (2d Cir. 1990). Thus, in this case, the issue turns on whether Hartshorn knew or should have known that Mr. Calkins would have taxable income attributable to him notwithstanding Hartshorn's advice that by becoming a minister and following Church protocol, Mr. Calkins would be exempt from taxation. Hartshorn opposes summary judgment, arguing that he did not make false claims, did not give tax advice, and had no reason to know that his statements about the tax consequences of Church membership were false. (Dkt. No. 18, 65-66.) He asserts that various jurisdictions in which ministers serve have taken different positions on the status of the Church. He fails, however, to cite any support for this position. Id. Hartshorn further argues that the Church is not in violation of law, that he continues to practice his faith through his Church, and his belief in the religion has not changed. Id. The opposition misses the point. As noted initially, for purposes of this motion, the court assumes that the Church is legitimate and also assumes Hartshorn's expression of his religion is sincere. That is not at issue. The issue is whether Hartshorn had reason to know that his advice to other ministers that they could avoid tax on income they earned by assigning it to the Church was false or fraudulent.

The United States argues that notwithstanding his denials, Hartshorn is charged with knowledge of the fraudulent nature of his statements because similar tax avoidance theories have been consistently rejected by the courts and various I.R.S. rulings. (Dkt. No. 15, 15) citing United States v. White, 769 F.2d 511, 515 (8th Cir. 1985). Indeed, the I.R.S. has ruled:

t is a basic principle of Federal income tax law that an assignment or similar transfer of compensation for personal services to another individual or entity is ineffectual to relieve the taxpayer of Federal income tax liability on such compensation, regardless of the motivation behind the transfer. . . . n order for the employment of a member of a religious order to constitute the exercise of duties required by such order . . . the services performed in such employment must be of the type that are ordinarily the duties of members of the order and must be performed by the member as part of the duties that are required to be exercised for or on behalf of the religious order as its agent. . . . [Furthermore,] a religious order is not engaged in the performance of services as a principal where the legal relationship of employer and employee exists between the member and a third party with respect to the performance of such services. However, where a member of a religious order is directed to perform services for another agency of the supervising church, or an associated institution, the member will be considered an agent of the order.

Rev. Rul. 77-290, 1977-2 C.B. 26.
The court is satisfied that this regulation sufficiently explains the anticipatory assignment of income doctrine such that Hartshorn knew or should have known that his statements about the tax liabilities of the Church's ministers were either false or fraudulent. These rulings are publicly available on the I.R.S. website and were readily available to Hartshorn. Moreover, he has demonstrated his familiarity with tax laws and regulations and his ability to access those materials. Accordingly, the court finds that Hartshorn knew or should have known that the relevant statements he made were false, as a matter of law.

D. Hartshorn's Statements Were Material.

To be material, a statement must be such that it "would have a substantial impact on the decision-making process of a reasonably prudent investor and includes matters relevant to the availability of a tax benefit." United States v. Campbell, 897 F.2d 1317, 1320 (5th Cir. 1990) (citations omitted). In this case, it is undisputed that a number of ministers acted upon Hartshorn's advice by not filing tax returns for the years in which they had "assigned" their income to the Church. Indeed, is defies logic to believe that Hartshorn's advice would have been given were it not intended to impact "the decision-making process" of the Church's ministers in deciding whether to file their tax returns. In any event, given the potential penalties for not paying taxes, a "reasonably prudent investor" would need heavy assurances before risking I.R.S. assessments. Hartshorn provided these assurances through a persuasive, albeit flawed analysis of I.R.S. regulations. There is no evidence before the court to support even an inference that the Church's ministers generally, and Mr. Calkins specifically, would have avoided payment of income taxes on their own accord. (Dkt. No. 27, 25.) The evidence is sufficient for the court to conclude, as a matter of law, that the statements were material.

E. An Injunction is Necessary to Prevent Future Violations.

The government lists the following factors as appropriate for the court to consider in determining whether an injunction is necessary (Dkt. No. 15, 37):

(1) the gravity of the harm caused by the offense; (2) the extent of the defendant's participation; (3) the defendant's degree of scienter; (4) the isolated or recurrent nature of the infraction; (5) the defendant's recognition (or non-recognition) of his own culpability; and (6) the likelihood that defendant's occupation would place him in a position where future violations would be anticipated.

Estate Pres. Servs., 202 F.3d at 1105 (citations omitted).

Hartshorn acknowledges that these are the appropriate considerations. (Dkt. No. 32, 26.) The undisputed facts support that each of these elements has been satisfied and that an injunction is necessary in this case. The harm suffered by the United States is evident from the loss of tax revenue. The harm caused to the ministers is apparent from the risk they face for fines, penalties and other legal proceedings for failure to report and file tax returns. The failure of Hartshorn to advise ministers of at least the uncertainty of his tax position and the risk inherent in following his advice satisfies the scienter requirement. More importantly, it is evident from Hartshorn's position that he has not accepted that the advice he gave is misguided and that, absent an injunction, he will continue to advise ministers to not report their earnings to the I.R.S. For these reasons, the court concludes that an injunction is necessary and should be entered upon summary judgment.

II. A Permanent Injunction Under I.R.C. § 7408 Is Necessary.

Section 7408(b) of the Internal Revenue Code provides that the court "may enjoin [a] person from engaging in . . . activity subject to penalty under [the Internal Revenue Code]." Such conduct includes aiding and abetting the understatement of tax liability. The elements necessary to prove a violation include any person, "(1) who aids or assists in, procures, or advises with respect to, the preparation or presentation of any portion of a return, affidavit, claim, or other document; (2) who knows (or has reason to believe) that such portion will be used in connection with any material matter arising under the internal revenue laws, and (3) who knows that such portion (if so used) would result in an understatement of the liability for tax of another person." I.R.C. § 6701. From the discussion in prior sections, it is clear that all three requirements have been met in this case.

III. A Permanent Injunction Under I.R.C. § 7402 Will Not Issue.

The government also requests injunctive relief under § 7402 to prevent Defendant from "continuing to interfere with tax enforcement." (Dkt. No. 15, 21.) In addition, the government asks the court to order Defendant to take other affirmative action, including providing names and addresses of ministers who may have relied upon Hartshorn's advice. Under I.R.C. § 7402, this court is authorized to issue an injunction "as may be necessary or appropriate for the enforcement of the internal revenue laws." Indeed, this authorization is broad, permitting the court to "enjoin interference with tax enforcement even when such interference does not violate any particular tax statute." United States v. Ernst & Whinney, 735 F.2d 1296, 1300 (11th Cir. 1984).

Notwithstanding this broad authority, the court at this point denies the relief requested under § 7402. Hartshorn, by this ruling, is now on notice that the income obtained through the services rendered by Mr. Calkins to Kaiser Permanente is taxable to Mr. Calkins. Whether the facts of other particular ministers may support a different conclusion remains unresolved. Their particular circumstances may meet the Internal Revenue Code requirements necessary to avoid tax liability. Those circumstance, however, would have to be substantially different than the facts presented by Mr. Calkins and others presented by the United States in support of this motion.

The court will not, however, grant an injunction under § 7402 at this time absent additional evidence that, after this decision, Hartshorn continues to promote the same tax avoidance arrangement that is addressed in this decision. The court concludes that the present record is inadequate for the court to find that the injunction requested by the United States is necessary to "prevent Hartshorn from continuing to disrupt the federal tax system." Such an assertion is simply too broad to have persuasive effect. (Dkt. No. 15, 22.) It should be clear to Hartshorn, however, that he now has notice of the law and that if he continues his actions or attempts to cleverly distinguish future actions from the particulars of the violative conduct discussed in this memorandum decision and order, the court will not be sympathetic. It would also be appropriate for Hartshorn to undertake all necessary actions to correct any advice he has given to other ministers and to assure that the Church's directions and instructional manuals are consistent with this decision. Should he fail to take such actions, the court will entertain a request by the United States for further relief.

CONCLUSION

For the foregoing reasons, the government's motion for summary judgment is GRANTED in part and DENIED in part. On or before March 15, 2012, the government shall submit a proposed form of order granting the injunction and describing with detail the conduct that is to be prohibited. Any objection Hartshorn may have to the proposed form of the order shall be submitted on or before March 22, 2012.
DATED this 9th day of March, 2012.

By the Court:

Clark Waddoups
United States District Judge

FOOTNOTES

1 Defendant cites one case in his opposition, United States v. Raymond, for the proposition that "section 6700 is aimed at tax scam plans sold off to individuals . . . rather than the religious organization here." (Dkt. No. 18, 54) citing 228 F.3d 804, 811 (7th Cir. 2000). But this case makes no such differentiation. Indeed, neither the word "religion" nor "church" can be found anywhere in the opinion.

2 The government argues that there are two approaches. Given that Pollard (cited by the government as the majority approach) cites Fogarty for its own support (which is also cited by the government as the minority approach), this distinction is not so clear. This court views them as one and the same, only with slightly different emphases or applications.

3 The court notes that under this stricter standard, Defendant would fail outright. Although Defendant argues that "[t]he Church does have a contract with each ministers' secular employers," (Dkt. No. 18, 65) Defendant has not directed the court to such an employment contract between the Church and Kaiser Permanente. Without such evidence at this stage in the litigation, such a bald proffer fails.

4 It is unknown whether the nun's ability to leave her order was dispositive to the court's decision in Schuster, but it is ultimately unimportant for purposes of this case. What is clear to the court is that Mr. Calkins falls so short of the factors under the anticipatory assignment of income doctrine, that even if the nun in Shuster were found not to have had taxable income, such a finding would have no bearing on this court's decision in this matter.

5 Because Mr. Calkins suffices as an example of this prong, an analysis of other ministers is unneeded.

Omne · Post by **Omne** » Mon Mar 19, 2012 11:34 pm

Except for the debit card this is a word for word retread of the Basic Bible Church started by Jerome Daly back in the early 70s. It didn't work then either.

Truly nothing new under the sun....

Post by **LPC** » Wed Jun 04, 2014 1:00 pm

Affirmed by the 10th Circuit. Biggest surprise is that he got a lawyer (from Boston?) to take the appeal.

United States v. Kevin Hartshorn, No. 12-4104 (10th Cir. 6/2/2014)

UNITED STATES OF AMERICA,
Plaintiff - Appellee,
v.
KEVIN HARTSHORN,
CONDUCTING BUSINESS THROUGH THE CHURCH OF COMPASSIONATE SERVICE,
Defendant - Appellant.

June 2, 2014

UNITED STATES COURT OF APPEALS
TENTH CIRCUIT

APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF UTAH

John J.E. Markham, II, of Markham & Read, Boston, Massachusetts, for Defendant -- Appellant.

Regina S. Moriarty, Attorney, Tax Division, Department of Justice, Washington, D.C. (David Barlow, United States Attorney, Salt Lake City, Utah, of Counsel; Kathryn Keneally, Assistant Attorney General, and Teresa E. McLaughlin, Attorney, Tax Division, Department of Justice, Washington D.C., with her on the brief) for Plaintiff -- Appellee.

Before KELLY, McKAY, and O'BRIEN, Circuit Judges.

McKAY, Circuit Judge.

Defendant Kevin Hartshorn appeals the district court's issuance of an injunction against him under 26 U.S.C. § 7408, arguing the court erred in concluding he promoted an abusive tax shelter in violation of 26 U.S.C. § 6700. The district court agreed with the government that Defendant was promoting abusive tax shelters through his church, the Church of Compassionate Service, and particularly through his representations that individuals who took vows of poverty and obedience and became ministers of his church would not be required to pay taxes on income they earned and assigned to the church. The court accordingly granted summary judgment in favor of the government and issued an injunction prohibiting Defendant from promoting or selling "the use of church-based tax-fraud schemes." (Appellant's App. at 1140.) On appeal, Defendant contends we should reverse the district court's summary judgment decision because (1) Defendant's statements regarding the tax benefits for vow-of-poverty ministers were correct, and (2) if any of his statements were false or fraudulent, he did not know or have reason to know of this fact.

BACKGROUND

Defendant organized and was appointed head minister of the Church of Compassionate Service in 2004. At the time of the proceedings below, the church had approximately fifty active ministers.[1] To become a minister, an individual is required to take a vow of obedience and a vow of poverty. Upon taking the vow of poverty, ministers transfer title to all of their property to the church. They also assign to the church all income that is earned as part of their normal employment, either endorsing their employment checks in favor of the church or directing their employers to deposit their earnings directly into various church accounts. The ministers' homes, now owned by the church, are designated as parsonages, and their mortgages and other expenses are paid for with church funds. The church issues ministers a debit card on an individual church account, and each minister's family submits a regular "Request for Ministry Funding" to fund their ministry bank accounts.[2] (See id. at 606, 756-61.) While the church formally maintains the right to refuse payment of these requests, Defendant presented no evidence of any particular request that was refused. According to internal church documents, "10% will be withheld on all funds flowing through the Order, with 90% being available for local ministry funding." (Id. at 240.) Defendant testified that the church's "policy [of trying] to make 90 percent available to fund ministries for their compassionate service projects [is] not tied to how much money they make." (Id. at 153.) However, ministers who were deposed in the course of this litigation indicated that it was their understanding they would "get back 90 percent of whatever funds [they] generate[d] for the church." (Id. at 109; see also id. at 124.)

As the head minister of the Church of Compassionate Service, Defendant has assisted individuals in executing vows of poverty and transferring their property to the church, and he has made representations to them about the tax consequences of doing so. He has told ministers they need not pay taxes on money they earn that is assigned to the church pursuant to a vow of poverty. The Minister's Handbook, which Defendant drafted, states:

When ministers of the [Compassionate] Order [of Service] take the Vow of Poverty, even the IRS recognizes that they have no income and that any income that they would receive belongs to the religious order. If a minister under a Vow of Poverty has no income, nor assets, then it would be futile for someone to sue them. If a minister has no income, then there is no income tax.
(Id. at 563.) In a section covering "Speaking to Government Authorities," the Minister's Handbook states the government officials "may ask technical legal questions" that should be referred to church authorities rather than answered by individual ministers. (Id. at 592.) Ministers are "directed" "not [to] chat or discuss anything," "not [to] volunteer any information or provide them with any information," and "not [to] invite them into the parsonage." (Id. at 593.) The Minister's Handbook also contains a table of "Church Vocabulary" for ministers to use in speaking with others, using, for instance, the phrase "Church/Order funds" instead of "Income," the phrase "By assignment, as a Vow of Poverty Minister" instead of "My Business/My job," and the phrase "the assigned boat for use by the ministry" instead of "My Boat." (Id. at 590.)

In support of its motion for summary judgment, the government provided details about various church ministers but relied mainly on one individual, a minister named Bruce Calkins. On appeal, we likewise focus on Mr. Calkins' situation. As part of the process of applying to become a church minister, Mr. Calkins filled out an information sheet in which he provided Defendant with information about his job, employer, average income, net worth, bank accounts, and past financial history. The information sheet included a section asking for the "Company(s) you are involved with and position(s) you hold: (Please include ALL income-producing activities)." (Id. at 218.) Mr. Calkins filled out this section with the following information: "Kaiser Permanente Medical Center, San Diego, CA: Histotechnologist[;] USANA Health Sciences, Salt Lake City, UT: Independent Associate/Distributor of nutritional supplements and skin care products. (network marketing business)." (Id.) Mr. Calkins was accepted as a minister and issued written vows of obedience and poverty, which he signed. He was also issued an "Agency Assignment" that essentially instructed him to continue doing what he was already doing:

[T]o enable you to fulfill your responsibilities as agent of the Order, you are hereby instructed to pursue work in histotechnology at Kaiser Permanente Medical Center, San Diego, CA as a Histotechnologist and as an Independent Associate/Distributor of nutritional supplements and skin care products produced by USANA Health Sciences . . . for the financial support of the Order. Further, funds generated from the results of your labors are not to be construed as income or financial gain to you personally, yet will be the financial blessings of the Compassionate Order of Service.
(Id. at 225.)

After becoming a minister, Mr. Calkins assigned his pay from Kaiser Permanente to the church and directed that his paycheck be deposited directly into a church account. Mr. Calkins continues to receive employee benefits from Kaiser Permanente, including health care, sick leave, and vacation days. Mr. Calkins testified that the church does not exercise any control over the work he performs for Kaiser Permanente; rather, his work is directed by Kaiser Permanente employees. He testified that roughly ninety percent of the money he earns and turns over to the church is available "to provide for expenses of [his] ministry" (id. at 107) and there "hasn't been an issue" with him being unable to buy something he wanted after taking his vow of poverty (id. at 106). Mr. Calkins last filed a federal income tax return in 2000.

Taking the facts in the light most favorable to Defendant, the district court concluded that Mr. Calkins' employment with Kaiser Permanente resulted in taxable income. The court accordingly concluded that Defendant made false or fraudulent statements when he told Mr. Calkins he was exempt from income tax obligations due to his relationship with the church. The court also concluded that Defendant knew or should have known of the falsity of his statements, given the fact that similar tax avoidance theories have been consistently rejected by the Internal Revenue Service and federal courts. The court further concluded Defendant's false or fraudulent statements were material and an injunction was necessary to prevent the recurrence of this conduct, and the court accordingly granted the government's motion for summary judgment as to the necessity of an injunction under 26 U.S.C. § 7408.3 The court then issued an injunction prohibiting Defendant from promoting or selling "the use of church-based tax-fraud schemes." (Id. at 1140.) On appeal, Defendant challenges the district court's legal conclusion that an injunction was necessary but does not otherwise challenge the scope of injunctive relief ordered by the district court. Specifically, Defendant raises two arguments regarding the district court's summary judgment order: he argues (1) his statements to Mr. Calkins and other ministers were not false or fraudulent and (2) even if they were, he did not know or have reason to know of this fact.

DISCUSSION

While we typically "review a district court's grant of an injunction for abuse of discretion," "[w]e review de novo a summary judgment which serves as a basis for an injunction." Law v. Nat'l Collegiate Athletic Ass'n, 134 F.3d 1010, 1016 (10th Cir. 1998).

For injunctive relief to be warranted under § 7408, the government was required to prove by a preponderance of the evidence that (1) Defendant organized an entity, plan, or arrangement; (2) he made false or fraudulent statements concerning the tax benefits to be derived from the entity, plan, or arrangement; (3) he knew or had reason to know that the statements were false or fraudulent; (4) the false or fraudulent statements pertained to a material matter; and (5) an injunction was necessary to prevent recurrence of this conduct. See United States v. Estate Pres. Servs., 202 F.3d 1093, 1098 (9th Cir. 2000). In this appeal, the only elements in dispute are the second and third elements -- whether Defendant's statements about the tax benefits relating to vow-of-poverty ministers were false or fraudulent, and whether Defendant knew or had reason to know of this fact. Thus, the main question we must decide in this case is whether Church of Compassionate Service ministers like Mr. Calkins are required to pay federal income taxes on income they earn in normal employment and assign to the Church of Compassionate Service.

To resolve this question, we must first consider whether a minister's income is tax exempt only if he receives it as an agent of the church or whether, as Defendant argues, it is sufficient that a minister assigns earnings to his church pursuant to a vow of poverty. All of the circuit courts that have considered this issue have concluded a minister must earn income as an agent of his church in order for his earnings to be tax exempt. See, e.g., Page v. Comm'r, 823 F.2d 1263, 1270-71 (8th Cir. 1987); Schuster v. Comm'r, 800 F.2d 672, 676-78 (7th Cir. 1986); Pollard v. Comm'r, 786 F.2d 1063, 1065-66 (11th Cir. 1986); Fogarty v. United States, 780 F.2d 1005, 1012 (Fed. Cir. 1986); Mone v. Comm'r, 774 F.2d 570, 573-74 (2d Cir. 1985); see also In re Von Kiel, 461 B.R. 323, 333 (Bankr. E.D. Penn. 2012) (collecting cases and noting that "[a]ll eight Courts of Appeal . . . to have addressed the issue are in agreement: Attempts to avoid personal tax liability based on vows of poverty without proof that some agency relationship exists between the entity providing the wages and the church or religious order requiring the vow of poverty are simply unavailing"). As the Eighth Circuit has explained:

A basic principle of tax law is that income is taxable to the one who earns it. It is likewise basic that a taxpayer is not relieved of his obligation to pay income tax on any income he earns when he transfers it or assigns it to another person or entity. If, however, one receives income as an agent for a principal, it is the income of the principal and not that of the agent. Specifically, if a member of a religious order earns income as an agent of and on behalf of the order, and gives that money to the order pursuant to his vow of poverty, that sum becomes income to the order and the individual is not taxed on it. Conversely, if a member of a religious order earns income in his individual capacity and gives the money to the order pursuant to his vow of poverty, that sum is income to him and is subject to federal income tax.
Page, 823 F.2d at 1270 (citations omitted).

Notwithstanding this weight of authority, Defendant argues an agency relationship is not required based on an IRS publication and a few regulations from Title 26, Part 31 of the Code of Federal Regulations. The publication he cites, IRS Publication 517, provides:

Earnings -- Members of Religious Orders

Your earnings may be exempt from both income tax and [self-employment] tax if you are a member of a religious order who:

Has taken a vow of poverty,
Receives earnings for services performed as an agent of the order and in the exercise of duties required by the order, and
Renounces the earnings and gives them to the order.
IRS Pub. No. 517, Social Security and Other Information for Members of the Clergy and Religious Workers (2012),4 at 9 (emphasis added). This publication is thus in accordance with the courts' rulings -- it provides tax-exempt status to a minister's earnings only when the minister earns the income as an agent of the church and not in his individual capacity. As for the federal regulations Defendant relies on, 26 C.F.R. §§ 31.3121(b)(8)-1 and 31.3401(a)(9)-1, these regulations do not define the federal income tax rules for a minister's earnings. Rather, 26 C.F.R. § 31.3121(b)(8)-1 relates only to employee and employer taxes under the Federal Insurance Contributions Act -- i.e., Social Security and Medicare taxes. See 26 C.F.R. § 31.0-3(a). And 26 C.F.R. § 31.3401(a)(9)-1 only defines the types of earnings that are "excepted from wages" and thus not subject to withholding at the source under 26 U.S.C. § 3402. See 26 C.F.R. § 31.3401(a)(9)-1(a).[5] As explained in more detail in IRS Publication 517, a minister's earnings may be subject to special rules, depending on various circumstances that are not pertinent to this appeal. Thus, for instance, in some circumstances a minister's earnings may be covered under the Self-Employment Contributions Act rather than FICA, or a minister may be required to make estimated income tax payments throughout the year because his salary is not withheld at the source. However, regardless of whether or not an agency relationship is required to trigger the regulations cited by Defendant, these regulations do nothing to change the general rule that a minister's earnings are only tax exempt if (1) the minister has taken a vow of poverty, (2) the minister acts as an agent of the church and in the exercise of duties required by the church, and (3) the minister renounces the earnings and gives them to the church.

Although our sister circuits all agree it is necessary for a minister to act as an agent of the church for his earnings to be tax-exempt, they have applied different tests to determine when this agency requirement is satisfied. Some courts require taxpayers to "show that a contractual relationship existed between their secular employers and the religious order," Mone, 774 F.2d at 573, while others apply a more flexible test that views a contractual relationship as only one factor in determining whether there is an agency relationship, see Fogarty, 780 F.2d at 1012. We conclude the flexible approach is most appropriate. Under this approach, courts may consider various factors pertinent to the relationships between the religious order and the minister, between the minister and the third-party employer, and between the employer and the order. See Fogarty, 780 F.2d at 1012 (explaining that relevant factors may include "the degree of control exercised by the order over the member"; "ownership rights between member and order"; "the purposes or mission of the order, and the type of work performed by the member vis-a-vis those purposes or mission"; "dealings between the member and the third-party employer," including "circumstances surrounding job inquiries and interviews, and control or supervision exercised by the employer"; and "dealings between the employer and order," including the possible existence of a contractual arrangement between the third-party employer and the order). Because this approach is flexible, "[t]he presence of unique facts in each case will inevitably lead the court to place more emphasis on one or more factors and less on others." Id.6

Applying this flexible test to Mr. Calkins' employment with Kaiser Permanente, we first conclude the relationship between the church and Mr. Calkins provides little evidence to support the conclusion that Mr. Calkins acted as an agent of the church in this employment. Without providing any specifics, Defendant testified he "direct[ed]" Mr. Calkins "n his agency assignment and in our meetings together dealing with his ministry and the needs of the ministry, where he's at, how are things going." (Appellant's App. at 158.) However, with the exception of Mr. Calkins asking Kaiser Permanente to transmit his earnings to a church account instead of a personal account, there is no evidence that Mr. Calkins took any particular actions -- much less actions relating to his employment with Kaiser Permanente -- as a result of his relationship with the church. In arguing that we should treat Mr. Calkins as an agent of the church in his employment with Kaiser Permanente, Defendant contends we should give conclusive weight to the purported "agency assignment" the church issued to Mr. Calkins. However, this document bears little, if any, persuasive weight. As a comparison with Mr. Calkins' pre-acceptance information sheet makes clear, the agency assignment simply directed Mr. Calkins to continue in his present employment, and nothing in the record suggests the agency assignment should be treated as anything other than illusory. See Page, 823 F.2d at 1270-71 (rejecting argument that ministers were agents of their church because they were directed to secure secular employment: "even though appellants were meticulous in organizing and operating their churches, giving rise to the appearance that their religious doctrine required them to obtain secular employment, and they did not control the money purportedly turned over to the churches, the fact remains that appellants have failed to meet the agency standard").

Nor does Mr. Calkins' relationship with the third-party employer weigh in favor of finding him to be acting as an agent of the church. Mr. Calkins was already employed by Kaiser Permanente when he became a minister of the church, and there is no evidence that anything about his employment -- with the sole exception of the payee on his employment checks -- changed as a result of his ministry. Mr. Calkins' testimony reflects that he simply continued as usual with his employment with Kaiser Permanente and that the church has never exercised any control over the work he performed there. Rather, his work at Kaiser Permanente is directed by Kaiser Permanente employees -- the "senior or lead tech" who "does the daily scheduling," an administrative supervisor, and the pathologist. (Appellant's App. at 107); see also Fogarty, 780 F.2d at 1012 (noting that factors relevant to the dealings between the member and the third-party employer include "circumstances surrounding job inquiries and interviews, and control or supervision exercised by the employer").

Finally, the relationship between the church and Kaiser Permanente does not support the conclusion that Mr. Calkins was acting as the church's agent. At Mr. Calkins' direction, Kaiser Permanente deposited Mr. Calkins' earnings into a church-owned account, but there otherwise were absolutely no dealings between the church and the third-party employer. Cf. Schuster, 800 F.2d at 682 (Korner, J., dissenting) (arguing that a nun should have been treated as an agent for her religious order where, among other things, the order "was intimately involved in negotiating for and approving [her] job" with a health clinic).

Considering all of these factors as a whole, we are persuaded that Mr. Calkins was not acting as an agent of the church in his employment with Kaiser Permanente. We accordingly agree with the district court that Defendant's representations to Mr. Calkins regarding the tax consequences of becoming a minister of the church were false or fraudulent.

We turn then to the question of whether Defendant knew or should have known his representations were false or fraudulent. Defendant argues he reasonably relied on the IRS publication and regulations discussed above to determine that vow-of-poverty ministers of the Church of Compassionate Service did not have to pay income taxes on earnings they assigned to the church. Defendant dismisses as inapposite all of the circuit court cases holding that a true agency relationship is required for a minister's earnings to be tax exempt, arguing that (1) these cases involved obvious shams and (2) the ministers in those cases had more control over their wages because, unlike Mr. Calkins, they received employment checks and then turned them over to their respective religious orders, rather than requesting that their salaries be paid directly into church accounts.

We find none of these arguments persuasive. The test for injunctive relief under § 7408 is satisfied if the defendant had reason to know his statements were false or fraudulent, regardless of what he actually knew or believed. See Estate Pres. Servs., 202 F.3d at 1098; see also 26 U.S.C. § 6700(a)(2)(A). And we conclude that, whether or not Defendant actually knew his purported interpretation of federal tax law was incorrect, "a reasonable person in [his] subjective position would have discovered" the falsity of his representations. Estate Pres. Servs., 202 F.3d at 1103 (internal quotation marks and alterations omitted).

As discussed above, the IRS publication Defendant relies on is actually in accordance with the pertinent case law, while the regulations he cites do not address the question of when a minister's earnings will be exempted from federal income tax requirements. Defendant's attempt to distinguish the pertinent cases is likewise unavailing. First, while some of the relevant cases involve obvious shams, others do not. See, e.g., Fogarty, 780 F.2d at 1007, 1013 (holding a Jesuit priest was required to pay income taxes on the salary he received for teaching religious courses at a university); Schuster, 800 F.2d at 676-79 (holding a Roman Catholic nun was required to pay income taxes on wages she earned at a health clinic). Even legitimate ministers' earnings are subject to federal income taxes if the minister was acting in his individual capacity, rather than as an agent of the church. See Pollard, 786 F.2d at 1066 ("[T]he . . . Church's religious bona fides are irrelevant -- it is the purported assignment of income here that is a 'sham,' and for tax rather than religious reasons."). Second, we conclude that a reasonable person in Defendant's situation would not believe Mr. Calkins' direction for his employer to deposit his salary into church accounts was effective to exempt his earnings from taxation. Under the anticipatory assignment of income doctrine, when income is assigned to a third party before the moment of receipt, the income is still considered earned by the assignor if he "retains dominion over the income-generating asset." Comm'r v. Banks, 543 U.S. 426, 434 (2005). And here, Mr. Calkins retained control over the income-generating asset because he had the unfettered ability to direct Kaiser Permanente to deposit his salary into his own account instead of the church's.[7] Defendant suggests Mr. Calkins did not actually have control over the disposition of his salary because he could only stop the assignment of income to his church if he decided to ignore his vow of poverty. However, the ministers in other cases who received a salary and then assigned it to their respective religious orders would likewise have needed to ignore their vows of poverty in order to keep the money. Thus, Defendant has not cited to a meaningful distinction between Mr. Calkins' situation and other cases in which ministers have been required to pay income taxes on their earnings. Based on all of these pertinent cases, as well as the relevant IRS rulings and publications, we conclude a reasonable person in Defendant's position would know that his representations regarding the tax consequences of Mr. Calkins' actions were false.

CONCLUSION

For the foregoing reasons, we conclude that Defendant made false representations to Mr. Calkins about the tax consequences of his actions and that he knew or should have known of the falsity of his representations. Defendant does not challenge the other elements for injunctive relief under § 7408. We accordingly AFFIRM the district court's summary judgment ruling and order of injunctive relief.

12-4104, U.S. v. Hartshorn

O'BRIEN, J. concurring in the result and, in part, concurring in the opinion.

Without qualification I concur in the result. I concur in the opinion in all respects but one. I part company with the majority as to the appropriate test for determining an agency relationship. The majority has chosen the flexible approach espoused by Fogarty v. United States, 780 F.2d 1005 (Fed. Cir. 1986); accord Schuster v. Comm'r, 800 F.2d 672, 678 (7th Cir. 1986). The Fogarty approach is insufficiently rigorous because it facilitates the manipulations of charlatans and tax evaders.

The rule announced by the Second Circuit in Mone v. Comm'r, 774 F.2d 570, 573 (2d Cir. 1985) is far superior:

To prove assignment of income on an agency theory, the taxpayers bear a double burden: they must show that a contractual relationship existed between their secular employers and the religious order, and that the religious order controlled or restricted the taxpayers' use of the money purportedly turned over to the order. See Stephenson v. Commissioner, 79 T.C. 995, 1001 (1982), aff'd per curiam, 748 F.2d 331 (6th Cir.1984); White v. Commissioner, 41 T.C.M. (CCH) 1180, 1183 (1981); Kelley v. Commissioner, 62 T.C. 131 (1974).

See also Page v. Comm'r, 823 F.2d 1263, 1270-71 (8th Cir. 1987) (adopting the Mone test).

Paying income taxes is a statutory duty; some also consider it a civic duty. Few gladly pay, but most faithfully do. Faithful compliance is tested, sometimes beyond elastic limits, by the siren's song of the unscrupulous -- pay 10% of your income to the "church" and completely avoid the much higher extractions demanded by the taxman AND do so without changing your life circumstances in any significant manner. Sounds great! To the unprincipled or the naïve, it is precisely what the doctor ordered. It is also illegal.

The Mone approach to recognizing a claimed agency agreement requires an explicit agreement between the "minister" and the "church." Properly done, and preferably in writing, the agreement would clearly set forth the correlative rights and duties of the contracting parties, narrowing wriggle room for the charlatans and foreclosing the "I didn't know" or "nobody told me" excuses of the conveniently ignorant. Strict standards facilitate the collection of taxes properly due without significantly burdening legitimate agency agreements.

The Mone approach to enforceability of such agreements should be extended by also requiring an explicit agreement, preferably written, between the "church" and the "minister's" employer detailing its particulars. At a minimum it would, of necessity, make clear that the "church," rather than the employee, would be responsible for negotiating the employee's assignments, pay, benefits, opportunity for advancements, and other conditions of employment. It would also make clear that the employment agreement could be terminated or changed only by agreement between the "church" and the employer.

FOOTNOTES

1 It is not clear from the record whether the church has any lay members.

2 An individual who did administrative work for the church testified that "a ministry usually consists of a couple people, a husband and wife and/or a family would be involved with ministry work in general." (Id. at 177.) Thus, the church's approximately fifty ministers were organized into approximately thirty-four ministries. (Id.) According to the evidence in the record, when a married couple submitted ministry funding requests for their family's ministry, they submitted a single form requesting funding for accounts in each minister's name.

3 The court rejected the government's request for additional injunctive relief under 26 U.S.C. § 7402, holding that it would entertain such a request only if Defendant continued to promote the same tax avoidance arrangement following the court's decision. The court's denial of an injunction under § 7402 is not at issue in this appeal.

4 This publication existed in much the same format when Defendant organized the church in 2004.

5 Defendant contends that if a minister's earnings are not considered "wages" under 26 C.F.R. § 31.3401(a)(9)-1, they cannot be considered "income" for federal income tax purposes, since they do not fall under any of the other specific types of income mentioned in 26 C.F.R. § 1.61-2(a). We find this argument unpersuasive. First, we note that Section 31.3401(a)(9)-1 only describes when a minister's earnings will be "excepted from wages" for purposes of withholding requirements, not for all taxation purposes. Second, it is clear that "[g]ross income means all income from whatever source derived, unless excluded by law. . . . Section 61 lists the more common items of gross income for purposes of illustration. . . . Gross income, however, is not limited to the items so enumerated." 26 C.F.R. § 1.61-1(a).

6 We note that Fogarty and other cases applying the flexible test, most notably the Seventh Circuit's decision in Schuster, have been criticized for disregarding facts favorable to the minister and for applying a narrow definition of agency that sweeps up bona fide vow-of-poverty ministers along with bogus ones. See, e.g., J. Timothy Phillips, But Reverend, Why Does Your Baptismal Font Have a Diving Board? Equitable Treatment for Vows of Poverty Under the Federal Income Tax, 44 Wash. & Lee L. Rev.19, 40-41 (1987); Wanda F. Reed, Revenue Ruling 77-290 -- Recent Interpretations of Agency Law Inequitably Taxes Members of Religious Orders, 23 Val. U. L. Rev. 179,199-203 (1988). Although we apply the more flexible Fogarty test here, we do not necessarily endorse our sister circuits' application of this test to the facts in the cases before them.

7 Defendant appears to argue that the anticipatory assignment of income doctrine should be inapplicable to cases involving vow-of-poverty ministers. Since ministers cannot be forced to adhere to religious vows, he argues, then a minister will always have the legal right to renounce his vow of poverty and begin keeping his money for himself, and thus "no Vow of Poverty arrangement would ever work" if the anticipatory assignment of income doctrine is applied. (Appellant's Reply Br. at 15.) However, the anticipatory assignment of income doctrine does not hold that a minister's earnings are always taxable if the minister has the ultimate power to change his employment or financial arrangements. If a minister actually earns money as an agent of his church, these earnings will be tax-exempt regardless of whether the earnings are directly given to the church or are signed over by the minister. Where, however, a minister earns income in his individual capacity, the anticipatory assignment of income doctrine prevents him from avoiding the tax liability he would otherwise incur by preemptively assigning the income to the religious order before he receives it. In other words, this doctrine targets individuals' attempts to avoid tax liability by bookkeeping arrangements; it does not alter existing tax rules establishing when earnings will be tax-exempt.

END OF FOOTNOTES

Post by **The Observer** » Thu Nov 05, 2015 4:01 pm

And Hartshorn's "disciple" pays the price of selecting a counsel with conflict of interest issues:

UNITED STATES OF AMERICA,
Plaintiff-Appellee
v.
TIMOTHY DALE JACKSON,
Defendant-Appellant

Release Date: NOVEMBER 04, 2015

IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT

Appeal from the United States District Court
for the Southern District of Mississippi

Before OWEN, GRAVES, and HIGGINSON, Circuit Judges.

JAMES E. GRAVES, JR., Circuit Judge:

Timothy Dale Jackson appeals his conviction for income tax evasion and corrupt interference with the administration of Internal Revenue laws claiming deprivation of the Sixth Amendment right to counsel of choice. Because the district court did not abuse its discretion when it disqualified Jackson's counsel of choice for non-waivable conflicts of interest, we AFFIRM.

FACTS AND PROCEDURAL BACKGROUND

Timothy Dale Jackson engaged in a tax-avoidance scheme promoted by the Church of Compassionate Service and its senior minister, Kevin Hartshorn. As part of the scheme, Jackson became a minister of the Church, held himself out to have taken a vow-of-poverty, and transferred all assets and assigned future income to the Church. Jackson then claimed, according to Hartshorn's interpretation of the IRS's vow-of-poverty regulations, exemption from federal income taxation. Despite the vow of poverty, Jackson maintained possession of his assets and received 90% of his income back from the Church to pay for personal expenses such as mortgages, vehicles, food, horses, school tuition, and clothing. Hartshorn and the other ministers of the Church did the same.

After coming under IRS investigation, Jackson retained John J.E. Markham, II as counsel. Jackson retained Markham because he was at the time, or had previously, represented Hartshorn, the Church as an entity, and other ministers of the Church in similar investigations. 1 Markham represented Jackson throughout the investigation and, upon Jackson's indictment, was admitted pro hac vice to represent him during trial.

The government moved to disqualify Markham as Jackson's counsel because of two situations creating conflicts of interest. First, Markham's representation of Hartshorn and other participants of the tax-avoidance scheme, whom the government intended to call as witnesses during trial, would require Markham to cross-examine current or former clients, resulting in divided loyalties. Second, Markham's borrowing of money from the Church, which was later repaid, and his fee to represent Jackson was to be paid with Church funds controlled by Hartshorn (meaning Hartshorn would have ultimate control over whether or how much Jackson's attorney was paid). This created, according to the government, actual conflicts of interest or, at a minimum, the potential for conflicts of interest to arise during trial.

Jackson opposed disqualification, stating that Jackson and Hartshorn were aware of the conflicts, retained separate counsel to review issues that may arise because of the conflicts, and knowingly and voluntarily waived all conflicts. Jackson further asserted that Hartshorn's interests were completely aligned with his own, even if Hartshorn was called as a government witness, because Hartshorn's testimony would be that he advised Jackson that IRS regulations exempted Jackson from federal income taxes because of his role as a minister for the Church. 2

The district court assumed the waivers were valid, but found the conflicts of interest to be non-waivable and disqualified Markham. Following trial, Jackson was convicted of four counts of income tax evasion and one count of corrupt interference with the administration of Internal Revenue laws. Jackson now requests his conviction be vacated and the case be remanded for retrial because the disqualification of Markham deprived him of the Sixth Amendment's right to counsel of choice.

DISCUSSION

We review the disqualification of counsel because of conflict of interest for abuse of discretion. United States v. Sanchez Guerrero, 546 F.3d 328, 332-33 (5th Cir. 2008). Review for abuse of discretion is deferential. United States v. Anderson, 755 F.3d 782, 800 (5th Cir. 2014). An abuse of discretion occurs if the district court: "(1) relies on clearly erroneous factual findings; (2) relies on erroneous conclusions of law; or (3) misapplies the law to the facts." Love v. Tyson Foods, Inc., 677 F.3d 258, 262 (5th Cir. 2012) (internal quotation marks and citation omitted). The district court is therefore "allowed substantial latitude in refusing waivers of conflicts of interest" for an actual conflict of interest or a serious potential conflict that may arise during trial. Wheat v. United States, 486 U.S. 153, 163 (1988).

I.

The Sixth Amendment grants criminal defendants the right to "assistance of counsel for [their] defense." U.S. CONST. amend VI. Assistance of counsel includes the right to select an attorney of one's choosing. United States v. Gharbi, 510 F.3d 550, 553 (5th Cir. 2007) (citing Powell v. Alabama,287 U.S. 45, 53 (1932)). This right, however, is not absolute. Wheat, 486 U.S. at 159. Rather, the right to counsel of choice is limited if that counsel has an actual conflict of interest or a serious potential conflict of interest that may arise during trial. United States v. Sotelo, 97 F.3d 782, 791 (5th Cir. 1996). Therefore, while we recognize a presumption that a defendant is entitled to counsel of choice, that presumption may be rebutted by a showing of actual or potential conflicts of interest. Wheat, 486 U.S. at 164; Gharbi, 510 F.3d at 553.

This is so even if valid waivers are acquired by defense counsel. Gharbi, 510 F.3d at 553. A waiver is not sufficient to remedy constitutional infirmity because the courts are obligated to conduct proceedings "within the ethical standards of the profession and . . . appear fair" to the public. Wheat, 486 U.S. at 160. Therefore, "[w]hen a defendant's selection of counsel . . . gravely imperils the prospect of a fair trial, a trial court may justifiably refuse to accede to the choice." Id. at 166 (Marshall, J. dissenting).

II.

The district court did not abuse its discretion when it disqualified Markham because he held actual and potential conflicts of interest. The district court properly acknowledged the presumption to counsel of choice, but also properly decided that the presumption was overcome. The court found that Markham currently represented or had represented Jackson, Hartshorn, and other Church ministers in similar or related proceedings. The representation of potential government witnesses presented, in the district court's view, three problems: first, Markham's cross-examination may be "tempered by [his] obligation or need to protect" Hartshorn and the Goodes, or adversely, extensive cross-examination by Markham could damage his other clients. Second, the court found that Jackson and Hartshorn's interests were not completely aligned since cross-examination of Hartshorn while under criminal investigation and subject to a civil injunction 3 could endanger Hartshorn's legal interests. 4 And third, Hartshorn's control of Jackson's attorney's fees created further divided loyalties, possibly requiring Markham to choose between vigorously representing his client or pleasing the person paying that client's fees. These factors, taken together, were the basis for the district court's holding that Markham's actual and potential conflicts of interest could not be overcome by waiver.

This conclusion is supported by our precedent. We have affirmed the disqualification of a defense attorney who also represented a proposed government witness. United States v. Millsaps, 157 F.3d 989, 995-96 (5th Cir. 1998). We have also held that the cross-examination of a current or former client can be a conflict of interest. Perillo v. Johnson, 205 F.3d 775, 802 (5th Cir. 2000). And the Supreme Court has noted "the inherent dangers that arise when a criminal defendant is represented by a lawyer . . . paid by a third party." Wood v. Georgia, 450 U.S. 261, 268-69 (1981).

Jackson argues that Markham would not have been disqualified if the district court engaged in a different analysis, and lists seven additional steps the district court could have taken. See Brief of Appellant at 15. But, a court does not abuse its discretion by failing to engage in a defendant's preferred analysis of the issues. The district court's findings of actual and potential conflicts of interest are supported by the record and our precedent. Jackson's counsel of choice was properly disqualified.

CONCLUSION

The conviction is AFFIRMED.

FOOTNOTES:

/1/ At the time of Jackson's indictment, Markham was actively representing Hartshorn in an IRS investigation and civil proceedings in the United States District Court for the District of Utah and the United States Court of Appeals for the Tenth Circuit initiated because of his promotion of the tax-avoidance scheme. Markham had also made a presentation to federal prosecutors on behalf of Church ministers Karen and Tom Goode because of their participation in the same scheme.

/2/ Jackson planned to illicit [sic] this testimony in support of a state-of-mind defense.

/3/ The civil proceedings, discussed above, resulted in Hartshorn being subject to a civil injunction preventing him from giving further tax advice regarding the vow of poverty exemptions.

/4/ Indeed, Jackson acknowledged the conflict in both his pre-conviction Motion to Suppress Dr. Timothy Jackson's Statement Due to Actual Conflict of Interest of His Former Trial Counsel ("It is quite obvious that this 'serious conflict' existed with attorney Markham from the moment he began providing advice to Dr. Jackson") and his post-conviction Motion for Downward Variance ("Dr. Jackson rationalized the nonsensical advice obtained from these charlatans because he believed that their arguments were consistent with his strong religious beliefs.").

Quatloos!

Hartshorn - Vow of Poverty Program Enjoined

Hartshorn - Vow of Poverty Program Enjoined

Re: Hartshorn - Vow of Poverty Program Enjoined

Re: Hartshorn - Vow of Poverty Program Enjoined

Re: Hartshorn - Vow of Poverty Program Enjoined