Case of the Week: Arizona Ministers Cannot Avoid Taxes With supposed “Vow of Poverty”

The 9th Circuit Court of Appeals recently ruled (01/12/2017) that an Arizona ministry cannot avoid income taxes by claiming that they had taken a vow of poverty and were only being supported by donations to the church.

Elizabeth and Fredric Gardner asserted that their maintenance was supported by Bethel Aram Ministries, and that any payments that they received were donations to the church. The court disagreed, and several facts indicated that the supposed vows of poverty were really an attempt to evade taxes.

The Gardners had total control over Bethel Aram Ministries, including all of the finances. Money received by the ministry was under the Gardners’ control at all times. They did not have personal bank accounts and were not accountable to anyone for their use of the ministry’s funds.

The Gardeners also offered services in exchange for “donations” to the ministry. The Gardeners offered their services to various churches to set up corporations and limited liability companies. They set up over 300 corporations and 18 limited liability companies.

A piece of particularly damaging evidence was a “donation sheet” that the Gardners provided to their clients. This sheet requested donations of $1,200 for setting up a corporation and $700 for a limited liability company. None of these payments were reported as income by the Gardners.

The court found that these payments were actually made in exchange for the Gardners’ services, not donations. The Gardners were ordered to pay taxes on all of the payments.

The Gardners are not the first people to attempt to avoid income taxes by taking a vow of poverty. A Florida Reverend was also ordered to pay back taxes for the same type of arrangement last year.

According to IRS Revenue Ruling 77-290, it is possible to avoid income taxes by taking a vow of poverty. However, the payments received must be for work done for the affiliate religious order or church, and the payments must be remitted to religious order or church. You must actually give up control over the funds if you want to convince the IRS that they are not your income. In other words, if you take a vow of poverty, it only avoids income taxes if it is genuine.

Subscribe to Chernoff Law Firm’s newsletter for more updates about new cases and other legal matters.

MENU