Stephenson v. Comm'r of Internal Revenue

• Decision Date: 13 December 1982
• Docket Number: Docket No. 12543-80.
• Parties: JOHN LYNN STEPHENSON, PETITIONER v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

79 T.C. 995

JOHN LYNN STEPHENSON, PETITIONER

v.COMMISSIONER of INTERNAL REVENUE, RESPONDENT

Docket No. 12543-80.

United States Tax Court

Filed December 13, 1982.

Held, P could not exclude wages and other amounts received on the theory that he was an agent of either a church he purportedly created or the parent church (the Life Science Church), which allegedly ordained him as a minister. Held, further, P was not entitled to any charitable contribution deductions and could not claim personal exemption deductions with respect to his wife and two children. Held, further, P is liable for the sec. 6653(b), I.R.C. 1954, addition to the tax for both 1976 and 1977 and for the sec. 6654 addition for 1977. Michael G. Parham, for the petitioner.

F. Michael Kovach, Jr., for the respondent.

OPINION

WHITAKER , Judge:

Respondent determined the following deficiencies and additions to the tax for petitioner for the years 1976 and 1977:

+----------------------------------------------------------------+
                ¦      ¦            ¦Additions to the tax                        ¦
                +------+------------+--------------------------------------------¦
                ¦Year  ¦Deficiency  ¦Sec. 6651(a) 1  ¦Sec. 6653(a)  ¦Sec. 6654  ¦
                +------+------------+-----------------+--------------+-----------¦
                ¦      ¦            ¦                 ¦              ¦           ¦
                +------+------------+-----------------+--------------+-----------¦
                ¦1976  ¦$21,625.35  ¦0                ¦$1,081.27     ¦0          ¦
                +------+------------+-----------------+--------------+-----------¦
                ¦1977  ¦53,451.70   ¦$13,362.92       ¦2,672.59      ¦$1,902     ¦
                +----------------------------------------------------------------+
                

In the amended answer, respondent raises the claim that petitioner is liable for section 6653(b) additions to the tax for fraud during both the years in issue.

The primary issue for decision is whether petitioner is relieved from income tax liability for the years in issue because of his association with the Life Science Church of Allegan (hereinafter the church). If the answer to this question is in the negative, we must decide additionally the following issues:

(1) Is petitioner entitled to any charitable deductions?

(2) Did petitioner realize gain in 1977 on the sale of his residence, and, if so, does section 1034 allow such gain not to be recognized?

(3) Is petitioner entitled to personal exemption deductions with respect to his wife and two children?

(4) Is petitioner liable for the section 6654 addition to the tax in 1977 for failure to pay estimated income tax?

(5) Is petitioner liable for the section 6653(b) addition to the tax for fraud for both 1976 and 1977, or alternatively, the section 6651(a) addition to the tax for 1977 and the section 6653(a) addition to the tax for both 1976 and 1977?

Some of the facts have been stipulated and are so found. For convenience, the findings of fact and opinion have been combined.

The petition alleges that petitioner resided in Chelsea, Mich., when the petition in this case was filed.

Effect of “Church” Upon Petitioner's Tax Liability

In late 1976, petitioner traveled to Elkhart, Ind., to attend a meeting at which Peter Beaumont and William Drexler spoke about the Life Science Church and its beliefs. After attending this meeting, petitioner paid $500 by check dated December 30, 1976, to the Life Science Church. He was thereafter ordained as a “minister” of the Life Science Church and given preprinted documents to use in organizing his “church.”

Petitioner executed a charter for his “church” on one of the forms provided by the Life Science Church. The charter was dated December 30, 1976, and signed by William Drexler as bishop and dean of Life Science College and by petitioner, his wife, and another individual as trustees of the newly formed “church.” He also executed a vow of poverty, dated December 30, 1976, which stated that all his possessions and income were the property of the “church” regardless of whether they continued to appear in his name and that “Outside employment renumberation [sic] (when directed by the church or order) is not personal income, but rather income/gift to the church/order.” Petitioner and his wife also executed a quitclaim deed to transfer their residence in Allegan, Mich., to petitioner as trustee for the “church,” in return for stated consideration of $1. This deed was dated March 16, 1977, and recorded by the Register of Deeds on March 18, 1977.

Petitioner worked during the years in issue as a physician, first as an employee of the Allegan Medical Clinic, P.C. (hereinafter the clinic), and later as an independent contractor with Chelsea Emergency Physicians, P.C. (hereinafter Chelsea Physicians). The clinic paid petitioner wages of $50,692.25 in 1976 and $32,302.65 in 1977, and made out Forms W-2 showing these amounts. Chelsea Physicians paid petitioner a total of $44,151.90 during 1977. These payments were by checks made payable to “John L. Stephenson, M.D.” Also during 1977, petitioner received a $10,602.99 check as a distribution from the profit-sharing plan of the clinic. This check was made payable to John L. Stephenson, individually, and he cashed it in that capacity. During 1978, he received a Form 1099R informing him that this distribution was ordinary income to him during 1977.

Petitioner's Federal income tax return for the taxable year 1976, which was filed on or about April 15, 1977, listed his filing status as “single” and specified his occupation as a “member of religious order.” He reported as income his wages of $50,692.25 from the clinic, and subtracted this same amount as an adjustment to gross income, resulting in adjusted gross income of zero. He did not fill out part II of the return to explain the adjustment to income. Attached to the return was a copy of the vow of poverty and a Form 4029, “Application for Exemption From Tax on Self-Employment Income and Waiver of Benefits,” dated December 30, 1976. The Form 4029 stated that he was—-

conscientiously opposed to acceptance of the benefits of any private or public insurance which makes payments in the event of death, disability, old-age, or retirement or makes payments toward the cost of, or provides services for, medical care * * *

For the year 1977, petitioner filed no Federal income tax return.

On January 1, 1977, petitioner executed and submitted to the clinic a Form W- 4E, “Exemption From Withholding,” certifying that he incurred no Federal income tax liability for 1976 and anticipated incurring no liability for 1977. He also executed and submitted a similar withholding exemption certificate for Michigan State income taxes. Because of the clinic's concern for the legality of its stopping the withholding of income and FICA taxes from petitioner's wages, it consulted its attorney, who drew up a memorandum of understanding. In this memorandum, which was dated January 2, 1977, petitioner agreed to indemnify the clinic for any liability and expenses resulting from its acquiescence in his request that they terminate withholding taxes from his pay checks.

In the latter part of March 1977, petitioner resigned from the clinic and contracted with Chelsea Physicians to work for them on an independent contractor basis. He entered into a memorandum of understanding with Chelsea Physicians dated March 30, 1977, which stated:

the Corporation does not agree with or support directly or indirectly [[[petitioner's] personal activities relating to his own philosophy on government policies or programs nor his personal religious practices. While the Corporation does respect the Doctors [sic] First Amendment rights, Doctor agrees not to promote the previously mentioned activities within the Corporation's service area and to refrain from any activity which may create an unfavorable impression or be cause of embarrassment for the Corporation in its service area.

From approximately April 21, 1973, through November 16, 1977, petitioner and his wife maintained a personal checking account with the American National Bank, Allegan, Mich. Many of their personal living expenses, such as payments for mortgage, insurance, home improvements, and repairs, were made by checks drawn from this account. On March 19, 1977, petitioner opened with the same bank a checking account in the name of Life Science Church of Allegan, with himself and his wife named as the sole trustees and signatories on the account. After this “church” account was opened, petitioner rarely used his personal account. Rather, he deposited his earnings in the “church” account, and drew checks on it to pay the same types of expenses, such as mortgage and insurance payments, that had previously been paid from his personal account. For instance, prior to March 19, 1977, petitioner used his personal account to make mortgage payments of $204 per month on his Allegan residence; after he opened the “church” account, he used it as the source for all the mortgage payments. Furthermore, after he sold the Allegan residence, the approximately $48,000 of sale proceeds were deposited in the “church” account, and shortly thereafter, he drew a check on the “church” account for $59,000, which was used to purchase the Chelsea residence. Title to the Chelsea residence was in the name of petitioner and his wife, not the “church.”

The first question which we must answer is whether income was earned by petitioner, individually, during the years in issue. Petitioner claims, in essence, that amounts paid to him by his employers should be excluded from his income because they were paid to him as an agent of the “church.”

The year 1976 can be quickly disposed of because documentary evidence indicates petitioner never created any “church” in that year. Petitioner testified that he was ordained and created the “church” on December 30, 1976, after he “contributed” a $500 check to William Drexler of the Life Science Church. Respondent contends that the check was actually written in late February or...