June 26, 2019

Tenth Circuit: No Agency Relationship Existed Between Purported Ministers and Church that would Supersede Tax Liability

The Tenth Circuit Court of Appeals issued its opinion in United States v. Hartshorn on Monday, June 2, 2014.

Kevin Hartshorn was the head minister of the Church of Compassionate Service, which he founded in 2004. Hartshorn encouraged members to become “ministers,” whereby they would transfer all of their assets to the church and assign all of their income to the church. Hartshorn assured ministers that by transferring all of their assets and income to the church and taking a vow of poverty and obedience, they would be exempt from personal income tax liability. Approximately 90% of each minister’s earnings were returned to the minister as “local ministry funding.” The district court issued an injunction against Hartshorn under 26 U.S.C. § 7408, and Hartshorn appealed.

The Tenth Circuit analyzed the five factors for issuing injunctive relief: “(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.” Only factors two and three were in dispute; Hartshorn argued that he did not believe the statements regarding non-payment of income taxes to be false or fraudulent. The Tenth Circuit considered whether a minister’s income is tax exempt only if he receives it as an agent of the church or whether it is sufficient that a minister assigns earnings to his church pursuant to a vow of poverty, and noted that all of the circuit courts that had considered the issue had determined that a minister must earn income as an agent of his church in order for his earnings to be tax exempt. Next, the Tenth Circuit examined the agency relationship between Hartshorn’s ministers and the church, and determined that there was no agency relationship – the ministers continued their life as usual with the sole exception that their paychecks were deposited in a church account instead of a personal account.

The Tenth Circuit affirmed the injunction, concluding a reasonable person in Hartshorn’s position would know that his representations regarding the tax consequences of the ministers’ actions were false. Judge O’Brien concurred eloquently.