United States v. Hartshorn

Defendant Kevin Hartshorn appealed a district court's issuance of an injunction against him, arguing the court erred in concluding he promoted an abusive tax shelter in violation of 26 U.S.C. 6700. Defendant organized and was appointed head minister of the Church of Compassionate Service in 2004. At that time, the church had approximately fifty active ministers. 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 transferred title to all of their property to the church. They also assigned to the church all income that was 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. According to internal church documents, 90% of the money ministers earned and assigned to the church was "available for local ministry funding." 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." 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.” Ministers deposed for the litigation had not filed tax returns for numerous years though the income they earned at their jobs outside the church was taxable income. The district court agreed with the government that Defendant was promoting abusive tax shelters through his church, 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." On appeal, Defendant argued that the Tenth Circuit 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. The Tenth Circuit agreed with the district court that Defendant’s representations to the ministers regarding the tax consequences of becoming a minister of the church were false or fraudulent. With respect to reversal of summary judgment because of statements Defendant made to the ministers, the Tenth Circuit found none of his arguments persuasive: "the test for injunctive relief under [26 U.S.C. 7408] is satisfied if the defendant had reason to know his statements were false or fraudulent, regardless of what he actually knew or believed. 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." View "United States v. Hartshorn" on Justia Law