Gardner v. Commissioner

[Editor’s Note: The casebook Federal Tax Practice and Procedure: Cases, Materials, and Problems (Camilla Watson, Brookes Billman Jr., and Jennifer Chapman eds., 3rd ed. 2022) erroneously gives 2008 WL 906696 as a citation for this case. However, 2008 WL 906696 is a citation for the ruling of the United States District Court for the District of Arizona against the Gardners in 2008.] A corporation sole was an entity that allowed religious leaders to hold property and conduct a religious organization’s activity for the organization’s benefit. Via seminars and the Internet, Frederic and Elizabeth Gardner (plaintiffs) claimed that customers could use corporations sole to legally convert otherwise taxable personal income to nontaxable income. In exchange for their services, the Gardners requested donations via a purported donation sheet that quoted how much should be donated. Concluding that the Gardners’ plan was an abusive tax shelter, the Internal Revenue Service (IRS) obtained a permanent injunction prohibiting the Gardners from promoting their plan. In granting the injunction, the district court found that (1) the Gardners had formed more than 300 corporations sole and related entities, (2) the Gardners made material misstatements, (3) the Gardners knew or had reason to know that their statements were false or fraudulent, and (4) the donation sheet was a price list. The district court’s injunction was affirmed on appeal. The IRS continued to investigate the Gardners and their customers, leading it to identify potential tax issues with 47 customers. The IRS issued penalty assessments of $47,000 ($1,000 per violation) against each of the Gardners pursuant to 26 U.S.C. § 6700. After rejecting the Gardners’ administrative objections, the IRS issued notices of determination. The Gardners filed petitions against the commissioner of the IRS (commissioner) (defendant) with the United States Tax Court, which the court consolidated for trial. At trial, the commissioner argued that the collateral-estoppel doctrine precluded the Gardners from contesting that they promoted an abusive tax shelter and that the only issue was whether the Gardners made false statements in connection with at least 47 customers. On that score, the commissioner presented detailed evidence about the IRS’s investigation. The Gardners responded that collateral estoppel was inapplicable and presented testimony from four customers that the customers did not misuse their corporations sole and that the IRS proposed no audit adjustments based on the customers’ uses of corporations sole (with one receiving a refund).