Unpublished Disposition, 904 F.2d 41 (9th Cir. 1990)

MEMORANDUM^** 

These are consolidated appeals in which taxpayers contest their liability to pay federal income taxes based on a purported "vow of poverty" made to a church which the taxpayers organized and control. Alternatively, the taxpayers claim entitlement to charitable deductions and contend that penalties should not have been assessed. We affirm.

* In 1977 Attila Rakosi organized the Church of the Saved. Rakosi and his wife Shigeko are ministers of the church and claim to have taken vows of poverty. The Rakosis failed to file income tax returns from 1978 through 1982. After filing appropriate administrative claims for taxes withheld in 1978, 1979, and 1980, the Rakosis filed a refund action in district court. The court concluded that the Rakosis' vows of poverty were ineffective to avoid taxation on their wages. After receiving deficiency notices for taxes due in 1981 and 1982, the Rakosis petitioned the tax court for a redetermination of the claimed deficiencies. The tax court rejected the Rakosis' petition, finding that (1) the Rakosis exercised full control over the church; (2) they were the only ministers; (3) the church had no formal membership, no scheduled services, and no formal place for holding religious worship; and (4) the sole source of funds for the church was Shigeko's salary checks which the Rakosis used to pay their personal living expenses. The tax court concluded that Shigeko earned the income in dispute and that her purported vow of poverty was ineffective to relieve her of federal income tax. The court also ruled that the Church of the Saved did not qualify as a tax-exempt church to which the Rakosis could make tax deductible charitable donations.

II

Income is taxed to the person who earns it. Commissioner v. Culbertson, 337 U.S. 733, 739-40 (1949). A taxpayer cannot avoid tax liability by assigning or transferring income to another party. United States v. Basye, 410 U.S. 441, 449-51 (1973). The Rakosis argue, however, that Shigeko's wages were earned as an agent for the church. To establish whether an agency relationship exists between the church and Shigeko's employer, the Rakosis must establish that their church "has the right to control the activities of [Shigeko] and the amount of compensation [she] receives for those activities; and [that] this control has been recognized and accepted by the contracting party." Johnson v. United States, 698 F.2d 372, 374 (9th Cir. 1983). The Rakosis presented no evidence that the church contracted with Shigeko's employer for her services. Shigeko was therefore not an agent of the church with respect to her employment. The Rakosis failed to establish that their income is not taxable. See Helvering v. Taylor, 293 U.S. 507, 515 (1935) ("the burden of proof is on the taxpayer to show that the commissioner's determination is invalid").

III

The Rakosis alternatively contend that if their income is taxable, the Commissioner's assessment is erroneous because the Rakosis were not allowed charitable deductions. "The taxpayer has the burden of proving entitlement to a charitable deduction...." Hansen v. Commissioner, 820 F.2d 1464, 1467 (9th Cir. 1987). The burden is particularly heavy when the taxpayer controls the donee church. Id. at 1467-68. To be entitled to a charitable deduction the Rakosis must show that none of the church's earnings "inure to the benefit of any private individual." Id. at 1468. The Rakosis admit that they use church money to support their personal living expenses. On this basis alone, they are not entitled to a charitable donation deduction. See Bubbling Well Church Of Universal Love, Inc. v. Commissioner, 670 F.2d 104, 106 (9th Cir. 1982) (absence of inurement of benefit must be shown).

IV

The Commissioner assessed penalties for Shigeko's negligence and failure to file tax returns. See 26 U.S.C. §§ 6653(a); 6651(a) (1) (1988). These assessments are presumptively correct. Hansen, 820 F.2d at 1469. The only evidence offered by Shigeko to support her argument against the penalties was that she relied on her husband's advice that she was not required to file tax returns. We agree with the tax court that such evidence is inadequate to sustain a taxpayer's burden of proof with respect to these penalties. See id. (evidence of sincere belief was insufficient to avoid penalties); Rapp v. Commissioner, 774 F.2d 932, 935 (9th Cir. 1985) (taxpayer presented no evidence that failure to file was due to anything other than the taxpayer's negligence or disregard of the tax laws). Shigeko was clearly negligent in assuming that she could avoid liability for federal income taxes and her obligation to file tax returns by turning her income over to the church and then continuing to spend the income for support. See Hanson v. Commissioner, 696 F.2d 1232, 1234 (9th Cir. 1983) (no reasonable person could put their faith in a flagrant tax avoidance scheme repeatedly rejected by the courts).

AFFIRMED.