Part I – 1986 Code

Sections 6651, 6662, 6663

Rev. Ruling  2004-27


PURPOSE

The Service is aware that some taxpayers are attempting to reduce their federal
tax liability by taking the position that the taxpayer’s income belongs to a “corporation
sole” created by the taxpayer for the purpose of avoiding taxes on the taxpayer’s
income. The Service also is aware that promoters, including return preparers, are
advising or recommending that taxpayers take frivolous positions based on this
argument. Some promoters may be marketing a package, kit, or other materials that
claim to show taxpayers how they can avoid paying income taxes based on this and
other meritless arguments.

This revenue ruling emphasizes to taxpayers, and to promoters and return
preparers who assist taxpayers with this scheme, that a taxpayer cannot avoid income
tax by establishing a corporation sole for the purpose of avoiding taxes on the
taxpayer’s income. A corporation sole may be used only by a bona fide religious leader
for specific, limited purposes relating to the religious leader’s office. The argument that
a taxpayer’s income can be assigned to a corporation sole, and thus be exempted from
taxation, has no merit and is frivolous.

The Service is committed to identifying taxpayers who attempt to avoid their tax
obligations by taking frivolous positions, such as frivolous positions based on a
meritless “corporation sole” argument. The Service will take vigorous enforcement
action against these taxpayers and against promoters and return preparers who assist
taxpayers in taking these frivolous positions. Frivolous returns and other similar
documents submitted to the Service are processed through its Frivolous Return
Program. As part of this program, the Service confirms whether taxpayers who take
frivolous positions have filed all of their required tax returns, computes the correct
amount of tax and interest due, and determines whether civil and criminal penalties
should apply. The Service also determines whether civil or criminal penalties should
apply to return preparers, promoters, and others who assist taxpayers in taking frivolous
positions, and recommends whether a court injunction should be sought to halt such
activities. Other information about frivolous tax positions is available on the Service
website at www.irs.gov.

ISSUE

Whether a taxpayer may exclude income from taxation based on the argument
that the taxpayer’s income belongs to a “corporation sole” created by the taxpayer for
the purpose of avoiding taxes on the taxpayer’s income.

FACTS

A “corporation sole” is a corporate form authorized under certain state laws to
enable bona fide religious leaders to hold property and conduct business for the
benefit of the religious entity.  A number of individuals are promoting the use of these
entities to avoid taxes on income and conceal the taxpayer’s assets from tax collection.
Participants in this scheme apply for incorporation under the pretext of being an official
of a church or other religious organization or society. Participants then are provided
with a state identification number that can be used to open financial accounts.
Participants claim that their income is exempt from federal and state taxation because
this income belongs to the corporation sole, which is claimed to be a tax exempt
organization described in section 501(c)(3) of the Internal Revenue Code. Participants
may further claim that because the taxpayer’s assets are held by the corporation sole,
the taxpayer is not subject to collection actions for the payment of personal federal or
state income taxes or for the payment of other obligations, such as child support.

LAW AND ANALYSIS

A valid corporation sole enables a bona fide religious leader, such as a bishop or
other authorized church or other religious official, to incorporate under state law, in his
capacity as a religious official. See, e.g., Berry v. Society of Saint Pius X, 69 Cal. App.
4th 354 (1999) (“One purpose of the corporation sole is to insure [sic] the continuation
of ownership of property dedicated to the benefit of a religious organization which may
be held in the name of its titular head.”). A corporation sole may own property and enter
into contracts as a natural person, but only for the purposes of the religious entity and
not for the individual office holder’s personal benefit. Title to property that vests in the
office holder as a corporation sole passes not to the office holder’s heirs, but to the
successors to the office by operation of law. A legitimate corporation sole is designed
to ensure continuity of ownership of property dedicated to the benefit of a legitimate
religious organization.

A taxpayer cannot avoid income tax or other financial responsibilities by
purporting to be a religious leader and forming a corporation sole for tax avoidance
purposes. The claims that such a corporation sole is described in section 501(c)(3) and
that assignment of income and transfer of assets to such an entity will exempt an
individual from income tax are meritless. Courts repeatedly have rejected similar
arguments as frivolous, imposed penalties for making such arguments, and upheld
criminal tax evasion convictions against those making or promoting the use of such
arguments. See, e.g., United States v. Heineman, 801 F.2d 86 (2d Cir. 1986)
(upholding conviction for promoting use of purported church entities to avoid taxes);
United States v. Adu, 770 F.2d 1511 (9th Cir. 1985) (upholding conviction for aiding and
assisting in the preparation and presentation of false income tax returns with respect to false charitable contribution deductions to same type of purported church entities
involved in Heineman); Svedahl v. Commissioner, 89 T.C. 245 (1987) (sanctioning
taxpayer for using contributions to purported church entities similar to those involved in
Heineman to shield income and pay personal expenses).

CIVIL AND CRIMINAL PENALTIES

In addition to having to pay the actual tax due plus statutory interest, individuals who
claim tax benefits on their returns based on a “corporation sole” scheme or other
frivolous arguments face substantial civil and criminal penalties. Potentially applicable
civil penalties include: (1) the section 6662 accuracy-related penalty, which is equal to
20 percent of the amount of taxes the taxpayer should have paid; (2) the section 6663
penalty for civil fraud, which is equal to 75 percent of the amount of taxes the taxpayer
should have paid; (3) a $500 penalty under section 6702 for filing a frivolous return; and
(4) a penalty of up to $25,000 under section 6673 if the taxpayer makes frivolous
arguments in the United States Tax Court.

Taxpayers relying on this scheme also may face criminal prosecution for: (1)
attempting to evade or defeat tax under section 7201 for which the penalty is a fine of
up to $100,000 and imprisonment for up to 5 years; or (2) making false statements on a
return under section 7206 for which the penalty is a fine of up to $100,000 and
imprisonment for up to 3 years.

Persons who promote this scheme and those who assist taxpayers in claiming
tax benefits based on this scheme also may face penalties. Potential penalties include:
(1) a $250 penalty for each return prepared by an income tax return preparer who knew
or should have known that the taxpayer’s argument was frivolous (or $1,000 for each
return where the return preparer’s actions were willful, intentional or reckless); (2) a
$1,000 penalty under section 6701 for aiding and abetting the understatement of tax;
and (3) criminal prosecution under section 7206 for which the penalty is a fine of up to
$100,000 and imprisonment for up to 3 years for assisting or advising about the
preparation of a false return or other document under the internal revenue laws.
Promoters and others who assist taxpayers in engaging in these schemes also may be
enjoined from doing so under section 7408.

HOLDING

A taxpayer cannot use a corporation sole as a means to exclude the taxpayer’s
income from taxation. Taxpayers attempting to reduce their federal tax liability by taking
frivolous positions based on this argument will be liable for the actual tax due plus
statutory interest. In addition, the Service will determine civil penalties against
taxpayers where appropriate, and those taxpayers also may face criminal prosecution.
The Service also will determine appropriate civil penalties against persons who prepare
frivolous returns or promote frivolous positions, and those persons also may face
criminal prosecution. Promoters and others who assist taxpayers in engaging in these
schemes also may be enjoined from doing so under section 7408.

DRAFTING INFORMATION
This revenue ruling was authored by the Office of Associate Chief Counsel
(Procedure and Administration), Administrative Provisions and Judicial Practice
Division. For further information regarding this revenue ruling, contact that office on
(202) 622-7950 (not a toll-free call).