Some persons are promoting the use of “corporations sole” by churches and church members as a lawful way to avoid all government laws and regulations, including income taxes and payroll taxes. Church leaders are informed that by structuring their church as a corporation sole they will become an “ecclesiastical” entity beyond the jurisdiction of the government. Individuals are told that by becoming a corporation sole they can avoid income taxes. The promoters, who often use email and the Internet, make it all sound so believable with numerous references to legal dictionaries, judges, and ancient cases. As this article will demonstrate, such claims are false. Any material you receive promoting the corporation sole scam should be immediately discarded.
What is a corporation sole?
A corporation sole is type of corporation that allows the incorporation of a religious office, such as a bishop. One court described such corporations sole as follows,
A 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. One purpose of the corporation sole is to ensure the continuation of ownership of property dedicated to the benefit of a religious organization which may be held in the name of its chief officer. 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.
Corporations sole are recognized in only the following 12 states:
If your church is not in one of these states, it cannot form a corporation sole, and you should ignore any information you receive to the contrary.
A typical example of a corporation sole statute is section 10002 of the California Corporations Code (enacted in 1878), which provides, “A corporation sole may be formed under this part by the bishop, chief priest, presiding elder, or other presiding officer of any religious denomination, society, or church, for the purpose of administering and managing the affairs, property, and temporalities thereof.” Section 10008 specifies that “every corporation sole has perpetual existence and also has continuity of existence, notwithstanding vacancies in the incumbency thereof.”
These sections in the California Corporations Code illustrate the purpose of the corporation sole—to provide for the incorporation of an ecclesiastical office so that it is not affected by changes in the persons who occupy that office. The corporation sole is designed for use by an individual ecclesiastical officer, and not by churches or other religious organizations.
Are corporations sole exempt from government laws?
Absolutely not. Consider the following two points. First, a church cannot incorporate as a corporation sole. Only the presiding officer of a religious organization can do so. A church officer’s decision to incorporate as a corporation sole has no effect on the relationship of the church with the government.
Second, there is not one word in any corporation sole statute suggesting that a corporation sole is an “ecclesiastical corporation” that no longer is subject to the laws or jurisdiction of the government. Such a claim is preposterous. In fact, most corporation sole statutes clarify that such corporations are subject to all governmental laws and regulations. A good example is the California Corporations Code, which specifies that “the articles of incorporation may state any desired provision for the regulation of the affairs of the corporation in a manner not in conflict with law.”
Similarly, the Oregon corporations sole statute specifies that such corporations differ from other corporations “only in that they shall have no board of directors, need not have officers and shall be managed by a single director who shall be the individual constituting the corporation and its incorporator or the successor of the incorporator.” This is hardly a license to avoid compliance with tax or reporting obligations! Nothing in the corporation sole statutes of any state would remotely suggest such a conclusion.
In summary, a church officer who incorporates as a corporation sole will not exempt his or her church from having to withhold taxes from employees’ wages, issue W-2 and 1099 forms, file quarterly 941 forms with the IRS, or comply with any other law or regulation. Further, an officer who incorporates as a corporation sole will not insulate his or her church from legal liability.
Can individuals avoid taxes by forming a corporation sole?
No. In fact, the IRS recently issued a warning to persons who promote or succumb to such scams. Revenue Ruling 2004-27. The IRS noted that participants in these scams are provided with a state identification number that can be used to open financial accounts. They claim that their income is exempt from federal and state taxation because this income belongs to the corporation sole, a tax-exempt organization. Participants may further claim that because their assets are held by the corporation sole, they are not subject to collection actions for the payment of federal or state income taxes or for the payment of other obligations, such as child support.
The IRS has noted that promoters, including return preparers, are recommending that taxpayers take frivolous positions based on this argument. Some promoters are 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.
The IRS concluded, “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.”
This article first appeared in Church Treasurer Alert, April 2004.