Thursday, July 31, 2014

Asking the right tax questions - Guest Post by Professor Annette Nellen

Originally Published on on August 22nd,2011
Most tax bloggers are more serious than I am.  Professor Annette Nellen of San Jose State University is no exception.  She previously appeared as a guest blogger before I started with Forbes.  Serious as she is, she was reckless enough to invite me on to her policy blog 21st Century Taxation. Professor Nellen was selected by the AICPA to tesitfy before Congress on the need for comprehensive tax reform. 
The start of the 2012 presidential campaign and formation of a new congressional committee to propose a plan to reduce the deficit by $1.5 trillion over ten years, brings with them mention of spending cuts, tax changes, and no new revenues. Big dollars are involved – trillions (!), and our federal budget is complicated. But the issues are too important to let the rhetoric shape tax and budget reform. There are a lot of questions for which the answers can help us understand the problems and find workable solutions. I suggest one question here that is pertinent to talk of spending cuts or not increasing revenues. 
Question – Will spending cuts include reducing any spending that exists in the tax law?  
Over the past two decades, a growing amount of spending has been inserted into the tax law rather than as line items in an agency’s annual budget (or just not implemented in the first place). To explain, let’s first consider this basic budget concept: 
            Revenues – Spending = Surplus (Deficit) 
If the government wants to spend more (such as to fund a war) without creating a deficit, revenues must be increased or spending reduced.  Revenues come primarily from taxes; but when spending exceeds revenues, borrowing is needed to supplement the tax revenues. 
If taxes are cut, revenues go down. A tax cut might be in the form of a rate reduction, or a new or increased deduction, exemption or credit. To avoid a deficit, other revenues must be increased or other spending reduced. 

If the government decides it wants to encourage use of renewable energy, it could authorize more spending by the Department of Energy. Without any other changes, there would be a deficit. Alternatively, the government could enact tax credits for people who invest in renewable energy. A tax credit lowers a taxpayer’s tax bill (and thus, reduces government revenues). Under either approach, the budget effect is the same – a deficit (unless other changes are made to increase revenues or reduce spending). 
Our federal income tax has over 200 special deductions, exclusions and credits (called “tax expenditures”). Like the energy credits in the prior example, tax expenditures reduce revenues. In most situations, the tax expenditure could instead have been a line item in an agency’s budget. For example, consider a tax credit for higher education costs, such as the existing American Opportunity Tax Credit (AOTC). This credit reduces an individual’s income tax bill by up to $2,500 per college student (for each of the first four years of college subject to an income phase-out rule). This credit means that less revenue is collected. Alternatively, the government could have created agrant program to distribute these funds. Either way, the budget effect is the same (reduced revenues or increased spending). 
Yet, there are differences, including the following:
  • Special tax rules are not reviewed regularly whereas agency budgets are subject to annual review.
  • The true cost of the government assistance for a particular activity (such as subsidizing those paying college tuition) is not obvious. For example, you can find the cost of Pell grants in the Department of Education budget, but not the cost of the AOTC.
  • Tax spending is affected by traits of a tax system. For example, a Pell grant for higher education can be obtained when tuition is due. The AOTC is not tied to that timing.  Also, tax benefits go to those with tax liabilities. Thus, the AOTC won’t help low-income individuals with incomes below the filing threshold, even though they may need the assistance more than individuals with over $100,000 of income. And, when the special tax provision is a deduction or exclusion, the tax benefit is greater for those in higher brackets. That is, a $1,000 deduction saves $350 of taxes for someone in a 35% bracket, but only $100 for someone in a 10% bracket (meaning that the higher income person is out-of-pocket $650 while the lower income individual is out of pocket $900). 
Today, non-defense discretionary spending (what’s available for cuts) represents 19% of total spending (CBO) or about $703 billion (CBO). In contrast, spending in the tax law totals about $1.1 trillion (Deficit Commissionreport page 28). Thus, a spending cut exercise that only considers the $703 billion overlooks a lot of other spending. 
There are at least two hurdles to cutting spending in the tax law beyond the fact that it is often overlooked as even being spending. First, taxpayers who claim the special deductions and credits don’t want to see them eliminated or reduced. Second, removal or reduction of tax expenditures results in an increase in revenue. Politicians who seek no increase in revenues have to ignore the big pot of spending in the tax law. In contrast, a reduction in the budget of any agency is labeled a spending cut. It is up to us to ask the right question – where are the cuts to the spending in the tax law to help reduce the deficit? 
And by the way, a related tax question to anyone calling for new tax deductions or credits is – how will you pay for that spending?

Can Carried Interest be Fixed Without Legislation ? Part 3 of a Two Part Series.

Originally Published on on August 22nd,2011
Carried interest is the nefarious concept that the evil hedge managers use  to turn their service income into capital gains.  The problem with combating this great evil is that it is based on a fundamental principle of partnership taxation.  The nature of income is determined at the entity level and the partner stands in the shoes of the partnership.  The proposed fix – Code Section 710 is about 3,000 words long.  It is ridiculously complicated and affects many more people than hedge fund managers.  On the bright side, it could be appropriatly titled the Partnership Tax Expert FullEmployment Act of 2011.
  When I told Janet Novack, my editor, that I was working on this she asked me if I thought the problem could be fixed administratively.  She referred me to an article about it.  I wrote a post on it.  I’m skeptical that the rationale  mentioned there would serve.
Now I am going to explain to you the world of partnership taxation by way of an analogy.  If partnership taxation were a religion, my friend,CharleyEgerton, would be a bishop – no a cardinal. He just completed a term as chair of the ABA Tax Section.  Previously he had chaired the Tax Section’s partnership committee.  Whenever I call Charley with a question he almost always says “Did you check McKee?”  He is referring to Federal Taxation of Partnerships and Partners.  The lead author is William S. McKee.  In my analogy Mr. McKee is the pope.  Myself I’m an altar boy, but one of the eighth graders who could sleep late on Sunday, because he had the 12 O’clock Mass.  Priesthood requires at least a law degree and anadvanced degree in taxation.  I am so pathetic.  No law degree and my masters is in applied mathematics.
So I went looking for what Mr. Mckee has had to say on the subject lately.  In the process I foundthis article.  It’s in a college newspaper or magazine or something.  Whatever it is it’s run by the kids.  The college used to be a seminary for congregational ministers.  I hear it’s a pretty good school, not too far from Boston College.   They play Holy Cross in football so it’s not a bunch of stupid jocks.  At any rate the article is recent, it covers the issue in depth and it mentions Mr. McKee, if only in a footnote, so it has some credibility.  The article discuss seven methods for solving carried interest.  If you want to make an intelligent comment on this issue you should read the article, two or three times.  If you don’t understand it, shut up.
I don’t agree that they have found the best solution.  I don’t think they understand the realities of maintaining captial accounts.  That’s the amusing thing about the partnership religion.  The priests and the bishops talk about all these concepts. It’s the altar boys like me that actually put numbers on returns.  Of course it’s the fourth graders doing that.  I just review the returns and make obscure comments, check Mckee and maybe once every couple of months call Charley Egerton.
The Solution ?

I believe though that I have found the solution to the problem and that it does not require legislation.  It will also not have implications outside the world of investment partnersips.  I remeber when Reg. 1.701-2 came out.  It is titled Anit-abuse rule.  (It has nothing to do with my previous post on42nd Street). I was on the AICPA Partnership Division Tax Committee (Hey, it impressed one of our peer reviewers once).  The other members were wailing and gnashing their teeth.  The regulation explains that:
Subchapter K is intended to permit taxpayers to conduct joint business (including investment) activities through a flexible economic arrangement without incurring an entity-level tax
The provisions of subchapter K and the regulations thereunder must be applied in a manner that is consistent with the intent of subchapter K as set forth in paragraph (a) of this section (intent of subchapter K). Accordingly, if a partnership is formed or availed of in connection with a transaction a principal purpose of which is to reduce substantially the present value of the partners’ aggregate federal tax liability in a manner that is inconsistent with the intent of subchapter K, the Commissioner can recast the transaction for federal tax purposes, as appropriate to achieve tax results that are consistent with the intent of subchapter K, in light of the applicable statutory and regulatory provisions and the pertinent facts and circumstances. Thus, even though the transaction may fall within the literal words of a particular statutory or regulatory provision, the Commissioner can determine, based on the particular facts and circumstances, that to achieve tax results that are consistent with the intent of subchapter K
The regulation then goes on to give examples of partnerships that either do (nice partnership) or do not (bad partnerhsip)use subchapter K as it was intended.  I immediatly found Example 6:
A and B, high-bracket taxpayers, and X, a corporation with net operating loss carryforwards, form general partnership PRS to own and operate a building that qualifies for the low-income housing credit provided by section 42. - Nice partnership
I decided these regulations were something I didn’t have to worry about it.  In retrospect I see why the national firm guys and gals were worried.  They should have paid even more attention and we might not have had debacles like Son of Boss.
So you are starting a venture capital fund.  Why not organize it as some sort of co-ownership arrangement, some sort of trust with the managers getting incentive compensation ? Well. Uh.  We want a partnership so the managers can get capital gain treatment on their incentive compensation.  The Commissioner can just add that as an example of a bad partnership.  Why doesn’t the President order that ? (I don’t know if it works that way).I would say do it prospectively for partnerships formed after a certain date.
Why Killing Carried Interest is Very Bad
This is discussed in the article.  If you start a business even though you invest very little, when you sell out you get capital gains (generally).  The article notes that some of the carried interest return is like that and some is for services.  It suggests teasing those two pieces apart.  The concern is that these guys are doing such a fantastic job of managing our economy that we don’t want to demoralize them by making them pay taxes at ordinary rates on their very contingent bonuses.  Look at Mr. Dagres, whose victory some think could turn into a disaster for the industry. Over 90% of his compensation was contingent.  He might be demoralized and we’ll lose the benefit of his guidance.  Well.  What is it that he is going to go into where he can match his 2 million dollar salary if he is disgusted because his 40 million dollar bonus is taxed as ordinary income ?  Pediatrics ? Education ? Public accounting ? Blogging ? He doesn’t have any experience in those fields.  It would take him years to get back to his old salary
What’s In it For Me ?
Unlike the other proposals, this one doesn’t make me salivate.  Fewer partnership returns to prepare.  Fewer complications.  Less need to check McKee or call Charley Egerton.  Half our laity would be converting to a different subchapter.  I’m really not worried.  Just in case, though, I’ll try to improve blog quality.

Could President Obama End Carried Interests Without Congress ?

Originally Published on on August 23rd,2011
Much of the debate about the favorable tax treatment of hedge fund managers and venture capitalists is ideological.  There is either resentment or a spirited defense of the free-enterprise system.  There is little or no understanding as to what makes the tax break work in most discussions.  I suspect that many people think there must be a section of the law dedicated to hedge fund managers that they managed to slip into a defense bill or something.  Much as I love conspiracy theories, it is nothing like that.  The favorable treatment is based on fundamental principles of partnership taxation.  I explained that here.
My big concern is that the legislative fix will do collateral damage.  It adds a fairly long  section to the Internal Revenue Code and creates a new category.  It is also not limited to hedge fund managers and venture capitalists – neither of which are tax terms.  I explained that here.
When I started this my editor, Janet Novack, pointed me to a piece in the Wall Street Journal by Laura Sanders.  It was mainly about comments made by Michael Graetz, a former treasury official and now tax professor at Columbia University.  He pointed to a tax court decision that was won by venture capitalist Todd A. Dagres.  I had mentioned the case previously.  Mr. Dagres had roughly a 2 million dollar salary.  He had about 40 milllion in long term gains  mostly from carried interests.  He had lost over 3.5 million on a loan that he had made to somebody who helped find him deals.  He thought he should get an ordinary deduction for that and the Court agreed, because all that capital gain that he had was really business income and the loan was related to that.  Professor Graetz indicated that following that logic all the income should be ordinary and the IRS should turn this minor defeat into a major triumph.  I wouldn’t want to be Mr. Dagres at the venture capital picnic if Professor Graetz is right and the IRS picks up on it.  “You killed carried interests so you could save a lousy five hundred grand or so ? Gimme a break.”
I was criticized on another site (If you are going to knock me at least do it on Forbes) for being unclear as to what my thoughts were on the merits of this particular reform.  That is whether it is a good thing or a bad thing that hedge fund managers and venture capitalists pay capital gains on their share of their funds capital gains as opposed to getting paid some sort of ordinary incomeincentive bonus.  The unclarity comes from my tendency to satirize the overblown rhetoric that gets into these discussions.  I started off my most recent piece with “Carried interest is the nefarious concept that the evil hedge fund managers use …..”  I think the other person who read that piece might have liked it though.  So I will make my position clear on whether it is a good idea or a bad idea to make hedge fund managers and venture capitalitspay taxes at ordinary rates on their carried interest gains.  I have none.
With respect to the proposed legislation, I think that it is very bad legislation.  On the other hand it will mean more work for people like me, so it can’t be all that bad.
There is, however, an approach that could end the benefit without adding three thousand words to the Code.  It does not require the cooperation of Congress.  There is a regulation 1.701-2 that governs using the partnership form in a way that is inconsistent with its purpose to:

permit taxpayers to conduct joint business (including investment) activities through a flexible economic arrangement without incurring an entity-level tax
The regulation goes on to list good and bad reasons for using the partnership form. Venture capital funds and hedge funds do not have to be organized as partnerships in order to do what they do.  You could have some sort of co-ownership.  Frequently people prefer co-ownerships, since they can often be simpler.  Why do venture capital funds and hedge funds organize as partnerships ? Well one reason is so that the managers can get captial gains treatment on their incentive compensation.  If that is not a good reason, the IRS can add it to the “bad partnership” list and it is done.
That approach is totally in the executive branch.  I doubt it is as simple as the President getting on the phone to the Commissioner and telling him he wants him to add another example to the list in 1.701-2.  There is probably a political calculus to this that is beyond my feeble understanding.  By making it another girdlock issue he gets to rail against Congress.  Congress gets to say they are standing up for free enterprise.  If the regulations were tweaked in the way I suggested there would be litigation.  One way to do it might be for it to be prospective so that it would only apply to new deals.
There are good arguments on both sides of the issue.  In some ways venture capitalists are like any entrepeneur who starts a business without much of his own capital and eventually gets to a “liquidity event”.  Of course they are not exactly like that, but I am concerned that the new Code Section 710 will create a new gray area.  The concern about the brain drain out of venture capital if they no longer get capital gain treatment on their incentive compensation is not one that I share.  If we can get more brain power into professions by letting them recognize their income as capital gains we should start with elementary education.  Although since they don’t make enough to benefit very much maybe we should do it with internal medicine or pediatrics.

"Patriot's" Comment Evokes Nostalgia for the Old 42nd Street

Originally Published on on August 21st,2011
I haven’t been blogging that long, but one of the principles I’ve learned is to cherish those persons who are kind enough to make comments on my posts.  I realize now that I was less than thorough in my response to plautus .  The post was one in which I expressed sympathy for the taxing authorities of Highlands Country, Florida who had to cope with people who thought they could remove their property from the tax rolls either by “land patents” or some sort of trust nonsense.  Here is his comment:
One thing you apparently fail to mention is that the income tax is, per statute, VOLUNTARY. Never mind that the government is entirely illegitimate in the first place and enforces their “authority” at the point of a gun. Never mind that the monetary system is a stupid rigged game nobody can win unless they’re making the rules. Never mind that all your blogs are pointless and m**********y because of the two above mentioned facts.
Anytime there is a major development that might affect my clients, I’m all over it.  And plautus is talking about a statute here, so I practically begged him for a citation.  I haven’t heard back from him.  The bowdlerized portion of the comment above, which I let stand in the original comment in the interest of free speech, I had to beg off on.  It refers to an activity that according to research, the overwhelming majority of human beings engage in at some time in their lives.  In the 19th century it was thought to cause insanity.  In modern times, some believe it is conducive to mental health.  Go figure.  I believe that there are ampleweb resources to aid in the activity and that the Forbes contributor guidelines prevented me from being of any further assistance.  By the way, I recognize that plautus might have been making a figurative observation about my blog.  The school of tax analysis that he appears to espouse though often relies on misplaced literalism.
My self appointed role is to bring out into the sunshine authoritative tax information, of interest, that while relatively easy to access, is, in effect, hidden in plain sight, because it is combined with a large body of unspeakably dull and opaque material.  It turns out that there is in fact authoritative tax material that touches onplautus’s other passion besides crackpot legal theories.  I generally stick with material no more than a year old, usually much less, but in the interest of thoroughness, I am going back to the mid-nineties to discuss 303 WEST 42ND STREET ENTERPRISES INC. v. IRS.  (Let’s call it 303). 
303 is an employee classification case.  It is a little unusual.  Usually the case is about whether people are employees or independent contractors.  That terminology is so deeply entrenched that a primitive accounting system will often have an expense account named “Independent Contractors” or “Contract Labor”, where the payments are recorded to the employees that the employer is electing not to so classify.  I’m sure that is a great convenience to examiners.  In 303, though it was not employee versus independent contractor.  It was employee versus tenant.  According to the company the persons in question were not employees.  They were tenants.  The tenants were renting booths.  The facts were very similar to that in the recent Mayfield Therapy case, which was a taxpayer victory.  The various nail technicians, cosmetologists and massage therapists that rented booths at the center were recognized by the court as being tenants not employees.
The activity at 303 was a little different.  The booths had two compartments.  They were divided by a window.  The window was covered.  Insertion of tokens, that were purchased at the establishment,  somehow removed the covering.  Their was a phone that allowed conversation between the tenant and the customer.  There was a slot that allowed the customer to transfer additional funds to the tenant.  The relationship between those two was that of audience and performer.  The arrangement allowed clients like plautus to experience the semblance of female companionship while indulging their private passions. The tenant/performers received a percentage of the gross revenue from the sale of tokens used in their booth and the entire amount of cash compensation that went into the slot.  In the discussion of the case it was noted that the interest of the tenant and the landlord were not perfectly aligned.  The landlord would benefit from lengthy visits regardless of the tip amount, whereas if tips were good the tenant would be well served by high turnover.

Close study of 303 (taxpayer loss) and Mayfield Therapy (taxpayer win) would, I think, indicate that the courts have shifted some in their attitude toward booth rental.  It is also possible that the Court may have been prejudiced by the nature of the activity at 303.  This would not have been proper.  The tax issue should not have turned on whether the tenant was polishing the customers nails or cheering while he polished his own knob.

West 42nd Street Now and then
303 West 42nd St, unless I messed up on googlemaps is now a drug store.  It is across 42nd street from the Port Authority Bus Terminal (Need I mention which city we are talking about here?  It is The City).  Astoundlingly I must have been near there very many times as I commuted to high school and summer work in the financial district.  Of course there is underground access to the subway from the bus terminal and a 16 year old boy taught to ask for help avoiding all sins, but especially those against the sixth and ninth commandments, which includes impure thoughts, would have no reason to wander around 42nd between 7th and 8th  before it was converted into an extension of Disneyworld.  So who knew there was such a thing going on there ?
Policy Announcement
Forbes allows its contributors immense powers over comments, so I think it would be good for me to announce a formal policy.  I will rarely delete comments other than obvious spam.  I will even leave obvious spam if it is amusing.  I will be generous in calling out comments particularly if you strongly disagree with me.  Finally if like plautus and charliemurf you choose to mock me, you will be called out and possibly mentioned in a future post.  Naturally this policy is subject to change at my whim.

Wednesday, July 30, 2014

Bishop Corletta Vaughn, Chief Apostle, Held Personally Responsible for Ministry's Payroll Withholding

Originally Published on on October 27th,2011
Apostle Corletta J. Vaughn has been a trailblazer and forerunner among women in ministry for the last thirty-two years.  
From answering the call of God in 1974 to her elevation as a Bishop on November 5, 1995 in the West African country of
Nigeria; God has used her life and ministry to impact the Body of Christ and serve a death blow to the kingdom of darkness
The website does not explain what Bishop Vaughn and her husband Gilbert are doing in North Carolina federal bankruptcy court. The most recent decision by the Court does not fully explain it either.  I am just a tax blogger not an investigative reporter so you will have to go elsewhere to find out.  The decision is interesting though.  It is about Bishop Vaughn’s personal responsibility for a ministry’s payroll taxes.

Here is some of the story:
Go Tell It Evangelistic Ministry (“GTI”) failed to remit to the United States payroll taxes for the quarters ending June 30, 2002, September 30, 2002, December 31, 2002, March 31, 2003, June 30, 2003, September 30, 2003, December 31, 2003, and March 31, 2004. Ms. Vaughn founded GTI. GTI was incorporated in 1984 and is located in Detroit, Michigan. GTI is a 26 U.S.C. § 501(c)(3) organization and has no stockholders or owners. GTI was an umbrella entity that had oversight of five different divisions: (1) the Holy Ghost Full Gospel Church (the “Holy Ghost Church”); (2) Go Tell It Evangelistic Ministry; (3) Go Tell It Network; (4) Spread the Word Media; and (5) KFBC School. Ms. Vaughn was actively involved in all five of the divisions and was considered the “face” or spokesperson of GTI.
Ms. Vaughn’s father founded the Holy Ghost Missionary Baptist Church in 1972. The Holy Ghost Church is a church that holds services twice a week. Ms. Vaughn became an associate minister of the Holy Ghost Church and her father trained her. Ms. Vaughn’s father passed away in 1993. Ms. Vaughn became the Senior Pastor of the Holy Ghost Church. Over time, Ms. Vaughn created the five divisions of GTI as outreach ministries. The five divisions kept separate monetary accounts and forwarded funds to GTI to cover expenses. At all relevant times, GTI’s officers were Ms. Vaughn, the President, CEO and Chief Apostle, Gilbert Vaughn, the Chief Financial Officer and Ruth Sinclair, the Comptroller.
The GTI Bylaws provide that the Chief Apostle shall act “as CEO over all spiritual and business matters.” Additionally, the bylaws provide that the Chief Apostle shall be the “Chief Executive Officer of the said organization and shall be a continuing member of all boards and committees.” The Chief Apostle “shall be an ex-officio member of all standing committees, and shall have the general powers and duties of supervision andmanagement usually vested in the office of president of a corporation.” The Holy Ghost Church Bylaws provide that the “Senior Pastor shall have general management of the affairs of the church and general supervision of the other officers.” The Senior Pastor shall be “an ex-officio member of all standing committees, and shall have the general powers and duties of supervison [sic] and management usually vested in the office of president of a corporation.” The Senior Pastor “shall be designated attorney-in-fact for the Church by virtue of his office.”
In 1999, Ruth Adams (“Ms. Adams”) was appointed as GTI’s Fiscal Administrator. Prior to her appointment as Fiscal Administrator, Ms. Adams was a Trustee and Elder of the Holy Ghost Church. She was also involved in the accounting and financial duties of GTI as a volunteer. In 1999, Ms. Adams discovered there was a problem with payroll tax accounting and payments with respect to GTI. It became apparent that the hired employee responsible for payroll had not been remitting the proper amount of employment taxes to the United States. Ms. Adams made Ms. Vaughn aware that the employment taxes were not being paid. In response, Ms. Vaughn created the Fiscal Affairs Department and the Fiscal Administrator position. The Fiscal Affairs Department and the Fiscal Administrator consolidated the accounting and financial functions of the five different divisions under one department. Ms. Adams was to oversee the payroll and accounting functions of GTI and eventually pay off any outstanding tax liabilities. In 2000, GTI entered into a payment Plan with the IRS, regarding GTI’s failure to remit employment taxes for the quarter ending March 31, 2002. These quarter payments were paid off in November 2002. Although, GTI paid off the amount owed for the quarter ending March 31, 2002, it failed to pay employment taxes for the second, third and fourth quarters of 2002 and the first and second quarter of 2003.
Ms. Vaughn regularly traveled the country doing speaking engagements for GTI’s outreach ministires. On January 6, 2003, Ms. Vaughn’s husband became ill. In April, 2003, Ms. Vaughn and her husband moved to North Carolina. In May 2003, Ms. Vaughn resigned as Senior Pastor and began caring for her husband. Throughout this period, Ms. Vaughn remained the CEO and President of GTI.
In June 2003, Ms. Vaughn returned to Michigan to deal with GTI’s significant financial difficulties. During this visit, Ms. Vaughn sent an inter-office memorandum directing that “no disbursements to vendors or to staff are to be made until further notice except to Pastor Clifton Jefferson and myself, effective immediately.” As a result, many of GTI’s employees, including Ms. Adams resigned.
The Court agreed with the IRS that Bishop Vaughn was a responsible person with respect to the ministry’s payroll taxes:
The Court finds that the Debtors have failed to carry their burden of disproving that Ms. Vaughn was a “responsible person” under Section 6672. Ms. Vaughn was CEO and President of GTI during the periods at issue and possessed decisionmaking authority over GTI’s finances. Even after she resigned as Pastor and Board Member of the Holy Ghost Church, she remained CEO and President of GTI. Additionally, Ms. Vaughn continued receiving a salary from GTI, even after she moved to North Carolina to care for her husband. According to Schedule I, Ms. Vaughn’s estimated average monthly income at the time the case was filed was $11,800.00.
At the hearing, Ms. Vaughn testified that she was the spiritual head of the organization, and therefore she was prohibited from participating in the financial management of GTI. GTI’s bylaws, however, provide for Ms. Vaughn’s decisionmaking authority over the business matters of GTI. The bylaws provide that Chief Apostle Vaughn shall act as CEO over all spiritual and business matters. (emphasis added). Additionally, the bylaws provide that the Chief Apostle shall be the CEO of GTI and shall be a continuing member of all boards and committees. The Chief Apostle shall preside at all meetings if present, of the Board of Governors and the Board of Presbytery and shall see that all orders and resolutions of the Boards are carried into effect. Further, the bylaws provide that the Chief Apostle “shall execute in the name of the Church all deeds, bonds, mortgages, contracts, and other documents authorized by the Board of Governors” and shall have the general powers and duties of supervision and management usually vested in the office of president of a corporation.” The terms of the bylaws, provide for Ms. Vaughn’s decisionmaking authority and authorize her to supervise the business matters of GTI.

Throughout her testimony, Ms. Vaughn contended that her primary responsibilities rested with the spiritual nature of the church and not the business matters of the church. The documentary evidence however, presents a different picture. The documentary evidence clearly shows Ms. Vaughn had control over the business matters of GTI. The documentary evidence shows she exercised authority over matters such as check-signing, loan procurement and hiring and firing.
I think that religious organizations with a strong pastor governance model are prone to problems like this.  Earlier this year I wrote about Rev. Tom Chambers, who appears to have been a humble godly man who managed to accidently stumble into doing most of the things that people who set up phony churches do.  The Tax Court was only able to partially save him from himself.  Both the Reverend Chambers and Bishop Vaughn would have been well served by consulting the prinicples of the Evangelical Council for Financial Accountability when they established their governance models. 
You can follow me on twitter @peterreillycpa.