Leon McCullough and his wife, Edna, bought it. They had heard about foreign trusts and wanted some of the action.

The chiropractor and his wife, a beautician, signed a document saying they sold their life earnings for a dollar a year to Professional and Technical Services (PTS). The PTS representative, Frank Forrester, and its marketing manual explained the plan. After a participant signs the document, that person's income becomes income of the Panamanian nontaxable trust. Because this is done before the income is receivable, the participants don't owe the taxes. After the trust receives the income checks, it will return about 90 percent as a "gift." The manual added that these gifts are tax-free and need not be reported to the Internal Revenue Service.

After participating for some time, the Silver City, N.M., couple received an unusual letter. It said, "Frank Forrester will be unavailable for an indefinite period and no further business can be conducted by or through this office until his return." Another letter, this one from Mrs. Forrester, explained the cryptic message. She said her husband had died while in jail, and the FBI and the Internal Revenue Service seized all PTS records and documents. She enclosed seven of the couple's checks, totaling $33,269. This left $190,511, which the McCulloughs had sent, with nothing returned as gifts.

The IRS increased the couple's taxes for unreported income saying the trust was a sham and had no effect. The McCulloughs challenged this, saying even if the court rules the trust invalid, they deserve a theft deduction because they were swindled.

The court disagreed; the trust was a farce and there was no theft. A theft includes larceny, embezzlement and robbery; none existed in this case because the McCulloughs didn't prove Forrester used either false pretenses or misrepresentations. The couple heard about the scheme and contacted Forrester. His failure to return their money was not a misrepresentation because nothing in the contract guaranteed repayment. Getting their money back would be a gift, which the court interpreted to be within Forrester's discretion.

What the McCulloughs bargained for -- and received -- was bad tax advice.

A.J. Cook is a lawyer and CPA. His tax column appears weekly in numerous newspapers. Why isn't it published in your hometown newspaper? Ask its Business Editor to subscribe.

Copyright © 1987-2001 A.J. Cook All Rights Reserved
This information is not intended for use without professional advise.
Disclaimer
Released 8-11-97