By: A.J. Cook


Promoters are hawking certain trust plans as newly discovered ways of saving taxes.

Most of these ideas are untrustworthy. Usually, the victim purchases bogus information, trust forms and how-to manuals, from the sharpie. This wily operator claims to have found tax code loopholes that can be exploited.

These shams have been called pure trust, family trust, contract trust, business trust, Sovereign trust, ABC trust, common-law trust, pure equity trust, family estate trust, constitutional trust, unincorporated business trust. The common thread is that the taxpayer transfers personal or business assets or income into the trust. The taxpayer, the promoter or someone the taxpayer can control is named trustee. The transfer masks the transaction's substance, nothing changed. The taxpayer continues to control the asset and continues to benefit from whatever is placed in the trust.

Usually, unallowable personal expenses are deducted or income isn't reported. Here are some current shams:

• A homeowner transfers his residence to a trust, which then rents it back to him. Supposedly, the taxpayer can then deduct home expenses such as utilities and maintenance.
  
• The taxpayer establishes a group of trusts in a foreign country. The taxpayer's money is moved among them and then returned.
  
• A taxpayer transfers his business to a trust. The trust makes payments to the taxpayer, which are then called deductible business expenses.
  

Even though state law recognizes these trusts as valid, federal courts continue to reject them for tax purposes. Here are a few examples:

• An executive created a business trust. The court said it lacked any profit objective; its sole purpose was to avoid taxes. Able Co., 60 TCM 813.
• A veterinarian transferred his practice to a business trust. The court said the trust had no existence independent of the doctor himself. J.J. Paulson, 62 TCM 1622. Similarly P. Quad Co., 93-2 USTC 50,497, and Professional Services Corp., 79 TC 888.
• In K. Chase, 60 TCM 1364, the court imposed a negligence penalty even though the victim claimed he had relied on expert tax advice. The court said the advisor was the same person who sold the trust package.
  

If you have any doubt about the program, get advice from someone independent of the sponsor. Talk to a tax CPA or tax attorney that you know or one with a good reputation in your community.

While many trusts are legitimate ways to save taxes, the sham trusts will trigger an Internal Revenue Service audit and the victim will owe taxes, penalties, interest and even sometime jail time. The IRS has a priority program underway to locate and shut down fraudulent trusts. When the hustlers are caught, their client lists are examined; before long, everyone on the list is examined.

The Moral: If it's too good to be true, don't trust it.

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.
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Released 3-15-99