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Quatloos! > Tax Scams > Tax Protestors > Tax Protestor Theories De-Bunked > Fraudulent Trusts Warnings

IRS Warnings on Fraudulent Trusts


There are many scam artists who are actively selling what they call "legal" trusts for tax reduction, that's are 100% tax evasive. For instance, the old Global Prosperity Group used to sell a combination of Pure Trusts and Offshore Trusts which were tax evasive -- telling the suckers who bought into these trusts that they were "100% legal" and showing them a bunch of "legal research." This didn't make the trusts legal, and it didn't keep the suckers who bought the GPG materials and actually set up these trusts from going to jail.

This page highlights some of the IRS warnings about these types of trusts.

IRS Tax News of 17 April 2000

April 17, 2000, Volume 2000, Issue 7
To Trust or Not To Trust?

That is the Question!

A trust is a form of ownership, which completely separates responsibility and control of assets from all the benefits of ownership.  Trusts are used in such matters as estate planning; to facilitate the genuine charitable transfer of assets; and to hold assets for minors and those unable to handle their financial affairs.

Under a trust arrangement, you must give up control over income and assets.  An independent trustee is designated to hold legal title to the trust assets, to exercise independent control over the trust, and to manage the trust.  Taxes must be paid on the income received by the trust, including the income generated by property held in trust.  The responsibility to pay taxes may fall to the trust, the beneficiary, or the grantor.

A trustee is designated to hold legal title to the trust property, to exercise independent control over it, and is responsible for its management.

All trusts must comply with the tax laws as set forth by the Congress in the Internal Revenue Code, Section 641-683.  Trusts established to hide the true ownership of assets and income or to disguise the substance of financial transactions are considered Fraudulent/Abusive Trusts.

Too Good to be True...

Promoters of fraudulent trust arrangements use a variety of methods to advertise their schemes.  They may include seminars, flyers, and even the Internet.  The main selling point of fraudulent trust arrangements is that the paperwork will look like you are giving up control of your assets and money; when in reality you still control how your money and assets are used.

A fraudulent trust only has the appearance of a trust.  It is typically promoted by the promise of tax benefits or avoidance with no meaningful change in the taxpayer's control over or benefit from the taxpayer's income or assets.

Using the name "trust" in association with financial arrangements does not make it a legitimate trust.  No matter how carefully written the trust documents are, if the intent is to evade taxes, the trust will be treated as fraudulent.

Fraudulent trusts are illegal and are a specific area of concern for IRS Criminal Investigation.

The Jungle of Fraudulent Trust Schemes-

Currently, there are two prevalent fraudulent arrangements that are being promoted: The "domestic package" and the "foreign package."   The domestic package involves a series of trusts that are formed in the US, while the foreign trust packages are formed offshore and outside the jurisdiction of the US.  Further, trusts involved in the schemes are vertically layered with each trust distributing income to the next layer.  The goal of this layered distribution of income is to fraudulently reduce taxable income to nominal amounts.

The Business Trust- Some trust promoters are advising taxpayers to transfer their on-going business to Business Trusts.  This scheme gives the appearance that the taxpayer has given up control of his/her business to a trust; however, in reality the taxpayer is still running the day-to-day activities of business and is controlling its income stream.  This is accomplished through trustees or other entities controlled by the taxpayer.

The Equipment or Service Trust- The Equipment or Service trust is formed to hold equipment that is rented or leased to the business trust, often at inflated rates.  The business trust reduces its income by claiming deductions for payments to the equipment trust.

The Family Residence Trust- Taxpayers are being advised to transfer family residences, including furnishings, to trusts.  These trusts sometimes rent the residence back to the taxpayer.  They also deduct depreciation and the expenses of maintaining and operating the residence, such as gardening, pool service, and utilities.

The Charitable Trust- Taxpayers are receiving advice to transfer assets or income to trusts claiming to be charitable organizations.  These trusts or "charitable organizations" pay for personal, educational, or recreational expenses on behalf of the taxpayer or family members.  The payments are then claimed as "charitable" deductions on the trust tax return.

Foreign Trusts- These trusts are often domiciled in a foreign country that imposes little or no tax on trusts and also provide financial secrecy. Typically, abusive foreign trust arrangements enable taxable funds to flow through several trusts or entities until the funds are ultimately distributed or made available to the original owner, purportedly tax-free.  These trusts are usually used in combination with a foreign corporation and foreign bank account.

 Buyer Beware! Recognizing a Fraudulent Trust. Common Warning Signs:

- A promise to reduce or eliminate income and self-employment tax; - Deductions for personal expenses paid by the trust; - Depreciation deductions on an owner's personal residence and   furnishings; - High fees for trust packages, to be offset by promised tax   benefits; - Use of back-dated documents and post office boxes for trust   addresses; - Unjustified replacement of trustee; - Lack of an independent trustee; - Use of terms such as pure trust, constitutional trust, sovereign   trust, or unincorporated business organization.

Just the Facts

It is estimated that $4.8 trillion in wealth will be inherited or transferred from one generation to the next by 2015, with much of it transferred through a variety of trusts.  Filings of trust returns (Form 1041's) are now the third most frequently filed income tax return behind individual and corporate returns.  Although the vast majority of these transfers are legal, there is widespread potential for fraud.

In Fiscal Year 1999, Criminal Investigation elevated abusive foreign and domestic trusts from an emerging issue to a program area.  This elevation was due to the proliferation of abusive promotions in the US.  These promotions are targeted towards wealthy individuals, small business owners, and professionals such as doctors, lawyers, and dentists.  The promotions, which are in some instances distributed by a national network of promoters, promise taxpayers substantial tax reduction and asset protection.  In reality, these promotions are nothing more than complex tax evasion schemes.

The IRS takes fraudulent trust arrangements seriously.  It is a matter of maintaining public confidence in the fairness of the tax laws. Recommending prosecution of those who violate the tax laws demonstrate the IRS' commitment to ensuring all taxpayers pay their fair share of taxes.

Civil and Criminal Outcomes

If a taxpayer chooses to participate in a trust that improperly avoids or evades income tax, that person will not be shielded from payment of taxes, interest, and penalties due.  Evasion of income taxes may result in a civil fraud penalty or criminal prosecution:

- Civil fraud can include a penalty up to 75 percent of the   underpayment of tax attributable to the fraud in addition   to the taxes owed. - Criminal conviction may result in fines up to $250,000 and/or up   to five years in prison for such offenses.

Since the 1990's there has been a substantial increase in both civil examinations and criminal investigations.  The tax court has consistently found against abusive schemes, deeming them shams or simply grantor trusts that do not deliver the promised tax benefits.

Following false, misleading, or unorthodox tax advice is seldom free. Upfront you pay fees or commissions to subscribe to fraudulent trust schemes and in the end; unfortunately, you pay even more in penalties, interest and fines for following bad advice.

Knowingly participating in fraudulent trust arrangements has led to the incarceration and/or financial ruin of many taxpayers.

The bottom line is Don't Buy In!

Too Good - Exhibit A -- A physician was sentenced to 37 months imprisonment followed by 3 years supervised release, and ordered to pay $414,819 in restitution to the IRS for tax evasion for the years 1992 through 1996.  The physician created trusts, including one for his family residence, that he controlled and used to conceal his taxable income.  In addition, he transferred funds between trusts, offshore corporations, and their corresponding bank accounts located in the US, Bahamas, and the Channel Islands in order to conceal taxable income.

Too Good - Exhibit B -- A father and his sons were sentenced to 60, 57, and 46 months imprisonment followed by three years of supervised release, respectively, for conspiracy to defraud the IRS and for failing to file tax returns.  A Federal jury found them guilty in an attempt to conceal income, assign their income to several nominees and purported irrevocable trusts that that had no economic substance.  As part of the conspiracy, they used several bank accounts opened in trust and other names to conceal insurance commission receipts and proceeds from the sale of certificates of deposits and coins.   They also attempted to conceal their assets from the IRS by the conveyance of real property from their names to purported trusts and nominees.  In addition to their imprisonment, the judge in the case ordered them to pay fines of $413,500 and restitution in excess of $635,000 to the IRS.

Too Good - Exhibit C -- A former CPA was sentenced to 87 months imprisonment for defrauding the IRS by promoting bogus trusts.  In addition, an attorney and a former legislative aide were sentenced for their involvement in the scam.  The men sold packages of bogus trusts to clients and advised them on how to use trusts to generate fraudulent tax deductions.  Clients of these individuals put businesses, homes, and other assets in trusts, but in fact continued to control those assets.  Clients claimed various personal expenses related to the bogus trust on their tax returns including depreciation of personal residences, house cleaning, lawn care, and scholarships for their children.  The judge in the case found that the trust scheme cost the federal and state government more than $2.5 million in lost tax revenue.

For more information about what the Federal Courts REALLY say about fraudulent trusts...

See Criminal cases United States v. Scott and United States v. Noske at  -

A recent fiscal year:

Criminal Investigations Initiated 67
Prosecutions Recommended 57
Incarceration Rate 85.7%
Average Prison Sentence (Months) 35

Tax News is published by the Public Affairs Office, Southern California District.  Please send ideas or comments to IRS, Public Affairs Office, Attn: Tax News Editor, P.O. Box 30210, Laguna Niguel, CA 92607-0210, or e-mail them to


IRS Notice 97-24

IRS Warns Of Abusive Trusts 

The IRS has issued an alert to taxpayers (Notice 97-24) about trust arrangements that purport to reduce or eliminate federal taxes in ways that are not permitted by law (abusive trust arrangements). 


====== SUMMARY ====== 

The IRS has issued an alert to taxpayers (Notice 97-24) about trust arrangements that purport to reduce or eliminate federal taxes in ways that are not permitted by law (abusive trust arrangements). 

The trust arrangements that concern the IRS ignore the true ownership of assets or the substance of transactions. According to the IRS, promoters of the arrangements claim that they allow the owners to retain full benefit of business or personal assets but reduce or eliminate taxes. The arrangements often involve more than one trust; for example, a person may put business assets in an unincorporated business trust, transfer business equipment to an equipment trust, place his home in a family residence trust, and set up a foreign trust to hold the other trust units and to receive trust income. The notice contains five examples of the arrangements. 

The IRS warns taxpayers to be suspicious of arrangements that claim to make personal living expenses deductible, to create charitable deductions for payments benefiting the transferor or family, or that otherwise result in an individual having to pay no tax with no change in control over the assets. 

The IRS says promoters of the arrangements advertise "investment seminars" or "tax seminars" in local media and the Internet. The trusts, says the IRS, may have names that refer to constitutional issues, fairness, equity, or patriotic themes, but often have names that are similar to common business organizations and nonabusive trusts. The Service encourages individuals who have participated in abusive trust arrangements to file correct tax returns for 1996, as well as amended returns for prior years. 

====== FULL TEXT ====== 

Communications Division 

Part III - Administrative, Procedural, and Miscellaneous 

Notice 97-24 

[1] This notice is intended to alert taxpayers about certain trust arrangements that purport to reduce or eliminate federal taxes in ways that are not permitted by federal tax law. (The notice refers to such arrangements as "abusive trust arrangements." See Section I. ABUSIVE TRUST ARRANGEMENTS - IN GENERAL, below.) The notice describes some typical abusive trust arrangements, as well as the tax benefits promised by promoters, and then explains the correct tax principles that apply to these trust arrangements. Taxpayers should be aware that abusive trust arrangements will not produce the tax benefits advertised by their promoters and that the Internal Revenue Service is actively examining these types of trust arrangements as part of the National Compliance Strategy, Fiduciary and Special Projects. Furthermore, in appropriate circumstances, taxpayers and/or the promoters of these trust arrangements may be subject to civil and/or criminal penalties. 

[2] This notice should not, however, create concerns about the legitimate uses of trusts. For example, trusts are frequently used properly in estate planning, to facilitate the genuine charitable transfer of property, and to hold property for minors and incompetents. 

[3] Under the federal tax laws, trusts generally are separate entities subject to income tax (except for certain charitable or pension trusts that are expressly exempted by the tax laws and certain grantor trusts described in sections 671 - 679 of the Internal Revenue Code). Under these laws and certain court developed doctrines, either the trust, the beneficiary, or the transferor, as applicable, must pay the tax on the income realized by the trust including the income generated by property held in trust. 


[4] Abusive trust arrangements typically are promoted by the promise of tax benefits with no meaningful change in the taxpayer's control over or benefit from the taxpayer's income or assets. The promised benefits may include reduction or elimination of income subject to tax; deductions for personal expenses paid by the trust; depreciation deductions of an owner's personal residence and furnishings; a stepped-up basis for property transferred to the trust; the reduction or elimination of self-employment taxes; and the reduction or elimination of gift and estate taxes. These promised benefits are inconsistent with the tax rules applicable to the abusive trust arrangements, as described below. 

[5] Abusive trust arrangements often use trusts to hide the true ownership of assets and income or to disguise the substance of transactions. These arrangements frequently involve more than one trust, each holding different assets of the taxpayer (for example, the taxpayer's business, business equipment, home, automobile, etc.), as well as interests in other trusts. Funds may flow from one trust to another trust by way of rental agreements, fees for services, purchase and sale agreements, and distributions. Some trusts purport to involve charitable purposes. In some situations, one or more foreign trusts also may be part of the arrangement. 


[6] Described below are five examples of abusive trust arrangements that have come to the attention of the Internal Revenue Service. An abusive trust arrangement may involve some or all of the trusts described below. The type of trust arrangement selected is dependent on the particular tax benefit the arrangement purports to achieve. In each of the trusts described below, the original owner of the assets that are nominally subject to the trust effectively retains authority to cause the financial benefits of the trust to be directly or indirectly returned or made available to the owner. For example, the trustee may be the promoter, or a relative or friend of the owner who simply carries out the directions of the owner whether or not permitted by the terms of the trust. Often, the trustee gives the owner checks that are pre-signed by the trustee, checks that are accompanied by a rubber stamp of the trustee's signature, a credit card or a debit card with the intention of permitting the owner to obtain cash from the trust or otherwise to use the assets of the trust for the owner's benefit. 


[7] The owner of a business transfers the business to a trust (sometimes described as an unincorporated business trust) in exchange for units or certificates of beneficial interest, sometimes described as units of beneficial interest or UBI's (trust units). The business trust makes payments to the trust unit holders or to other trusts created by the owner (characterized either as deductible business expenses or as deductible distributions) that purport to reduce the taxable income of the business trust to the point where little or no tax is due from the business trust. In addition, the owner claims the arrangement reduces or eliminates the owner's self-employment taxes on the theory that the owner is receiving reduced or no income from the operation of the business. In some cases, the trust units are supposed to be canceled at death or "sold" at a nominal price to the owner's children, leading to the contention by promoters that there is no estate tax liability. 


[8] The equipment trust is formed to hold equipment that is rented or leased to the business trust, often at inflated rates. The service trust is formed to provide services to the business trust, often for inflated fees. Under these abusive trust arrangements, the business trust may purport to reduce its income by making allegedly deductible payments to the equipment or service trust. Further, as to the equipment trust, the equipment owner may claim that the transfer of equipment to the equipment trust in exchange for the trust units is a taxable exchange. The trust takes the position that the trust has "purchased" the equipment with a known value (its fair market value) and that the value is the tax basis of the equipment for purposes of claiming depreciation deductions. The owner, on the other hand, takes the inconsistent position that the value of the trust units received cannot be determined, resulting in no taxable gain to the owner on the exchange. The equipment or service trust also may attempt to reduce or eliminate its income by distributions to other trusts. 


[9] The owner of the family residence transfers the residence, including its furnishings, to a trust. The parties claim inconsistent tax treatment for the trust and the owner (similar to the equipment trust). The trust claims the exchange results in a stepped-up basis for the property, while the owner reports no gain. The trust claims to be in the rental business and purports to rent the residence back to the owner; however, in most cases, little or no rent is actually paid. Rather, the owner contends that the owner and family members are caretakers or provide services to the trust and, therefore, live in the residence for the benefit of the trust. Under some arrangements, the family residence trust receives funds from other trusts (such as a business trust) which are treated as the income of the trust. In order to reduce the tax which might be due with respect to such income (and any income from rent actually paid by the owner), the trust may attempt to deduct depreciation and the expenses of maintaining and operating the residence. 


[10] The owner transfers assets to a purported charitable trust and claims either that the payments to the trust are deductible or that payments made by the trust are deductible charitable contributions. Payments are made to charitable organizations; however, in fact, the payments are principally for the personal educational, living, or recreational expenses of the owner or the owner's family. For example, the trust may pay for the college tuition of a child of the owner. 


[11] In some multi-trust arrangements, the U.S. owner of one or more abusive trusts establishes a trust (the "final trust") that holds trust units of the owner's other trusts and is the final distributee of their income. A final trust often is formed in a foreign country that will impose little or no tax on the trust. In some arrangements, more than one foreign trust is used, with the cash flowing from one trust to another until the cash is ultimately distributed or made available to the U.S. owner, purportedly tax free. 


[12] As noted above, when trusts are used for legitimate business, family or estate planning purposes, either the trust, the trust beneficiary, or the transferor to the trust, as appropriate under the tax laws, will pay the tax on the income generated by the trust property. When used in accordance with the tax laws, trusts will not transform a taxpayer's personal, living or educational expenses into deductible items, and will not seek to avoid tax liability by ignoring either the true ownership of income and assets or the true substance of transactions. Accordingly, the tax results that are promised by the promoters of abusive trust arrangements are not allowable under federal tax law. Contrary to promises made in promotional materials, several well-established tax principles control the proper tax treatment of these abusive trust arrangements. 


[13] The Supreme Court of the United States has consistently stated that the substance rather than the form of the transaction is controlling for tax purposes. See, for example, Gregory v. Helvering, 293 U.S. 465 (1935), XIV-1 C.B. 193; Helvering v. Clifford, 309 U.S. 331 (1940), 1940-1 C.B. 105. Under this doctrine, the abusive trust arrangements may be viewed as sham transactions, and the IRS may ignore the trust and its transactions for federal tax purposes. See Markosian v. Commissioner, 73 T.C. 1235 (1980) (holding that the trust was a sham because the parties did not comply with the terms of the trust and the supporting documents and the relationship of the grantors to the property transferred did not differ in any material aspect after the creation of the trust); Zmuda v. Commissioner, 731 F.2d 1417 (9th Cir. 1984). Accordingly, the income and assets of the business trust, the equipment in the equipment trust, the residence in the family residence trust, and the assets in the foreign trust would all be treated as belonging directly to the owner. 


[14] The grantor trust rules provide that if the owner of property transferred to a trust retains an economic interest in, or control over, the trust, the owner is treated for income tax purposes as the owner of the trust property, and all transactions by the trust are treated as transactions of the owner. Sections 671 - 677. In addition, a U.S. person who directly or indirectly transfers property to a foreign trust is treated as the owner of that property if there is a U.S. beneficiary of the trust. Section 679. This means that all expenses and income of the trust would belong to and must be reported by the owner, and tax deductions and losses arising from transactions between the owner and the trust would be ignored. Furthermore, there would be no taxable "exchange" of property with the trust, and the tax basis of property transferred to the trust would not be stepped- up for depreciation purposes. See Rev. Rul. 85-13, 1985-1 C.B. 184. 


[15] If the trust is not a sham and is not a grantor trust, the trust is taxable on its income, reduced by amounts distributed to beneficiaries. The trust must obtain a taxpayer identification number and file annual returns reporting its income. The trust must report distributions to beneficiaries on a Form K-1, and the beneficiary must include the distributed income on the beneficiary's tax return. Sections 641, 651, 652, 661 and 662. 


[16] Transfers to a trust may be recognized as completed gifts for federal gift tax purposes. Further, whether or not the gift tax applies, if the owner retains until the owner's death the use of, enjoyment of, or income from the property placed in a trust, the property will be subject to federal estate tax when the transferor dies. Section 2036(a). 


[17] Personal expenses such as those for home maintenance, education, and personal travel are not deductible unless expressly authorized by the tax laws. See section 262. The courts have consistently held that non-deductible personal expenses cannot be transformed into deductible expenses by the use of trusts. Furthermore, the costs of creating these trusts are not deductible. See, for example, Schulz v. Commissioner, 686 F.2d 490 (7th Cir. 1982); Neely v. United States, 775 F.2d 1092 (9th Cir. 1985); and Zmuda. 


[18] Charitable trusts that are exempt from tax are carefully defined in the tax law. Arrangements are not exempt charitable trusts if they do not satisfy the requirements of the tax law, including the requirement that their true purpose is to benefit charity. Furthermore, supposed charitable payments made by a trust are not deductible charitable contributions where the payments are really for the benefit of the owner or the owner's family members. See, for example, Fausner v. Commissioner, 55 T.C. 620 (1971). 


[19] If an arrangement involves a foreign trust, taxpayers should be aware that a number of special provisions apply to foreign trusts with U.S. grantors or U.S. beneficiaries, including several provisions added in 1996. For example, a U.S. person that fails to report a transfer of property to a foreign trust or the receipt of a distribution from a foreign trust is subject to a tax penalty equal to 35 percent of the gross value of the transaction. Other examples of these provisions are the application of U.S. withholding taxes to payments to foreign trusts and the application of U.S. excise taxes to transfers of appreciated property to foreign trusts. See sections 6048, 6677, 1441, and 1491. 


[20] The participants in and promoters of abusive trust arrangements may be subject to civil and/or criminal penalties in appropriate cases. See, for example, United States v. Buttorff, 761 F.2d 1056 (5th Cir. 1985); United States v. Krall, 835 F.2d 711 (8th Cir. 1987); Zmuda and Neely. 


[21] The Internal Revenue Service has undertaken a nationally coordinated enforcement initiative to address abusive trust schemes - the National Compliance Strategy, Fiduciary and Special Projects. This initiative involves Service personnel from the Assistant Commissioner (Examination), Assistant Commissioner (Criminal Investigation), and the Office of Chief Counsel. 

[22] As part of this strategy, the Service seeks to encourage voluntary compliance with the tax law. Accordingly, taxpayers who have participated in abusive trust arrangements are encouraged to file correct tax returns for 1996, as well as amended tax returns for prior years, consistent with the explanation of the law set forth in this notice. 

[23] For information regarding issues addressed in this notice, taxpayers may call (202) 622-4512 (not a toll-free number). 

Date Published: 04-03-97 



Bob Sommer's Trust Scams Series

Well-respected tax attorney Bob Sommers has put together a series of articles dealing with these inane and ineffective trusts.

Mark Pitcavage Expose of Pure Trusts

Mark Pitcavage, PhD, of the MilitiaWatchdog group, has written an excellent expose of the Pure Trust promotes and the lies they spin to sell Pure Trusts.

Vern Jacobs and Richard Duke

Two of America's best planner discuss Pure Trust scams at great length.

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