Barbed wire just isn’t your friend.
The US Department of Justice has a Indictment against six people for promoting or participating in an abusive tax-saving transaction with fictitious trusts and family foundations. We learned about this through a press release from the Ministry of Justice, Four more co-conspirators charged in alleged nationwide tax haven scheme (27 April 2024) and the Substitute indictment in US v. ConnerD.Colo. Case No. 23-CR-390 (April 24, 2024), which is open to the general public. Note that an indictment is merely a listing of unproven allegations and this case has not been tried or appealed.
The indictment alleges that Larry E. Conner operated a tax mitigation company in Frisco, Texas, called The Business Solutions Group (“TBSG”), which was the trading name of Conner’s Eden Green Trust.
Timothy A. McPhee and Marcia G. Predmore were a husband and wife team living in Estes Park, Colorado. In addition to owning Protech Plumbing & Heating, Inc. and a number of other other businesses, McPhee also owned (together with Predmore) an organization called Private Banking Concepts (“PBC”) through which they sold financial and tax mitigation strategies.
Roderick A. Prescott lived alternately in California and Nevada and ran the Stewardship Institute (“TSI”), which promoted and sold “private family foundations” to U.S. taxpayers.
Suzanne B. Thompson lived in Kalispell, Montana, and operated a bookkeeping and accounting service called The CFO Agency LLC for clients in Montana and Wyoming.
Weldon W. Wulstein lived in Gardnerville, Nevada, and operated Wulstein Financial Services & Company, Inc., which provided tax preparation services to clients within the Lake Tahoe area.
Together, Thompson and Wulstein operated a business called Concierge Accounting Corporation, which provided bookkeeping and accounting services nationwide.
According to the next indictment, all the defendants conspired to sell an abusive tax shelter that allowed U.S. taxpayers to channel their income through a series of sham trusts and ultimately through a charitable foundation, thereby evading taxes.
Conner and McPhee would advise a client to transfer 98% of ownership of their ongoing business to a “business trust” in order that the client would now not must pay taxes on that 98% of business income. The “business trust” would then transfer its interest to a second trust, then to a 3rd trust, with the third trust eventually “donating” any remaining income to a family foundation (also organized as a trust). The family foundation would then “loan” that 98% of income back to the client tax-free, and so all taxes were avoided – just not legally.
Conner and McPhee explained to their clients that although 98% of their business had been transferred to the trusts, in point of fact nothing had modified and the clients had complete control over their business.
To promote the scheme, Conner, McPhee, Prescott, Thompson and Wulstein held seminars and workshops within the United States and abroad where they introduced the scheme to entrepreneurs. At these seminars, Prescott also introduced his private family foundations as the ultimate step within the scheme. Meanwhile, Thompson and Wulstein offered their bookkeeping and accounting services to the entrepreneurs. Conner typically charged his clients between $25,000 and $50,000 for this structure. Other individuals who were unindicted co-conspirators were hired to draft the trust deeds and transaction documents for the scheme.
Business owners who fell for this scam were tricked into paying their personal expenses from the bank accounts of the sham trusts to make it appear as if the expenses were the trusts’ expenses and never personal expenses.
Meanwhile, Prescott (who also used the alias “Rick Scott” to hide the undeniable fact that he already had a Department of Justice injunction against him under his real name for a similar things) urged his clients to spend the “donated” funds for private use and to disguise the transactions to make them seem like of a charitable nature.
The business owners were, in fact, told that this was all a wonderfully legal strategy to avoid taxes – although it wasn’t. Thompson used her tax preparation business to create false financial reports for the business owners, who could then submit them to their tax preparers to arrange their tax returns. Meanwhile, Wulstein prepared and filed false tax returns for clients of the scheme.
Suffice it to say that referral fees were paid to draw latest business customers to this scheme. Of course, the defendants (or a minimum of a few of them) also used this sham trust structure to evade their very own income taxes.
While the indictment below comprises quite a few details of specific actions and transactions of interest, you get my point: According to the indictment, the entire thing was just an enormous tax fraud.
ANALYSIS
Abusive trust schemes to avoid income taxes have been around for a long time. They are all based on the identical premise, which is that a trust pays no taxes. This is definitely true if the tax is a grantor trust – but that just implies that the one that is the “tax grantor” (whether or not they are the legal grantor of the trust or not) pays the tax as a substitute. What the initiators of those schemes do is tell their victims that they aren’t the tax grantor (even in the event that they are) and that income tax can subsequently be legally avoided by transferring income to the trust. This is a lie, since the trust’s taxable income must either be passed on to a living person or be taxed at trust tax rates which might be effectively worse than those for a living person.
To get around this consequence, the trust scammers next try to make use of some form of charity to gather the tax. The problem with a charity on this context, nonetheless, is that the donation to the charity have to be real and completely separate the assets from the owner. However, from the trust scammers’ perspective, this just isn’t good because their clients only need to avoid taxes but are not looking for to lose control of their assets. So the “donation” reported to the IRS is only a sham and the client still retains the profitable use and pleasure of the assets as if it had never been a donation.
These fraudulent trusts have various names: Business Trusts, Pure Trusts, Patriot Trusts, Constitutional Trusts, Contract Trusts, Equity Trusts, Common Law Trusts, etc., and infrequently the name is similar as a legitimate trust (that is a part of the scam). But the scam is similar: a trust is used to avoid income taxes, which it cannot legally do.
The scammers who sell some of these trusts search for inexperienced victims, that’s, successful business owners who aren’t aware of taxes or accounting. To keep their victims at nighttime, the scammers refer them to their accomplices who will handle the accounting and tax returns – not because this may be very profitable, but since it prevents a good tax preparer from noticing the fraud and alerting the victim that they’re committing tax evasion. In just about all of those cases, the tax fraud would have been immediately discovered if the victim had gone to an independent accountant or tax preparer.
This is crucial advice for somebody considering a tax arrangement that seems dubious or too good to be true: get an independent second opinion, where independent here implies that you might have an opinion yourself and it just isn’t advisable by the initiators of the transaction. Most likely, all customers who participated on this deal might be denied the deduction and may have to pay a 40% penalty along with the interest.
The problem for these clients is that a lot of them appear to have been referred to the deal by their existing accounting and bookkeeping providers, who were also aware about the deal. The lesson here is that even when you might have been working with someone for a very long time in your taxes, you need to still seek an independent second opinion in the event that they say something that sounds too good to be true. The sad truth is that sometimes tax and financial professionals perform poorly, and that is something to be wary of.
