IRS
Indicts Two Men for Phony Trusts; Hong Kong Remains a Separate Country
My April 20th column described the IRS's concentrated attack on the
following phony trust schemes: (1) small business trusts where the beneficiary (person
receiving the benefits) is the same person as the grantor (creator); (2) equipment or
service trusts which rent equipment or perform services for the business trust; (3)
family-residence trusts which assume ownership of the home and furnishings in which the
grantor (owner) is the renter (beneficiary) or occupant; (4) charitable trusts which treat
non-deductible payments (tuition for the grantor's children) as charitable distributions;
and (5) final trusts which oversee multiple abusive trusts and are often located in
foreign jurisdictions.
Note: Do not confuse these sham trusts with the legitimate and proper revocable trusts to avoid probate and minimize estate taxes which are drafted by estate planning attorneys.
The IRS's nationwide crackdown on sham trusts has claimed its first victims: The
Justice Department recently indicted two men from Roseville, California (a former CPA and
an attorney), who worked for G&D Associates Estate Planning and later Forest Estates
Planning Associates, for conspiring to conceal taxable income earned by their clients
through off-shore (foreign) sham trusts. The indictment also alleged that these trust
promoters assisted their clients in filing false and fraudulent income tax returns.
The defendants created and used "unincorporated business organizations"
(UBO), entities that resemble trusts to assist their clients hide taxable income from the
IRS. The use of UBOs is popular among trust scam promoters, although, in reality, they
offer no protection against taxation. Clients were counseled and assisted in transferring
their businesses, medical practices, homes and other assets into UBOs or to bank accounts
corresponding to these entities.
Although the UBOs had "nominal trustees" or "administrators," the
entities were actually under the management and control of the clients, who operated the
entities, and maintained full control of the bank accounts and other assets supposedly
transferred to the entities. The UBOs were used to funnel money into and out of the
off-shore trusts and to otherwise evade income taxes.
According to U.S. Attorney Charles J. Stevens, "Sham transactions intended solely
to evade taxes or conceal income from the IRS are illegal. Those who deliberately fail to
pay their fair share in taxes by engaging in such conduct should expect to be criminally
prosecuted." This warning applies to all taxpayers using sham trusts, whether foreign
or domestic, to evade income taxes.
These individuals are expected to stand trial for conspiracy to defraud the U.S.
(maximum penalty of 5 years in prison and a $250,00 fine) and for aiding and assisting in
filing false income tax returns (maximum penalty of 3 years in prison and a $100,000
fine).
The Agreement between the U.S. and China for the Avoidance of Double Taxation and the
Prevention of Tax Evasion with Respect to Taxes on Income (the "Convention")
will not apply to Hong Kong, according to the IRS. The Convention provides that its
geographical scope is limited to those areas in which the laws relating to Chinese taxes
are in force. This limitation precludes application of the Convention to Hong Kong since
the Chinese have stated that Chinese tax law will not apply in Hong Kong after the
takeover.
For purposes of the Internal Revenue Code and Income Tax Regulations (including subpart
F of the Code), Hong Kong has always been treated as a separate country. The IRS will
continue to treat Hong Kong and China as separate countries after July 1, 1997.
Because it does not have a tax treaty with Hong Kong, the U.S. will continue applying its 30 percent flat tax on interest, dividends, royalties, rents and other income received by Hong Kong residents and companies. In contrast, the tax rate for interest, dividends and royalties under the Convention is 10 percent. Note: The tax rate applicable to Hong Kong residents and companies cannot be avoided by claiming residency in mainland China solely to take advantage of the Convention.
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