The U.S. Department of Justice has brought a superseding indictment against six persons for promoting or participating in an abusive tax shelter transaction involving sham trusts and family foundations. We learn about this through a DOJ Press Release, Four More Co-Conspirators Charged in Alleged Nationwide Abusive-Trust Tax Shelter Scheme (April 27, 2024), and the Superseding Indictment in U.S. v. Conner, D.Colo. Case No. 23-CR-390 (April 24, 2024), which is of public record. Note that an indictment is merely a list of unproven allegations and this matter has been neither tried nor appealed.
The indictment alleges that Larry E. Conner ran a tax-mitigation company in Frisco, Texas, called The Business Solutions Group (“TBSG”), which was the trade name for Conner’s Eden Green Trust.
Timothy A. McPhee and Marcia G. Predmore were a married couple living in Estes Park, Colorado. In addition to owning Protech Plumbing & Heating, Inc., and some other companies, McPhee also owned (with Predmore) a company called Private Banking Concepts (“PBC”) through which they sold financial and tax-mitigation strategies.
Roderick A. Prescott resided in variously California or 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 ran 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 offered tax preparation services to clients in the Lake Tahoe area.
Together, Thompson and Wulstein operated a business called Concierge Acctncy Corporation which offered bookkeeping and accounting services nationwide.
According to the superseding indictment, all of these defendants conspired to sell an abusive tax shelter by which U.S. taxpayers would divert their income through a series of sham trusts, and ultimately a charitable foundation, to evade taxes.
Conner and McPhee would advise a client to assign 98% of the ownership of their operating businesses to a “business trust” such that the client was no longer paying taxes on that 98% of the business income. The “business trust” would then assign its interest to a second trust, then yet a third trust, with the third trust finally “donating” any remaining income to a family foundation (which was also organized as a trust). The family foundation then “loaned” this 98% of the income back to the clients tax-free, and thus all the tax was avoided — just not lawfully.
Conner and McPhee told their clients that although the 98% of their businesses had been assigned to the trusts, in fact nothing really changed and the clients were in complete control of their businesses.
To promote the scheme, Conner, McPhee, Prescott, Thompson and Wulstein held seminars and workshops throughout the U.S. and abroad which pitched the scheme to business owners. At these seminars, Prescott also pitched his private family foundations as the final step of the scheme. Meanwhile, Thompson and Wulstein pitched their bookkeeping and accounting services to the business owners. Conner typically charged his clients between $25,000 and $50,000 for this structure. Other persons, being unindicted co-conspirators, were hired to draft the trusts and transaction documents for the scheme.
Business owners who fell for this scheme were told pay their personal expenses from the bank accounts of the sham trusts so that they would appear to be expenses of the trusts and not personal expenses.
Meanwhile, Prescott (who also went by the alias of “Rick Scott” to conceal that he was already under a DOJ promoter injunction in his real name for doing this same stuff) to clients to spend their “donated” funds on themselves for their personal use and to disguise the transactions to make them appear to be charitable in nature.
The business owners were told, of course, that all of this was totally legal tax-reduction method — even though it was not. Thompson used her tax preparation business to prepare false financial statements for the business owners for them to use with their tax preparers in creating returns. Meanwhile, Wulstein prepared and filed false tax returns for clients of the scheme.
Suffice it to say that there were referral fees paid all around for generating new business owner clients for this scheme. Of course, the defendants (or at least some of them) also used this same sham trust structure to evade their own income taxes.
Anyway, the superseding indictment gives a lot of specifics about certain actions and transaction of interest, but you get the picture: According to the indictment, it was all just a giant tax scam.
ANALYSIS
Abusive trust schemes to evade income taxes have been around for decades. They all have about the same premise which is that a trust doesn’t pay taxes. Indeed, that is true if the tax is a grantor trust — but that only means that the individual who is the “tax grantor” (whether they are the legal grantor of the trust or not) pays the tax instead. What the promoters of these schemes do is to tell their victims that they are not the tax grantor (even if they are) and therefore income tax can be lawfully averted by transferring income to the trust. This is a lie, since the taxable income of the trust must either pass through to a live person or else be taxed at trust tax rates, which are effectively worse than those for a live person.
Thus, to overcome this result, the trust scammers will next use some form of charitable organization in an attempt to soak up the tax. The problem with a charitable organization in this context is, however, that the gift to charity must be real and totally separate the asset from the owner. This is no good from the trust scammer’s viewpoint, however, as their clients just want to avoid taxes but not actually lose control of their assets. So, the “gift” reported to the IRS is just a sham and the client still maintains the beneficial use and enjoyment of the asset as if it had never been gifted at all.
These scam trusts go by various names: Business trusts, pure trusts, patriot trusts, constitutional trusts, contract trusts, equity trusts, common law trusts, etc., and often the name will be the same as a legitimate trust (this is part of the scam). But the scam is the same: A trust is used to avoid income taxes, which it cannot lawfully do.
The scam artists who sell these types of trusts do so by looking for unsophisticated victims, being business owners that have been successful but don’t really know anything about taxes or accounting. To keep their victims in the dark, the scam artists will refer the victims to their co-conspirators to do the bookkeeping and prepare tax returns — not because that is very profitable, but because it keeps a legitimate tax professional from seeing the scam and advising the victim that they are committing tax evasion. In nearly all these cases, if the victim had gone to an independent CPA or tax attorney, the tax scam would have been immediately revealed.
This is the most important advice for somebody who is considering a tax arrangement that seems iffy or too good to be true: Get an independent second opinion, with independent here meaning one that you find yourself and is not recommended by the promoters of the transaction. Probably all the clients who participated in this deal will have their deduction denied and will pay 40% penalties on top of interest.
The problem here for these clients is that many seem to have been recommended into this deal by their existing bookkeeping and accounting service providers, who were in on the deal. There is thus a lesson to be found that even if you have a longstanding relationship with somebody regarding your taxes, if they come up with something that sounds too good to be true, an independent second opinion should still be sought. The sad truth is that sometimes tax and financial professionals go bad, and you have to look to out for that.
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