Monday, May 21, 2012

Sham trusts may be disregarded

The IRS has identified as an “abusive trust arrangement” as described in  Notice 97-24, 1997-1 C.B. 409, in which the taxpayer attempts to minimize income taxation by transferring assets to a trust with no meaningful change in the taxpayer's control over the assets. See also Zmuda v. Commissioner,  79 T.C. 714 (1982), aff'd. 731 F.2d 1417 (1984); Markosian v. Commissioner,  73 T.C. 1235 (1980). The Service has won several cases involving such “sham trusts.” See Zachman v. Commissioner,  T.C. Memo 1999-391 (1999). Accordingly, your office may wish to examine the returns of A and B to determine whether these arrangements constitute “sham trusts.”

CCA 201220027

UIL No. 9300.99-07Letter rulings, information letters, and determination letters—refusal of IRS to issue rulings requested by taxpayers—sham trusts—frivolous issues.


IRS refused to issue letter rulings requested by taxpayers to determine specific tax laws applicable to trusts purported to have been created by Social Security Administration, where trusts appeared to be “sham trusts.”

Reference(s): IRC Sec(s). 6702


Number: 201220027

Release Date: 05/18/2012 Office of Chief Counsel

Internal Revenue Service Memorandum

Number: 201220027 Release Date: 5/18/2012

CC:PSI:2 Third Party Communication: None

POSTN-105364-12 Date of Communication: Not Applicable

UILC: 9300.99-07

date: February 07, 2012

Case Information:

[pg. 99-2468]
Code Sec(s):       6662
Docket:                Dkt. No. 13252-91.
Date Issued:       12/01/1999.
Judge:   Opinion by Thornton, J.
Tax Year(s):        Years 1987, 1988, 1989.
Disposition:       Decision for Commissioner.
Cites:    TC Memo 1999-391, RIA TC Memo P 99391, 78 CCH TCM 880.

 Business trust to which taxpayers transferred their income-producing property, including farm and parts business, was sham that lacked economic substance: taxpayers retained control over farm where together with sons, they provided all labor; corporate trustees weren't independent and [pg. 99-2469] didn't perform duties or control farm; trustees' presidents were figureheads and merely signed documents when asked by trust organizers; trustee-appointed “managers” served no meaningful function; under trust, no economic interest would pass to any beneficiary other than taxpayers; trust wasn't created for estate planning purposes where it wouldn't have assured that farm would remain in family; claimed limited liability objective to protect farm property was rejected as peripheral to tax savings objective; and taxpayers were properly treated as receiving all farm and parts income due to their control. (212) 588-1113

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