The following information came from the text of what Senator Trent Lott said about IRS and the inadequacies of their operations. Information Resource Associates on behalf of Worthington Group has combined this information with a recent IRS Notice 97-24 about what the IRS says about Abusive Trusts:

Senator Lott said the following, and was not hesitant in giving the IRS every reason to do a very close self examination relating to their conduct and sloppy unprofessional operational procedures.

"Recent revelations about gross mismanagement, wasteful spending, and flagrant abuse of taxpayers' rights by the IRS are even worse than I've ever imagined".

EXAMPLE:

* "The IRS has spent hundreds of millions of OUR TAX DOLLARS on a high-tech system to answer taxpayer questions and resolve problems. To date, this system does not work and IRS agents still have to access up to nine different computer systems to answer taxpayer inquiries".

* "The IRS has spent almost $1 BILLION ($1,000,000,000) of our tax dollars on a second "document imaging system" (to replace the first multi-million dollar system that was a failure). The IRS has announced it is now terminating this second system, because it is a failure, too".

* "The Government Accounting Office (GAO) audit revealed the IRS cannot account for more than half of its $3 BILLION non-salary operating budget".

* "The GAO also found almost 75% of the taxpayers who tried to call the IRS for assistance last year failed to get through. And of those who did manage to get help, 8.5 MILLION of them received incorrect or incomplete answers! (Remember: if your tax return is wrong because the IRS gave you a wrong answer, YOU are still liable for the fines and penalties, unbelievable!")

* "Nearly one-half of the 100 MILLION "Demand Letters" sent by the IRS telling a person he or she owes more in taxes, fines, and/or penalties are WRONG. Yet correcting the IRS' information and getting your name and credit record cleared can cost hundreds or even thousands of dollars in legal and accounting fees".

* "The IRS's own data shows 40% of the penalties levied on taxpayers are reversed when appealed. In 1993 alone, the IRS charged taxpayers $5 BILLION in mistaken penalties, often ruining the honest taxpayers' credit records, and they do so without any remorse".

"IF PRIVATE BUSINESSES WERE TO OPERATE IN THIS MANNER, IRS WOULD BE CONDUCTING SOME SORT OF INVESTIGATION TO DETERMINE WHY THE BUSINESS WAS NOT KEEPING PROPER BUSINESS RECORDS FOR TAX PURPOSES"

Senator Lott went on to say; "I don't know about you, but I get especially angry when I realize it is MY TAX DOLLARS AND YOURS the IRS is wasting by its shoddy management procedures".

"In 1994, 368 IRS agents were caught illegally scouring through the confidential tax files of citizens, from their own neighbors and friends to VIPs and celebrities. However, the worst thing about this is, only 5 of the 368 were fired or reprimanded in some manner".

EX-HATE GROUP MEMBER WAS ALSO AN IRS AGENT (Reprinted from May 97 PROTECTOR Newsletter)

From The Wall Street Journal 4/3/97

Boston-Richard W. Czubinski had been a member of the Knights of the Klu Klux Klan, and once ran for City Council opposing affirmative action and 'radical homosexual agenda'. The leadership of The White-Supremacist Movement calls Mr. Czubinski a 'stalwart of the organization'. Mr. Czubinski says he entered the Klu Klux Klan for reasons of 'fraternity not political'. It was just an organization, like the Elks to me. A high school dropout with a general equivalency diploma, Mr. Czubinski found steady work at IRS. "I enjoyed it very much he said".

From 1987 to 1995, Czubinski was a contact representative for IRS Boston office. He was assigned to answer taxpayer queries called on toll free numbers. This of course gave him access to an IRS data base annually composed of 200 million business and personal tax records. Czubinski made a point of seeking out provocative political leaders and causes. He appeared on local TV news to explain his support for the presidential campaign of former Klan leader David Duke.

Numerous reports of wrongdoing in the early 90's prompted a sweeping probe of IRS employee record browsing. The results were publicized at a Senate Hearing in 1993. Since late 1994, more than 700 IRS employees have been punished for improper accessing of tax records. The penalties range from reprimands to firings, and 20 have faced criminal charges.

Mr. Czubinski denied any nefarious intent, but doesn't dispute his actions. He said " it was just curiosity, it is human nature to be curious". This did not strike Mr. Czubinski as wrong, because he was not the only one doing this. It seemed widespread that employees of IRS browsed records and IRS tolerated such actions.

Mr. Czubinski was not wrong in his assumptions. In Massachusetts, a part time examiner. Walter Higgins plead guilty in 1995 to disclosing to a Private Investigator tax records of a congressional candidate.

In another incident, Robert M. Patterson an IRS examiner in Memphis Tenn. scanned agency computers for tax records of people like Dolly Parton, Wynonna Judd, Karen Carpenter, Garth Brooks, Elizabeth Taylor, Michael Jordan, and Lawrence Welk. Patterson was on the graveyard shift at IRS examining records of businesses and organizations. He said IRS did not give him adequate training, so he taught himself by looking up names he had seen in that days newspaper.

Both Mr. Czubinski and Patterson were tried in Federal court on charges that they broke the law. Mr. Czubinski was found guilty on 13 counts of wire and computer fraud. He spent 6 months in jail before the Appellate court overturned the conviction. Mr. Patterson was acquitted of the charge.

On April 15, 1997 a bill was passed in congress which makes it a crime to do what Patterson, Czubinski, and other IRS employees have done.

The penalty is 5 years, and a $100,000 fine.

Senator Lott continued, "Nothing galls me more than the stories of the outright harassment of law-abiding taxpayers, especially our senior citizens". The following example of horror stories are just the tip of the iceberg, but they are all true".

"A man who received an IRS Letter accusing him of wrongdoing and threatening seizure of his property was so frightened that he killed himself so his widow would have the money to pay the IRS. A judge found the dead man innocent".

"A woman owed $1,725 in taxes. The IRS seized her $50,000 home and sold it for $1,725, they showed no remorse as usual".

The following examples are from the Kenneth A. Clark Foundation, Sponsors of The Golden Helmet Revenue System:

IRS Abuse Report #138, December 28, 1996

"I was hired and worked as an IRS Agent in Jacksonville Florida District. My work was fine until I helped a taxpayer get a previously closed case reopened due to sloppiness of a Collections Officer. I also discovered a refund amount due her that was nearly barred by the statute of limitations (her tax accountant had failed to file her claim for refund)"

"The combined amount she was refunded should have been around $30,000.00".

"After I closed the case, I was belittled, chastised, and hassled by the Group Manager and the Branch Chief. I resigned. The lip service about taxpayer rights is a source of great mirth in the bowels of an IRS post-of-duty".

IRS Abuse Report #170, April 30, 1997

"I have three clients that were given Notices of Levy and either had their account seized or were verbally abused by Collection Officers. No hearings were held of Notices given prior to the Levy notices. I had no idea this was this widespread".

IRA Abuse Report # 139, December 28, 1996

"Paul is a 77 year old gentleman, he has had a heart attack, and had heart surgery twice. He has had a stroke is pre-diabetic and has circulatory problems in his legs and feet. He has trouble talking and walking".

"The IRS says Paul and Florence owe $62,203 in taxes for 1973-1980; $32,949 in penalties for 1973-1980; and $286,362 in interest for 1973-1980. The IRS also says they owe $264,000 in taxes, penalties and interest for 1981-1988. This totals $596,514 plus compound interest for 1995-1996".

"The IRS is currently seizing Paul's entire ERISA pension by continuous levy for the past year and a half. The amount seized will not cover the accumulating interest, or reduce the alleged tax liability".

"The Taxpayer's Bill of Rights passed by Congress in 1988 provides that a taxpayer's home is exempt from seizure, except as authorized by the District Director of the Assistant. The Chicago District Director of IRS has authorized the seizure of Paul and Florence's home."

"The home is appraised at $95,000. Net proceeds from a sale will not be sufficient enough to pay the interest owed nor extinguish the penalties or the taxes. After the seizure takes place, Paul and Florence will be HOMELESS".

(Think about it, something must be done to protect US citizens from this kind of treatment)

(Reprinted from June 97 PROTECTOR Newsletter)

It came to our attention that the IRS recently published NOTICE 97-24: Certain Trust Arrangements, ie: Abusive Trust Arrangements In General. This is not surprising to us, as we know IRS has been looking into the validity of certain trusts for some time now. We voluntary submitted example copies of our trust documents to Washington, D.C. ; Austin, Texas; Ogden, Utah; and Denver, Colorado. We also have had direct communication with the Chief of Entity Control in Washington D.C. in reference to obtaining EIN Numbers, and we must state," we are in compliance with those Treasury Regulations which govern Unincorporated Organizations/Business Trusts".

We thought it was important information our clients should be informed of, so we decided to respond to IRS's definitions contained herein.

IRS: "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". Taxpayers should be aware that abusive trust arrangements will not produce tax benefits advertised by their promoters and that the IRS is actively examining these types of trust arrangements"

Our Response: We agree, anyone who is using a trust to eliminate taxes that are not permitted by law should be shut down. The KEY in the above statement is "in ways that are not permitted by federal tax law".

Under Title 26 USC, §661 i.e.: Complex Trusts, distributions can be made or not be made. If distributions are made, the receiver has the tax liability NOT the entity which made the distribution. Title 26 USC §661(a)-2, Deductions For Distributions To Beneficiaries states:

"In computing the taxable income of an estate or trust there is allowed under §661(a) a deduction for distributions to beneficiaries the sum of:

(1) The amount of income for the taxable year which is required to be distributed currently, and

(2) Any other amounts properly paid or credited or required to be distributed for such taxable year".

§661(c) "The term 'any other amounts paid, credited, or required to be distributed' includes all amounts properly paid, credited, or required to be distributed by an estate or trust during the taxable year other than income required to be distributed currently".

IRS: "This notice should not, however, create concerns about legitimate uses for trusts". "Under federal tax laws, trusts generally are separate entities subject to income tax (except for certain charitable or pension trusts that are expressly exempted by tax laws and certain grantor trusts described in §671-679).

Our Response: We completely agree, "legitimate trusts are valid", and under Treasury Regulation §301. 7701-(2)(3)(4) it states:

"(2) (a) Characteristics of corporations. (1) The term 'association' refers to an organization whose characteristics require it to be classified for purposes of taxation as a corporation rather than as another type of organization such as a partnership or trust".

"(3) An unincorporated organization shall not be classified as an association unless such organization has more corporate characteristics than non-corporate characteristics". "In determining whether an organization has more corporate characteristics than non-corporate characteristics, ALL characteristics common to both types of organizations shall not be considered".

Commissioner v Brouillard, 70 F 2d 154, 157, Cert. denied, 293 US 574 No. 152 state:

"It is whether the entities were taxable as associations with the corporation rates applied, or as trusts (with conduit method applied)".

IRS: "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". "Abusive trust arrangements often use trusts to hide the true ownership of assets and income or to disguise the substance of transactions."

"The promised benefits may include reduction or elimination of income subject to tax; deductions for personal expenses paid by trust; stepped up basis for property transferred to the trust; reduction or elimination of self-employment taxes; etc."

Our Response: The KEY is "with no meaningful change in the taxpayer's control over or benefit from the taxpayer's income or assets". As we have always said, there MUST be an arms length position taken. This means that the conveyor of assets can never be a trustee, or any longer hold title to any asset. The conveyor of assets completely surrenders ALL control over the asset conveyed.

Additionally it means, now that ownership/title to an asset has been conveyed, the trustee is now the owner of ALL assets, and has complete control of them.

In Boyd v U S, 116 US 618, Silver Thorne Lumber Co. v U S, 1251 US 385 and Article IV, United States Constitution state:

"The trustees of a trust have all the power necessary to carry out their obligations which they assume and their books and records are not subject to review or subpoena"

IRS: "The Business Trust. 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 trust unit holders or to other trusts created by the owner (Characterized either as deductible business expenses or deductible distributions) that purport to reduce taxable income of the business trust to the point where little or no tax is due from the business trust."

"In some cases, the trust units are supposed to be cancelled at death or 'sold' at a nominal price to the owners children, leading to the contention by promoters that there is no estate tax liability".

Our Response: The KEY to this statement is in the line that says; "sold at a nominal price to the owners children", and "contention by promoters that there is no estate tax liability". These statements are not referring to what is described in Title 26 USC §301.7701-3 as 'unincorporated organizations', in that the person who conveys their title to the assets to a trustee are no longer the owners therefore this does not happen. Additionally, a taxable event has not happened as conveyance of assets is NOT a sale, therefore a taxable event did not take place.

Parker v Mona-Marie Trust, 278 SE 321 state:

" Certificates are personal property and convey no interest in the Trust Property" (How can one sell that which they have no interest in?)

and; Goodhue v State St. Trust Co, 267 Mass 28 state:

" Certificates are not chattels but evidences of intangible rights".

and; Knowlton v Moore, 178 US 41, 20 S.Ct 747, 44 L Ed 969 (1900); YMCA v Davis, 264 US 47 (1924), 44 S Ct 291, 68 L Ed 564; Goodman v Granger, 243 F 2d 264 (1957); Babb v US, 349 F. Supp 792 (1972) state:

" Interests which terminate 'on' or 'before' death are not a proper subject of the Federal Estate Tax".

CAPITAL CERTIFICATES:

Bouchard v People's Trust, 253 Mass 351, 148 NE 895 state:

" Certificate holders are devoid of legal rights, have no officers, are and must remain forever mute as to selection, approval or disapproval of the trustees and their methods to conduct business affairs would make the trustee the absolute owner"

and; Goldwater v Oltman, 210 Cal 408, 292 P 624, 71 ALR 871 state:

" Certificate holders of a trust contract enjoy an even greater immunity from personal liability than is accorded to stockholders of corporations".

and; Estate of Anderson v Commissioner of Internal Revenue, 8 Tax Court 706, 721 state:

" Certificates have no ascertainable 'Fair Market Value', and have minimal value to someone else. Bad bargains do not result in taxable gifts, Contract trusts is a genuine business transaction".

and; U S v Merriam, 263 US 179 (1923); Gould v Gould, US 151; Commissioner v Harrelson, 282 US 55 (1930) state:

" No equitable construction of a tax statute, Code must be strictly construed as gain measured from 'Fair Market Value' of property received".

and; Brigham v US, D.C. Mass. 1941, 38 F. Supp 625, appeal dismissed 122 F 2d 792 state:

" A trust ia a separate and distinct entity from its beneficiaries for income tax purposes".

and; Estate of Anderson, 8 Tax Court 706(A) (1947) state:

" Even bad bargains in genuine business transactions do not result in taxable gifts".

and; Lucas v Earl, 281 US 111 (1930) state:

" Tax can only be shifted where the 'tree' (income) is conveyed. Mere anticipatory assignment is not good enough".

IRS: The IRS also lists as abusive trusts, The Equipment or Service Trust; The Family Residence Trust; Charitable Trusts; and The Final Trust.

Our Response: Since we do not structure these type of trust entities, we will not take time to discuss them. If the reader wishes more information, we suggest a Law Library and some research.

IRS: Substance not form controls taxation. "The Supreme Court of the United States has consistently stated that substance rather than the form of the transaction is controlling for tax purposes" See 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 it's transactions for federal tax purposes". (Notice how OLD these cases are?)

Our Response: RIGHT OF CONTRACT: Constitution of the United States, Article I Section X states in part:

"No State shall...pass any bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts........"

and; Smith v Morse, 2 CA 524 states:

" A Pure trust is established by contract, and any law or procedure in its operation, denying or obstructing contract rights impairs contract obligation and is therefore, violative of the United States Constitution".

and; Ashworth v Hagen Estates, 165 VA 151, 182 SE 381 states:

" One of the main objectives of a trust contract is to obtain most of the advantages of corporations, but with freedom from the burdens, restrictions, and regulations generally imposed upon them".

and; Hecht v Malley, 265 US 144 (1924), Navarro v Lee, 466 US 458 (1980) state:

" The United States Supreme Court has acknowledged the trust contract as a 'pure or true trust'".

IRS: "Taxation of Non-Grantor Trusts-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 beneficiaries tax return".

(Doesn't this seem contradictory to everything IRS previously said?)

Our Response: It appears from the above statements, that there are Grantor and Non-Grantor Trusts, and that Grantor Trusts have certain requirements Non-Grantor Trusts do not have. It also appears, that the Unincorporated Organization/Business Trust is NOT a Grantor type Trust. We have always maintained consistently in the information we send to potential clients and the information on our Web Home Page, that there are trusts which are Non-Grantor, and are constitutionally based. These are the type trusts we construct and recommend.

It is hoped, that this information will help to enlighten and educate the reader. It is by no means meant as legal advice, and should not be construed as such. If additional information is desired, we recommend the reader do personal research at a Law Library.