The financial system described herein, can best be characterized as "a network of relationships based on `trust' rather than documents." It is a system based on `integrity' rather than `force'. It is a system in which legally separate individuals and entities act independently of one another for the economic welfare of an individual.
Worthington Group advises that the information provided the reader, to the best of Worthington Group's knowledge is accurate and on point. However, additional research is recommended for readers of this information who anticipate the structuring of an Unincorporated Organization. Additionally, they should seek legal counsel if questions have not been answered to their satisfaction, and if legal counsel is available with knowledge on this subject.
It is a system which takes advantage of the fact that the United States has become the largest tax haven in the Free World. The annual US Government deficit has been paid by constantly increasing the borrowing of money by the US Government. Foreign investments provide many billions in financing the bloat of United States governmental business. Foreign investments are invested in the United States because they escape most or ALL of the burdensome taxes US citizens are required to pay.
The amount/s of money owed by the United States to foreign entities by the most current figures, is in the area of One Trillion Dollars, with the interest on the debt in excess of 300 billion dollars per year. Much of the debt being short term must be rolled over every few years, thus increasing the burden of repayment. In order to make investments attractive to foreign entities that invest in the United States on a continuing basis, there must be tax laws which make it possible for the foreign entity investor to avoid the payment of taxes required of United States citizens.
Everyday foreign entities get to vote with their check books. The only question they need to answer is, shall we leave our funds invested in United States debt securities, or shall we take our funds out of the United States? One fact which influences their decision/s, is the privacy they have in the return (flow) of interest on their investments, and the lack of tax payments on their investments.
These facts obliviously are not well known nor publicized within the United States, and it is not likely that the system foreign entities use in handling their investments in the United States is going to be changed. This would reduce their motivation to continue to invest in the United States. QUESTION, If one can legally transform their money using a foreign domiciled entity and have that entity loan or invest in the United States, is it then possible to have the same tax advantages that are afforded to those of foreign status?
How A Contractual Business Works, Step By Step:
A system composed of an Unincorporated Organization, (Contractual Business), which is free from regulations that effect corporations is first structured. This system of the Unincorporated Organization (Contractual Business) files its tax returns like any other business entity however, the form it files is IRS Form 1041, a fiduciary return.
1) The Unincorporated Organization (Contractual Business) is created to operate as a business using the Trust form of organization rather than the Corporate form of business.
2) The `Unincorporated Organization' (Contractual Business) pays taxes in the same manner as an individual US taxpayer, on profits earned and kept, and files as an individual according to Fabens v CIR, CA 1, 1975, 519 F.2d 1310, in which the court stated:
"Trusts are taxable entities which compute their deductions basically as individuals".
Worthington Group requires all of its clients to file any tax or informational returns which are required by the Internal Revenue Service, or their State tax agencies.
An Unincorporated Organization is created by the trustee/s and a Settlor. When the client has named the Trust/s, protector, and beneficiaries, the conveying/ exchanging of assets takes place, i.e.: Equipment, Real Estate, Household Items, Antiques, Cash, etc.
In return for those assets conveyed/exchanged, the client receives Capital Certificates. Capital Certificates are the medium of exchange for assets, and have the same non-determined value. The assets which are conveyed/exchanged are not sales, nor gifts. It is a conveyance/exchange for valuable consideration, with indeterminable value. ***This process is not a taxable event.
The Certificate, while valuable and entitled to various types of distributions when and if declared by the trustee, has no ***determinable value, thus no taxable event has taken place in conveying/exchanging assets for certificates. ***The Supreme Court in Burnett v. Logan, US 283 404 stated;
"If property received in exchange has no fair market value, it does not represent taxable gain to the recipient."
3) A client can convey/exchange a large variety of assets which may or may not be of value equal to acquisition costs (real estate is treated specifically). The Trust/s receive the assets on an original cost basis, therefore the client would not be subject to taxes on the profit/s in exchange, simply because the Certificate given and received have no determinable value.(1)
The client is not the beneficiary, the trustee, or the creator of the trust. The client can be appointed by the board of trustee/s as the manager of the Contractual Business.
As manager, the client becomes contract labor of the 'Contractual Business', and will receive an agreed upon managers fee, and pay tax on same, as the Contractual Business issues IRS Form 1099 to the manager each year. The client conveyed/exchanged the `assets' of a going business along with personal 'assets' into a trust, and then as manager continues to operate the business on behalf of the beneficiary, while under the direction of the trustee.(2)
The client is not the beneficiary nor the trustee, thus he/she has no personal tax liabilities for the profits of the `Contractual Business '.
The `Contractual Business' pays the normal tax on business related profits retained. The key phrase is `retained', and must be carefully defined. In the world of "Tax Loopholes", we have learned words do not always mean what we think they mean. Example: Does `retained' mean that the `Contractual Business' keeps the monies?
When the `Contractual Business' distributes the taxable income to the beneficiary, there is no tax to be paid by the `Contractual Business', it is the beneficiary who is liable for the tax. The `Contractual Business' it seems, can legally avoid tax liabilities without the actual disbursement of cash, and can retain the cash, and not retain the liability? If the `Contractual Business' distributes all of the profits to the beneficiaries of the `Contractual Business', the `Contractual Business' pays no taxes. See, Title 26 USC 661 (a).
4) The `Contractual Business' files a tax return, and identifies (on a Schedule K-1) who the beneficiaries of the `Contractual Business' are. The Internal Revenue Service now knows that the beneficiaries are responsible for the payment of taxes not the `Contractual Business'.
We hope this brief explanation has given the reader some additional insight into what an Unincorporated Organization is.
Write Protected 94 and Future, Worthington Group
1. 1 Stern v C.I.R., 747 F.2d 555 (1984) is a very important case in that it relates to and gives several examples of taxpayers exchanging of stocks into a ;trust', in exchange for future income.
2. 2 The more complicated arrangement could include a Limited Partnership, where the General Partner is a Corporation, with the manager as Owner, dealing with the public as a corporation. The corporation in turn, would have only a 1% interest in the Limited Partnership, while one or more 'Business Trusts' would hold the remaining partnership percent interest.
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