Just today someone sent me an email noting the following “truth”:
Hey Russ, [redacted] sent me this video on how I can put all my wages and other income into this investment vehicle and I’ll no longer have to pay taxes on any of this.
I know, it sounds too good to be true, but it is true. I’ve read all of these documents and it sure seems legal….
I won’t bore you with all of the other details. Suffice to say, I was being asked to invest in a Cayman Islands Trust. Somehow, after spending lots of money in fees my taxable income will become sheltered from US income taxes. There’s no reporting, no tax, and no trouble from the IRS!
If it sounds too good to be true it probably is.
This is. We start with the first problem, the economic substance rule. In order for any transaction to be meaningful in the Tax Code, there must be some economic substance to it. For example, I sell John $10 worth of paper. That has economic substance: I now have $10 and John has a bunch of paper. But what economic substance can there possibly be when I magically turn my earned income into vanished income?
In order for a Trust to be recognized under federal tax law, a trust must have some real economic effects.
Next, federal law requires the grantor of a foreign trust to report that. So if you decide to obtain a foreign trust, you had better be prepared to disclose it or face severe penalties including possible time at ClubFed.
I hope you get the idea. If you follow this Bozo path you will likely get in deep trouble. Consider what happened to Lorin Sloan, as noted in United States v. Sloan, 939 F.2d 499 (7th Cir. 1991), cert. den. 112 S.Ct. 940 (1992). (My thanks to Dan Evans’ Tax Protester FAQ for this.)
Like moths to a flame, some people find themselves irresistibly drawn to the tax protestor movement’s illusory claim that there is no legal requirement to pay federal income tax. And, like the moths, these people sometimes get burned. Lorin G. Sloan believed these claims and because he acted upon them now faces four months in a federal prison; there can be little doubt that he has been burned.
[. . . .]
The real tragedy of this case is the unconscionable waste of Mr. Sloan’s time, resources, and emotion in continuing to pursue these wholly defective and unsuccessful arguments about the validity of the income tax laws of the United States. Despite our rejection of Mr. Sloan’s legal analysis of the tax laws, we are not unmindful of the sincerity of his beliefs. On the other hand, we are less sure of the sincerity of the professional tax protestors who promote their views in literature and meetings to persons like Mr. Sloan, yet are unlikely ever to face the type of penalties incurred by him. It may be that our decision will not alter Mr. Sloan’s views regarding the tax laws of this country, for he has stated that if we affirm his conviction without applying the law as he understands it, our decision will be ‘a sham to which I WILL NOT SUBMIT.’ It may also be that serving his sentence in prison will not alter Mr. Sloan’s view. We hope this pessimistic assessment is incorrect.
Tomorrow we will bring you our #1 Bozo Tax Tip of the Year. And it’s brand new for this year!