No Rulings on Social Security "Trusts"

[LPC]

For some reason, the IRS Office of Chief Counsel is refusing to rule on the tax consequences of "trusts" supposedly created by the Social Security Administration when they issued social security numbers. Instead they suggest that the taxpayers who requested the rulings be investigated.

ILM 201220027

Third Party Communication: None
Date of Communication: Not Applicable

UILC: 9300.99-07
Release Date: 5/18/2012
Date: February 7, 2012

CC:PSI:2 - POSTN-105364-12

to:
Constance Allison
(IRS, PSP, Western Area)

from:
Bradford Poston
(CC:PSI:2)

subject:
A, B

This Chief Counsel Advice responds to your request for assistance. This advice may not be used or cited as precedent.

LEGEND:

A = * * *
B = * * *
X = * * *
Year = * * *

We are notifying you of our refusal to issue the rulings requested by the above-captioned taxpayers pursuant to § 6.10 of Rev. Proc. 2011-1.

A and B have each submitted a private letter ruling request to determine the specific tax laws applicable to trusts that they purport to have been created by the Social Security Administration (SSA).

A and B assert that the SSA created trusts in their names with each of them as trustee for the benefit of the US government. They each provided a nearly identical instrument entitled "Simple Social Security Trust." Each trust instrument states that it was created when SSA issued social security cards in each of their names. The instruments also state that A and B are "Stewards in the Kingdom of Israel" that provide "the consciousness and physical capacity" for the trusts. After making FICA payments, any net income may be held, invested, used as fiduciary fees, or distributed to its "Steward."

In their ruling requests, A and B represent that the "trusts" contracted to perform services for X, and that each trust also controls two units of ownership interest in X. The "trusts" were paid for services in connection with the contract with X in Year. However, A and B state that they are unable to determine the proper income tax treatment or filing requirements for the trusts.

We have attached copies of A's and B's correspondence with this office, including two documents entitled "Simple Social Security Trust."

This situation appears to be 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."

In addition to the attachments mentioned above, we are including a copy of the letter which this office is sending to A and B. Copies of this memorandum and the supporting documentation are also being provided to the Office of Division Counsel, Associate Chief Counsel (Criminal Tax).

Please call (202) 622-3060 if you have any further questions.

[LPC]

Incidentally, requesting a private letter ruling is not something done accidentally. It's not like these clowns wrote to the IRS and asked a question, and the IRS decided to treat it as a request for a private letter ruling. They would have had to expressly request a ruling, and paid a fee.

So these guys went to some effort to shoot themselves in their feet.

[Gregg]

Could have been worse. Imagine if you DID have a super secret account at Social Security and it was worth billions, just like the whackadoodles say, but if you ask about it it immediately becomes taxable income and you owe the tax, interest and penalties all the way back to the day your birth certificate was issued.

I am making a side bet that within a few years that explanation shows up as serious advice on some website somewhere

[The Observer]

For some reason, the IRS Office of Chief Counsel is refusing to rule on the tax consequences of "trusts" supposedly created by the Social Security Administration when they issued social security numbers.

I imagine the reason might be that Counsel does not want to jeopardize what could be a successful investigation and criminal prosecution of potential promoters.

[Quixote]

This situation appears to be 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.

...

Accordingly, your office may wish to examine the returns of A and B to determine whether these arrangements constitute "sham trusts."

WTF? What arrangements? A and B are batshit crazy and that fact may be a bit hard to work into a PLR response, but I would have expected better than this. I suspect Bradford Poston did not write that memo alone. Whichever member of the committee wrote the bit above can't have read the part about A and B being "Stewards in the Kingdom of Israel". A better approach would have been to point out the obvious, that SSA did not set up trusts and certainly did not make the individual workers trustees of those trusts.

[LPC]

For some reason, the IRS Office of Chief Counsel is refusing to rule on the tax consequences of "trusts" supposedly created by the Social Security Administration when they issued social security numbers.

I imagine the reason might be that Counsel does not want to jeopardize what could be a successful investigation and criminal prosecution of potential promoters.

The "for some reason" was facetious.

The actual reason cited by the Chief Counsel was section 6.10 of Rev. Proc. 2011-1, which reads as follows:

The Service will not issue a letter ruling or a determination letter on frivolous issues. A “frivolous issue” is one without basis in fact or law or one that asserts a position that courts have held frivolous or groundless. Examples of frivolous or groundless issues include, but are not limited to:

(1) frivolous “constitutional” claims, such as claims that the requirement to file tax returns and pay taxes constitutes an unreasonable search barred by the Fourth Amendment, violates Fifth and Fourteenth Amendment protections of due process, violates Thirteenth Amendment protections against involuntary servitude, or is unenforceable because the Sixteenth Amendment does not authorize nonapportioned direct taxes or was never ratified;

(2) claims that income taxes are voluntary, that the term “income” is not defined in the Internal Revenue Code, or that preparation and filing of Federal income tax returns violates the Paperwork Reduction Act;

(3) claims that tax may be imposed only on coins minted under a gold or silver standard or that receipt of Federal Reserve Notes does not cause an accretion to wealth;

(4) claims that a person is not taxable on income because he or she falls within a class entitled to “reparation claims” or an extra-statutory class of individuals exempt from tax, e.g., “free-born” individuals;

(5) claims that a taxpayer can refuse to pay taxes on the basis of opposition to certain Governmental expenditures;

(6) claims that taxes apply only to Federal employees; only to residents of Puerto Rico, Guam, the U.S. Virgin Islands, the District of Columbia, or “Federal enclaves;” or that §§ 861 through 865 or any other provision of the Code imposes taxes on U.S. citizens and residents only on income derived from foreign based activities;

(7) claims that wages or personal service income are “not income,” are “nontaxable receipts,” or are a “nontaxable exchange for labor;”

(8) claims that income tax withholding by an employer on wages is optional; or

(9) other claims that the courts have characterized as frivolous or groundless.

Additional examples of frivolous or groundless issues may be found in IRS publications and other guidance (including, but not limited to, Notice 2010-33, Frivolous Positions, and I.R.M. 4.10.12.1.1, Frivolous Arguments) and as may be described on the IRS website at http://www.irs.gov/pub/irs-utl/friv_tax.pdf.

But *why* will the IRS not rule on a frivolous issue, even negatively?

I expect for the same reason that the 5th Circuit refused to rule on Crain's arguments:

"We perceive no need to refute these arguments with somber reasoning and copious citation of precedent; to do so might suggest that these arguments have some colorable merit." Crain v. Commissioner, 737 F.2d 1417, 1417 (5th Cir. 1984).