Maxwell -1041, Claim of Right, Non-profit "black holes"

[jcolvin2]

http://www.ca8.uscourts.gov/opndir/11/07/102237P.pdf

The promoter did not file returns while hawking the various schemes. On appeal, he unsuccessfully challenged the government's introduction of evidence that he personally failed to file returns.

The 1041 scheme and the bogus "claim of right" deduction are old news, but the non-profit clubs owning LLCs is a new twist:

The third scheme was more complex. The group formed LLCs for their clients,
which were, in turn, purportedly owned by non-profit clubs. The LLCs had no
obligation to pay tax but rather were mere pass-through entities, required only to
report to the Internal Revenue Service (IRS) the amount of income that had passed
through to the owners, i.e., the non-profit clubs. According to the conspirators, the
clubs had no obligation to pay taxes by virtue of their status, nor could they be audited
by the IRS. Leiter therefore described them as “black hole[s].” Trial Tr. at 719:9-14.
Clients would then use the non-profits’ bank accounts as their own, freely taking
money for their personal use.

[wserra]

Rose and Valerie, screaming from the gallery
Say he must go free
(Maxwell must go free)
The judge does not agree and he tells them
So-o-o-o.

[Gregg]

Clients would then use the non-profits’ bank accounts as their own, freely taking
money for their personal use.

Taxable income

[Arthur Rubin]

http://www.ca8.uscourts.gov/opndir/11/07/102237P.pdf

The promoter did not file returns while hawking the various schemes. On appeal, he unsuccessfully challenged the government's introduction of evidence that he personally failed to file returns.

The 1041 scheme and the bogus "claim of right" deduction are old news, but the non-profit clubs owning LLCs is a new twist:

The third scheme was more complex. The group formed LLCs for their clients,
which were, in turn, purportedly owned by non-profit clubs. The LLCs had no
obligation to pay tax but rather were mere pass-through entities, required only to
report to the Internal Revenue Service (IRS) the amount of income that had passed
through to the owners, i.e., the non-profit clubs. According to the conspirators, the
clubs had no obligation to pay taxes by virtue of their status, nor could they be audited
by the IRS. Leiter therefore described them as “black hole[s].” Trial Tr. at 719:9-14.

Unrelated business income? (Although I don't prepare non-profit returns, I've seen the return of our homeowners' association.)

[Gregg]

No, what I was saying was, they can juggle the money around all the Schedule Cs that own LLCs that hold non profit foundations that control charitable trusts, but when any real person gets money for personal expenses, all the other stuff falls apart, when you get cash, that's gross income, and if its above the threshold, its taxable income.

[grixit]

Someone is about to disappear inside the event horizon. Also known as the Lost Horizon.

[LPC]

Unrelated business income?

Yes, there is that. The tax on UBTI applies pretty much to any organization otherwise exempt from tax.

But Gregg's point is the better one, which is that you can play all the shell games you want, but as soon as the money benefits an individual, it's taxable income to that individual, and the second scheme described in the court opinion suffered from that same problem.

The second scheme involved filing 1041s (a trust income tax return) instead of 1040s, and claiming trustee fees equal to the gross income on the return. But trustee fees are income to the trustee.

All three schemes were just ways of filing fraudulent returns, with just a very thin patina of rationale.

[Gregg]

OMG, Dan came pretty close to saying I was right!

Thank you, and I'm not being in the least a smart ass.

[LPC]

OMG, Dan can pretty close to saying I was right!

I think I did say you were right.

But don't let it go to your head. You were wrong about other stuff.