A New One: IRC Section 643

[LPC]

This is a new one for me (after all these years): a claim that a "non-grantor, irrevocable, complex, discretionary, spendthrift trust" is not taxed on gains because they are "excluded" from tax under IRC section 643(a)(3).

The full General Counsel Memorandum refuting the nonsense is here: https://www.irs.gov/pub/lanoa/am-2023-006.pdf (AM 2023-006).

The gist of it is that the definition in section 643(a) is a definition of "distributable net income" (aka "DNI") and not "taxable income." DNI is a measure of the amount of income that can be taxed to the beneficiaries of the trust, rather than the trust itself, and does not in any way limit the gross income or taxable income of the trust itself.

I don't know who has been promoting this scam, but it's now got the attention of the IRS.

[The Observer]

I don't know who has been promoting this scam, but it's now got the attention of the IRS.

At least it doesn't seem to be thetypical sovrun/tax denier source:

The structure is being promoted by a combination of attorneys, accountants, enrolled agents, and unlicensed tax advisors.

But their ethics seem to have lapsed. I can't believe that these professionals are so stupid as for all of them to believe this loopy interpretation.

[Cpt Banjo]

The IRS memo states that these trusts permit the grantor, as "Compliance Overseer", to change the trust's beneficiaries. This makes the trust a grantor trust under Section 674 thereby making the grantor taxable on the trust's income.

[The Observer]

This makes the trust a grantor trust under Section 674 thereby making the grantor taxable on the trust's income.

IRC 675 and 676 also spell out the ways the grantor can end up being seen as the owner of the trust. an issue that most of the marks don't realize that exists. It's an issue that the promoter rarely talks about to the marks and they are confounded when the government tells them that the assets they placed in the trust are not protected due to the fact it was set up as a revocable trust or at moved assets out of the trust back into their name without the trust being compensated equitably. I remember a situation where a person created a trust that was supposed to be irrevocable, but every time they needed money, they move the real property in it to their name, completed the loan process, then moved the real property back to the trust. This was done several times. Senior creditors pounced on that once the history of the property was researched and the trustee/owner lost the real property.