Farmers have long been the target of fraudulent tax schemes. One common scheme involves the claim that farm business property can be transferred to a trust with the result that the transfer eliminates all taxes due and owing. In this case, a farmer transferred Gove county farmland to a trust with the farmer’s daughter purporting to be the secretary and general manager. The trust promoter was the managing agent of the trust. The farmer was the initial beneficiary of the trust. When he died in 1994, the daughter was named the sole beneficiary. In 2001, the trust disbursed $195,000 to the daughter as a “loan” for farming purposes. The loan was not documented, had no repayment schedule, no final payoff date and no interest rate. The daughter and her husband farmed the trust land as tenant farmers under a crop-share lease. They claimed that they need not report income from the farm because the federal income tax was merely voluntary and, ultimately, unconstitutional. The court noted that these arguments have been repeatedly rejected judicially. The court also noted that the couple managed the trust property as if it were their personal property and were not bound by any trust restrictions. Consequently, the court upheld the government’s claim that the trust should be disregarded for tax purposes. Because the trust was a sham, the court held that the couple’s assignment of farm income to the trust failed with the result that the couple had earned income from farming that was also subject to self-employment tax. The court imposed an accuracy-related penalty against the couple for substantial underreporting of income, and an additional penalty for wasting the court’s time with frivolous and groundless arguments. The court imposed the latter penalty even though the government did not request it. Lundgren v. Comr., T.C. Memo. 2006-177.
Note: In a separate proceeding, the trust promoter, Jimmy C. Chisum, was sentenced to 97 months in prison, followed by two years supervised release for tax evasion. Chisum’s tactic was to conduct seminars to sell a trust package involving foreign and domestic trusts, claiming that the trust would eliminate any tax due and owing. Chisum claimed that filing income tax returns was voluntary and that taxpayers could protest government spending by refusing to pay taxes. Chisum collected up to $15,000 to set up the trusts. His clients would transfer 95 percent of their business income to a trust set up by Chisum, who transferred the funds to offshore bank accounts. People who invested in the trusts would request money for payment of personal bills and expenses, and Chisum directed the payments of his clients’ bills. When his clients were audited, Chisum helped them file fraudulent returns in an attempt to hide actual income.