Hi there,

As the 3rd quarter of the year winds down, it’s time to start looking ahead to 2024. But first, this week’s top 3 insights curated just for you.

TikTok Trust Smack-Down. 

This story feels like a serotonin injection straight into my veins. The IRS recently released a memo striking down a trust-scheme commonly (unfortunately) seen on TikTok and Instagram.

Promoters advertise this as a “Non-grantor, irrevocable, complex, discretionary, spendthrift trust”. They claim that this unique (and sometimes will say proprietary, copyrighted, etc.) structure is an oh-so-clever way to make that pesky income tax disappear. The basic premise is you sell an asset to the trust in exchange for a promissory note. That initial step is fine - but then we quickly go off the rails when they claim you can sell the assets at their “book value”, and not their Fair Market Value (FMV), and thus have no gain on this initial sale. Gain on an asset sale is calculated on the FMV minus the book value, but just claiming you can sell it at book value and not FMV to avoid gain is completely incorrect. It has to be sold at FMV.

The next huge mistake they make is claiming none of the income generated by the trust from selling the asset it’s purchased is subject to income tax. They say they’re able to do this by allocating this income to “corpus” and not distributing to beneficiaries (IRC Section 643(a)(c). They then claim that any remaining income in the trust is an “extraordinary dividend”, and thus if allocated to corpus is not considered income of the trust (IRC Section 643(a)(4).

Normally, trust income will be taxed in one of two ways - upon distribution to the beneficiaries via a K-1, or at the trust level if not distribution is made (trusts have HORRENDOUS tax rates). They’re thinking they’re super clever by calling all income corpus, and thus saying none of it is taxable. The main issue these promoters run into is they lack basic trust accounting knowledge. Trust accounting happens on multiple levels - there is both fiduciary accounting income (FAI) and distributable net income accounting (DNI).

FAI is not calculating income for income tax purposes - think of it as an internal set of records of income for the trust which allocates receipts to income and not corpus. The DNI is what what limits what can be deducted from the trust income in arriving what will be taxed to beneficiaries. The promoters mix up these two types of accounting and mistake the rules associated with determining income with FAI and DNI. As a result, they completely take the subsections of 643 out of context and promote fraudulent tax structures.

If you want to see what a pitch deck for this type of scam looks like - here’s a good one to reference.

Charity Scam at Petco Park. 

HUGE yikes on bikes. There has been a fake charity - Chula Vista Fast Pitch, that’s been operating at Petco Park concession stands for the past 9 years and have taken a cut of the proceeds in return for staffing. First off - this type of arrangement is not at all uncommon. I’ve heard of city fast-pitch softball teams working the concession at State football games as a fundraiser.

Chula Vista Fast Pitch was a non-profit at one time - but last filed according to records in 2014. It’s estimated $370,000 in income was obtained by CV Fast Pitch for their concession work and never claimed or reported anywhere.

Ca-Ching at the IRS.

When you owe the IRS money, you have to pay interest on your amount due (this interest rate is adjusted quarterly). But did you know if the IRS owes you money, they also must pay interest on that amount due?

This big news this week is that the new IRS interest rate is now 8% for Q4, compounded daily. That means if you owe money, it’s in your best interest to get it paid off ASAP.

And if the IRS owes you money? Cha-Ching!