Legal Question in Tax Law in Illinois

Regulation 301.7701-4(b)

In IRS Notice 97-24 - "Abusive Trusts", the IRS says, "Described below are five examples of abusive trust arrangements that have come to the attention of the Internal Revenue Service. ... 1. The Business Trust. The owner of a business transfers the business to a trust (sometimes described as an unincorporated business trust) in exchange for units or certificates of beneficial interest..." The IRS has classified a "Business Trust" as an "Abusive Trust". However, at IRS Regulation 301.7701-4(b), the IRS has written, "(b) BUSINESS TRUSTS. There are other arrangements which are known as trusts because the legal title to property is conveyed to trustees for the benefit of beneficiaries, but which are not classified as trusts for purposes of the Internal Revenue Code... These trusts, which are often known as business or commercial trusts, generally are created by the beneficiaries simply as a device to carry on a profit-making business ..."

How can the IRS recognize a business trust in their own regulations, and then call it an Abusive Trust in their Notice??!!! What's up? Which publication carries weight? And, are they just trying to dissuade people from using a device that is legitimate?


Asked on 2/28/00, 5:52 pm

1 Answer from Attorneys
Christopher Enge Law Offices of Christopher J. Enge

Re: Regulation 301.7701-4(b)

I think the IRS finds business trusts abusive because they are marketed as a way of escaping income tax. For more details on business trusts and other vehicles the IRS believe are scams, check out www.quatloos.com. Despite the funny name, the site has a lot of good information. It tries to distinguish between legitimate tax planning vehicles and scams.

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Answered on 3/10/00, 11:17 am


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