The Tax Times: Two Men Indicted On Charges Of Peddling Abusive Trusts

According to Law360, two men promoted and sold abusive tax shelters for the last six years by instructing their clients to use sham trusts to hide business income and illegally deduct personal expenses such as family weddings, according to an indictment in a Colorado federal court in the case of U.S. v. Conner et al., case number 1:23-cr-00390, in the U.S. District Court for the District of Colorado.

Larry Conner, who operated The Business Solutions Group from his home in Frisco, Texas, and Timothy McPhee, who operated Private Banking Concepts from his home in Estes Park, Colorado, told their clients the trust arrangement was legal, according to the indictment, unsealed On September 25, 2023.

The pair were charged with conspiring to defraud the government and multiple counts of helping clients prepare false tax returns. McPhee and his wife, Marcia Predmore, were also charged with evading their own federal income taxes by employing the abusive trust structure that McPhee is accused of promoting. McPhee and Predmore pled not guilty in Colorado federal court.

The Indictment Said Conner And McPhee Peddled The
Tax Avoidance Strategy At Hotel Seminars Throughout Colorado And Texas Starting In 2017. Conner Also Taught Three "Advanced Workshops" On The Method In Cabo San Lucas, Mexico, From 2018 To 2019, The Indictment Said.

An email promotion for one Colorado seminar promised that attendees, who were typically charged attendance fees, would learn "how to recapture the money that is leaving your household never to be seen again without having to earn more," according to the indictment.

Conner And McPhee Charged Their Clients, Most Of
Whom Were Business Owners, A Fee Of $25,000 To $50,000
In Exchange For Helping Them Fraudulently Divert Nearly
All Of Their Income Through A Series Of Sham Trusts And
A Purported Charitable Foundation To Avoid Paying Taxes,
The Indictment Said.

The pair instructed clients to assign legitimate business income to a sham "business trust" to create the appearance that the client hadn't earned the income, the indictment said. That trust then distributed its income to a second sham trust, which distributed it to a third sham trust, according to the indictment.

"Each trust in the series reported deductions matching or exceeding its income, and the third sham trust purportedly 'donated' any remaining income to a private family foundation, which in turn 'loaned' the funds back to the client's business or business trust, tax free," the indictment said.

Conner and McPhee told clients to pay for personal expenses, including mortgage payments, dining costs and weddings, with money held in the trusts, the indictment said. They also told their clients to direct assets including real estate and vehicles to the trusts to avoid the appearance of ownership and to avoid paying income taxes on capital gains from selling the assets, according to the indictment.

Further, Conner and McPhee referred their clients to tax preparers and accountants who prepared financial documents consistent with the abusive strategy, the indictment said. One bookkeeper and tax preparer teamed up to market their services to Conner and McPhee's clients, according to the indictment.

The fraudulent federal tax filings cost the government tens of millions of dollars in tax losses, the indictment said.

Conner and McPhee went to lengths to convince their clients the tax avoidance strategy was legal, the indictment said, circulating their own materials responding to Internal Revenue Service warnings about abusive trust tax-evasion schemes. They also criticized outside accountants who questioned the legality of their strategy, saying the accountants "simply did not understand it," according to the indictment.

A government agent posing as a potential client caught McPhee in February 2022 when he agreed to meet her at a restaurant in Colorado and detailed how the shelter illegally circumvented taxes, according to the indictment.

"McPhee explained that there was '[n]o limitations whatsoever at all' on how a taxpayer could spend the money held in a trust and said that all the money spent from a trust bank account, for example on a pool, car, meals, gifts, entertainment, or home renovations, is a deduction," the indictment said.

In An Earlier Videoconference With The Agent, McPhee
Said He Knew Of A Structure To Reduce Her Tax Liability
By 95% To 98%, According To The Indictment.

McPhee and his wife used the abusive trust arrangement to conceal their own income from the government, the indictment said, creating four trusts and opening bank accounts for each and using them to pay personal expenses. The couple transferred multiple real estate properties to one of the trusts before selling, according to the indictment.

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