Sham Trusts

In the case of Robert A. Lund; Colleen L. Lund; Zero Gee Enterprises Trust; Sun Federal, Inc., Trustee, Petitioners - Appellants, V. Commissioner of Internal Revenue, Respondent - Appellee., the United States Court of Appeals for the Ninth Circuit, in a decision designated "as NOT FOR PUBLICATION," made a determination regarding the use of sham trusts.



The court stated:



Trusts lacking in economic substance are considered shams and are properly disregarded for federal income tax purposes. Zmuda v. C.I.R, 731 F.2d 1417, 1421 (9th Cir. 1984). Here, the Tax Court applied a four factor test to determine that the Zero Gee Trust lacked economic substance: (1) Lund's relationship to the trust property (his computer consulting business) did not differ materially before and after he formed the trust and granted the business to the trust; (2) the trust did not have independent trustees; (3) no economic interest passed to the named beneficiaries of the trust; (4) Lund did not honor restrictions imposed by the trust or by the law of trusts.



Telltale indicators that Zero Gee lacked economic substance include the following: (1)After forming the trust, placing his computer consulting business in the trust, and making himself sole beneficiary of the trust, Lund purportedly transferred his entire beneficial interest, which he valued at between $1 and $2 million, to a foreign corporation without any consideration whatsoever; (2) the trustees of Zero Gee performed no meaningful work, received only $3600 per year for managing the trust (despite gross income for the trust of over $5 million total over three years), and Lund continued to operate and control the business; (3) the named beneficiaries of Zero Gee received only token payments ($41,000) despite a net trust income of over $1.2 million and despite the fact that Zero Gee reported distributions equal to its entire income; (4) Lund obtained bank loans and credit for the consulting business using as collateral real property owned by the Lunds, without approval of the trustees, and Lund had essentially unrestricted use of trust property.