A federal district court in Missouri has barred several individuals and Hoffman Associates, LLC, from promoting, selling, or marketing a tax shelter scheme involving the use of charitable remainder annuity trusts (CRAT). According to court records, the defendants falsely claimed that, by using their CRAT scheme, taxpayers could sell property and avoid paying federal income tax on any gain generated by the sale. (Eickhoff, Jr., (DC MO) 131 AFTR 2d ¶2023-690)
The promoters recruited participants to their scheme by advertising in local newspapers, using online platforms and the Hoffman Associates website. Once a participant signed on to the scheme, the promoters created a CRAT. The participant then contributed property (usually appreciated real property) to the CRAT. After the property transfer, the promoters would sell the property and use most of the proceeds to purchase an annuity for the participant. Finally, the promoters falsely reported the annuity payments received by the participant as a tax-free distribution from the CRAT. As a result, neither the CRAT nor the participant pay tax on any gain from the sale of the contributed property.
Note. The tax savings came from the promoters unlawfully inflating (stepping up) the participant’s basis in the contributed property.
According to the government, the defendants promoted, sold, or established at least 70 CRATs, resulting in an estimated $40 million of unreported taxable income.
To date, the court has barred four individuals from promoting the CRAT scheme. Those individuals are Rhonda Eickhoff, John Eickhoff, Jr., and attorneys John William Gray II and Damon Thomas Eisma.
In addition, the court ordered Hoffman Associates LLC, the company used to promote the scheme, to disgorge $1.1 million and ordered John Eickhoff, Jr., to disgorge $400,000.
The IRS has listed abusive arrangements using CRATs as one of its Dirty Dozen tax scams.
For more information about charitable remainder annuity trusts, see Checkpoint’s Federal Tax Coordinator ¶ K-3261.
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