Pure Trusts Are One Of The Oldest Tax Scams Going.
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We last visited the story of Larry E. Conner of Frisco, Texas, in my article, Abusive Trust Tax Shelters And Charitable Foundation Lead To Indictments In Conner (July 9, 2024). The indictment in Conner’s case involved his sale of a tax strategy that involved multiple layers of trusts and foundations with the end result being that Conner’s clients ended up paying little or no federal income tax on their business income. These sorts of trust schemes have been around a long time and are known by a variety of hinky names such as the constitutional equity pure trust or a pure trust organization. The IRS has long targeted such schemes and have routinely turned over the promoters and their clients to the DOJ for prosecution.
One of Conner’s clients was a dentist by the name of Ryan L. Ulibarri of Fort Collins, Colorado, which is just north of Denver. We read about Ulibarri and his Conner-designed tax scheme in the Indictment issued by a jury in the case of U.S. v. Ulibarri, D.Colo. Case No. 24-CR-252 (Aug. 21, 2024), and which gives a good example of how Conner’s pure trust scheme worked. The usual caution must be given, however, that what follows is simply the unproven allegations of the indictment and it is possible that Conner, Ulibarri, or both could ultimately be acquitted. You can (and should) read the Indictment for yourself here, and to the extent that my description differs from the Indictment then of course the Indictment should control.
According to the indictment, Ulibarri used Conner’s scheme to avoid paying over $1 million in federal income taxes. Conner of course charged Ulibarri the sum of $50,000 for this scheme, which involved Conner helping Ulibarri to set up three levels of trusts and one layer of a family foundation that was purportedly a tax-exempt entity. The way this was structured was that Ulibarri assigned his income from Ulibarri Family Dentistry to the Smile High Trust, which then passed the income through to its beneficiary, the Title of Liberty Family Trust, which then transferred the income through to its beneficiary, the Rod of Iron Charitable Trust, and finally the income was passed to its beneficiary, the Faith Hope & Trust Foundation. Ulibarri and his wife also transferred their assets to these trusts, but of course continued to enjoy the assets as if nothing had actually changed.
If this already doesn’t make any sense from a tax perspective (or any perspective really), then be assured that it doesn’t. In fact, Ulibarri was told that it didn’t make any sense by a person who was both an attorney and CPA whom Ulibarri had e-mailed with the question, “can a dental S corporation be converted over to an LLC and if so can a business trust be named as a participating member of the LLC[?]” To which the attorney/CPA responded:
“What a wacky structure. Why would you want to do this?”
“I don’t believe a trust would be a valid owner of a dental practice.”
“Once a client ask [sic] me about a trust, I am having to explain to my clients about why a trust is inappropriate and a ‘wacky’ option presented by someone trying to sell my client something.”
Despite having been warned, Ulibarri proceeded with Conner’s “whacky” scheme anyway, including moving his dentistry practice’s bank accounts to a new bank that did not know they were dealing with a dentistry business instead of a bunch of trusts.
The indictment then goes on to allege that Ulibarri assigned 90% of his total income to the Smile High Trust, taking a business deduction for that income, and paying taxes only on the remaining 10%. Ultimately, from 2015 to 2023, Ulibarri had falsely claimed over $5 million in deductions for payments to the Smile High Trust,
The Smile High Trust was described as a “Pure Trust Organization In Common Law”, which is of course just a bunch of sovereign citizen gibberish having no real basis in law, common or otherwise. Ulibarri reported the Smile High Trust as having no income, because he caused the Smile High Trust to take a a business deduction to payments made to the next trust in line, the Title of Liberty Family Trust.
The Title of Liberty Family Trust was another “Pure Trust Organization In Common Law”, and Ulibarri used this trust for various personal expenses, mortgage loan repayments, payments of his credit card bills, and even over $1 million in life insurance premiums. In fact, Ulibarri wrote the bookkeeper for this scheme (Suzanne B. Thompson of Kalispell, Montana, who was indicted along with Conner) that he was basically running all of his personal expenses through the Title of Liberty Family Trust. But that trust did not have any income either, because it was taking a business deduction made to the Rod of Iron Charitable Trust.
The Rod of Iron Charitable Trust was another “Pure Trust Organization In Common Law”, and the story was basically the same as the previous two trusts. It took a business deduction for transferring money to the purported charitable trust known as the Faith Hope & Trust Foundation. This Foundation had applied for exempt status as a charity, though Ulibarri used it to pay his personal expenses, including season tickets to the Colorado Rockies baseball team.
All the involved trusts purported to be irrevocable non-grantor trusts, but in fact there were simply shams used by Ulibarri to commit rather blatant tax evasion. Indeed, the Indictment charges Ulibarri with tax evasion based on his transfers to these trusts and false reporting of their income and expenses for the years 2017 to 2023.
ANALYSIS
I’ve never figured out why, but it seems like dentists and chiropractors are the ones most likely to fall for the pure trust scam. Somebody please throw me a bone on that one.
While one might think that those who get involved in these schemes are themselves a victim to an extent, and they are, the larger truth is that they knew or should have known at the time that what they were doing was wrong. Here, the attorney/CPA told Ulibarri in no uncertain terms that this scheme was “wacky”, which at the very least was a huge and bright red flag that something was seriously amiss. But likely, Ulibarri had already mentally bought into Conner’s scheme and had decided to go through with it anyway, risking the chance of being caught against the possibility of saving a lot in taxes if he were to get away with it. This is the same analysis that anybody who participates in a tax shelter goes through. It is just that some tax shelters result in the denial of deductions and fines while others result in prison. The pure trust scheme is of the latter varietal.
The pure trust scheme has been around for a long time, at least 50 years, and has appeared under a variety of names and forms. The premise is always the same, however, which is to use trusts for something that they cannot do, which is to avoid federal income taxes. Here, the involved pure trusts were backstopped by a purported exempt charity, but that doesn’t work either. Doubtless the next pure trust scam we see will feature something slightly different, but it will not work either. The reason is that the scam artists who hawk pure trusts have to keep changing up the structure to be able to sell them: It’s why their pure trust structure “works” when all the others have failed. In truth, they all fail.
Trials for both Ulibarri and Conner have been set in 2025. My guess is that everybody will plead out in exchange for reduced sentences, but stay tuned for that last chapter.