Part Two

The Equipment or Service Trust

The equipment trust is formed to hold equipment rented or leased to the business trust, often at inflated rates, while the service trust is formed to provide services to the business trust, again often for inflated fees. Under these abusive trust arrangements, the aim of the business trust is to reduce its income by making allegedly deductible payments to the equipment or service trust. As to the equipment trust, the owner of the equipment may claim that transferring the equipment to the equipment trust in exchange for the trust units are a taxable exchange. The trust takes the position that the trust has bought the equipment at its fair market value and that the value is the tax basis of the equipment for intentions of claiming deductions for depreciation. On the other hand, the owner takes the unstable position that the value of the trust units received cannot be determined, resulting in no taxable gain to the owner on the exchange. The equipment or service trust could also attempt reducing or eliminating its income by being distributed to other trusts.

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