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Is It Legal???

One of the common questions arising in the formation of Common-Law trusts surrounds its legality. The enclosed legal cites are some important cases to support the common-law, contractual company, and trust entity.

ARTICLE 1, SECTION 10 of the United States Constitution….
“No state shall pass any law impairing the obligation of contracts.”


A) Certificate holders are devoid of legal rights, have no officers, are and must remain forever mute as to the selection, approval, or disapproval of the trustees and their methods of conduct of business affairs would make the trustee absolute owner.
Bourchard v. First People’s trust, 253 Mas 351, 148 NE 895.

B) Right to Contract
Schumman-Heink v. Folsom, 159 NE 250 (1927)

C) United States Supreme Court has long held and recognized that freedom to make contracts and have them enforced by the courts is a part of the bundle of rights protected by the “due process” clauses of both the Fifth and Fourteenth Amendments.
Paterson v. Bank Eudora (1903) 190 US 169, 47 L Ed 1002, 23 S Ct 821
Muller v. Oregon, 208 US 412, 52 L Ed 551, 38 S Ct 324 1908 v. U.S. 157 US 160, 39 L Ed 657, 15 S Ct 586 (1895)

D) The trust contract is established by private parties, for personal purposes, is not registered with the state corporation commissioner to comply with statutes relating to incorporating and does not invalidate the trust organization.
Hodgkiss v. Northland Petroleum Consolidated, 104 Mont 328. 67, P 2d 811

E) Certificate holders of a Trust Contract enjoy an even greater immunity from personal liability than is accorded to stockholders of corporations.
Goldwater v. Oltman, 210 Cal 408, 292 P624, 71 ALR 871

F) One of the main objectives of a trust contract is to obtain most of the advantages of corporations, but with freedom from the burdens, restrictions, and regulations generally imposed upon them.
Ashworth v. Hagen Estates 165 Va 151, 181 SE 381

G) The United States Supreme Court has acknowledged the Trust contract as a “pure or true” trust, citing the Hecht case in Navarro v. Lee.
Hecht v. Malley 265 US 144 (1924) Navarro v. Lee 446 US 458 (1980)

H) Business trusts are found in Corpus Juris Secundum and American Jurisprudence, 2d.

I) Business trusts are recognized under the term “common law trust”
88 American Law Reports 3d 704, citing Schumann-Heink v. Folsom 328 III 321, 159 NE 250, 50 ALR 485 (1927)

J) A Trust is one of several juridical devices whereby one person is enabled to deal with property for the benefit of another person.
Restatement of the Law of Trusts, 2d Introduction Note, Pa. 1

K) Any law or procedure materially affecting contract rights necessarily impairs the obligation of the contract upon which right is founded and is, therefore, violative of the United States Constitution.
Smith v. Morse 2 CA 524

L) The creation of a Pure Trust is not subject to legislative control. The United States Supreme Court holds that trust relationship comes under the realm of equity, based upon common law, and is not subject to legislative restrictions as are corporations and other organizations created by legislative authority.
Eliot v. Freeman 220 US 178

M) The creator of a Pure Trust may mold and give it any shape he chooses, and he chooses, and he or the trustees may provide for the appointment of a successor or successors to the trustee or trustees, upon such terms as he may choose to impose.
Shaw v. Pine 12 Allen (Mass) 293; also in Harwood vs. Tracy, 118 Mo. 631, 24 SW 214

N) The court will support the trustees in carrying out the terms of their Trust contract and agreement.
Clews v. Jamison, 182 US 461, 21 S. Ct. 845

O) Trust property cannot be held under attachment nor sold upon execution, for the trustees’ personal debts. Personal liability of a trustee cannot be enforced against the trust property.
Mayo v. Moritz, 24 N. E. 1083 (1890)

P) If the Trustee owned personally any amounts of beneficial interest, these Certificate Units can be attached.
Hussey v. Arnold 70 N.E. 87 (1904)


A) Internal Revenue Regulations acknowledgement of contract Trust Organization.
IRS Regulations 301, 7701 4 (b) Berry v. McCourt 204 NE 2d 235, 240

B) An “exchange” is a reciprocal transfer of property as distinguished from the transfer of property for a money or consideration only.
TR 118, S. 39.112 (a) 1(e)

C) The owner of Beneficial Certificates is not an owner as a stockholder is an owner; the Certificate Holders have no ownership whatever in property held by the Contract Trust, nor do they have any voice or control over the Trustees.
Becker v. St. Louis Union Trust Co. 296 US 48, 50; 80L ED 35:56 S CT 78

D) “The Internal Revenue Code classifies a Trust as an ‘individual’ for tax purposes.” Trusts are included with persons and “individuals'” in Section 1 which lists entities which are subject to tax. Also Section 3(b)(2) refers to Trusts as individuals. Also the tax forms for trusts clearly illustrate they are not to be Corporations, partnerships, etc.
“A trust certificate, while valuable, has ‘no determinable value’ when exchanged for assets, and thus there is no taxable event because of this exchange, as determined by the U.S. Supreme Court.” Burenett v. Logan 283 U.S. 404), also (Stern v. C.I.R., 747 F. 2d 555 (1984)


A) Certificates have no ascertainable “Fair Market Value”, and have minimal value to someone else. Bad bargains do not result in taxable gifts. Contract Trust in a genuine business transaction.
Estate of Anderson V. Commissioner of Internal Revenue. 8 Tax Court 706.721

B) Rationale of federal estate tax is not a levy on property of the estate but on its transfer at death.
Second National Bank of Newhaven v. U.S. 422 F 2d 49 (1970)


A) If a bona fide transfer, sale or exchange is made at arm’s length in the ordinary course of business, the transaction will be assumed to be for consideration and not gratuitous. A consideration that is not reducible to a value in money or money’s worth, i.e., love and affection or promise or marriage, is to be wholly disregarded and considered totally gratuitous.
Internal Revenue Service “Federal Estate and Gift Taxation Publication” #488

B) The Unites States Circuit Court of Appeals for the First Circuit has long held that full and adequate consideration is met by issuance of trust certificate units in exchange for real and personal property invested in a “pure” trust organization.
Carpenter v. White, CIR, 80 F 2d 145

C) The measure of the gain … of an exchange is the difference between the (adjusted) cost … basis of the property transferred … and the fair market value of the property … received.
Internal Revenue Code 1001 (a), (b) Parrington v. Attorney General, LR. H. L. l00. 122

D) No “Equitable Construction” of a tax statute. Code must be strictly construed. Gain [is] measured from fair market value of property received.
U.S. v. Merriam, 263 US 179 (1923)
Commissioner v. Harrelson 282 US 55 (1930) Gould v. Gould US 151

E) The “fair market value” is the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell, and both having knowledge of all the relevant facts. It may not be determined by a forced sales price, nor is it to be determined by the sale price of the item in a market other than that in which such item is most commonly sold to the public.
Federal Estate and Gift taxation, Publication No. 448
Davis v. U.S. (1961) 287 F 2d 168, 82 S Ct. 805 affirmed in part and reversed in part on other grounds, 370 US 65, 82 S Ct 1190, 8 L Ed 335, Rehearing denied 371 VS 854 , 83 S. Ct 14, 15.F)

F) IRC Section 1001 (b) requires that the capital gain be measured by “the fair market value” of the property received (emphasis added) by the taxpayer, not by the fair market value transferred by the taxpayer in exchange for the property received. To say that the fair market value of the property received is the same as the fair market value of the property given up not only ignores realities, but is the use of a formula which is radically different from the recognized formula approved by the courts for determining fair market value.
Commissioner v. Marshman 279 F 2d 27, Cert. den. 364 US 918, 8 S Ct 282, 286; 5 L Ed 2d 259.
Maxfied v. U.S. 152 F 2d 593, Cert. den. 2 Cases 327 US 791, 66 S Ct 821.9

G) This definition primarily benefits the Treasury in estate tax situations. However, IRS may not have one definition for “fair market value” at one time when it is beneficial, and a different one for another time when the benefit goes to the taxpayer. The IRS is obliged to keep their conclusion that the fair market value of valuable beneficial units cannot be determined in any forum other than a voluntary sale.
The IRS may not force a sale to determine price where the item displays an inherent yet unsettled value. They may also not force the beneficial units to be sold in a market other than that in which such certificates may commonly be sold to the public. In addition, when the Treasury says “public”, they mean at retail rather than wholesale. The value of the above definition is evident in the point that the client may plan affairs around hard and fast rules not subject to change.
Federal Estate and Gift Taxation, Publication No. 448, p. 39 Burnett v. Logan, 283 US 404, 51 S Ct. 75 LED 1143 (1931)

H) Interests which terminate “on” or “before” death are not a proper subject of the Federal Estate Tax.
Knowlton v. Moore, 178 US 41, 20 S Ct 747, 44 L Ed 969 (1900): YMCA V. Davis. 264 US 47 (1924), 44 S Ct 291, 68 LED 564: Goodman v. Grander, 243 F 2d 264 (1957): Babb v. US 349 F Supp 792 (1972)

I) Because Code Sec. 644 does not provide a method for determining the basis of property transferred (into a trust), Code Sec. 2516 of the gift tax provisions controls. Under Code Sec. 2516, the distribution of (property) was deemed to be a transfer for full and adequate consideration –. Accordingly, the trust’s basis in the (property) was its fair market value on the date of transfer —.”
(St. Joseph Bank and Trust Co., Ca-7, 83-2 USTC 9586.) – (907 CCH – Standard Federal Tax Reports 46, 191.)


A) The Contract Trust owns the property and is a distinct legal entity. Beneficial Certificate Holders are not treated as co-owners of trust property.
National City Finance v. Lewis (Cal App) 3P 2d 316 (Rehearing denied) 4P2d 163: Beilin v. Krenn & Dato 350 III 284, 183 NE 330:
Hemphil v. Orloff 238 Mich 508, 213 NW 867, 58 ALR 507, aid 277 US
537, 72 L Ed 978. 48 S Ct 577, Annotation 156 ALR 32. Goldwater v.
Oltman, 210 Cal 408: 292 P 624

B) The Contract Trust does not escape the necessity of having substance and business motives. “Sham” transactions , having no economic effect other than the creation of income tax losses, cannot be recognized for tax purposes.
Thompson v. Commissioner. 631 F 2d 642. 646 (1980) Cert. Denied 452 US 961 (1981) Edwards v. Commissioner. 415 F 2d 578, 582 Lewis and Talor, Inc. v. Commissioner, 447 F 2d 1074 (1971)

C) The fact that transactions of business are so arranged that tax consequences are highly favorable (or altogether avoid taxes) affords no license to the government to recast it into a mold or less advantage.
Gyro Engineering, Inc. v US. F 2d 578, 582 Peter Pan Seafoods, Inc. V. US 417 F 2d 670

D) “It (Pure Trust) is established by legal precedent that pure trusts are lawful, Valid Business Organizations.”
Baker vx. Stern 58 A.L.R. 462

E) “Trust or trust estate is a legal entity for most all purposes as are common law trust.”
Burnett vs. Smith 240 S.W. 1007 (1922)


A) Legal and equitable title held by contract trust.
Hecht v. Malley US 144.68 L Ed 949, 44 Ct. 462
Williams v. Milton 215 MASS 2. 102 NE 355
Goldwater v. Oltman, 210 CA 148, 292 P624. 71 ALR 871 Schumann-Heink v. Folsom 328 III 321. 159 NE 250, 58 ALR 485

B) When legal and equitable title, possession and control of property are legally and irrevocably passed from the Trustor (contracting investor) to himself as Trustee in
legal contemplation, it is as though the trustee receiving the conveyance is another
Com. of Internal Revenue v. St. Louis Union Trust Co., 296 US 48, 50 (1935)

C) Property invested in the Contract Trust Organization must be fixed and irrevocable. Thus the Trustor (contracting investor) may legally be recognized as a different person even when de facto he/she may be the same human being. Trusteeship is a position created by parties at arm’s length which when established is an office to be occupied by any qualified person.
Becker, Collector Internal Revenue v. St. Louis Union Trust Co.
296 Us 48, 50. 50: 80 L ED 35 56 S Ct 78.

D) Genuine contractual obligations control the substance.
Estate of Hilt N. Goodwyn, T.C. Memo 1976-238

E) Trustees of the Contractual Trust have the exclusive power to interpret or construe the intent and direction of the Trust Indenture.
Cohen v. US Trust Securities Corporation, 40 NE 2d 282

F) Statutes may authorize limited liability of partnerships and corporations, but those statutes do not by implication prohibit the creation of Contract Trusts to enjoy similar immunity by virtue of the Common Law.
Goldwater v. Oltman, 292 P 624. 71 ALR 871 Annotation

G) In tax context, “Associated” relates to a joint action and interest of the stock holders and their directors. Contract Trust Trustees and Beneficiaries are not
associated in a joint action.
Elm Street Realty Trust, 76 TC No 68 (1981): Morrissey v. CIR, 296 US 34 (1935); Crocker v. Malley, 249 US 223 (1919); Internal Revenue Regulations 301.7701-1, 2 (a) (2); Schumann Heink v. Folsom. 159 NE 250, annotation 58 ALR 485; Hecht v. Malley, 265 US 144

H) IRS Regulations state the term “Person” includes an “Unincorporated Organization or Group”.
Internal Revenue Regulations 301.7701-1 (a) Internal Revenue Ruling 73-254

I) It is whether the entities were taxable as associations with the corporation rates applied, or as trusts (with the conduit method applied).
Commissioner v. Brouillard, 70 F 2d 154, 157, Cert. denied 293
US 574 No. 152

J) The United States Supreme Court articulated what has become recognized as the standard for determining whether an entity will be taxed as a corporation or as a trust by saying that its the nature of the entity’s dominant functions and attributes which determines whether it is an association for tax purposes.
The system and course of procedure approximates much more closely that of an ordinary partnership among personal friends reposing “full confidence” (Pure trust thus a Contract Trust) in each other. The resemblances predominate strongly in favor of a trusts, not associations.
Commissioner of Internal Revenue v. Brouillard. Same v. Shepherd Syndicate, and Same v. Pryor & Lockhart Development Co., 70 F 2d 154 Cert. den. 293 US 574 No. 152. Hemphil v. Orloff, 277 US 537, 48 S Ct 277, 72 L Ed 978 cited Ibid.


A) (A) Foreign Trust (is a trust) the income of which, from sources without the United States which is not effectively connected with the conduct of a trade or business within the United States, is not includable in gross income under subtitle A (Income Taxes).
Internal Revenue Code Sec. 7701 (a) (31)

B) Since 1967 the Internal Revenue Code has actually provided that a blanket exception from federal gift taxation is provided for all gifts made by nonresident alien of intangible property even though the situs or location of that intangible property is within the United States.
IRC Sec 2501 (a) (2). All intangibles include stock, bonds, funds, notes or other certificates of indebtedness (not Federal Reserve Notes “green backs” or US currency, or checks drawn on US banks — IRR Sec. 25.2511-3 (b) (4) (IV), bank accounts, or US government bonds, etc.)

A trust can be a separate, legal profit making, business entity. When trust income is accumulated or distributed at the sole discretion of the Fiduciary (the Board of Trustees), net income so held and accumulated is taxable to the trust. Only the income that is distributed to the beneficiaries is taxable to them. In one case, the IRS claimed that the trust was an association taxable as a corporation. The then Board of Tax Appeals held that the trust was not an association, and, thus, not so taxable. It also held that income earned by the trust in any given year, not distributed, as is the case with incorporated businesses.
Buitar Family Trust Estate v. Commissioner 72 F 2d 544 (1934)

And, most important of all, the contractual companies are not trusts under the Code — for trusts, by their very definition, at common law, require a division or split of title (legal and equitable) between the trustees, serving on the corpus of the trust, and the beneficiaries.

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