A Taxing Experience

The pitch was disarmingly simple. If the superrich could set up tax-free trusts and foundations, why couldn't the moderately wealthy also build cozy little shel ters from income and inheritance taxes?

The answer, according to an Illinois-based outfit called Americans Building Constitutionally (ABC), was a decided yes. ABC's expert tutors showed businessmen, small industrialists and well-to-do professionals how to set up family foundations, hire themselves and their relatives as directors, and then all but thumb their noses at federal and state tax collectors. The trick was to minimize income taxes by paying themselves small salaries and by writing off such things as cars, general-expense accounts and life-insurance policies.

In two busy years of operation, ABC helped to organize hundreds of small foundations, raking in at least $1,000,000 in fees. Texas' Democratic Congressman Wright Patman deplored ABC's tactics. "If this sort of thing is carried to its logical conclusion," Patman complained during congressional hearings (TIME, Jan. 5, 1968), "there would be nobody left to pay taxes."

Absolute Secrecy. Nowhere was ABC more energetic than in California, where it mixed its usual shrewd salesmanship with strong appeals to patriotism. Describing a typical approach, Dr. Jack Hagadorn, a Costa Mesa physician, said that ABC representatives displayed a right-wing tract denouncing the use of tax money to aid Communist countries. By depriving the Government of such money, they argued, an individual could decide how it should be spent.

ABC's sales pitch was also its undoing.

On closer inspection, the California attorney general's office decided that the organization's spiel was sufficiently false to warrant prosecution as a felony under the state's anti-fraud statutes.

The basic flaws in ABC's tax-saving system, the state's fiduciary experts explained, were that: 1) the founder of the trust never really relinquished his control or interest in it; and 2) he never redly intended it to be set up exclusively for charitable purposes. Though ABC knew that this was contrary to federal statutes governing tax-free foundations, the state charged, the outfit tried to conceal the fact by enjoining its clients to absolute secrecy. "The cleverness of the scheme," said California Deputy Attorney General H. Warren Siegel, "was to get you to join by saying 'Only we have this plan,' and then saying 'Don't tell anyone what we told you or we'll boot you out.' And then no one would know until after the founder died that they couldn't really avoid inheritance taxes."

Real Losen. Five ABC officials, including founders James Walsh, 52, and Robert D. Hayes, 68, were convicted by an Orange County jury after a five-week trial on charges ranging from conspiracy to grand theft; three others pleaded guilty. None received jail sentences, but they were placed on probation for up to three years and given fines as high as $7,000. Hayes and Walsh, among others, said that they would appeal on the ground that no criminal intent was involved, but their careers as tax consultants have already been ruined. ABC is virtually out of business.

The real losers are those who followed ABC's advice. The Internal Revenue Service is reportedly letting them dissolve their private trusts and foundations, and no criminal charges will be brought. At the very least, though, they will have to pay all their back taxes, plus interest. The victims have one consolation: the IRS may let them write off their ABC fees as theft losses.

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