Mid-Atlantic

How is the PTO treated for tax purposes? To understand this we have to look into some basic tax law concerning business organizations. We will start with the corporation:

Corporation: the corporation is an artificial entity and a creature of the state legislature, therefore it is extended to you to use as a privilege from the state. When you partake of a privilege given to you by the state the state can tax it, this then becomes an excise tax on the privilege of doing business as a corporation, therefore, it is not an income tax but an indirect excise tax.

LLC: this newer form of business the limited liability company (LLC) like the corporation is a creature of the state legislature and again a privilege extended to you from the state. The difference is that you are taxed as a partnership. The LLC files a form 1065 listing the income paid to each member and then each member if they are a “taxpayer” pays the tax on their own form 1040. The LLC itself pays no tax.

PTO: the PTO unlike the corporation or the LLC is not a creature of the state or any legislature, the PTO is created by private citizens for themselves and therefore, when creating this entity you are not receiving any privilege from the state. Instead of a privilege this is a right. You have a constitutional right to create this business form no other business form can say that except a sole proprietorship. Therefore, the state nor the federal government can tax the PTO, no excise tax can be levied against a constitutional right. The only tax paid here would be your personal income tax on any distributions you receive as income from the PTO if you are a “taxpayer.”

Estate tax:  the “estate tax” sometimes called a death tax is really not a tax on death. No one has to pay a tax to die. The tax is on the transfer of property of the decedent, when you leave your property to your heirs, real estate is then transferred into their name, bank accounts, investment accounts, all have to be transferred from the decedent to the heir this is what creates the tax. Now, if all of these assets are in PTO’s then upon your death there is no transfer of property, the assets remain in the name of the PTO, your heirs just take over as general manager and certificate holder(s), therefore, no change in ownership no tax, it’s not reportable.

Capital gains:  when you exchange assets to the PTO the assets get a “stepped up basis” because this is not a transfer of assets it’s an exchange for full and adequate consideration. For instance; if you bought your home in 1980 for $35,000 and sold it to me in 2005 for $400,000 what would be my basis in the home? $400,000 of course because you received full, and adequate consideration from me so i couldn’t possibly retain your basis, it would start anew with me. When you exchange assets to the PTO you also receive full and adequate consideration from the PTO, therefore the PTO has to have its own basis which would be today’s fair market value. Stocks, bonds, business, ect., anything you exchange to the trust is treated in this manner.

Bush v. Cir., 1941 45 b. 7ca 609. “Capital gains of the taxpayer were not taxable to taxpayer in view of the impossibility of reversion to him.”