Werner H. Erhard v. Commissioner Internal Revenue Service, (Three Cases)

We are invited to follow the winding paths of circular money movements to determine whether they lead to transactions of economic substance for federal income tax purposes.

I

Werner Erhard has offered a variety of seminars, workshops, and other programs in personal effectiveness since 1971. At that time, Erhard hired tax attorney Harry Mar-golis to be his personal financial and legal advisor. Margolis arranged the formation and financing of Erhard Seminars Training, Inc.

In 1975, Margolis created a new corporation, “est, a.e.c.,” to assume the activities of Erhard Seminars Training, Inc. The stock of est, a.e.c. was seemingly owned by a complex web of offshore entities created by Mar-golis. Erhard purported to be just an employee of est, a.e.c., without any legal ownership interest.

Integral to both est, a.e.c. and its predecessor, Erhard Seminars Training, Inc., was the Harry Margolis “system.” The system was composed of offshore and domestic corporations, trusts, banks, partnerships, and other entities that were used to implement Margolis’ tax planning. Such so-called “system entities” were controlled either directly or indirectly by Margolis. The est, a.e.c. organizational…