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b. Funding of the Super Trust
Petitioner and members of the Gustafson family contributed
liquid assets and stock in petitioner to the Super Trust. These
assets were held in separate funds for each contributor.
Petitioner transferred $3,677,911 to the Super Trust in
fiscal year 1988 and $1,250,000 in fiscal year 1989. Petitioner
accounted for these transfers on its books by reducing cash and
retained earnings by the amounts of the transfers. Petitioner
reported these transfers as nondeductible contributions from
retained earnings on its Federal income tax returns. Petitioner
received the net income from its fund but was not entitled to
have its principal returned until the Super Trust was terminated.
E.S. Gustafson had sole discretion to invade the principal of
petitioner's fund in the Super Trust and to direct how to use it.
c. Trust Income
The Super Trust filed Forms 1041, U.S. Fiduciary Income Tax
Return, for 1988 and 1989. It reported no taxable income for
those years. Most of its income was from tax-exempt municipal
bonds. Petitioner failed to report $35,285.08 of taxable income
and $152,637.74 of tax-exempt municipal bond interest earned by
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