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A fundamental principle of tax law is that income is taxed
to the person who earns it. Commissioner v. Culbertson, 337 U.S.
733, 739-740 (1949); Lucas v. Earl, 281 U.S. 111 (1930). An
assignment of income to a trust is ineffective to shift the tax
burden from the taxpayer to a trust when the taxpayer controls
the earning of the income. Vnuk v. Commissioner, 621 F.2d 1318,
1320 (8th Cir. 1980), affg. T.C. Memo. 1979-164.
Taxpayers have the right to conduct their transactions in
such a manner and form as to minimize or altogether avoid the
incidence of taxation by whatever means the law permits. Gregory
v. Helvering, 293 U.S. 465, 469 (1935). This right, however,
does not bestow upon taxpayers a right to structure a paper
entity to avoid taxation when that entity is without economic
substance. Zmuda v. Commissioner, 79 T.C. 714, 719 (1982), affd.
731 F.2d 1417 (9th Cir. 1984). The Commissioner is not required
to apply the tax laws in accordance with the form a taxpayer
employs where that form is a sham or inconsistent with economic
reality. Higgins v. Smith, 308 U.S. 473, 477 (1940).
Application of these principles requires us to look beneath the
surface of the entity and transactions at issue to examine their
reality. Professional Servs. v. Commissioner, 79 T.C. 888, 924
(1982).
Where an entity is created that has no real economic effect
and which affects no cognizable economic relationships, the
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Last modified: May 25, 2011