Matthew and Janice Leonard - Page 3

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          incorporated herein by this reference.  Petitioners Matthew and             
          Janice Leonard, husband and wife, resided in West Sacramento,               
          California, at the time they filed their petition.                          
               During 1990, 1991, 1993, and 1994, Mr. Leonard worked as a             
          firefighter, a welder, and a contractor.  Customers paid for Mr.            
          Leonard's services by checks made payable to "Republic Project              
          (Federation)" (Republic) or other trusts1 which allegedly                   
          constituted Republic.                                                       
               Petitioners filed fiduciary income tax returns on Form 1041            
          for Republic for 1990, 1993, and 1994.  For 1991, in lieu of a              
          Form 1041, petitioners filed a document for Republic entitled               
          "Beneficiaries Tax Report for 1992".  Petitioners did not file              
          individual Federal income tax returns for 1990 and 1991.                    
          Petitioners filed joint Federal income tax returns for 1993 and             
          1994.  On these returns, petitioners reported income only from              
          trustee's fees relating to Republic.                                        
               Respondent determined that Republic was a sham trust and the           
          money paid to Republic is taxable income to petitioners.                    
          Discussion                                                                  
               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             

               1  We use the words "trust" and "trustee" for convenience              
          only.  Our use of these terms is not meant to indicate any                  
          conclusion about the substance of the transactions at issue.                


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