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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.
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). Where an entity is created that has no
real economic effect and which affects no cognizable economic
relationships, the substance of a transaction involving this
entity will control over its form. Zmuda v. Commissioner, 731
F.2d 1417, 1420-1421 (9th Cir. 1984), affg. 79 T.C. 714, 719
(1982); Markosian v. Commissioner, 73 T.C. 1235, 1241 (1980).
These principles apply even though an entity may have been
properly formed and have a separate existence under applicable
local law. Zmuda v. Commissioner, 79 T.C. at 720.
Petitioners argue that Republic is a bona fide trust. They
have not introduced any evidence, however, that rebuts
respondent's determination that Republic is a sham. Accordingly,
we hold that Republic shall not be respected as a trust for
Federal income tax purposes, and the money paid to Republic is
taxable income to petitioners. See Rule 142(a).
We must next determine whether this income, which is taxable
wholly to petitioners, is community property income.2 Under
2 Respondent, in the separate notices of deficiency sent to
each petitioner in 1990 and 1991, determined: (1) That Mr.
(continued...)
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