- 4 - 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...)Page: Previous 1 2 3 4 5 6 7 Next
Last modified: May 25, 2011