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necessary business expenses under section 162 and that they were
nondeductible constructive dividends. Respondent disallowed
these deductions in full.
The Muhichs
The Muhichs filed Federal income tax returns for 1994 and
1995. On these returns, the Muhichs did not report any income
from Midwest in the form of compensation or dividends.
By notice of deficiency dated August 6, 1997, respondent
determined the trust scheme was an abusive trust arrangement
which should be ignored for tax purposes. Respondent determined
that petitioner received constructive dividends from Midwest in
the amounts of $112,820 and $130,193 for 1994 and 1995,
respectively. For 1994, the constructive dividend amount is
composed of the $12,000 paid by Midwest to Bartoli and the
$100,820 in fees paid by Midwest to the Asset Trust during the
year. For 1995, the entire amount represents fees paid by
Midwest to the Asset Trust during the year.8
OPINION
Economic Reality of the Trusts
We first decide whether the trusts should be disregarded for
tax purposes. According to respondent, they should because they
lack economic substance and are shams. We agree.
8 Respondent also made smaller, miscellaneous upward and
downward adjustments to the Muhichs' income in both years which
flowed from his determination that the trusts should be ignored.
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