Frank and Virginia Muhich - Page 13

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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                                
          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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