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the business trusts and then issue 60 percent of their trust
shares to BBCA, thus effectively evading the assessment and
payment of 60 percent of their clients’ Federal income tax
liability.
Oak Hill filed Federal income tax returns for 1987 through
1989 reporting Schedule F income from petitioners’ farming
operation, interest income, Schedule C income from petitioners’
parts business, and capital gains. In taxable year 1987, Oak
Hill reported a net loss. In taxable years 1988 and 1989, Oak
Hill reported that 40 percent of its net income was distributed
to petitioners.7 The trust itself paid no taxes. Petitioners
reported only their distributive share of Oak Hill’s net income
on their joint Federal income tax returns.
Respondent determined that petitioners are taxable on the
gross income reported by Oak Hill because the creation of Oak
Hill and the subsequent transfer of petitioners’ assets thereto
was a sham transaction lacking in economic substance, because
petitioners have improperly attempted to assign their income to
7 For taxable year 1988, Oak Hill claimed an income
distribution deduction for 100 percent of its reported
distributable net income, reporting that 40 percent was
distributed to petitioners, but failing to report the recipient
of the remaining 60 percent. For taxable year 1989, Oak Hill
reported that its reported distributable net income was
distributed 40 percent to petitioners and 60 percent to BBCA.
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Last modified: May 25, 2011