Leon L. Zachman and Estate of Ione Zachman - Page 11

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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                   
              Hillside Farm filed Federal income tax returns for 1987                 
         through 1989 reporting Schedule F income from petitioners’                   
         farming operation.  During the years at issue, Hillside Farm                 
         reported that 40 percent of its net income was distributed to                
         petitioners.7  The trust itself paid no taxes.                               
              Respondent determined that petitioners are taxable on                   
         Hillside Farm’s gross income because the creation of Hillside                
         Farm 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              
         Hillside Farm, and because petitioners are taxable on the trust              
         income under the grantor trust rules in sections 671 through 678.            
              If the creation of a trust has no real economic effect and              
         alters no cognizable economic relationships, it will be                      
         disregarded for Federal income tax purposes; our guidepost is the            
         economic substance of the transaction.  See Zmuda v.                         

               7 Hillside Farm claimed an income distribution deduction for           
          100 percent of its reported distributable net income, but it                
          failed to report the recipient of the remaining 60 percent of its           
          net income.                                                                 

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Last modified: May 25, 2011