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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.
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.
OPINION
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