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II. Lack of Economic Substance
Respondent’s primary argument in support of his position
that the trusts should be disregarded for income tax purposes is
that the trusts lack economic substance. Respondent
alternatively argues that the jewelry business’ income is
allocable to the Castros under the assignment of income doctrine
or under the grantor trust rules of sections 671 through 679.
Petitioners dispute each of respondent’s arguments in turn and,
with respect to respondent’s primary argument, contend that the
trusts are valid under State law, that tax was not a
consideration in creating the trusts, and that respondent’s
interpretation of the law is too narrow to permit any
restructuring of a business.
Taxpayers have a legal right, by whatever means allowable
under the law, to structure their transactions to minimize their
tax obligations. See Gregory v. Helvering, 293 U.S. 465, 469
(1935). Transactions, however, that have no significant purpose
other than to avoid tax and do not reflect economic reality will
not be recognized for Federal income tax purposes. See Zmuda v.
Commissioner, 79 T.C. 714, 719 (1982), affd. 731 F.2d 1417 (9th
Cir. 1984). We have held that, if a transaction has not altered
any cognizable economic relationships, we must look beyond the
form of the transaction and apply the tax law according to the
transaction’s substance. See Markosian v. Commissioner, 73 T.C.
1235, 1241 (1980). This principle applies regardless of whether
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