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transaction and of reporting for tax purposes was done by the
Morrows’ tax preparer.
OPINION
Respondent’s position is that the trust lacks economic
substance and should be disregarded for Federal income tax
purposes. Respondent maintains that the Morrows created a mere
paper entity, the trust, and transferred the business operations
of their sole proprietorship, I.D.F. Pest Control Co., to the
trust for the purpose of avoiding self-employment tax under
section 1402.
Petitioners argue that the trust should be treated as a
separate entity because: (1) The trust is a valid trust under
State law; (2) a business may lawfully change from one form of
entity to another, provided that the legal requirements are met;
and (3) the trustee of the trust may operate a sole
proprietorship business within the trust entity. Petitioners
claim that the income and expenses of I.D.F. Pest Control Co.
were properly reported for Federal income tax purposes, because
the net income from the trust was reported as an income
distribution on a Schedule K-1 to Charlotte Morrow and
accordingly was reflected on the Morrows’ Schedule E of their
jointly filed Federal individual income tax return.
Taxpayers are entitled to structure their transactions to
minimize their tax obligations. Gregory v. Helvering, 293 U.S.
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Last modified: May 25, 2011