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to the trust is taxable income to petitioner. At trial,
respondent orally renewed his motion that the Court impose a
section 6673 penalty on petitioner.
OPINION
A fundamental principle of tax law is that income is taxed
to the person who earns it. See Commissioner v. Culbertson, 337
U.S. 733, 739-740 (1949); Lucas v. Earl, 281 U.S. 111, 114-115
(1930); Johnston v. Commissioner, T.C. Memo. 2000-315. An
assignment of income to a trust is ineffective to shift the tax
burden from the taxpayer to a trust when the taxpayer controls
the earning of the income. See Vnuk v. Commissioner, 621 F.2d
1318, 1320 (8th Cir. 1980), affg. T.C. Memo. 1979-164.
The Commissioner is not required to apply the tax laws in
accordance with the form a taxpayer employs where that form is a
sham or inconsistent with economic reality. See Diedrich v.
Commissioner, 457 U.S. 191, 195 (1982); Higgins v. Smith, 308
U.S. 473, 477 (1940). Where an entity is created that has no
real economic effect and which affects no cognizable economic
relationships, the substance of a transaction involving this
entity will control over the form. See Zmuda v. Commissioner,
731 F.2d 1417, 1420-1421 (9th Cir. 1984), affg. 79 T.C. 714, 719
(1982); Markosian v. Commissioner, 73 T.C. 1235, 1241 (1980).
These principles apply even though an entity may have been
properly formed and have a separate existence under applicable
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