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net income from the trust was reported as an income distribution
on a Schedule K-1 to Richard Pelham and accordingly was reflected
on the Pelhams’ 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.
465, 469 (1935). However, transactions that have no significant
purpose other than to avoid tax and that do not reflect economic
reality will not be recognized for Federal income tax purposes.
Zmuda v. Commissioner, 79 T.C. 714, 719 (1982), affd. 731 F.2d
1417 (9th Cir. 1984); Markosian v. Comissioner, 73 T.C. 1235,
1245 (1980); see also Furman v. Commissioner, 45 T.C. 360, 364-
366 (1966), affd. 381 F.2d 22 (5th Cir. 1967). Where the form of
a transaction has not altered any cognizable economic
relationships, we look through the form of the transaction and
apply the tax law according to the transaction’s substance.
Markosian v. Commissioner, supra at 1241. This principle applies
regardless of whether the transaction creates an entity with
separate existence under State law. Zmuda v. Commissioner, supra
at 720; see also Furman v. Commissioner, supra at 364.
In deciding whether a purported trust lacks economic
substance, we consider the following factors: (1) Whether the
taxpayer’s relationship, as grantor, to property purportedly
transferred into trust differed materially before and after the
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