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continued to treat it as if they owned it, as evidenced by their
use of the residence to secure an indebtedness of theirs after
their purported transfer of it to the trust. Petitioners
exercised control over J&R Trust, as evidenced by their
signatures, as fiduciary, on the J&R Trust returns and their
authority to write checks on the J&R checking account.
Petitioners distributed the income of J&R Trust to themselves and
used the J&R Trust account to pay their personal expenses, as
evidenced by checks drawn, for instance, to Robert C. Miller,
D.D.S., New Covenant Church of God, K Mart, Steven J. Harmon,
M.D., Central Coast Pathology, Payless Shoes, Musician’s
Emporium, Bakery Works, and Bauer Speck Student Council.
2. Fundamental Principles
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 (1930).
Recently, in Barmes v. Commissioner, T.C. Memo. 2001-155, we
applied assignment of income principles to tax the income of a
business to a taxpayer who had attempted an anticipatory
assignment of that income to a trust. We had this to say:
Attempts to subvert * * * [the fundamental principle
that income is taxed to the person who earns it] by
diverting income away from its true earner to another
entity by means of contractual arrangements, however
cleverly drafted, are not recognized as dispositive for
Federal income tax purposes, regardless of whether such
arrangements are otherwise valid under State law. See
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