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Respondent presented alternative arguments as to why Mr. and
Mrs. Norton should be taxed individually on the incomes reported
by the trusts. First, respondent argues that the trusts are
shams and should be disregarded for tax purposes because the
trusts lack economic substance. Second, respondent argues that
the South Denali Lands and Denali Company trusts are grantor
trusts. Third, respondent argues that income of the South Denali
Lands and Denali Company trusts is taxable to Mr. and Mrs. Norton
on assignment of income principles.
A fundamental principle of tax law is that income is taxed
to the person who earns it. Commissioner v. Culbertson, 337 U.S.
733, 739 (1949); Lucas v. Earl, 281 U.S. 111, 114 (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. 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. 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
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