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bear the burden of proof on all issues in this case, other than
the statute of limitations issue under section 6501.26
IV. Whether the Pago and McKenzie Trusts Lack Economic Substance
Respondent argues that the Pago and McKenzie Trusts were
sham entities with no economic substance and should be
disregarded for Federal income tax purposes. Alternatively,
respondent argues that the income earned by the Pago and McKenzie
Trusts should be taxed to the Gouveias under the assignment of
income doctrine or the grantor trust rules of sections 674(a),
675(1), and 677(a). Petitioners dispute each of respondent’s
arguments and contend that the “McKenzie Trust and Pago Trust
engaged in extensive economic activity” and that the trusts
cannot be characterized as shams because a valid business purpose
for each trust existed.
Taxpayers have a legal right, by whatever means allowable
under the law, to structure their transactions to minimize their
tax obligations. See Gregory v. Helvering, 293 U.S. 465, 469
(1935). Transactions, however, that have no significant purpose
other than to avoid tax and do not reflect economic reality will
not be recognized for Federal income tax purposes. See Zmuda v.
Commissioner, 79 T.C. 714, 719 (1982), affd. 731 F.2d 1417 (9th
Cir. 1984). We have held that, if a transaction has not altered
26Although respondent has the initial burden of production
with respect to the penalty imposed under sec. 6662, the burden
of proof remains on petitioners. Sec. 7491(c).
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