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tax implications. See Gregory v. Helvering, 293 U.S. 465, 469
(1935); Markosian v. Commissioner, 73 T.C. 1235, 1241 (1980).
However, where the creation of a trust lacks economic effect and
has no other cognizable economic relationship, we may ignore the
trust as a sham. See, e.g., Zmuda v. Commissioner, 79 T.C. 714
(1982), affd. 731 F.2d 1417, 1421 (9th Cir. 1984); Markosian v.
Commissioner, supra; Muhich v. Commissioner, T.C. Memo. 1999-192,
affd. 238 F.2d 860 (7th Cir. 2001).
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). A taxpayer cannot avoid income taxation by assigning
income which a taxpayer controlled to a trust, thereby
effectively shifting the burden of tax. Vnuk v. Commissioner,
621 F.2d 1318, 1320 (8th Cir. 1980), affg. T.C. Memo. 1979-164.
Petitioners, by assigning income from their farming operations,
have attempted to shift their income to Lucky Kirt Trust.
The Court looks behind the trust and will disregard the
trust if it lacks economic substance and was created for tax
avoidance purposes. To determine whether a trust has economic
substance, we consider these factors: (1) Whether the taxpayer-
grantor’s relationship to the transferred property differed
materially before and after the trust’s creation; (2) whether the
trust had an independent trustee; (3) whether an economic
interest passed to other trust beneficiaries; and (4) whether the
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