- 11 - 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 thePage: Previous 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Next
Last modified: May 25, 2011