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Melnik should recognize additional capital gain of $3,625,560.
In the alternative, respondent determined that petitioners’
“capital gains are increased because the * * * [Rashi and Rambam]
trusts which * * * [petitioners] state own the stock of * * *
[Clend] are grantor trusts whose income is taxable to * * *
[them] individually either as direct capital gains or Subpart F
income taxable as ordinary income.” Respondent also determined
that, with respect to either position, petitioners are liable for
section 6662(a) accuracy-related penalties.
OPINION
I. The Private Annuity Transactions’ Economic Substance
A. The Economic Substance Doctrine in General
A taxpayer has the legal right to structure transactions in
a manner that minimizes or avoids taxes by any means the law
allows. Gregory v. Helvering, 293 U.S. 465, 469 (1935). Even
so, if the “form employed for doing business or carrying out the
challenged tax event is unreal or a sham”, the Government may
“disregard the effect of the fiction as best serves the purposes
of the tax statute.” Higgens v. Smith, 308 U.S. 473, 477 (1940).
In Frank Lyon Co. v. United States, 435 U.S. 561, 583-584
(1978), the United States Supreme Court identified the
circumstances under which the the Commissioner must respect a
transaction for Federal tax purposes. It stated that
where * * * there is a genuine multiple-party
transaction with economic substance which is compelled
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