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decided by the Court of Appeals for the Ninth Circuit, we have
held in each of the enumerated cases either that the underlying
transactions and/or entities lacked economic substance or were
shams, that the private annuity transaction was really a transfer
in trust with a retained income interest, or that the taxpayer
was the grantor of the foreign trusts.
None of the above-cited cases involved an obligation to make
annuity payments by a foreign corporation owned by foreign
trusts. Interposing a foreign corporation between the annuitant
and the foreign trust enabled petitioners to argue that the
private annuity/foreign trust cases are distinguishable from the
facts of this case and are not controlling.
The injection of Clend into the transaction planning in this
case also enabled petitioners to argue that other Code sections
designed to circumvent foreign entity tax planning do not apply.
For example, section 679 provides that, subject to certain
exceptions, a United States person39 who directly or indirectly
transfers property to a foreign trust shall be treated as the
owner of the trust if there is a United States beneficiary of any
portion of the trust. Because the Melniks transferred 75 percent
of their HouTex stock to a foreign corporation and not to the
39Sec. 7701(a)(30) defines a U.S. person as a citizen or
resident of the United States. The Melniks were U.S. persons
within the meaning of sec. 7701(a)(30) and were beneficiaries of
their respective foreign trusts.
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