Vin Scully was a wealthy executive. He held a controlling stock ownership in a federal savings and loan association. He and his wife, Gina , had 2children. Vinset up a partnership. A trust was set up for each child, all of whom were underage minors. Gina acted as the trustee for each of the four trusts, one for each child. A partnership was formed of the four children's trusts, plus Chuck, 33.3% interest to each, the business of which was to engage in the real estate loan business. Through his position controlling the company, Vin was able to direct and control a substantial number of appraisal and inspection fees, insurance commissions, and the abstract and title policy commissions, and to direct this income to the partnership. The eldest son, James, was 16 and extremely competent, and any services performed by the partnership to earn the fees and commissions, were performed by James. In addition, the partnership made loans, for which it received interest. Most of the capital used to make these loans were derived from loans made to the partnership by their parents, for which the partnership executed promissory notes to the parents, bearing interest at 2 1/2% per annum. The notes were all payable on demand. The partnership was able to use the money obtained from these loans to itself make loans at 6% annual interest rate. The partnership is profitable. To whom should the income of the partnership be taxed? Will the transfers/gifts of partnership interests to the children's trusts be respected? Assume that Vin and his family will argue that 80% should be taxed to the children. 

The IRS argues that the income was essentially earned from the activities of Vin, and should be taxed to him. Who should win and why? Note that it may be that neither the IRS nor the taxpayers win completely. There are two types of income, the interest income on the 6% loans, and the other income from commissions, appraisals, inspection fees etc. Different answer for each type of income? explain citing current law as it stands including Code Section 704(e).