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2. The Corporation as a Separate Taxable Entity
Petitioner contends that he properly deducted the expenses
claimed on his Schedule C because PPS was a mere shell, it had no
assets, and he received no benefit from the corporate form or the
expenditures he made.
Generally, a corporation is a taxable entity separate from
its shareholders. In Moline Props., Inc. v. Commissioner, 319
U.S. 436, 438-439 (1943), the Supreme Court stated:
The doctrine of corporate entity fills a useful purpose
in business life. Whether the purpose [is] to gain an
advantage under the law of the state of incorporation
or to avoid or to comply with the demands of creditors
or to serve the creator’s personal or undisclosed
convenience, so long as that purpose is the equivalent
of business activity or is followed by the carrying on
of business * * *, the corporation remains a separate
taxable entity. [Fn. ref. omitted.]
Consequently, a shareholder is not entitled to a deduction for
the payment of corporate expenses. Deputy v. du Pont, 308 U.S.
488, 494 (1940). Rather, the corporate expenditures that were
not reimbursed constitute capital contributions and increase the
cost basis of the shareholder’s stock to the extent that they can
be substantiated. See Ward v. Commissioner, 20 T.C. 332, 334
(1953), affd. 224 F.2d 547 (9th Cir. 1955).
The courts have also recognized exceptions to the general
rule. In Moline Props., Inc. v. Commissioner, supra at 439, the
Supreme Court also stated that the corporate form may be
disregarded when it is determined that the corporation is a sham
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