Milo G. and Sarah E. Chapman, et al. - Page 31

                                                - 31 -                                                   
            v. Heininger, 320 U.S. 467, 475 (1943); Thompson v. Commissioner,                            
            631 F.2d 642, 646 (9th Cir. 1980), affg. 66 T.C. 1024 (1976).                                
                  Tax laws affect the shape of many business transactions.                               
            The parties to a transaction are entitled to take into account                               
            and to maximize favorable tax results so long as the transaction                             
            is compelled or encouraged by nontax business reasons.  Frank                                
            Lyon Co. v. United States, 435 U.S. 561, 580 (1978); James v.                                
            Commissioner, 87 T.C. 905, 918 (1986), affd. 899 F.2d 905 (10th                              
            Cir. 1990).  We agree with respondent, however, that the payments                            
            of the processing fees by Dura-Craft to Northwest were shams.                                
                  Dura-Craft is a subchapter C corporation, and Northwest is a                           
            subchapter S corporation as defined in section 1361.  The profits                            
            of a C corporation are subject to corporate income tax, sec. 11,                             
            and any distributions to shareholders are then subject to the                                
            shareholders' personal income tax, secs. 61(a), 316.  The profits                            
            of a subchapter S corporation, however, are generally not subject                            
            to a corporate tax, sec. 1371(a), but pass through to be taxed on                            
            the individual shareholders' returns, sec. 1366, thereby                                     
            eliminating the double taxation of distributions to the                                      
            shareholders of C corporations.  Moreover, petitioners have                                  
            failed to show that Dura-Craft had a business purpose in making                              
            the payments.  Furthermore, the payments served no purpose other                             
            than the generation of tax benefits by shifting money and income                             
            between Dura-Craft and Northwest.  The record is devoid of                                   

Page:  Previous  13  14  15  16  17  18  19  20  21  22  23  24  25  26  27  28  29  30  31  32  Next

Last modified: May 25, 2011