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II. OPINION
A. Parties' Contentions and Background
Respondent determined and contends that petitioners' police
dog training business was incorporated on February 28, 1990, and
that petitioners may not deduct its loss on a Schedule C for that
year. The Commissioner's determination is presumed to be
correct, and the taxpayer has the burden of proving otherwise.
Rule 142(a); Welch v. Helvering, 290 U.S. 111, 114 (1933).
Petitioners contend that they may deduct the $159,426 loss
from the police dog training business on their individual tax
return because they intended it to be a sole proprietorship in
1990. Petitioners contend that we should disregard the
incorporation of Rosewood Kennels, Inc., because they did not
intend to incorporate it or operate it as a corporation in 1990
and did not know until October 1990 that Bischoff had
incorporated it.
State law governs whether a corporation is formed and
governs the legal relationships that are established when an
entity is formed. Stoody v. Commissioner, 66 T.C. 710, 716
(1976); Skarda v. Commissioner, 27 T.C. 137, 144 (1956), affd.
250 F.2d 429 (10th Cir. 1957); sec. 301.7701-1(c), Proced. &
Admin. Regs. Federal law governs whether an entity is taxed, or
disregarded, as a corporation. Burk-Waggoner Oil Association v.
Hopkins, 269 U.S. 110 (1925); Carver v. United States; 188 Ct.
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