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its shareholders, even when, as here, the shareholders'
services helped to produce that income. An S
corporation's income passes through to its shareholders
not because they helped to create that income, but
because they are shareholders. [Durando v. United
States, supra at 552.]
Here petitioner had accession to taxable income from two
separate sources--one, as passthrough income from his S
corporation, and the other as rental income from his individual
activity of leasing boats to his corporation. The impact on
petitioner, as a shareholder, of the disallowance of his S
corporation’s deductions for the boat lease payments under
section 274 is unrelated to his recognition of income as a lessor
with respect to those same payments. “[S]ection 274 does not
affect the includability of an item in, or the excludability of
an item from, the gross income of any taxpayer.” Sec. 1.274-1,
Income Tax Regs. The separate existence of petitioner’s S
corporation means that petitioner as an individual generally can
enter a transaction with the corporation as if he were unrelated
to it, which petitioner has chosen to do in the case of the boat
leasing transactions, but as a consequence petitioner’s distinct
positions as shareholder and as unrelated lessor with respect to
the corporation must be kept separate for tax purposes.
The taxable incomes of a shareholder and his S corporation
are computed separately, even though the corporation's taxable
income is passed through to, and the tax thereon imposed upon,
the shareholder. See sec. 1363(a) and (b). This separate
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