Patrick E. Catalano - Page 12

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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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