Patrick E. Catalano - Page 13

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          computation of taxable income means that the disallowance of a              
          deduction for a lease payment by the lessee-corporation has no              
          impact on the lessor-shareholder's recognition of the lease                 
          payment as income.  “There is no necessary correlation between              
          the payor’s right to a deduction for a payment and the taxability           
          of the payment to the recipient.”  1 Mertens, Law of Federal                
          Taxation, sec. 5A.11, at 22 (1998 rev.); see also Smith v.                  
          Manning, 189 F.2d 345 (3d Cir. 1951); Sterno Sales Corp. v.                 
          United States, 170 Ct. Cl. 506, 345 F.2d 552 (1965); Reynard                
          Corp. v. Commissioner, 30 B.T.A. 451 (1934); Mosby v.                       
          Commissioner, T.C. Memo. 1984-90; Zeunen Corp. v. United States,            
          227 F. Supp. 952 (E.D. Mich. 1964).  This separate treatment of a           
          payment’s deductibility and recognition as income obtains even              
          where the payor and payee are a corporation and its sole                    
          shareholder, Reynard Corp. v. Commissioner, supra; Mosby v.                 
          Commissioner, supra; a parent corporation and its wholly owned              
          subsidiary, Zeunen Corp. v. United States, supra; or two wholly             
          owned subsidiaries of a common parent.  Sterno Sales Corp. v.               
          United States, supra.  Petitioner has taxable income arising from           
          two capacities, as leasing income from his individual activity of           
          leasing boats and as a shareholder receiving the passthrough                
          income of his S corporation conducting a law practice.                      
               Petitioner contends that the “tax benefit rule” provides the           
          relief he seeks--that is, the exclusion of the boat lease income            

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