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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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