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Cabana Boy to be an S corporation, those intentions would be
irrelevant because what matters is what petitioners did. See Don
E. Williams Co. v. Commissioner, 429 U.S. 569, 579-580 (1977);
Commissioner v. National Alfalfa Dehydrating & Milling Co., 417
U.S. 134, 148-149 (1974).
Citing Arrowsmith v. Commissioner, 344 U.S. 6 (1952),
petitioners contend that they may disregard Cabana Boy’s
subchapter C status because they were Cabana Boy's alter ego. We
disagree. In Arrowsmith v. Commissioner, supra, two taxpayers
liquidated their corporation and reported a capital gain. See
id. at 7. Later, the taxpayers paid a judgment against the
corporation, and deducted the judgment as an ordinary business
expense on their personal income tax returns. The U.S. Supreme
Court held that the judgment was a capital expense. See id. at
9. Arrowsmith does not establish that Cabana Boy should not be
treated as a C corporation.
Cabana Boy had a business purpose and assets, did business,
entered into contracts, and had officers. It was a subchapter C
corporation, separate from petitioners, and petitioners treated
it as such. We conclude that petitioners may not disregard
Cabana Boy’s subchapter C status.
C. Whether Petitioners May Deduct the Advances Under Section
212
Petitioners contend that they may deduct the advances under
section 212. We disagree. A taxpayer may deduct ordinary and
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