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remaining profits allocated to and retained on behalf of the
other three stockholders.
Petitioner argues that the stockholders’ agreement was
superseded by the royalty agreement. Respondent argues that the
stockholders’ agreement continues in effect and determines the
split of net profits.
We reject both petitioner’s and respondent’s arguments. We
reject respondent’s argument because a corporate entity generally
will not be disregarded for tax purposes so long as it is formed
for a substantial business purpose or actually engages in a
business activity after its formation. Moline Props., Inc. v.
Commissioner, 319 U.S. 436, 439 (1943); O’Neill v. Commissioner,
170 F.2d 596, 598 (2d Cir. 1948), affg. a Memorandum Opinion of
this Court dated Aug. 8, 1947; Recklitis v. Commissioner, 91 T.C.
874, 892 (1988). On the other hand, when a corporation is not
formed for any significant, nontax business purpose, and does not
engage in any substantive business activity, its existence will
be disregarded for tax purposes, even though it may be validly
incorporated under State law. Recklitis v. Commissioner, supra;
Noonan v. Commissioner, 52 T.C. 907, 910 (1969), affd. 451 F.2d
992 (9th Cir. 1971). In Natl. Carbide Corp. v. Commissioner, 336
U.S. 422, 433 (1949), the Supreme Court refused to disregard the
existence of a corporation even though it stated: “Undoubtedly
the great majority of corporations owned by sole stockholders are
‘dummies’ in the sense that their policies and day-to-day
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