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Assuming arguendo that petitioners were able to prove that a
bona fide debt was created with respect to the July 21, 1995,
transaction, petitioners still would not be entitled to the bad
debt deduction. Petitioners have failed to show that they are
entitled to deductions that on their face would be allowable to
Navis, if at all. The promissory note was made between
Search2000 and Navis. Because Navis was incorporated under the
laws of the State of California and there are other indicia of
its separate status, we shall treat it as a separate entity. See
Moline Properties, Inc. v. Commissioner, 319 U.S. 436, 438-439
(1943).
Since the promissory note was made payable to Navis, it is
Navis that would be entitled to the bad debt deduction, if any
were to be allowed, and petitioners have not shown that the note
was transferred to them personally. Moreover, petitioners have
not shown that any S corporation election was in effect for Navis
for the year in issue.
On the basis of the foregoing, we hold that petitioners may
7(...continued)
materially participate in the business of lending. Petitioners
have not provided this Court with any evidence which supports
their contention that Mr. Sundby was in the trade or business of
being a lender during 1995, 1996, or 1997. Petitioners have
failed to show that Mr. Sundby continually or regularly engaged
in lending for income or profit. Even though Mr. Sundby was
president of both Search2000 and Navis, full-time service to a
corporation does not necessarily amount to engaging in a trade or
business (other than the trade or business of being an employee).
See Whipple v. Commissioner, 373 U.S. 193, 203 (1963).
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