Timothy J. Phelan and Deborah A. Phelan - Page 19

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         taxpayer and his partners subsequently formed a separate                     
         corporation for the purpose of developing and selling real                   
         estate.  The partners held ownership interests in the corporation            
         in the same proportions as they did in the partnership.  The                 
         partnership later sold land to the corporation for development.              
         The Court of Appeals for the Fifth Circuit held that the record              
         reflected that the business activities of the corporation were               
         not attributable to the partnership.                                         
              The Court of Appeals for the Fifth Circuit relied on the                
         holding of the Supreme Court to the effect that where the form               
         chosen by the taxpayer “'is compelled or encouraged by business              
         or regulatory realities, is imbued with tax-independent                      
         considerations, and is not shaped solely by tax-avoidance                    
         features'”, the form should be honored by the Government.  Id. at            
         533 (quoting Frank Lyon Co. v. United States, 435 U.S. 561, 583              
         (1978)); see also Lemons v. Commissioner, T.C. Memo. 1997-404.               
         The Court of Appeals for the Fifth Circuit found it significant              
         that the Commissioner had accepted the fact that the partnership             
         and corporation were separate business entities and that the                 
         corporation was not a sham.  The Court of Appeals also found                 
         significant the fact that there was an independent business                  
         reason to organize the corporation, that being to protect the                
         partnership from unlimited liability from a multitude of sources.            








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