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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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