Dale H. Sundby and Edith Littlefield Sundby - Page 15

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          separate taxable entity, the expenses they incurred were those of           
          the corporation and therefore nondeductible by them.  See Deputy            
          v. du Pont, 308 U.S. 488 (1940).  If petitioners argue that Navis           
          was not a separate taxable entity, the entity cannot now be                 
          disregarded for tax purposes and its expenses remain                        
          nondeductible by petitioners.  See Moline Props., Inc. v.                   
          Commissioner, 319 U.S. 436 (1943).                                          
               An issue involving Navis as a corporate entity was                     
          previously addressed by this Court in Sundby v. Commissioner,               
          T.C. Memo. 2003-204.  In that case, a deficiency with respect to            
          petitioners’ taxable year 1997 was before the Court.  Petitioners           
          had claimed a bad debt deduction of $350,000 on a Schedule C in             
          1997.  We concluded that, assuming arguendo that a bona fide debt           
          had existed, Navis would have been entitled to a bad debt                   
          deduction rather than petitioners.  We stated:                              
               The promissory note was made between Search2000 and Navis              
               [in 1995].  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. * *           
               * 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 [1997].                  
          In reaching this conclusion, we found that Navis was a                      
          corporation when the promissory note was signed in 1995, and we             
          held that the corporate form could not be disregarded with                  
          respect to that transaction at the time that the debt allegedly             

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