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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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