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Moreover, transfers between related parties are examined
with special scrutiny. Hubert Enters., Inc. and Subs. v.
Commissioner, supra at 91. In the circumstances of this case,
where the entities involved in the transactions are wholly owned
by petitioners, petitioners bear a heavy burden of demonstrating
that the substance of the transactions differs from their form.
See, e.g., Bergman v. United States, 174 F.3d 928, 933 (8th Cir.
1999). Nevertheless, “[t]he existence of a close relationship
between the parties to the transaction `is not necessarily fatal
if other elements are present which clearly establish the bona
fides of the transactions and their economic impact’”. Id.
(quoting Bhatia v. Commissioner, supra). In Culnen v.
Commissioner, T.C. Memo. 2000-139, revd. on another issue 28 Fed.
Appx. 116 (3d Cir. 2002), the uncontradicted testimony was that
the taxpayer had for many years used his controlled, profitable
corporation as an incorporated pocketbook, having the corporation
make payments on his behalf that were posted to the corporation’s
books as loans to the taxpayer, creating a loan balance, which,
periodically, the taxpayer would liquidate by making payments to
the corporation. We found that, in substance, the corporation’s
advances to a loss corporation (an S corporation) in which the
taxpayer was a shareholder constituted economic outlays or
payments on the taxpayer’s behalf, thereby creating a tax basis
for the taxpayer in the S corporation under section
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