                   T.C. Summary Opinion 2007-181



                      UNITED STATES TAX COURT



             JOHN F. AND SUSAN D. MEYER, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 8471-06S.             Filed October 24, 2007.



     John F. Meyer and Susan D. Meyer, pro sese.

     Joe P. Wilson, for respondent.


     DEAN, Special Trial Judge:   This case was heard pursuant to

the provisions of section 7463 of the Internal Revenue Code in

effect when the petition was filed.   Pursuant to section 7463(b),

the decision to be entered is not reviewable by any other court,

and this opinion shall not be treated as precedent for any other

case.   Unless otherwise indicated, subsequent section references

are to the Internal Revenue Code in effect for the year in issue,
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and all Rule references are to the Tax Court Rules of Practice

and Procedure.

     Respondent issued a timely notice of deficiency to

petitioners.   Initially, respondent determined a $16,079

deficiency in petitioners’ 2002 Federal income tax.   Respondent

reasoned that the expenses claimed on petitioners’ Form 1040,

U.S. Individual Income Tax Return, were not deductible by them

because they were incurred by a corporation and could only be

claimed on a Form 1120, U.S. Corporation Income Tax Return.

Respondent reduced the deductions claimed on petitioners’

Schedule C, Profit or Loss From Business, by $39,257.   Prior to

trial, respondent filed a Motion for Leave to File an Answer,

seeking to correct the amount of the deficiency by decreasing it

to $13,410.    Respondent represented that the notice of deficiency

had failed to disallow the entire amount of petitioners’ Schedule

C deductions; rather, they should have been reduced by $47,521.

Respondent also inconsistently included in petitioners’ income

$39,529 of Schedule C gross receipts, which triggered self-

employment taxes.   In his answer, respondent conceded that

petitioners did not owe self-employment taxes.   The issue for

decision is whether petitioners are entitled to deduct the

$47,521 in expenses reported on their Schedule C.
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                            Background

     Some of the facts have been stipulated and are so found.

The stipulation of facts and the exhibits received into evidence

are incorporated herein by reference.    At the time the petition

was filed, petitioners resided in Orange, California.

     John F. Meyer (petitioner) is an engineer and software

developer.   Petitioner developed a unique bill payments system

(the technology) that involved the application of a bar code to a

“billhead that had a 1 in 30 billion to 1 in 300 billion error

rate” while “normal bar codes have an error rate of 1 in 2

million or 1 in 20 million.”

     In October 2001, petitioner and his partner organized

Pacific Payment Systems, Inc. (PPS) to be “a sales and marketing

company that was going to offer a bill payment service to the

unbanked, underserved” in anticipation of a funding commitment.

They hired the Duane Morris law firm to form PPS, negotiate

deals, and interpret any financing proposals.1   The first funding

commitment fell through.   Thereafter, petitioner, on behalf of

PPS, submitted a business proposal to the U.S. Postal Service,

seeking a sponsorship in 2001 that fell through.   A commitment in

May 2002 fell through.   They did not dissolve PPS, and it

subsequently operated as a going concern in 2003, 2004, and 2005.


     1
       The contract with the Duane Morris law firm was adopted by
PPS by a resolution dated October 26, 2001.
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     Petitioner was a director and the chief financial officer of

PPS, he did not work for any other entity in 2002, and he spent

his time developing the technology and organizing PPS.

Petitioner assigned his interests in the technology to PPS in

2003, and it was not patented until 2005.

                            Discussion

1. Burden of Proof

     Generally, the Commissioner’s determinations in a notice of

deficiency are presumed correct, and the taxpayer has the burden

to prove that the determinations are in error.   Rule 142(a);

Welch v. Helvering, 290 U.S. 111, 115 (1933).    But the burden of

proof is shifted to the Commissioner when he seeks to raise a

“new matter”, which is defined as a new assertion that does not

simply narrow the issue raised in the deficiency notice and

either alters the amount of the original deficiency or requires

the presentation of different evidence.   See Rule 142(a); Estate

of Falese v. Commissioner, 58 T.C. 895, 897-899 (1972); McSpadden

v. Commissioner, 50 T.C. 478, 491-492 (1968); Papineau v.

Commissioner, 28 T.C. 54, 57 (1957); Tauber v. Commissioner, 24

T.C. 179, 185 (1955).   Where the new assertion merely clarifies

or develops the original determination’s basis without increasing

the deficiency amount, the burden of proof does not shift to the

Commissioner.   See Estate of Abraham v. Commissioner, 408 F.3d 26

(1st Cir. 2005), affg. T.C. Memo. 2004-39; Shea v. Commissioner,
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112 T.C. 183 (1999); Wayne Bolt & Nut Co. v. Commissioner, 93

T.C. 500 (1989); Estate of Jayne v. Commissioner, 61 T.C. 744,

748-749 (1974); McSpadden v. Commissioner, supra.

     Respondent’s new position, which seeks to increase the

disallowance of petitioners’ Schedule C deductions from $39,527

to $47,521 and to exclude the $39,527 in Schedule C gross

receipts on the ground that the items were reportable by PPS,

falls in this latter category--it merely clarifies or develops

the original determination.    The theory in the amended answer is

the same as in the notice of deficiency (i.e., the income and

deductions were reportable by PPS), it does not increase the

deficiency amount, and it does not require the presentation of

new evidence.    Therefore, the burden is not shifted to

respondent.

     The burden of proof on factual issues that affect a

taxpayer’s tax liability may also be shifted to respondent where

the “taxpayer introduces credible evidence with respect to * * *

such issue.”    Sec. 7491(a)(1).    Petitioner has not alleged that

section 7491(a) applies; however, we need not decide whether the

burden shifted to respondent pursuant to section 7491(a) because

our analysis is based on the record before the Court and not on

who bears the burden of proof.
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2. The Corporation as a Separate Taxable Entity

     Petitioner contends that he properly deducted the expenses

claimed on his Schedule C because PPS was a mere shell, it had no

assets, and he received no benefit from the corporate form or the

expenditures he made.

     Generally, a corporation is a taxable entity separate from

its shareholders.    In Moline Props., Inc. v. Commissioner, 319

U.S. 436, 438-439 (1943), the Supreme Court stated:

     The doctrine of corporate entity fills a useful purpose
     in business life. Whether the purpose [is] to gain an
     advantage under the law of the state of incorporation
     or to avoid or to comply with the demands of creditors
     or to serve the creator’s personal or undisclosed
     convenience, so long as that purpose is the equivalent
     of business activity or is followed by the carrying on
     of business * * *, the corporation remains a separate
     taxable entity. [Fn. ref. omitted.]

Consequently, a shareholder is not entitled to a deduction for

the payment of corporate expenses.      Deputy v. du Pont, 308 U.S.

488, 494 (1940).    Rather, the corporate expenditures that were

not reimbursed constitute capital contributions and increase the

cost basis of the shareholder’s stock to the extent that they can

be substantiated.    See Ward v. Commissioner, 20 T.C. 332, 334

(1953), affd. 224 F.2d 547 (9th Cir. 1955).

     The courts have also recognized exceptions to the general

rule.   In Moline Props., Inc. v. Commissioner, supra at 439, the

Supreme Court also stated that the corporate form may be

disregarded when it is determined that the corporation is a sham
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or unreal.    And the Court has recognized that if the corporation

is merely an empty shell, which has no assets and has not

conducted any business activity, then it is not a separate

taxable entity.    Blue Flame Gas Co. v. Commissioner, 54 T.C. 584,

599 (1970); see also Barker v. Commissioner, T.C. Memo. 1993-280

(citing Bystry v. United States, 596 F. Supp. 574, 579 (W.D. Wis.

1984) and Blue Flame Gas Co. v. Commissioner, supra).     But a

taxpayer’s claim that his corporation should be disregarded will

be closely scrutinized.     Strong v. Commissioner, 66 T.C. 12, 25

(1976), affd. without published opinion 553 F.2d 94 (2d Cir.

1977).   And a taxpayer’s choice to adopt the corporate form

because of its advantages also requires the acceptance of its tax

disadvantages.    See Burnet v. Commonwealth Improv. Co., 287 U.S.

415 (1932).

     Whether a corporation is organized for a business purpose or

carries on substantial business activity is determined from the

facts and circumstances of each case.    See Strong v.

Commissioner, supra at 24-25; Ross Glove v. Commissioner, 60 T.C.

569, 589 (1973; Weigman v. Commissioner, 47 T.C. 596, 605 (1967),

affd. per curiam 400 F.2d 584 (9th Cir. 1968); Bystry v. United

States, supra at 578.     The Court has stated that the “degree of

corporate purpose and activity requiring recognition of the

corporation as a separate entity is extremely low.”      Strong v.

Commissioner, supra at 24.    The determination of whether a
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corporation is “doing business is not necessarily dependent on

the quantum of business and [the] business activity may be

‘minimal.’”   Id. (quoting Britt v. United States, 431 F.2d 227,

235, 237 (5th Cir. 1970)).

     The Court finds that PPS was in existence, and as such, it

is a separate taxable entity for the following reasons:    (1) PPS

served its organizational purpose in that a potential investor

required its formation before he would invest in 2001; (2) it

held itself out as actively engaged in business when it submitted

a business proposal to the U.S. Postal Service and actively

sought other investors in 2001; (3) it adopted a contract with a

law firm in 2001 to negotiate and interpret agreements with

investors so that it could obtain venture capital; (4) it applied

for and received an employer identification number in 2001; (5)

it opened a bank account; and (6) the record contains invoices

for purchases of machinery and equipment that were issued in

PPS’s name and dated February 15 and May 15, 30, and 31, 2002,

which were paid by company checks or credit cards.

     Because petitioners have not proven that any of the $47,521

in Schedule C expenses were paid or incurred by petitioner in his

individual capacity rather than by PPS and the Court has

determined that PPS was a separate taxable entity, it follows

that petitioners are not entitled to deduct the expenses claimed

on the Schedule C attached to their 2002 joint Federal income
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tax return.   Accordingly, respondent’s determination is

sustained.

     To reflect the foregoing,


                                         Decision will be entered for

                                 respondent.
