                       T.C. Memo. 1999-299



                     UNITED STATES TAX COURT



                 SHERYL D. BUMPUS, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 8507-98.                 Filed September 7, 1999.



     Yale F. Goldberg and Mitzi L. Torri, for petitioner.

     David A. Winsten, for respondent.


             MEMORANDUM FINDINGS OF FACT AND OPINION


     CARLUZZO, Special Trial Judge:   Respondent determined a

deficiency of $8,041 in petitioner's 1995 Federal income tax.

     The issue for decision is whether petitioner, who was an

officer and shareholder of a closely held corporation, is

entitled to a deduction for a lease cancellation fee (the fee)

paid to release the corporation from liability under a lease.
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                         FINDINGS OF FACT

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

At the time the petition was filed, petitioner resided in

Glendale, Arizona.

     During 1995 petitioner was employed as a sales

representative for two companies that manufactured construction

materials.   She was an independent contractor for one and an

employee of the other.

     With the assistance of legal counsel, petitioner and Richard

Schuster, a long-time friend with metal fabrication experience,

incorporated Drywall Cornerbead, Inc. (Drywall).   According to

Drywall's Articles of Incorporation, which were filed June 9,

1995, the corporation was organized "for the purpose of

transacting any and all lawful business for which corporations

may be incorporated under the laws of the State of Arizona."    Its

initial purpose was "to conduct in the State of Arizona the

business of manufacturing and distributing drywall and plastering

products."

     Petitioner opened a checking account for Drywall and

deposited $100 of her money into the corporation's account.     An

Arizona sales tax exemption certificate was issued to Drywall, as

was a Federal employer identification number.   Drywall secured

workers' compensation insurance, although the corporation had no

employees other than its officers.
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     In June 1995, Drywall, as the lessee, and Marchant

Corporation (Marchant), as the lessor, entered into a lease

agreement for certain industrial property (the lease).    The

property was to be used by Drywall for manufacturing and

distribution purposes.   The term of the lease was 3 years

beginning on August 1, 1995.   Base rent, which increased from

year-to-year, was initially $4,998.30 per month.    A $5,664.74

security deposit was due when the lease was signed but the

deposit was not made at that time.     Petitioner and Mr. Schuster

signed the lease as officers of Drywall; neither signed the lease

in an individual capacity.   Corwon J. Finley, petitioner's

personal friend and business associate, was a guarantor on the

lease, as was a corporation that he apparently controlled.

     By checks dated June 20, 1995, drawn on her personal

checking account and made payable to Marchant, petitioner:

(1) Made the security deposit required under the lease; and (2)

paid the first month's rent, which was due August 1.    The rent

check was for $5,255.71.   The parties did not explain why the

amount was higher than required under the lease.

     Soon after the lease was signed, Mr. Schuster decided that

he no longer wanted to be involved with Drywall.    Petitioner

believed that she could not successfully operate Drywall without

Mr. Schuster and decided to abandon the project.
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     The lease was canceled, and Drywall was released from

liability under the lease in return for the payment of $9,996.60

(the lease cancellation fee).   The lease cancellation fee was

paid by cashier's check made payable to Marchant.   The cashier's

check was purchased by Mr. Finley, either in his individual

capacity or as an officer of a corporation that he controlled.

Mr. Finley delivered the check to petitioner, who in turn

delivered it to Marchant.

     Drywall was dissolved on August 31, 1995.   Drywall did not

issue stock, conduct an organizational meeting, adopt bylaws, or

file a Federal income tax return.   The balance in Drywall's

checking account (petitioner's initial $100 deposit) was

withdrawn by petitioner, and the account was closed.

     Petitioner's 1995 Federal income tax return was timely

filed.   On a Schedule C included with that return petitioner

reported various items attributable to her self-employment as an

independent sales representative.   Relevant for our purposes, on

that Schedule C she claimed a $26,918 deduction for rent on

business property.   Of this amount, $15,997 was disallowed in the

notice of deficiency because petitioner "did not establish that

the * * * expense * * * was paid or incurred during the taxable

year and that the expense was ordinary and necessary to * * *

[her] business".   Other adjustments made in the notice of

deficiency have been resolved by the parties.
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                               OPINION

     The rent deduction claimed on petitioner's return is

attributable to the lease and takes into account:   (1) The

security deposit; (2) rent for the first month; and (3) the lease

cancellation fee.   The balance of the deduction ($6,000) has not

been identified.    The controversy between the parties focuses on

whether petitioner is entitled to include the lease cancellation

fee in the rent deduction.

     Although the lease cancellation fee was paid with a

cashier's check purchased by Mr. Finley, petitioner considers

that the payment was made by her.   According to petitioner, she,

in effect, borrowed the funds from Mr. Finley and repaid him over

a period of time.   Petitioner contends that the deduction is

allowable under section 162,1 which, in general, allows a

taxpayer to deduct "all the ordinary and necessary expenses paid

or incurred during the taxable year in carrying on any trade or

business."

     Respondent argues that petitioner is not entitled to a

deduction for the lease cancellation fee because the fee was not

paid by her.   According to respondent, the fee was paid by Mr.

Finley as the guarantor on the lease.    Respondent further argues

that the fee, even if paid by petitioner, was an expense of


     1
      Section references are to the Internal Revenue Code of
1986, as amended and in effect for the year 1995. Rule
references are to the Tax Court Rules of Practice and Procedure.
                                - 6 -

Drywall, and, if deductible, could only be deducted by Drywall.

Because we agree with respondent on this point, we need not

address the controversy between the parties as to whether the

lease cancellation fee should be considered to have been paid by

petitioner or Mr. Finley.

     A corporation formed for legitimate business purposes is an

entity separate from its shareholders.    See Moline Properties,

Inc. v. Commissioner, 319 U.S. 436 (1943).    Furthermore, the

business of a corporation is separate and distinct from the

business of its shareholders.   See id.; Deputy v. du Pont, 308

U.S. 488, 494 (1940); Crook v. Commissioner, 80 T.C. 27, 33

(1983), affd. without published opinion 747 F.2d 1463 (5th Cir.

1984).   Consequently, a shareholder generally is not entitled to

a deduction for the payment of corporate expenses.   See Deputy v.

du Pont, supra; Hewett v. Commissioner, 47 T.C. 483 (1967).

Petitioner agrees with these general legal principles but argues

that the principles do not apply because Drywall's existence

should be disregarded for Federal income tax purposes.   According

to petitioner, Drywall did not take sufficient, if any, action to

further its corporate business purpose.   We disagree.

     A corporation will be recognized for Federal income tax

purposes as a taxable entity separate from its shareholders if

(1) the purpose of incorporation was the equivalent of business

activity, or (2) the corporation carried on business after
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incorporation.    See Moline Properties, Inc. v. Commissioner,

supra.

     Drywall's corporate existence was effective as June 9, 1995,

the date that its articles of incorporation were filed.    See

Ariz. Rev. Stat. sec. 10-056 (1995) (repealed, effective January

1, 1996).    Drywall was incorporated in connection with

petitioner's intention to start a business.    Her decision to

conduct the business in corporate form was deliberate, reasoned,

and made with the assistance of legal counsel.    Thereafter,

Drywall opened a checking account, obtained an Arizona sales tax

exemption certificate, was issued a Federal employer

identification number, and secured workers' compensation

insurance.    Through the lease Drywall arranged for a physical

plant that furthered its manufacturing and distribution

objectives.

     The obligation to make the lease cancellation fee arose

under the lease.    Because petitioner did not sign the lease in

her individual capacity, she enjoyed the limited liability aspect

of the corporate form of business, which, no doubt, was one of

the reasons that Drywall was established.    Any obligation, legal

or otherwise, that petitioner might have owed to Mr. Finley in

connection with the lease cancellation fee did not arise from the

lease.
                               - 8 -

     Having elected to conduct the business in corporate form,

petitioner is bound by the Federal income tax consequences of

that election.   See Higgins v. Smith, 308 U.S. 473 (1940).

Drywall's corporate existence cannot be disregarded for Federal

income tax purposes, and petitioner's argument that it should be

is rejected.   Because the lease cancellation fee was an expense

of Drywall, petitioner is not entitled to include the payment of

the fee in the rent expense deduction claimed on her return.

Respondent's determination in this regard is sustained.

     To reflect the foregoing and the concessions of the parties,

                                       Decision will be entered

                               under Rule 155.
