Opinion ID: 1364715
Heading Depth: 1
Heading Rank: 2

Heading: Corporate Purpose and Personal Tax Advantages

Text: Integral to the trial court's conclusion that the corporation was a sham and an instrumentality of the O'Hazzas were its findings that: (1) the primary purpose of the corporation was to allow the O'Hazzas to provide a constant source of income to Guy O'Hazza through a monthly loan from the corporation; and (2) that the subchapter S election by the corporation allowed the O'Hazzas to derive a tax benefit from the operating losses of the corporation, while at the same time avoiding any gift tax associated with the transfer of these funds from the shareholders to their son. The O'Hazzas testified that they felt an obligation as parents to give their son financial support, and that they gave their son the money [f]or business purposes and so he'd have a job. They also testified that they intended the money to go into the business, and that the corporation was a business to make money. This testimony, which the trial court stated from the bench that it believed, at a minimum dictates a conclusion that the corporation was not formed for a single purpose, but for purposes that included the hope of establishing a functioning, viable business. In fact, the corporation had gross receipts exceeding $1 million over its corporate life, had up to seven employees, and had a number of subcontractors and installation jobs. It had the attributes of an ongoing business. Even if the O'Hazzas established and funded the corporation to provide a personal benefit to their son, as the trial court found, the corporation did not operate solely as a paper entity to pass money from parents to child. The testimony and financial documents, including tax returns, show that the trial court's holding that the purpose of the corporation was not for any proper business purpose is clearly erroneous and, therefore, does not support piercing the corporate veil. Similarly, neither the actual nor the potential tax consequences to the O'Hazzas from subchapter S election suggests any impropriety justifying piercing the corporate veil. Election of subchapter S status for federal tax purposes is common and legitimate. In this case, the election resulted in the O'Hazzas reporting both income and losses from the corporation's operations on their federal tax returns. [3]