Linda Smith is a single investor living in Phoenix, Arizona, who wants to buy an apartment building for $240,000 in Houston, Texas. Because real estate prices are currently attractive, Linda plans to acquire the property at a good price and hold it until the real estate market improves (hopefully, within the next five years). By agreeing to make a $40,000 down payment on the apartment building, Linda has obtained a loan commitment from National Mortgage Company for $200,000 on a nonrecourse note with a 14% interest rate (the interest rate is high because of the speculative nature of the investment). However, because Texas usu-ry law limits the interest rate to 12% when a loan is made to a noncorporate entity, the lender requires that the loan be made to a corporate entity. Linda is concerned about the negative tax implications of holding the in-vestment in the corporate form. She wants to receive the tax benefits from the investment (e.g., loss pass-throughs) for use on her personal return (she will qual-ify for the $25,000 actively managed rental realty exception to the passive activity loss rules). Linda knows that losses generated by a regular corporation will not pass through to her and may be used only to offset future corporate income. Linda has also considered forming a corporation under state law and making the S corporation election for Federal income tax purposes. Although this looks like a good alternative, she is concerned that her pass-through losses will soon exceed her $40,000 direct investment in the corporation, and the remaining losses will be suspended just as they would be with a regular corporation. Linda has also considered forming a regular corporation under state law and having the corporation treated as her agent (i.e., a nontaxable entity). This would be a great alternative if it works because she could obtain her loan and still have the investment losses pass through for use on her personal return. 

Can this be done? What specific steps must she take to ensure that the IRS will not treat the corporation as a taxable entity?