- 13 -
282, 294-295 (1938); Seagate Technology v. Commissioner, 102 T.C.
149, 186 (1994), and we refuse to follow Stan Lee's conclusions
here. We sustain respondent's determination that Hamalee's gross
profit percentage is 12 percent for each relevant year, and that
Hamalee has unreported sales income of $577,488 for its 1985
taxable year, $554,815 for its 1986 taxable year, $387,504 for
its 1987 taxable year, and $550,763 for its 1988 taxable year.
Because Hamalee is an S Corporation for its 1987 and 1988 taxable
years, we also sustain respondent's determination that Hamalee's
income for those years is includable in the Lees' 1987 and 1988
taxable incomes.
2. Constructive Distributions
A distribution may constructively arise when corporate funds
are diverted to a shareholder's personal use; e.g., to pay a
shareholder's personal expense or to discharge his or her
personal obligation. A constructive distribution may arise even
when the distributing corporation does not formally declare that
it is making a distribution. Crosby v. United States, 496 F.2d
1384, 1388 (5th Cir. 1974); Tollefsen v. Commissioner, 431 F.2d
511 (2d Cir. 1970), affg. 52 T.C. 671 (1969); Dean v.
Commissioner, 57 T.C. 32 (1971); Challenge Manufacturing Co. v.
Commissioner, 37 T.C. 650 (1962). When a constructive
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