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whether withdrawals by a shareholder of an S corporation are
loans or distributions that must be included in gross income.
Accordingly, with the foregoing factors in mind, we turn to
the facts and circumstances surrounding the withdrawals at issue
to determine whether at the time of each withdrawal petitioner
entered into a bona fide creditor-debtor relationship with
Development.
Petitioner was the president and owner of Development from
the time of its incorporation in 1973 until its termination in
1991. Petitioner had complete control of Development and the
authority to make decisions as to the timing, amount, and use of
the funds he withdrew. Petitioner did not execute any notes to
evidence the loans nor provide any security for the withdrawn
amounts. Furthermore, the withdrawn amounts were provided
without any date for repayment, and Development made no demands
for repayment.
12(...continued)
sec. 1371(a)(1), S corporations generally do not produce any
current earnings and profits, sec. 1371(c)(1). Furthermore, sec.
1366 provides, in general, that the gross income of an S
corporation is included pro rata in the gross income of its
shareholders, and sec. 1367 provides the general rule that the
basis of each shareholder's stock is increased by the items of S
corporation income included in the shareholder's income. Since
an S corporation's income is allocated to its shareholders when
realized by the corporation, regardless of whether it is actually
distributed to the shareholders, the second factor under Alterman
Foods, Inc. v. United States, 505 F.2d 873, 877 (5th Cir. 1974),
which considers earnings and profits and dividend history, is not
generally applicable to S corporations.
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