Carl E. Jones and Elaine Y. Jones - Page 19

            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                                
                  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            evidence the loans nor provide any security for the withdrawn                             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  Furthermore, the withdrawn amounts were provided                                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.                                                                            

            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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