-41-
Drive to petitioner, which was recorded as an increase of $23,718
to the account. In 1991, the loan account was increased by
$46,794 for the earlier distribution of a lot on Papermill Road
to Mrs. Jones.
In 1989, petitioner as a corporate officer of INI authorized
a $175,000 salary payment to himself. INI credited the account
it maintained for loans to shareholders for $175,000, issued
petitioner a Form W-2 for this amount, and deducted $175,000 as a
salary expense on the consolidated return filed by Spalding for
the year ended September 30, 1989. Petitioner then changed his
mind about taking the $175,000 as a salary payment, and instead
decided to take the amount as a loan. To document the
reclassification of the amount as a loan, petitioner signed an
interest-bearing promissory note dated December 15, 1989, for
$175,000. INI reversed the previous journal entries by crediting
salary expense and debiting the loans to shareholder account but
did not file an amended return to reflect the changed amount of
the salary expense.
In preparing their individual income tax return (Form 1040)
for 1989, petitioners used a corrected Form W-2 that did not
include the $175,000 as salary income.
Respondent determined that petitioner received constructive
dividend income from INI of $314,504,24 $27,298, and $116,163 in
1989, 1990, and 1991, respectively. In each year at issue, the
24
This amount does not include the $80,051 that we found
Spalding transferred to INI in 1989. See supra Issue 3.
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