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C. Whether the Unpaid Balances of the Loans From Activewear to
Jackson's Corporations Are Constructive Dividends to
Petitioner
Respondent contends that the unpaid balances of Activewear's
advances to Jackson or his corporations were constructive
dividends to petitioner. We disagree.
Gross income includes dividends. Sec. 61(a)(7). A dividend
is a distribution of property by a corporation to its
shareholders from its earnings and profits. Sec. 316(a). A
shareholder receives a constructive dividend to the extent of the
corporation's earnings and profits if the corporation pays a
personal expense of its shareholder or the shareholder uses
corporate property for a personal purpose. Secs. 301, 316;
Falsetti v. Commissioner, 85 T.C. 332, 356-357 (1985); Henry
Schwartz Corp. v. Commissioner, 60 T.C. 728, 743-744 (1973).
Whether a shareholder receives a constructive dividend is a
question of fact. Hagaman v. Commissioner, 958 F.2d 684, 690-691
(6th Cir. 1992), affg. and remanding T.C. Memo. 1990-655; Loftin
& Woodard, Inc. v. United States, 577 F.2d 1206, 1214-1215 (5th
Cir. 1978).
Petitioner did not use or receive any benefit from the
unpaid balance of Activewear's loans to Jackson or his
corporations. Petitioner used his own funds to compensate for
Jackson's failure to repay Activewear. Petitioner reasonably
believed that it was in Activewear's interest to help Jackson and
to earn interest for Activewear.
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