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Issue 2. Constructive Dividends
The second issue for decision is whether the individual
petitioners must include in income as a constructive dividend the
value of Mohan Roy's use of the Rolls Royce. The individual
petitioners contend that the Rolls Royce was used solely for
business purposes, and thus they should not realize income from
Mohan Roy's sparse use of the Rolls Royce.
Distributions of property from a corporation to a shareholder
with respect to its stock constitute dividends to the extent of the
corporation's earnings and profits. Secs. 301(c), 316(a).
Dividends may be formally declared or they may be constructive.
Noble v. Commissioner, 368 F.2d 439, 442 (9th Cir. 1966), affg.
T.C. Memo. 1965-84. Nondeductible expenditures made by a
corporation for the personal benefit of a shareholder constitute a
constructive dividend to that shareholder. Meridian Wood Prods.
Co. v. United States, 725 F.2d 1183, 1191 (9th Cir. 1984);
Falsetti v. Commissioner, 85 T.C. 332, 356-358 (1985); Challenge
Manufacturing Co. v. Commissioner, 37 T.C. 650, 663 (1962).
Dividends are includable in the shareholder's gross income. Sec.
61(a)(7). In the instant case, as discussed supra, we have found
that the expenses associated with the Rolls Royce are not ordinary
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