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Earnings
Paz reported retained earnings of $376,792 at the beginning
of the year in issue and $566,944 at the end of the year in
issue.
OPINION
Respondent determined that the transfer of the Ranch was a
dividend from Paz and therefore income to petitioner.2
Petitioner contends, however, that the transfer was pursuant to
his purchase of the Ranch from Paz, in which the purchase price
was advanced to petitioner by Paz in exchange for a promissory
note. It is respondent's position that petitioner did not intend
to pay for the Ranch, and consequently that dividend treatment is
appropriate. Petitioner's contention requires us to decide
whether a bona fide indebtedness was created between Paz and
petitioner, its controlling shareholder, when the transfer
occurred. The question of whether an advance by a corporation to
its shareholder is a dividend or a loan is a recurrent one, the
central issue therein being whether the parties to the alleged
loan intended to create a bona fide indebtedness. See, e.g.,
Alterman Foods, Inc. v. United States, 505 F.2d 873 (5th Cir.
1974), and cases cited therein; Electric & Neon, Inc. v.
2 In the notice of deficiency, respondent determined that
the value of the dividend to petitioner was $154,007, the book
value of Ranch at the time of the transfer.
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Last modified: May 25, 2011