- 13 -
nothing more than after the fact self-serving espousals designed
to make the lease seem bona fide.
II. Constructive Dividends
As a result of our finding that there was no economic
reality behind GRC's and petitioners' lease agreement, we now
turn to the question of whether GRC's construction expenditures
constitute constructive dividends to petitioners. Section
61(a)(7) includes dividends in a taxpayer's gross income.
Section 316(a) defines dividends as any distribution of property
made by a corporation to its shareholders out of its earnings and
profits. Section 1.317-1, Income Tax Regs., provides that "the
term 'property' * * * means any property (including money,
securities, and indebtedness to the corporation) other than
stock, or rights to acquire stock, in the corporation making the
distribution." Where a corporation confers an economic benefit
on a shareholder without the expectation of repayment, that
benefit may be a constructive dividend, taxable to the
shareholder. See sec. 61(a)(7); Fields v. Commissioner, T.C.
Memo. 1996-425.
Construction services performed by a corporation which
improve property owned by its shareholder may constitute a
constructive dividend. Magnon v. Commissioner, 73 T.C. 980
(1980). Likewise, transfers between related corporations can
result in constructive dividends to their common shareholder if
Page: Previous 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 NextLast modified: May 25, 2011