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everything about the business of AJF, with the exception of how
to drive a truck, but does not know how many casual laborers were
used. Finally, Brittain's testimony indicates that she herself
doubts the accuracy of her Report. When asked whether the
Buffalo office hired casual laborers, Brittain replied,
"probably, yes." The tentativeness of her response suggests a
significant lack of confidence in her Report.
Based on the foregoing, we reject the Report in its entirety
due to its flawed analysis and lack of credibility. Since
Ferrentino cannot show that payments were made for casual labor,
we conclude that Ferrentino used the funds derived from cashing
the delivery service and fuel reimbursement checks solely for his
own benefit.
Since Ferrentino used the check proceeds solely for his
personal benefit, we must then decide whether Ferrentino must
include the value of the check proceeds as dividends in gross
income. Under sections 301(c) and 316(a), dividends are taxable
to the shareholder as ordinary income to the extent of the
corporation's earnings and profits, and any amount received by
the shareholder in excess of earnings and profits is considered a
nontaxable return of capital to the extent of the shareholder's
basis in his stock. Any amount received in excess of both the
earnings and profits of the corporation and the shareholder's
basis in his stock is treated as gain from the sale or exchange
of property. Truesdell v. Commissioner, 89 T.C. 1280, 1294-1295
(1987).
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