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Dividends may be formally declared or they may be
constructive. A constructive dividend is found where a
corporation confers a benefit upon its shareholder in order to
distribute available earnings and profits without expectation of
repayment. Truesdell v. Commissioner, supra at 1295. Therefore,
if Ferrentino is to be required to include the constructive
distribution in gross income as a dividend, AJF must have had
earnings and profits sufficient to support the distribution of a
dividend.
The U.S. Court of Appeals for the Second Circuit, the Court
to which this case would normally be appealable, has held that in
cases where the Commissioner alleges fraudulent intent to evade
income tax with respect to the diversion of corporate funds which
is not per se unlawful, the burden of proof is on the taxpayer to
establish that the corporation did not have earnings and profits
equal to the amounts diverted. DiZenzo v. Commissioner, 348 F.2d
at 127.
Section 312(a) provides that a corporation's earnings and
profits are reduced by, among other things, the amount of money
distributed with respect to its stock. Earnings and profits for
a particular period include tax-exempt income, as well as items
included in gross income under section 61. Sec. 1.312-6, Income
Tax Regs. We are required to make a finding as to whether AJF
had sufficient earnings and profits to sustain a dividend.
DiZenzo v. Commissioner, supra at 127 (remanding to the Tax Court
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