- 23 -23 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 CourtPage: Previous 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 Next
Last modified: May 25, 2011