AJF Transportation Consultants, Inc. - Page 23




                                                    - 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 Court                                    



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