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to make a finding with respect to whether amounts of accumulated
earnings and profits were at least equal to a constructive
distribution).
The only evidence with respect to AJF's earnings and profits
is AJF's tax returns for 1988, 1989, and 1990. The tax returns
reveal that AJF reported taxable income of $151,199 and $247,037
in 1988 and 1989, respectively. AJF's 1990 tax return reports a
$2,169 loss. Since we have held that AJF should have included
the amounts of the checks cashed by Ferrentino in gross income,
earnings and profits for 1988, 1989, and 1990 must be increased
by $163,372.35, $135,458.78, and $162,863.82, respectively. If
distributed funds constitute constructive dividends, earnings and
profits should be reduced by such amount under section 312(a).
Enoch v. Commissioner, 57 T.C. 781, 800 (1972). Because AJF is
on the cash receipts and disbursements method of accounting,
accrued tax liabilities and penalties do not reduce earnings and
profits until paid. Sec. 1.312-6(a), Income Tax Regs.
Petitioners have presented no credible evidence requiring the
further reduction of AJF's earnings and profits.
We conclude that petitioners have not shown that AJF had
insufficient earnings and profits to sustain a dividend to
Ferrentino for each of the years in issue. The evidence shows
that AJF had sufficient current earnings and profits to sustain a
dividend in each of the 1988 and 1989 taxable years. Although
AJF shows a deficit of $2,169 in taxable income for the 1990
taxable year, AJF had sufficient accumulated earnings and profits
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