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IV. Did Holland America’s Payment of the Expenses Discussed
Above Result in a Constructive Dividend to Mr. and Mrs. Dobbe?
Respondent determined that Holland America’s payment of the
landscaping, grocery reimbursement, solarium addition, and
miscellaneous expenses resulted in economic gain, benefit, or
income to Mr. and Mrs. Dobbe as individuals, which is taxable to
them as a constructive dividend. Petitioners contend the
expenditures primarily benefited Holland America’s business and
not Mr. and Mrs. Dobbe; in the alternative, they contend that, if
we hold that Holland America’s payment of the expenses primarily
benefited Mr. and Mrs. Dobbe, then those payments must be treated
as loan repayments rather than constructive dividends. We
disagree and hold that Holland America’s payment of the disputed
expenses resulted in constructive dividends to Mr. and Mrs.
Dobbe.
Dividends are includable in a taxpayer’s gross income. See
sec. 61(a)(7). Section 316(a) defines a dividend as any
distribution of property made by a corporation to its
shareholders out of its earnings and profits. “Where the
corporation confers an economic benefit on a shareholder without
the expectation of repayment, that benefit may be a constructive
dividend, taxable to the shareholder.” Spera v. Commissioner,
T.C. Memo. 1998-225; see also sec. 61(a)(7); Magnon v.
Commissioner, 73 T.C. at 993-994; American Insulation Corp. v.
Commissioner, T.C. Memo. 1985-436.
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