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which petitioners claim error in connection with the net worth
analysis.
Respondent determined that all of the underpayments
attributable to Nanny’s were includable in petitioners’ gross
income as constructive dividends. We disagree. Absent a
provision to the contrary, funds which a shareholder diverts from
a corporation are generally includable in the shareholder’s gross
income under section 61(a) to the extent that the shareholder has
dominion and control over them. See also Commissioner v.
Glenshaw Glass Co., 348 U.S. 426, 431 (1955). One example of a
contrary provision is section 301, where Congress has provided
that funds (or any other property) distributed by a corporation
to a shareholder over which the shareholder has dominion and
control are to be taxed under the provisions of section 301(c).
Under section 301(c), a constructive distribution is taxable to
the shareholder as a dividend only to the extent of the
corporation’s earnings and profits. Any excess is a nontaxable
return of capital to the extent of the shareholder’s basis in the
corporation, and any remaining amount is taxable to the
shareholder as a long-term capital gain. Sec. 301(c)(2) and (3);
Truesdell v. Commissioner, 89 T.C. 1280, 1295-1298 (1987). See
also FDIC v. First Heights Bank, FSB, 229 F.3d 528, 540 (6th Cir.
2000), wherein the Court of Appeals for the Sixth Circuit, the
court to which this case is appealable, stated:
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