- 19 -
are comfortable in treating the two as the same for purposes of
the instant case. See Jones v. Commissioner, T.C. Memo. 1997-
400, affd. without published opinion 177 F.3d 983 (11th Cir.
1999).
Respondent asserts that petitioners’ understatements for the
subject years are attributable to Nanny’s to the extent of
$29,213, $40,670, and $37,712, respectively. We agree. We
disagree with respondent, however, that all of these amounts are
constructive dividends which are includable in petitioners’ gross
income as ordinary income. As to 1987, we conclude and hold that
$18,659 (i.e., Nanny’s 1987 income) of the $29,213 is includable
in petitioners’ gross income as a dividend, that $10,000 is
excludable from their gross income as a return of capital, and
that $554 is includable in their gross income as a long-term
capital gain.6 Sec. 301(c). As to 1988, we conclude and hold
that $31,529 (i.e., Nanny’s 1988 income) of the $40,670 is
includable in their gross income as a dividend and that the
remainder of $9,141 is includable in their gross income as a
long-term capital gain. Id. As to 1989, we conclude and hold
6 After considering our opinion herein, we find that at the
end of Nanny’s 1987 taxable year: (1) Nanny’s had a $582 deficit
in earnings and profit (the $18,077 less the constructive
dividend of $18,659) and (2) petitioners had a zero basis in
their Nanny’s stock (their original $10,000 basis less the
$10,000 return of capital).
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