Gary Gealer - Page 9

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               Under section 61(a)(7), gross income includes the receipt of           
          any dividend.  A dividend is defined in section 316(a) as "any              
          distribution of property made by a corporation to its                       
          shareholders".  There is no requirement that the dividend be                
          formally declared or even intended by the corporation.  Loftin &            
          Woodward, Inc. v. United States, 577 F.2d 1206, 1214 (5th Cir.              
          1978).  It is well settled that expenditures made by a                      
          corporation for the personal benefit of a shareholder are                   
          constructive distributions to the shareholder in amounts equal to           
          the fair value of the benefits involved.  Roy v. Commissioner,              
          T.C. Memo. 1997-562, affd. without published opinion 182 F.3d 927           
          (9th Cir. 1999); Halpern v. Commissioner, T.C. Memo. 1982-31.               
          The test for constructive dividends is twofold:  The expenses               
          must be nondeductible to the corporation, and they must represent           
          some economic gain, benefit, or income to the taxpayer.  Meridian           
          Wood Prods. Co. v. United States, 725 F.2d 1183, 1191 (9th Cir.             
          1984).  The mere fact that expenses have been disallowed as                 
          deductions to the corporation does not necessarily make the                 
          payments constructive dividend income to the shareholder under              
          section 61(a)(7).  Erickson v. Commissioner, 598 F.2d 525, 531              
          (9th Cir. 1979), affg. in part and revg. in part T.C. Memo. 1976-           
          147; Ashby v. Commissioner, 50 T.C. 409, 418 (1968); Donnelly v.            
          Commissioner, T.C. Memo. 1974-226.  However, if this Court found            
          that it was impossible to determine whether the disallowed                  

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