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The legal fees paid by Capital Video in its taxable year
ending February 29, 1996 ($343,971), and in its short taxable
year ending December 31, 1996 ($423,101), to defend Guarino
against the conspiracy charge are not deductible as business
expenses of Capital Video.
Constructive Dividend to Guarino
A constructive dividend to a shareholder of a corporation
may occur where the corporation “confers an economic benefit on
* * * [the] shareholder without the expectation of repayment
* * * even though neither the corporation nor the shareholder
intended a dividend.” Magnon v. Commissioner, 73 T.C. 980,
993-994 (1980). Not every payment by a corporation, however,
which incidentally confers an economic benefit on a shareholder
is treated as a constructive dividend. Hood v. Commissioner, 115
T.C. 172 (2000). Generally, the test of whether a payment is to
be treated as a constructive dividend to a shareholder is whether
the payment primarily benefited the shareholder and whether the
payment was made for a valid business purpose of the corporation.
Loftin & Woodard, Inc. v. United States, 577 F.2d 1206, 1214 (5th
Cir. 1978).
As we have held, petitioners have not established that
Capital Video made the payments of Guarino’s legal fees in
connection with the business of Capital Video. Capital Video had
no obligation to make such payments. The payment by Capital
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