- 28 -
expenses and the Cordeses’ income from interest and from
constructive dividends, however, must await the Rule 155
computation.
B. Constructive Dividends
Respondent determined that Mrs. Cordes, in 1989 through
1991, individually, and the Cordeses, in 1992 and 1993, jointly,
had taxable income from constructive dividends made by CFC to
Mrs. Cordes, as one of CFC’s shareholders. See sec. 61(a)(7).
Those constructive dividends, as respondent determined, consisted
in part of the portion of payments made by CFC to Mr. Cordes on
the three loans in excess of the amount that represents an arm’s-
length rate of interest29 (calculated in accordance with our
holding, supra) and consisted in part of (1) withdrawals of
corporate funds for distribution to friends and family, (2)
corporate payments of personal expenses, (3) diversion to the
Cordeses of corporate income, and (4) Mr. Cordes’s bargain
purchase of corporate notes.30
Petitioners contend that the transfers do not constitute
constructive dividends to Mrs. Cordes (1) because Mrs. Cordes did
29We discuss this transaction in the context of constructive
dividends in connection with our discussion of diversion of
corporate income because the applicable law is similar.
30Respondent also determined certain other items constituted
income from constructive dividends from CFC to the Cordeses in
the taxable years before us, but either Mr. or Mrs. Cordes or
respondent has conceded those items. See Appendix B, Summary of
Conceded, Deemed Conceded, Computational, and Settled Issues.
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