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B. Constructive Dividends From CFC
1. Cash Distributions to John Cordes and Jean Ann
Richard
On March 16, 1994, CFC made two checks payable, one to John
Cordes, the other to Jean Ann Richard, each in the amount of
$800,000. Both checks bore the notation “Purchase Stock”, and
both checks were endorsed by Mr. Cordes, or someone acting on his
behalf, and redeposited in CFC’s bank account at Mr. Cordes’s
direction. Upon receipt of the checks, CFC established accounts
on its books evidencing a note payable to John Cordes and another
to Jean Ann Richard, each in the amount of $800,000. Throughout
1994 and 1995, CFC made a number of distributions to John Cordes,
Jean Ann Richard, and Mrs. Cordes and charged those distributions
to John Cordes’s and Jean Ann Richard’s loan accounts.
a. The Two $800,000 Distributions
Respondent’s primary arguments with respect to the two
$800,000 distributions are: (1) CFC distributed $800,000 for Mr.
Cordes’s use in purchasing stock from John Cordes, and the
distribution thereby constitutes a constructive dividend to CFC’s
shareholder(s),14 and (2) CFC distributed $800,000 to Jean Ann
14Respondent also argued that John Cordes received the
$800,000 as proceeds from the sale of a capital asset, but
respondent did not amend his answer to include the tax on such
proceeds. Respondent further argued that John Cordes lent the
$800,000 to CFC upon his receipt of the funds and that CFC made
payments to John Cordes on that loan in 1994 and 1995. As these
arguments have no bearing on whether the items in the notice of
deficiency constitute constructive dividends to CFC’s
shareholder(s), we do not examine these arguments.
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