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the corporation was insolvent were taxable to the shareholder
under the predecessor of section 61(a).49 The taxpayer had not
argued, and we did not consider, whether these amounts were
constructive dividends taxable under section 301(c). In a more
recent case, Truesdell v. Commissioner, supra, the Commissioner
likewise argued that a shareholder who diverted funds from his
wholly owned corporation was taxable under section 61(a). The
taxpayer argued that the amounts were constructive dividends,
taxable pursuant to the terms of section 301(c). We agreed with
the taxpayer, stating:
As a general proposition, where a taxpayer has dominion
and control over diverted funds, they are includable in
his gross income under section 61(a), unless some other
modifying Code section applies. The latter is the
situation here, since Congress has provided that funds
(or other property) distributed by a corporation to its
shareholders over which the shareholders have dominion
and control are to be taxed under the provisions of
section 301(c). [Id. at 1298; citation omitted.]
We distinguished Leaf on the grounds that the taxpayer therein
had fraudulently transferred funds that should have been
available to creditors, in contemplation of bankruptcy. By
contrast, the diverted funds in Truesdell had not been wrongfully
appropriated from other shareholders or in fraud of creditors.
“We need not and do not express an opinion on the need to apply a
constructive dividend analysis in a situation where the
49 Sec. 22(a), I.R.C. 1939.
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