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to him pursuant to section 61(a); in the absence of better proof
by respondent, we decline to do so and hold that the taxation of
the amounts at issue is governed by section 301(c).
Under section 301, the distribution is treated as a dividend
if it meets the requirements of section 316. Under section
316(a), dividends are taxable to the shareholder as ordinary
income to the extent of the earnings and profits of the
corporation, and any amount received by the shareholder in excess
of earnings and profits is considered a nontaxable return of
capital to the extent of the shareholder’s basis in his stock.
Any amount received in excess of both the earnings and profits of
the corporation and the shareholder’s basis in his stock is
treated as gain from the sale or exchange of property.
Respondent concedes that IL NA Tours had no current or
accumulated earnings and profits. Petitioner had no basis in his
IL NA Tours stock.50 Accordingly, the $352,752 that we have
50 IL NA Tours’ 1988 return lists capital stock on its
balance sheet of $10,000, although petitioner testified that he
only lent money to his corporations. Even if petitioner
contributed $10,000 to IL NA Tours, we are satisfied that
petitioner had no basis in his IL NA Tours’ stock. We have found
that petitioner took an additional $85,688 from IL NA Tours
during 1988 that was not included in the amount that respondent
has pled as unreported income, and petitioner reported salary
income of only $37,500 on his 1988 return. Thus there were
diversions from IL NA Tours in 1988 that exceeded any possible
basis petitioner had in the stock of the corporation.
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