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China for TCM. We disagree. There is no credible evidence to
support those claims. We conclude that Camaro performed no bona
fide services for the Shinwa-Chrysler transaction.
3. Conclusion
Income is taxed to the party which earns it; the incidence
of taxation cannot be shifted by an anticipatory arrangement.
Helvering v. Horst, 311 U.S. 112, 119-120 (1940); Lucas v. Earl,
281 U.S. 111, 114-115 (1930); Kimbrell v. Commissioner, 371 F.2d
897, 901-902 (5th Cir. 1967), affg. T.C. Memo. 1965-115. We do
not recognize petitioner’s diversion of TCM's commission income
to Camaro for Federal income tax purposes. We conclude that TCM
understated its taxable income in 1987 by failing to report:
(1) $298,601.27 from NSA checks payable to Camaro; (2) $19,738.65
that TCM received but diverted to petitioner’s Double D account;
(3) $2,106.63 that TCM received but did not deposit to a TCM
account; and (4) $1,698.35 that TCM received but that was
diverted to petitioner’s personal account.10
Where a shareholder diverts corporate funds to his or her
own use, those funds generally are constructive dividends to the
shareholder and are ordinary income to the extent of the
corporation’s earnings and profits. Secs. 301, 316; Truesdell v.
10 TCM had unreported income of $322,144.90, minus the
amount of Camaro checks TCM deposited and reported ($11,789.54)
and the amount by which TCM overstated its gross business
receipts for 1987 ($2,660).
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