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1995 1996
Distributions $36,268 $18,206
Current Earnings and Profits 14,335 17,325
Accumulated Earnings and Profits (50,600) (39,121)
Paid-in-capital (basis) 1,000 0
Loans from stockholders1 123,645 120,842
1 These amounts reflect the amounts “loaned” by
petitioners to PPP for each tax year as reported on
Schedule L, Balance Sheets per Books, on the respective
year’s Form 1120, U.S. Corporation Income Tax Return.
These amounts are in addition to the $285,580 on PPP’s
books at the start of 1995.
Discussion
Bona Fide Debt
It is respondent’s contention that there is little evidence
of “loans” from petitioner to PPP and that the payments in
question, made to or on behalf of petitioners, must be treated as
constructive dividends and taxed as ordinary income.
Petitioners, however, claim that because PPP was indebted to
petitioner in amounts in excess of the payments herein that they
are entitled to treat the payments as loan repayments. Under
such an interpretation, the payments would not constitute
dividend income and would not be taxable as ordinary income of
petitioners.
Generally, respondent’s determination in a notice of
deficiency is presumptively correct, and petitioners bear the
burden of disproving the adjustments. Rule 142(a); Falsetti v.
Commissioner, 85 T.C. 332, 356 (1985). However, under section
7491(a)(1), effective for court proceedings arising in connection
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