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Security benefits he received during 1993. The Zhadanovs
vigorously disagree that they had constructive dividend income in
any of the years at issue. The Zhadanovs bear the burden of
proving, by a preponderance of the evidence, that they did not
receive the income alleged by respondent. Rule 142(a).
1. Constructive Dividends
Respondent asserts that the Zhadanovs diverted Vortex income
totaling $728,346 and retained it for their personal use. The
Zhadanovs claim that the cash was not diverted but remained
Vortex’s asset despite its physical location in the Zhadanovs’
safe, and that, therefore, they did not underreport their income
or underpay their income tax liabilities for the years at issue.
A constructive dividend arises when a corporation confers an
economic benefit upon a shareholder without expectation of
repayment and the corporation on the date of the deemed
distribution had current or accumulated earnings and profits.16
Crosby v. United States, 496 F.2d 1384, 1388 (5th Cir. 1974);
Truesdell v. Commissioner, 89 T.C. 1280, 1295 (1987).
Constructive dividends are includable in a taxpayer’s gross
income under section 61(a)(7).
As a general rule, “a taxpayer need not treat as income
moneys which he did not receive under a claim of right, which
16Petitioners conceded that Vortex had sufficient earnings
and profits for the years at issue to support a constructive
dividend of the amounts at issue.
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