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Buse Co. v. Commissioner, 56 T.C. 1225, 1238 (1971); Challenge
Manufacturing Co. v. Commissioner, 37 T.C. 650, 663 (1962). The
courts have often used a two-level inquiry to decide whether a
taxpayer received constructive dividend income. The first level
of inquiry requires an examination of whether the corporation
conferred an economic benefit on the shareholder without
expectation of repayment. United States v. Smith, 418 F.2d 589
(5th Cir. 1969). The second level requires an examination of
whether the benefit primarily advanced the shareholder’s personal
interest as opposed to the business of the corporation. Ireland
v. United States, 621 F.2d 731 (5th Cir. 1980); Sammons v.
Commissioner, 472 F.2d 449 (5th Cir. 1972), affg. on this point
T.C. Memo. 1971-145; United States v. Gotcher, 401 F.2d 118 (5th
Cir. 1968).
Respondent argues that the Zhadanovs received constructive
dividends equal to the unreported vial income kept in their safe
because their unfettered control over the funds in the safe
conferred an economic benefit upon them, and the benefit was
primarily personal. Respondent relies upon the fact that Mr.
Zhadanov, as president and sole shareholder of Vortex, had ample
opportunity to spend the cash by virtue of its location in his
personal safe.
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