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taxable to the shareholder as a dividend only to the extent of
the corporation’s earnings and profits. Any excess is a
nontaxable return of capital to the extent of the shareholder’s
basis in the corporation. Any remaining amount is taxable to the
shareholder as capital gain. Sec. 301(c)(2) and (3); Truesdell
v. Commissioner, 89 T.C. 1280, 1295-1298 (1987).
On the basis of the record before us, we are convinced:
(1) The Les had full dominion and control of DDL’s funds; i.e.,
the diverted attorney checks, and (2) they diverted those funds
for their personal use. In fact, as to 1990, they admitted as
much in their plea agreements.13 Petitioners do not challenge
respondent’s analysis as to the tax treatment of the constructive
distributions from DDL. We have reviewed those calculations, and
finding no error therein, we sustain respondent’s calculation of
the amounts of the constructive distributions that are dividends
and long-term capital gains.
C. Fraud Penalties
Respondent determined that the Les are liable for fraud
penalties under section 6663(a). Section 6663(a) imposes a
13 Whereas petitioners stress that all of the attorney
checks were made out to petitioner personally, given the plea
agreements, we find this to be but one more step in the Les’ goal
to hide this income from the IRS. We also reject petitioners’
assertion that the Les were naive, unsophisticated, and
incompetent as to tax matters. In fact, the Les willfully
concealed the receipt of the attorney checks by petitioner and
DDL. They were caught because the Commissioner was auditing the
personal injury attorney.
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