-19- 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.Page: Previous 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Next
Last modified: May 25, 2011