- 44 -
earnings and profits;42 any excess is nontaxable return of
capital to the extent of the taxpayer’s basis; and any remaining
amount received is taxable as capital gain from the sale or
exchange of a capital asset. Sec. 301(c)(1),(2), and (3);
Truesdell v. Commissioner, 89 T.C. 1280, 1295-1298 (1987);
Barnard v. Commissioner, supra. The parties have stipulated
that, to the extent we find constructive dividends, ERG had
sufficient earnings and profits to deem any distributions as
ordinary income.
“It is well established that transfers between related
corporations may result in constructive dividends to a common
shareholder.” Speer v. Commissioner, T.C. Memo. 1996-323 (citing
Joseph Lupowitz Sons, Inc. v. Commissioner, 497 F.2d 862, 868 (3d
Cir. 1974), affg. in part, revg. in part on another ground, and
remanding T.C. Memo. 1972-238); see DiLeo v. Commissioner, 96
T.C. 858, 883 (1991), affd. 959 F.2d 16 (2d Cir. 1992). “A
greater potential for constructive dividends * * * exists in
closely held corporations where dealing between stockholders and
the corporation are commonly characterized by informality.”
Zhadanov v. Commissioner, T.C. Memo. 2002-104. However, common
ownership alone will not support a finding of constructive
dividends. Sammons v. Commissioner, 472 F.2d 449, 451 (5th Cir.
42The determination and calculation of earnings and profits
is governed by sec. 316 and the regulations promulgated
thereunder.
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