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portion of the 1997 and 1998 primary sponsorship fees equal to
$3,873,611.70
IV. The TMI Expenses as a Constructive Dividend
The amount of TMI expenses that Menards paid during 1998 as
advertising expenses was unreasonable to the extent of
$1,619,918.71 Respondent alleges that this difference (the
excess TMI expenses) was a constructive dividend to Mr. Menard.
Section 61(a)(7) includes dividends in a taxpayer’s gross
income. Section 316(a) defines a dividend as any distribution of
property that a corporation makes to its shareholders out of its
earnings and profits. A constructive dividend may arise “‘Where
a corporation confers an economic benefit on a shareholder
without the expectation of repayment, * * * even though neither
the corporation nor the shareholder intended a dividend.’” Hood
v. Commissioner, 115 T.C. 172, 179 (2000) (quoting Magnon v.
Commissioner, 73 T.C. 980, 993-994 (1980)).
70We calculated the amount as follows: Step 1: $3,850,000
(1997's fees added together: $2.35M + $1.5M)/12 (months) x 11
(months) (Feb.-Dec. 1997) = $3,529,167; Step 2: $4,133,333
(1998's fees added together: $2.55M + 1,583,333)/12 (months) x 1
(month) (Jan. 1998) = $344,444; Step 3: $3,529,167 + 344,444 =
$3,873,611.
71We calculated the amount as follows: $5,703,251 (alleged
constructive dividend amount) - $4,083,333 (1998 fees added
together: $2.55M + 1,583,333) = $1,619,918.
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