William H. Breucher III - Page 10

                                        - 9 -                                         
          dividend is taxed as ordinary income only to the extent of the              
          distributing corporation’s earnings and profits;3 any excess is a           
          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 for the fiscal years ending March 31, 1999             
          and March 31, 2000, Bruecher Foundation had current and                     
          accumulated earnings and profits in excess of the “advances” at             
          issue in these cases.                                                       
               It is well established that “A greater potential for                   
          constructive dividends * * * exists in closely held corporations,           
          where dealings between stockholders and the corporation are                 
          commonly characterized by informality.”  Zhadanov v.                        
          Commissioner, T.C. Memo. 2002-104.                                          
               “Corporate expenditures constitute constructive dividends              
          only if 1) the expenditures do not give rise to a deduction on              
          behalf of the corporation, and 2) the expenditures create                   
          ‘economic gain, benefit, or income to the owner-taxpayer.’”  P.R.           
          Farms, Inc. v. Commissioner, 820 F.2d 1084, 1088 (9th Cir. 1987)            
          (quoting Meridian Wood Prods. Co. v. United States, 725 F.2d                

          3The determination and calculation of earnings and profits                  
          is governed by sec. 316 and the regulations promulgated                     

Page:  Previous  1  2  3  4  5  6  7  8  9  10  11  12  13  14  15  16  17  Next

Last modified: May 25, 2011