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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
thereunder.
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