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become an owner of ALSL and never became such an owner. ALSL’s
owners, on the other hand, who were themselves indirect owners
and insiders of HEI, did choose to become ALSL’s owners. They
did this not by using their personal funds to pay for their
equity but by using HEI’s funds. Distributions by a corporation
are treated as dividends to a shareholder (to the extent of the
corporation’s earnings and profits, see Estate of DeNiro v.
Commissioner, 746 F.2d 327, 332 (6th Cir. 1984)) if the
distributions are made for the shareholder’s personal benefit
without any expectation of repayment. See Hagaman v.
Commissioner, 958 F.2d 684, 690-691 (6th Cir. 1992), affg. and
remanding T.C. Memo. 1987-549; J.F. Stevenhagen Co. v.
Commissioner, T.C. Memo. 1975-198, affd. 551 F.2d 106 (6th Cir.
1977); see also Shedd v. Commissioner, T.C. Memo. 2000-292; Davis
v. Commissioner, T.C. Memo. 1995-283. Such is so even if the
funds are not distributed directly to the shareholder. See Rapid
Elec. Co. v. Commissioner, 61 T.C. 232, 239 (1973); see also J.F.
Stevenhagen Co. v. Commissioner, supra.
HEI had no equity in ALSL, and HEI’s transfers of the funds
to ALSL enhanced the controlling settlors’ investments in ALSL;
e.g., the controlling settlors never made any capital
contributions to ALSL from their personal funds but still
received interests in ALSL totaling 60 percent. The transfers
also were made without a reasonable expectation of repayment.
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