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the Lenzens’ personal expenses on the corporate card should not
be treated as additional compensation.
Lastly, petitioners argue that because RAF did not declare a
formal dividend or make payments ratably to its shareholders in
proportion to their interests, the payments of the Lenzens’
personal expenses cannot be characterized as constructive
dividends.4 We disagree. A dividend is any distribution of
property made by a corporation to its shareholders out of its
earnings and profits. Sec. 316(a). The test for a constructive
dividend is twofold: (1) The expense must be nondeductible to
the corporation; and (2) it must represent some economic gain,
benefit, or income to the shareholder. See Meridian Wood Prods.,
Inc. v. United States, 725 F.2d 1183, 1191 (9th Cir. 1984). The
payments here provided economic benefit to the Lenzens by paying
their personal expenses and are not deductible by RAF as
compensation or business expenses. The fact that no dividend is
formally declared does not preclude the finding of a dividend in
fact. See Noble v. Commissioner, supra at 442. Also, the
disbursement of corporation earnings to a shareholder may
constitute a dividend to the shareholder notwithstanding that it
is not in proportion to stockholdings or that some shareholders
do not participate in its benefits. Baird v. Commissioner, 25
4Petitioners do not dispute that RAF had sufficient earnings
and profits to cover the amounts in question.
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