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available earnings and profits without the expectation of
repayment, the benefit is taxable to the shareholder as a
constructive dividend. Neonatology Associates, P.A. v.
Commissioner, 299 F.3d 221, 232 (3d Cir. 2002), affg. 115 T.C. 43
(2000); Magnon v. Commissioner, 73 T.C. 980, 993-994 (1980).
“The crucial test of the existence of a constructive dividend is
whether ‘the distribution was primarily for the benefit of the
shareholder.’” Magnon v. Commissioner, supra at 994 (quoting
Loftin v. United States, 577 F.2d 1206, 1214 (5th Cir. 1978)).
When shareholders divert corporate funds for their own personal
use, those diverted funds are constructive dividends to the
shareholders to the extent of the corporation’s earnings and
profits. Falsetti v. Commissioner, 85 T.C. 332, 356 (1985).
Mr. Kong argues that he did not receive constructive
dividends from Sam Kong Fashions because the money was used to
pay employees, to purchase machines, and to redeem Mr. Wen’s
shares of stock in Sam Kong Fashion.17 Mr. Kong further argues
that he did not have control over the $100,330 deposited into the
Corestates bank account because Mr. Wen endorsed checks deposited
to that account. Respondent argues that Mr. Kong had control
17 As previously noted, Mr. Kong also seems to argue that
some of the corporate income that he received was actually
received from customers in his individual capacity. However, Mr.
Kong failed to report any of these amounts as income.
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