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Strong freely used the money for personal expenses. Petitioners
do not address respondent’s argument.
If a controlling shareholder diverts corporate income to his
own use, the diverted funds are generally treated as constructive
dividends for tax purposes. DiLeo v. Commissioner, 96 T.C. at
883. A dividend is any distribution of property made by a
corporation to its shareholders out of its earnings and profits.
Sec. 316(a). Where a corporation makes a distribution to a
shareholder that serves no legitimate corporate purpose and
results in an economic benefit to the shareholder, the payment is
a constructive dividend to the benefited shareholder.
Commissioner v. Riss, 374 F.2d 161, 167 (8th Cir. 1967), affg. in
part, revg. in part and vacating in part T.C. Memo. 1964-190; see
also Meridian Wood Prods., Inc. v. United States, 725 F.2d 1183,
1191 (9th Cir. 1984). However, the fact that certain payments
are not deductible by a corporation as business expenses does not
automatically make them taxable to the shareholder. Dolese v.
United States, 605 F.2d 1146, 1152 (10th Cir. 1979); Falsetti v.
Commissioner, 85 T.C. 332, 356-357 (1985); Ashby v. Commissioner,
50 T.C. 409, 418 (1968). To the extent the payments do not
represent some direct benefit to the shareholder, they are not
taxable to him. See Ashby v. Commissioner, supra.
Some of the income deposited into account No. 893315300 was
used by Mr. Strong for SCC’s legitimate business expenses.
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