Background

• P–H fully owned TWC, a C corporation, which acted as general contractor for their lakefront home project.
• TWC tracked costs via a cost-plus job account; petitioners personally arranged subcontractors and vendors while TWC paid them and provided framing.
• Petitioners reimbursed TWC for all costs, including overhead, but did not pay TWC its customary profit margin (forgone profit).
• Respondent determined a constructive dividend in 2006 to P–H equal to TWC’s forgone profit, totaling $48,275.
• Court recognizes construct. dividends arise when corporate assets are diverted to shareholders to reduce earnings and profits, but here TWC did not divert earnings by providing at-cost services to the shareholder.
• Court holds petitioners did not receive a constructive dividend because services were at cost and did not reduce TWC’s earnings and profits.

Issues

Key Cases Cited

• Loftin & Woodard, Inc. v. United States, 577 F.2d 1206 (5th Cir. 1978) (constructive dividends require diversion of corporate assets to shareholder)
• Palmer v. Commissioner, 302 U.S. 63 (U.S. 1937) (dividends require distribution of corporate earnings through a conveyance to shareholders)
• Ireland v. United States, 621 F.2d 731 (2d Cir. 1980) (measurement of constructive dividends by fair market value where appropriate)
• Melvin v. Commissioner, 88 T.C. 63 (1987) (use of FMV for the benefit; use of corporate property may constitute a dividend)
• Dellinger v. Commissioner, 32 T.C. 1178 (1959) (constructive dividend when property is sold below FMV to shareholder)
• Honigman v. Commissioner, 466 F.2d 69 (6th Cir. 1972) (bargain sale/dividend concepts; below-market transactions)
• Goldstein v. Commissioner, 298 F.2d 562 (9th Cir. 1962) (assets diverted to shareholder may create a constructive dividend)
• United Aniline Co. v. Commissioner, 316 F.2d 701 (1st Cir. 1963) (use/value of corporate assets in shareholder arrangements)