Appeal from the United States Tax Court.
Eschbach and Flaum, Circuit Judges, and Swygert, Senior Circuit Judge.
This appeal raises the issue of whether certain withdrawals made by a taxpayer from his wholly-owned corporation should be treated as loans or dividends in determining the taxpayer's income tax liability. The Tax Court determined that the amounts withdrawn were taxable as dividends. For the reasons stated below, we affirm the Tax Court.
Appellant Richard E. Busch Jr.*fn1 is the sole stockholder, the president, and a director of the Fort Wayne Chiropractic Clinic, Inc. (the corporation). He is also an employee of the corporation.
During the tax years 1973, 1974, and 1975, Busch made a series of withdrawals of money from the corporation. The corporation maintained an account in the corporate books and records titled "Notes Receivable -- R. E. Busch." The outstanding balance in the account at the end of each year was as follows: for 1973, $11,358.70; for 1974, $28,260.87; for 1975, $40,358.29. The total amount of money withdrawn exceeded $300,000.
The sums withdrawn were used primarily to pay construction expenses and mortgage expenses for a new building to house the corporation. Approximately $265,000 was used for this purpose. Busch and his wife held title to the building. They reported rent from other tenants in the building as income on their personal income tax return. Busch used some of the balance of the withdrawn sums for personal purposes.
Busch executed a series of promissory demand notes to the corporation during the years in question. The notes were noninterest-bearing and none contained a repayment schedule. At some point, Busch executed a note incorporating the old notes; this new note did provide for interest. The notes did not cover the entire amount withdrawn.
Busch gave the corporation no collateral for the withdrawn amounts. The corporate record book did not contain a corporate resolution authorizing the loans. In 1980, Busch prepared such a resolution, backdated it to 1973, and inserted it into the records.
During the tax years in question, the corporation's retained earnings grew from $19,277.38 for the fiscal year ending September 30, 1973, to $74,427.75 for the fiscal year ending September 30, 1976. The corporation did not declare or pay any dividends during this period.
Busch repaid some of the withdrawn sums prior to being contacted by the IRS for an audit. Some of the repayments were bookkeeping entries involving no transfer of cash. For example, some repayments were set-offs against Busch's salary from the corporation. Similarly, Busch borrowed $6,000 from the corporation's profit-sharing trust and used this to repay part of the sums.
The IRS initially contacted Busch regarding an audit in April 1976. He fully repaid the withdrawn funds by the end of 1980.
The Tax Court found that the net amounts withdrawn by Busch each year were constructive dividends and thus includible in his taxable income.*fn2 The court held that the character of the withdrawn sums depends on whether, at the time of the withdrawal, the taxpayer intended to repay the sums. The court ...