times, and the individual returns of the McCabes have been
audited more than nine times.
The Seventh Circuit has held that a constructive dividend
exists where there has been a corporate distribution that is
not formally labeled as a dividend payment and is not "an
expenditure for the corporation's benefit." United States v.
Mews, 923 F.2d 67, 68 (7th Cir. 1991). First, then, it must be
determined whether the fetal calf blood sales were a corporate
distribution or expenditure. In this case, there is no way that
these sales could be labeled as a corporate distribution or
expenditure, because there was no asset of the corporation that
was being distributed. The fetal calf blood was a worthless
byproduct to the McCabe Company, and, therefore, there was no
distribution of any asset of the McCabe Company to John McCabe
and hence no constructive dividend. This holding appears
readily from a review of the corporate opportunity doctrine.
Under Illinois law, the business decision of a corporation
not to engage in a particular line of business is beyond any
questioning by the courts, as long as the corporation was given
the opportunity upon full disclosure of the facts to decide
whether to enter the particular line of business. Kerrigan v.
Unity Savings Assoc., 58 Ill.2d 20, 27-28, 317 N.E.2d 39
(1974). Under the corporate opportunity doctrine, a director or
agent of a corporation is free to take a business opportunity
for himself if there has been full disclosure of the
opportunity to the corporation and if the corporation has
rejected the opportunity or is not in a position to accept the
opportunity or has tried without success to obtain it.
Northwestern Terra Cotta Corp. v. Wilson, 74 Ill. App.2d 38,
47, 219 N.E.2d 860 (1966); Forkin v. Cole, 192 Ill. App.3d 409,
429-30, 139 Ill.Dec. 410, 548 N.E.2d 795 (1989).
In this case, the McCabe Company was fully aware of the
opportunity to extract the fetal calf blood and sell it as a
byproduct. The McCabe Company had been approached by Riggs
Biochemical for purchase of the blood and had decided not to
pursue this line of business. This was a business decision of
the corporation made based on a full disclosure of the relevant
facts, and as such, the decision is not subject to question by
Nonetheless, it was not at all unreasonable for the
corporation to decide not to extract fetal calf blood as a
byproduct prior to 1987. The McCabe Company was a relatively
small slaughterhouse, and it did not want to expend the time
and effort required to develop a new and somewhat complicated
process for the sale of a byproduct that might produce only
marginal returns to the corporation. Since 1974, the McCabe
Company has had annual sales ranging from $12,000,000 to
$32,000,000, and the fetal calf blood sales would have amounted
at most to less than three-tenths of one per cent of total
annual sales. The company had already tried to extract the
blood without any success and did not want to bother with what
it considered to be an insignificant activity in comparison to
its overall operations. The McCabe Company's main business was
the sale of beef, and the company chose to concentrate its
efforts on developing its beef sales. Thus, the McCabe Company,
after full disclosure of the business opportunity, decided not
to engage in the sale of fetal calf blood, which was an
otherwise worthless byproduct to the company.
Consequently, John McCabe was free to pursue the extraction
and sale of the fetal calf blood on his own without any
accountability to the corporation. He performed the work on his
own time at no cost to the corporation, and all of the revenue
he realized from the sale of the fetal calf blood was fully
reported to the Internal Revenue Service. There is no question
here of any non-reporting of income. Because the sale of the
fetal calf blood was not in any way a business activity of the
corporation, the income derived therefrom was properly reported
as personal business income by John McCabe for the tax years
1986 and 1987, and there was no constructive dividend made by
the McCabe Packing Company to John McCabe for those years.
Ergo, Plaintiffs' motion for summary judgment is ALLOWED, and
Defendant's cross motion for summary judgment is DENIED.
The United States is hereby ordered to pay to the Plaintiffs
$134,203, representing the deficiencies wrongly assessed
against the McCabe Company and John and Camille McCabe by the
Internal Revenue Service for the tax years 1986 and 1987.
© 1992-2003 VersusLaw Inc.