                         T.C. Memo. 2010-173



                      UNITED STATES TAX COURT



             R.V.J. CEZAR CORPORATION, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent

      RESTITUTO T. AND VIRGENCITA P. CEZAR, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 30125-08, 30144-08.   Filed August 4, 2010.



     Marc Paul Jacobs, for petitioners.

     Steven M. Roth, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     KROUPA, Judge:   Respondent determined a $190,093 deficiency

in Restituto T. and Virgencita P. Cezar’s (petitioners)

individual Federal income tax as well as a $130,408 deficiency in

the Federal income tax of petitioners’ wholly owned corporation,
                                  -2-

R.V.J. Cezar Corporation (the corporation) for 2004.    Respondent

also determined petitioners and the corporation were liable for

accuracy-related penalties of $38,018 and $27,192, respectively.

      After concessions, we must decide five issues.   First, we

must decide whether the corporation’s distribution of

improvements on a corporate-owned lot to petitioners is taxable

as a constructive dividend to petitioners.    We find that it is.

The second issue is whether the corporation recognized income by

distributing the improvements to petitioners, the corporation’s

sole shareholders.   We hold that the corporation recognized the

income.   We also must decide whether petitioners as well as the

corporation are liable for the accuracy-related penalty for 2004.

We hold that they each are liable.

                         FINDINGS OF FACT

      Some of the facts have been stipulated and are so found.

The stipulation of facts and the accompanying exhibits are

incorporated by this reference.    Petitioners resided in Santa

Barbara, California, at the time they filed the petition.    The

corporation’s headquarters was in Santa Barbara, California, at

the time it filed the petition.

I.   Background on Petitioners and the Corporation

      Mr. Cezar was trained and worked as an engineer in the

Phillippines and American Samoa before moving to the United

States.   He moved his family to the United States so his disabled
                                  -3-

son could enroll in special education classes.      Mr. Cezar

obtained a contractor’s license after moving to California in

1991.     He purchased a construction corporation from a contractor

who was leaving the industry and began operating the corporation

under the name R.V.J. Cezar Corporation in 1996.

      The corporation built “spec” houses1 that it sold to the

public.     The corporation paid the construction costs with

construction loans in the corporation’s name.      The corporation

owned each spec house it built and reported any sales of the

houses on the corporate income tax returns.

      Petitioners were sole shareholders in the corporation during

2004.     They paid $500 for their stock.   Mr. Cezar, a general

contractor, was the sole employee of the corporation and he

received wages from the corporation in 2004.

II.   The 604 Farrell Drive Property

      The corporation purchased a lot at 604 Farrell Drive (the

lot) in 2001.     The corporation financed part of the $150,000

purchase price for the lot with a mortgage.

      The corporation obtained a permit to begin construction of a

4,000 square foot spec home on the lot in 2003.      Mr. Cezar

prepared the blueprints and oversaw the construction.      The spec

home at 604 Farrell Drive is approximately twice the size of the


      1
      A “spec” house is a house constructed by a builder to the
builder's specifications with the intention of selling it at a
profit upon completion.
                                 -4-

corporation’s other spec homes and includes “upgrades” such as

granite countertops, central vacuum and carpeted bedrooms.    The

backyard has a jacuzzi tub, surround sound, and tile walkways.

       The corporation is listed as the sole owner of the spec home

on the blueprints, the permit and the notice of completion.

Nothing on the blueprints, the permit or the completion notice

indicates that the improvements were constructed through a joint

venture between petitioners and the corporation or that the

corporation permitted petitioners to construct the home on the

corporate-owned lot.    At no time did the corporation or

petitioners ever notify the Santa Barbara County Assessor’s

Office (Assessor’s Office) that petitioners rather than the

corporation owned the improvements.    The Assessor’s Office did

not assign the improvements a separate parcel number from the

lot.    The Assessor’s Office sent one tax bill for the lot and the

improvements, rather than two separate unsecured bills, to the

corporation as the record owner.    The corporation did not object

that it had been billed for improvements that it did not own nor

that the lot and the improvements were separately owned.

       The corporation submitted construction cost estimates to the

Assessor’s Office but did not maintain any receipts or invoices

to substantiate the costs.    The parties agree that construction

costs were $502,000.    Petitioners did not produce any records or

otherwise demonstrate that they paid any of the construction
                                 -5-

costs.    Some construction materials were purchased with credit

cards issued in both Mr. Cezar’s name and the name of the

corporation.    Petitioners failed to provide any documentation as

to who paid the credit card bills.     Petitioners were only able to

produce credit card statements for a year after construction was

completed.

     Petitioners were unable to document most of the labor costs

of constructing the home.    Petitioners did not include any “sweat

equity” from the corporation in income for any construction labor

they may have done themselves or with the help of their sons, nor

did they provide testimony from their sons.    Mr. Cezar hired some

laborers for the construction but many of the laborers were paid

in cash and no records exist.    Mr. Cezar did not maintain any

record of whom he hired, what they did, how much he paid them or

whether he paid them with his own funds.    In addition, many of

the labor costs Mr. Cezar documented were incurred after the

construction was completed.

     Construction of the improvements was completed in June 2004.

The corporation offered both the lot and the improvements for

sale during the summer of 2004 but did not receive any purchase

offers.    There was no transfer of interest between petitioners

and the corporation until the corporation transferred the lot and

improvements to petitioners by quitclaim deed four months later.

Petitioners assumed the outstanding mortgage of $57,227.    The lot
                                    -6-

and the improvements had a total fair market value of $920,000 at

the time of transfer.       The corporation filed a transfer of

ownership report with the Assessor’s Office.      The ownership

report did not indicate that the property interest transferred to

petitioners was a partial interest.

       Petitioners did not report the receipt of the lot or the

improvements on their return for 2004, nor did the corporation

report the distribution of the lot and the improvements on the

corporate return for 2004.

III.       The Deficiency Notices for 2004

       Respondent examined petitioners’ individual return and the

corporation’s corporate return for 2004.      Mr. Cezar stated

repeatedly during the audit that the improvements and the lot

were corporate assets.

       Respondent issued a deficiency notice to petitioners

determining that the distribution of the lot and the improvements

was a constructive dividend from the corporation.2      Respondent

determined petitioners received a qualified dividend up to the

amount of earnings and profits of the corporation.      Respondent

also determined that petitioners received the remainder of the

distribution, less their $500 initial capital contribution, as

long-term capital gain.       Respondent also determined petitioners



       2
      The deficiency notices issued to petitioners and the
corporation determined other issues now conceded.
                                -7-

were liable for the accuracy-related penalty.    Petitioners timely

filed a petition.

     Respondent also issued a deficiency notice to the

corporation determining an increase in gross income due to the

distribution of the lot and the improvements to petitioners.

Respondent also determined the corporation was liable for the

accuracy-related penalty.   The corporation timely filed a

petition.

                              OPINION

     We must now determine whether the corporation’s distribution

of improvements on a corporate-owned lot is taxable to

petitioners as a constructive dividend.    Petitioners concede they

received the lot as a constructive dividend but argue that they

did not receive the improvements as a constructive dividend

because they “owned” the improvements.3    We must also determine

the tax consequences to the corporation in a closely held

situation as here where neither petitioners nor the corporation

kept adequate records.   We must also decide whether petitioners

and the corporation are each liable for the accuracy-related

penalty for failing to maintain adequate records and failing to

properly report the distribution.     We address each of these

issues in turn.



     3
      Ownership of the improvements is not necessarily acquired
by paying for the materials or even providing the labor.
                                  -8-

I.   The Constructive Dividend to Petitioners From the Corporation

      We begin with the general rules for taxability of dividends.

A dividend is a distribution of property from a corporation to

its shareholders out of the corporation’s earnings and profits.

Sec. 316(a).4   The amount of the distribution equals the fair

market value of the distributed property on the date of

distribution.    Sec. 301(b)(1)(A), (3); Schrott v. Commissioner,

T.C. Memo. 1989-346.    Any portion of a distribution that is a

dividend is taxable to the recipient as ordinary income.    Secs.

61(a)(7), 301(c), 316(a).    The amount of the distribution that

exceeds earnings and profits, and is therefore not a dividend, is

taxable capital gain to the recipient.    See sec. 301(c)(3).

      Dividends may be formally declared or they may be

constructive, and the corporation’s intent is not determinative.

See Roy v. Commissioner, T.C. Memo. 1997-562, affd. without

published opinion 182 F.3d 927 (9th Cir. 1999); Noble v.

Commissioner, T.C. Memo. 1965-84, affd. 368 F.2d 439 (9th Cir.

1966).    A constructive dividend arises when a corporation confers

a benefit on a shareholder by distributing available earnings and

profits without expectation of repayment.     Noble v. Commissioner,

supra.    The classification of a distribution as a constructive

dividend is a question of fact.     Loftin & Woodard, Inc. v. United


      4
      All section references are to the Internal Revenue Code
and all Rule references are to the Tax Court Rules of Practice
and Procedure, unless otherwise indicated.
                                -9-

States, 577 F.2d 1206, 1215 (5th Cir. 1978).    There is a greater

potential for a constructive dividend with closely held

corporations where dealings between shareholders and the

corporation are commonly characterized by informality.     Zhadanov

v. Commissioner, T.C. Memo. 2002-104.     Petitioners bear the

burden of proving that respondent’s determination of a

constructive dividend is erroneous.   See Rule 142(a).

     Petitioners concede that they received the lot as a

constructive dividend from the corporation.    They argue, however,

that the improvements were not a constructive dividend because

they owned the improvements by having paid for the construction

materials and having done all the work to construct the

improvements.   We are not persuaded that petitioners owned the

improvements.   They conceded that the corporation owned the lot

on which the improvements were built.   As respondent points out,

it is axiomatic that improvements are built on land that one owns

or else there would be an agreement identifying the rights and

responsibilities of the parties.   We agree.   Petitioners failed

to provide any authority to support the argument that the lot and

the improvements were separately owned.    They have not shown that

there was an agreement between them and the corporation that

would have allowed them to construct a home on the corporation’s

property.   Their ownership argument also is directly contradicted
                                -10-

by Mr. Cezar’s statements during the audit that the lot and the

improvements were both corporate assets.

     Moreover, petitioners did not present any credible evidence

to support their claim that they owned the improvements by paying

the construction costs and personally completing the labor.     The

only evidence petitioners presented of having completed the

construction labor was Mr. Cezar’s self-serving testimony, which

we are not required to accept, and which we do not, in fact, find

credible.    See Niedringhaus v. Commissioner, 99 T.C. 202, 219

(1992).    Neither petitioners nor the corporation kept adequate

records.    The store account and the credit card statements they

did provide do not establish that petitioners were separate from

the corporation.    The statements were for credit cards and

accounts jointly held by Mr. Cezar and the corporation, and

petitioners did not produce any cancelled checks or receipts to

establish who paid the bills.    The only records petitioners

produced to establish that they paid the construction costs were

insufficient.    Moreover, the statements were for periods after

the improvements were built.

     Furthermore, the record reflects that the corporation was

the sole owner of the lot as well as the improvements from the

start of construction until the distribution to petitioners.      The

corporation is listed as the sole record owner of the lot and the

improvements on the blueprints, the permit, and the notice of
                                -11-

completion.    The corporation received property tax bills for both

the lot and the improvements and did not protest that it had been

billed for improvements that it did not own.      We also find it

compelling that the corporation, which is in the business of

building and selling homes, offered the lot and the improvements

for sale without obtaining any transfer of interest from

petitioners.   No prospective buyer would buy only the

improvements and not the lot or vice versa.      Equally compelling,

we note that no other spec home that the corporation sold before

or since was owned by petitioners individually.      Rather, all the

homes and lots were owned and offered for sale by the

corporation.

      Accordingly, we find that petitioners have not established

that they owned the improvements.      We therefore sustain

respondent’s determination that petitioners must include the

distribution of the lot and the improvements in gross income as a

constructive dividend from the corporation.5

II.   The Corporation’s Recognition of Income

      We now turn to the tax consequences to the corporation of

the constructive dividend.   We begin by noting that it is a

fundamental tax principle that the Commissioner’s determinations


      5
      The parties have stipulated that the total fair market
value of the lot and the improvements at the time of distribution
was $920,000. We therefore find that the value of the
distribution was $920,000, not the larger amount determined in
the deficiency notice.
                                -12-

are generally presumed correct, and taxpayers bear the burden of

proving that these determinations are erroneous.    Rule 142(a);

INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992); Welch v.

Helvering, 290 U.S. 111, 115 (1933).    Where a corporation

distributes appreciated property to a shareholder, the

corporation recognizes gain as if the property were sold to the

shareholder at its fair market value.    See sec. 311(b)(1).   Gain

is recognized to the extent that the property’s fair market value

exceeds the corporation’s adjusted basis.    See id.

       The parties agree that the constructive dividend to

petitioners caused the corporation to recognize taxable income to

the extent the fair market value of the lot and the improvements

exceeded the corporation’s adjusted basis.    The parties also

agree that the amount is taxable to the corporation as gross

income.    The corporation has not established its adjusted bases

in the lot and the improvements as anything other than what the

parties conceded.    We find therefore that the corporation

recognized additional income.

III.    Petitioners’ Liability for the Accuracy-Related Penalty

       We next consider petitioners’ liability for the accuracy-

related penalty under section 6662(a) and (b)(1).      Taxpayers are

liable for an accuracy-related penalty for any portion of an

underpayment of income tax attributable to negligence or

disregard of rules and regulations, unless they establish that
                                -13-

there was reasonable cause for the underpayment and that they

acted in good faith.    Secs. 6662(a) and (b)(1), 6664(c)(1).

Negligence is defined as any failure to make a reasonable attempt

to comply with the provisions of the Code and includes any

failure by the taxpayer to keep adequate books and records or to

substantiate items properly.    Sec. 6662(c); sec. 1.6662-3(b)(1),

Income Tax Regs.

      Petitioners did not keep any books and records to

substantiate their claim that they owned the improvements and

properly reported the distribution of the lot and the

improvements to them.   Moreover, petitioners failed to present

any defense against the accuracy-related penalty.    Petitioners

admit that they did not seek professional tax advice nor consider

the tax ramifications of receiving the lot and the improvements

as a distribution from the corporation.    Accordingly, we sustain

respondent’s determination that petitioners are liable for the

section 6662 accuracy-related penalty for 2004.

IV.   The Corporation’s Liability for the Accuracy-Related Penalty

      We now turn to the corporation’s liability for the accuracy-

related penalty.   Respondent determined that the corporation is

liable for the accuracy-related penalty for a substantial

understatement of income tax under section 6662(b)(2) for 2004.

There is a substantial understatement of a corporation’s income

tax if the amount of the understatement exceeds the greater of 10
                                -14-

percent of the tax required to be shown on the return, or

$10,000.    Sec. 6662(d)(1)(B); sec. 1.6662-4(b), Income Tax Regs.

       The corporation reported tax due of $5,398.   Respondent

determined the corporation had a $130,408 understatement from

failing to report an additional $920,000 in gross receipts.

Respondent has therefore met his burden of production with

respect to the corporation’s substantial understatement of income

tax.    In addition, the corporation failed to present any defense

against the accuracy-related penalty.     Accordingly, we sustain

respondent’s determination that the corporation is liable for the

section 6662 accuracy-related penalty.

       We have considered petitioners’ other arguments and conclude

they are irrelevant, moot, or meritless.

       To reflect the foregoing and the concessions of the parties,



                                            Decisions will be entered

                                       under Rule 155.
