                       T.C. Memo. 2002-124



                     UNITED STATES TAX COURT



              JUNE CORDES, ET AL.,1 Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 20254-94, 9294-95,      Filed May 22, 2002.
                  3284-96, 3305-96,
                  4182-96, 19178-97,
                 19256-97, 19277-97,
                 19278-97, 19279-97.



     Michael C. Mayhall and O. Christopher Meyers,

for petitioners.

     Gary L. Bloom, for respondent.




     1
      For purposes of trial, briefing, and opinion, the cases of
the following petitioners are consolidated herewith: Cordes
Finance Corp., docket Nos. 9294-95 and 3284-96; June J. Cordes,
docket No. 3305-96; Edmund J. & June J. Cordes, docket No. 4182-
96; Edmund J. Cordes, docket No. 19178-97; John J. Cordes, docket
No. 19256-97; Jean Ann Richard, docket No. 19277-97; Eddy Ben
Cordes, docket No. 19278-97; and June Cordes, docket No. 19279-
97.
                                 - 2 -

                MEMORANDUM FINDINGS OF FACT AND OPINION

     MARVEL, Judge:     In these consolidated cases, respondent

determined deficiencies in petitioners’ Federal income tax and

additions to tax and/or penalties as follow:

Docket Nos. 9294-95 and 3284-96
Petitioner Cordes Finance Corp.:

                                         Penalties
         Year     Deficiency     sec. 6662(a)2   sec. 6663
         1991      $606,863        $121,373        $9,773
         1992       686,695         131,784        20,832
         1993       743,902         145,200        13,428

Docket Nos. 20254-94 and 3305-96
Petitioner June Cordes:3

                                      Additions to tax
         Year     Deficiency     sec. 6651(a)(1) sec. 6654
         1989      $135,298          $33,825         $232
         1990       134,608           33,652        8,863
         1991       368,551           92,138       21,201

Docket No. 4182-96
Petitioners Edmund J. & June J. Cordes:

                                                Penalties
         Year             Deficiency           sec. 6662(a)
         1992              $17,281                $3,456
         1993               98,957                19,791




     2
      Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the taxable years in
issue, and all Rule references are to the Tax Court Rules of
Practice and Procedure. Monetary amounts have been rounded to
the nearest dollar amount as appropriate.
     3
      June Cordes (docket No. 20254-94) and June J. Cordes
(docket Nos. 3305-96 and 4182-96) refer to the same person.
Hereinafter, June Cordes and June J. Cordes shall be referred to
as Mrs. Cordes or petitioner, as appropriate.
                                 - 3 -

Collectively, the above five cases are referred to as the income

tax cases.

     In these consolidated cases, respondent also determined

deficiencies in petitioners’ Federal gift tax and additions to

tax as follow:

Docket No. 19178-97
Petitioner Edmund J. Cordes:

                                         Additions to tax
          Year      Deficiency           sec. 6651(a)(1)
          1983       $73,100                 $18,275
          1991       349,503                     -0-
          1992        18,450                   4,613
          1993        13,500                   3,375

Docket No. 19256-97
Petitioner John J. Cordes:

                                         Addition to tax
          Year      Deficiency           sec. 6651(a)(1)
          1994       $154,230                $38,558

Docket No. 19277-97
Petitioner Jean Ann Richard:4

                                         Additions to tax
          Year      Deficiency           sec. 6651(a)(1)
          1987        $16,650                 $4,163
          1988        130,500                 32,625




     4
      The parties and exhibits refer to this petitioner as Jean
Ann Cordes and as Jean Ann Richard. Jean Ann Cordes married
Joseph P. Richard prior to the issuance of the notices of
deficiency. Throughout this opinion, we shall refer to her as
Jean Ann Richard or petitioner for the sake of clarity. Neither
her name nor marital status has any bearing on our holdings
herein.
                                  - 4 -

Docket No. 19278-97
Petitioner Eddy Ben Cordes:

                                          Additions to tax
           Year      Deficiency           sec. 6651(a)(1)
           1983       $190,450                $47,613
           1989        101,600                 25,400

Docket No. 19279-97
Petitioner June Cordes:

                                          Additions to Tax
           Year      Deficiency           sec. 6651(a)(1)
           1991       $286,654                   -0-
           1993         28,767                 $7,192
           1994      1,749,930                437,483

Collectively, the above five cases are referred to as the gift

tax cases.

     After concessions,5 the issues for decision are:

     (1)   As to the income tax cases, whether respondent abused

his discretion in determining that the interest charged for 1992

and 1993 on loans between Edmund J. Cordes (Mr. Cordes) and

Cordes Finance Corp. (CFC) was unreasonable and excessive and in

recharacterizing the amounts transferred to reflect an arm’s-

length rate of interest under section 482;




     5
      Many issues in these consolidated cases have been settled
or conceded by the parties, or are deemed conceded by this Court.
Other issues raised by the parties are computational in nature.
In the interest of space, these conceded, deemed conceded,
computational, and settled issues, and their respective
dispositions, are set forth in Appendix B, Summary of Conceded,
Deemed Conceded, Computational, and Settled Issues. We
incorporate those dispositions into our opinion by this
reference.
                                - 5 -

     (2)    as to the income tax cases, whether Mrs. Cordes, in

1989 through 1991, and Edmund J. and June J. Cordes (the

Cordeses), in 1992 and 1993, received constructive dividends from

CFC, resulting in additional taxable income to Mrs. Cordes for

1989 through 1991 and to the Cordeses for 1992 and 1993;

     (3)    as to the income tax case in which CFC is the

petitioner, whether CFC is liable for a civil fraud penalty on an

underpayment of its income tax, pursuant to section 6663, for

1991; and

     (4)    as to the gift tax cases, whether petitioners therein

made completed gifts of stock in family-owned and closely held

corporations for Federal gift tax purposes.

                          FINDINGS OF FACT

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

The stipulation of facts, the supplemental stipulation of facts,

and two stipulations of agreed adjustments are incorporated in

our findings by this reference.

I.   Background

     A.    Petitioners

     The Cordeses were married and resided in Lawton, Oklahoma,

at the time they filed their individual and joint petitions.

Petitioner John J. Cordes (John Cordes) was a resident of Austin,

Texas, at the time his petition was filed.    Petitioner Jean Ann

Richard was a resident of Lawton, Oklahoma, at the time her
                                 - 6 -

petition was filed.     Petitioner Eddy Ben Cordes was a resident of

Lawton, Oklahoma, at the time his petition was filed.    Each of

the individual petitioners was a cash basis, calendar-year

taxpayer.   The Cordeses are the parents of petitioners John

Cordes, Jean Ann Richard, and Eddy Ben Cordes.    We shall

hereinafter refer to the above-named petitioners collectively as

the Cordes family.

     CFC was incorporated in Oklahoma on January 24, 1964.

CFC’s principal place of business was in Lawton, Oklahoma, at the

time its petitions were filed.

     B.   The Cordes Corporations

     During the taxable years at issue, members of the Cordes

family held legal title to all the shares of stock in the

following closely held corporations:6    CFC,7 Eddie Cordes, Inc.,

Edmund Cordes, Inc., and John Cordes, Inc. (collectively, the

Cordes corporations).    The primary business activity of each of

     6
      It appears from the record that members of the Cordes
family have held legal title to all, or nearly all, of the shares
of stock in CFC, Eddie Cordes, Inc., Edmund Cordes, Inc., and
John Cordes, Inc. (collectively, the Cordes corporations), since
their respective incorporations.
     7
      In 1971, CFC issued 500 shares of stock, 105 of which were
issued to Eddy Ben Cordes. The record does not indicate who
became the recordholder of the other 395 shares. The record does
indicate that, in 1988, Ellen Cordes, Mr. Cordes’s daughter-in-
law, held legal title to 100 shares which she transferred to Jean
Ann Richard later that year. The testimony and exhibits confirm
that members of the Cordes family held legal title to all
outstanding stock in the Cordes corporations during the taxable
years at issue.
                               - 7 -

the Cordes corporations was either selling, or financing

customers’ purchases of, motor vehicles.

     Eddie Cordes, Inc., was incorporated in Oklahoma on January

2, 1963, as an authorized dealership for Jeep-Eagle and

eventually Dodge vehicles.   Edmund Cordes, Inc. (known as Cordes

Dodge, Inc., until February 16, 1989), was incorporated in

Oklahoma on January 2, 1967, as an authorized dealership for

Dodge vehicles.   John Cordes, Inc., was incorporated in Oklahoma

on June 13, 1983, as an authorized dealership for Chevrolet,

Oldsmobile, Pontiac, and General Motors vehicles.   We

collectively refer to Edmund Cordes, Inc., John Cordes, Inc., and

Eddie Cordes, Inc., as the Cordes family dealerships.    CFC

operated mainly to finance new and used vehicles purchased by

customers from the Cordes family dealerships.

     Each of the Cordes family dealerships was governed by a

franchise agreement with the vehicle manufacturer whose cars it

sold.   Each franchise agreement identified an individual as the

franchise holder and bound that individual to specific

restrictions.   The two common restrictions relevant herein

required the franchise holder (1) to maintain direct ownership of

a certain minimum percentage of stock of that Cordes family

dealership and (2) to maintain active operational control of the

respective Cordes family dealership.   The franchise holder had to
                                - 8 -

be both the principal owner and the principal operator of the

Cordes family dealership involved.8

     For most of the relevant periods, Mr. Cordes was the

franchise holder for each Cordes family dealership.    At times,

John Cordes, Jean Ann Richard, and Eddy Ben Cordes were the

franchise holders or principal owners, at least nominally

(sometimes in conflict with the relevant franchise agreement), of

John Cordes, Inc., Edmund Cordes, Inc., and Eddie Cordes, Inc.,

respectively.    From time to time, legal title to the stock in the

Cordes family dealerships would change hands among members of the

Cordes family.

     Each member of the Cordes family played a role in the Cordes

corporations, but no one played a more substantial role than Mr.

Cordes.   Mr. Cordes served as president of each of the Cordes

corporations and controlled every aspect of the day-to-day

operations.    No one questioned Mr. Cordes’s dominance or

attempted to exercise any control over any corporate decision,

regardless of his or her ostensible stock ownership in that

corporation.    None of the Cordes corporations held shareholder

meetings; instead, Mr. Cordes directed his corporate attorney to

draft meeting minutes, which he brought home for Mrs. Cordes and


     8
      The record does not contain any such franchise agreements,
but we accept petitioners’ testimony as to the existence of the
agreements and the requirements therein regarding a principal
owner and principal operator.
                               - 9 -

their children, as appropriate, to sign.     Similar sequences of

events occurred for each other document Mr. Cordes required Mrs.

Cordes and their children to sign.     Mr. Cordes prepared (or

directed the preparation of), retained, and maintained all

corporate minutes, records, stock certificates, and other

corporate documents.

     Mr. Cordes decided who would hold legal title to each of the

shares of stock in each of the Cordes corporations.     He believed

he had the power to revoke those holdings if the shareholder did

not follow his directions, or for any other reason, by virtue of

his original capitalization of the Cordes corporations.     The

other members of the Cordes family acknowledged Mr. Cordes’s

complete control and, in many cases, did not know how many shares

were titled in their names, if any, or whether they were officers

in any of the Cordes corporations.

     All external dealings were also controlled and executed by

Mr. Cordes.   Banks dealt solely with Mr. Cordes and held him

liable on all corporate debts, although they occasionally

required other members of the Cordes family to sign certain

documents as a formality.   Likewise, the Cordes corporations’

accounting firm dealt only with Mr. Cordes.     Mr. Cordes had sole

control over the occurrence, timing, amount, and recipient of

corporate payments for noncorporate reasons, and he occasionally
                                - 10 -

made below-market loans to and from the corporations to suit his

own purposes.

      Mrs. Cordes and Jean Ann Richard each served as officers or

directors of each of the Cordes corporations but did not

participate in any of the Cordes corporations’ day-to-day

operations or business decisions.    Neither of them had any

knowledge of any financial transactions, stock-related or

otherwise.   Jean Ann Richard treated the Cordes corporations as

belonging exclusively to Mr. Cordes, no matter the amount of

shares that may have been titled in her name.

      John Cordes served as an officer of CFC, but his only

operational involvement with the Cordes corporations was the

occasional execution of vehicle repossessions in Texas.     He

otherwise was unaware of any corporate transaction.    Eddy Ben

Cordes served as an officer of CFC and as the full-time sales

manager of Eddie Cordes, Inc.    He had no decision-making ability,

but he placed orders for acquisitions of new cars.

      The Cordes family occasionally discussed the Cordes

corporations’ business and financial matters in informal

settings, including at the Cordeses’ kitchen table.

II.   The Income Tax Cases

      In the income tax cases, respondent contends that CFC

transferred funds to the Cordeses, or the Cordeses diverted funds

from CFC, or funds were otherwise appropriated from CFC for the
                                - 11 -

Cordeses’ benefit.     Below, we set forth additional findings of

fact specific to these purported transactions and their tax

consequences.

     A.     Loan Interest Allocation

     Mr. Cordes lent $200,000 to CFC on August 20, 1991 (the

first $200,000 loan), and again on September 18, 1991 (the second

$200,000 loan) (collectively, the two $200,000 loans).     CFC

repaid in full each of the two $200,000 loans by December 31,

1992.     On December 31, 1992, CFC paid Mr. Cordes $80,000, by

check, as interest on the two $200,000 loans.     The following day,

January 1, 1993, Mr. Cordes lent $80,000 to CFC (the $80,000

loan).9    CFC repaid in full the $80,000 loan by March 27, 1993.

On December 31, 1993, CFC paid Mr. Cordes $20,000 as interest on

the $80,000 loan.     The record does not contain any evidence of

indebtedness reciting the terms of the two $200,000 loans or the

$80,000 loan.

     CFC and the Cordeses treated the transfers from CFC to Mr.

Cordes of $80,000 and of $20,000 consistently as between

themselves; CFC reported them as deductible interest expenses on

its 1992 and 1993 Forms 1120, U.S. Corporation Income Tax Return,

respectively, and the Cordeses reported them as interest income



     9
      Mr. Cordes made this loan of $80,000 to CFC by endorsing
the $80,000 check he had received as interest on the two $200,000
loans the day before and returning it to CFC.
                              - 12 -

on their 1992 and 1993 Forms 1040, U.S. Individual Income Tax

Return, respectively.

     B.   Withdrawal of Corporate Funds for Distribution to
          Friends and Family

     During each of the taxable years 1989 through 1993, CFC

maintained an account in its corporate records that operated as a

shareholder loan account for the Cordeses (account No. 312).

Account No. 312 tracked amounts transferred between CFC and the

Cordeses.

     Mr. Cordes withdrew funds from CFC during each of the

taxable years at issue; the withdrawn funds were charged to

account No. 312 and were distributed as follows:
                              - 13 -

    Payee           1989      1990      1991         1992      1993
John Cordes       $108,000   $54,000   $84,000      $20,000   $30,000
Mrs. Cordes1       120,000   120,000   135,711      150,000   220,000
Jean Ann Richard    24,000    24,000     4,000        -0-       -0-
Ellen Cordes2       12,000    15,500     1,500        -0-       -0-
Jean Patton         18,000    18,000     1,500        -0-       -0-
Mr. Cordes          10,700    47,159   323,200        -0-       -0-
Ray Lee             18,000    12,000     -0-          -0-       -0-
Margie Lange         5,000     -0-       -0-          -0-       -0-
Cordes bank accts.   -0-       -0-      50,600        -0-       -0-
John Cordes, Inc.     -0-      -0-     300,000        -0-       -0-
  Total            315,700   290,659   900,511      170,000   250,000
     1
       Mrs. Cordes conceded that the funds distributed to her
constitute income from constructive dividends as determined by
respondent. See Appendix B, Summary of Conceded, Deemed
Conceded, Computational, and Settled Issues. Because Mrs.
Cordes’s concession is inconsistent with the substance of her
argument and in light of our holding regarding the beneficial
ownership of the Cordes corporations, we relieve her of her
concession and conclude only that these are constructive
dividends to Mr. Cordes in 1992 and 1993.
     2
       Ellen Cordes is Mr. Cordes’s daughter-in-law; Jean Patton
is Mr. Cordes’s sister; Ray Lee and Margie Lange are Mr. Cordes’s
friends. Also, the Cordes bank accounts are personal accounts
jointly held by Mr. and Mrs. Cordes. During 1991, Mr. Cordes and
John Cordes were the sole holders of legal title in John Cordes,
Inc. See Appendix A, Schedule of Stock Transfers, for details of
their proportionate holdings.

     C.   Corporate Payments of Personal Expenses

     In 1989, 1990, and 1991, Mr. Cordes caused CFC to pay

certain of the Cordes family’s personal expenses, as follows:
                              - 14 -

       Expenditure              1989       1990      1991
Medical insurance premiums1     $6,184     $6,910     -0-
Medical expenses                 -0-        3,121     -0-
Life insurance premiums            530        540     -0-
American Express charges2      148,760    168,854   $36,986
Martin’s Restaurant3             3,849      5,639     1,111
     1
       Eddie Cordes, Inc., paid the medical insurance premiums in
1989 and 1990. CFC fully reimbursed Eddie Cordes, Inc., in 1992
for those expenses with funds charged to account No. 312. The
parties tried by consent, and we consider, whether those expenses
constitute constructive dividends in 1989 and 1990 as if CFC
originally incurred those expenses. See Cordes v. Commissioner,
T.C. Memo. 1994-377.
     Respondent determined Mrs. Cordes was responsible for tax on
$3,955 and $4,459, respectively. The parties, however, have
stipulated that the medical insurance premiums were $6,184 and
$6,910 in 1989 and 1990, respectively.
     2
       Respondent determined Mrs. Cordes was responsible for tax
on $148,757 for 1989, and $169,465 for 1990. The parties,
however, have stipulated that CFC paid $148,760 and $168,854 of
the Cordeses’ American Express charges in 1989 and 1990,
respectively. We treat the parties’ stipulation as to 1990 as a
concession on respondent’s part, to the extent of $611.
     3
       Respondent determined Mrs. Cordes was responsible for tax
on $3,682 for 1989. The parties have stipulated, however, that
CFC paid $3,849 of the Cordeses’ Martin’s Restaurant charges in
1989.

     D.   Diversion of Corporate Income

     Mr. Cordes also diverted from CFC, for his and Mrs. Cordes’s

personal use, $57,732, $69,251, and $26,240 in 1991, 1992, and

1993, respectively.   These amounts represented collections on

debts CFC had previously reported as bad debts.10

     E.   Purchases of Corporate Notes at Bargain Prices

     In 1986, Jaime D. Patton (the Cordeses’ niece) and Robert A.

     10
      The Cordeses do not dispute respondent’s determinations
regarding 1992 and 1993. We therefore treat the Cordeses as
conceding those specific determinations. See Appendix B, Summary
of Conceded, Deemed Conceded, Computational, and Settled Issues.
                                - 15 -

Bower (Jaime D. Patton’s then-fiancé) (collectively, the Bowers)

executed a 30-year note payable to CFC (the Bower Note).    The

Bower Note, secured by the Bowers’ personal residence, had a face

value of $80,000 and bore an 11.62-percent market rate of

interest.    The total amount of interest due under the Bower Note

was $208,000.

     In 1987, Joseph P. Richard,11 Jean Ann Richard’s husband,

executed a 15-year note payable to CFC (the Richard Note).     The

Richard Note, secured by real estate jointly owned by the

Richards, had a face value of $555,000 and bore a 10.1-percent

market rate of interest.    The total amount of interest due under

the Richard Note was $525,000.

     Both the Bowers and the Richards made payments on their

notes.12    On March 25, 1991, the Bowers still owed $243,200 in

principal and interest, and the Richards still owed $813,000 in

principal and interest.    On March 25, 1991, Mr. Cordes purchased

from CFC the Bower Note for $35,200 and the Richard Note for

$288,000.

     At issue is whether, and to what extent, Mrs. Cordes has

taxable income from constructive dividends stemming from Mr.


     11
      The petitioners stipulated that whether Jean Ann Richard
executed the Richard Note is at issue. In light of our holding,
infra, we need not decide that issue.
     12
      Although the parties stipulated that the payments were
timely, many of the payments were, in fact, made late.
                                  - 16 -

Cordes’s purchases of the Bower Note and the Richard Note for

amounts less than their fair market values.

III.    The Gift Tax Cases

       In the gift tax cases, respondent determined that members of

the Cordes family transferred shares among themselves without

properly reporting those transfers or paying gift tax thereon.

Below, we set forth the findings of fact specifically relevant to

the gift tax cases.     The details of the stock transfers can be

found in Appendix A, Schedule of Stock Transfers.13

       A.   CFC Stock Transfers

       CFC initially issued 500 shares of stock in January 1964--

250 shares to Mr. Cordes, 249 shares to Mrs. Cordes, and 1 share

to B.B. Journeycake (Mrs. Cordes’s father).     On January 4, 1965,

B.B. Journeycake transferred 1 share to the Eddy Ben Cordes

Trust.      On January 8, 1965, Mrs. Cordes transferred 28 shares to

Eddy Ben Cordes.     On December 29, 1965, Mr. Cordes transferred 50

shares, Mrs. Cordes transferred 50 shares, and the Eddy Ben

Cordes Trust transferred 1 share, to Eddy Ben Cordes.     On

December 16, 1966, Mr. Cordes transferred 100 shares to Eddy Ben

Cordes.     On January 8, 1971, CFC issued 500 additional shares of


       13
      The record does not contain complete information regarding
all of the stock transfers which took place before and during the
taxable years at issue. As the stock transfers pertain to the
issues in the gift tax cases, however, the record contains
information sufficient for us to decide the issues presented by
these cases.
                                - 17 -

its stock, 105 shares of which were issued to Eddy Ben Cordes.14

On March 14, 1983, Eddy Ben Cordes transferred 334 shares to Mrs.

Cordes.     On January 14, 1994, Mrs. Cordes transferred 334 shares

back to Eddy Ben Cordes.

     On CFC’s Schedule E, Compensation of Officers, to its 1992

and 1993 Forms 1120, CFC reported that Mrs. Cordes owned 33.4

percent and Jean Ann Richard owned 33.3 percent of its stock at

the end of 1992 and 1993.15    During his examination of CFC’s

taxable years 1988 through 1993, respondent determined that Mrs.

Cordes owned approximately one-third of CFC’s stock.      On Schedule

E to its 1994 Form 1120, CFC reported that Eddy Ben Cordes owned

33.4 percent, John Cordes owned 33.3 percent, and Jean Ann

Richard owned 33.3 percent of its stock at the end of 1994.

     B.     Eddie Cordes, Inc., Stock Transfers

     Eddie Cordes, Inc., initially issued 1,000 shares of stock

in January 1963--500 shares to Mr. Cordes, 400 shares to Mrs.

Cordes, and 100 shares to B.B. Journeycake.       In January 1971,

B.B. Journeycake transferred 100 shares to Mr. Cordes.       Also in

January 1971, Mrs. Cordes transferred 400 shares to Jean Ann

Richard.     On March 29, 1983, Mr. Cordes transferred 600 shares to


     14
          See supra note 7.
     15
      CFC’s 1992 and 1993 Forms 1120 do not reveal who held
legal title to the remaining 33.3 percent of CFC stock during
those taxable years. We note, however, that Mr. Cordes did not
hold legal title to any shares of CFC during those taxable years.
                                - 18 -

Jean Ann Richard.     On January 7, 1987, Jean Ann Richard

transferred 600 shares back to Mr. Cordes.16     On July 25, 1988,

Jean Ann Richard transferred the 400 shares remaining in her name

to Eddy Ben Cordes.    On August 8, 1991, Mr. Cordes transferred

600 shares to Eddy Ben Cordes.

     C.   Edmund Cordes, Inc., Stock Transfers

     Edmund Cordes, Inc., initially issued 1,000 shares of stock

in January 1967--600 shares to Mr. Cordes, 200 shares to Mrs.

Cordes, and 200 shares to a John Parkinson.      On February 15,

1967, Mrs. Cordes transferred 1 share to John Parkinson.      On

January 8, 1971, John Parkinson transferred 201 shares and Mrs.

Cordes transferred 199 shares to Eddy Ben Cordes.      On October 26,

1979, Mr. Cordes transferred 500 shares to Eddy Ben Cordes.        Mr.

Cordes effected this transfer so that Eddy Ben Cordes would be in

compliance with the franchise agreement Eddy Ben Cordes had made

with Chrysler Corp.     Chrysler Corp. terminated that franchise

agreement in 1988 and entered into a new franchise agreement with

Mr. Cordes.   That franchise agreement required Mr. Cordes to be

the principal owner and principal operator of Edmund Cordes, Inc.

Nevertheless, on July 25, 1988, Eddy Ben Cordes transferred 900

     16
      Mr. Cordes testified that the franchise agreement with
Jeep-Eagle/Dodge required Mr. Cordes to maintain ownership of at
least 60 percent of Eddie Cordes, Inc.’s stock. Presumably, this
transfer was made so as to comply with that franchise agreement.
However, Mr. Cordes’s testimony is irreconcilable with his
transfer in 1991 to Eddy Ben Cordes of 600 shares of stock in
Eddie Cordes, Inc.
                                   - 19 -

shares to Jean Ann Richard, and Ellen Cordes transferred 100

shares17 to Jean Ann Richard.      On January 26, 1989, Jean Ann

Richard transferred 1,000 shares to Mr. Cordes.         On August 20,

1991, Mr. Cordes transferred 1,000 shares back to Jean Ann

Richard.

       D.     John Cordes, Inc., Stock Transfers

       John Cordes, Inc., initially issued 500 shares of stock in

May 1983--300 shares to Mr. Cordes, 100 shares to Mrs. Cordes,

and 100 shares to Jean Ann Richard.         On January 7, 1987, Mrs.

Cordes and Jean Ann Richard each transferred 100 shares to John

Cordes.       On August 8, 1991, Mr. Cordes transferred 300 shares to

John Cordes.18       Mr. Cordes effected these transfers of John

Cordes, Inc., stock to John Cordes because he intended John

Cordes to hold legal title to the stock and operate John Cordes,

Inc.    Sometime thereafter, the franchisor, General Motors,

informed Mr. Cordes that he was in violation of their franchise

agreement requiring that Mr. Cordes be the principal owner and

principal operator of John Cordes, Inc.         In response, on March

16, 1994, John Cordes transferred 500 shares back to Mr. Cordes.




       17
            See supra note 7.
       18
      Mr. Cordes reported a gift to John Cordes of 200 shares of
stock in John Cordes, Inc., in 1991.
                              - 20 -

     E.   The Gift Tax Returns and Notices of Deficiency

     None of the stock transfers at issue in the gift tax cases

were made for any consideration.19

     Mr. Cordes timely filed Form 709, United States Gift (and

Generation-Skipping Transfer) Tax Return (gift tax return), for

1991 but never filed a gift tax return for 1983, 1992, or 1993.

In his 1991 gift tax return, Mr. Cordes elected to split gifts

with Mrs. Cordes, and Mr. Cordes reported making two gifts--200

shares of stock in John Cordes, Inc.,20 and $100,000 cash--both

to John Cordes.   Respondent determined, as set forth in his

notice of deficiency, that, pursuant to section 2503(a), Mr.

Cordes made taxable gifts in 1983, 1991, 1992, and 1993 of stock

and/or cash equivalents.   The following transfers are still at

issue:




     19
      In their petitions in docket No. 19256-97 and docket No.
19277-97, John Cordes and Jean Ann Richard contend they received
items in exchange for their shares equal in value to those shares
transferred. Neither John Cordes nor Jean Ann Richard discussed
these contentions at trial or on brief, and the record contains
no evidence to support these contentions. We therefore disregard
the statements made in those petitions and find the transfers
were made for no consideration.
     20
      As detailed above, in 1991, Mr. Cordes transferred 300
shares of stock in John Cordes, Inc., to John Cordes. The
parties have stipulated that it is the transfer of 300 shares
that is disputed herein.
                                - 21 -

 Taxable Year       Date of Transfer          Details of Transfer

     1983            Mar. 29, 1983         600 shares of Eddie
                                           Cordes, Inc., to Jean Ann
                                           Richard

     1991            Aug. 8, 1991          600 shares of Eddie
                                           Cordes, Inc., to Eddy Ben
                                           Cordes

     1991            Aug. 8, 1991          300 shares of John
                                           Cordes, Inc., to John
                                           Cordes

     John Cordes never filed a gift tax return for 1994.

Respondent determined, as set forth in his notice of deficiency,

that, pursuant to section 2503(a), John Cordes made a taxable

gift in 1994 to Mr. Cordes of 500 shares of stock in John Cordes,

Inc.21

     Jean Ann Richard never filed a gift tax return for 1987 or

1988.     Respondent determined, as set forth in his notice of

deficiency, that, pursuant to section 2503(a), Jean Ann Richard

made the following taxable gifts:




     21
      Respondent subsequently took the position in Cordes v.
Commissioner, T.C. Memo. 2002-125, that John Cordes instead sold
these 500 shares to Mr. Cordes for $800,000, and respondent
acknowledged this change in position from that taken in the case
before us. In light of our finding herein regarding the
beneficial ownership of John Cordes, Inc., we decline to address
respondent’s change of position.
                                - 22 -

 Taxable Year    Date of Transfer            Details of Transfer

     1987          Jan. 7, 1987           100 shares of John
                                          Cordes, Inc., to John
                                          Cordes

     1987          Jan. 7, 1987           600 shares of Eddie
                                          Cordes, Inc., to Mr.
                                          Cordes

     1988          July 25, 1988          400 shares of Eddie
                                          Cordes, Inc., to Eddy Ben
                                          Cordes

     Eddy Ben Cordes never filed a gift tax return for 1983.

Respondent determined, as set forth in his notice of deficiency,

that, pursuant to section 2503(a), Eddy Ben Cordes made a taxable

gift in 1983 to Mrs. Cordes of 334 shares of stock in CFC.

     Mrs. Cordes timely filed her 1991 gift tax return but never

filed a gift tax return for 1987, 1993, or 1994.   In her 1991

gift tax return, Mrs. Cordes elected to split gifts with Mr.

Cordes, and she reported making a gift to Jean Ann Richard of

1,000 shares of stock in Edmund Cordes, Inc.   Respondent

determined, as set forth in his notice of deficiency, that Mrs.

Cordes made taxable gifts of stock and/or cash equivalents in

1987, 1991, 1993, and 1994.22   The following transfers are still

at issue:




     22
      Regarding 1987, respondent determined only that Mrs.
Cordes made taxable gifts; respondent did not determine any
deficiency in Mrs. Cordes’s tax for 1987.
                                 - 23 -

Taxable Year         Date of Transfer            Details of Transfer

      1987             Jan. 7, 1987           100 shares of John
                                              Cordes, Inc., to John
                                              Cordes

      1991             Aug. 20, 1991          1,000 shares of Edmund
                                              Cordes, Inc., to Jean Ann
                                              Richard

      1994             Jan. 14, 1994          334 shares of CFC to Eddy
                                              Ben Cordes

                                 OPINION

I.   Income Tax Cases

      The five sets of transactions at issue in the income tax

cases are similar in nature in that respondent determined they

each give rise to constructive dividends to the shareholder-

taxpayer(s).      The first transactions, involving the excessive

interest paid by CFC to Mr. Cordes, however, are of a slightly

different nature in that our decision involves a reallocation of

income and deduction under section 482.        For that reason, we

initially and separately consider the section 482 reallocation,

and we then decide whether the five sets of transactions result

in constructive dividends to petitioners.

      A.     Loan Interest Allocation

      Respondent determined that CFC transferred to Mr. Cordes

amounts in excess of those that can reasonably be characterized

as interest on the two $200,000 loans and the $80,000 loan

(collectively, the three loans).        Respondent reallocated CFC’s

and the Cordeses’ income and deductions pursuant to his authority
                             - 24 -

under section 482; respondent accordingly disallowed what he

determined were excessive interest deductions claimed by CFC--

$52,870 in 1992 and $19,105 in 1993--and determined that like

amounts were properly allocated to the Cordeses as income from

constructive dividends, rather than from interest.23   See sec.

1.482-1A(b)(1), Income Tax Regs.

     On brief, respondent conceded that CFC may deduct as

interest expense--and the Cordeses may report as income from

interest, rather than from constructive dividends--amounts equal

to those calculated pursuant to section 1.482-2(a)(2)(iii),

Income Tax Regs.; i.e., the safe-haven interest rate.24

Respondent maintained that the amounts of the transfers in excess

of those computed in accordance with section 1.482-2(a)(2)(iii),

Income Tax Regs., are nondeductible interest expenses with regard

to CFC and income from constructive dividends with regard to the

Cordeses.




     23
      In his notice of deficiency, respondent failed to reduce
the Cordeses’ interest income by the amounts he reallocated to
income from constructive dividends. In his reply brief,
respondent conceded that the Cordeses may reduce interest income
reported on their returns to the extent we hold the transfers are
income to the Cordeses from constructive dividends.
     24
      The parties have not computed the safe-haven interest
rates applicable under sec. 1.482-2(a)(2)(iii), Income Tax Regs.
Our holding is not to be construed in any way as allowing
respondent to reallocate, with respect to these items, more than
$52,870 in 1992 or $19,105 in 1993.
                             - 25 -

     CFC and the Cordeses (collectively, with respect to this

issue, petitioners) contend that, under section 482,25 18 percent

is an arm’s-length rate of interest for loans such as the three

loans before us26 and that income and deductions from interest

are properly allocable in a manner consistent with an 18-percent

rate of interest.27




     25
      Neither CFC nor the Cordeses (collectively, with respect
to this issue, petitioners) dispute the applicability of sec.
482; they only dispute the way in which respondent applies sec.
482.
     26
       Throughout these proceedings, petitioners have treated the
three loans as made on identical terms with identical interest
rates.
     27
      Petitioners also argued on brief that CFC’s and the
Cordeses’ consistent reporting of the interest at issue, as
between themselves, justified the amounts of interest expense and
income claimed. In light of our holding, and because petitioners
offered no authority for their supposition, we decline to
consider that argument.
     Furthermore, petitioners appear to contend for the first
time in their reply brief that respondent would abuse his
discretion under sec. 482 to reallocate income and deductions in
a manner inconsistent with an interest rate of 18 percent.
Ordinarily, we do not consider issues raised for the first time
in a party’s reply brief. Cordes v. Commissioner, T.C. Memo.
1994-377, and cases cited therein. We note, in passing, that the
Commissioner is afforded broad discretion under sec. 482, and his
reallocations will be upheld absent a taxpayer’s showing that
they are arbitrary, capricious, or unreasonable. Dolese v.
Commissioner, 811 F.2d 543, 546 (10th Cir. 1987), affg. 82 T.C.
830 (1984); Ach v. Commissioner, 42 T.C. 114, 125-126 (1964),
affd. 358 F.2d 342 (6th Cir. 1966). Moreover, petitioners’
income and deductions from interest were not reported using an
18-percent rate.
                              - 26 -

     Section 48228 gives the Commissioner authority to reallocate

income and deductions among certain related taxpayers.

Respondent’s determination under section 482 is presumptively

correct, and the burden of disproving that determination lies

with petitioners.   Dolese v. Commissioner, 811 F.2d 543, 546

(10th Cir. 1987), affg. 82 T.C. 830 (1984).

     The purpose of section 482 is to place a controlled taxpayer

on a tax parity with an uncontrolled and unrelated taxpayer by

determining the true taxable income of the controlled taxpayer

using the standard of an uncontrolled taxpayer dealing at arm’s

length with another uncontrolled taxpayer.    Ciba-Geigy Corp. v.

Commissioner, 85 T.C. 172, 221 (1985); Huber Homes, Inc. v.

Commissioner, 55 T.C. 598, 605 (1971); sec. 1.482-1(a)(1) and

(b)(1), Income Tax Regs.   An interest rate satisfies the arm’s-

length standard under section 482 if it is a rate that was

actually charged, or would have been charged, at the time the

indebtedness arose, in independent transactions with or between




     28
      SEC. 482. ALLOCATION OF INCOME AND DEDUCTIONS AMONG
                TAXPAYERS.
          In any case of two or more organizations * * *
     owned or controlled directly or indirectly by the same
     interests, the Secretary may * * * allocate gross
     income, deductions, credits, or allowances between or
     among such organizations * * * if he determines that
     such * * * allocation is necessary in order * * *
     clearly to reflect the income of any of such
     organizations * * *
                                - 27 -

unrelated parties under similar circumstances, considering all

the relevant factors.    Sec. 1.482-2(a)(2)(i), Income Tax Regs.

     Petitioners have not introduced evidence of actual rates

charged in transactions with or between unrelated taxpayers, nor

have they offered any but the barest evidence relevant to

deciding what a chargeable interest rate would be in an

independent transaction involving unrelated parties under similar

circumstances.    Petitioners provided us only with the original

principal amounts of the loans and have indicated that the loans

were unsecured.    Petitioners introduced no evidence regarding

other relevant factors, including the duration of the loans,

CFC’s credit standing, and the prevailing interest rates at CFC’s

or the Cordeses’ situs for comparable loans between unrelated

parties.   Id.    Because petitioners have failed to establish that

respondent’s determinations are incorrect, let alone that 18

percent is an arm’s-length rate of interest on the three loans

under section 1.482-2(a)(2)(i), Income Tax Regs., we must hold

for respondent.

     In holding for respondent, we note that respondent’s

concession to reallocate petitioners’ interest income and

deductions in accordance with the safe-haven interest rate found

in section 1.482-2(a)(2)(iii)(B), Income Tax Regs., satisfies the

arm’s-length standard of section 482, and we accept it.    The

calculation of the appropriate adjustments to CFC’s interest
                                 - 28 -

expenses and the Cordeses’ income from interest and from

constructive dividends, however, must await the Rule 155

computation.

     B.   Constructive Dividends

     Respondent determined that Mrs. Cordes, in 1989 through

1991, individually, and the Cordeses, in 1992 and 1993, jointly,

had taxable income from constructive dividends made by CFC to

Mrs. Cordes, as one of CFC’s shareholders.   See sec. 61(a)(7).

Those constructive dividends, as respondent determined, consisted

in part of the portion of payments made by CFC to Mr. Cordes on

the three loans in excess of the amount that represents an arm’s-

length rate of interest29 (calculated in accordance with our

holding, supra) and consisted in part of (1) withdrawals of

corporate funds for distribution to friends and family, (2)

corporate payments of personal expenses, (3) diversion to the

Cordeses of corporate income, and (4) Mr. Cordes’s bargain

purchase of corporate notes.30

     Petitioners contend that the transfers do not constitute

constructive dividends to Mrs. Cordes (1) because Mrs. Cordes did

     29
      We discuss this transaction in the context of constructive
dividends in connection with our discussion of diversion of
corporate income because the applicable law is similar.
     30
      Respondent also determined certain other items constituted
income from constructive dividends from CFC to the Cordeses in
the taxable years before us, but either Mr. or Mrs. Cordes or
respondent has conceded those items. See Appendix B, Summary of
Conceded, Deemed Conceded, Computational, and Settled Issues.
                               - 29 -

not control CFC, control or participate in the transfers at

issue, or in some cases know of the transfers at issue, and (2)

because the transfers did not cause an accession to her wealth.

     The law in this area is well settled.    Section 301(a) and

(c)(1) requires the inclusion in a shareholder’s gross income of

amounts received as dividends.    Secs. 61(a)(7), 301(c)(1),

316(a); Hillsboro Natl. Bank v. Commissioner, 460 U.S. 370, 392

(1983); see Ireland v. United States, 621 F.2d 731, 735 (5th Cir.

1980); see also Old Colony Trust Co. v. Commissioner, 279 U.S.

716, 729-731 (1929).    Section 316(a) defines a dividend as “any

distribution of property made by a corporation to its

shareholders--(1) out of its earnings and profits accumulated

after February 28, 1913, or (2) out of its earnings and profits

of the taxable year”.31   It is not necessary that the corporation

intend a dividend, or that the distribution be termed a dividend

or be recorded as such.    Dolese v. United States, 605 F.2d 1146,

1152 (10th Cir. 1979).    Thus, dividends may be either formally

declared or they may be “constructive”.    Ireland v. United

States, supra at 735.




     31
      Petitioners have failed to meet their burden of proving
that there were not sufficient accumulated or current earnings
and profits to support the deficiencies determined in
respondent’s notices of deficiency. Rule 142(a). But see
Appendix B, Summary of Conceded, Deemed Conceded, Computational,
and Settled Issues.
                               - 30 -

     A constructive dividend is paid when a corporation confers

an economic benefit on a shareholder without expectation of

repayment.   Wortham Mach. Co. v. United States, 521 F.2d 160, 164

(10th Cir. 1975).   Petitioners do not dispute that the payments

in question were made without expectation of repayment; they

focus instead on whether CFC conferred an economic benefit on

Mrs. Cordes as a shareholder of CFC.    Because only shareholders

may receive constructive dividends for Federal income tax

purposes and because we do not believe Mrs. Cordes was a

shareholder of CFC for Federal income tax purposes, we conclude

she did not receive constructive dividends from CFC during the

years at issue.

     Mrs. Cordes held legal title to at least 33.4 percent of the

outstanding shares of stock in CFC throughout the taxable years

at issue.    The Cordeses’ children held legal title to the balance

of the shares.    See Appendix A, Schedule of Stock Transfers, and

notes therein.    Regardless of Mrs. Cordes’s percentage of record

ownership, however, “record ownership of stock, standing alone,

is not determinative of who is required to include any dividends

attributable to such stock in gross income.   Rather, beneficial

ownership is the controlling factor.”    Cordes v. Commissioner,

T.C. Memo. 1994-377 (citing Walker v. Commissioner, 544 F.2d 419

(9th Cir. 1976), revg. T.C. Memo. 1972-223; Ragghianti v.

Commissioner, 71 T.C. 346, 349 (1978), affd. without published
                                - 31 -

opinion 652 F.2d 65 (9th Cir. 1981); Cepeda v. Commissioner, T.C.

Memo. 1994-62).    “‘Beneficial ownership is marked by command over

property or enjoyment of its economic benefits.’”     Cordes v.

Commissioner, T.C. Memo. 1994-377 (quoting Cepeda v.

Commissioner, supra).     A taxpayer’s total control over a

corporation and use of corporate funds for personal reasons can

result in constructive dividends, even though the taxpayer did

not hold legal title to the corporation’s stock at the time of

the advances.     Yelencsics v. Commissioner, 74 T.C. 1513, 1532-

1533 (1980); Cordes v. Commissioner, T.C. Memo. 1994-377.

     In Cordes v. Commissioner, T.C. Memo. 1994-377, we held Mr.

Cordes received constructive dividends even if he did not hold

legal title to any shares, because we found he exercised full

control over CFC in the taxable year at issue, 1988.32    In 1988,

the taxable year immediately preceding those before us here, Mr.

Cordes caused CFC to make distributions to him, to friends and

family, and to his personal creditors.    He controlled the timing,

amount, and uses of those funds.    Because Mr. Cordes had total

control over CFC and used the corporate funds for personal

reasons, we concluded that “whether or not petitioner [Mr.

Cordes] was a stockholder of record, petitioner had beneficial


     32
      We note in passing that in Cordes v. Commissioner, T.C.
Memo. 1994-377, we stated, based on the evidence therein: “[Mr.
Cordes’s] complete control over Cordes Finance Corp. continued
until at least 1992”.
                              - 32 -

ownership of all of the stock of Cordes Finance Corp. in 1988.”

By virtue of his beneficial ownership, we held he received

constructive dividends in 1988 and was required to include those

dividends in his gross income.

     Mr. Cordes’s relationship to CFC did not change from 1988 to

1989, or during any of the other taxable years before us; in the

taxable years 1989 through 1993, Mr. Cordes remained in complete

control of CFC and remained the beneficial owner of the shares of

stock therein.   In deciding beneficial ownership, we examine the

facts and circumstances concerning one’s control over the

property and continued enjoyment of economic benefits.

Yelencsics v. Commissioner, supra at 1532; Cepeda v.

Commissioner, supra; see also Weiner v. Commissioner, T.C. Memo.

1984-163 (citing Schoenberg v. Commissioner, 302 F.2d 416 (8th

Cir. 1962), affg. T.C. Memo. 1961-235; Snyder v. Commissioner, 66

T.C. 785 (1976)).

     Mr. Cordes’s actions with respect to CFC exceeded the level

of control normally conferred upon corporate officers.   He made

every corporate decision without conferring with the shareholders

of record.   Any purported shareholder meeting was an invention of

his design; he made all shareholder decisions and instructed the

legal titleholders merely where to sign the corporate minutes,

loan arrangements, stock certificates, and so forth.   The legal

titleholders complied with his every instruction.
                              - 33 -

     His actions were that of an owner and sole shareholder.      He

viewed the Cordes corporations as his own and used them to make

generous loans and gifts to family and friends, and to satisfy

personal obligations and desires.   He made loans to third parties

of CFC funds and then unilaterally forgave those loans.     Mr.

Cordes controlled the timing, amount, and use of the

distributions and transactions.

     The legal titleholders viewed CFC as Mr. Cordes did.    They

paid no attention to their purported stockholdings and never

attempted to exercise any of the rights that “ownership” may have

theoretically provided.   They did not attempt to attend

shareholder meetings, transfer or vote their shares, or otherwise

involve themselves in CFC, unless Mr. Cordes instructed them to

do so.   His control was unmitigated.

     Taken together, the facts and circumstances reveal that Mr.

Cordes was CFC’s sole beneficial owner during the taxable years

at issue; Mrs. Cordes’s status as a shareholder was in name only.

Because beneficial ownership is the controlling factor in

deciding who is required to include dividends in gross income, we

hold that Mrs. Cordes did not receive constructive dividends from

CFC for the 1989, 1990, and 1991 taxable years, the years in

which she filed separately.   With respect to those taxable years,

we conclude only that Mrs. Cordes was not a beneficial owner or

shareholder of CFC for Federal income tax purposes.    We decline
                              - 34 -

to consider whether Mr. Cordes received constructive dividends as

a shareholder for those taxable years, as he is not a party to

those years herein.

     The Cordeses filed jointly for 1992 and 1993, and, in docket

No. 4182-96, respondent determined they were jointly liable for

tax on the receipt of constructive dividends for those taxable

years.   In that docket, we must consider whether CFC conferred an

economic benefit on petitioner-shareholder, Mr. Cordes, as

beneficial owner.   See Dolese v. United States, 605 F.2d at 1152

(citing Palo Alto Town & Country Vill., Inc. v. Commissioner, 565

F.2d 1388 (9th Cir. 1977), affg. T.C. Memo. 1973-223).    In order

for a company-provided benefit to be treated as income to the

shareholder, the item “must primarily benefit taxpayer’s personal

interests as opposed to the business interests of the

corporation.”   Ireland v. United States, 621 F.2d at 735; accord

Dolese v. United States, supra at 1152.

     Petitioners bear the burden of proving that the amounts at

issue were not expended for personal benefit or in discharge of

personal obligations.   Rule 142(a); Welch v. Helvering, 290 U.S.

111 (1933); Challenge Manufacturing Co. v. Commissioner, 37 T.C.

650, 663 (1962); Arnold v. Commissioner, T.C. Memo. 1994-97.     Our

standard, in reviewing these many expenditures, is whether the

expenditures primarily benefited CFC or Mr. Cordes.     Frazier v.
                              - 35 -

Commissioner, T.C. Memo. 1994-358, affd. 90 F.3d 437 (10th Cir.

1996).

          1.   Withdrawal of Corporate Funds for Distribution to
               Friends and Family

     In 1992 and 1993, Mr. Cordes directed the withdrawal of

corporate funds from CFC and the payment of those funds to John

Cordes and Mrs. Cordes.   It is well-settled that corporate

payments to children of its shareholders can constitute

constructive dividends to the shareholders when the payments are

made to satisfy personal parental objectives as opposed to the

bona fide business purposes of the corporation.   Engg. Sales,

Inc. v. United States, 510 F.2d 565, 569-570 (5th Cir. 1975);

58th St. Plaza Theatre, Inc. v. Commissioner, 195 F.2d 724, 725

(2d Cir. 1952), affg. 16 T.C. 469 (1951); Frazier v.

Commissioner, supra.

     Likewise, payments to family members can constitute

constructive dividends to the shareholders when the payments fail

to benefit the corporation.   Cordes v. Commissioner, T.C. Memo.

1994-377 (in situation nearly identical to that before us, this

Court held corporate transfers to friends, wife, and children of

shareholder to be constructive dividend to shareholder, namely

Mr. Cordes, when shareholder failed to show corporate benefit or

expectation of repayment); Proctor v. Commissioner, T.C. Memo.

1981-436 (payments to shareholder’s mother, in excess of

compensation reasonable for services provided, constituted
                                - 36 -

constructive dividend income to shareholder).     Petitioners have

introduced no evidence that these transfers benefited CFC and do

not contend that the transfers were made for any reason other

than personal reasons.     Therefore, because petitioners failed to

show Mr. Cordes received no personal benefit or satisfaction from

these transfers, we hold Mr. Cordes received constructive

dividends in 1992 and 1993 with respect to these items in the

amounts determined by respondent.

            2.   Diversion of Corporate Income33 and Loan Interest
                 Allocation

     In 1992 and 1993, Mr. Cordes diverted CFC income--amounts

collected on debts CFC had previously reported as bad debts--to

the Cordeses’ benefit.     Income diverted from a corporation for a

shareholder’s benefit may be a constructive dividend to that

shareholder.     Truesdell v. Commissioner, 89 T.C. 1280, 1295

(1987); Fed. Auto Body Works, Inc. v. Commissioner, T.C. Memo.

1990-303.    Petitioners have not introduced any evidence that CFC

recognized any benefit from these transfers.     We hold Mr. Cordes

received constructive dividends with respect to these items in

the amounts determined by respondent.

     Likewise, with regard to the excess interest paid in 1992

and 1993 by CFC to Mr. Cordes, discussed supra, petitioners



     33
      See supra note 10. Petitioners did not present arguments
regarding the diversion of corporate income in 1992 and 1993. We
nevertheless choose to address it briefly here.
                                - 37 -

offered no evidence showing that either a benefit accrued to CFC

or a benefit did not accrue personally.    We therefore hold that

Mr. Cordes received constructive dividends with respect to the

amounts CFC paid to him as interest on the three loans, to the

extent the amounts of those payments exceed the amounts allocated

as interest income in accordance with our holding supra.       We

sustain respondent’s determination with regard to this issue.

     C.     Fraud Penalty Against CFC

     Respondent determined CFC was liable for a civil fraud

penalty in the amount of $9,773 for 1991, pursuant to section

6663.     Respondent based his determination on CFC’s understatement

of income attributable to $35,349 from late fees received.      CFC

filed an amended return for 1991 reflecting CFC’s receipt of this

income.     The parties stipulated that this issue of whether CFC is

liable for the civil fraud penalty for 1991 would be resolved on

the same basis as that in the final decision in Cordes Fin. Corp.

v. Commissioner, T.C. Memo. 1997-162, affd. without published

opinion 162 F.3d 1172 (10th Cir. 1998).    In Cordes Fin. Corp., we

sustained respondent’s determination of fraud for the 1990

taxable year because Mr. Cordes, as CFC’s president, schemed to

divert and disguise the diverted income.    CFC appealed our

decision to the Court of Appeals for the Tenth Circuit.    However,

as the Court of Appeals stated in note 1 to its unpublished

opinion, CFC did not dispute our holding as to the fraud penalty
                                - 38 -

in its appeal.    In accordance with the parties’ stipulation, we

hold CFC is liable for the civil fraud penalty for 1991.

II.   Gift Tax Cases

      Respondent determined that the disputed stock transfers are

taxable gifts pursuant to section 2503(a).     Petitioners in these

gift tax cases contend that (1) the stock in CFC was not actually

transferred by and between Eddy Ben Cordes and Mrs. Cordes

because Eddy Ben Cordes and Mrs. Cordes did not knowingly and

voluntarily transfer CFC stock between themselves, and (2) all of

the transfers of stock at issue herein were incomplete gifts

because Mr. Cordes reserved and retained a power to revoke, or to

otherwise alter, any and all of the gifts of stock in the Cordes

corporations.     Therefore, petitioners argue, none of the disputed

transfers constitute completed gifts for Federal gift tax

purposes.

      Section 2501(a)(1) imposes a tax on the “transfer of

property by gift”.     This gift tax applies “whether the transfer

is in trust or otherwise, whether the gift is direct or indirect,

and whether the property is real or personal, tangible or

intangible”.     Sec. 2511(a); sec. 25.2511-1(a), Gift Tax Regs.

The terms “transfer * * * by gift” and “indirect” are designed to

encompass all transfers whereby, and to the extent that, property

or a property right is gratuitously passed to or conferred upon

another, regardless of the means or the device employed in its
                              - 39 -

accomplishment.   H. Rept. 708, 72d Cong., 1st Sess. (1932), 1939-

1 C.B. (Part 2) 457, 476; S. Rept. 665, 72d Cong., 1st Sess.

(1932), 1939-1 C.B. (Part 2) 496, 524; sec. 25.2511-1(c)(1), Gift

Tax Regs; see also Dickman v. Commissioner, 465 U.S. 330, 334 n.4

(1984) (describing the scope of the gift tax to be analogous in

breadth to the definition of gross income contained in section

61); Commissioner v. Wemyss, 324 U.S. 303, 306 (1945) (“Congress

intended to use the term ‘gifts’ in its broadest and most

comprehensive sense * * * [in order] to hit all the protean

arrangements which the wit of man can devise”).

     Nevertheless, gift tax is not applicable to certain types of

transfers.   “It is applicable only to a transfer of a beneficial

interest in property.   It is not applicable to a transfer of bare

legal title to a trustee.”   Sec. 25.2511-1(g)(1), Gift Tax Regs.

We conclude below, based on all the facts and circumstances, that

Mr. Cordes had complete control over all the Cordes corporations

and that the disputed transfers herein were only of bare legal

title and are therefore not subject to the gift tax.

     A.   Transfers of CFC Stock By and Between Eddy Ben Cordes
          and Mrs. Cordes

     Respondent contends the purported transfers of shares of

stock in CFC by and between Eddy Ben Cordes and Mrs. Cordes are

completed gifts of stock and subject to the gift tax.   Eddy Ben

Cordes and Mrs. Cordes contend that because neither of them knew

of the transfers or voluntarily made those transfers, the
                               - 40 -

transfers did not occur for Federal gift tax purposes.   We have

considered Eddy Ben Cordes’s and Mrs. Cordes’s levels of

involvement in these and other corporate activities, and we agree

that these transfers are not subject to the gift tax, not because

the transfers of legal title to the stock did not occur on the

books of the corporation, but because the transfers were not of a

beneficial interest.

     In Cordes v. Commissioner, T.C. Memo. 1994-377, we found Mr.

Cordes to be the beneficial owner of CFC in 1988.   We concluded

earlier in this opinion that Mr. Cordes was the beneficial owner

of CFC in 1989 through 1993.   The facts before us indicate that

Mr. Cordes’s control has existed unimpaired from CFC’s

incorporation in 1964 through the date of the trial.   On all of

the intervening dates, Mr. Cordes was the beneficial owner of all

of CFC’s stock.

     Eddy Ben Cordes did not have any beneficial interest in CFC

in 1983 when he transferred mere legal title to Mrs. Cordes, nor

did he later obtain a beneficial interest in CFC and transfer

that to Mrs. Cordes.   Because Eddy Ben Cordes never transferred a

beneficial interest in CFC to Mrs. Cordes, the transfer is not

subject to the gift tax.

     Likewise, Mrs. Cordes never acquired a beneficial interest

in CFC and therefore never transferred such an interest.   Mrs.

Cordes held only legal title to some of CFC’s stock from 1983
                                - 41 -

through 1994.    She transferred that legal title to Eddy Ben

Cordes in 1994, but at no time did she transfer a beneficial

interest in CFC.     The transfer, therefore, is not subject to the

gift tax.

       We conclude that because Mr. Cordes owned all beneficial

interest in CFC during the years at issue, the transfers of CFC

stock by and between Eddy Ben Cordes and Mrs. Cordes were merely

of legal title and, as a result, were not subject to the gift

tax.

       B.   Transfers of Stock in the Cordes Family Dealerships

       The other disputed transfers were of shares of stock in the

Cordes family dealerships by and between members of the Cordes

family.     Respondent determined the transfers were completed gifts

subject to the gift tax.     Petitioners argued that Mr. Cordes

retained a power to revoke those transfers, thereby rendering the

gifts incomplete and not subject to the gift tax.

       Petitioners do not expressly argue that Mr. Cordes was the

beneficial owner of all the stock in the Cordes family

dealerships.     However, their argument that Mr. Cordes exercised

complete and unencumbered control over the Cordes corporations

and retained the power to revoke all stock transfers implicitly

recognizes that Mr. Cordes was the beneficial owner of the Cordes
                                - 42 -

family dealerships.34    In fact, in related cases, respondent has

argued that Mr. Cordes was the beneficial owner, and we have so

held.     Cordes v. Commissioner, T.C. Memo. 1994-377.

     The evidence in this case resoundingly demonstrates that Mr.

Cordes’s control over the Cordes family dealerships remained

unimpaired and was so complete that he could do anything he

wanted with the Cordes family dealerships regardless of which

family member held legal title to the shares of stock.    While the

record in this case contains several examples of Mr. Cordes’s

taking inconsistent positions with the Internal Revenue Service

and with others regarding the ownership of the Cordes family

dealerships, we simply cannot ignore the overwhelming weight of

the evidence establishing that no member of the Cordes family

other than Mr. Cordes held any beneficial ownership interest in

the Cordes family dealerships.    The family members knew it,

corporate employees knew it, and, despite respondent’s position

in these consolidated cases, respondent knew it (having taken

such a position in related cases).



     34
      In related cases, respondent has argued that Mr. Cordes
was the beneficial owner, and we have so held. Cordes v.
Commissioner, T.C. Memo. 1994-377 and T.C. Memo. 2002-125. This
may explain petitioners’ failure to argue directly that Mr.
Cordes beneficially owned all of the stock in the Cordes
corporations. We note, however, that it is difficult, if not
impossible, to reconcile respondent’s position in this case that
the transfers of stock were completed gifts with respondent’s
position in the related cases that Mr. Cordes was the beneficial
owner of the Cordes corporations.
                               - 43 -

       Mr. Cordes’s absolute control over all aspects of the Cordes

family dealerships--stock, financial, and operational--was such

that we must conclude he was the beneficial owner of all of the

Cordes family dealerships.

       Because Mr. Cordes owned all beneficial interest in the

Cordes family dealerships during the taxable years at issue, all

of the disputed transfers were solely of legal title.     Because

such transfers of legal title are not subject to the gift tax, we

must hold for petitioners with respect to the gift tax cases

involving stock in the Cordes family dealerships.

III.    Conclusion

       We have carefully considered all remaining arguments made by

the parties for contrary holdings and, to the extent not

discussed, find them to be irrelevant or without merit.

       To reflect the foregoing,


                                            Decisions will be entered

                                        under Rule 155.
                                - 44 -

                              APPENDIX A

                    Schedule of Stock Transfers1

Cordes Finance Corp.2

             Mr.     Mrs.        B.B.        Eddy Ben     Eddy Ben
           Cordes   Cordes   Journeycake   Cordes Trust    Cordes
1/24/64      250      249         1
1/4/65                           (1)            +1
1/4/65       250     249          0              1
1/8/65               (28)                                     +28
1/8/65       250     221                         1             28
12/29/65     (50)    (50)                       (1)          +101
12/29/65     200     171                         0            129
12/16/66    (100)                                            +100
12/16/66     100     171                                      229
                                                           3
1/8/71                                                       +105
1/8/71       100      171                                     334
3/14/83             +334                                     (334)
            4        5
3/14/83      100       505                                      0
1/14/94             (334)                                    +334
                    6
1/14/94      100      171                                     334
     1
       Transfers of shares from one entity to another are shown in
parentheses. Receipts of shares by an entity from another are
shown with a plus sign.
     2
       The incompleteness of the record prevents us from
presenting a complete and accurate chart of stock ownership and
transfers regarding CFC. For instance, the record shows Jean Ann
Richard held legal title to 33.3 percent of the stock in CFC in
1992, 1993 and 1994, but we are not able to decipher the date she
acquired legal title to those shares. We are only able to guess
the extent to which she obtained legal title to those shares from
CFC, see infra note 3, Mr. Cordes, see infra note 4, or Mrs.
Cordes, see infra note 5.
     Additionally, John Cordes acquired legal title to 33.3
percent of the stock in CFC sometime in 1994, but we are not able
to decipher the date he acquired legal title to those shares or
from whom he acquired legal title.
     3
       On Jan. 8, 1971, CFC issued 500 additional shares of stock.
Eddy Ben Cordes received 105 of those shares. The record does
not indicate who, if anyone, received the other 395 shares at
that time.
     4
       The record indicates that Mr. Cordes did not hold legal
title to any stock in CFC in 1992 or 1993.
     5
       The record indicates that Mrs. Cordes held legal title to
33.4 percent of the stock in CFC in 1992 and 1993.
                                 - 45 -
     6
      The record indicates that Mrs. Cordes did not hold legal
title to any stock in CFC in 1994.

Eddie Cordes, Inc.

             Mr.       Mrs.         B.B.      Jean Ann    Eddy Ben
           Cordes     Cordes    Journeycake   Richard      Cordes
1/2/63       500       400          100
1/71        +100                   (100)
1/71         600       400            0
1/71                  (400)                       +400
1/71         600         0                         400
3/29/83     (600)                                 +600
3/29/83        0                                 1,000
1/7/87      +600                                  (600)
1/7/87       600                                   400
7/25/88                                           (400)       +400
7/25/88      600                                     0         400
8/8/91      (600)                                             +600
8/8/91         0                                             1,000

Edmund Cordes, Inc.

             Mr.        Mrs.           John        Eddy Ben Jean Ann
           Cordes      Cordes        Parkinson      Cordes Richard
1/4/67        600        200            200
2/15/67                   (1)            +1
2/15/67       600        199            201
1/8/71                  (199)          (201)         +400
1/8/71        600          0              0           400
10/26/79     (500)                                   +500
10/26/79      100                                     900
                                                               1
7/25/88                                              (900)      +1,000
7/25/88       100                                                1,000
1/26/89    +1,000                                               (1,000)
1/26/89     1,100                                                    0
8/20/91    (1,000)                                              +1,000
8/20/91       100                                                1,000

     1
       The record indicates that on July 25, 1988, Jean Ann
Richard received 900 shares of stock in Edmund Cordes, Inc., from
Eddy Ben Cordes, and 100 shares of stock in Edmund Cordes, Inc.,
from Ellen Cordes, Mr. Cordes’s daughter-in-law. The record does
not indicate how, when, or from whom Ellen Cordes acquired those
100 shares of stock in Edmund Cordes, Inc., nor is it
particularly relevant.
                         - 46 -

John Cordes, Inc.

                Mr.     Mrs.      Jean Ann    John
              Cordes   Cordes     Richard    Cordes
5/1/83         300      100         100
1/7/87                 (100)       (100)      +200
1/7/87         300        0           0        200
8/8/91        (300)                           +300
8/8/91           0                             500
3/16/94       +500                            (500)
3/16/94        500                               0
4/1/94        (500)                           +500
4/1/94           0                             500
                             - 47 -

                            APPENDIX B

      Summary of Conceded, Deemed Conceded, Computational,
                       and Settled Issues

     The following is a summary of issues and/or adjustments
conceded, deemed conceded, of a computational nature, or settled.

                      The Income Tax Cases

I.   Docket No. 9294-95, Cordes Finance Corp.:
     A.   1991:
          1.    Respondent adjusted petitioner’s income for 1991
                to reflect additional gross receipts of $355,200.
                Petitioner concedes this adjustment.
          2.    Respondent adjusted petitioner’s income for 1991
                by $37,505, pursuant to sec. 482, to reflect an
                improper deduction for interest expense.
                Petitioner concedes this adjustment.
          3.    Respondent readjusted petitioner’s reported bad
                debt deduction for 1991 by $501,267 to reflect
                actual realized bad debts for the taxable year.
                Respondent concedes this adjustment.
          4.    Respondent determined petitioner used an incorrect
                method of accounting for 1991 and readjusted
                petitioner’s interest income by $859,338 to
                reflect interest accrued under the accrual method
                of accounting. The parties stipulated that the
                final decision in Cordes Fin. Corp. v.
                Commissioner, T.C. Memo. 1997-162, affd. without
               published opinion 162 F.3d 1172 (10th Cir. 1998),
               would decide the proper amount of petitioner’s
               interest income for 1991. In accordance with the
               parties’ stipulations, respondent concedes this
               adjustment.
          5.   Petitioner conceded an increase in its interest
               income in the amount of $16,600. This concession
               does not appear to relate to any specific
               adjustment in the notice of deficiency.
          6.   Petitioner claimed a net operating loss for 1994
               and carried a loss back to 1991. Petitioner
               concedes it was not entitled to claim a net
               operating loss in 1994 or carry a loss back to
               1991.
          7.   Respondent determined petitioner was liable for a
               penalty for 1991 pursuant to sec. 6662(a) for
               substantial understatement of tax. Petitioner
                              - 48 -

                presented no argument regarding the penalty. We
                deem petitioner to have conceded the application
                of the penalty.
II.   Docket No. 3284-96, Cordes Finance Corporation:
      A.   1992:
           1.    Respondent adjusted petitioner’s income for 1992
                 to reflect additional gross receipts of
                 $1,174,666.
                 a.    Petitioner concedes this adjustment, to the
                       extent of $311,928.
                 b.    Respondent concedes this adjustment, to the
                       extent of $20,000.
                 c.    The remaining $842,738 at issue reflects
                       gross receipts that respondent determined
                       were income to petitioner for 1992 because
                       respondent determined petitioner used an
                       incorrect method of accounting for its 1992
                       taxable year and readjusted petitioner’s
                       income to reflect income accrued under the
                       accrual method of accounting. The parties
                       stipulated that the final decision in
                       Cordes Fin. Corp. v. Commissioner, supra,
                       would decide the proper amount of
                       petitioner’s gross receipts for 1992. In
                       accordance with the parties’ stipulations,
                       respondent concedes this adjustment.
           2.    Respondent readjusted petitioner’s reported bad
                 debt deduction for 1992 by $537,599 to reflect
                 substantiated bad debts for the taxable year.
                 Respondent concedes this adjustment.
           3.    Respondent disallowed $112,756 of petitioner’s
                 reported interest expense deduction for 1992 to
                 reflect substantiated interest expenses for the
                 taxable year. Petitioner concedes that
                 adjustment, to the extent of $73,298.
                 a.    As a mathematical computation, petitioner’s
                       concession leaves $39,458 of the interest
                       expense at issue for 1992. The parties
                       stipulated, however, that $52,870 is
                       properly at issue.
                 b.    Respondent concedes that portion of the
                       $52,870 paid which constitutes a safe-haven
                       rate of interest calculated, pursuant to
                       sec. 482 and the regulations thereunder, on
                       the underlying loans, to the extent that
                       portion exceeds the amount paid on those
                       underlying loans already allowed as an
                       interest expense on the underlying loans
                        - 49 -

                 ($27,130).
     4.   Petitioner claimed a net operating loss for 1994
          and carried a loss back to 1992. Petitioner
          concedes it was not entitled to claim a net
          operating loss in 1994 or carry a loss back to
          1992.
     5.   Respondent recomputed petitioner’s environmental
          tax and environmental tax deduction. Petitioner
          presented no argument regarding this
          recomputation, and we deem petitioner to have
          conceded this adjustment.
     6.   Respondent determined petitioner was liable for a
          civil fraud penalty for 1992 in the amount of
          $20,832 pursuant to sec. 6663. Respondent
          concedes that determination.
     7.   Respondent determined petitioner was liable for a
          penalty for 1992 pursuant to sec. 6662(a) for
          substantial understatement of tax. Petitioner
          presented no argument regarding the penalty. We
          deem petitioner to have conceded the application
          of the penalty.
B.   1993:
     1.    Respondent adjusted petitioner’s income for 1993
           to reflect additional gross receipts of
           $1,199,590.
           a.    Petitioner concedes this adjustment, to the
                 extent of $326,852.
           b.    Respondent concedes this adjustment, to the
                 extent of $30,000.
           c.    The remaining $842,738 at issue reflects
                 gross receipts that respondent determined
                 were income to petitioner for 1993 because
                 respondent determined petitioner used an
                 incorrect method of accounting for its 1993
                 taxable year and readjusted petitioner’s
                 income to reflect income accrued under the
                 accrual method of accounting. The parties
                 stipulated that the final decision in
                 Cordes Fin. Corp. v. Commissioner, supra,
                 would decide the proper amount of
                 petitioner’s gross receipts for 1993. In
                 accordance with the parties’ stipulations,
                 petitioner’s income will be increased by
                 $405,181 from gross receipts due to a
                 change in accounting method.
     2.    Respondent readjusted petitioner’s reported bad
           debt deduction for 1993 by $650,900 to reflect
                             - 50 -

               unsubstantiated bad debts for the taxable year.
               Respondent concedes this adjustment.
          3.   Respondent disallowed $140,873 of petitioner’s
               reported interest expense deduction for 1993 to
               reflect unsubstantiated interest expenses for the
               taxable year. Petitioner concedes that
               adjustment, to the extent of $142,214.
               a.     As a mathematical computation, petitioner’s
                      concession is in excess of that which
                      respondent determined was unsubstantiated.
                      The parties stipulated, however, that
                      $19,105 is properly at issue.
               b.     Respondent concedes that portion of the
                      $19,105 paid which constitutes a safe-haven
                      rate of interest calculated, pursuant to
                      sec. 482 and the regulations thereunder, on
                      the underlying loan, to the extent that
                      portion exceeds the amount paid on that
                      underlying loan already allowed as an
                      interest expense on the underlying loan
                      ($895).
          4.   Petitioner claimed a net operating loss for 1994
               and carried a loss back to 1993. Petitioner
               concedes it was not entitled to claim a net
               operating loss in 1994 or carry a loss back to
               1993.
          5.   Respondent recomputed petitioner’s environmental
               tax and environmental tax deduction. Petitioner
               presented no argument regarding this
               recomputation, and we deem petitioner to have
               conceded this adjustment.
          6.   Respondent determined petitioner was liable for a
               civil fraud penalty for 1993 in the amount of
               $13,428 pursuant to sec. 6663. Respondent
               concedes that determination.
          7.   Respondent determined petitioner was liable for a
               penalty for 1993 pursuant to sec. 6662(a) for
               substantial understatement of tax. Petitioner
               presented no argument regarding the penalty. We
               deem petitioner to have conceded the application
               of the penalty.
III. Docket No. 20254-94, June Cordes:
     A.   1989:
          1.    Respondent determined petitioner was allowed a
                deduction for 1989 for a personal exemption in the
                amount of $2,000. Petitioner did not dispute this
                determination, and we deem petitioner to have
                conceded this adjustment.
                              - 51 -

           2.   Respondent determined petitioner was allowed a
                deduction for 1989 for the standard deduction, in
                the amount of $2,600. Petitioner did not dispute
                this determination, and we deem petitioner to have
                conceded this adjustment.
      B.   1990:
           1.    Respondent determined petitioner was allowed a
                 deduction for 1990 for a personal exemption in the
                 amount of $2,050. Petitioner did not dispute this
                 determination, and we deem petitioner to have
                 conceded this adjustment.
           2.    Respondent determined petitioner was allowed a
                 deduction for 1990 for the standard deduction, in
                 the amount of $2,725. Petitioner did not dispute
                 this determination, and we deem petitioner to have
                 conceded this adjustment.
IV.   Docket No. 3305-96, June J. Cordes:
      A.   1991:
           1.    Respondent adjusted petitioner’s income for 1991
                 to reflect her receipt of taxable Social Security
                 benefits in the amount of $2,088. Petitioner
                 concedes this adjustment.
           2.    Respondent determined petitioner received interest
                 income for 1991 in the amount of $33,000.
                 Respondent concedes this adjustment.
           3.    Respondent determined petitioner was allowed a
                 deduction for 1991 for the standard deduction, in
                 the amount of $3,500. Petitioner disputed this
                 determination in her petition but presented no
                 further argument. We deem petitioner to have
                 conceded this adjustment.
           4.    Respondent determined petitioner was liable for an
                 addition to tax for 1991, pursuant to sec.
                 6651(a)(1), for failure timely to file a tax
                 return. Petitioner concedes she did not file an
                 income tax return for 1991 and concedes that, if
                 the Court concludes petitioner received income for
                 1991, she is liable for the addition to tax to the
                 extent of that income.
           5.    Respondent determined petitioner was liable for an
                 addition to tax for 1991, pursuant to sec. 6654,
                 for failure to make estimated tax payments.
                 Petitioner presented no argument regarding the
                 addition to tax and concedes that, if the Court
                 concludes petitioner received income for 1991, she
                 is liable for the addition to tax to the extent of
                 that income.
                             - 52 -

V.   Docket No. 4182-96, Edmund J. & June J. Cordes:
     A.   1992:
          1.    Respondent determined petitioners had income from
                constructive dividends in the amount of $56,904
                for 1992.
                a.    Petitioners presented no argument regarding
                      CFC’s earnings and profits for 1992. In
                      his brief, respondent noted that earnings
                      and profits at the end of 1990, and
                      therefore 1992, were dependent on the final
                      decision in Cordes Fin. Corp. v.
                      Commissioner, T.C. Memo. 1997-162. The
                      decision in Cordes Fin. Corp. became final
                      after the briefs were filed herein. We
                      leave for the Rule 155 computation the
                      calculation of CFC’s earnings and profits
                      and its impact on the treatment of the
                      constructive dividends.
                b.    Respondent concedes that, because there
                      were total credits of $326,930 to account
                      No. 312 during 1992, petitioner is entitled
                      to credit that amount against the amount we
                      conclude petitioner received as
                      constructive dividends for 1992.
                c.    Petitioners failed to address a number of
                      the items respondent determined were
                      constructive dividends for 1992. We deem
                      petitioners to have conceded those
                      adjustments. Petitioners’ arguments are
                      such that only adjustments pertaining to
                      the distribution of CFC’s funds to John
                      Cordes and to the receipt of excess
                      interest from CFC remain at issue.
          2.    Respondent determined petitioners were liable for
                a penalty for 1992, pursuant to sec. 6662(a), for
                substantial understatement of tax. Petitioners
                presented no argument regarding the penalty and
                concede that, if the Court concludes petitioners
                received income in 1992, they are liable for the
                penalty to the extent of that income.
     B.   1993:
          1.    Respondent determined petitioners had income from
                constructive dividends in the amount of $293,796
                for 1993.
                a.    Petitioners presented no argument regarding
                      CFC’s earnings and profits for 1993. In
                      his brief, respondent noted that earnings
                      and profits at the end of 1990, and
                             - 53 -

                     therefore 1993, were dependent on the final
                     decision in Cordes Fin. Corp. v.
                     Commissioner, supra. The decision in
                     Cordes Fin. Corp. became final after the
                     briefs were filed herein. We leave for the
                     Rule 155 computation the calculation of
                     CFC’s earnings and profits and its impact
                     on the treatment of the constructive
                     dividends.
               b.    Respondent concedes that because there were
                     total credits of $80,000 to account No. 312
                     during 1993, petitioner is entitled to
                     credit that amount against the amount we
                     conclude petitioner received as
                     constructive dividends for 1993.
               c.    Petitioners failed to address a number of
                     the items respondent determined were
                     constructive dividends for 1993. We deem
                     petitioners to have conceded those
                     adjustments. Petitioners’ arguments are
                     such that only adjustments pertaining to
                     the distribution of CFC’s funds to John
                     Cordes and to the receipt of excess
                     interest from CFC remain at issue.
          2.   Respondent adjusted petitioners’ income to reflect
               their receipt of taxable Social Security benefits
               in the amount of $6,860. Petitioners concede this
               adjustment.
          3.   Respondent recomputed petitioners’ itemized
               deductions and deduction for exemptions.
               Petitioners presented no arguments regarding these
               recomputations, and we deem petitioner to have
               conceded these adjustments.
          4.   Respondent determined petitioners were liable for
               a penalty for 1993, pursuant to sec. 6662(a), for
               substantial understatement of tax. Petitioners
               presented no argument regarding the penalty and
               concede that, if the Court concludes petitioners
               received income in 1993, they are liable for the
               penalty to the extent of that income.

                       The Gift Tax Cases

I.   Docket No. 19178-97, Edmund J. Cordes:
     A.   1991:
          1.    Respondent determined petitioner made other
                taxable gifts as follows:
             - 54 -

a.   Respondent determined petitioner made a
     taxable gift of $125,000 to John Cordes in
     1991. Petitioner, in his petition, alleged
     that the transfer of $125,000 was a loan,
     rather than a taxable gift. Petitioner
     introduced no evidence of a loan and did
     not present any argument regarding this
     adjustment in his posttrial briefs. We
     deem petitioner to have conceded the
     transfer of $125,000 to John Cordes was a
     taxable gift.
b.   Respondent determined petitioner made
     taxable gifts of $100,000 and $84,000 to
     John Cordes, and forgave portions of the
     Richard Note and the Bower Note in the
     amounts of $300,000 and $77,900,
     respectively, such forgiveness constituting
     taxable gifts.
     (1)      Petitioner conceded in his reply
              brief that he made gifts, with
              respect to the Richard Note and the
              Bower Note, in amounts equal to
              $300,000 and $77,900, respectively.
              However, respondent concedes that
              the correct amounts of the gifts
              are $214,941 and $77,550,
              respectively. In light of
              respondent’s concession, we shall
              treat petitioner’s concession as
              effective to the extent of $214,941
              and $77,550, respectively.
     (2)      Petitioner, in his petition,
              alleged that the gifts are not
              taxable only because the
              applications of the unified credit
              and annual exclusions, see sec.
              2503, reduce his tax liability.
              Petitioner has not presented any
              argument regarding these
              adjustments in his posttrial
              briefs. We deem petitioner to have
              conceded that the gifts are taxable
              gifts, as defined in sec. 2503(a),
              subject to the annual exclusion in
              sec. 2503(b). We leave for the
              Rule 155 computation whether and to
              what extent the unified credit and
                        - 55 -

                         the annual exclusions are
                         applicable.
B.   1992:
     1.    Respondent determined petitioner made a taxable
           gift of $31,000 to John Cordes in 1992.
           Petitioner, in his petition, alleged that the
           transfer of $31,000 was a loan, rather than a
           taxable gift. Petitioner introduced no evidence
           of a loan and did not present any argument
           regarding this adjustment in his posttrial briefs.
           We deem petitioner to have conceded the transfer
           of $31,000 to John Cordes was a taxable gift.
     2.    Respondent determined petitioner made a taxable
           gift of $20,000 to John Cordes in 1992.
           Petitioner has not presented any argument
           regarding this adjustment in his petition or
           posttrial briefs. We deem petitioner to have
           conceded that the transfer is a taxable gift, as
           defined in sec. 2503(a).
     3.    Respondent determined petitioner was liable for an
           addition to tax for 1992, pursuant to sec.
           6651(a)(1), for failure to file a gift tax return.
           Petitioner concedes he did not file a gift tax
           return for 1992 and did not present any argument
           regarding the addition to tax. We deem petitioner
           to have conceded liability for the addition to
           tax.
C.   1993:
     1.    Respondent determined petitioner made a taxable
           gift of $10,000 to John Cordes in 1993.
           Petitioner, in his petition, alleged that the
           transfer of $10,000 was a loan, rather than a
           taxable gift. Petitioner introduced no evidence
           of a loan and did not present any argument
           regarding this adjustment in his posttrial briefs.
           We deem petitioner to have conceded the transfer
           of $10,000 to John Cordes was a taxable gift.
     2.    Respondent determined petitioner made a taxable
           gift of $30,000 to John Cordes in 1993.
           Petitioner has not presented any argument
           regarding this adjustment in his petition or
           posttrial briefs. We deem petitioner to have
           conceded that the transfer is a taxable gift, as
           defined in sec. 2503(a).
     3.    Respondent determined petitioner was liable for an
           addition to tax for 1993, pursuant to sec.
           6651(a)(1), for failure to file a gift tax return.
           Petitioner concedes he did not file a gift tax
                              - 56 -

                return for 1993 and did not present any argument
                regarding the addition to tax. We deem petitioner
                to have conceded liability for the addition to
                tax.
II.   Docket No. 19279-97, June Cordes:
      A.   1993:
           1.    Respondent determined petitioner made taxable
                 gifts to John Cordes in 1993, in the aggregate
                 amount of $76,900. Petitioner, in her petition,
                 alleged that the transfers are not taxable gifts
                 only because the applications of the unified
                 credit and annual exclusions, see sec. 2503,
                 reduce her tax liability. Petitioner has not
                 presented any argument regarding these adjustments
                 in her posttrial briefs. We deem petitioner to
                 have conceded that the transfers are taxable
                 gifts, as defined in sec. 2503(a), subject to the
                 annual exclusion in 2503(b). We leave for the
                 Rule 155 computation whether and to what extent
                 the unified credit and the annual exclusions are
                 applicable.
           2.    Respondent determined petitioner was liable for an
                 addition to tax for 1993, pursuant to sec.
                 6651(a)(1), for failure to file a gift tax return.
                 Petitioner concedes she did not file a gift tax
                 return for 1993 and did not present any argument
                 regarding the addition to tax. We deem petitioner
                 to have conceded liability for the addition to
                 tax.
