                                           TERRY J. WELLE AND CHRISSE J. WELLE, PETITIONERS v.
                                            COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
                                                        Docket No. 156–11.                         Filed June 27, 2013.

                                                 P–H is the sole shareholder of TWC, a subch. C corporation.
                                               Ps used TWC to facilitate the construction of their lakefront
                                               home in that TWC kept track of construction costs and TWC’s
                                               framing crew framed the home. Ps, however, personally hired
                                               the subcontractors and ordered building supplies from the
                                               vendors in TWC’s name. Ps reimbursed TWC for its costs,
                                               including overhead, but did not pay TWC an amount equal to
                                               the profit margin of 6% to 7% that TWC normally charged its
                                               customers (forgone profit). R determined that P–H received a
                                               constructive dividend from TWC in an amount equal to TWC’s
                                               forgone profit. Held: P–H did not receive a constructive divi-
                                               dend equal to TWC’s forgone profit from services that TWC
                                               provided during the building of Ps’ home because the trans-
                                               actions did not result in the distribution of current or accumu-
                                               lated earnings and profits.

                                           Jon J. Jensen, for petitioners.
                                           Christina L. Cook, for respondent.
                                         MARVEL, Judge: Respondent determined a deficiency of
                                      $10,620 in petitioners’ Federal income tax and an accuracy-
                                      related penalty under section 6662(a) 1 of $2,124 for 2006.
                                      The issues for decision are: (1) whether petitioner Terry J.
                                      Welle received a constructive dividend of $48,275 from his
                                      wholly owned subchapter C corporation, Terry Welle
                                      Construction, Inc. (TWC), in 2006; and (2) whether peti-
                                      tioners are liable for the accuracy-related penalty under sec-
                                      tion 6662(a).

                                                                           FINDINGS OF FACT

                                        Some of the facts have been stipulated. The stipulation of
                                      facts is incorporated herein by this reference. Petitioners
                                      resided in North Dakota when they petitioned this Court.
                                        TWC is a construction company specializing in multifamily
                                      housing projects. For most jobs that closed during 2006 TWC
                                      had profit margins of 6% to 7%. Mr. Welle is the president
                                      and sole shareholder of TWC.
                                        1 Unless otherwise indicated, section references are to the Internal Rev-

                                      enue Code (Code) in effect for the year at issue, and Rule references are
                                      to the Tax Court Rules of Practice and Procedure.

                                      420




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                                      (420)                          WELLE v. COMMISSIONER                                        421


                                         Petitioners owned lakefront property in Detroit Lakes,
                                      Minnesota, on which they planned to build a second home
                                      (lakefront home). In 2004 petitioners began construction of
                                      the lakefront home. To keep track of material and other
                                      construction costs, Mr. Welle caused TWC to open a ‘‘cost
                                      plus’’ job account on its books. Petitioners, however, person-
                                      ally contacted all of the subcontractors and building supply
                                      vendors that built or supplied materials for the lakefront
                                      home and acted as their own general contractors during its
                                      construction.
                                         During the construction TWC paid the subcontractors and
                                      vendors directly, and its framing crew framed the lakefront
                                      home. Petitioners repaid TWC for all amounts paid to the
                                      subcontractors and also reimbursed TWC for its labor and
                                      overhead costs. TWC, however, did not charge petitioners,
                                      and petitioners did not pay to TWC, an amount equal to the
                                      customary profit margin that TWC used to calculate the con-
                                      tract price that it charged its unrelated clients (forgone
                                      profit).
                                         Respondent determined that Mr. Welle received a qualified
                                      dividend of $48,275 from TWC in 2006, equal to the forgone
                                      profit.

                                                                                  OPINION

                                         Respondent contends that Mr. Welle received a construc-
                                      tive dividend from TWC when TWC built petitioners’ lake-
                                      front home without charging them an amount equal to its
                                      customary profit margin of 6% to 7%.
                                         Petitioners contend that (1) Mr. Welle did not receive a
                                      constructive dividend because a shareholder does not receive
                                      a constructive dividend when a corporation provides services
                                      to the shareholder at cost; and (2) respondent’s determina-
                                      tion of the measure of any constructive dividend that Mr.
                                      Welle may have received was erroneous because the services
                                      that TWC provided to Mr. Welle were not comparable to the
                                      services that it provided to its unrelated clients. Because we
                                      decide on this record that Mr. Welle did not receive a




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                                      422                 140 UNITED STATES TAX COURT REPORTS                                   (420)


                                      constructive dividend, 2 we need not address petitioners’
                                      second contention. 3
                                      I. Constructive Dividends Generally
                                         Section 61(a)(7) includes dividends in a taxpayer’s gross
                                      income. Section 316(a) defines a dividend as any distribution
                                      of property that a corporation makes to its shareholders out
                                      of its earnings and profits accumulated after February 28,
                                      1913, or out of its earnings and profits for the taxable year.
                                      Section 317(a) defines property as money, securities, and any
                                      other property except stock in the distributing corporation.
                                      We have held that, under some circumstances, the provision
                                      of services by a corporation to its shareholders constitutes
                                      ‘‘property’’ within the meaning of section 317(a). See Magnon
                                      v. Commissioner, 73 T.C. 980, 993 (1980) (citing Loftin &
                                      Woodard, Inc. v. United States, 577 F.2d 1206, 1214 (5th Cir.
                                      1978), and Benes v. Commissioner, 42 T.C. 358, 379 (1964),
                                      aff ’d, 355 F.2d 929 (6th Cir. 1966)).
                                         ‘‘A constructive dividend arises ‘[w]here a corporation con-
                                      fers an economic benefit on a shareholder without the
                                      expectation of repayment, * * * even though neither the cor-
                                      poration nor the shareholder intended a dividend.’ ’’ Hood v.
                                      Commissioner, 115 T.C. 172, 179 (2000) (quoting Magnon v.
                                      Commissioner, 73 T.C. at 993–994). ‘‘ ‘The crucial concept in
                                      a finding that there is a constructive dividend is that the cor-
                                      poration has conferred a benefit on the shareholder in order
                                           2 Wedecide this case without regard to the allocation of the burden of
                                      proof. We therefore need not decide whether petitioners satisfied the re-
                                      quirements of sec. 7491(a). See Blodgett v. Commissioner, 394 F.3d 1030,
                                      1039 (8th Cir. 2005), aff ’g T.C. Memo. 2003–212; Knudsen v. Commis-
                                      sioner, 131 T.C. 185, 188–189 (2008).
                                         3 We question the timing of respondent’s constructive dividend adjust-

                                      ment. TWC advanced payment of the expenses relating to the construction
                                      of petitioners’ lakefront home during 2004 and 2005. Additionally, Mr.
                                      Welle credibly testified that he and petitioner Chrisse J. Welle moved into
                                      the lakefront home during Memorial Day weekend of 2005. Accordingly, it
                                      appears that a credible argument could have been made that any construc-
                                      tive dividend arose in 2004 and/or 2005. See sec. 1.451–1(a), Income Tax
                                      Regs. However, we deem this issue waived by petitioners because they
                                      never raised it. See Muhich v. Commissioner, 238 F.3d 860, 864 n.10 (7th
                                      Cir. 2001) (issues not addressed or developed are deemed waived—it is not
                                      the Court’s obligation to research and construct the parties’ arguments),
                                      aff ’g T.C. Memo. 1999–192.




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                                      (420)                          WELLE v. COMMISSIONER                                        423


                                      to distribute available earnings and profits without expecta-
                                      tion of repayment.’ ’’ Truesdell v. Commissioner, 89 T.C. 1280,
                                      1295 (1987) (quoting Noble v. Commissioner, 368 F.2d 439,
                                      443 (9th Cir. 1966), aff ’g T.C. Memo. 1965–84); see also
                                      Palmer v. Commissioner, 302 U.S. 63, 70 (1937) (stating that,
                                      for a transaction to be treated as a deemed dividend, ‘‘it is
                                      at least necessary to make some showing that the trans-
                                      action is in purpose or effect used as an implement for the
                                      distribution of corporate earnings to stockholders’’); CTM
                                      Constr., Inc. v. Commissioner, T.C. Memo. 1988–590, 56
                                      T.C.M. (CCH) 971, 974 (1988) (‘‘Generally, a constructive dis-
                                      tribution occurs when corporate assets are diverted to or for
                                      the benefit of a shareholder without adequate consideration
                                      for the diversion.’’ (citing Sammons v. Commissioner, 472
                                      F.2d 449 (5th Cir. 1972), aff ’g in part, rev’g in part T.C.
                                      Memo. 1971–145)). However, ‘‘ ‘[n]ot every corporate expendi-
                                      ture [that] incidentally confer[s] economic benefit on a share-
                                      holder is a constructive dividend.’ ’’ Loftin & Woodard, 577
                                      F.2d at 1215 (quoting Crosby v. United States, 496 F.2d 1384,
                                      1388 (5th Cir. 1974)).
                                         Where a corporation constructively distributes property to
                                      a shareholder, the constructive dividend received by the
                                      shareholder is ordinarily measured by the fair market value
                                      of the benefit conferred. See Ireland v. United States, 621
                                      F.2d 731, 737 (1980) (citing Loftin & Woodard, 577 F.2d at
                                      1223); Melvin v. Commissioner, 88 T.C. 63, 80–81 (1987),
                                      aff ’d, 894 F.2d 1072 (9th Cir. 1990). However, where fair
                                      market value cannot be reliably ascertained or there is evi-
                                      dence that fair market value is an inappropriate mode of
                                      measurement, the constructive dividend can be measured by
                                      the cost to the corporation of the benefit conferred. See Loftin
                                      & Woodard, 577 F.2d at 1223 (citing Commissioner v. Riss,
                                      374 F.2d 161, 170 (8th Cir. 1967), aff ’g in part, rev’g in part
                                      T.C. Memo. 1964–190).
                                         The Code does not define the term ‘‘earnings and profits’’.
                                      See sec. 316(a); Henry C. Beck Co. v. Commissioner, 52 T.C.
                                      1, 6 (1969), aff ’d per curiam, 433 F.2d 309 (5th Cir. 1970).
                                      As we have previously observed, the calculation of earnings
                                      and profits is not easy or obvious. See, e.g., Anderson v.
                                      Commissioner, 67 T.C. 522, 527 (1976), aff ’d, 583 F.2d 953
                                      (7th Cir. 1978); Juha v. Commissioner, T.C. Memo. 2012–68,
                                      103 T.C.M. (CCH) 1338, 1341 (2012). For example, although




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                                      424                 140 UNITED STATES TAX COURT REPORTS                                   (420)


                                      section 1.312–6(a), Income Tax Regs., provides that a cor-
                                      poration must compute earnings and profits using the same
                                      method of accounting employed in computing taxable income,
                                      earnings and profits are not equivalent to taxable income.
                                      See Commissioner v. Wheeler, 324 U.S. 542, 546 (1945);
                                      Jaques v. Commissioner, 935 F.2d 104, 107–108 (6th Cir.
                                      1991), aff ’g T.C. Memo. 1989–673. The reason for this
                                      distinction is that earnings and profits is a broad concept
                                      ‘‘which the tax law has utilized ‘to approximate a corpora-
                                      tion’s power to make distributions which are more than just
                                      a return of investment.’ ’’ Henry C. Beck Co. v. Commissioner,
                                      52 T.C. at 6 (quoting Arthur R. Albrecht, ‘‘ ‘Dividends’ and
                                      ‘Earnings or Profits’ ’’, 7 Tax L. Rev. 157, 183 (1952)).
                                      II. Services Provided by a Corporation to a Shareholder at
                                          Cost
                                         Respondent contends that Magnon v. Commissioner, 73
                                      T.C. 980, stands for the proposition that a shareholder
                                      receives a constructive dividend equal to the cost of the serv-
                                      ices provided to the shareholder by a corporation plus the
                                      corporation’s customary profit margin. In Magnon v.
                                      Commissioner, 73 T.C. at 994–996, we held that the amount
                                      of the costs and overhead for electrical services provided by
                                      a corporation to a shareholder without expectation of repay-
                                      ment was a constructive dividend. But we did not hold, and
                                      the Commissioner did not assert, that the constructive divi-
                                      dend the shareholder received included an amount cor-
                                      responding to the corporation’s forgone profit.
                                         Similarly, in cases such as Benes v. Commissioner, 42 T.C.
                                      at 379, Nahikian v. Commissioner, T.C. Memo. 1995–161, 69
                                      T.C.M. (CCH) 2370, 2372–2375 (1995), CTM Constr., Inc. v.
                                      Commissioner, 56 T.C.M. (CCH) at 974, and Clevenger v.
                                      Commissioner, T.C. Memo. 1986–149, 51 T.C.M. (CCH) 835,
                                      839–840 (1986), aff ’d, 826 F.2d 1379 (4th Cir. 1987), we held
                                      that amounts expended by the respective corporations in con-
                                      structing homes for their shareholders constituted construc-
                                      tive dividends. But we did not hold, and the Commissioner
                                      did not assert, that the constructive dividends in those cases
                                      each included an amount corresponding to the respective cor-
                                      porations’ forgone profit.




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                                      (420)                          WELLE v. COMMISSIONER                                        425


                                         Respondent does not explain how a corporation’s decision
                                      not to make a profit on services provided to a shareholder
                                      who fully reimburses the corporation for the cost of the serv-
                                      ices (including overhead) constitutes a distribution of prop-
                                      erty that reduces the corporation’s earnings and profits
                                      under section 316(a), nor does respondent cite any cases sup-
                                      porting such a position. Respondent argues that his position
                                      follows from the general rule that constructive dividends are
                                      ordinarily measured by the fair market value of the benefit
                                      conferred. See Ireland, 621 F.2d at 737; Melvin v. Commis-
                                      sioner, 88 T.C. at 80–81. It appears to us, however, that
                                      respondent’s argument skips an important analytical step
                                      required by section 316(a)—we must first find that there has
                                      been a distribution of property to the shareholder that
                                      reduces the corporation’s current or accumulated earnings
                                      and profits. A finding that a shareholder received a construc-
                                      tive dividend from a corporation is only appropriate where
                                      ‘‘corporate assets are diverted to or for the benefit of a share-
                                      holder’’, CTM Constr., Inc. v. Commissioner, 56 T.C.M. (CCH)
                                      at 974, ‘‘in order to distribute available earnings and profits
                                      without expectation of repayment’’, Truesdell v. Commis-
                                      sioner, 89 T.C. at 1295; see also Palmer v. Commissioner, 302
                                      U.S. at 69 (‘‘While a sale of corporate assets to stockholders
                                      is, in a literal sense, a distribution of its property, such a
                                      transaction does not necessarily fall within the statutory
                                      definition of a dividend. For a sale to stockholders may not
                                      result in any diminution of its net worth and in that case
                                      cannot result in any distribution of its profits.’’); Honigman
                                      v. Commissioner, 466 F.2d 69, 74 (6th Cir. 1972) (noting that
                                      the below-market sale of corporate assets at issue diminished
                                      the net worth of the corporation), aff ’g in part, rev’g in part,
                                      and remanding 55 T.C. 1067 (1971); Goldstein v. Commis-
                                      sioner, 298 F.2d 562, 568 (9th Cir. 1962) (noting that cor-
                                      porate assets were reduced in the amount held to be a dis-
                                      guised dividend), aff ’g T.C. Memo. 1960–276; McCabe
                                      Packing Co. v. United States, 809 F. Supp. 614, 617 (C.D. Ill.
                                      1992) (holding that a shareholder’s use of a discarded
                                      slaughterhouse byproduct was not a constructive dividend to
                                      the shareholder because corporate assets were not distrib-
                                      uted or expended).
                                         We cannot see how TWC’s provision of services to Mr.
                                      Welle at cost resulted in the diversion of corporate assets or




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                                      426                 140 UNITED STATES TAX COURT REPORTS                                   (420)


                                      the distribution of its earnings and profits. Moreover, we do
                                      not think that TWC’s provision of services to Mr. Welle at
                                      cost was ‘‘in purpose or effect * * * an implement for the dis-
                                      tribution of corporate earnings’’ and profits. See Palmer v.
                                      Commissioner, 302 U.S. at 70.
                                         By contrast, in cases involving the bargain sale of property
                                      to a shareholder, we have held that the shareholder receives
                                      a constructive dividend equal to the excess of the fair market
                                      value over the sale price, see, e.g., Dellinger v. Commissioner,
                                      32 T.C. 1178, 1182–1183 (1959); Nelson v. Commissioner,
                                      T.C. Memo. 1982–361, 44 T.C.M. (CCH) 277, 281 (1982),
                                      aff ’d, 767 F.2d 667 (10th Cir. 1985); see also sec. 1.301–1(j),
                                      Income Tax Regs., because the property being sold is an
                                      asset of the corporation and its sale for less than fair market
                                      value diverts actual value otherwise available to the corpora-
                                      tion to or for the benefit of a shareholder, see Honigman v.
                                      Commissioner, 466 F.2d at 74; Goldstein v. Commissioner,
                                      298 F.2d at 568. Similarly, we have held that, where a cor-
                                      poration provides a shareholder with the use of corporate
                                      property and the shareholder does not fully and reasonably
                                      reimburse the corporation for its use, the shareholder has
                                      received a constructive dividend equal to the fair market
                                      value of the use of the property. See Melvin v. Commissioner,
                                      88 T.C. at 80–81. In Melvin, however, we observed that inci-
                                      dental or insignificant use of corporate property may not jus-
                                      tify a finding of a constructive dividend, id. at 82 (citing
                                      United Aniline Co. v. Commissioner, 316 F.2d 701, 703 (1st
                                      Cir. 1963), aff ’g T.C. Memo. 1962–60); see also Loftin &
                                      Woodard, 577 F.2d at 1214, and we specifically found that
                                      the taxpayer’s personal use of the property was not inci-
                                      dental to the taxpayer’s business use of the property, Melvin
                                      v. Commissioner, 88 T.C. at 82–83.
                                         TWC maintained its corporate infrastucture and workforce
                                      for business purposes. Mr. Welle’s use of TWC during the
                                      construction of petitioners’ lakefront home was at most inci-
                                      dental to those purposes. The most that can be said about
                                      Mr. Welle’s use of TWC is that he used the corporation as
                                      a conduit in paying subcontractors and vendors and that he
                                      obtained some limited services from corporate employees. Mr.
                                      Welle fully reimbursed the corporation for all costs, including
                                      overhead, associated with those services, and TWC did not
                                      divert actual value otherwise available to it by failing to




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                                      (420)                          WELLE v. COMMISSIONER                                         427


                                      apply its customary profit margin in determining the amount
                                      Mr. Welle had to reimburse the corporation. We therefore
                                      conclude that this arrangement did not operate as a vehicle
                                      for the distribution of TWC’s current or accumulated
                                      earnings and profits within the meaning of section 316(a).
                                      III. Conclusion
                                        We hold that Mr. Welle did not receive constructive divi-
                                      dend income when TWC provided services to him at cost and
                                      for which he timely paid. Accordingly, we do not sustain
                                      respondent’s deficiency determination, and we thus need not
                                      decide whether an accuracy-related penalty under section
                                      6662(a) would be appropriate.
                                        We have considered the parties’ remaining arguments, and
                                      to the extent not discussed above, conclude those arguments
                                      are irrelevant, moot, or without merit.
                                        To reflect the foregoing,
                                                                               Decision will be entered for petitioners.

                                                                               f




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