                        T.C. Memo. 2007-273



                      UNITED STATES TAX COURT



                 DANIEL L. REEVES, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 8734-02.              Filed September 12, 2007.



     Daniel L. Reeves, pro se.

     Wesley F. McNamara, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     HAINES, Judge:   Respondent determined a deficiency in

petitioner’s Federal income tax for 1995 of $74,571.1




     1
       Unless otherwise indicated, all section references are to
the Internal Revenue Code, as amended, and Rule references are to
the Tax Court Rules of Practice and Procedure. Amounts are
rounded to the nearest dollar.
                                - 2 -

     The issue for decision is whether petitioner received

constructive dividends from a company in which he was the sole

shareholder.

                           FINDINGS OF FACT

     The parties’ stipulation of facts and the attached exhibits

are incorporated herein by this reference, and the facts

stipulated are so found.    At the time the petition was filed,

petitioner resided in Wilsonville, Oregon.

A.   Petitioner’s Background

     In 1995, petitioner was the president, secretary, treasurer,

and sole shareholder of Vitamin Village, Inc. (VVI), and

performed all of its managerial duties, including managing VVI’s

product research and development, production, sales, marketing,

and advertising.2   VVI, with a fiscal year ending (FYE) June 30,

was in the business of producing, distributing, and selling skin

care products, tanning lotions, diet aids, sports performance

products, nutritional supplements, health food products, and

apparel at both the retail and wholesale levels.

B.   Petitioner’s Home and the Floating Structures

     On September 24, 1993, petitioner purchased 1.2 acres along

the Willamette River in Newberg, Oregon, which included his

family residence and a dilapidated houseboat and a floating dock


     2
       Petitioner incorporated Universal Marketing, Inc. (UMI),
on June 1, 1995, to perform VVI’s branding, marketing, and
advertising.
                               - 3 -

on the river behind and down a hill from the residence.    The

residence was a two-story house with approximately 2,200 square

feet per floor.   The first floor was a daylight basement used by

the previous owner to store automobiles.   The houseboat and the

dock were connected to petitioner’s property by a rundown

gangway.   The houseboat, the dock, and the gangway were in a poor

and dangerous condition.

     Shortly after petitioner purchased the property, petitioner

and VVI entered into a lease agreement for $1,000 a month to

provide VVI with access from petitioner’s residence to the

houseboat and the dock, the use of his utilities, and the use of

his parking lot, boat, and jet skis for advertising and

promotional purposes.3   VVI also rented the first floor of

petitioner’s residence for $700 a month to store goods.

     In 1995, petitioner and VVI removed the dilapidated

houseboat and the dock and hired a contractor to build a new

houseboat, a 100-foot dock, and a floating garage (floating

structures).   Construction of the floating structures was

completed in the spring of 1996, and they were placed into




     3
       The $1,000 a month also allowed access to petitioner’s
tennis court and an enclosed area where corporate guests could
place their children so they would be safe from accidently
falling into the Willamette river.
                                - 4 -

service on May 28, 1996.4   The Oregon State Marine Board listed

VVI as the owner and petitioner as the coowner.5

     The new houseboat was approximately 43 feet long and 28 feet

wide.    It had one floor with three rooms including a living area,

a photo studio, and office space, and an open air deck on top

which included an outdoor cafe.   Adjacent to the new houseboat

was the floating garage where petitioner’s boat and jet skis and

VVI’s tables and chairs were stored.    The garage was covered and

securely locked.

     Petitioner and VVI shared the costs of the floating

structures’ construction.   Petitioner paid $80,717 in 1995 and

VVI paid a total of $185,327:   $95,046 in FYE June 30, 1995, and

$90,281 in FYE June 30, 1996.   Petitioner was not reimbursed.

VVI capitalized the $185,327 and planned to depreciate the costs

over a 39-year period.   VVI reported these expenditures on its

Forms 4562, Depreciation and Amortization, as leasehold

improvements involving nonresidential real property.

     VVI and UMI used the floating structures for promotional

events, meetings, and advertising photo shoots.    Petitioner used

the floating structures for personal purposes approximately 10




     4
       VVI’s Form 4562, Depreciation and Amortization, reported
the property was placed into service on May 28, 1996.
     5
       Petitioner claimed that only VVI owned the floating
structures and he was listed as a coowner because the State
required an individual contact.
                                 - 5 -

times a year.   Neither petitioner nor VVI kept a log of the use

of the floating structures.

     In 2002, petitioner sold his residence in Newberg, Oregon,

as part of a bankruptcy sale.    As part of the sale, VVI sold the

floating structures to petitioner’s wife’s company, Royal Sun

Properties, L.L.C., for $100,000 with $55,000 paid as a

downpayment.6

                                OPINION

     Respondent contends petitioner was the primary beneficiary

of the floating structures and VVI received only a slight benefit

from its use of the property.    As a result, VVI’s expenditure of

$185,327 to construct the floating structures constituted a

constructive dividend to petitioner.

     When corporate property that serves no legitimate corporate

purpose is used by a shareholder for personal purposes, the value

of that property is includable in the shareholder’s income as a

constructive dividend to the extent of the corporation’s earnings

and profits.7   Falsetti v. Commissioner, 85 T.C. 332, 356 (1985).

According to the Court of Appeals for the Ninth Circuit, to which


     6
       As of the date of trial, Royal Sun Properties, L.L.C.,
still owed VVI $45,000.
     7
       Where substantial business and personal uses of the
property exist, the expenses may be allocated. Intl. Artists,
Ltd. v. Commissioner, 55 T.C. 94, 105 (1970). Such allocation
depends upon a comparison of the personal and business
considerations. Id.
                                 - 6 -

an appeal of this case would lie, for the value of the personal

use of corporate property to be treated as a constructive

dividend, the expenses must:    (1) Be nondeductible by the

corporation; and (2) represent some economic gain or benefit to

the shareholder.   Palo Alto Town & Country Village, Inc. v.

Commissioner, 565 F.2d 1388, 1391 (9th Cir. 1977) (the Tax Court

must find appropriate facts in the record to support a

determination that disallowed expenses constitute constructive

dividends to the taxpayer), affg. in part, revg. in part, and

remanding T.C. Memo. 1973-223.    A corporation’s inability to

substantiate a deduction, without more, is not grounds for

treating corporate expenditures as constructive dividends to the

individual.   Erickson v. Commissioner, 598 F.2d 525, 531 (9th

Cir. 1979), affg. in part and revg. in part T.C. Memo. 1976-147;

Palo Alto Town & Country Village, Inc. v. Commissioner, supra at

1391; Nicholls, North, Buse Co. v. Commissioner, 56 T.C. 1225,

1238-1239 (1971); Ashby v. Commissioner, 50 T.C. 409, 417-418

(1968).   Petitioner has the burden of proving respondent’s

determinations are incorrect.    See Rule 142(a).

     This Court found in Vitamin Village, Inc. v. Commissioner,

T.C. Memo. 2007-272, that VVI was not entitled to claim

depreciation deductions for the costs incurred in constructing

the floating structures because it failed to substantiate its

business use of the structures in its FYE June 30, 1995 and 1996.
                               - 7 -

This fact alone is not sufficient grounds for treating the costs

of building the floating structures as constructive dividends to

petitioner.   See Nicholls, North, Buse Co. v. Commissioner, supra

at 1238-1239.

     In support of his contention respondent argues that the

floating structures conferred an economic gain and benefit upon

petitioner because they “reflected a positive light upon

petitioner’s standing in the community and his wealth”, they

provided “prestige and [a] positive, youthful image”, and they

provided security and covered moorage for his boat and jet skis,

and petitioner used the property approximately 10 times a year

for personal purposes.8

     The record does not indicate petitioner personally received

an economic gain or benefit from the floating structures in 1995.

They were under construction in 1995 and were not available for

use until May 28, 1996.   Moreover, title to the floating

structures was in VVI’s name, and when petitioner sold his

residence as part of his bankruptcy in 2002, VVI was compensated

for the accompanying sale of the floating structures.


     8
       On brief, respondent additionally argued that petitioner
economically benefited when he used the floating structures to
justify draws from VVI of $1,000 per month pursuant to the lease
agreement between VVI and petitioner. However, respondent did
not assert that the lease agreement between VVI and petitioner
lacked corporate purpose, that VVI was not entitled to deduct its
leasehold payments, or that petitioner did not report VVI’s
leasehold payments as income.
                                 - 8 -

     Although after May 28, 1996, petitioner used the floating

structures approximately 10 times a year for personal purposes,

including the storage of his boat and jet skis, he paid $80,717

out of his own pocket to construct the floating structures.9

Consequently, his interest (approximately 30 percent) in the

structures allowed him a reasonable amount of personal use

without conferring an economic gain or benefit upon him.       The

record does not indicate petitioner used the floating structures

in an unreasonable manner.

     Therefore, this Court finds petitioner did not receive an

economic gain or benefit from his personal use of the floating

structures.   Accordingly, petitioner did not receive a

constructive dividend for the amounts VVI paid to construct the

floating structures.

     The Court, in reaching its holding, has considered all

arguments made and concludes that any arguments not mentioned

above are moot, irrelevant, or without merit.

     To reflect the foregoing,


                                         Decision will be entered

                                 for petitioner.




     9
       Total cost of constructing the floating structures was
$266,044, of which VVI and petitioner paid approximately 70
percent ($185,327) and 30 percent, respectively.
