                   T.C. Summary Opinion 2005-52



                      UNITED STATES TAX COURT



              WILLIAM H. BRUECHER III, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent

         BRUECHER FOUNDATION SERVICES, INC., Petitioner v.
            COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 21530-03S, 21531-03S.       Filed April 25, 2005.


     Kent Mason Leediker, for petitioners.

     Daniel N. Price, for respondent.



     GOLDBERG, Special Trial Judge:     These consolidated cases

were heard pursuant to the provisions of section 7463 of the

Internal Revenue Code in effect at the time the petitions were

filed.   The decisions to be entered are not reviewable by any

other court, and this opinion should not be cited as authority.

Unless otherwise indicated, subsequent section references are to
                                   - 2 -

the Internal Revenue Code in effect for the years in issue, and

all Rule references are to the Tax Court Rules of Practice and

Procedure.

     Respondent determined deficiencies in petitioners’ Federal

income taxes and additions to tax as follows:

     William H. Bruecher III--Docket No. 21530-03S

         Taxable      Deficiency           Addition to Tax
          Year                             Sec. 6651(a)(1)

          1998         $17,602                   -0-

          1999         $10,077                 $504

     Bruecher Foundation Services, Inc.--Docket No. 21531-03S

         Taxable      Deficiency           Addition to Tax
          Year                             Sec. 6651(a)(1)

         3/31/20001    $3,792                   $948
     1
      Corporate fiscal tax year ending Mar. 31, 2000.

     After concessions, the issues for decision are: (1) Whether

petitioner William H. Bruecher, III received constructive

dividends from Bruecher Foundation Services, Inc., in tax years

1998 and 1999 in the amounts of $33,082 and $48,112,

respectively; and (2) whether petitioner Bruecher Foundation

Services, Inc., is liable for the addition to tax under section

6651(a)(1) in the amount of $948.

                             Background

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

The stipulation of facts and the attached exhibits are
                               - 3 -

incorporated herein by this reference.   Petitioner William H.

Bruecher III (Mr. Bruecher) resided in Austin, Texas, and

petitioner Bruecher Foundation Services, Inc. (Bruecher

Foundation) had its principal place of business in Texas at the

time of the filing of the respective petitions.

     Mr. Bruecher started Bruecher Foundation as a sole

proprietorship in 1989 and incorporated it in approximately 1994.

Bruecher Foundation was engaged in the business of repairing

foundations of homes and “light” apartment buildings.   Mr.

Bruecher is the sole shareholder of Bruecher Foundation and its

chief executive.   He actively operates Bruecher Foundation.

     Bruecher Foundation has a history of not paying Mr. Bruecher

a salary or a dividend.   During the taxable years in issue, Mr.

Bruecher did not maintain a personal bank account.   Mr. Bruecher

used Bruecher Foundation’s bank account as his own, paying both

his personal expenses and some expenses related to his Schedule C

“landscaping/foundation” business from the corporate bank

account.   During those years, Mr. Bruecher maintained a business

banking account for his Schedule C business, which account was

separate from Bruecher Foundation’s corporate banking account.

Bruecher Foundation characterized the payments of Mr. Bruecher’s

personal expenses as “advances”, recording the amounts paid on

his behalf on its books under the account heading “Advance -

Bruecher, WM.”
                               - 4 -

     Early in 1998, the balance in the “Advance - Bruecher, WM.”

account grew to more than $191,000.    At that point, Mr.

Bruecher’s accountant reclassified about $114,000 of these

advances as wages paid to Mr. Bruecher and filed an amended Form

941, Employer’s Quarterly Federal Tax Return, for the first

quarter of taxable year 1998, reporting said payment.1      Mr.

Bruecher reported the $120,000 as wages on his 1998 Form 1040,

U.S. Individual Income Tax Return.     After the reclassification,

the “Advance - Bruecher, WM.” account had a balance of about

$77,000.

     Mr. Bruecher continued to pay his personal expenses from the

corporation’s bank account.   Within 9 months of the deemed

payment of wages, the balance in the “Advance - Bruecher, WM.”

account increased to $120,325.48.     The following table contains

examples of expenses recorded under the “Advance - Bruecher, WM.”

account and are taken directly from Bruecher Foundation’s general

ledger for the relevant time period:




     1
      The following table reconciles the decrease in the “Advance
- Bruecher, WM.” account and Bruecher Foundation’s deemed payment
of wages:
          Decrease in “Advance - Bruecher, WM.”   $114,019.20
          Social Security tax (payroll tax)          4,240.80
          Medicare tax (payroll tax)                 1,740.00
             Total                                 120,000.00
                                      - 5 -
Payment Type     Date       Number   Name of Payee      Memo              Amount

  Check        06/03/1998   9884     Karen Robinson    Child Support      $800.00
  Check        06/12/1998   9908     Lori Bruecher     Per Divorce       2,000.00
                                                        Agreement
  Check        07/04/1998   10022    Albertsons                            68.03
  Check        07/07/1998   10028    Best Buy          Television         443.80
  Check        09/04/1998   10126    Seventeen         Magazine Sub.       29.95
  Check        09/11/1998   10267    Green Tree        Harley Davidson    355.04
  Check        09/15/1998   10276    Margaret          Sea Doo            500.00
                                     Kilpatrick
  Check        10/11/1998   10399    Pat H.            Boat Repair        300.00
  Check        12/10/1998   10640    Internal          1997 1040 tax,     425.80
                                     Revenue Service    penalty & int.

     As this table shows, Mr. Bruecher used Bruecher Foundation’s

bank account to pay various personal expenses.             Rather than

recognizing any of these payments made on behalf of Mr. Bruecher

as deemed wages or dividends, the payments continued to be ear-

marked as “advances” and caused the “Advance -Bruecher, WM.”

account to exceed $141,000 at the close of Bruecher Foundation’s

fiscal year ending March 31, 1999.            Even with certain adjustments

to the “Advance - Bruecher, WM.” account2 to recognize rent paid

to Mr. Bruecher for the corporation’s use of real property, by

the close of calendar year 1999, the account balance exceeded

$200,000.

     There were no written agreements such as promissory notes

between Mr. Bruecher and Bruecher Foundation concerning the

“advances” to Mr. Bruecher.          Mr. Bruecher did not give any

collateral in consideration for these “advances”.              Bruecher

Foundation did not ask for or charge Mr. Bruecher interest and


     2
      For the fiscal year ending Mar. 31, 2000, the account
“Advance - Bruecher, WM.” was labeled “Advance Officer” in
Bruecher Foundation’s general ledger.
                               - 6 -

did not require a repayment schedule for such “advances”.

Bruecher Foundation did report the “advances” as a liability on

each of its Forms 1120, U.S. Corporation Income Tax Return,

Schedule L, Balance Sheets per Books for the fiscal tax years

1998 and 1999.

     In the notice of deficiency issued to Mr. Bruecher,

respondent determined that for tax years 1998 and 1999 he

received constructive dividends in the amounts of $33,082 and

$48,112, respectively.   These amounts were computed by using

figures in the “Advance - Bruecher, WM.” account adjusted as

follows:

Tax Year 1998

                 Date                           Amount

     04/01/1998 - Beginning balance            $77,318
     12/31/1998 - Ending balance               120,325
     Difference - Increase in balance           43,007
     Corporate expenses paid by
          Mr. Bruecher1                          9,925
     Net constructive dividends                 33,082
                                - 7 -

Tax Year 1999

                 Date                            Amount

     01/01/1999 - Beginning balance             $120,325
     12/31/1999 - Ending balance                 177,863
     Difference - Increase in balance             57,538
     Corporate expenses paid by
          Mr. Bruecher1                            9,426
     Net constructive dividends                   48,112
     1
      Such expenses could arguably be classified as contributions
of capital by Mr. Bruecher to his corporation; however,
respondent used these amounts to reduce the net constructive
dividends.

                              Discussion

1.   Constructive Dividends

     As stated previously, respondent determined that Mr.

Bruecher received constructive dividends from Bruecher Foundation

in tax years 1998 and 1999 in the amounts of $33,082 and $48,112,

respectively.    However, Mr. Bruecher argues that such

distributions were loans from Bruecher Foundation and were made

with the intent of being repaid.

     The Commissioner is authorized to reconstruct income in

accordance with any reasonable method that accurately reflects

actual income.    Secs. 446(b), 6001; Petzoldt v. Commissioner, 92

T.C. 661, 687 (1989); Meneguzzo v. Commissioner, 43 T.C. 824, 831

(1965); see Taglianetti v. United States, 398 F.2d 558, 562 (1st

Cir. 1968), affd. on other grounds 394 U.S. 316 (1969).    The

reconstruction of a taxpayer’s income need only be reasonable in

light of the surrounding facts and circumstances.    Giddio v.
                                - 8 -

Commissioner, 54 T.C. 1530, 1533 (1970); Schroeder v.

Commissioner, 40 T.C. 30, 33 (1963).     Furthermore, it is

axiomatic that “The Commissioner and the reviewing courts are

permitted to fully examine any transaction to determine its

economic and financial reality.”     Noble v. Commissioner, 368 F.2d

439, 443 (9th Cir. 1966), affg. T.C. Memo. 1965-84.     Those

transactions which lack economic substance may be ignored.      See,

e.g., Gregory v. Helvering, 293 U.S. 465, 467 (1935); Muhich v.

Commissioner, 238 F.3d 860, 864 (7th Cir. 2001), affg. T.C. Memo.

1999-192.

     Section 61(a) defines gross income as “all income from

whatever source derived”.    The regulations demonstrate the term’s

expanse:    “Gross income includes income realized in any form,

whether in money, property, or services.”     Sec. 1.61-1(a), Income

Tax Regs.; see Han v. Commissioner, T.C. Memo. 2002-148 (citing

Commissioner v. Glenshaw Glass Co., 348 U.S. 426, 431 (1955)).

As the Supreme Court explained, an amount “constitutes taxable

income when its recipient has such control over it that, as a

practical matter, he derives readily realizable economic value

from it.”    Rutkin v. United States, 343 U.S. 130, 137 (1952).

     However, funds distributed by a corporation to a shareholder

over which the shareholder has dominion and control generally are

taxed under the auspices of section 301(c).      Barnard v.

Commissioner, T.C. Memo. 2001-242.      Pursuant to section 301(c), a
                              - 9 -

dividend is taxed as ordinary income only to the extent of the

distributing corporation’s earnings and profits;3 any excess is a

nontaxable return of capital to the extent of the taxpayer’s

basis; and any remaining amount received is taxable as capital

gain from the sale or exchange of a capital asset.   Sec.

301(c)(1), (2), and (3); Truesdell v. Commissioner, 89 T.C. 1280,

1295-1298 (1987); Barnard v. Commissioner, supra.    The parties

have stipulated that for the fiscal years ending March 31, 1999

and March 31, 2000, Bruecher Foundation had current and

accumulated earnings and profits in excess of the “advances” at

issue in these cases.

     It is well established that “A greater potential for

constructive dividends * * * exists in closely held corporations,

where dealings between stockholders and the corporation are

commonly characterized by informality.”   Zhadanov v.

Commissioner, T.C. Memo. 2002-104.

     “Corporate expenditures constitute constructive dividends

only if 1) the expenditures do not give rise to a deduction on

behalf of the corporation, and 2) the expenditures create

‘economic gain, benefit, or income to the owner-taxpayer.’”    P.R.

Farms, Inc. v. Commissioner, 820 F.2d 1084, 1088 (9th Cir. 1987)

(quoting Meridian Wood Prods. Co. v. United States, 725 F.2d


     3
      The determination and calculation of earnings and profits
is governed by sec. 316 and the regulations promulgated
thereunder.
                             - 10 -

1183, 1191 (9th Cir. 1984)), affg. T.C. Memo. 1984-549).    “The

crucial concept in a finding that there is a constructive

dividend is that the corporation has conferred a benefit on the

shareholder in order to distribute available earnings and profits

without expectation of repayment.”    Truesdell v. Commissioner,

supra at 1295 (citing Noble v. Commissioner, supra at 443); see

Williams v. Commissioner, 627 F.2d 1032, 1034 (10th Cir. 1980)

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

(10th Cir. 1975)), affg. T.C. Memo. 1978-306.

     “To constitute a distribution taxable as a dividend, the
     benefit received by the shareholder need not be considered
     as a dividend either by the corporation or its shareholders,
     declared by the board of directors, nor other formalities
     of a dividend declaration need be observed, if on all the
     evidence there is a distribution of available earnings or
     profits under a claim of right or without any expectation of
     repayment.” * * *

Noble v. Commissioner, supra at 443 (quoting Clark v.

Commissioner, 266 F.2d 698, 711 (9th Cir. 1959)).   A

“constructive dividend” is “simply a corporate disbursement that

is a dividend in the contemplation of law though not called such

by the corporation making the disbursement.”    United States v.

Mews, 923 F.2d 67, 68 (7th Cir. 1991).   Furthermore, to be a

constructive dividend to a shareholder, the corporation need not

pay it directly to the shareholder.    Id.

     The first consideration in determining whether a

shareholder’s withdrawals or advances from a corporation

constitute loans or constructive dividends is whether, at the
                               - 11 -

time of the withdrawals or advances, the shareholder intended to

repay the amounts received and the corporation intended to

require repayment.    Miele v. Commissioner, 56 T.C. 556, 567

(1971), affd. without published opinion 474 F.2d 1338 (3d Cir.

1973).   Respondent’s determination that the withdrawals or

advances constitute constructive dividends, and therefore gross

income, is presumptively correct, and petitioners bear the burden

of proving that respondent’s determination is erroneous.    Rule

142(a); Welch v. Helvering, 290 U.S. 111 (1933); Miele v.

Commissioner, supra at 567.    Section 7491(a) shifts the burden of

proof to the Commissioner under certain circumstances.    The

burden does not shift with respect to any factual issue relating

to the present cases because petitioners did not introduce

credible evidence.    Sec. 7491(a)(1).

     A court may look to various factors to determine intent to

repay, but, once the taxpayer’s intent is found, that finding is

conclusive of the legal issue of loans versus dividends.      Busch

v. Commissioner, 728 F.2d 945, 948-949 (7th Cir. 1984), affg.

T.C. Memo. 1983-98.    The issue of taxpayer intent in the loan

versus dividend context is a question of fact, and, even though

one must look at objective facts to determine intent, it is the

taxpayer’s actual intent or actual motive with which the Court is

concerned.   Id. at 949; see also United States v. Pomponio, 563

F.2d 659, 662 (4th Cir. 1977); Livernois Trust v. Commissioner,
                              - 12 -

433 F.2d 879, 883 (6th Cir. 1970), affg. T.C. Memo. 1969-111;

Berthold v. Commissioner, 404 F.2d 119, 121 (6th Cir. 1968),

affg. T.C. Memo. 1967-102.

     Establishing the taxpayer’s intent by direct evidence is

extremely difficult.   Dean v. Commissioner, 57 T.C. 32, 43-44

(1971).   Consequently, we must consider the taxpayer’s testimony

that he intended to repay, although such testimony is not

determinative, and must consider objective factors to determine

whether an advance constitutes a loan or a dividend.    The

following objective factors are often considered in deciding

whether shareholder withdrawals or advances from a corporation

are loans or constructive dividends:   (1) The extent of

shareholder control of the corporation; (2) the retained earnings

and dividend history of the corporation; (3) the size of the

withdrawals; (4) the presence of conventional indicia of debt,

such as promissory notes, collateral, and provision for interest;

(5) treatment of advances in corporate records; (6) the history

of repayment; and (7) the shareholder’s use of the funds.     Busch

v. Commissioner, supra at 948; see also Alterman Foods, Inc. v.

United States, 505 F.2d 873, 877 n.7 (5th Cir. 1974).

     Other objective criteria include “‘whether the corporation

imposed a ceiling on the amounts that might be borrowed, whether

there were definite maturity dates, attempts to force repayment,

intention or attempts to repay, and the shareholder’s ability to
                                - 13 -

liquidate the loan.’”     Williams v. Commissioner, supra at 1035

(quoting Dolese v. United States, 605 F.2d 1146, 1153 (10th Cir.

1979)).   None of these factors, standing alone, is determinative

of the issue before us.     Alterman Foods, Inc. v. United States,

supra at 876-877 n.6.   However, these factors are useful in

determining whether there is a true intention to repay.

     As previously stated, Mr. Bruecher is the sole shareholder

of Bruecher Foundation.    He actively directs and operates

Bruecher Foundation and makes the decisions as to the timing,

amounts, and uses of the funds advanced by Bruecher Foundation.

     Prior to 1998, Bruecher Foundation had paid Mr. Bruecher

neither a salary nor a dividend.    Mr. Bruecher first received a

salary early in 1998 when his accountant reclassified about

$114,000 of “advances” as wages.    It is clear that Mr. Bruecher

used Bruecher Foundation’s bank account to pay his own personal

expenses and in certain instances expenses related to his

Schedule C “landscaping/foundation” business.    In fact, for tax

years 1998 and 1999, Mr. Bruecher maintained a business banking

account for his Schedule C business, which was separate from

Bruecher Foundation’s banking account.    He did not maintain his

own separate personal bank account.

     There were no written agreements such as promissory notes

between Mr. Bruecher and Bruecher Foundation concerning the

“advances” to Mr. Bruecher.    Mr. Bruecher did not give any
                                - 14 -

collateral in consideration for these “advances”.    Bruecher

Foundation did not ask for or charge Mr. Bruecher interest and

did not require a repayment schedule for such “advances”.

Bruecher Foundation did report the “advances” as a liability on

each of its Forms 1120 for the fiscal tax years 1998 and 1999.

     As previously noted, in the notice of deficiency issued to

Mr. Bruecher, respondent determined for tax years 1998 and 1999

that he received constructive dividends in the amounts of $33,082

and $48,112, respectively.    The computation of these amounts was

previously explained.    Furthermore, Mr. Bruecher did not argue

that such amounts were inaccurate.

     Mr. Bruecher argues that he intended, in good faith, to

create a debtor/creditor relationship with Bruecher Foundation

and that he did have the intent of repaying these “advances”.

However, the only evidence presented by Mr. Bruecher which would

indicate that these “advances” were loans was the corporate

income tax returns (Forms 1120) and Mr. Bruecher’s self-serving

testimony.    However, while this evidence is to be considered, it

is not controlling.    “Book entries and records may not be used to

conceal a situation which is not in reality what it is made to

appear.”    Fenn v. Commissioner, T.C. Memo. 1980-229.

     Based upon the objective circumstances, we must reject Mr.

Bruecher’s contention that the “advances” at issue were bona fide

loans.     We conclude that such amounts were constructive dividends
                             - 15 -

distributed to Mr. Bruecher from Bruecher Foundation.

Respondent’s determination that Mr. Bruecher received

constructive dividends is sustained.

2.   Section 6651(a)(1)--Failure To File

     Respondent determined that Bruecher Foundation is liable for

an addition to tax under section 6651(a)(1) in the amount of $948

for taxable year ended March 31, 2000.

     Section 6651(a)(1) imposes an addition to tax for the

failure to file timely a required return unless the failure is

due to reasonable cause and not due to willful neglect.

“Reasonable cause as applied in section 6651 has been defined as

the ‘exercise of ordinary business care and prudence.’”     Estate

of Duttenhofer v. Commissioner, 49 T.C. 200, 204 (1967) (quoting

Southeastern Fin. Co. v. Commissioner, 153 F.2d 205 (5th Cir.

1946), affg. 4 T.C. 1069 (1945)), affd. 410 F.2d 302 (6th Cir.

1969); see also sec. 301.6651-1(c)(1), Proced. & Admin. Regs.

(“If the taxpayer exercised ordinary business care and prudence

and was nevertheless unable to file the return within the

prescribed time, then the delay is due to a reasonable cause.”).

     Whether the failure to file on time was due to reasonable

cause is primarily a question of fact to be decided from all the

circumstances in a particular case.    See Estate of Duttenhofer v.

Commissioner, supra.
                              - 16 -

     Bruecher Foundation’s tax return for taxable year ending

March 31, 2000, was filed more than 8 months after the due date

of June 15, 2000.   Bruecher Foundation claims that its failure to

file its return in a timely manner was due to reasonable cause in

that Bruecher Foundation relied on its accountant to file a

request for an extension for such tax return.    Mr. Bruecher

testified that his accountant, Richard Heiling (Mr. Heiling),

usually filed for extensions for Bruecher Foundation returns and

that he believed Mr. Heiling had done so for taxable year ended

March 31, 2000.   However, Mr. Bruecher failed to produce any

evidence that an extension request was filed or that his reliance

was reasonable.   Accordingly, although Bruecher Foundation has

provided a reason for failing to timely file, it has not provided

a reason for which its failure to file can be excused.

3.   Conclusion

     We have considered all of the other arguments made by the

parties, and, to the extent that we have not specifically

addressed them, we conclude they are without merit.

     Reviewed and adopted as the report of the Small Tax Case

Division.

                                    Decisions will be entered

                               for respondent.
