Opinion ID: 357068
Heading Depth: 2
Heading Rank: 2

Heading: post-transfer expenses:

Text: 144 The issue of post-transfer expenses presents a more difficult problem. As was noted above, the district court did not deny deductibility as to the full amount of these expenses. Instead, the Corporation was permitted to deduct that portion which did not exceed the payments made to it in each respective year. 145 The predicate for this denial was the district court's resolution of the constructive dividend issue. Because expenses incurred in conferring a dividend, constructive or otherwise, are not deductible and because the district court determined that expenses incurred in excess of payments received by the Corporation represented constructive dividends to the shareholders, the excess was deemed to be non-deductible by the Corporation. See, United States v. Smith, 418 F.2d 589, 596 (5th Cir. 1969). 146 We note, at the outset, that our decision to vacate as to the constructive dividend issue necessarily mandates that we vacate and remand as to the deduction of post-transfer expenses because the former is an essential predicate of the latter. However, in addition to this overriding problem, we are troubled with a further aspect of the district court's treatment of the post-transfer expenses which we discuss now in an effort to avoid further delays in the resolution of this matter. 147 The district court chose to measure the deductions on a fiscal year basis. That is, the court arrived at a determination of the non-deductible excess of costs over payments by matching costs and payments in each of the Corporation's fiscal years. At first glance, this is appealing given that the Corporation, which was the entity seeking the deductions, had selected a fiscal tax year for reporting its income. However, the choice of a fiscal year period is less convincing when one considers that the district court chose to link the issue of the deductibility of costs with the issue of the constructive dividend. The constructive dividend was measured on a calendar year and if the deductibility of a portion of the expenses was denied because those expenses represented a constructive dividend, as determined on a calendar year basis, it would appear to be inconsistent to measure the excess portion within a different time frame for purposes of resolving the deduction issue. 148 Thus, if the district court, on remand, decides that a constructive dividend was conferred on the basis of the land clearing operation, it must measure the portion of non-deductible expenses related thereto in a manner consistent with its measurement of the constructive dividend should they remain inextricably related, as they are under the present approach of the district court.