Opinion ID: 357068
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Heading: the remaining expenditures:

Text: 181 Absent the constructive dividend as a potential support for the finding of fraud, we must focus on the remainder of the expenditures in question: the travel expenses; advances; political campaign contributions; and premium payments received by Loftin from corporate funds. In all likelihood, proof of fraud as to any one of these items would mandate approval of the district court's finding of fraud as to the entire deficiency in which it appeared. Webb, 394 F.2d at 378. However, such proof is not present herein. 182 First, Woodard was the recipient of all but one of these expenditures in the years at issue the political campaign contributions. Yet, the district court did not find Woodard liable for fraud in any of these years. Unless there is evidence supporting a distinction between Loftin and Woodard as to their intent in not reporting the income connected with the assorted funds received by each from corporate coffers or there is evidence supporting a finding of fraud as to the expenditure received by Loftin alone, we must remand on the issue of fraud. 183 One possible explanation for the decision to find only Loftin liable is that the district court believed that as to the expenditures received by both Loftin and Woodard, Loftin intended to evade the tax known to be owing while Woodard did not. While this could be a plausible explanation, it is not so here because there is no basis in the record or in the district court's findings to support such a distinction. 73 In fact, the record suggests that as to the corporate expenditures received by both taxpayers, Loftin and Woodard should be treated in pari materia on the issue of intent. 184 Perhaps, then, the court's distinction between the two taxpayers for 1963 and 1964 was based on the fact that Loftin had not declared income arising from the political campaign contributions he received from the Corporation an item that Woodard did not receive. 74 The political contributions for his race for the Louisiana legislature totaled slightly over $4,000. Although it is unclear whether these payments were received in both 1963 and 1964, 75 that they were received in at least one of those years is beyond peradventure. 185 Were the state of the law as to political contributions clear in 1963, there would be little problem in resolving this matter. However, such is not the case. 186 Louisiana law, as of 1963, dictated that contributions by a corporation to a political party or person were prohibited. La.R.S. 18:1483. There is no question, then, that this contribution may have been impermissible as a matter of law. But this fact stands independent from an inquiry into whether the recipient, Loftin, should have known that the receipt of the contribution was a taxable event and whether his failure to declare that contribution was willful. In this regard, it is significant that while the dividend statute generally indicates that if the distribution is to a shareholder and it is out of earnings, it is a dividend, not all such distributions are in fact found to be constructive dividends. 187 There is no dearth of case law refusing to designate certain corporate distributions as constructive dividends. See, John Kelley Co. v. Commissioner of Internal Revenue, 326 U.S. 521, 66 S.Ct. 299, 90 L.Ed. 278 (1946); Bogardus v. Commissioner of Internal Revenue, 302 U.S. 34, 58 S.Ct. 61, 82 L.Ed. 32 (1937); Limericks, Inc. v. Commissioner of Internal Revenue, 165 F.2d 483 (5th Cir. 1948); and Paramount-Richards Theatres, Inc. v. Commissioner of Internal Revenue, 153 F.2d 602 (5th Cir. 1946). The nature of the distribution only can be decided within the factual context of each case. 188 Simply stated, 189 Whether or not a corporate distribution is a dividend or something else, such as a gift, compensation for services, repayment of a loan, or payment of property purchased, presents a question of fact to be determined in each case. 190 Lengsfield v. Commissioner of Internal Revenue, 241 F.2d 508 (5th Cir. 1957). See, Hoover v. Commissioner, 27 T.C.M. 226 (1968). 191 Instances of corporate distributions which were not found to be  dividends are numerous. For example, when an interest payment is made by a corporation to a stockholder, the court must decide whether the relationship of the stockholder to the corporation is one of creditor and debtor. This is mandatory, despite the fact that such a payment from the corporation would fit within the language of 26 U.S.C. § 301, the statute describing a dividend. See, McSorley's Inc. v. United States, 323 F.2d 900 (10th Cir. 1963). The basic tenet underlying the decision not to categorize corporate distributions as dividends, despite their appearance to the contrary, is embodied in Regulation § 1.301-1(c). This regulation makes § 301, which sets forth (r) ules applicable with respect to distributions of money and other property (,) . . . not applicable to an amount paid by a corporation to a shareholder unless the amount is paid to the shareholder in his capacity as such. Thus, interest paid to a stockholder who is a bona fide creditor is not a dividend nor are payments made to a stockholder who is a bona fide lessor. 192 In a similar vein, Loftin may have believed that the political contributions made to him were not income as long as he utilized them for political purposes. The state of the law at that time does not preclude such a conclusion. In line with this, it is clear from the record that Loftin explained that his failure to declare these amounts as income rested upon a belief that he was acting in a manner beneficial to the Corporation since his election would redound to its benefit. See, testimony of IRS Agent French, App. 1043. 193 It is significant, in this regard, that by 1963, taxpayers still were bound by the guidance provided in Revenue Ruling 54-80: 194 Where a political gift is received by an individual or political organization and it is held or used for the purposes intended, i. e., for present or future expenses of a political campaign or for some similar purpose, it is not taxable income to the recipient. 195 1954-1 Cum.Bull. 11. At the same time, the ruling cautions, unlike its 1939 precursor, that funds diverted to personal use must be declared as taxable income. 196 This ruling provided a foundation for the court's opinion in O'Dwyer v. Commissioner of Internal Revenue, 266 F.2d 575 (4th Cir. 1959), a case concluding, under Ruling 54-80, that had the taxpayer not diverted political contributions to personal use, he would not have incurred taxable income therefrom. The O'Dwyer court decided, in 1959, that Revenue Ruling 54-80 was declaratory of judicial interpretation of existing law. O'Dwyer, 266 F.2d at 586. In United States v. Jett, a case involving a charge of criminal tax evasion premised on facts comparable to those found in the case sub judice, Revenue Ruling 54-80 was established as the reigning legal principle as of 1961. 352 F.2d 179, 182 (6th Cir. 1965). This trend was carried through at least as far as 1970 by United States v. Miriani, 422 F.2d 150, 152 (6th Cir. 1970) a date subsequent to the time frame at issue in this case. 197 Thus, in 1963, Loftin rightfully could have relied on Revenue Ruling 54-80 in seeking guidance with regard to the proper tax treatment of political contributions. According to this ruling, the receipt of the contribution, without more, did not signal a taxable event. The advice of this ruling, in combination with the fact that not all corporate distributions to shareholders were and are constructive dividends, suggest that an inference of fraudulent intent could not be supported atop the political campaign contribution alone. 198 The income tax characteristics of the political contributions received by Loftin are and were too uncertain to support a finding of fraud without more direct evidence that Loftin knew that he had an obligation to report such funds. This is not Webb, supra, where the taxpayer was found liable for fraud because he persistently failed to supply the proper information to the tax authorities after being warned to do so several times. Webb, 394 F.2d at 380. Nor is the present case comparable to Benes, supra, where the taxpayer did not admit to his accountant until the year in which his corporation completed its work for him four years after the work in question had been commenced that he may have withheld certain information from him. Finally, we are not faced here with the type of fraudulent taxpayer present in Merritt a taxpayer whose consistent and substantial understatement of income was accompanied by a failure to maintain complete and accurate records and by a decision to withhold from the bookkeeper a substantial amount of vital data needed in the maintenance of complete and accurate records. Indeed, the testimony that we have before us indicates that Loftin was cooperative and forthright in the course of the audit of these potentially fraudulent deficiencies. 199 In sum, while the Corporation would have been remiss had it taken deductions for the contributions made, both from the perspective of Revenue Ruling 54-80 and the Louisiana law prohibiting such contributions, this fact has no bearing on the issue of Loftin's fraud as an individual taxpayer. His involvement with potential corporate fraud in requesting certain deductions cannot support a finding of fraud on his individual tax return in this instance. 76 200 The evidence before us does not substantially support a finding of fraudulent intent as to Loftin. The trial court is directed to reconsider this issue on remand in a manner consistent with the above instructions.