Court Opinion

ID: 2964605
Source: CourtListenerOpinion
Date Created: 2015-09-21 21:28:11.17484+00
Date Added: 2024-06-11T11:42:58.434101
License: Public Domain

USCA1 Opinion

	

                            UNITED STATES COURT OF APPEALS
                                FOR THE FIRST CIRCUIT
                                 ____________________

        No. 96-1730

                      EARL O. BERGERSEN and EVELYN K. BERGERSEN,

                                     Petitioners,

                                          v.

                          COMMISSIONER OF INTERNAL REVENUE,

                                     Respondent.

                                 ____________________

                APPEAL FROM A DECISION OF THE UNITED STATES TAX COURT

                             [Hon. Edna G. Parker, Judge]
                                                   _____

                                 ____________________

                                        Before

                                 Selya, Circuit Judge,
                                        _____________

                            Bownes, Senior Circuit Judge,
                                    ____________________

                             and Boudin, Circuit Judge. 
                                         _____________

                                 ____________________

            James M. O'Brien  with whom  Baker &  McKenzie was  on briefs  for
            ________________             _________________
        petitioners.
            Jonathan  S.  Cohen  with  whom  Loretta  C.  Argrett,   Assistant
            ___________________              ____________________
        Attorney  General, and  Frank P.  Cihlar, Tax Division,  Department of
                                ________________
        Justice, were on brief for respondent.

                                 ____________________

                                    March 21, 1997
                                 ____________________

                 BOUDIN,  Circuit  Judge.   This  appeal  involves a  tax
                          ______________

            dispute posing  two questions:   whether certain  payments to

            the  taxpayers  by  a  controlled  company  were constructive

            dividends (rather than loans)  and whether the taxpayers were

            residents of Illinois  (rather than Puerto Rico)  in 1986 and

            1987.    The  Tax  Court  answered  yes  to  both  questions,

            resulting in adverse consequences  for the taxpayers, who now

            appeal.  We affirm the Tax Court.

                 The  basic facts,  derived from  the record and  the Tax

            Court   findings,  are   largely  undisputed,   although  the

            inferences and  conclusions  to be  drawn  are very  much  in

            dispute.   The  taxpayers are  Earl and  Evelyn Bergersen,  a

            long-married couple  who resided for many  years in Illinois.

            Earl  Bergersen practiced  as  an  orthodontist in  Winnetka,

            Illinois,  starting in  1959.   In  addition to  practice and

            part-time teaching, Earl Bergersen invented and  patented new

            orthodontic products, which enjoyed a good deal of success.  

                 In the early  1970s, the Bergersens  incorporated Ortho-

            Tain,  Inc.,  under Delaware  law,  to  manufacture and  sell

            products  based upon  Earl  Bergersen's inventions.   At  all

            times  pertinent, the  couple were  the only  members of  the

            Ortho-Tain board of directors.  During the tax years at issue

            in this case (1985-1987), the Bergersens also held all of the

            class A voting  shares in  the company (56  each), with  five

            class B voting shares  held by each of their  three children.

                                         -2-
                                         -2-

            Each of the children also held between 100 and  300 shares of

            class  C  nonvoting stock.    Santos  Ortiz,  manager of  the

            company's  Puerto Rico  plant,  held 200  shares  of class  D

            nonvoting stock,  and Thomas Sedwick, the tool  and die maker

            at the plant, held 190 shares of class E nonvoting stock.

                 Initially  based in  Winnetka,  the plant  was moved  to

            Puerto Rico in 1976.  The Bergersens hoped to move to  Puerto

            Rico  eventually; residents  of Puerto  Rico are  exempt from

            U.S. income tax on  income derived from Puerto Rico  sources.

            26 U.S.C.   933.   After the plant moved,  Ortho-Tain elected

            to be treated as a possessions corporation, exempting it from

            U.S. income  tax on Puerto  Rico source income.   Id.    936.
                                                              ___

            The company also received  a 15-year industrial tax exemption

            from Puerto Rico, which  also permitted Puerto Rico residents

            to  receive company  dividends free  of income  tax.   See 13
                                                                   ___

            L.P.R.A.   252 et seq.; id.   252b(a)(1).
                           _______  ___

                 During the late 1970s, Ortiz and Sedwick  ran the Puerto

            Rico   plant  while  the  Bergersens  handled  the  company's

            finances  from   Illinois.    Ortho-Tain's  sales  grew  from

            $600,000  in  1977 to  $1.2 million  in  1987.   During these

            years, the taxpayers received no salary from the company, and

            no dividends were declared on their stock until 1987.  During

            most of the period, modest  dividends (ranging from $5,000 to

            around $22,000) were paid annually to Ortiz and to Sedwick.

                                         -3-
                                         -3-

                 In   this   same   period,    Ortho-Tain's   accumulated

            undistributed earnings grew from  just under $350,000 in 1977

            to  just over $5 million  in 1986.   The company's possession

            status freed it from  the U.S. accumulated earnings tax.   26

            U.S.C.   936(g).  Meanwhile, starting in 1982, Earl Bergersen

            borrowed  substantial  amounts  from  the  company,  totaling

            almost  $3,700,000  by 1987.    The loans  were  evidenced by

            unsecured demand notes and carried  interest rates of 8.5  to

            10 percent; the taxpayers regularly paid this interest to the

            company  and deducted  the  interest payments  on their  U.S.

            income tax returns for the years 1982 through 1986.

                 Apart from one loan repayment of about $400,000 in 1984,

            the  loans were  carried  on Ortho-Tain's  books until  March

            1987, when Ortho-Tain issued dividends of about $2,800,000 to

            the taxpayers, which they treated as exempt from  U.S. income

            tax under  section  933  and immediately  paid  back  to  the

            company  to reduce  their outstanding  loans.   The remaining

            loan balance  was repaid after further dividends of just over

            $2,000,000  to taxpayers in 1988.  As  one might guess, it is

            the position of  the Internal Revenue Service that  the loans

            were constructive  dividends subject to U.S.  income tax when

            made.

                 The other  issue in dispute  concerns the timing  of the

            Bergersens'  move to Puerto Rico.   Looking toward this move,

            they purchased land in Puerto Rico in 1981 and, over the next

                                         -4-
                                         -4-

            several  years,  planned an  elaborate  house.   Construction

            began  in  1984 but,  because of  delays,  the house  was not

            finished as expected by late 1985.  In the meantime, starting

            in 1984, Earl Bergersen turned over much of his  orthodontics

            practice to another dentist and spent only a few days a month

            with established patients.

                 In July  1985, the Bergersens sold  their Winnetka house

            and in September 1985 agreed to buy a town house in Glenview,

            Illinois.  In April 1986, they joined a Glenview social club.

            They  also  sublet an  apartment  in Puerto  Rico  from their

            employee Sedwick  from November  1985  through October  1986.

            When  the sale closed on the Winnetka house in November 1985,

            the Bergersens  dispersed their belongings to  various places

            in Illinois and Puerto Rico.

                 By summer  1986, the  Bergersens' new Puerto  Rico house

            had one bedroom  finished, which they  used on occasion,  and

            they  installed a housekeeper couple  in the house.   More of

            their furnishings  were shipped  there in  August  1986.   At

            about the same time,  the Bergersens shipped a car  to Puerto

            Rico, registered it, and  activated a country club membership

            there.  They obtained  an occupancy permit for the  new house

            in  January  1987, but  construction  continued  until August

            1987.  

                 During  1986 and  1987, the  Bergersens traveled  a good

            deal  for both  business  and pleasure,  dividing their  time

                                         -5-
                                         -5-

            between Puerto Rico  and the  United States  mainland.   They

            spent 108 days in Puerto  Rico in 1986 and 93 there  in 1987.

            They spent  107 days in the  Glenview town house in  1986 and

            138  days there in 1987.  Thus,  in 1986, they spent 150 days

            in places other than  Illinois and Puerto Rico; in  1987, the

            figure was 134 days.  Earl Bergersen spent no more than a few

            weeks each year seeing patients in Winnetka.

                 In  February  1987,  the  Bergersens  replaced  Illinois

            drivers'  licenses that they had  lost.  In  August 1987, the

            new  Puerto  Rico house  was  completed,  and the  government

            admits  that  the  taxpayers   used  it  as  their  principal

            residence thereafter.   Earl Bergersen wound  up his Winnetka

            practice in  late 1987.    In 1988,  the Bergersens  acquired

            Puerto Rico voting  cards and, in 1989,  Puerto Rico drivers'

            licenses.

                 The  present  case  began  after  the  Internal  Revenue

            Service reviewed  the taxpayers' income tax  returns for 1985

            through 1987.  In  due course, the  IRS ruled that the  loans

            made  to the  Bergersens in  these years  were not  bona fide

            loans but  constructive dividends; the result  was to include

            the  amounts received  as part  of the  taxpayers' reportable

            income and to disallow  deductions taken by them for interest

            payments on the loans.  

                 The  IRS also concluded that the  Bergersens in 1986 and

            1987  were not  bona fide  residents of  Puerto Rico  for the

                                         -6-
                                         -6-

            entire year, as they claimed, but  were residents of Illinois

            for all of 1986  and part of 1987.  It  is common ground that

            section  933 excludes  Puerto  Rico source  income from  U.S.

            income  tax only where the  taxpayer is a  resident of Puerto

            Rico  for   the  entire  year   in  question.     Vazquez  v.
                                                              _______

            Commissioner, 66 T.C.M. (CCH) 406, 407 (1993); Treas.  Reg.  
            ____________

            1.933-1(a).   Accordingly, the  IRS determination  meant that

            the moneys  the Bergersens received from  Ortho-Tain in those

            years were  not excludable from U.S. income tax under section

            933.  

                 The Bergersens petitioned  the Tax Court  to redetermine

            various  disputed issues  pertaining  to their  returns.   26

            U.S.C.    6213.  The case  was tried before the  Tax Court in

            April 1994.   In August 1995, the Tax Court  issued a 66-page

            decision, resolving a number of issues including the  two now

            presented on appeal.  On those two issues, the Tax Court held

            that  the  loans were  constructive  dividends  and that  the

            Bergersens were not residents  of Puerto Rico for the  entire

            year either in 1986  or 1987.  Bergersen v.  Commissioner, 70
                                           _________     ____________

            T.C.M. (CCH) 568, 588 (1995).  This appeal followed.

                 The  Loan or  Dividend Issue.      The loan  or dividend
                 _____________________________

            issue,  which   is  not  uncommon  in   tax  cases  involving

            controlled companies, usually poses the question  whether the

            owner is  trying  to  smuggle  earnings out  of  the  company

            without paying  personal income  tax.   A dividend or  salary

                                         -7-
                                         -7-

            paid  to an owner is taxable as  income; a loan, being only a

            temporary transfer, is not.   But if a "loan" by  the company

            to an owner is not intended  to be repaid, then allowing that

            label to control would  effectively deprive the government of

            its tax bite on dividends and salaries.  

                 The  conventional test is to ask whether, at the time of

            the  withdrawal in  question, the  parties actually  intended

            repayment.  Crowley v. Commissioner, 962 F.2d 1077, 1079 (1st
                        _______    ____________

            Cir.  1992).    Explaining  that  "intent"  is  difficult  to

            discern,  courts  regularly  resort  to  objective  criteria,

            asking   whether  the   transaction  bears   the  traditional

            hallmarks  of a loan or  of a dividend.   Id.   In any event,
                                                      ___

            purporting to be looking  at intent, appeals courts generally

            describe such intent as a fact,  id. at 1080, and subject the
                                             ___

            fact-finder's determination to  clear error review, see  id.;
                                                                ___  ___

            see  also Commissioner  v. Duberstein,  363 U.S.  278, 290-91
            _________ ____________     __________

            (1960).

                 Here, the  government invokes this  deferential standard

            of  review.    It argues  that  the  finding of  constructive

            dividends cannot be clearly erroneous in light of the various

            indicia  mentioned by  the Tax  Court as  suggesting dividend

            status:   that  the  loans had  no  collateral and  no  fixed

            repayment schedule; that no limits were set on the amounts to

            be borrowed;  that the proceeds  were used by  the Bergersens

            for personal purposes;  and that Ortho-Tain  accumulated huge

                                         -8-
                                         -8-

            earnings  but paid  the  Bergersens no  dividends during  the

            years of the loans until 1987.  

                 The  Bergersens, on  the other  hand, say  that the  Tax

            Court made an error  of law by stressing that  the Bergersens

            were trying to "avoid taxes" by delaying dividends until they

            moved  to Puerto  Rico; Congress,  the Bergersens  point out,

            chose  in section  936(g) to  allow possessions  companies to

            accumulate  earnings in  Puerto  Rico and  to distribute  the

            amounts  free  of U.S.  income tax  to  those who  have moved

            there.  And the Bergersens dispute the government's portrayal

            and weighing of the objective factors.

                 Like white asparagus or a blood orange, this first issue

            is  not ordinary  fare but  an odd  variation, caused  by the

            interplay of  ordinary factors  with Puerto Rico  tax status.

            The  Bergersens may  well  have intended  to repay  the loans

            after they moved  to Puerto Rico.   After all, at  that point

            they could do so  by declaring a dividend to  themselves free

            of U.S. (and  Puerto Rico)  income tax; and  after using  the

            dividends to repay the  loans, they remained free to  use the

            repaid funds  for  a new  dividend,  again without  U.S.  (or

            local) tax consequences.

                 The situation  is thus very different  from the ordinary

            loan-or-dividend  case, where  repayment of  the loan  to the

            company would  effectively preclude a  tax-free distribution.

            Here, the Bergersens could  reasonably have intended to repay

                                         -9-
                                         -9-

            the money and reap  the benefits of a  tax-free distribution.
                      ___

            Nor would there  have been anything wrong if  the Bergersens,

            knowing that they were moving  eventually to Puerto Rico, had

            accumulated  earnings  in  the  company  but  refrained  from

            withdrawing them until after the move.

                 The question here, then, is whether the Bergersens could

            pay out moneys to themselves before moving to Puerto Rico and
                                         ______

            avoid U.S. income taxes by designating the payments as loans.

            We think that this  ought to depend upon whether,  in overall

            character and context, the  payments were more like  loans or

            more  like dividends.  After all, "intent to repay" is merely

            a functional test  that is usually suitable;  but the purpose

            of the tax law is to tax transactions, not rubrics or labels.

            Cf.  Helvering v. Gregory, 69  F.2d 809, 810  (2d Cir. 1934),
            ___  _________    _______

            aff'd, 293 U.S. 465 (1935).
            _____

                 Here, the  payments had some of  the traditional indicia

            of  loans  (notes  existed,  interest was  paid).    In other

            respects, formalities were  absent (no fixed  repayment date,

            no  collateral,   no  credit  limit).     But  regardless  of

            formalities, the nominal loans,  paid by a controlled company

            that  was accumulating  large  earnings but  paying its  main

            owners   no  dividends,   effectively  gave   the  Bergersens

            permanent tax-free control over the moneys.
            _________

                  If after their move, the Bergersens had decided  not to

            repay but  to cancel the loans  as a form of  dividend, there

                                         -10-
                                         -10-

            would have been no tax due on this dividend.   If instead--as

            actually  happened--they declared  cash dividends  and repaid

            the loans, the effect was to redeposit the money in their own

            corporate  vehicle, available  for redistribution to  them at

            any time, again with no tax  consequences.  As the Tax  Court

            observed,  the  repayment   was  effectively  a  "meaningless

            exchange  of  checks."    Bergersen,  70  T.C.M.  at  585-86.
                                      _________

            Indeed, even the earlier interest payments could be recovered

            by the Bergersens without tax effects.

                 Thus, at the  very outset of  the loans, the  Bergersens

            knew  that there  was  no effective  corporate constraint  to

            induce  repayment, nor  (given  the intended  move to  Puerto

            Rico)  any  meaningful  tax  consequences  from  a  permanent

            failure  to  repay.    An  effective  permanent  transfer  of

            corporate funds to an owner is the hallmark of a  dividend or

            a salary, and  not a loan.   There is  nothing wrong with  an

            owner  making  such a  transfer.   But  when made  to  a U.S.

            mainland  resident, the  transfer is  subject to  U.S. income

            tax.1

                                
            ____________________

                 1Nor  does  it matter  that  the  Bergersens might  have
            achieved  their  ends through  a  different  device, say,  by
            borrowing  the  money  from  a bank--a  real  loan  requiring
            repayment--and repaying  it with a tax-free dividend declared
            after the move to Puerto Rico.  The  taxpayers are stuck with
            the transaction  they chose to  employ.  See  Commissioner v.
                                                     ___  ____________
            National  Alfalfa Dehydrating  & Milling  Co., 417  U.S. 134,
            _____________________________________________
            148-49 (1974).

                                         -11-
                                         -11-

                 Looking through form  to substance, see Commissioner  v.
                                                     ___ ____________

            Court  Holding Co., 324 U.S. 331, 333-34 (1945), we reach the
            __________________

            same result as the  Tax Court and therefore need  not concern

            ourselves on this  issue with the  proper standard of  review

            (since  even de novo review  would lead to  affirmance).  The
                         _______

            claim that the Tax Court made a  mistake of law in construing

            section   933  without  giving  sufficient  consideration  to

            section 936(g) is a red herring.   Congress' policy permitted

            the  company to  accumulate earnings  in Puerto Rico  free of

            tax;  it did  not  authorize tax-free  dividends to  Illinois

            residents.

                 The Residence Issue.  We turn now to a more conventional
                 ____________________

            issue,  namely,  whether  the Bergersens  were  residents  of

            Illinois during  1986 and at least  part of 1987, as  the Tax

            Court ruled,  or whether they  were residents of  Puerto Rico

            for  either or  both years  in their  entirety.   Determining

            residence  can present  distinctive issues  either of  law or

            fact;  but  quite commonly  in  the  end the  question--often

            called a "mixed question of law  and fact"--turns on applying

            a legal label, refracted into  a set of legal criteria, to  a

            unique set of facts.  That is so here.

                 "Mixed question"  is something  of a misnomer;  once the

            raw  facts  are  determined  (and  such   determinations  are

            normally reviewed only for clear error), deciding which legal

            label  to  apply to  those  facts is  a  normative decision--

                                         -12-
                                         -12-

            strictly speaking, a legal issue.  United States v. McConney,
                                               _____________    ________

            728 F.2d 1195, 1202  (9th Cir.) (en banc), cert.  denied, 469
                                             _______   _____________

            U.S.  824 (1984).  But  a fact-finder closer  to the evidence

            may  still have a superior "feel"; and the value of precedent

            is limited,  since the  next shake  of the  kaleidoscope will

            produce a different fact pattern.    

                 We  think that  a  mixed question  of  fact and  law  is

            presented  in this case,  and that  some deference  should be

            afforded to the Tax  Court's ultimate determination.  Johnson
                                                                  _______

            v.  Watts Regulator Co., 63 F.3d 1129, 1132 ((1st Cir. 1995).
                ___________________

            See  generally 9A C. Wright & A. Miller, Federal Practice and
            ______________                           ____________________

            Procedure    2589  (1995 &  Supp. 1996).   In  certain narrow
            _________

            situations involving residency, subjective intent may be very

            important, and  review limited  to clear  error.   Cf. Treas.
                                                               ___

            Reg.    1.871-3, 1.871-4(c) (residency of alien seamen).  But

            the  ordinary case presenting  the residency  question, which

            arises  under several  tax  code provisions,2  is decided  by

            using largely objective criteria, developed in the decisions.

            E.g., Sochurek v.  Commissioner, 300  F.2d 34,  38 (7th  Cir.
            ____  ________     ____________

            1962).

                 These laundry  lists have to  be used with  some caution

            because they are framed broadly, to cover disparate problems.

            Deciding when the Bergersens  became bona fide "residents" of

                                
            ____________________

                 2See, e.g., 26 U.S.C.   871 (nonresident aliens);  id.  
                  _________                                         ___
            911  (foreign  earned  income  exclusion  for  U.S.  citizens
            residing abroad); id.   933 (Puerto Rico residents).
                              ___

                                         -13-
                                         -13-

            Puerto Rico is  somewhat different  from determining,  albeit

            for U.S. tax  purposes, when an American airline  pilot based

            abroad  is  a  "resident"  of Japan,  or  a  visiting  French

            consultant  is  a  "resident" of  New  York.    Cf. Jones  v.
                                                            ___ _____

            Commissioner, 927 F.2d 849,  855-57 (5th Cir. 1991); Friedman
            ____________                                         ________

            v. Commissioner, 37 T.C. 539, 551 (1961).
               ____________

                 But in  all three  situations, "residence"  implies that

            the individual  has established his or  her residential base,

            planning to remain indefinitely or at least for a substantial

            period.    See  Treas.  Reg.      1.871-2(b).    Clearly  the
                       ___

            Bergersens did  intend  eventually  to  base  themselves  and

            remain permanently in Puerto Rico;  that is why they embarked

            on construction of a very expensive house in 1984, before the
                                                               ______

            tax years in dispute.  The question for us, as  we see it, is

            when  the  Bergersens had  effectively  moved  their base  to

            Puerto Rico and established their residence there.

                  As the Tax Court candidly said, the Bergersens' conduct

            amounts to a move to Puerto Rico carried out over a period of

            time.    Bergersen, 70  T.C.M. at  582.   Here,  some  of the
                     _________

            conduct was completed by 1986.  Prior to  1986 they had moved

            some  furnishings to Puerto Rico and rented an apartment.  In

            1986, they began  to use portions  of their partly  completed

            house,  installed  a  housekeeper  couple,  activated a  club

            membership  in Puerto Rico, and  shipped over a  car and some

                                         -14-
                                         -14-

            remaining furnishings.  Apparently they  also spent Christmas

            there in 1986.

                  But the  links with Illinois  extended into 1987.   The

            Bergersens  continued to  use their  Glenview house  in 1987,

            spending 138 days  there in that year  and only 93  in Puerto

            Rico.   They maintained Illinois drivers'  licenses, and Earl

            Bergersen still  did occasional work in  his Winnetka office.

            The  Puerto Rico house  was not fully  completed until August

            1987, and the Bergersens  did not register to vote  in Puerto

            Rico  or  get drivers'  licenses there  until 1988  and 1989,

            respectively.

                 We  agree with the Tax Court  that for 1986 and at least

            part of  1987, the Bergersens were residents  of Illinois and

            not  yet of Puerto Rico.   No one  consideration is decisive:

            the center  of gravity was  shifting from Illinois  to Puerto

            Rico throughout the period.  But taking account of all of the

            ties to both places,  the Tax Court's conclusion seems  to us

            not  only reasonable  but right.   While we  would ordinarily

            give  some weight to its view in  applying a tax code concept

            to specific  facts, see,  e.g., Manzoli v.  Commissioner, 904
                                ___   ____  _______     ____________

            F.3d 101, 103 (1st Cir. 1990), we would reach the same result

            here even if review were de novo.
                                     _______

                 The  Bergersens imply  that  the Tax  Court  erred as  a

            matter of  law by giving  weight, in  deciding the  residency

            issue, to an  alleged tax  avoidance motive.   The Tax  Court

                                         -15-
                                         -15-

            made one reference  to tax  avoidance as  a relevant  concern

            (the other reference  was to an argument by  the government).

            Bergersen,  70 T.C.M.  at 581,  583.   But in  the very  same
            _________

            passage, the Tax Court made clear that it was the time of the

            move to  Puerto Rico, judged  by objective factors,  that was

            decisive.  We reach the same result,  giving no weight to the

            alleged motive.

                 A tax avoidance motive is often included  in the laundry

            list of  factors bearing on  bona fide residency,  see, e.g.,
                                                               _________

            Sochurek,  300 F.2d at 38,  so it is  not surprising that the
            ________

            Tax Court mentioned it  in passing.  But the  Bergersens were

            perfectly  free to  consider tax  advantages in  moving their

            residence  to Puerto Rico, and here we think that tax motives

            provide little  help in determining when  this move occurred.

            (A tax  motive does, however,  help explain why  the payments

            were structured as loans.)

                 The balance of the Bergersens' argument on the residency

            issue  is an effort to  stress factors favorable  to an early

            residence  in Puerto Rico (e.g.,  that work on  the house was
                                       ____

            largely  completed in 1986) and  to explain away  some of the

            factors pointing to Illinois (e.g., the retention of Illinois
                                          ____

            drivers' licenses).   The arguments are perfectly  legitimate

            and well  presented.  They serve to explain why the case is a

            close one on the issue of residency at least as to 1987.

                                         -16-
                                         -16-

                 But a number  of important  considerations--such as  the

            purchase and  maintenance of  the house in  Glenview and  the

            time spent  in Illinois  in 1987--cannot  be minimized.   And

            even  if small  adjustments are made  in other  elements, the

            overall balance  still seems to  us to favor  the government.

            When dealing  with incommensurable factors, it  is often hard

            to do more than fairly array the factors on both sides, as we

            have done in summary  and the Tax Court  in detail, and  then

            state the result.

                   Because the Bergersens were not bona fide residents of

            Puerto Rico either in 1986 or for the full year in 1987, they

            were not entitled  to avoid  U.S. income tax  on Puerto  Rico

            source  income in  those years.   26  U.S.C.    933.   As the

            "loans" were constructive dividends, they were taxable income

            to  the Bergersens  when  made, and  the Bergersens  were not

            entitled to deduct the interest payments to the company.  See
                                                                      ___

            Knetsch v. United States, 364 U.S. 361, 365-66 (1960).
            _______    _____________

                 Affirmed.
                 _________

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