## Facts

- John D. MacArthur was the sole shareholder, board chair, and chief executive officer of Bankers Life & Casualty Company (Bankers), an insurance company that used large quantities of printed materials.
- John’s brother, Telfer MacArthur, worked in the printing and publishing industry and was associated with Pioneer Publishing Company (Pioneer).
- In 1950, John and Telfer formed Brookshore Company (Brookshore) to supply Bankers with printed material.
- Telfer managed Brookshore’s operations; John provided capital and helped secure Brookshore’s business with Bankers.
- John and Telfer each owned 50% of Brookshore’s outstanding stock.
- In 1957, the brothers signed a mutual buyout agreement providing that if one brother died, the survivor would purchase the decedent’s Brookshore stock, with a maximum price of $200,000.
- Telfer died in 1960, and Telfer’s estate representatives disputed the $200,000 cap, believing the Brookshore interest was worth more.
- After negotiations, a package arrangement was reached under which John would acquire (a) Telfer’s Brookshore interest for $200,000 and (b) Telfer’s interest in Pioneer for $175,000.
- Bankers issued a single $375,000 check payable to Telfer’s estate to complete the overall transaction.
- The Internal Revenue Service treated $200,000 of Bankers’ payment (attributed to Brookshore) as a taxable constructive dividend to John on the theory that it relieved John’s personal duty under the buyout agreement.
- The taxpayers (including John’s estate, administered by Citizens Bank & Trust Company) paid the asserted deficiency and brought a refund suit in the United States Court of Claims.

## Issues

1. Whether Bankers’ $200,000 payment to Telfer’s estate, tied to the acquisition of Brookshore stock, was a constructive dividend to John because it satisfied (in whole or in part) John’s personal obligation to purchase the stock.
2. Whether the transaction should be treated as a corporate expenditure rather than a dividend because Bankers made the payment as part of a business-driven arrangement connected to Bankers’ supply and operational needs.

## Decision

- The Court of Claims entered judgment for the taxpayers in the refund suit.
- The court held that the $200,000 portion of Bankers’ payment was not taxable dividend income to John.
- The court concluded that, on these facts, the payment was not properly recharacterized as a distribution of corporate earnings to John merely because the arrangement overlapped with John’s buyout agreement.

## Legal Principles

- A constructive dividend generally arises when a corporation confers an economic benefit on a shareholder without adequate consideration, including by paying a shareholder’s personal obligation.
- The inquiry is substance-based: the tax result turns on what the corporation’s payment accomplished and who primarily benefited from it.
- A corporate payment is less likely to be treated as a constructive dividend where the payment is made for the corporation’s own business reasons and produces substantial corporate benefits, rather than functioning as a disguised distribution to the shareholder.
- Similar fact patterns may yield different outcomes depending on whether the shareholder had an unconditional personal obligation that the corporation simply discharged, versus a broader business transaction in which the corporation acted for itself.
- In a tax refund suit, the taxpayer bears the burden to show an overpayment of tax for the year at issue.

## Conclusion

The Court of Claims held that Bankers’ $200,000 payment connected to the Brookshore stock was not a constructive dividend to John D. MacArthur, because the transaction—viewed as a whole—was treated as a business-driven corporate expenditure rather than a disguised distribution made mainly to satisfy John’s personal buyout obligation.


Citizens Bank & Trust Co. v. Commissioner, 580 F.2d 442 (1978)