## Facts

- Joseph B. Ferguson, a New York automobile dealer and inventor, owned an automobile dealership business and all stock of 444 West 55th Street Corp. (444), which owned the dealership premises.
- In 1955, Ferguson transferred the operating dealership to a new corporation (later Fergus Imported Cars, Inc.), while retaining control of an “experimental department” devoted to automotive development.
- The dealership corporation paid a contractually determined percentage of sales into the experimental department, which Ferguson controlled.
- A 1958 agreement directed that the first $75,000 of the sales-based percentage be paid as rent to 444, with any excess continuing to be paid to the experimental department.
- In 1959, the dealership corporation paid $75,000 to 444 and $57,592.57 to the experimental department (total $132,592.57).
- Ferguson exercised complete control over the experimental department and its funds and treated the activities as his own.
- Ferguson also controlled a savings account titled in the name of his deceased brother; Ferguson had authority to draw on the account and used the title to conceal the account from his estranged wife amid alimony disputes.
- The IRS determined a deficiency for 1959 and, after concessions, litigated whether (i) the 1959 payments were taxable to Ferguson and (ii) the 1959 interest on the savings account was taxable to him.

## Issues

1. Whether the 1959 payments to the experimental department ($57,592.57) were taxable income to Ferguson.
2. Whether the $75,000 paid to 444 was rent income to 444 and also a constructive dividend to Ferguson to the extent of 444’s earnings and profits, and whether 444’s earnings and profits could be reduced by unpaid federal income taxes when 444 used the cash method.
3. Whether 1959 interest credited to the savings account titled in another’s name was taxable to Ferguson because he controlled and beneficially owned the funds.

## Decision

- Payments to the experimental department were taxable to Ferguson because he owned and controlled the department and enjoyed the economic benefit of its receipts.
- The $75,000 payment was rent income to 444 and, to the extent of 444’s earnings and profits, constituted a constructive dividend to Ferguson as 444’s sole shareholder.
- For a cash-method corporation, unpaid federal income taxes did not reduce earnings and profits until paid; 444 therefore had sufficient earnings and profits for constructive-dividend treatment.
- Interest on the savings account was taxable to Ferguson because he had dominion and control over the account and held the beneficial interest despite the nominal title.

## Legal Principles

- Income is attributable to the person with dominion, control, and beneficial ownership over the income source, regardless of labels or nominal title.
- Corporate payments conferring economic benefit on a shareholder may be treated as constructive dividends to the extent of the corporation’s earnings and profits.
- In computing earnings and profits of a cash-basis corporation for dividend purposes, federal income taxes do not reduce earnings and profits until actually paid.
- Interest income is taxable to the beneficial owner of the account funds, not necessarily the named account holder.

## Conclusion

The Tax Court held that amounts paid to a shareholder-controlled “experimental department” and interest on a nominee-titled savings account were taxable to the shareholder who controlled and benefited from them, and that rent paid to his wholly owned real-estate corporation could be treated as a constructive dividend based on the corporation’s cash-method earnings and profits without reduction for unpaid federal income taxes.


Ferguson v. Commissioner, 47 T.C. 11 (1966)