## Facts

- Leonard C. Jaques, an attorney, formed a professional corporation in 1971 and remained its sole shareholder.
- Beginning in 1977 and continuing through the tax years at issue, Jaques withdrew corporate funds to pay personal living expenses.
- For the corporate fiscal years ending October 31, the withdrawals totaled approximately $14,687 (1983), $275,682 (1984), and $803,398 (1985).
- The corporation recorded the withdrawals as “Accounts Receivable–Officer” (loans to stockholders) and carried large “loan” balances on its balance sheet.
- Jaques did not execute promissory notes for the withdrawals, there were no fixed maturity dates or repayment schedules, and no collateral secured the advances.
- Some withdrawals were indirectly funded through pension plan withdrawals treated as loans to the corporation.
- The corporation had sufficient earnings and profits during the relevant period.
- The IRS recharacterized the withdrawals as constructive dividends, and the Tax Court sustained income tax deficiencies against Leonard and Sybil Jaques for 1983–1985.

## Issues

1. Whether the Tax Court clearly erred in finding that the shareholder withdrawals, despite being booked as loans, lacked the substance of bona fide indebtedness and instead were constructive dividends taxable under I.R.C. § 316.
2. What effect the absence of standard loan formalities, the shareholder’s personal use of funds, and the limited repayment history had on characterizing the transfers.

## Decision

- The Sixth Circuit affirmed the Tax Court.
- The court held the Tax Court did not clearly err in determining the withdrawals were constructive dividends rather than nontaxable loans.
- The appellate court applied clear-error review because the loan-versus-dividend characterization is primarily a factual determination.
- The resulting income tax deficiencies for the 1983–1985 years were upheld.

## Legal Principles

- Under I.R.C. § 316, a dividend includes a corporate distribution to a shareholder out of earnings and profits, regardless of labels used in corporate records.
- Transfers from a closely held corporation to a controlling shareholder may be treated as constructive dividends if the objective facts do not show a genuine debtor–creditor relationship.
- Bookkeeping treatment as “loans” is not controlling; courts assess substance, including whether there are notes, fixed repayment terms, interest, security, and meaningful repayment behavior.
- Use of corporate advances for personal expenses and disproportion between withdrawals and repayments support dividend characterization.
- Appellate review of the Tax Court’s characterization is deferential and will be reversed only for clear error.

## Conclusion

The Sixth Circuit upheld the Tax Court’s finding that large, undocumented shareholder withdrawals used for personal expenses were constructive dividends taxable under I.R.C. § 316, notwithstanding their classification as loans on the corporation’s books.


Jaques v. Comm’r, 935 F.2d 104 (6th Cir. 1991)