## Facts

- Ray Tanner, Jr. and Patricia Tanner were minority shareholders of Ray Tanner Motors, Inc. (the corporation).
- Ray Tanner, Jr. also served as vice president of the corporation.
- During 1977 and 1978, the corporation provided the Tanners with three company vehicles that they used for personal purposes.
- The corporation paid the maintenance and other costs connected with the vehicles.
- The Tanners did not reimburse the corporation for any personal-use portion of the vehicle costs.
- After the Tanners’ use, the corporation sold each vehicle, and the profits from those sales were included in the corporation’s earnings and profits.
- The corporation’s earnings and profits in 1977 and 1978 were at least equal to the fair market value of the Tanners’ personal use of the vehicles.
- The Commissioner of Internal Revenue determined that the Tanners received constructive dividends from their personal use of the corporate vehicles and assessed income tax deficiencies for 1977 and 1978 based on the fair market value of that use.

## Issues

1. Whether the Tanners’ personal use of corporate-owned vehicles, with the corporation paying the related expenses and no reimbursement by the Tanners, constituted taxable constructive dividends.
2. If so, whether the constructive dividend amount was properly measured by the fair market value of the personal use, subject to the corporation’s earnings and profits.

## Decision

- The Tax Court held that the Tanners’ personal use of the corporation’s vehicles, without reimbursement, constituted constructive dividends taxable to them.
- The court sustained the Commissioner’s determination to measure the constructive dividends by the fair market value of the personal-use benefit, with dividend treatment limited to the extent of the corporation’s earnings and profits.

## Legal Principles

- Gross income includes economic benefits conferred on a taxpayer, including benefits provided through a corporation to its shareholders. (I.R.C. § 61)
- A dividend for federal income tax purposes generally requires a distribution by a corporation to a shareholder out of current or accumulated earnings and profits. (I.R.C. § 316; see also I.R.C. §§ 301–302 regarding treatment of corporate distributions)
- A constructive dividend occurs when a corporation confers an economic benefit on a shareholder without adequate consideration or a repayment expectation, and the benefit is primarily personal rather than for corporate business.
- A shareholder’s personal use of corporate property (such as vehicles), when the corporation bears the costs and the shareholder does not reimburse the corporation, can be treated as a constructive dividend.
- The amount of a constructive dividend is generally the fair market value of the benefit received (for vehicle use, the fair value of the personal-use portion).
- Constructive dividend treatment is limited by the corporation’s earnings and profits for the year(s) at issue; to the extent earnings and profits are sufficient, the benefit is taxable as a dividend.

## Conclusion

In Tanner v. Commissioner, the Tax Court concluded that Ray and Patricia Tanner received taxable constructive dividends when they personally used three corporate-owned vehicles during 1977 and 1978 without reimbursing the corporation for the related costs. Because the corporation had sufficient earnings and profits, the court upheld the Commissioner’s deficiencies and valued the constructive dividends by the fair market value of the personal-use benefit.


Tanner v. Commissioner, 45 T.C.M. 1419 (1983), T.C. Memo. 1983-230