Nicholls, North, Buse Co. v. Commissioner
56 T.C. 1225; 1971 U.S. Tax Ct. LEXIS 65 (1971)
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Rule of Law:
When a corporation owns an asset that provides a personal benefit to a shareholder, the shareholder receives a constructive dividend. The measure of this dividend is the fair rental value of the asset for the period of personal use, not the asset's purchase price, provided the corporation retains clear title and ownership.
Facts:
- Herbert A. Resenhoeft was the president and controlling shareholder of Nicholls, North, Buse Co. (Nicholls), a food brokerage firm.
- Resenhoeft personally owned two previous boats, Pea Picker I and Pea Picker II, which were frequently used by his son James, a boating enthusiast.
- In 1964, James Resenhoeft negotiated the purchase of a new 52-foot yacht, the Pea Picker III.
- Nicholls' board of directors approved the purchase with over $68,000 in corporate funds, resolving that Resenhoeft would bear the cost of any personal use.
- Nicholls was named as the owner on the bill of sale, state registration, and federal radio license for the yacht.
- Resenhoeft sold his personally-owned boat, Pea Picker II, and loaned the $20,000 proceeds to Nicholls to help finance the purchase of Pea Picker III.
- During the 1964 boating season, the yacht was used by Resenhoeft, his family, and business associates for a mixture of personal and purported business activities.
- A log kept for the yacht listed guests and their business affiliations but generally failed to document the specific business purpose or discussions for most occasions, and James Resenhoeft engaged in additional, unrecorded personal use of the boat.
Procedural Posture:
- The Commissioner of Internal Revenue determined deficiencies in income tax against Nicholls, North, Buse Co. and Herbert A. Resenhoeft for the 1964 tax year.
- The Commissioner disallowed the corporation's deductions for depreciation and operating expenses related to a yacht and denied its claim for an investment credit.
- The Commissioner initially asserted that the entire purchase price of the yacht constituted a taxable constructive dividend to Resenhoeft.
- Nicholls and Resenhoeft petitioned the United States Tax Court to challenge the Commissioner's determinations.
- In the Tax Court, the Commissioner amended his answer to assert an alternative argument that the dividend to Resenhoeft should be measured by the fair rental value of the yacht's use.
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Issue:
When a corporation purchases and maintains an asset, such as a yacht, for the personal benefit of a controlling shareholder, does the shareholder receive a constructive dividend, and is the value of that dividend measured by the asset's purchase price or its fair rental value for the period of personal use?
Opinions:
Majority - Withey, Judge
Yes, the shareholder receives a constructive dividend measured by the asset's fair rental value for the period of personal use. It is well established that a corporate expenditure for the personal benefit of a shareholder constitutes a constructive dividend. Here, the court determined the yacht was used 75% for personal purposes. This benefit is imputed to the controlling shareholder, Herbert Resenhoeft, under the assignment of income doctrine, as he possessed the power to direct the corporate funds and authorized the personal use for his family. The measure of the dividend is not the yacht's acquisition cost but its fair rental value, because title and all other formal indicia of ownership remained with the corporation. The court distinguished this from cases where ownership effectively transferred to the shareholder, which would warrant treating the full purchase price as a dividend.
Analysis:
This decision provides a crucial distinction for calculating the value of constructive dividends arising from shareholder use of corporate assets. It solidifies the principle that the location of legal title is the primary determinant: if the corporation retains ownership, the dividend is the value of the use (fair rental value), not the value of the asset itself. This creates a more predictable framework for tax disputes involving corporate perks in closely-held companies. The ruling also affirms the broad application of the assignment of income doctrine, holding a controlling shareholder responsible for benefits directed to other family members, even if they are adults and fellow shareholders.
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