Ferguson v. Commissioner

47 T.C. 11 (1966)

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Ferguson v. Commissioner

United States Tax Court
47 T.C. 11 (1966)

  • Written by Heather Ryfa, JD

Facts

Joseph Ferguson (plaintiff) received $75,000 from a corporation named 444, of which he was the sole shareholder. The commissioner of Internal Revenue (defendant) characterized the payment as a constructive dividend. Ferguson appealed the assessment to the United States Tax Court, contending that 444 did not have sufficient earnings and profits to pay the dividend once the current year’s corporate income tax liability was deducted. The commissioner responded that such a deduction was improper because the corporation, which used the cash method of accounting, had not paid the tax liability in the tax year at issue.

Rule of Law

Issue

Holding and Reasoning (Hoyt, J.)

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Casebooks

Corporate and Partnership Tax

Key Terms

  • Accrual Method of AccountingA method of accounting under which all expenses or gains are recognized at the time the right to collect or obligation to pay exists. Under this method, a taxpayer who reasonably doubts that a debt will be paid may decline to accrue the debt in the year payment is due. However, the taxpayer must include the debt payment in the year he becomes certain to recover the debt.
  • Cash Method of AccountingA method of accounting that recognizes income as it is received.
  • Constructive DividendAn economic benefit given to a shareholder by a corporation from the corporation’s earnings or profits that has not been classified as a dividend by the corporation. A constructive dividend is also called a disguised dividend.

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