T.C. Memo. 2004-63
UNITED STATES TAX COURT
STEPHEN M. AND REBECCA A. KERNS, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 12728-02. Filed March 11, 2004.
Charles Wist and Joan Kehlhof, for petitioners.
John D. Faucher, for respondent.
MEMORANDUM OPINION
COLVIN, Judge: Respondent determined that petitioners are
liable for deficiencies in Federal income tax of $3,357 for 1998
and $3,637 for 1999, and accuracy-related penalties under section
6662(a) of $671 for 1998 and $727 for 1999.
After concessions, the sole issue for decision is whether a
$7,800 payment by petitioner Stephen M. Kerns’s wholly owned
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corporation in 1999 for a permanent seat license allowing him to
buy six season tickets to Houston Texans football games was a
constructive dividend to petitioners. We hold that it was.
References to petitioner are to Stephen M. Kerns. Section
references are to the Internal Revenue Code in effect for the
years in issue. Rule references are to the Tax Court Rules of
Practice and Procedure.
Background
The parties submitted this case fully stipulated under Rule
122.
A. Petitioners and InsurMark
Petitioners resided in Houston, Texas, when they filed their
petition.
In 1998 and 1999, petitioners owned 100 percent of the stock
of InsurMark, Inc., a corporation which sells annuities to
insurance and financial agents. Petitioner was the president and
chief executive officer of InsurMark, Inc., in 1998 and 1999 and
is currently its president.
B. The Permanent Seat License
On December 31, 1999, petitioner submitted an application to
the Harris County-Houston Sports Authority for a permanent seat
license under which petitioner had the right to buy six season
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tickets for all home games of the Houston Texans football team1
to be played in the new football stadium (now called Reliant
Stadium) that was then under construction in Houston, Texas.
Petitioner listed his home address and Social Security number on
the application. InsurMark paid $7,800 with the application but
did not deduct this payment on its 1999 corporate income tax
return.
On May 23, 2000, petitioner signed a Harris County Stadium
permanent seat license agreement, under which the permanent seat
license fee was payable in three installments of $7,800, totaling
$23,400. Petitioner signed the agreement as “president” but did
not specify the entity of which he was president. Petitioner had
the exclusive right to use the seat license. He could not
transfer the license before the end of May 2003 without the
consent of the Harris County-Houston Sports Authority, other than
to an immediate family member. Petitioner indicated in the
agreement that he was not acquiring the license as an investment
and that he intended to use the license himself, and not to
distribute it or season tickets to others.
InsurMark also paid $7,800 for the permanent seat license in
the year ending December 31, 2000, and $7,800 in the year ending
December 31, 2001, for a total of $23,400 by the end of 2001.
1
The Houston Texans are a member of the National Football
League (NFL).
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The Houston Texans football team played its first regular
season home game at Reliant Stadium on August 24, 2002.
On April 4, 2003, after the petition was filed in this case,
petitioner asked the Harris County-Houston Sports Authority to
transfer his permanent seat license to InsurMark.
C. Petitioners’ Returns and Respondent’s Determination
Petitioners filed Federal income tax returns for 1998 and
1999. Respondent determined that petitioners had unreported
income of $8,229 for 1998 and $8,916 for 1999, in the form of
constructive dividends from InsurMark for its payment of their
personal expenses.
Discussion
Petitioners contend that Insurmark’s purchase of the
permanent seat license was not a constructive dividend to them in
1999. They contend that the license conferred no benefit on them
(and thus they received no constructive dividend) in 1999 because
the Houston Texans football team (and Reliant Stadium) did not
exist in 1999. Petitioners point out that InsurMark did not
deduct its $7,800 payment for the permanent seat license in 1999
and contend that a property right for which their corporation
claimed no deduction and which can be used only in the future
does not result in a constructive dividend to them in 1999.2
2
We need not decide whether the burden of proof shifts to
respondent under sec. 7491(a) because the facts are not in
dispute and the issue is one of law. See sec. 7491(a).
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We disagree. A shareholder receives a constructive dividend
to the extent of the corporation’s earnings and profits if the
corporation pays a personal expense of its shareholder or the
shareholder uses corporate property for a personal purpose.3
Secs. 301(c), 316(a); Falsetti v. Commissioner, 85 T.C. 332,
356-357 (1985); Henry Schwartz Corp. v. Commissioner, 60 T.C.
728, 743-744 (1973). If the earnings and profits requirement is
met, a payment is a constructive dividend if the corporation has
conferred an economic benefit on the shareholder without
expectation of repayment. United States v. Smith, 418 F.2d 589,
593 (5th Cir. 1969); Truesdell v. Commissioner, 89 T.C. 1280,
1295 (1987). Petitioners economically benefited from InsurMark’s
payment of the seat license fee in 1999 because they acquired,
without cost to themselves, the permanent seat license. The fact
that the football team and the stadium did not exist in 1999 did
not prevent the seat license from conferring an economic benefit
on petitioners; i.e., the right to buy season tickets when the
Houston Texans began playing football games.
Petitioner, not InsurMark, had the exclusive right to use
the seat license. The permanent seat license agreement was
between the Harris County-Houston Sports Authority and
petitioner. He could not transfer the license, other than to an
3
Petitioners do not contend that InsurMark’s earnings and
profits were less than the amount of constructive dividends
respondent determined.
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immediate family member, before the end of May 2003 without the
consent of the Harris County-Houston Sports Authority. In the
license agreement, petitioner agreed to use the license himself,
rather than to distribute it or the season tickets to others.
Because petitioner held title to the seat license until 2003,
InsurMark did not benefit from the license in 1999.4
We conclude that InsurMark’s $7,800 payment in 1999 for the
permanent seat license was a constructive dividend to
petitioners.
Decision will be
entered for respondent.
4
Petitioners do not contend, and we do not find, that the
primary benefit of the permanent seat license ran to InsurMark
rather than to them. Cf. Hood v. Commissioner, 115 T.C. 172, 180
(2000).