SUPPLEMENTAL MEMORANDUM FINDINGS OF FACT AND OPINION
WILES, Judge: The Court of Appeals for the Sixth Circuit remanded this case for us to reconsider the sufficiency or insufficiency of the earnings and profits of National Cigarette Service, Inc. (NCS), for purposes of determining the proper tax treatment of a constructive dividend received by petitioner, Estate of Vincent DeNiro, during 1969. We were not directed to hold further hearings on this issue; indeed to do so would give petitioners a second bite at the apple. Therefore, to the extent necessary, we find the facts to be as set forth in the findings of fact in our opinion filed in the
NCS was incorporated in the State of Ohio during 1955 and has been a corporation in good standing since that year. NCS reported on its 1969 U.S. corporate income tax return (Form 1120) that it had taxable income of $33,031.64 before net operating loss deduction.*497 On an amended 1969 U.S. corporate income tax return (Form 1120X) NCS reported a net loss for the year ending December 31, 1969, in the amount of $40,494.05.On its amended return, NCS deducted, as a business expense, a $89,257.04 payment to satisfy the estate tax liability assessed against the estate of Vincent DeNiro. On March 21, 1979, NCS paid $7,000 in settlement of a complaint filed by the United States, in the United States District Court for the Northern District of Ohio, for an erroneous income tax refund which resulted from NCS's deduction of the $89,257.04 payment during its 1969 taxable year.
The dispute herein involves NCS's $89,257.04 payment in 1969 to satisfy the estate's tax liability. Petitioners argue that NCS's earnings and profits were less than the $89,257.04 payment and, therefore, only part of the payment can be considered a constructive dividend. In our original opinion, we found "the evidence contained in the record is insufficient to establish the accumulated earnings and profits of * * * [NCS] * * *." As directed by the Sixth Circuit, we must make "a more specific determination about the sufficiency or insufficiency of the earnings and profits of NCS. *498 "
If, upon reconsideration, the tax court concludes that NCS's contention is corrct at least in part and that some portion of the $89,257 considered as a constructive dividend should be treated as a reduction in basis, it should so indicate and set forth how the sum should be allocated. If the tax court considers that the evidence is insufficient to support the petitioners' contention, it should set out in what respect petitioners have failed to meet the necessary criteria to establish the amount of the 1969 earnings and profits. [
After careful reconsideration of the entire record, we must conclude, as we did in our original opinion, that petitioners have failed to carry their burden of proof in establishing NCS's accumulated earnings and profits and, accordingly, we must sustain respondent's determination.
The term earnings and profits is not defined in the Internal Revenue Code and does*499 not correspond exactly to taxable income or any of the corporate accounting concepts. See
A distribution of property by a corporation to its shareholders is taxable as a dividend to the extent of its current earnings and profits calculated at the end of its taxable year, and then to the extent of its earnings and profits accumulated since February 28, 1913, or the date of its incorporation, whichever is later. Section 316(a)(1);
We begin our analysis with a computation of NCS's current earnings and profits calculated at the end of its 1969 taxable year; it is undisputed that, to the extent thereof, the $89,257.04 payment is taxable as ordinary income. We agree with petitioner's computation that at the end of its 1969 taxable year NCS had current earnings and profits in the amount of $41,762.99. 3 Thus, that amount of the $89,257.04 payment is taxable as ordinary income; the excess is taxable as ordinary income to the extent of NCS's accumulated earnings and profits.
*502 In the instant case, the only evidence petitioners submitted to establish NCS's accumulated earnings and profits consists of the following: (1) NCS's 19869 U.S. corporate income tax return; (2) NCS's 1969 amended corporate income tax return; 4 and (3) the testimony of Mr. Rogan, NCS's accountant, that as of January 1, 1969, NCS had a "deficit balance of $96,335.90." For the reasons set forth below, we believe that this evidence is insufficient to establish NCS's accumulated earnings and profits.
NCS was incorporated in 1955 and to arrive at a correct determination of its accumulated earnings and profits, adjustments need to have been made to the taxable income and retained earnings of the corporation from 1955 through 1969. Petitioner did not produce any evidence that the proper adjustments were made to NCS's taxable income and retained earnings since 1955 to derive NSC's accumulated earnings and profits as of January 1, 1969. What petitioner did present at trial was a schedule, attached to NCS's 1969 amended corporate tax return, titled "Reconciliation*503 of of Retained Earnings Account." According to this schedule, the balance of retained earnings as of December 31, 1967, was ($105,484.64). NCS made various adjustments, based upon a IRS audit for the years 1962 through 1967, to the retained earnings account and arrived at a revised balance as of December 31, 1968, of ($96,335.90).
We are not bound to accept testimony at face value even when it is uncontroverted if it is improbable, unreasonable, or questionable.
*505 To reflect the foregoing,
Our prior decision will be reentered
Footnotes
1. All section references are to the Internal Revenue Code of 1954, as amended.↩
2. This is assuming, of course, that the stock is a capital asset in the shareholder's hands.↩
3. During 1969, NCS reported a net loss of $40,494.04 on its amended corporate tax return. Because this net loss included a deduction for the estate tax payment of $89,257.04, which was a nondeductible expense, Mr. Rogan, NCS's accountant, adjusted its current (1969) earnings and profits to $48,762.99. He further adjusted the current earnings and profits to reflect the $7,000 payment made in 1977 to settle the suit brought by the United States to recover an erroneous income tax refund which resulted from NCS's deduction of the estate tax payment on its amended 1969 tax return.↩
4. We note that NCS's corporate income tax returns for the years 1955 through 1968 are not part of the record herein.↩
5. Mr. Rogan has been NCS's accountant since 1969 or 1970.He was initially engaged by NCS's officers "to participate in a tax situation involving the years 1962 through 1967." There is no evidence that Mr. Rogan ever examined the corporate books and records for the years 1955 through 1967 in order to make the proper adjustments to the retained earnings account which would be necessary to derive NCS's earnings and profits, as of December 31, 1967. ↩
6. Although permitted to do so by the Court of Appeals, because of our resolution of this issue, we need not reconsider respondent's alternative argument that NCS's payment of the estate tax liability constitutes ordinary income to the estate regardless of NCS's earnings and profits.↩