¹ Mr. Henderson defaulted on the payment of his note, and as a result, WVI instituted suit against him in the Circuit Court of Virginia Beach on Oct. 20, 1988. Mr. Henderson countersued, alleging violation of his shareholder rights and requested the dissolution of WVI. - 5 - Simultaneously with the sale of the 200 shares, Dr. Gow and Mr. Jones executed a voting trust agreement (VTA). Under the terms of the VTA, Dr. Gow and Mr. Jones agreed to, and did, transfer all of their shares in WVI to Mr. Gow, as trustee of the voting trust. The trust was to continue until September 30, 1993. On October 24, 1988, the VTA was amended. Pursuant to this amendment, Dr. Gow agreed to, and did, transfer all stock issued to her since September 30, 1983 (the date the VTA was executed) to Mr. Gow, as trustee. Moreover, Dr. Gow agreed to transfer to the trustee all stock subsequently issued to, or owned by, her. On October 19, 1983, Dr. Gow, Mr. Henderson, and Mr. Jones signed an agreement to purchase a 256-acre tract of land located 1 mile west of the restored colonial area of Williamsburg, Virginia, known as Powhatan Plantation. (This property was acquired for development as a time-share resort. See infra.) On January 16, 1984, they assigned their rights in Powhatan Plantation to WVI. By early 1984, WVI was in need of operating funds. In an attempt to provide working capital to WVI, Dr. Gow lent the company $120,000. WVI was unable to repay this loan, and on August 1, 1985, Dr. Gow accepted 50 shares of WVI’s stock in satisfaction of the company’s obligation to her. On February 16, 1988, WVI’s board of directors approved a stock bonus plan for Dr. Gow. Under the terms of the plan, Dr. Gow was entitled to receive as a bonus up to 10,000 shares of WVI - 6 - stock, at a maximum rate of 1,000 shares per year, for 10 years. The number of shares to be issued annually as a bonus was to be determined by Dr. Gow. In accordance with the stock bonus plan, on February 16, 1989, WVI issued 800 shares of WVI common stock to Dr. Gow. On February 15, 1990, WVI issued an additional 400 shares of its common stock to her as a bonus. It is the value of these shares at the time of award that is subject to dispute--the first issue. Financing History WVI borrowed $100,000 from Central Fidelity Bank. These funds were used to cover startup expenses and other administrative costs. In late 1983, WVI received an acquisition/development loan from First American Savings & Loan (First American) in the amount of $1.75 million; it also received a financing commitment from Berkeley Federal Savings (Berkeley) for $10 million. In 1984, Bush began construction of, and Offsite marketed, the time-share project. In early 1985, Berkeley withdrew its loan commitment, making it difficult for WVI to timely meet its financial obligations to Bush for construction and to Offsite for marketing. WVI became delinquent in its payments to Bush, and in May 1985, Bush filed a mechanics lien against the project. The project further became mired in financial difficulties when, in early 1986, over its concern with Bush’s mechanics lien, First American threatened to terminate its loan to WVI. Eventually, - 7 - Security Pacific (a local financial institution) agreed to provide development financing, as well as a bridge loan, to refinance the First American loan. Security Pacific conditioned its financing agreement on WVI’s ability to reduce its outstanding debt. Consequently, in order to obtain debt forgiveness and secure additional guarantors, WVI proposed a joint venture with Bush and Offsite. Powhatan Associates On November 19, 1986, WVI, Bush, and Offsite formed Powhatan Associates. WVI contributed the development assets (which consisted of the Powhatan Plantation time-share project, land, unsold inventory, and contractual and other rights associated with the project net of project liabilities) as well as its services and expertise as a developer and administrator. Bush and Offsite each agreed to forgive the debt owed them by WVI; they further agreed to guarantee certain liabilities of WVI to repurchase defaulting time- share contracts under several financial agreements. Offsite agreed to continue to provide marketing services to the joint venture in exchange for an allocation of the fees and expenses relating to its marketing operations. Bush agreed to continue to provide construction services to Powhatan Plantation so long as it was allocated the profits and expenses associated with construction. The parties agreed that WVI would receive all of its administration costs (including reasonable salaries), plus 1-1/2 percent of the - 8 - gross proceeds after a certain level of development had been reached. This development fee was designed to equalize the estimated profit margins among Offsite, Bush, and WVI. As the administrative partner of Powhatan Associates, WVI was responsible for the strategic planning and day-to-day operation of Powhatan Plantation. WVI’s responsibilities included: (1) Reviewing and approving all time-share sales contracts; (2) obtaining financing for the joint venture; (3) preparing all required reports and accountings; (4) servicing and collecting joint venture mortgage portfolios; (5) monitoring product quality and customer satisfaction; and (6) coordinating the construction schedules and inventory availability. Nonroutine matters required the approval of all three members of the joint venture. The joint venture agreement contained restrictions on the transferability or sale of an interest in the joint venture. In pertinent part, it provided: - 9 - RESTRICTIONS ON TRANSFER

² On Feb. 16, 1989, the project was in phase III of its planned development, with approximately 50 acres (146 units) of the 256-acre site devoted to the project. By Feb. 15, 1990, 65 acres (196 units) had been devoted to the project. According to the zoning and final site plan, approved by the James City County Board of Supervisors in April 1984, only 500 residential units could be built on the 256 acres. Therefore, in 1989, 206 acres remained to be developed with a maximum of 354 residences and in 1990, 191 acres remained which could be developed with 304 residences. - 27 - income-producing nature of the property. To project the number of time-share sales, she relied on Powhatan Associates’ annual reports to the Virginia Department of Professional and Occupational Regulation’s real estate board, the public offering statement for the project, and computer printouts of 1989 and 1990 sales provided by petitioners. Ms. Maiden determined that potentially 500 units could be built, and after taking into account the number (5,497) of intervals which had been sold as of February 16, 1989, 20,003 intervals remained for sale.3 She projected annual sales of 1,800 intervals for 1989 and 1,900 intervals for each of the subsequent years until the total number of intervals (20,003) that remained to be sold as of February 1989 was sold. To determine a weighted average interval sales price, Ms. Maiden used the audited financial statements of Powhatan Associates and a price list for sale in 1997 (the only existing price list), in addition to the information used to project the number of time-share units sold. On the basis of this information, Ms. Maiden determined a weighted average sale price of $14,000 for all years in the projection period. The net operating income per interval was then estimated, using Powhatan

³ In calculating the number of intervals which could be sold, both experts used 51 intervals per unit. - 28 - Associates’ financial statements and Powhatan Associates’ marketing and construction agreements, as follows: Average interval sales price: $14,000 Expenses: Sales/marketing 45.0 Cost of construction 25.0 Development fees 1.5 Reserves for amenities 1.5 Total 73.0 Net operating income per interval $3,780 ($14,000 - (73% x 14,000 = $10,220)) On the basis of the assumptions that (1) as of February 1989, 20,003 intervals remained for sale, (2) 1,800 of the 20,003 intervals would be sold in year 1, 1,900 of the intervals would be sold in each of the years 2-10, and 1,103 intervals would be sold in year 11, and (3) the net operating income per interval would be $3,780, Ms. Maiden calculated the income stream that could be generated from the sale of Powhatan Plantation’s time-share properties to be $75,611,340 for 1989 and $69,586,020 for 1990. Ms. Maiden then considered the proper discount rate to be used to bring the estimated future income stream to present value. Ultimately, Ms. Maiden determined that a 25-percent discount rate was appropriate, using “the band of investment” method, which is a “synthesis of mortgage and equity * * * [yield] rates, which market data discloses as applicable to comparable properties”. The method selected is “a weighted average of rates of return by the lender and equity investor”. In arriving at the 25-percent discount rate, - 29 - Ms. Maiden combined the safe rate of return from the 10-year U.S. Treasury bond (9.17 percent and 8.47 percent on the two valuation dates) and the equity rate expected by land and real estate developers (between 15 and 30 percent). Believing that the risk and lack of liquidity inherent in the time-share industry increases the discount rate, Ms. Maiden selected the higher end of the range. Use of the 25-percent discount rate resulted in Powhatan Associates’ inventory of time-share intervals and the land yet to be developed having a fair market value of $28,732,000 as of February 16, 1989, and $28,402,000 as of February 15, 1990. Respondent’s experts adjusted (increased) Powhatan Associates’ yearend audited balance sheet to reflect the fair market values of the inventory and land. Using the first-in first-out (FIFO) method of inventory, they determined the division between inventory and land fair market values to be as follows: 2/16/89 Inventory on hand–-1,949 intervals (Rounded) Number Net Value Discounted Value (25%) Sales (projected) 1,800 $3,381 $6,085,498 Remaining inventory 149 2,705 403,045 Value allocated to inventory of intervals 1,949 6,488,543 Total FMV 28,732,000 Value allocated to land 22,243,457 - 30 - 2/15/90 Inventory on hand–-2,905 intervals (Rounded) Number Net Value Discounted Value (25%) Sales (projected) 1,900 $3,381 $6,423,581 Remaining inventory 1,005 2,705 2,718,525 Value allocated to inventory of intervals 2,905 9,142,106 Total FMV 28,402,000 Value allocated to land 19,259,894 Powhatan Associates’ balance sheet line items (other than inventory and land devoted to time-share development) were interpolated from the close of the end of the prior year to the applicable valuation date (at a straight-line rate) to reflect the time difference.4 (No provision for taxes was included in determining the overall value of Powhatan Associates on the basis that no tax is paid at the joint venture level.) After making these adjustments, respondent’s experts concluded that (1) the venturers’ equity in Powhatan Associates was $32,866,718 as of February 16, 1989, and $35,001,760 as of February 15, 1990, and (2) WVI’s one-third pro rata interest in Powhatan Associates (before discounts to reflect lack of control and lack of marketability) was $10,955,573 as of February 16, 1989, and $11,667,253 as of February 15, 1990.

⁴ The interpolation factor for Feb. 16, 1989, was 47 days/365 days, and for Feb. 15, 1990, was 46 days/365 days. - 31 - Next, respondent’s experts considered whether discounts (either for lack of marketability or for minority interest, or both) were appropriate. Initially, the experts did not believe a discount for lack of marketability was appropriate at the joint venture level. Subsequently, they concluded that a 10-percent lack of marketability discount was appropriate, stating: The chief asset of Powhatan Associates is the inventory and land to be developed for time shares, and ample allowance for lack of marketability was taken into account for that asset, both in the projections of income and in the application of a relatively large discount rate. There is judicial precedent for this judgment not to duplicate discounts already taken. The experts further concluded that at the joint venture level only a relatively small discount (5 percent) for a minority interest was appropriate, stating: The history of the joint venture displays a careful attention to conservative development: inventory was kept low, and areas were built in clusters close to one another and the amenities, to allow for maximum use of the residual acreage should the time share development slow or cease. This history was taken into account in the real estate appraiser’s finding of fair market value of the time share property. There is no reason that these practices should change if another entity stepped into the shoes of WVI as administrator of the project. The exit provisions of the joint venture agreement provide for a purchase (by the other venturers) of a selling venturer’s interest at fair market value or at the price offered by a bona fide third party. A purchaser of a 1/3 interest might have the opportunity to purchase the entire entity under those exit provisions. We apply a 5% discount for the WVI minority interest to account for the risk that a purchaser of 1/3 interest might be invited to purchase all of the venture but be unwilling to do so, thus cancelling the 1/3 interest purchase. Because of the profitability of the venture to the other two “partners”, this scenario is unlikely. - 32 - After application of these two discounts, respondent’s experts opined that WVI’s one-third pro rata interest in Powhatan Associates was $9,367,015 as of February 16, 1989, and $9,975,502 as of February 15, 1990. This discounted value of WVI’s interest in Powhatan Associates was incorporated into the balance sheet of WVI. The experts further adjusted WVI’s balance sheet (1) to account for the fair market value of a 1-1/2-percent development fee payable to WVI from Powhatan Associates, (2) to apply a provision for the present value of taxes to be paid at the time of the time-share sales, and (3) to reduce from book to fair market value the interest WVI held in a parcel of undeveloped land in North Carolina. On the basis of these adjustments, the experts determined (1) the fair market value of WVI was $6,880,694 as of February 16, 1989, and $7,466,913 as of February 15, 1990, and (2) the pro rata value of the 800 shares and the 400 shares was $2,975,435 as of February 16, 1989, and $1,327,451 as of February 15, 1990. In arriving at the value of the 1989 and 1990 stock issuance, respondent’s experts’ final step was to sequentially apply (1) a 20-percent ($595,087) minority interest discount and a 10-percent lack of marketability discount ($238,035) for 1989, and (2) a 50- percent ($663,726) minority interest discount and a 10-percent ($66,373) lack of marketability discount for 1990. Having done so, respondent’s experts determined that the fair market value of the - 33 - February 16, 1989, stock issuance to Dr. Gow was $2,142,313 ($2,678 per share), and the fair market value of the February 15, 1990, stock issuance to Dr. Gow was $597,353 ($1,493 per share). In determining the fair market value of the stock bonus, the experts considered the VTA agreement and the fact that Dr. Gow, at her election, could receive within 10 years up to 10,000 shares, at a maximum of 1,000 shares per year. The experts believed that before purchase an informed hypothetical buyer would require protection against the potential dilution effect of the share authorization, as well as the placing of the stock in a voting trust. C. Court’s Analysis and Conclusion For ease of understanding, we have set forth in the appendices hereto a comparison of Mr. Gampel’s and Ms. Maiden’s-Ms. Kalmar’s valuations. Giving due consideration to the totality of the evidence before us, and in particular the testimony and reports of the expert witnesses, we find the analysis and conclusions of respondent’s experts more persuasive than those of petitioners’ expert. Consequently, we accept, with modifications discussed hereinafter, Ms. Maiden’s and Ms. Kalmar’s valuations. We agree with respondent that Mr. Gampel’s report contains fatal errors. These errors include: (1) His understatement of - 34 - Powhatan Associates’ anticipated income stream;5 (2) the size of the discount rate (32 percent) he developed through the summation method; and (3) his application of a 15-percent contingency discount to reduce the adjusted book values of WVI as of the valuation dates. We conclude that these errors resulted in an unacceptable understatement of fair market value for the stock bonuses awarded to Dr. Gow.6 We agree with the valuation methodology used by Ms. Maiden and Ms. Kalmar (respondent’s experts) but disagree with the quantum of the discounts they determined for lack of control and lack of

⁵ Mr. Gampel determined Powhatan Associates’ anticipated income stream by (1) projecting the number of intervals sold, and (2) estimating the sale price for those units. He projected the number of intervals sold by averaging the interval sales for the 2-year period preceding each valuation date. He then divided total sales by intervals sold for each of 1987, 1988, and 1989 in order to arrive at the average interval price for the applicable valuation date. By using this methodology, he used $12,250 as the average interval sale price for the 1987-88 period and $13,200 for the 1988-89 period. We believe Mr. Gampel’s methodology to be flawed. The yearly interval sale price was trending upward, and by 1989 it was $13,300. The interval sale price used by Mr. Gampel for the 1989 and 1990 valuation dates was clearly understated, which in turn, resulted in the understatement of Powhatan Associates’ income stream.

⁶ We are mindful that besides the value of Powhatan Associates, there are other differences between the experts in valuing WVI, such as Mr. Gampel’s reducing to 90 percent of face Mr. Henderson’s note to WVI, whereas Ms. Maiden and Ms. Kalmar did not. Additionally, Mr. Gampel increased WVI’s adjusted book value to include WVI’s estimated earnings from the close of the end of the prior year to each of the respective valuation dates. We have chosen to disregard these differences but note that they would result in an overall increase in the value of WVI’s stock. - 35 - marketability at both the Powhatan Associates and WVI levels. The discounts they used were as follows: At Powhatan Associates Level 1989 1990 Lack of control 5% 5% Lack of marketability 10 10 At WVI Level 1989 1990 Lack of control 20% 50% Lack of marketability 10 10 In contrast to these discounts, Mr. Gampel used the following discounts: At Powhatan Associates Level 1989 1990 Lack of control 15% 15% Lack of marketability 30 30 At WVI Level 1989 1990 Lack of control 20% 30% Lack of marketability 30 30 We have duly considered and studied the factors and reasoning used by the experts in determining their respective discount amounts. In this regard, we found Mr. Gampel’s reasoning to be well founded and more persuasive than that of Ms. Maiden and Ms. Kalmar. Mr. Gampel used empirical studies and factors (stated supra pp. 24-26) that we believe appropriate in formulating his - 36 - opinion as to the discount amounts, whereas respondent’s experts did not. We are not persuaded by respondent’s experts’ reasoning in determining the quantum of the discounts. The quantum of the discount for lack of control ranged from a low of 5 percent at the joint venture level to a high of 50 percent at the WVI level. Moreover, we are mindful that initially respondent’s experts believed a discount for lack of marketability was not appropriate at the joint venture level, but eventually changed their minds and applied a 10-percent discount. In contrast, Mr. Gampel’s discount rates were consistent and uniform, ranging from 15 percent for lack of control at the joint venture level (20 percent for lack of control at the WVI level) to 30 percent for lack of marketability at both levels. Consequently, we adopt the quantum of the discounts for lack of control and lack of marketability at both levels for both valuation dates as determined by Mr. Gampel. Thus, the valuation conclusions of Ms. Maiden and Ms. Kalmar should be adjusted (reduced) to reflect Mr. Gampel’s discount amounts. This adjustment can be made by the parties in their Rule 155 computation. In reaching our conclusions, we have considered all arguments raised by the parties in their posttrial briefs. We reject, as apparently did petitioners’ own expert, the argument (which petitioners’ counsel alleges was conceded by Ms. Kalmar during her testimony) that the shares of WVI stock awarded to Dr. Gow have no - 37 - value because of the existence of the voting trust agreement and the potential dilution of WVI stock as a consequence of Dr. Gow’s right to have 10,000 shares of WVI stock issued to her. Issues 2 and 3. Constructive Dividends We next examine whether WVI’s payments of petitioners’ expenses for trips to Key West and Hawaii, as well as WVI’s payments for the acquisition of the animal trophy collection, constitute constructive dividends to petitioners. The amount of these expenditures is not in dispute. Rather, the dispute centers upon whether these expenditures were made primarily to advance petitioners’ personal interests or were for legitimate business interests of WVI. Petitioners maintain that the trips to both Key West and Hawaii generated numerous ideas and concepts that were considered and later incorporated by Powhatan Associates in the time-share resort. Further, petitioners maintain that the amounts expended on the procurement of the animal trophy collection created an amenity intended to attract buyers of the time-share intervals. Respondent, on the other hand, maintains that these expenditures were made primarily to provide a substantial personal benefit to petitioners. It has long been recognized that when a corporation makes an expenditure or distribution out of its earnings and profits (without an expectation of repayment) primarily to confer a substantial personal benefit to a shareholder, the value of the - 38 - benefit conferred is taxable as a constructive dividend. See secs. 61(a)(7), 301, 316; Ireland v. United States, 621 F.2d 731, 735 (5th Cir. 1980); Loftin & Woodard, Inc. v. United States, 577 F.2d 1206, 1214 (5th Cir. 1978); Hash v. Commissioner, 273 F.2d 248, 250 (4th Cir. 1959), affg. T.C. Memo. 1959-96; Falsetti v. Commissioner, 85 T.C. 332, 356-357 (1985). A constructive dividend can take the form of either a distribution of corporate funds, the use of corporate property for personal purposes, or paying off a personal expense of the shareholder by the corporation. See Ireland v. United States, supra; Wall v. United States, 164 F.2d 462 (4th Cir. 1947); Martin v. Commissioner, T.C. Memo. 1997-492; Yarbrough Oldsmobile Cadillac, Inc. v. Commissioner, T.C. Memo. 1995-538. Control of a corporation by a shareholder as well as a corporate history of not paying dividends weighs strongly in favor of finding a constructive dividend. See Yarbrough Oldsmobile Caddillac, Inc. v. Commissioner, supra; Thielking v. Commissioner, T.C. Memo. 1987-227, affd. 855 F.2d 856 (8th Cir. 1988). In determining whether or not the expenditure related to the business of the corporation, we must ascertain whether the payment or expenditure has independent and substantial importance to the paying corporation. See T.J. Enters., Inc. v. Commissioner, 101 T.C. 581 (1993). An expenditure generally does not have independent and substantial importance to the distributing corporation if it is not deductible under section 162. See, e.g., - 39 - P.R. Farms, Inc. v. Commissioner, 820 F.2d 1084, 1089 (9th Cir. 1987), affg. T.C. Memo. 1984-549; Gill v. Commissioner, T.C. Memo. 1994-92, affd. 76 F.3d 378 (6th Cir. 1996). Thus, our analysis begins by focusing upon whether WVI’s expenditures were ordinary and necessary in the context of the time-share resort industry. An expense is ordinary if it is common or frequent in the context of the particular business out of which it arose. See Deputy v. DuPont, 308 U.S. 488, 495 (1940). An expense is necessary if it is appropriate and helpful to the operation of the taxpayer’s trade or business. See Carbine v. Commissioner, 83 T.C. 356, 363 (1984), affd. 777 F.2d 662 (11th Cir. 1985). A. Expenditures for the Hawaii and Key West Trips Petitioners’ evidence substantiating their activities of their Key West and Hawaii trips consisted of their testimony and prepared itineraries. We view petitioners’ testimony with caution, as it was self-serving. In addition, the itineraries were prepared by petitioners at least a year after the trips and in response to a tax audit; understandably, we question their reliability. Moreover, we are unable to ascertain from the itineraries the business relevance of many of petitioners’ activities. Accordingly, petitioners failed to persuade us that the purpose of these trips was not primarily their personal benefit. See Grossman v. Commissioner, T.C. Memo. 1996-452, supplemented by T.C. Memo. 1997-451, affd. 182 F.3d 275 (4th Cir. 1999); Fong v. Commissioner, - 40 - T.C. Memo. 1991-180. Respondent, on the other hand, produced numerous billing statements and invoices as well as testimony regarding WVI’s expenditures for 1991. We find respondent’s evidence persuasive. According to petitioners, these trips were undertaken to investigate and research Powhatan Plantation’s competition in order to incorporate comparable resort features and services that would make them more attractive to potential customers. We view this assertion with skepticism. In our opinion, the innovations and research petitioners sought could have been obtained without the elements of substantial personal pleasure. To illustrate, petitioners spent a large amount of time on these trips enjoying shopping malls, theme parks, and historical locations. Many of these trips were taken around the Thanksgiving, Christmas, or New Year’s holidays and were the only time during the year petitioners managed to escape their everyday routine. WVI subsidized many of the incidental expenses incurred by the spouses of members of the “management team”. During some of the activities, dinners costing $1,000 or more, as well as room service bills of almost $500, became the norm. Although it might be ordinary and necessary for Powhatan Plantation to investigate its competition in the same geographic area, it has not been shown to be ordinary and necessary for petitioners to examine resorts that are located in distant areas and are not in direct competition with Powhatan Plantation. - 41 - In light of petitioners’ control of WVI, such expenses become especially suspect. We conclude that the primary purpose of these trips was petitioners’ personal enjoyment. Petitioners’ visits were, at best, of marginal benefit to WVI and the joint venture. As we have previously stated: a trip that is primarily for the taxpayer’s individual pleasure is not converted into a business trip merely because some short portions of the trip involve business activities, even when it is clear that the asserted business activities actually occurred and that those business activities actually affected the cost of the trip. Grossman v. Commissioner, supra (citing George R. Holswade, M.D., P.C. v. Commissioner, 82 T.C. 686 (1984)). In Grossman, a case whose facts are similar to those in this case, we found that corporate expenses for trips taken by the taxpayer and his wife that had a slight business component constituted constructive dividends. In Grossman, the taxpayer and his wife, the two principal owners in a closely held corporation, took multiple trips to resort locations across North America, ostensibly to conduct discussions regarding corporate business. The taxpayers subsequently caused their corporation to reimburse them for their expenses. Relying solely upon the taxpayer’s assurances that there were no personal expenses involved, the corporation’s accountant claimed deductions for travel and entertainment expenses. In finding that the corporation made constructive dividends to the taxpayer, we disagreed with the - 42 - taxpayer’s characterization of the trips as relating to business, and held that the predominant purpose of most of the trips, despite having an incidental business purpose, was personal pleasure. We find no reason or distinction that compels a different result in the case before us. Petitioners have failed to persuade us that the expenditures were predominantly for business purposes. Accordingly, we sustain respondent’s determination that for the years in issue, the total amounts expended by WVI for petitioners’ entertainment expenses to Hawaii and Key West constitute constructive dividends to petitioners. B. Expenditures for the Animal Trophy Collection We now turn our attention to WVI’s expenditures for the procurement of the animal trophy collection. Once again, our factual analysis focuses upon whether the expenditures have an independent and substantial importance to the payor corporation. See Gill v. Commissioner, T.C. Memo. 1994-92. Although amounts spent advancing a personal interest of a taxpayer may constitute constructive dividends, amounts expended for the legitimate improvement of a corporation’s trade or business do not. Petitioners suggest that because the expenditures for the animal trophy collection constitute capital expenditures, they should receive different treatment than deductible expenses with regard to constructive dividend treatment. We disagree. Even if we were to accept the premise that these expenses otherwise were - 43 - amortizable under section 263, capital expenditures, if made for the personal benefit of the shareholder, can constitute constructive dividends. See, e.g., Challenge Manufacturing Co. v. Commissioner, 37 T.C. 650, 663 (1962); Gill v. Commissioner, supra. The expenses incurred for the animal trophy collection were composed mainly of costs associated with the acquisition and display of the animal trophy mounts; i.e., acquisition and mounting costs. Petitioners contend that the animal trophy collection was to be used both as a marketing tool and as an amenity of Powhatan Plantation. They allege the collection was to tour selected sites around the country as well as to be placed in a “museum” located on Powhatan Plantation. Petitioners assert that such displays would attract potential buyers of the time-share intervals. However, most of the animal trophy mounts were put on display at Bob’s and the Y.O. Ranch. We find petitioners’ argument unconvincing. Powhatan Plantation had a colonial working plantation theme, emphasizing the history of the Williamsburg-Jamestown, Virginia, area. The “world- class” animal trophy mounts collection was designed to be composed of exotic animals whose natural habitat did not include the tidewater area of Virginia. We do not believe the display of exotic animals such as elk, caribou, or Armenian red sheep furthers the historical colonial theme that was in place as a marketing strategy. In this respect we are mindful that notably absent from - 44 - the marketing brochure created by Offsite to highlight the salient amenities of the time-share resort was the mention of an animal trophy collection. Also revealing is the fact that the other members of the joint venture were unaware of the acquisition of an animal trophy collection, which is of significance in view of the fact that the joint venture agreement required a majority of the venturers to decide nonroutine matters. In acquiring the animal trophy collection, Mr. Gow personally hunted the animals and made numerous trips to Y.O. Ranch and Alaska. On several occasions he took his wife along as a traveling companion. He used a customized handgun and spent many hours practicing his shooting skills at a range. He obviously enjoyed hunting. Although the mere enjoyment of one’s work may not alone transform a work assignment into a hobby, see Sanitary Farms Dairy, Inc. v. Commissioner, 25 T.C. 463, 468 (1955), petitioners’ enjoyment, along with the questionable business purpose, strongly suggests the hunting activities were for Mr. Gow’s personal benefit. In viewing the entire record, we are convinced that all expenditures incurred for the animal trophy collection were primarily for the personal benefit of petitioners and thus should be treated as a constructive dividend. In an attempt to convince us otherwise, petitioners cite Sanitary Farms Dairy, Inc., as support that costs associated with hunting trips can have a - 45 - legitimate business purpose. In Sanitary Farms Dairy, Inc., we found that “The cost of a big game hunt in Africa does not sound like an ordinary and necessary expense of a dairy business in Erie, Pennsylvania, but the evidence in this case shows clearly that it was and was so intended.” Id. at 467. Unlike here, in Sanitary Farms Dairy, Inc., we were satisfied from the evidence in the record that costs associated with the safari actually assisted in the marketing of the product line of the business. Thus, Sanitary Farms Dairy, Inc., is distinguishable from this case and offers no support to petitioners’ cause. In sum, we hold that WVI’s payments of petitioners’ expenses for trips to Key West and Hawaii, as well as WVI’s payments for the acquisition of the animal trophy collection, constitute constructive dividends to petitioners. Issue 4. Imposition of the Fraud or Accuracy-Related Penalty We now address whether petitioners are liable for the fraud penalty under section 6663(a) or alternatively the accuracy-related penalty under section 6662(a). Section 6662(a) imposes an accuracy-related penalty in an amount equal to 20 percent of the portion of the underpayment attributable to negligence or disregard of rules or regulations or to a substantial understatement of tax. However, if section 6663(a) is applicable, a penalty in an amount equal to 75 percent of the underpayment is imposed. Respondent relies primarily on the record in its entirety and concludes that - 46 - petitioners engaged in a pattern of conduct that illustrates their intent fraudulently to evade payment of Federal income tax. Petitioners obviously disagree. Fraud is defined as an intentional act of a taxpayer to evade the payment of tax that is believed to be owing by conduct that conceals, misleads, or otherwise prevents the collection of such tax. See Sadler v. Commissioner, 113 T.C. 99, 102 (1999); McGee v. Commissioner, 61 T.C. 249, 256 (1973), affd. 519 F.2d 1121 (5th Cir. 1975); Snavely v. Commissioner, T.C. Memo. 1994-256. The Commissioner has the burden of proving fraud by clear and convincing evidence. See sec. 7454(a); Rule 142(b); Rowlee v. Commissioner, 80 T.C. 1111, 1123 (1983); Beddow v. Commissioner, T.C. Memo. 1999-232. To satisfy this burden, the Commissioner must show: (1) That an underpayment exists; and (2) that the taxpayer intended to evade taxes known to be owing by engaging in conduct intended to conceal, mislead, or otherwise prevent the collection of taxes. See Parks v. Commissioner, 94 T.C. 654, 660-661 (1990). The existence of fraud is a question of fact to be resolved from the entire record and can be proven by circumstantial evidence. See Recklitis v. Commissioner, 91 T.C. 874, 909 (1988); Grosshandler v. Commissioner, 75 T.C. 1, 19 (1980); Gajewski v. Commissioner, 67 T.C. 181, 199 (1976), affd. 578 F.2d 1383 (1978). But fraud is not presumed; it is required to be shown through - 47 - affirmative evidence. See Beaver v. Commissioner, 55 T.C. 85, 92 (1970). Courts have developed various factors or badges which tend to establish fraud. These include: (1) A pattern of understatement of income; (2) inadequate records; (3) concealment of assets; (4) income from illegal activities; (5) attempting to conceal illegal activities; (6) implausible or inconsistent explanations of behavior; and (7) dealings in cash. See McGee v. Commissioner, supra at 260; Snavely v. Commissioner, supra. In addition, the taxpayer’s sophistication, education, and intelligence may also be considered in determining the existence of fraud. See Sadler v. Commissioner, supra. No single factor or any combination of factors will necessarily lead us to the conclusion that fraud exists. We must examine whether a pattern of fraudulent intent was established on the basis of an examination of the entire record. Respondent argues that the record is replete with indicia of fraud by petitioners, including the following: (1) Gross undervaluation of the 1989 and 1990 stock bonus awards; (2) the hiding of the animal trophy collection expenditures by recording them in different accounts in the company’s general ledger at the direction of Dr. Gow; (3) lack of petitioners’ credibility in statements made both at audit and at trial; and (4) charging of personal items as business expenses. Moreover, respondent claims that petitioners’ knowledge of tax and accounting issues supports - 48 - a conclusion that they structured their dealings in WVI and Powhatan Associates in such a way as to purposely evade the payment of taxes. We disagree. We do not find petitioners to be tax sophisticated. Although marginally experienced in business matters, neither Dr. nor Mr. Gow had substantial knowledge or training in tax law. Dr. Gow’s advanced degrees were in the field of education, not business. Before the formation of WVI, her experience and training dealt more in the operational management and planning side of business than with the accounting or economic side. Several courses in tax do not make one an expert. Additionally, we draw no inferences regarding Dr. Gow’s tax sophistication from a letter she wrote to her personal accountant (Mr. Bielat) regarding her entitlement to specific deductions. Although we find petitioners’ testimony self-serving, we do not necessarily find their testimony untruthful or devious. Nor are we convinced that petitioners deliberately caused their travel and entertainment expenses to be hidden in the company’s books in a way designed to avoid taxes. The fact that Revenue Agent Puchaty could not find the expenses in the accounts where he expected them to be does not persuade us that petitioners intentionally “hid them”. Respondent cites Grossman v. Commissioner, T.C. Memo. 1996- 452, for the proposition that in circumstances similar to those - 49 - presented here, we upheld the imposition of the fraud penalty under section 6663(a). Within the fraud context, we find the situation in Grossman distinguishable from that involved herein. The taxpayer in Grossman was a practicing lawyer specializing in Federal income taxation. He held an LL.M. in taxation from New York University and had previously worked for the Internal Revenue Service. He obviously possessed a substantial level of sophistication in the area of tax law. Here, petitioners, although highly intelligent, do not possess the same level of tax expertise. We recognize that petitioners have grossly undervalued the stock bonus awards and charged personal items as business expenses. We have no doubt that petitioners’ conduct in this case comes close to the line that separates a conscious “disregard of rules or regulations” from an “intent to evade taxes believed to be owing”. However, even where there is a strong suspicion of an intent to evade taxes, we are hesitant to impose the section 6663(a) penalty unless we are convinced that the Commissioner satisfied his burden of proof. See Toussaint v. Commissioner, 743 F.2d 309, 312 (5th Cir. 1984), affg. T.C. Memo. 1984-25; Petzoldt v. Commissioner, 92 T.C. 661, 700 (1989). Here, a complete review of the record has convinced us that respondent has failed to do so. Accordingly, we decline to impose the fraud penalty upon petitioners. Petitioners, however, have failed to prove that they acted with reasonable cause and in good faith. Evidence in the record - 50 - persuades us that petitioners negligently disregarded rules or regulations. See Neely v. Commissioner, 85 T.C. 934, 947 (1985); sec. 1.6662-3(b)(1), Income Tax Regs. Accordingly, we hold petitioners liable for the accuracy-related penalty on the entire underpayment for the years in issue pursuant to section 6662(a). In reaching our conclusions herein, we have considered all of the arguments presented and, to the extent not discussed above, find them to be irrelevant or without merit. To reflect the foregoing and concessions of the parties, Decision will be entered under Rule 155. - 51 - APPENDIX A Comparison of Experts’ Valuation of Williamsburg Vacations, Inc. Stock As of February 16, 1989 Valuation Of Powhatan Associates Petitioners’ Respondent’s Expert Experts “Pre-tax” value of Powhatan $18,817,787 $32,866,718 “Post-tax” value of Powhatan 11,704,663 Pro-rata value of 1/3 joint venture interest 3,902,000 10,955,573 Discount for lack of control 15% (585,300) 5% (547,779) Discount for lack of marketability 30% (995,010) 10% (1,040,779) Fair market value of Powhatan 1/3 interest 2,321,690 9,367,015 Valuation Of WVI Petitioners’ Respondent’s Expert Experts Shareholders’ equity, 12/31/88 $840,100 $840,086 Estimated earnings to 2/16/89 359,324 Fair market value of Powhatan 2,321,690 9,367,015 Fair market value of development fee income 697,000 1,596,262 FMV promissory note from shareholder 19,223 Land held for investment 10,000 10,000 Other changes to assets 22,127 Cost basis of Powhatan joint venture (369,400) (369,421) Book amount of promissory note (192,230) Land held for investment at cost (357,000) (357,000) Tax adjustment (4,228,419) Other changes to liabilities 207 3,328,707 6,880,857 Contingency discount 15% (499,306) --- Fair market value of Williamsburg Vacations, Inc. 2,829,401 6,880,857 - 52 - Valuation Of The Shareholdings Petitioners’ Respondent’s Expert Experts Per share pro-rata value $1,529 $3,719 Pro-rata value of 800 shares 1,223,525 2,975,506 Discount for lack of control 20% (244,705) 20% (595,101) Discount for lack of marketability 30% (293,646) 10% (238,040) Fair market value of 800 shares in WVI 685,174 2,142,364 Rounded 685,000 Per share 856.25 2,678 - 53 - APPENDIX B Comparison of Experts’ Valuation of Williamsburg Vacations, Inc. Stock As of February 15, 1990 Valuation Of Powhatan Associates Petitioners’ Respondent’s Expert Experts “Pre-tax” value of Powhatan $22,456,921 $35,001,760 “Post-tax” value of Powhatan 13,968,205 Pro-rata value of 1/3 joint venture interest 4,656,000 11,667,253 Discount for lack of control 15% (698,400) 5% (583,363) Discount for lack of marketability 30% (1,187,280) 10% (1,108,389) Fair market value of Powhatan 1/3 interest 2,770,320 9,975,502 Valuation Of WVI Petitioners’ Respondent’s Expert Experts1 Shareholders’ equity, 12/31/89 $1,189,400 $1,189,397 Estimated earnings to 2/15/90 348,794 Fair market value of Powhatan 2,770,320 9,975,502 Fair market value of development fee income 799,000 1,557,915 FMV promissory note from shareholder 19,223 Land held for investment 10,000 10,000 Other changes to assets 22,126 Cost basis of Powhatan joint venture (546,560) (546,556) Book amount of promissory note (192,230) Land held for investment at cost (357,000) (357,000) Tax adjustment (4,391,591) Other changes to liabilities (12,881) 4,040,947 7,466,912 Contingency discount 15% (606,142) --- Fair market value of Williamsburg Vacations, Inc. 3,434,805 7,466,912 1 We are mindful that several mathematical errors exist in respondent’s computation. We do not believe these discrepancies are material. - 54 - Valuation Of The Shareholdings Petitioners’ Respondent’s Expert Experts Per share pro-rata value $1,527 $3,319 Pro-rata value of 400 shares 610,632 1,327,451 Discount for lack of control 30% (183,190) 50% (663,725) Discount for lack of marketability 30% (128,233) 10% (66,373) Fair market value of 400 Shares in WVI 299,210 597,353 Rounded 299,000 Per share 747.50 1,493