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constructive dividend |
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If a C corporation, with accumulated earnings and profits, assumes a shareholder's obligation to purchase another's stake in a business, the IRS may impute to the shareholder a constructive dividend (that is, reclassify it as a dividend distribution; see "Tax Pitfalls," at right). 18) A plan that does benefit shareholders, instead of employees, is not "for employees" and will be deemed a constructive dividend, in such case, the company will get no deduction for its payments and the shareholder will have to report the full premium cost as dividend income to the extent of the corporation's earnings and profits. If such an election is not made, or if requests for relief are denied, then the taxpayer may face constructive dividend (or capital) treatment. |
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