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constructive dividend

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constructive dividend
A corporate payment to a stockholder that is characterized by the Internal Revenue Service as a dividend distribution even though the corporation calls it something else. For example, a small firm may pay an employee who is also a stockholder an excessive salary so that the payment can be used as a tax-deductible expense rather than as an aftertax dividend payment. The IRS may determine that part of the payment is a constructive dividend and then disallow it as a tax-deductible expense.
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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).
Make the most of buy-sell agreements: these complex contracts solve ... by Hoekstra, Chad / Journal of Accountancy
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.
A fringe benefit primer for the closely held C corporation by Altieri, Mark P. / The Tax Adviser
If such an election is not made, or if requests for relief are denied, then the taxpayer may face constructive dividend (or capital) treatment.
Collateral consequences of U.S. transfer pricing adjustments by Tax Executive
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