constructive dividend

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Constructive Dividend

In American taxation, any payment to a shareholder that is not classified as a dividend by the company. The IRS treats these payments as dividends and taxes them as such. Constructive dividends are most common in closely-held corporations in which shareholders are often also employees or landlords of the company. For example, if a company rents its offices from a shareholder and pays in excess of the offices' fair market value, then the IRS considers the company's rent (or a portion of it) as a constructive dividend. Unlike business expenses, which are tax-deductible, constructive dividends are taxable. Thus, the company from the example will not be able to write off its rent like most other companies do.
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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.
Wall Street Words: An A to Z Guide to Investment Terms for Today's Investor by David L. Scott. Copyright © 2003 by Houghton Mifflin Company. Published by Houghton Mifflin Company. All rights reserved. All rights reserved.
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However, rental payments that are too high in relation to the property's fair rental value face possible reclassification as constructive dividends or compensation (Sec.
(12) Thus, under such a factual scenario, the amount of the constructive dividends as imputed from the Florida corporation and as based on the Key Biscayne property would have correspondingly been reduced.
The court also found that DKD's payments to Dursky for the expenses of the cattery, funding of the pension plan, and medical payments were constructive dividends and, thus, were all taxable to her.
The court also found that since the company here had sufficient earnings and profits to characterize the contributions as dividends, the contributions to the 419 plan could be taxed as constructive dividends under IRC Section 301(c).
Where the widow is a controlling stockholder, the payments may very likely be treated as constructive dividends. In such a case, the entire death benefit would be taxable to her and not deductible by the corporation.
Among the issues were loans by Caspian to Morrison and other shareholders that the IRS said were taxable constructive dividends. In 2003 Morrison petitioned the Tax Court to redetermine the deficiencies.
(106) However, the court did note that the directors' fees, the salary paid Gillam, and the personal expenses of the directors' wives paid for by the corporation could be construed as constructive dividends. (107) The court remanded the case for a determination of whether those payments were in fact constructive dividends and thus violated the rule of Donahue and Ahmanson because they were not made available to Muir.
The collateral or repayment-triggered constructive dividends are generally of the type subject to amelioration or elimination under Rev.
The seminal case on constructive dividends in intercorporate transfers is Rushing.|5~ This case involved cash advances from one controlled corporation to another.
Constructive dividends result in an unintended and unfavorable recharacterization by the IRS of a corporate-shareholder transaction as a dividend.
Menard were each due a credit of $196,845, the amount of Medicare taxes each paid on the wage income now recharacterired as constructive dividends. By the time rulings were issued in Menard I (TC Memo 2004-207) and Menard II (TC Memo 2005-3), the statute of limitations for filing a refund claim on the overpaid Medicare taxes had expired with respect to both taxpayers.
This amount was made up largely of constructive dividends so treated by the IRS because the corporation was paying many of the couple's personal expenses.

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