constructive dividend

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.

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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All that is required for treatment of a transaction as a constructive dividend is a finding by the IRS that a shareholder received some benefit from the corporation.
Identifying constructive dividends to shareholders
Based on these facts, the Tax Court concluded that the rent-free use of the houses was in substance a constructive dividend that was deemed to have been paid by the Florida corporation up through the corporate chain to Parker individually.
Personal use of Florida residential realty by a nonresident alien shareholder of a foreign corporate-related structure
Finally, the court remanded to the lower court for further consideration whether the 2005 pension plan contributions should be deductible by DKD and whether the distributions were taxable to Dursky as a constructive dividend.
Business expense deductions versus hobby expense deductions: recent court cases between taxpayers and the IRS
Amount paid by corporation for stock usually not taxable as constructive dividend to surviving stockholder(s).
Entity purchase agreement
The IRS would be hard pressed to impose a constructive dividend on the allocation of the corporation's opportunity to such new pass-through entity.
Buyers and sellers: tax strategies for buying and selling businesses
There has been some concern that a deferred compensation plan which covers only the majority or controlling shareholder/employee in a closely-held corporation might give rise to a constructive dividend, probably in an amount equal to the premium payments for any life insurance policy used as an additional funding vehicle.
Deferred compensation and salary continuation for the controlling shareholder
20 0 80 Initial Position on Tax Issue (from 1: definitely constructive dividend to 10: definitely deduct) 6.
The Effect of Staff Accountant Objectivity in the Review and Decision Process: A Tax Setting
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
In all of these cases, the Internal Revenue Service (Service) will attempt to reclassify part or all of the distribution as a constructive dividend.
Constructive dividends and intercorporate transfers: Mews turns back the hands of time
However, an advance or loan to a shareholder must be a bona fide loan to avoid a constructive dividend.
Using loans to extract cash from a closely held corporation
Miller held that a diversion of funds may be deemed a return of capital only if the taxpayer could demonstrate that the distribution, at the time it was made, was intended to be a return of capital and not a constructive dividend.
High court: no evasion without deficiency

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