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.
Mentioned in ?
References in periodicals archive ?
Such a reallocation could result in a recharacterization of the rent income as a constructive dividend.
Moreover, if a company is organized as a C corporation, there is a question not only about whether the company can deduct costs for owner-related services, but also about whether such expenditures constitute a constructive dividend taxable to the owner for whose benefit such services were provided.
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.
The value of brokerage commissions paid by a corporation to an agent under a dividend reinvestment plan is a constructive dividend to each shareholder in the amount of each shareholder's pro rata share of the brokerage fees actually paid.
Amount paid by corporation for stock usually not taxable as constructive dividend to surviving stockholder(s).
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.
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.
The fact pattern and tax issue used in this study (whether a planned bonus for the sole shareholder/president will be allowed as a salary deduction or will be classified as a constructive dividend) are the same as those used and developed by Johnson (1993).
Where the retiring minority shareholder obviously does not want to agree to a minority discount in valuing his or her stock and the corporation pays a proportionate value of the company's value for the stock, IRS could argue that the part of the payment equal to what should have been the discount is a constructive dividend and subject to ordinary income tax.
owner's deduction for premiums paid would exceed its constructive dividend under Subpart F, resulting in a net tax benefit.
Payments to family members of shareholders: Amounts paid to a family member that were in excess of the value of services the family member provided constituted a constructive dividend (Snyder, T.C.
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. Other circuits had ruled differently on the application of IRC [section][section] 301 (distributions) and 316(a) (dividends) to informally transferred or diverted corporate funds in criminal tax proceedings.

Full browser ?