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Constructive Dividend Vs. Constructive Dividends

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Generally, a constructive dividend is unique from an ordinary dividend in many different ways. A constructive dividend is a form of payment to the shareholders from a corporation which can cause in financial benefits to its shareholder. Section 316(a) defines a dividend as any distribution of property (money, securities, and any other property except stock) that a corporation makes to its shareholders out of its current and accumulated earnings and profits after February 28, 1913. In other hand, a constructive dividend is a payment made by a corporation, which benefits to a shareholder even if the payment is made indirectly to the shareholder, and even there is no formal dividend declaration. Similarly, for tax purposes, the constructive dividend and normal dividend are treated the same as actual distributions, which are taxable to the shareholders to the extent of the current and accumulated earnings and profits of the corporation.
Constructive dividend situations exist in various levels of corporations, especially in closely held corporations. The purposes of the constructive dividends are that the corporations intend to achieve some tax objectives to avoid actual and formal dividends. The following areas that the IRS usually focuses on to challenge the issues of constructive dividends to the shareholders and corporations: unreasonable compensation, shareholders use of corporation-owned property, bargain sale or bargain rental of corporate property to shareholders,

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