Constructive Dividends Essay

2270 WordsSep 17, 201410 Pages
Constructive Dividends In Ltr. Rul 20028806, the shareholders of a corporation owned, managed, and operated country club were given discounts for the use of the club’s facilities. The club was located in a community where both non shareholders and shareholders resided. Shareholders received discounts on membership dues as well as other incentives inside the club. Taxpayer requested a letter ruling on whether or not the discounts received constitute as constructive dividends received. The IRS indeed ruled the discounts received by the taxpayer constituted as constructive dividends under section 316 and the distribution applied to section 301. A constructive dividend is a form of payment made by a corporation to its shareholders that…show more content…
For example, property that was sold for under market value to shareholder will be reassessed at fair market value. The shareholder will have to pay back taxes on the difference of fair market value and the amount originally paid. Shareholders may also face criminal penalties if they are found to aid in the process of purposeful tax evasion. As mentioned, most constructive dividends occurred in closely held corporations, where there are a limited numbers of shareholders and sometimes may only consist of one or two shareholder(s). Often times these shareholder(s) serve as the corporation’s board of directors, management, and are in full control of the corporation’s day to day operations. Closely held corporation are usually not well structured and lack formalities, creating opportunities for shareholders to divert income and constructing other forms of constructive dividends for their own sole benefits. The federal court case of Truesdell v. Commissioner, 89 TC 1280, Code Sec(s)61 is an example of income diversion within a closely held corporation. James Truesdell, who solely owned both the company Asphalt Patch and Jim T. Enterprise (incorporated by his son who was 17 at the time), is found to have diverted funds from his solely owned corporations to his own bank account in the year 1977, 1978, and 1979. The diverted funds was neither reported on his tax return nor reported as income on both corporations. Because James controlled much of both company’s activities, he
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