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Taxable to extent of corporation's current and accumulated E&P○Usually arise in closely held corporation○Shareholder use corporation property for personal purposes at no cost□Shareholder has dividend income equal to fair rental value of property for period of personal use□Shareholder use of corporate-owned propertyShareholder purchase property at less than FMV□Produce dividend income = FMV - amount shareholder paid □Situation might be avoided by appraising property on or about the date of the sale □Bargain Sale of Corporate Property to ShareholderMeasure of constructive dividend is excess of property's fair rental price over what is paid □Bargain Rental of Corporate PropertyObligation need not be binding on shareholder Corporation pays obligation of shareholder, payment treated as constructive dividend. □Forgiveness by corporation for shareholder's debt = constructive dividend □Excessive rental paid by corporation to shareholder = constructive dividend □Payments for the Benefit of ShareholderNot deductible by corporation □Employee's qualification Comparison of salaries with dividend distributions Prevailing rate of compensation for comparable position in comparable business concern Nature and cope of employee's workSize and complexity of businessComparison of salaries paid with both gross and net incomeTaxpayer's salary policy toward all employeesSmall corporations with limited number of officers, amount of Determining reasonableness of salary payment□Unreasonable CompensationMost frequently encounter types of constructive dividend summarized below:○5-3d (Constructive Dividends)•Taxation Page 4
Small corporations with limited number of officers, amount of compensation paid to the employee in question previous year Whether a reasonable shareholder would have agreed to level of compensation paidAdvances to shareholders that are not bona fide loans usually are reclassified as constructive dividends. □Whether advance is open account or is evidence by written instrumentWhether shareholder furnished collateral or other security for advanceHow long the advance has been outstandingWhether any repayment have been madeThe shareholder's ability to repay the advanceThe shareholder's use of fundsRegularity of the advancesThe dividend-paying history of corporation Factors determining whether advance is bona fide loan:□Even when corporation make bona fide loan to shareholder, constructive dividend may be triggered = amount imputed interest on loan □When this applies, shareholder deemed to have made interest payment to corporation = to imputed interestCorporation deemed to have repaid imputed interest to shareholder through constructive dividend Corporation receives interest income and make nondeductible dividend payment Shareholder has taxable dividend income that may offset with interest