Taxable to extent of corporations current and accumulated EP Usually arise in

Taxable to extent of corporations current and

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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 property Shareholder 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 Shareholder Measure of constructive dividend is excess of property's fair rental price over what is paid Bargain Rental of Corporate Property Obligation 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 Shareholder Not 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 work Size and complexity of business Comparison of salaries paid with both gross and net income Taxpayer's salary policy toward all employees Small corporations with limited number of officers, amount of Determining reasonableness of salary payment Unreasonable Compensation Most frequently encounter types of constructive dividend summarized below: 5-3d (Constructive Dividends) Taxation Page 4
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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 paid Advances to shareholders that are not bona fide loans usually are reclassified as constructive dividends. Whether advance is open account or is evidence by written instrument Whether shareholder furnished collateral or other security for advance How long the advance has been outstanding Whether any repayment have been made The shareholder's ability to repay the advance The shareholder's use of funds Regularity of the advances The 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 interest Corporation 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
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