Under no circumstances can a distribution whether

➔
5-3d. Constructive Dividends
● Definition:A taxable benefit derived by a shareholder from his or her corporation
that is not actually initiated by the board of directors as a dividend.
● Shareholder Use of Corporate-Owned Property: dividend income equal to the
fair rental value of the property for the period of its personal use.
● Bargain Sale of Corporate Property to a Shareholder:dividend income equal to
the difference between the property's fair market value on the date of sale and
the amount the shareholder paid for the property
● Bargain Rental of Corporate Property:
● Payments for the Benefit of a Shareholder:If a corporation pays an obligation of a
shareholder, the payment is treated as a constructive dividend.
● Unreasonable Compensation
➔ A deduction is allowed for “reasonable” salaries or other compensation for
personal services actually rendered

➔ To the extent compensation is “excessive” (“unreasonable”), the
distribution could be treated as a dividend, such that no deduction is
allowed.
➔ Advances to shareholders that are not bona fide loans usually are
reclassified as constructive dividends.
● Loans to shareholders
5-3e. Stock Dividends and Stock Rights
● Stock Dividends—§ 305
➔ Not taxable if pro rata distributions of stock or stock rights on common
stock.
● Disproportionate distribution situation in which the stock distribution may be
taxed
➔ Distributions payable in either stock or property at the election of the
shareholder
➔ Distributions of property to some shareholders with a corresponding
increase in the proportionate interest of other shareholders in either
assets or E & P of the distributing corporation.
➔ Distributions of preferred stock to some common shareholders and of
common stock to other common shareholders.
➔ Distributions of either common or preferred stock to preferred
shareholders. However, changes in the conversion ratio of convertible
preferred stock to account for a stock dividend or stock split are not
taxable in some circumstances.
➔ Distributions of convertible preferred stock unless it can be shown that the
distribution will not result in a disproportionate distribution.
● If stock dividends are not taxable, the corporation's E & P is not reduced.
● If a stock dividend is taxable, the shareholder's basis for the newly received
shares is fair market value and the holding period starts on the date of receipt.
● If the dividend shares are identical to these formerly held shares, basis for the old
stock is reallocated by dividing the taxpayer's cost in the old stock by the total
number of shares.
● Stock Rights
➔ Definition: Assets that convey to the holder the power to purchase
corporate stock at a specified price, often for a limited period of time.
Stock rights received may be taxed as a distribution of earnings and
profits. After the right is exercised, the basis of the acquired share