86%(22)19 out of 22 people found this document helpful
This preview shows page 28 - 31 out of 36 pages.
➔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 ashareholder, the payment is treated as a constructive dividend.●Unreasonable Compensation➔A deduction is allowed for “reasonable” salaries or other compensation forpersonal 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 shareholders5-3e. 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 thedistribution 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 oldstock 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