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Here's an excellent definition of constructive dividend from a tax perspective:
A concept in U.S. taxation in which various distributions to shareholders are not labeled as dividends but are still considered dividends by the IRS and taxed as such. Constructive dividends are most commonly found in companies in which the employees are also the shareholders. You can think of a constructive dividend as an undeclared dividend by the company that involves the use of corporate assets.
I understand that the the corp is in debt to the shareholder far in excess of the disallowed expenses ...
I'm afraid, however, that it woud the the amount of the annual (tax year) debt service (P&I) that would the amont to "net against" in any tax year
NOthe total amount of debt
Does that make sense?
pardon the typos "NOT" the TOTAL amount of debt
I think your best case it to calculate the amount tht the corp would be liable in the tax yaer in question, and then THAT would be a subtraction from the amount they are calling a constructuve dividend
The loan document representing the corp debt to the shareholder is a demand note for both i&p.
Ahhh then IF you recall, you MAY have a case ... but then again they will argue that (substance over form) you did this to esca[e the taxation of EFFECTIVE dividends
The note is for $315,000 and about $25,000 per year is being deemed a constructive dividend
Because the demand note can be recalled upon the lenders request, assuming the notice required by the provisions of the loan are met, they may say that because there is no distinction between you and the PSC (again substance over form) you are evading the true dividend
... just trying to help you "see around corners" here, but they may say that declaring only 25K per year is a reasonable dividend
What THEY will argue is that what byou have is a "FORM over SUBSTANCE" argument
... still with me?
He actually lent the money ($315,000) and zeroed out the profit each year to a Salary for which he received a W-2. Any use of corporate funds for personal use was charged to him and none was deducted. A note was prepared each year for any excess he took or for the corp if he didn't draw his salary. So a pattern was established. The audit created "new" for the corp after the fact and the corp will pay it's tax.
Wow, nicely done.
That's "new Income" for the corp
Given the w-2 offset ....
and no deduction for personal use ...
If you prepare a statement outlining your logic, my professional opinion is that you do "have a leg to stand on."
Be sure to mlink the salary as you have have done here
having established a pattern of documenting the overages and underages(??) with notes for over 28 years I'm just a bit miffed that the agent has changed our accounting methods to serve his purposes
And the statement that you understand the tax liability to come ... once it's due
I would really consider asking for an appeal to a manager here ... you need to get past the "front lines"
You state this very well; "can be recalled upon the lenders request, assuming the notice required by the provisions of the loan are met. ... the agent has changed our accounting methods to serve his purposes"
some one has looked at this ... out of context
My client is actually wondering if he is being targetted because he actually is Tea Partyist and has joined about a dozen of their organizations
:) ... would not be surprised .... especially if this started before everything "went public."
If that's the case, the time might be right for a STRONG assertion of OBVIOUS manipulation, and a myopic point of view
... don't be too obvious, but the innuendo shouldn't be too obscure (given the audience)
Ok thanks for your input
I thinl you have a good case, IF you get to someone above the front lines level
I'm old school-how do print out your answers for my files
ok ... three options: bookmark this (everything will stay active if you bookmark - save as a favorite place in your browser) .... use the "file, print" command from your browser to print to either a file or paper .... or copy and paste to a document, such as Microsoft Word
Ok I can do the "favorite" thing, the rest my staff can handle when they return in the morning
Do you require/desire/want/need more money?
YOu can always just come back here throgh justanswer as well
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