In short
A constructive dividend is a benefit a corporation gives a shareholder that is treated as a dividend even though it wasn't formally declared, such as unreasonable compensation, personal use of corporate property or a bargain sale.
Key takeaways
- The corporation loses any deduction it claimed, such as for excessive salary.
- It is taxable to the shareholder as a dividend to the extent of earnings and profits.
- It mainly arises in closely held corporations.
Where it's tested
REG: C Corporation Taxation — study notes, a five-minute revision sheet and practice questions.
Practise: 3 questions
Question 1 of 3 · 0 answered
A corporation owns 30% of the stock of another domestic corporation and receives a $100,000 dividend. Ignoring the taxable income limitation, what is the dividends-received deduction?