Hot Constructive Dividend Scenarios

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Hot Constructive Dividend Scenarios
1. Excessive compensation to
shareholder-employees 2. Corporation payment of
personal shareholder expenses 3. Equity
disguised as debt the interest deduction and
return of capital issue 4. Excessive
shareholder rental 5. Phony family employment
6. Personal use of corporate assets 7. Bargain
sales or rentals of corporate property 8.
Brother Sister Corp 482 Trap
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Trap Four Section 482 Rev. Rule 69-630
Bargain sale
C Corp A
C Corp B
Imputed Income
Imputed Dividend
Imputed Contribution

Common owners

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243 Deduction Protectors
1. 246 Stock not held long enough 2.
249A - Debt financed stock ownership 3.
1059 - Extraordinary dividends 2 yr rule and
consolidated return rule 4. The Waterman
Bootstrap Acquisition
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Problem 524

• June 1 P Corp stock trades at 15 declares
  dividend 1 per share. Record date June 8.
  Payment date June 12
• June 3 I Corp buys 1000 shares for 15k,
  collects 1000 dividend on June 10
• June 15 I Corp sells stock for 14k
• Tax consequences to I Corp? Desire to have 243
  shelter 70 of 1k dividend and have 1k STCL. But
  flunk excess 45 holding period of 246(c). So, no
  243 deduction. All 1k dividend taxable.
• Sale date Dec 1. 246(c) not apply more than
  45 days satisfied. 243 deduction of 70 allowed.

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Problem 524

• June 1 P Corp stock trades at 15 declares
  dividend 1 per share. Record date June 5.
  Payment date June 10
• June 3 I Corp buys 1000 shares for 15k,
  collects 1000 dividend on June 10
• June 15 I Corp sells stock for 14k
• Sale still on Dec 1, but second dividend of 1
  paid on August 15 (ex date 8/5)? Per
  1059(c)(3)(A), dividends with ex-dates within 85
  days treated as one dividend for 10 excessive
  dividend to basis rule. Here, 2k dividend over
  10 of 15k basis. Effect under 1059(a) is that
  basis reduced by non-taxable portion - 1400.
  Hence, stock basis reduced to 13,600 (15k less
  1400). Note, 243 deduction still allowed, but
  creates basis reduction. When stock sold for
  14k, have 400 gain.

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Problem 524

• June 1 P Corp stock trades at 15 declares
  dividend 1 per share. Record date June 5.
  Payment date June 10
• June 3 I Corp buys 1000 shares for 15k,
  collects 1000 dividend on June 10
• June 15 I Corp sells stock for 14k
• I Corp receives 3k dividends, but holds 25 months
  before sale. 1059(a) still applies. Stock must
  have been held 2 years before dividend
  announcement date. Holding period after not
  relevant. Hence, 243 deduction (70 - 2100)
  would reduce basis to 12.9k.

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Problem 524

• I Corp borrowed 15k to buy stock, paid 1200
  interest and received 1000 dividend? What
  result? No 243 dividend deduction per 246(a).
  Average Indebtedness Percentage is 100, so
  entire deduction lost.
• What if debt 7.5k? Then Average Indebtedness
  Percentage 50 under 246A. Half of 243
  deduction disallowed. Deduction reduced to 35
  or net 350.

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Problem 538
Basic Facts S Corp hold X Corp stock more than
2 yrs, not part of consolidated group. Basis in
stock 150k. - X Corp pays 100k dividend to
S Corp. Plenty of EP. - B buys X Corp
stock from S for 400k. - Goal 100k
dividend sheltered 70 buy 243 capital gain on
sale reduced 100k. Will it work? Its the
Waterman, TSN, Litton Industries issue. Note, if
held stock for less than 2 yrs or consolidated
return, than basis in stock reduced by tax-free
dividend per 1059 and plan fails. Here, 1059 not
apply. Risky if cant show business purpose
(TSN) or unrelated acts (Litton). Was dividend
cash unwanted by buyer? Step Transaction/Sham
doctrines may kill under Waterman rationale.