Constructive Dividends
In Ltr. Rul 20028806, the shareholders of a corporation owned, managed, and operated country club were given discounts for the use of the club’s facilities. The club was located in a community where both non shareholders and shareholders resided. Shareholders received discounts on membership dues as well as other incentives inside the club. Taxpayer requested a letter ruling on whether or not the discounts received constitute as constructive dividends received. The IRS indeed ruled the discounts received by the taxpayer constituted as constructive dividends under section 316 and the distribution applied to section 301. A constructive dividend is a form of payment made by a corporation to its shareholders that …show more content…
Some of the tactics that were used involves unnumbered bills, invoices, and estimates. In conclusion of the case, the income diverted by James Trusdell was found to be constructive dividends. The Truesdell case is a great example of how a constructive dividend of an unstructured corporation can purposely occur. In theory, the less structured or less formal a corporation, the higher the possibility a constructive dividend occur purposely or inadvertently. Because the income was purposely diverted by James Truesdell, there is no legal action Truesdell could have taken if his purpose was truly to commit tax fraud. A recommendation of what Truesdell could have done initially is to increase the salary of the services he provided to both of his wholly-owned corporations. Truesdell controlled most of Patch and Jim T. Enterprise activities. Truesdell direct compensation for his service provided was never stated but if he would have increased his salary to a reasonable amount, it would have avoided some of the possible dividends that would have to be paid out by the corporations. There are many other ways corporations can divert income purposely to avoid possible paid out dividends. The federal case U.S v Ellefsen (655 F.3d 769) is an example that involved an illegal trust scheme (Aegis System). Brian Ellefsen, an orthopedic surgeon is the sole holder of his personal service corporation, Southwest Missouri Bone & Joint, Inc. (SMBJ, Inc) enrolled in the Aegis