Constructive Dividends in Closely Held Businesses
A constructive dividend generally refers to a situation where the IRS re-characterizes certain corporate “expenses” as dividends thereby excluding certain corporate deductions and increasing the corporation’s tax (along with possible penalties and interest). Examples of disallowed expenses include: (a) unreasonably large salaries; (b) low interest or no interest shareholder loans; and (c) unreasonable rent payments to affiliates. Thus, it is wise for closely held business owners to document all transactions between the corporation and its officers/directors/shareholders. The documentation should preferably include reasoned analysis where appropriate to avoid issues like the situation recently explained in Yates v. Holt-Smith 2008AP000017 05-14-09. In Yates, the court found that the alleged bonus payment was in fact a constructive dividend and also forced the corporation to pay said dividend despite one equal shareholder's objection to said payment. A well documented minute book, along with a detailed buy sell agreement, may have avoided this result and (I assume) lots of litigation expenses
I saw something recently that now requires Wisconsin businesses to inform WDOR of rents paid to related entities.