Avoiding constructive dividends when the Service reconstructs corporate income

Article Abstract:

The Internal Revenue Service has often taxed unreported income of closely held corporations to their shareholders as a constructive dividend. Specific income diverted to shareholders for personal use is considered a taxable dividend. An IRS reconstructions of unreported income are considered constructive dividends. Taxpayers can minimize or eliminate the effect of an assessment of constructive dividends by proving that a corporation does not have sufficient earnings and profits (E&P) to support the amount that is determined to be a shareholder dividend. Corporations must keep adequate records to support a computation of E&P. In a reconstruction of income, the shareholder must avoid automatic constructive dividend assessment by the IRS by establishing that funds received for personal use were for the purpose of meeting necessary and ordinary business expenses.

Dividends, Income

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Service revises tax shelter audit program

Article Abstract:

Changes to the Shelter Program by the Internal Revenue Service (IRS) have been announced in the Audit Manual for Income Tax Examinations. The Tax Shelter Program seeks to uncover and monitor shelters that try to obtain major tax breaks for investors that are not permissible for the transaction. Tax Shelter Program cases will be chosen according to the criteria that was previously used, including low gross income, huge net loss, a passive investor, final return, or non-operating entity.

Finance, taxation, & monetary policy, Tax shelters

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Tax benefits of equipment leasing may be lost when parties are related

Article Abstract:

The government has decided that if related-party lessees and lessors act to seek tax advantages that are available to unrelated parties, then they have to organize their leasing operations as active businesses. If they do not, their taxes will be extremely harsh. Unique problems may result if one party to an equipment lease has control over the other party.

Taxation, Economic aspects, Accounting and auditing, Leases, Industrial equipment leases, Lease or buy decisions

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