Constructive Dividends, Redemptions, and Related Party Losses

Mary Purnell

ACC 565- Organizational Tax Research and Planning

Dr. James Wright

Strayer University

October 31, 2015

As a CPA it is imperative to follow all steps when making a recommendation to clients, according to tax laws section 162 (A) 1 states that the IRC along with other authorities have limitations of the amount of compensation paid to shareholders. This limitations distinctly states that any compensation to shareholders to be less than or equivalent to other shareholders within the company in identical situations. When restrictions such as these are not followed it raises a red flag for the IRC, guidelines are implemented to ensure all ethical standards are being followed.

Section 302 of the IRC regulations states that any stock that is held by the company and redeemed this a form of compensation to the company, in exchange for stock because of this the company can no longer hold the stock. Clause b of section 302 states that this will only apply if the shareholders has less than half of the power to vote. According to the IRS passive loss rules states that losses that are accrued from passive activity are disallowed when the income exceeds the passive activity. Passive activity according to the IRS are things such as “trade or business activities in which you do not materially participate” (www.irs.gov). “In general, rental activities, including rental real estate activities, are also passive activities even if you do materially participate. However, rental real estate activities in which you materially participate are not passive activities if you qualify as a real estate professional. Additionally, there is a limited exception for rental real estate activities in which you actively participate. The rules for active participation are different from those for material participation. You can find guidelines for determining material participation, the rules for determining who is a real estate professional and...