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Case summary - Essay Example

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Summary
Welle’s income tax and a penalty relating to computation accuracy of $2,124 for 2006. The respondent seeks to determine whether the petitioner was awarded a constructive dividend of $48,275 from TWC and consequently…
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MEMORANDUM Case Citation Terry J. Welle and Chrisse J. Welle v. Commissioner of Internal Revenue, 14 T.C. No. 19.
Facts
a) Terry J. Welle is the only shareholder of TWC, a construction incorporated company.
b) Petitioners have a property in Detroit Lakes, Minnesota, and planned to erect a second home. Its construction commenced in 2004 and completed in 2005.
c) Petitioners contracted TWC to aid the construction of their home.
d) Petitioners contracted subcontractors directly and engaged them as if acting on behalf of TWC.
e) Petitioners reimbursed TWC the cost of construction that paid to the subcontractors contracted by the petitioners.
f) Petitioners only paid TWC the operating expenses cost and did not factor in the profit margin of 6% to 7% as would be expected when TWC is dealing with its other customers.
g) TWC did forego the profit.
h) Respondent determined Mr. Welle received constructive dividend from TWC. This was to the tune equal to the foregone profit.
Issues
a) Respondent established a deficiency of $10,620 in Mr. Welle’s income tax and a penalty relating to computation accuracy of $2,124 for 2006. The respondent seeks to determine whether the petitioner was awarded a constructive dividend of $48,275 from TWC and consequently liable to pay the accuracy penalty envisaged in section 6662(a).
b) Petitioners argue that no constructive dividend was received since a stockholder cannot receive a constructive dividend when the services provided to a shareholder were at cost.
c) Petitioner further contends that the services provided to Mr. Welle were different from those provided to TWC’s unrelated customers hence measuring the petitioner’s respondent’s constructive dividend was incorrect.
Holdings
a) Petitioner did not collect a constructive dividend amounting to the to the sum of TWC’s foregone profit derived from the petitioner’s home construction services the home.
b) There was no distribution of current and/or accumulated earnings and profits. It can be determined that TWC did not redirect actual value to the petitioner by failing to charge its normal profit margin when receiving the reimbursement.
Rationale
a) Even though it is not the court’s mandate to construct and inform arguments for the parties involved, it could clearly determine that the timing of respondent’s constructive dividend adjustment is highly inappropriate and untimely. TWC was reimbursed for its work during 2004 and 2005 while the petitioners relocated into the home in 2005 (Johnson, 502). Therefore, if there was any constructive dividend that had been received then it would have been received, and therefore brought up in 2004 and/or 2005, not 2006.
b) According Section 316(a) a dividend is any allocation of property that a firm makes to its stockholders from its earnings for the trading period and profits retained from the past periods (Johnson, 501). TWC did not make any profit or earnings from the transaction with Mr. Welle for the construction of his home.
c) Ault and Arnold rightly argue that a constructive dividend usually arise when a corporation awards an economic benefit, specifically earnings and profits, on a stockholder without the expecting any payment or adequate consideration for the same (360).
d) Not all business expenditure by an incorporated company that bestows some economic benefit on a stockholder can be termed as constructive dividend (Ault and Arnold, 358). Loftin & Woodward, 577 F.2d at 1215.
e) Respondent did not elucidate how a the decision to forego profits, especially when the stockholder reimburses the corporation in full for its services, results in distribution of property which reduces the earnings and or profits as envisaged in section 316(a). The respondent also failed to substantiate the assertions with a credible case that sets precedent.
f) Incidental or insignificant use of corporate property does not justify a finding of a constructive dividend (Johnson, 501). Mr. Welle’s employment of TWC for the construction work was incidental to those purposes. If the activity was employs the corporate property either incidentally or insignificantly may not constitute receiving of a constructive dividend.
Works Cited
Ault, Hugh. and Arnold, Brian. Comparative Income Taxation: A Structural analysis. New York: Kluwer Law International. 2010. Print.
Johnson, Linda. Federal Tax Course. New York: CCH.2008. Print. Read More
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