Comparative Income Taxation - Essay Example

1. TWC did forego the profit.
2. Respondent determined Mr. Welle received a constructive dividend from TWC. This was to the tune equal to the foregone profit.

Issues

2006. 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).
2007. 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.
2008. 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

1. Petitioner did not collect a constructive dividend amounting to the sum of TWC’s foregone profit derived from the petitioner’s home construction services the home.
2. 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

2006. 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 the 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.
2007. According to 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.
2008. Ault and Arnold rightly argue that a constructive dividend usually arises when a corporation awards an economic benefit, specifically earnings and profits, to a stockholder without expecting any payment or adequate consideration for the same (360).
2009. Not all business expenditures by an incorporated company that bestows some economic benefit on a stockholder can be termed constructive dividends (Ault and Arnold, 358). Loftin & Woodward, 577 F.2d at 1215.
2010. Respondent did not elucidate how a decision to forego profits, especially when the stockholder reimburses the corporation in full for its services, results in the 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.
2011. Incidental or insignificant use of the 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 employed the corporate property either incidentally or insignificantly may not constitute receiving a constructive dividend.