World Class Mergers & Acquisitions  |  For Companies $5 Million to $100 Million in Revenue

Tax Court Holds Cash Distributions to Sole Shareholder Were Constructive Dividends, Not Reimbursements; Poor Recording Keeping Cited

The Tax Court has held that cash disbursements from a closely-held company to its sole shareholder, in addition to payments for a variety of expenses, resulted in constructive dividend income to the shareholder.  The taxpayers were further found liable for the accuracy-related penalty on their underpayment of tax.  The court found that the taxpayers were negligent because they failed to maintain adequate records, they could not substantiate deductions they had claimed, and they had mislabeled their expenses.

Points of Interest

  • What many people don’t realize is limited liability is effective only if certain requirements are met.
  • During a lawsuit to seize assets, any assets located in the building can be presumed to be business property.
  • There is no requirement or rule stating that records cannot be created for past events.

By: Basi & Basi at the Center for Financial, Legal and Tax Planning for Transworld M&A Advisors