Carl E. Jones and Elaine Y. Jones - Page 18

            considered the following factors in deciding whether                                      
            distributions from a C corporation to a shareholder are loans:                            
            (1)  The extent to which the shareholder controls the                                     
            corporation, (2) the earnings and dividend history of the                                 
            corporation, (3) the magnitude of the withdrawals and whether a                           
            ceiling existed to limit the amount the corporation advanced, (4)                         
            how the parties recorded the withdrawals on their books and                               
            records, (5) whether the parties executed notes, (6) whether                              
            interest was paid or accrued, (7) whether security was given for                          
            the loan, (8) whether there was a set maturity date, (9) whether                          
            the corporation ever undertook to force repayment, (10) whether                           
            the shareholder was in a position to repay the withdrawals, and                           
            (11) whether there was any indication the shareholder attempted                           
            to repay withdrawals.  Id. at 877 n.7.  Due to the factual nature                         
            of such inquiries, the above factors are not exclusive, and no                            
            one factor is determinative.                                                              
                  Although these factors traditionally have been used in                              
            deciding whether distributions to a shareholder of a C                                    
            corporation are loans or dividends, with the exception of the                             
            second factor,12 the factors are equally applicable to decide                             

                  In general, the earnings and profits of a C corporation are                         
            not taxed to its shareholders until the shareholders receive a                            
            dividend.  Secs. 301, 316.  Therefore, in deciding whether a                              
            distribution from a C corporation to a shareholder is a loan or a                         
            dividend, a corporate history of not declaring and paying                                 
            dividends in spite of the existence of substantial earnings and                           
            profits weighs on the side of a constructive dividend.  Although                          
            an S corporation is subject to the earnings and profits concept,                          

Page:  Previous  8  9  10  11  12  13  14  15  16  17  18  19  20  21  22  23  24  25  26  27  Next

Last modified: May 25, 2011