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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
12
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,
(continued...)
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