The excerpt below is from CCH tax email service I get.........came in this morning.

Point to the excerpt-----and I have not read the case to determine all details-------is that IRS is going to require documentation of transactions, especially those related to shareholder/employees.

I would bet that the constructive dividends "...with respect to payments by the corporation of their personal expenses" were the result of the shareholders NOT paying back, ie reimbursing, the corp for those personal expenses paid with corp moneys, within a reasonable time.

Such amounts due to the corp should be paid back within, say, maybe, a year????, and if such cannot be, then notes need to be prepared, with definite repayment terms, and those terms should be followed.

The demonstration of "intent" goes a long ways-------both pro and con----------and it is the hardest element of transactions to document.  Therefore, actual performance is very, very important, so that "intent" does not have to carry as much weight.

Example--------"our intent was to pay the moneys back just as soon as possible, but you know how it is--------bills, etc etc and paying back our own corp seemed to have the least priority--------but we intended to repay the moneys".       Hard to document that "intent"........which if proven that it was intended as a mere loan, is what would keep the transaction from failing as written, ie being called a constructive dividend-----income to shareholder, but no related deduction to corp.

The way around the whole problem----------performance-------pay the receivable----eliminate the need for "intent" to be proven.

There must have been some interesting circumstances in this case---------note the comment that there was no medical benefits plan.  The usual code section under which medical exp are deducted for business------Sec 105--------and that requires NO written plan..............so something went on...........sounds as if tax person dropped the ball prior to the exam.

Note also the comment about assets not being placed in service----------if equipment is not placed in service "right away"------------make sure that is documented.  Example----if one purchases equipment at yearend, but does not pick it up from dealer--------still a good purchase for that year IF the item is ready for work, and it is the option of the purchaser to leave it sit.............so, might want the dealer to make written comment on invoice that all is ready................OR, if the purchase is desired to hit NEXT year, then dealer needs to make comment that the item was NOT ready in year of purchase, that part of deal was to put item in condition of readiness, etc etc etc.............ie document the INTENT.

I have highlighted some items, and have NOT listed the references.

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Close Corporation Denied Deductions; Owners Recognize Constructive Dividends; Penalties Imposed (Rosser, TCM), (Jan. 7, 2010)

A corporation owned by a married couple was denied business expense deductions, and its two owners were treated as receiving constructive dividends with respect to payments by the corporation of their personal expenses. The couple did not separate their personal transactions and expenses from those of the corporation. They paid personal expenses with corporate checks; they paid personal credit card expenses with corporate funds; and they used corporate property for their own use.

The corporation lacked an employee benefits plan through which it could deduct the cost of paying employees' insurance or medical expenses. The corporation could not deduct as business expense personal insurance expenses, medical expenses, credit card charges, and expenses incurred in the use of corporate automobiles. Instead, these amounts were treated as constructive dividends for the owners of the close corporation.

Accuracy-related penalties were imposed due to the failure to keep adequate records. Further, there was no evidence indicating that the problems were due to tax return preparer error.

The corporation could not expense the cost of assets purchased as a going concern in the year prior to the tax year at issue because the assets were placed in service in the year they were purchases, rather than in the tax year at issue.

The owners of the corporation were not allowed a charitable contribution deduction for a contribution made by their close corporation where there was no claim that the corporation was denied a deduction for the contribution.

The corporation had a reasonable prospect of recovering on a loss by means of a lawsuit or settlement in the tax year at issue and, therefore, could not deduct the loss in that tax year.

J. Rosser, TC Memo. 2010-6, Dec. 58,107(M)

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