Technical topics regarding tax preparation.
12-Oct-2021 5:05pm
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C-Corporation in the home construction industry buys a lot, builds home and sells the home to the shareholder's son for less than cost. Here are some numbers:
Sale price $750K
Construction costs $825K
Home value $1.1 million
Is there a constructive dividend here for $75K? Or maybe it's $350K?
If I take liberties with the facts in this article here, I am thinking it's just the $75K.
https://www.thetaxadviser.com/issues/20 ... ry-01.html
12-Oct-2021 6:50pm
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In my opinion, the constructive dividend is $350K (difference between FMV and amount paid), assuming that there’s sufficient E&P. See e.g., Terris, TC Memo 1983-29; Missimer, TC Memo 1979-48
12-Oct-2021 7:00pm
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If there is a constructive dividend, it's to the shareholder, not the son. Then there's a constructive gift to the son.
Think about son's tax basis after all that.
Oh, and by the way, Dave 829 makes an excellent point about E&P.
12-Oct-2021 8:52pm
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Hi, Wiles,
I'm assuming Dad is sole SHH.
I see this as a question of a return position. It looks like the story would be that corporation agreed to build him a house on the land for $750k and overspent. It feels like the usual FMV rule doesn't apply because the corporation was just fulfilling a contract. After all, the home did not exist before the contract.
First question: Is the $75k loss deductible at the corporate level? No, because 267 denies the loss on sale to a related party. Note that 267 would not have applied if the sale were to the daughter-in-law.
Second question: Is there a $75k dividend and gift or a $350k dividend and gift? My answer is $75k, but I'm still wondering about zero if the loss was unintentional.
Steve
12-Oct-2021 9:15pm
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gatortaxguy wrote:Second question: Is there a $75k dividend and gift or a $350k dividend and gift? My answer is $75k, but I'm still wondering about zero if the loss was unintentional.
Try reading the Terris case I cited in #2. It's on point.
https://www.leagle.com/decision/198357545ektcm5301435
12-Oct-2021 9:34pm
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I see the difference between the article I linked and dave829's cite is who owned the property. In the article, the property was owned outside of the corporation and the shareholder was just receiving services.
13-Oct-2021 7:16am
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aarrgghh. Another post not showing up...
Anyway, Terris is distinguishable because the son was a SHH and because, as I assumed, that there was a contract to build and sell the home for $750k with a cost overrun. In Terris the homes were more like inventory and there was no discussion of a contract to build. If there were no contract to build, then a FMV analysis becomes much more likely.
It seems to me that constructive transactions are always problematical from a return position perspective. That's one reason why, whenever a particular position is desired, I recommend no short-cuts. Stroke the extra check so that the cash flow mirrors the theory. (The other reason is to make it easier to avoid adjusting entries.)
Steve
13-Oct-2021 7:54am
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I figured that you would say this. This is what all good lawyers say. If you can’t argue the law, then argue the facts. If you can’t argue the facts, then say that they’re distinguishable.
In Terris, the taxpayer and his father were shareholders of a company that built new homes for sale to the public. The corporation sold a home to the taxpayer for $50,000. The same type of home was sold to an unrelated customer for $64,400. The IRS determined a constructive dividend of $14,400. The Tax Court agreed. The Tax Court said, “The applicable law is clear.” A bargain sale to a shareholder results in a constructive dividend equal to the difference between the FMV and the amount paid.
Here we have the same facts. The corporation builds homes and sells a home with a FMV of $1.1M to the shareholder’s son for $750,000. The dividend is the difference, $350,000. OP’s question was “Is there a constructive dividend here …?” The answer is YES.
The fact that the home was sold to the shareholder’s son is a non-distinguishable fact. There are literally hundreds of cases where amounts paid to or on behalf of a shareholder’s relatives are treated as a dividend. The constructive dividend in this case is to the shareholder, not to the son, but that wasn't OP's question.
13-Oct-2021 8:16am
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Hi, dave829,
Thanks for the compliment.
Your analysis is based on the characterization of the events as a bargain sale. I'm merely saying that this fact pattern holds promise for developing a good story to support a different return position based on a contract to build.
Steve
13-Oct-2021 8:41am
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dave829 wrote:I figured that you would say this. This is what all good lawyers say. If you can’t argue the law, then argue the facts. If you can’t argue the facts, then say that they’re distinguishable.
There's only one poster suggesting there was a contract to build and there was a cost overrun...and it's not the OP.
We can't create facts that don't exist.
~Captcook
13-Oct-2021 11:06am
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Hi, Captcook,
Of course you are correct. But the fact pattern in the OP presented an opportunity to view the facts from a different perspective which was worthy of mentioning.
On a personal note, I had a very black and white perspective (i.e., mathematical) before my 2nd year in law school. I studied very hard my first year and got bad grades. Then I took a course in jurisprudence (legal philosophy) in which the word "fact" was considered from many different perspectives. I realized that my grades were bad because I thought the questions had answers. After than I got all As without nearly as much work.
The bottom line is that facts are malleable. Clients' descriptions of events change as they recognize their interests depend on the story. So I generally don't take facts at their face value unless it is advantageous to do so or I can't see them changing.
Steve
13-Oct-2021 3:17pm
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Is there a HUD settlement statement for this “sale?”
13-Oct-2021 3:35pm
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