In some situations, a corporation may enter into a transaction that is not typically considered a dividend, but may be considered a dividend by the IRS. Constructive dividends do not need to be formally declared by the corporation or designated as a dividend.
All that is required according to the IRS is that a shareholder received some benefit from the corporation that was not paid for or reported on a Form W-2 or 1099. Since any benefit that was given to a taxpayer and not reported on a Form W-2 or 1099 is very broad, a constructive dividend can take many forms.
Constructive Dividend IRS
For the viewpoint of the IRS, there is no difference between a formal dividend and a constructive dividend. A dividend is not deductible by the corporation, and is taxable to the recipient shareholder to the extent of the corporation’s current or accumulated E&P. It can benefit both the taxpayer and corporation to try and pass off a dividend as something else in an attempt to lower a tax bill.