Cordeio, Inc., is a controlled foreign corporation (CFC) for the entire tax year

Question

Cordeio, Inc., is a controlled foreign corporation (CFC) for the entire tax year. Vancy Company, a U.S. corporation, owns 85% of Cordeio’s one class of stock for the entire year. Subpart F income is $465,000, and no distributions have been made during the year. Both entities use the calendar tax year. Assume a 365-day year. Round any division to four decimal places and use in subsequent computations. Round your final answers to the nearest dollar. a. What amount does Vancy include in gross income as a constructive dividend for the tax year? $______ b. Assume that Cordeio is a CFC until March 1 of the calendar tax year. What amount does Vancy include in gross income as a constructive dividend for the tax year? $_____

Explanation / Answer

It is a concept in U.S. taxation in which various distributions to shareholders are not labeled as dividends but are still considered dividends by the IRS and taxed as such. Constructive dividends are most commonly found in companies in which the employees are also the shareholders. You can think of a constructive dividend as an undeclared dividend by the company that involves the use of corporate assets.

In this case Vancy Company has 85% holding of Cordeio Inc. for the full year then:

a) Constructive Dividend = 465000*85% = 395250

b) In case Cordeio is a CFC until March 1 of the calendar tax year i.e for 31 days of Jan 28 days of Feb and 1 day of March i.e 60 days out of 365 days, then Constructive dividend is = 465000 * 60/365 *85% = 64973

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