The first consideration in determining whether a shareholder’s withdrawals or advances from a corporation constitute loans or constructive dividends is whether, at the time of the withdrawals or advances, the shareholder intended to repay the amounts received and the corporation intended to be repaid.  The issue of taxpayer intent in the loan versus dividend context is a question of fact.  It is the taxpayer’s actual intent or actual motive with which the court is concerned.  It is difficult to establish the taxpayer’s intent by direct evidence.  Therefore, the court must consider the taxpayer’s testimony that he intended to repay, although such testimony is not determinative and the court must consider objective factors to determine whether an advance constitutes a loan or a dividend.

The following objective factors are often considered in deciding whether shareholder withdrawals or advances from a corporation are loans or constructive dividends:

1) the extent of shareholder control of the corporation;

2) the retained earnings and dividend history of the corporation;

3) the size of the withdrawals;

4) the presence of conventional indicia of debt, such as promissory notes, collateral, and provision for interest;

5) treatment of advances in corporate records;

6) the history of repayment; and

7) the shareholder’s use of the funds.

Other objective criteria include whether the corporation imposed a ceiling on the amounts that might be borrowed, whether there were definite maturity dates, attempts to force repayment, intention or attempts to repay, and the shareholder’s ability to liquidate the loan.  These factors are useful in determining whether there is a true intention to repay[i].

[i] BRUECHER v. COMMISSIONER, T.C. Summary Opinion 2005-52 (T.C. 2005)