Dividends as Net Investment Income

Take-Away: The dividends an employee-shareholder receives from a C corporation will be subject to the net investment income tax.

IRS Chief Counsel Advisory: Earlier this year the IRS published Chief Counsel Advisory 2021009 (dated January 4, 2021, and released on May 7, 2021) that determined that dividend income that is received by an individual shareholder of a C corporation, in which the shareholder is an employee, is subject to the 3.8% Net Investment Income Tax. [IRC 1411.]

This is the same outcome even if the corporation is classified as a closely held corporation under the Tax Code. [IRC 469(h)(1) and IRC 465(a)(1)(B).]

Conclusion: Apparently some individual shareholders who were employed by their company claimed that the dividend paid to them was a form of compensation and thus it was excluded from the income that is subject to the NIIT. Apparently that position was not accurate.