If lease rental payments to a noncorporate shareholder-lessor are classified as unreasonable, the taxable income of a
C corporation increases and the gross income of the shareholder increases.

Question

Quizplus · Accepted Answer

If lease rental payments to a noncorporate shareholder-lessor are classified as unreasonable, the excess amount is reclassified as a dividend, which increases the taxable income of the C corporation but does not increase the gross income of the shareholder, as dividends are taxed differently and may not necessarily increase the shareholder's gross income in the same manner as rental income.

If Lease Rental Payments to a Noncorporate Shareholder-Lessor Are Classified