Individual S is the sole shareholder of Corporation S.The corporation employs S's college-aged granddaughter as secretary-treasurer for the summer, paying her $25,000 for three months work.If the Internal Revenue Service determines that the granddaughter is not a bona fide corporate employee and disallows the entire $25,000 salary deduction, the $25,000 payment could be reclassified as a dividend to the granddaughter.

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The $25,000 payment would more likely be reclassified as a dividend to Individual S, the sole shareholder, rather than directly to the granddaughter, since dividends are typically distributed to shareholders, not employees.

Individual S Is the Sole Shareholder of Corporation S