Mr. and Mrs. Williams are the sole shareholders of Lessing, Inc., a regular corporation. Last year, Lessing employed the Williams' son and paid him a $50,000 salary. During a recent IRS audit, the revenue agent discovered that the son rarely shows up for work and spends most of his time playing golf. Which of the following statements is true?

Question

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The IRS can treat the $50,000 payment as a constructive dividend to the Williams and disallow Lessing's $50,000 deduction for the son's salary. This is because the son did not perform any services for the company, and the payment can be seen as a way for the Williams to extract profits from the corporation without properly reporting it as a dividend. This would result in increased taxable income for the Williams and a decrease in taxable income for Lessing, making it a favorable tax outcome for both the IRS and the corporation.

Mr and Mrs