Which of the following items might an IRS agent seek to recharacterize as a constructive dividend?
A) Payment of interest expense to a corporate shareholder, where the loan bears interest at a market rate, has fixed written terms with a repayment required at a defined future point, and the corporation is not thinly capitalized.
B) Payment of salary expense to a corporate shareholder's wife, where the wife performs no services for the corporation.
C) Payment of rental expense to a corporate shareholder, for the use of equipment owned by the shareholder. The equipment is necessary to the corporate business, and the rental cost is similar to that charged by unrelated equipment providers.
D) All of these choices are payments could reasonably be considered constructive dividends.

Question

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A constructive dividend occurs when a shareholder receives a distribution from a corporation that is not formally declared as a dividend, but is treated as such for tax purposes. Payment of salary expense to a shareholder's spouse who does not perform any services for the corporation is an example of a transaction that may be recharacterized as a constructive dividend. Options A and C are legitimate business transactions that are not likely to be recharacterized as constructive dividends. Option D is incorrect as option A and C are not constructive dividends.

Which of the Following Items Might an IRS Agent Seek