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 Mr. and Mrs. Williams because the son is not performing any services for the corporation. This means that the payment is being made to the son simply because of his status as the son of the shareholders. As such, the payment can be treated as a constructive dividend to the Williams because it is effectively a distribution of corporate earnings to them in their capacity as shareholders.

Additionally, the IRS can disallow Lessing's $50,000 deduction for the son's salary since the payment is not a reasonable salary for services actually rendered. Since the son is not performing any services, the payment does not qualify as a deductible expense for the corporation.

Mr and Mrs