Question

ABC Corp. has one shareholder, George, who owns 100% of the ABC stock. George owns the building where ABC Corp. conducts its business. ABC Corp. occupies the entire building and leases it at a monthly cost of $10,000. In 2018, the IRS audited ABC Corp.’s tax return and found that the monthly lease expense was unreasonably high and should have paid only $8000 per month. Which of the following, if any, is correct:

a. IRS does not have the authority to disallow $24,000 of ABC Corp.’s building rent expense for the year, but George will be attributed with a constructive dividend of $24,000 for the year.

b. IRS will disallow $24,000 of ABC Corp.’s building rent expense for the year resulting in a constructive dividend paid to George of $24,000.

c. There is no such thing as a constructive dividend resulting from the IRS disallowing $24,000 of excessive building rent expense.

d. None of the other choices are correct.

e. IRS will disallow $120,000 of ABC Corp.’s building rent expense for the year resulting in a constructive dividend paid to George of $120,000.

Answer 1

Constructive dividend is an amount considered as excess amount paid by the corporation to the shareholder against any  payment, allowance, loan or other form of financial benefit by the IRS.

In this case, IRS believes rent should have been $ 8000 per month and not $ 10,000. Thus, they would recognize $ 2000 for 12 month equal to $ 24,000 as a constructive dividend and disallow it for company to claim as expense.

Thus, correct answer is Option B

Hope this helps, if not please let know in comments. We expert here put lots of effort to give correct and quality answer to students. Please mark the answer as helpful for the efforts put, it will mean alot. Thanks