Question

Which of the following statements is false?

	A.	All amounts paid by a lessee under a lease with an option to purchase are deductible as rent expense if the option is exercised.
	B.	If IRC§267 did not exist, an accrual basis lessee could accrue and deduct rent owed to a related cash basis lessor before the tax year the lessor has to include the rent in income.
	C.	If a corporation pays excessive rent (above fair rental value) to its sole shareholder, the amount of rent paid in excess of a fair market rent could be deemed a constructive dividend non-deductible by the corporation and dividend income to the shareholder.
	D.	All of the above are true.

Answer 1

Ans is A

All amounts paid by a lessee under a lease with an option to purchase are deductible as rent expense if the option is exercised.

Explanation: Bargain purchase option is one of the four conditions specified to classify the lease as capital lease or finance lease and when lease is classified as capital lease, minimum lease payment is allocated between lease liability and interest expense.

Amount is deductible as rent expense only for operating lease not for capital lease.

Other 2 and 3 options are true since for accrual based tax payer amount is deducted based on accrual of liability without payment, and sec 267 elimination make it mandatory to include this receipt as income in the books of lessor. Also its true that excess rent paid to shareholders above fair value is treated as constructive dividend.