Question

10. Which of the following payments could be treated as a constructive dividend by the IRS?

Multiple Choice

A. End of year bonus payment to a shareholder/employee

B. Rent paid to a shareholder/lessor

C. Interest paid to a shareholder/creditor

D. All of these payments could be treated as a constructive dividend by the IRS

Answer 1

The right answer is option (D) All of these payments could be treated as a constructive dividend by the IRS.

Justification:

All the above given options are payments made to shareholders. Every corporation will deduct these payments as an expense but IRS will not allow these payments as an expense. That means IRS will disallow these payments and are liable to tax. The concept of constructive dividend comes into picture where employee and shareholder are one and same. All these transactions are intended to reduce the profits of a corporation by making payments to shareholders and we can come to a conclusion that funds are being managed by a corporation in such a way that these payments are to avoid tax. Thus, all these transactions are treated as constructive dividend.