If lease rental payments to a shareholder-lessor are classified as unreasonable,the effect on the corporation is to increase taxable income and the effect on the shareholder is to increase gross income.

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The unreasonable amount of the lease rental payments is classified as a dividend rather than as a rental expense for the C corporation.Therefore,the taxable income of the corporation increases.From the perspective of the shareholder,gross income does not change.The unreasonable amount of the lease rental income is classified as dividend income rather than as lease rental income.Note,however,that there is a beneficial effect on the shareholder from the reclassification to a dividend due to the beneficial tax rate on qualified dividends .

If Lease Rental Payments to a Shareholder-Lessor Are Classified as Unreasonable,the