If lease rental payments to a noncorporate shareholder-lessor are classified as unreasonable,the taxable income of a C corporation decreases and the gross income of the shareholder remains the same.

Question

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If lease rental payments to a noncorporate shareholder-lessor are classified as unreasonable, the taxable income of a C corporation increases and the gross income of the shareholder also increases. This is because the excessive rental payments are treated as constructive dividends to the shareholder, which are taxable as ordinary income.

If Lease Rental Payments to a Noncorporate Shareholder-Lessor Are Classified