Paige is the sole shareholder of Citron Corporation. During the year, Paige leases a building to Citron for a monthly rental of $80,000 . If the fair rental value of the building is $60,000, what are the income tax consequences to the parties involved?
The rent charged by Paige is not "arms length"; as such, Citron Corporation's rent deduction is $60,000 (not $80,000). The $20,000 difference is a nondeductible dividend distribution. For Paige, the change merely requires reclassification. Instead of $80,000 of rent income, she has $60,000 of rent income and $20,000 of dividend income.
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