rex the sole shareholder of silver corporation leases property to the corporation fo 702279

Rex, the sole shareholder of Silver Corporation, leases property to the corporation for a yearly rent of $60,000. To test whether the corporation should be allowed a rent deduction for this amount, the IRS and the courts will apply the arm’s length concept. Would Silver Corporation have paid $60,000 a year in rent if it had leased the same property from an unrelated party (rather than from Rex)? Suppose it is determined that an unrelated third party would have paid an annual rent for the property of only $50,000. Under these circumstances, Silver Corporation will be allowed a deduction of only $50,000. The other $10,000 it paid for the use of the property represents a nondeductible dividend. Accordingly, Rex will be treated as having received rent income of $50,000 and dividend income of $10,000.