Final answer:
The IRS treats constructive dividends, such as bargain purchases of corporate property by a shareholder or personal use of corporate property, as taxed as ordinary income to the shareholder.
Step-by-step explanation:
The IRS treats constructive dividends such as the bargain purchase of corporate property or shareholder use of corporate property as taxable events for the shareholder. Specifically, the IRS will treat these constructive dividends as taxed as ordinary income to the shareholder, which means the correct answer to the question is B. Taxed as ordinary income to the shareholder. A constructive dividend occurs when a corporation provides an economic benefit to a shareholder without the formal declaration of a dividend. This can be in the form of allowing the personal use of corporate property or selling an asset to a shareholder for less than its fair market value.
As constructive dividends are considered a form of compensation or benefit to the shareholder, they are not deductible as a business expense by the corporation, and they are not treated as a capital gain for the shareholder. The IRS requires that these benefits are reported as ordinary income on the shareholder's individual tax return, and taxes are paid accordingly at their ordinary income tax rate.