Final answer:
The IRS is likely to classify the excess lease payments above the market rate as a disguised dividend, which could impact corporate deductions and shareholder income reporting.
Step-by-step explanation:
When a corporation leases property from a shareholder and pays the shareholder at a higher than market rate, the Internal Revenue Service (IRS) is likely to classify the excess amount as a disguised dividend.
This type of transaction can raise red flags for the IRS because it may be viewed as an attempt to distribute profits to the shareholder while bypassing the usual dividend treatment. The IRS looks at the substance over the form of transactions, and if the payments significantly exceed the fair market value of the lease, it will likely recharacterize the excess as a dividend. This has implications for both the corporation and the shareholder, as corporate tax deductions may be disallowed for the excess amount, and the shareholder may have to report the amount as dividend income, which is subject to different tax rules than lease income.