Final answer:
The intentional efforts to avoid dividend treatment typically result in the income being taxed as ordinary income. Transactions designed to avoid dividend treatment, but reclassified by the IRS, are taxed at the recipient's ordinary income tax rate.
Step-by-step explanation:
When a taxpayer engages in transactions that are structured to intentionally avoid dividend treatment for tax purposes, these efforts typically lead to the payment being reclassified by tax authorities. The correct answer to this question is c) Ordinary income treatment. If the Internal Revenue Service (IRS) concludes that a transaction which was designed to produce capital gain treatment should actually be treated as a dividend, the result is that the income in question is taxed at the recipient's ordinary income tax rate rather than potentially lower capital gains rates. This intentional avoidance is usually seen in cases where a taxpayer has taken steps to create what might superficially appear as a return of capital or a sale of stock - which typically results in capital gain or loss treatment - but upon closer scrutiny by the IRS, is properly characterized as a dividend.
This reclassification acknowledges that the true economic substance of the transaction is akin to that of a distribution of a company's earnings and profits, hence warranting ordinary income treatment. The tax implications of receiving dividends versus realizing a capital gain can be significant, as dividend income is subject to different tax rates and treatment than capital gains, thus individuals and corporations may attempt to disguise dividend income to reduce tax liability. However, the IRS has broad powers under tax law to recharacterize such transactions to prevent tax abuse, with Section 302 of the Internal Revenue Code detailing specific circumstances under which a redemption is treated as a dividend or as a sale/exchange.