Tax Research Problem

When the IRS audited Winter Corporation’s current year tax return, the IRS disallowed $10,000 of travel and entertainment expenses incurred by Charles, an officer-shareholder, because of inadequate documentation. The IRS asserted that the $10,000 expenditure was a constructive dividend to Charles, who maintained that the expense was business related.

Charles argued that he derived no personal benefit from the expenditure and therefore received no constructive dividend. Prepare a memorandum explaining whether the IRS’s assertion or Charles’s assertion is correct. You should address Internal Revenue Code Sections 162 and 274 and IRS Regulation Sections 1.274-1 and -2.