#44: In the prior year, Teague Co., a regular C corporation, deducted a $45,000 payment as a business expense deduction. In the current year, after Teague Co. had converted to an S corporation, the company recovered $20,000 of the deduction. Will the shareholders of Teague Co. (the owners of the S corporation) be required to report any taxable income due to the operation of the tax benefit rule (i.e., income to the extent that the former C corporation benefited from the initial deduction)? Explain.

#45: Sara Waters, a shareholder in Wicket Corporation, leased a building to Wicket at an annual rental of $60,000. A fair and reasonable annual rent for the building has been determined to be only $48,000. Will the additional $12,000 of rent be taxed as rental income or as dividend income? Explain.