To Avoid Recharacterization as a Dividend, an Advance to a Shareholder

question 36

Multiple Choice

To avoid recharacterization as a dividend, an advance to a shareholder must represent a bona fide loan.A bona fide debtor-creditor relationship is generally suggested by

• A)The advance being recorded on the books of the corporation and evidenced by a note
• B)The shareholder making payments on the note according to a fixed schedule with the note bearing a reasonable charge for interest
• C)The note being secured by collateral with the due dates for payments enforced
• D)All of the above

---

Definitions:

Fraud in the Inducement

A deceitful act causing someone to enter into an agreement or contract by misrepresenting material facts or intentions.

Holder in Due Course

A party in possession of a negotiable instrument, such as a check or promissory note, acquired in good faith and thus protected against many defenses.

Negotiable Instrument

An official document certifying the payment of a particular sum of cash, either to be paid on demand or at an agreed-upon time, with the payer's name mentioned in the document.

Good Faith

The honest intention to act without taking an unfair advantage over another party, typically implied in agreements and transactions to ensure fairness and integrity.