Matt, the sole shareholder of Pastel Corporation (a C corporation), has the corporation pay him a salary of $600,000 in the current year. The Tax Court has held that $200,000 represents unreasonable compensation. Matt must report a salary of $400,000 and a dividend of $200,000 on his individual tax return.

Question

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The Tax Court's determination means that $200,000 of the salary is reclassified as a dividend, which is not deductible by the corporation and is taxable to Matt as dividend income.

Matt, the Sole Shareholder of Pastel Corporation (A C Corporation)