Rob,a shareholder-employee of Falcon,Inc. ,receives a $300,000 salary.The IRS classifies $100,000 of this amount as unreasonable compensation.The effect of this reclassification is to decrease Rob's gross income by $100,000 and increase Falcon's gross income by $100,000.

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The reclassification of $100,000 as unreasonable compensation would not decrease Rob's gross income but rather reclassify it as a dividend. This means Rob's gross income remains the same, but the nature of the income changes. Falcon's gross income would not increase; instead, its taxable income might increase due to the disallowed deduction for the unreasonable compensation.

Rob,a Shareholder-Employee of Falcon,Inc