Katherine, the sole shareholder of Penguin Corporation, has the corporation pay her a salary of $300,000 in the current year. The Tax Court has held that $90,000 represents unreasonable compensation. Katherine has avoided double taxation only to the extent of $210,000 (the portion of the salary that is considered reasonable compensation).

Question

Quizplus · Accepted Answer

The portion of Katherine's salary deemed reasonable ($210,000) is deductible by Penguin Corporation, thus reducing its taxable income and avoiding double taxation on this amount. The $90,000 deemed unreasonable is not deductible by the corporation, potentially subjecting it to corporate tax and then to personal tax when distributed as dividends, illustrating the concept of double taxation.

Katherine, the Sole Shareholder of Penguin Corporation, Has the Corporation