Katherine, the sole shareholder of Purple Corporation, a calendar year C corporation, has the corporation pay her a salary of $450,000 in the current year. The Tax Court has held that $150,000 represents unreasonable compensation. Purple Corporation's taxable income is unaffected by the Tax Court's determination.

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The Tax Court's determination that $150,000 of Katherine's salary is unreasonable means that this amount is not deductible as a business expense for Purple Corporation, thus increasing its taxable income by $150,000.

Katherine, the Sole Shareholder of Purple Corporation, a Calendar Year