Paula Is the Sole Shareholder of Violet, Inc

Multiple Choice

Paula is the sole shareholder of Violet, Inc.For 2012, she receives from Violet a salary of $300,000 and dividends of $100,000.Violet's taxable income for 2012 is $500,000.On audit, the IRS treats $100,000 of Paula's salary as unreasonable.Which of the following statements is correct?

A) Paula's gross income will increase by $100,000 as a result of the IRS adjustment.
B) Violet's taxable income will not be affected by the IRS adjustment.
C) Paula's gross income will decrease by $100,000 as a result of the IRS adjustment.
D) Violet's taxable income will increase by $100,000 as a result of the IRS adjustment.
E) None of the above is correct.