Final answer:
The statement is false. The IRS reclassification of unreasonable compensation affects the corporation's deductions and taxable income but does not change the shareholder-employee's gross income; it only reclassifies the type of income they receive.
Step-by-step explanation:
The question pertains to whether the reclassification of a portion of a shareholder-employee's salary as unreasonable compensation by the IRS would result in a decrease in that individual's gross income and a corresponding increase in the gross income of the corporation. This statement is false. When the IRS determines that a portion of an employee's compensation is unreasonable, this means that the amount in question should not have been paid out as a salary, which is deductible for the corporation, but rather should have been distributed as a dividend, which is not deductible.
According to basic taxation principles, if Kyle receives a salary of $300,000 and the IRS classifies $100,000 of it as unreasonable compensation, the $100,000 is reclassified not as an expense for the corporation but as a dividend. Thus, the corporation's gross income would not change, but rather its deduction for compensation expenses decreases, which could lead to an increase in taxable income for the corporation. Conversely, Kyle's gross income remains the same, but now it includes both salary and dividend income, with the dividend portion being potentially subject to different tax considerations than the salary portion.