Pink Corporation has several employees. Their names and salaries are listed below.
Judy ................. $470,000
Holly (Judy’s daughter) .......... 100,000
Terry (Judy’s son) ............. 100,000
John (an unrelated third party) ........ 320,000
Holly and Terry are the only shareholders of Pink. Judy and John share equally in the management of the company’s operations. Holly and Terry are both full-time college students at a university 200 miles away. Pink has substantial E & P and never has distributed a dividend.
Discuss any income tax issues related to pink’s salary arrangement.