Dr. Sanders is a veterinarian who is the sole shareholder of Vet, Inc., an S corporation. The corporation offers consulting and surgical services to other veterinarians that Dr. Sanders provides. Dr. Sanders does not receive regular payments from the corporation, but withdraws funds as the need arises. During the current year, he withdraws

$118,000, and the net income of the corporation is $225,000. The corporation does not deduct the $118,000, nor does Dr. Sanders include it in his gross income. Dr. Sanders does, however, report the $225,000 in his gross income. Because Dr. Sanders has recognized all of the corporation’s income, he sees no need to pay himself a salary. He justifies the treatment by arguing that he is not an employee (i.e., he is the owner) of the corporation and that the Federal income tax consequences are the same. Evaluate the approach taken by Dr. Sanders and Vet, Inc.