A S-corp owner must take what the IRS deems to be a "reasonable salary" based on the overall profit of the company, and must pay self employment taxes (FICA, Medicare, etc.) on that amount.
The IRS does not give out much guidance on the definition of "reasonable salary" but has provided guidance on what is /not/ reasonable.
In this case the IRS evaluated the company's return and decided that his salary was less that reasonable and as such they went after him and got him to pay more tax.
To be clear: the rule doesn't apply to C Corporations because they are taxed differently; it's not an oversight. It's the pass-through taxation structure of S Corporations that make this an issue.
If you are a C corporation, you get no pass-through. My consulting business is set up as a C corp, and my accountant makes sure that it earns no profit each year. This is mostly done by paying any excess as salary bonus. Corporate tax rate is too high to leave money there.
The C corp cost me a little more in terms of the deductions, but was a big win because when I set it up many years ago I put in the bylaws a medical provision such that any full-time employee would have health coverage (up to a limit) including health insurance premiums. This, due to the very high cost of health insurance, was a big win, as these are a business expense.
Were I to do it again, I would probably do LLC with the new way that health care is taken care of.
Thus, there is no issue like there is with the S-corp, because any money taken out of the corporation is done through payroll.
The IRS does not give out much guidance on the definition of "reasonable salary" but has provided guidance on what is /not/ reasonable.
In this case the IRS evaluated the company's return and decided that his salary was less that reasonable and as such they went after him and got him to pay more tax.
This rule does not apply to C Corporations.