Accumulated Earnings Tax, written by Caroline H. Ngo, Esq., of McDermott Will & Emery LLP, and James C. Warner, Esq., of Wal-Mart Stores, Inc., analyzes in detail the problems associated with a corporation's failure to distribute its earnings and profits with the purpose of avoiding the tax on its shareholders.
This Portfolio outlines in detail the statutory framework of the accumulated earnings tax, the factors used to determine whether a corporation has a tax avoidance purpose, and a discussion of what constitutes the “reasonable needs” of a business.
The Worksheets include a withdrawn excerpt from the Internal Revenue Manual concerning audit guidelines for Internal Revenue Service agents when they are examining tax returns for the possible application of the accumulated earnings tax. Although these guidelines were withdrawn in 2000 and have not been reissued, given that there has been little change, other than rates, in the taxation of accumulated earnings, the guidelines may still be useful in planning and in dealing with examining agents.
The Worksheets also contain an illustration of how a corporation could analyze its exposure to the accumulated earnings tax and a sample taxpayer's statement pursuant to §534(c) and Regs. §1.534-2(d).
Accumulated Earnings Tax allows you to benefit from:
This Portfolio is part of the U.S. Income Portfolios Library, a comprehensive series that includes more than 200 Portfolios, which cover every federal tax topic with expert, in-depth analysis, and offer commentary on a wide range of federal taxation topics, including Compensation Planning, Deductions and Credits, Partnerships and Corporations, Special Pass-Through Entities, Corporate Reorganizations, Real Estate, Procedure and Administration, and more.
Detailed Analysis
I. Introduction
II. Rationale & Imposition of Tax
Introductory Material
A. Imposition of the Tax
B. Former § 531 Audit Guidelines
III. Corporations Subject to the § 531 Tax
A. Basic Coverage
B. Parent and Subsidiary Corporations
C. Consolidated Return Group
D. Publicly Held Corporations
E. Foreign Corporations
F. Specifically Excluded Corporations
1. PHCs and Exempt Corporations
2. Corporations in Which Shareholders Are Not Subject to Individual Income Tax
G. S Corporations
IV. Accumulated Taxable Income
A. General Rules
1. Definition and Basic Concepts
a. Tax-Exempt Interest
b. Possession Income
c. Additional Income Allocated Under § 482
d. Exceptions to the § 63 Definition of “Taxable Incomeâ€
2. Tax Benefit Rule
3. Short-year Taxable Income
4. Consolidated Accumulated Taxable Income
B. Section 535(b) Adjustments to Taxable Income
1. Taxes
2. Charitable Contributions
3. Special Deductions
4. Net Operating Loss
5. Capital Losses
6. Net Capital Gains
7. Capital Loss Carryover
8. Special Rules for Mere Holding or Investment Companies
9. Special Rules for Capital Gains and Losses of Foreign Corporations
10. Controlled Foreign Corporations
11. Other Special Consolidation Considerations
a. Built-in Deductions
b. Consolidated Earnings and Profits
C. Section 535(c) Accumulated Earnings Credit (Deduction)
1. Minimum Credit
2. Mere Holding or Investment Company
3. Controlled Group of Corporations
4. Consolidated Accumulated Earnings Credit
D. Section 561 Dividends Paid Deduction
1. Dividends Paid Deduction
2. Dividends Paid or Deemed Paid
3. Consent Dividends
4. Consolidated Dividends Paid Deduction
a. Dividends and Consent Dividends
b. Exception for Personal Holding Companies
c. Consolidated Dividends Received Deduction and Consolidated § 247 Deduction
V. Tax Avoidance Purpose
A. Purpose to Avoid Tax on Shareholders
B. Nature of the Purpose
C. Factors Indicating Tax Avoidance Purpose
1. Reasonableness of Accumulations
2. Holding or Investment Company Status
3. Dividends
4. Loans to Stockholder
5. Tax Rate of Shareholders
6. Low Shareholder-Employee Compensation
7. Unrelated Investments
8. Additional Factors
VI. Burden of Proof
A. General Rule
B. Presumption and Prima Facie Evidence
1. In General
C. Shift of Burden in Tax Court
1. Notification by the IRS
2. Taxpayer's Statement Regarding Accumulations
VII. Reasonable Needs of the Business
A. Aspects of “Businessâ€
1. Scope
2. Activity
B. Reasonably Anticipated Needs
1. Acquisition or Replacement of Property, Plant, and Equipment
2. Acquisition of, or Expansion into, Other Businesses
3. Working Capital
4. Business Contingencies
5. Taxes
6. Long-Term Debt
7. Stock Redemptions
a. IRS's Position
b. Future Redemptions
c. Past Redemptions
8. Product Liability Loss Reserves
C. Section 303 Redemption Needs
1. Present Law
2. Pre-1969 Case Law
D. Excess Business Holdings Redemption Needs
VIII. Detailed Analysis of Working Capital Needs
A. Definition of the Term “Working Capitalâ€
1. Current Assets
2. Current Liabilities
B. Operating Cycle
1. The Bardahl Formula - Generally
2. Understanding the Bardahl Calculation: Key Concepts
a. Peak Versus Average Cycle
b. Costs of Operation
c. Credit Cycle
3. Difficulties with the Bardahl Calculation
a. Inventory Problems
b. Accounts Receivable Problems
4. Expansion-Inflation Factor
5. Service Businesses
C. Other Formulae and Rules of Thumb
1. Apollo Industries Formula
2. Rules of Thumb
D. Expert Testimony
IX. Miscellaneous
A. Interest and Negligence Penalty on § 531 Deficiency
B. Information Statement
Working Papers
Table of Worksheets
Worksheet 1 AICPA Professional Standards, Accounting Research Bulletin 43
Worksheet 2 Illustration of Analysis of Corporate Data
Worksheet 3 Taxpayer's Statement Pursuant to § 534(c) and Regs. § 1.534-2(d)
Worksheet 4 Excerpt from Former Internal Revenue Manual, Handbook 4233 - Tax Audit Guidelines; Audit Techniques - Accumulated Earnings Tax [Ch. 600 and Exhibits]
Bibliography
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Statutes:
Treasury Regulations:
Committee Reports:
Public Laws:
Treasury Rulings:
Cases:
UNOFFICIAL
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