Accumulated Earnings Tax (Portfolio 796)

Description

Tax Management Portfolio, Accumulated Earnings Tax, No. 796, 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. The 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The Worksheets include a withdrawn excerpt from the Internal Revenue Manual concerning audit guidelines for Internal Revenue Service agents when they are examining tax returns for the possible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. These guidelines were withdrawn in 2000, and have not been reissued.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).

Table of Contents

I. Introduction
II. Rationale & Imposition of Tax
III. Corporations Subject to the § 531 Tax
IV. Accumulated Taxable Income
V. Tax Avoidance Purpose
VI. Burden of Proof
VII. Reasonable Needs of the Business
VIII. Detailed Analysis of Working Capital Needs
IX. Miscellaneous