Problem: Module 9 Textbook Problem 10
Learning Objective: 9-7 Explain the purpose of the accumulated earnings tax and the personal holding company tax
During a recent IRS audit, the revenue agent decided that the Parker family used their closely held corporation, Falco, to avoid
shareholder tax by accumulating earnings beyond the reasonable needs of the business. Falco's taxable income was $1,040,000, it
paid no dividends, and it had no business need to retain income. Falco's marginal tax rate in prior years was 34 percent. Assume the
accumulated earnings tax rate is 20% for all applicable years in this problem.
Required:
a. Compute Falco's accumulated earnings tax assuming that it had accumulated $5 million after-tax income in prior years. Assume that
for these years at issue, a corporation is exempt up to $250,000 of accumulated earnings without demonstrating a reasonable
business need for the accumulation.
b. Compute Falco's accumulated earnings tax assuming that it had accumulated $144,000 after-tax income in prior years. Assume that
for these years at issue, a corporation is exempt up to $250,000 of accumulated earnings without demonstrating a reasonable
business need for the accumulation.
Complete this question by entering your answers in the tabs below.
Required A Required B
Compute Falco's accumulated earnings tax assuming that it had accumulated $5 million after-tax income in prior years. (Enter
your answer in dollars and not in millions of dollars.)
Accumulated earnings tax
<Required A
Required B >
