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 $970,000, 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.
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 $970,000, 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.
SWFT Essntl Tax Individ/Bus Entities 2020
23rd Edition
ISBN:9780357391266
Author:Nellen
Publisher:Nellen
Chapter13: Corporations: Earning & Profits And Distributions
Section: Chapter Questions
Problem 12P
Related questions
Question
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 $970,000, 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
Required:
- Compute Falco’s accumulated earnings tax assuming that it had accumulated $6 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.
- Compute Falco’s accumulated earnings tax assuming that it had accumulated $137,000 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.
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 2 steps
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.Recommended textbooks for you