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 $900,000, it paid no dividends, and it had no business need to retain any income. Compute Falco’s accumulated earnings tax assuming that: Falco’s marginal tax rate is 34 percent. (Consider intermediate values in dollars and not in millions. Enter your answers also in dollars and not in millions of dollars.)

a. It had accumulated $4 million after-tax income in prior years.

b. It had accumulated $129,000 after-tax income in prior years.

Answer 1

a.)	Step-1
	After tax earnings of Falco	$ 594,000	( 900,000 x ( 1-34% ) )
	Step-2
	Accumulated earnings tax will be	$ 118,800	(594,000 x 20% )
b.)	Step-1
	After tax earnings of Falco	$ 594,000	( 900,000 x ( 1-34% ) )
	Step-2
	Accumulated taxable income	$ 465,000	(594,000 - 129,000 )
	Step-3
	Accumulated earnings tax will be	$ 93,000	(465,000 x 20% )