Question

The accumulated earnings tax is imposed on every corporation formed or availed for the purpose of avoiding income tax on its shareholders, by permitting earnings and profits to accumulate. Certain transactions may indicate a prohibited purpose. Which of the following is not one of these transactions?

	A.	Loans to shareholders
	B.	Accumulated earnings for use in a business expansion or for other bona fide business reasons
	C.	The corporation's dividend history
	D.	Investments in assets having no reasonable connection to the corporation's business

Answer 1

Accumulated income tax is imposed on corporations to prevent accumulation of amount beyond required by the corporations to avoid income tax on shareholders.

A) Loan to shareholders without any proper business reasons can be used to accumulate earnings to avoid income tax.

B) Since there are bonafide business reasons and hence purpose is not to prevent income tax.

C) Corporate dividend history shows the distribution of dividends which may be income tax saving for shareholder's

D) Since there are no reasonable connection between investment in assets and corporate business, therefore the purpose may be the income tax savings for the shareholders.

Thus the option (B) is not the prohibited transaction.

Hence option (B) is the answer.