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24211_ch21_final_p001-010 - 21 Taxation of Corporate...

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Taxation of Corporate Accumulations Solutions to Problem Materials D I S C U S S I O N Q U E S T I O N S 21-1 Four possible approaches are (1) issuing debt obligations instead of stock, (2) paying officer-shareholders very high salaries, (3) leasing property from shareholders at high rents, and (4) electing to be an S corporation. (See pp. 21-2 through 21-5.) 21-2 The purpose of AET is to force corporations to pay dividends to their shareholders when they accumulate earnings beyond their needs. (See p. 21-4.) 21-3 The rate conforms with the top marginal tax rate imposed on dividends received by individuals. (See p. 21-3 and § 531). 21-4 Taxable income plus or minus adjustments minus accumulated earnings credit minus dividends-paid deduction equals accumulated taxable income. (See Exhibit 21-1, and pp. 21-11 and 21-12.) 21-5 The accumulated earnings tax (AET) credit is the greater of E&P for the current year retained to meet reasonable business needs or $250,000 ($150,000 for PSCs) reduced by prior accumulations. The AET credit is a deduction used to arrive at ATI. (See Exhibit 21-2 and pp. 21-12 and 21-14.) 21-6 The dividends-paid deduction equals the sum of dividends paid during the taxable year plus dividends paid during the 2 1 = 2 months after the close of the taxable year plus consent dividends and liquidating distributions. (See Exhibit 21-3 and pp. 21-14 and 21-15.) 21-7 A throwback dividend is a dividend paid within the first 2 1 = 2 months following the close of the tax year. These dividends are treated as paid during the prior year. (See p. 21-15.) 21-8 A consent dividend is an agreement by the shareholders to record dividend income without actually receiving a distribution. It reduces the accumulated taxable income for corporations that do not have the cash to actually pay a dividend. (See p. 21-15 and § 565.) 21-9 An unreasonable accumulation may be indicated when there are loans to shareholders, expenditures for the benefit of shareholders, investment in unrelated assets, small or no dividend payments, and accumulations beyond the needs of the business. (See pp. 21-4 and 21-5.) 21 21-1
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21-10 Reasonable needs include stock redemption from an estate, redemption of excess business holdings, product liability loss reserves, business expansion or plant replacement, retirement of debt, investment or loans to suppliers or customers, contingencies, and working capital. (See pp. 21-5 through 21-7.) 21-11 The Bardahl formula calculates necessary working capital based on the operating cycle approach. Actual working capital is compared to the amount computed with the formula. As long as the actual amount does not exceed the formula, there has been no unreasonable accumulation. (See pp. 21-7 and 21-8.) 21-12 The personal holding company tax is a penalty tax on corporations used to shelter passive investment income and other similar abuses. (See pp. 21-15 and 21-16.) 21-13 It must meet an income requirement and an ownership requirement. (See pp. 21-16 through 21-18.) 21-14 The ownership requirement is that five or fewer persons own more than 50 percent of the value of the outstanding stock at any time during the last half of the taxable year. The constructive ownership rules in
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24211_ch21_final_p001-010 - 21 Taxation of Corporate...

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