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72-MBA Tax Ch18 Accumulated Earnings & Profits and PHC Tax

72-MBA Tax Ch18 Accumulated Earnings & Profits and PHC Tax

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Accumulated Earnings Tax and Personal Holding Company Tax Unless otherwise noted, these notes are based on Froth, Edward C., 2011 CCH Federal Tax Study Manual Chapter 18 1. The Accumulated Earnings and Profits Tax (AET) is a penalty tax on retention of excess earnings and profits in a company rather than paying out earnings to shareholders where it could be tax again at the shareholder level. 2. Earnings and Profits can be accumulated without limit if a reasonable business purpose can be demonstrated. For example, earnings and profits can be accumulated to replace plant, property and equipment. The difficulty is in demonstrating what constitutes a “reasonable” amount of working capital. 3. Courts have accepted the Bardahl Estimate of Working Capital as reasonable. See: Bardahl manufacturing Corp . 1965 PH T.C. Memo Paragraph 65,200; 24 TCM 1030, at 1044 The Bardahl equation (1) estimates a firm’s required Working Capital (WC) and is a means of defending against an IRS allegation that a company is retaining too much earnings and profits.
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