Exemption amount is 40000 and is phased out by 25 of

23. Exemption amount is $40,000 and is phased-out by 25% of the amount that AMTI
exceeds $150,000. For corporations, phase-out is complete once AMTI reaches
$310,000.
24. AMT is a separate tax system and is computed in addition to the regular tax. AMT credit
is available to eliminate the possibility of double taxation due to time differences.
25. AMT is subject to estimated tax rules, the only credits available to offset AMT are the
foreign tax credit (FTC), and AMT is computed on Form 4626.
PENALTY TAXES ON CORPORATE ACCUMULATIONS
26. For years before 2009.
a. A 15% penalty tax is imposed on earnings retained by corporations for the
purpose of avoiding the tax on dividends that would be imposed if distributions
were made to the shareholders.
b. The penalty taxes that may be imposed are the § 531, accumulated earnings tax
(AET) or the § 541, personal holding company tax (PHC tax).
Accumulated Earnings Tax (§§ 531–537)
27. The accumulated earning tax AET of 15% is imposed on the accumulated taxable income
(ATI), which is computed as follows.
ATI = Taxable income + Adjustment – Dividends paid – Accumulated earnings credit

Chapter 3 – Corporations: Special Situations 3-9
b. Accumulated earnings credit is the greater of the following:
(1) $250,000 ($150,000 for personal service corporations) less accumulated
earnings and profits (A E & P); or
(2) Reasonable business needs less accumulated earnings and profits
c. Additional safety valve. If a corporation invests earnings in assets essential to its
business, the IRS will have difficulty taxing such accumulated earnings (if all
other benchmarks are observed). The difficulty comes in agreeing on what are the
reasonable business needs of a corporation.
ADDITIONAL LECTURE RESOURCE
REASONABLE BUSINESS NEEDS JUSTIFICATION
Legitimate Reasons Invalid Reasons
Expansion of business Loans to shareholders
Replacement of capital assets Loans to brother-sister corporations
Replacement of plant Future economic depressions
Acquisition of a business Unrealistic contingencies
Working capital needs Investments in unrelated businesses
Debt retirement Retiring stock without reducing business
Loans to suppliers or customers
Redemption of § 303 stock
Business hazards
Loss of major client or customer
Protecting business from outsider takeovers
Product liability and actual lawsuit reserves Self-insurance
Personal Holding Company Tax (§§ 541–547)
28. Personal holding company (PHC) tax is to prevent high tax bracket individuals from
sheltering types of passive income by incorporating the activity and retaining control
(“incorporated pocketbooks”) by causing distributions of earnings to shareholders.
a. Definition of a personal holding company involves two mechanical tests.
(1) Stock ownership test. Was more than 50% of the value of the outstanding