Year: 1970
Type: article
Abstract: The accumulated earnings tax has been referred to as "a penalty on success itself."'Of all the taxes imposed upon business, this is probably one of the most unpopular, involving an after the fact verdict on management's business judgment.As long as substantial differences exist in the tax rates imposed upon the corporation on the one hand and upon the individual on the other, however, there will continue to be a need for such tax "as a barrier to . . .tax avoidance."2Presently two tests, one subjective and the other objective, are used to determine whether the tax will be imposed.The subjective test is derived from section 532(a) of the Internal Revenue Code of 1954, which provides that the accumulated earnings tax is to be imposed if the corporation was formed or availed of to avoid income tax on its shareholders by permitting earnings and profits to accumulate.In short, this test is based on the subjective intent of the shareholders in accumulating earnings and profits.The objective test is derived from section 533(a) and (c) of the Code.Section 533(a) creates a presumption that the purpose of avoidance is present if earnings are accumulated beyond the reasonable needs of the corporation's business.Section 535(c) provides a credit in computing accumulated taxable income for "such part of the earnings and profits for the taxable year as are retained for the reasonable needs of the business."3 The thesis of this discussion is that the subjective test no longer serves a valid purpose, and should therefore be discarded in favor of the objective test, one based on whether the accumulation serves the reasonable needs of the business.
Author: Homer L. Elliott
Language: English
Subfield: Accounting
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W1533088286