During a recent IRS audit, the revenue agent decided that the Parker family used their closely held corporation, Falco, to avoid shareholder tax by accumulating earnings beyond the reasonable needs of the business. Falco's taxable income was $1,030,000, it paid no dividends, and it had no business need to retain income. Falco's marginal tax rate in prior years was 34 percent. Required: a. Compute Falco's accumulated earnings tax assuming that it had accumulated $3 million after-tax income in prior years. b. Compute Falco's accumulated earnings tax assuming that it had accumulated $143,000 after-tax income in prior years.

During a recent IRS audit, the revenue agent decided that the Parker family used their closely held corporation, Falco, to avoid shareholder tax by accumulating earnings beyond the reasonable needs of the business. Falco's taxable income was $1,030,000, it paid no dividends, and it had no business need to retain income. Falco's marginal tax rate in prior years was 34 percent. Required: a. Compute Falco's accumulated earnings tax assuming that it had accumulated $3 million after-tax income in prior years. b. Compute Falco's accumulated earnings tax assuming that it had accumulated $143,000 after-tax income in prior years.

SWFT Individual Income Taxes

43rd Edition

ISBN:9780357391365

Author:YOUNG

Publisher:YOUNG

Chapter1: An Introduction To Taxation And Understanding The Federal Tax Law

Section: Chapter Questions

Problem 41DQ

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