Category: Corporations Copyright 1998, The Tax Resource Group. All rights reserved. Telephone 800-578-3498. Internet: www.taxresourcegroup.com You requested that The Tax Resource Group locate a body of case law from which one could extrapolate guidelines as to the amount of earnings which can safely be accumulated within a C corporation without the imposition of the accumulated earnings tax of §531. Under §§531 to 537, the accumulated earnings penalty tax is imposed if earnings are accumulated beyond the reasonable needs of the business, unless the taxpayer can show by a preponderance of the evidence that the accumulation did not have as one of its principal purposes the avoidance of income tax at the shareholder level. As a practical matter, if earnings are accumulated beyond the reasonable needs of the business, the penalty tax is imposed. The determination of what constitutes the reasonable needs of a business is purely a factual issue. Not surprisingly, there are scores of cases in this area, and based on scanning the annotations of some of the cases, the holdings appear to be so disparate as not to lend themselves to extrapolation of any sort of rule of thumb as to what can safely be accumulated. I also reviewed several commentary services, and none of the writers ventured to offer any rules of thumb. It seems to me that it might be extremely hazardous to attempt to create numerical generalizations about what might be considered a safe accumulation of earnings given the highly factual nature of this determination. Accordingly, I suggest focusing on the Bardahl computation as well as any other matters which might increase the need for accumulated earnings. |
