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34 U. Fla. L. Rev. 715 (1981-1982)
The Accumulated Earnings Tax: The Relationship between Earnings and Profits and Accumulated Taxable Income in a Redemption Transaction

handle is hein.journals/uflr34 and id is 729 raw text is: THE ACCUMULATED EARNINGS TAX: THE RELATIONSHIP BETWEEN EARNINGS AND PROFITS AND ACCUMULATED TAXABLE INCOME IN A REDEMPTION TRANSACTION RrcHARD L. DOE.NBERG* INTRODUCTION Differences in individual and corporate tax rate structures create an often irresistible temptation to use corporations as a shield against the individual income tax.1 Congress recognized this temptation as early as 1913 and moved to eliminate it by taxing the shareholders of offending corporations.2 The succes- sor to the early legislation is today's accumulated earnings tax,8 which is levied against the corporation itself. Internal Revenue Code section 532(a) applies the accumulated earnings tax to corporations that accumulate earnings and profits beyond an amount needed to meet reasonable business needs in order to avoid the individual income tax.4 If section 532(a)'s requirements are met, section 531 imposes a penalty on ac- cumulated taxable income, which is defined as taxable income with specified adjustments less the dividends paid and the accumulated earnings credit.5 Differing measures for triggering the tax, known as the triggering measure, and for computing the liability, known as the base measure, can prompt the accumulated earnings tax to be applied in a most peculiar situation: when there is no accumulation of current earnings. To those familiar with the Code it is not surprising that the accumulated earnings tax can be levied on a corporation that has distributed all of its earn- ings and profits for the period at issue. To illustrate: X Corporation, a calendar year taxpayer, formed in 1950, has one million dollars of accumulated earnings and profits as of December 31, 1978. There are no further accumulations in 1979 or 1980. In 1981, X has $200,000 of earnings and profits from operations *Assistant Professor of Law, Emory University School of Law. B.A., 1970, Yale; MA.T., 1972, Wesleyan University; J.D., University of Connecticut; LL.M., 1980, New York University. 1. B. Brrm'R, FEzRAL TAXATION OF INCOME, ESTATES AND GITs § 95.1.1 (1981). 2. Tariff Act of 1913, Pub. L. No. 16, § n, 38 Stat. 114, 116 (1913). 3. I.R.C. §§ 531-37 (1976). 4. I.R.C. § 532(a) (1976) reads: The accumulated earnings tax imposed by section 531 shall apply to every corporation (other than those described in subsection (b)) formed or availed for the purpose of avoiding the income tax with respect to its shareholders or the shareholders of any other corporation, by permitting earnings and profits to accumulate instead of being divided or distributed. Id. 5. Id. § 535(a). In years after 1981 the minimum accumulated earnings credit is increased from $150,000 to $250,000 except for certain service corporations. See id. § 535(c)(2)-(3) (West 1982).