Accumulated Earnings Tax – Defensive Planning

Roger S. Levitan, Accumulated Earnings Tax – Defensive Planning, 2 Gonz. L. Rev. 19 (1967)


This article will examine from the standpoint of advance planning certain common business conditions which have been probed by recent decisions, with varying results, as possible justifications for the retention of corporate earnings.  Retention of earnings for the “reasonable needs of the business,” which provides the principal bulwark against the imposition of the tax, requires a factual determination.  Therefore, certain judicial decisions which are seemingly inconsistent may to some extent be rationalized.

The accumulated earnings tax imposed by Section 531 of the 1954 Code is in effect a penalty tax on what is regarded as an improper accumulation of earnings and profits. The tax is designed to force a corporation to distribute current earnings which are in excess of its reasonable business needs, thus subjecting such earnings to the individual tax rates applicable to the recipient shareholders as well as the corporate rates. The accumulated earnings tax has been in effect since 1921 and, prior to 1954, was imposed by Section 102 of the 1939 Code. The tax rate is 27 per cent of the first $100,000 of accumulated taxable income, as defined in Section 535, plus 38.5 per cent of the accumulated taxable income in excess of $100,000.

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