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Problem: Module $9$ Textbook Problem $10$

Learning Objective: $9-7$ Explain the purpose of the accumulated earnings tax and the personal holding company tax

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During a recent IRS audit, the revenue agent decided that the Parker family used their closely held corporation, Falco, to avoid

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shareholder tax by accumulating earnings beyond the reasonable needs of the business. Falco's taxable income was $$870,000,$ it paid no dividends, and it had no business need to retain income. Falco's marginal tax rate in prior years was $34$ percent. Assume the accumulated earnings tax rate is $20\%$ for all applicable years in this problem.

Required:

a$.$ Compute Falco's accumulated earnings tax assuming that it had accumulated $$3$ million after$-$tax income in prior years. Assume that for these years at issue, a corporation is exempt up to $$250,000$ of accumulated earnings without demonstrating a reasonable business need for the accumulation.

b$.$ Compute Falco's accumulated earnings tax assuming that it had accumulated $$127,000$ after$-$tax income in prior years. Assume that for these years at issue, a corporation is exempt up to $$250,000$ of accumulated earnings without demonstrating a reasonable business need for the accumulation.

Complete this question by entering your answers in the tabs below.

Required A

Compute Falco's accumulated earnings tax assuming that it had accumulated $$3$ million after$-$tax income in prior years. $($Enter your answer in dollars and not in millions of dollars.$)$

Accumulated earnings tax