Problem: Module $9$ Textbook Problem $10$

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

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$$s taxable income was $$1,000,000,$ 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:

Compute Falco$$s accumulated earnings tax assuming that it had accumulated $$5$ 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.

Compute Falco$$s accumulated earnings tax assuming that it had accumulated $$140,000$ 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.