Content area
Full Text
This article discusses a recent IRS Chief Counsel Advice (CCA) focused on the accumulated earnings tax (AET), as well as past precedent relating to the AET The AET is a 20% tax on "accumulated taxable income," which may apply when earnings and profits (E&P)1 of a corporation are permitted to accumulate beyond the reasonable needs of the business. The recent CCA regarding the AET discusses various issues related to the tax, and this article discusses both the IRS's positions on these issues, as well as the precedent that supports and opposes the IRS's positions.
The question addressed in the CCA is whether the AET can apply when a C corporation has no liquid assets to distribute. Under the facts presented, the corporation was a pure holding company that had accumulated E&P from which it had made no distributions on the basis it lacked liquid assets with which to pay dividends. The CCA states that as a holding company, the corporation had no reasonable needs for which to accumulate E&P. It further states that a lack of liquidity does not prevent the payment of dividends or the imposition of the AET, as even illiquid corporations can pay consent dividends.2 Some perceive that the IRS's willingness to impose of the AET on an illiquid corporation may lead to a significant shift in AET enforcement.3 However, this article discusses Supreme Court precedent4 and other cases that would likely prevent the imposition of the tax on most illiquid corporations outside of the unique facts and circumstances of the memo. The facts in the memo strongly implied that the taxpayer was motivated by tax avoidance, and this perception generally leads to the imposition of the AET
To prevent the imposition of the AET when tax avoidance is not a motivation, business owners and practitioners should pay careful attention to the accumulation and distribution of E&P and continuously document a need for accumulations. This will allow corporations to maintain planned growth by escaping the burden of additional taxes in the form of AET The remainder of this article proceeds as follows: first, this article provides background information on the AET;...