During a recent IRS audit, the revenue agent decided that Roger used his closely-held corporation, Dodger Inc., to avoid shareholder tax by accumulating earnings beyond the reasonable needs of the business. Dodger's taxable income for the year was $500,000, and it paid no dividends. Compute Dodger's accumulated earnings tax, assuming that it had accumulated $2 million after-tax income in prior years.
A) $100,000
B) $400,000
C) $50,000
D) $0

Question

Quizplus · Accepted Answer

The accumulated earnings tax is 20% of the accumulated taxable income. Since Dodger Inc. has $500,000 in taxable income and no dividends were paid, the tax is 20% of $500,000, which is $100,000.

During a Recent IRS Audit, the Revenue Agent Decided That