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 $130,000 after-tax income in prior years.

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The accumulated earnings tax is 20% of the accumulated taxable income. First, determine the accumulated taxable income by subtracting the reasonable needs of the business and the accumulated earnings credit from the taxable income. Assuming no reasonable needs, the accumulated taxable income is $500,000 - $250,000 (credit) = $250,000. The tax is 20% of $250,000, which is $50,000.

During a Recent IRS Audit, the Revenue Agent Decided That