Volume 4 No 2    |    Read Article

By Fanny Karaman and Beate Erwin

Even absent a distribution, shareholders of U.S. corporations may, under certain circumstances, be subject to a second layer of tax: the accumulated earnings tax (“A.E.T.”). The tax is imposed on the accumulation of earnings beyond the reasonable needs of the business. Although rarely imposed on well-advised taxpayers, the A.E.T. could become increasingly important if the tax rate disparity between the corporate and individual income taxes increases under proposals put forth by the current administration. Fanny Karaman and Beate Erwin look at a recent Chief Counsel Advice Memorandum where the absence of liquidity within the corporation was found to be an irrelevant factor in determining that earnings were unreasonably accumulated by the corporate taxpayer.   See more →