Use of operating cycle formula may avoid earnings tax

Article Abstract:

Companies that try to avoid income tax on shareholders by retaining earnings and profits beyond the level needed to operate the business can be held liable for accumulated earnings tax under Section 531. According to the Internal Revenue Manual, the accumulated earnings tax is 28% of a company's ordinary taxable income less accrued federal income taxes, foreign taxes, excess charitable contributions, and net capital gains and losses. It is the job of IRS agents during audits to determine if the accumulated earnings tax is to be imposed on firms and how much. The Manual contains an operating cycle formula that is used to compute the reasonable profits and earnings that companies can retain without incurring the accumulated earnings tax. The application of this formula to service businesses is discussed.

Services, not elsewhere classified, Taxation, Services industry, Service industries, Accumulated earnings tax

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Rules on hostile takeover expenses are tightened

Article Abstract:

TAM 9144042 asserts that expenses accumulated in the execution of corporate anti-takeover measures may be considered ordinary and necessary business expenses if a corporation can provide proof that no long-term benefits resulted from the efforts of resistance to hostile takeover. Inability to show the nonexistence of said long-term benefits classifies any expenses incurred in the resistance as capital expenditures. The IRS National Office asserts that under TAM 9144042, deductibility of expenses shall be based on origin of claims, and not on the takeover's nature.

Usage, Capital investments, Stock redemption, Corporate anti-takeover measures, Antitakeover strategies

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