Question

Identify which of the following statements is true.A. A corporation bears the burden of proving that its earnings are not being accumulated to avoid income taxes.B. To avoid the accumulated earnings​ tax, a corporation needs to have a definite plan for expending the accumulated earnings.C. In​ practice, the accumulated earnings tax applies only to closely held corporations.

Answer 1

Answer: The statements

A. A corporation bears the burden of proving that its earnings are not being accumulated to avoid income taxes.

B. To avoid the accumulated earnings​ tax, a corporation needs to have a definite plan for expending the accumulated earnings.

C. In​ practice, the accumulated earnings tax applies only to closely held corporations.

Are TRUE.

Explanation: To avoid paying the tax on accumulated profits, the company has the obligation to show that it does not accumulate profits, in case of not being able to prove it, it must pay tax.

It is optimal for companies to have a defined plan to spend the accumulated profits on profitable projects and not waste the profits just to avoid paying tax.