Final answer:
A tax avoiding purpose refers to the intention of a corporation to retain earnings to evade paying individual shareholder taxes.
Step-by-step explanation:
The Accumulated Earnings Tax (AET) aims to prevent corporations from stockpiling earnings to dodge individual shareholder taxes. When companies retain excessive profits without a legitimate business purpose, it raises concerns that they might be attempting to circumvent tax liabilities. This tax is triggered when the accumulation of profits surpasses what's necessary for reasonable business needs, expansion, or other essential purposes.
A tax avoiding purpose typically involves scenarios where a corporation holds onto profits solely to sidestep distributing dividends to shareholders, who would then be taxed on those earnings at individual income tax rates. Companies must demonstrate that their retained earnings align with genuine business necessities, like reinvestment for growth or future operational requirements. Failure to justify the retention of earnings for valid business objectives can result in the application of the Accumulated Earnings Tax.
So, a tax avoiding purpose involves retaining earnings to evade individual shareholder taxes.