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Accumulated Earnings Tax-1995
Taxable income per Form 5278 $325,000
Less sec. 535(b) adjustments:
1. Federal income taxes accrued (2,674)
2. Net capital gains 40,354
less: income tax attribu-
table thereto 15,738
(24,616)
300,384
Less dividends paid:
Compensation treated as dividend (150,250)
Other expenses paid for benefit
of shareholders (8,094)
Accumulated taxable income 142,040
x 39.6% 56,248
In the above computation, respondent has interpreted section
535(b)(6) to mean that the net capital gain should first be
reduced by the full amount of tax on the capital gain and that it
is not limited by the amount of combined tax liability reported
by petitioner for 1995. Accordingly, respondent has taken the
net capital gain of $40,354, applied the 35-percent maximum rate
under section 1201 and arrived at $15,738 of income tax
attributable to the net capital gain.18 After making the “tax
attributable” adjustment, respondent reduced taxable income by
the $24,616 difference in the process of arriving at accumulated
taxable income.
18 We note that petitioner reported $35,884 of net capital
gain and that respondent made adjustments increasing the amount
to $40,354. We also note that 35 percent of $40,354 is
$14,123.90 ($14,124) and not $15,738. It appears that another
adjustment was combined with the one discussed herein, resulting
in the $15,738 amount.
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