§535 — Accumulated taxable income
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Statute Text — 26 U.S.C. §535
For purposes of this subtitle, the term “accumulated taxable income” means the taxable income, adjusted in the manner provided in subsection (b), minus the sum of the dividends paid deduction (as defined in section 561) and the accumulated earnings credit (as defined in subsection (c)).
For purposes of subsection (a), taxable income shall be adjusted as follows:
There shall be allowed as a deduction Federal income and excess profits taxes and income, war profits, and excess profits taxes of foreign countries and possessions of the United States (to the extent not allowable as a deduction under section 275(a)(4)), accrued during the taxable year or deemed to be paid by a domestic corporation under section 960 for the taxable year, but not including the accumulated earnings tax imposed by section 531 or the personal holding company tax imposed by section 541.
The deduction for charitable contributions provided under section 170 shall be allowed without regard to section 170(b)(2).
The special deductions for corporations provided in part VIII (except section 248) of subchapter B (section 241 and following, relating to the deduction for dividends received by corporations, etc.) shall not be allowed.
The net operating loss deduction provided in section 172 shall not be allowed.
Except as provided in subparagraph (B), there shall be allowed as a deduction an amount equal to the net capital loss for the taxable year (determined without regard to paragraph (7)(A)).
The aggregate amount allowable as a deduction under subparagraph (A) for any taxable year shall be reduced by the lesser of—
the nonrecaptured capital gains deductions, or
the amount of the accumulated earnings and profits of the corporation as of the close of the preceding taxable year.
For purposes of subparagraph (B), the term “nonrecaptured capital gains deductions” means the excess of—
the aggregate amount allowable as a deduction under paragraph (6) for preceding taxable years beginning after
July 18, 1984
, over
the aggregate of the reductions under subparagraph (B) for preceding taxable years.
There shall be allowed as a deduction—
the net capital gain for the taxable year (determined with the application of paragraph (7)), reduced by
the taxes attributable to such net capital gain.
For purposes of subparagraph (A), the taxes attributable to the net capital gain shall be an amount equal to the difference between—
the taxes imposed by this subtitle (except the tax imposed by this part) for the taxable year, and
such taxes computed for such year without including in taxable income the net capital gain for the taxable year (determined without the application of paragraph (7)).
The net capital loss for any taxable year shall be treated as a short-term capital loss in the next taxable year.
No allowance shall be made for the capital loss carryback or carryforward provided in section 1212.
In the case of a mere holding or investment company—
Paragraphs (5) and (7)(A) shall not apply.
There shall be allowed as a deduction the net short-term capital gain for the taxable year to the extent such gain does not exceed the amount of any capital loss carryover to such taxable year under section 1212 (determined without regard to paragraph (7)(B)).
For purposes of subchapter C, the accumulated earnings and profits at any time shall not be less than they would be if this subsection had applied to the computation of earnings and profits for all taxable years beginning after July 18, 1984.
In the case of a foreign corporation, paragraph (6) shall be applied by taking into account only gains and losses which are effectively connected with the conduct of a trade or business within the United States and are not exempt from tax under treaty.
There shall be allowed as a deduction the amount of the corporation’s income for the taxable year which is included in the gross income of a United States shareholder under section 951(a). In the case of any corporation the accumulated taxable income of which would (but for this sentence) be determined without allowance of any deductions, the deduction under this paragraph shall be allowed and shall be appropriately adjusted to take into account any deductions which reduced such inclusion.
For purposes of subsection (a), in the case of a corporation other than a mere holding or investment company the accumulated earnings credit is (A) an amount equal to such part of the earnings and profits for the taxable year as are retained for the reasonable needs of the business, minus (B) the deduction allowed by subsection (b)(6). For purposes of this paragraph, the amount of the earnings and profits for the taxable year which are retained is the amount by which the earnings and profits for the taxable year exceed the dividends paid deduction (as defined in section 561) for such year.
The credit allowable under paragraph (1) shall in no case be less than the amount by which $250,000 exceeds the accumulated earnings and profits of the corporation at the close of the preceding taxable year.
In the case of a corporation the principal function of which is the performance of services in the field of health, law, engineering, architecture, accounting, actuarial science, performing arts, or consulting, subparagraph (A) shall be applied by substituting “$150,000” for “$250,000”.
In the case of a corporation which is a mere holding or investment company, the accumulated earnings credit is the amount (if any) by which $250,000 exceeds the accumulated earnings and profits of the corporation at the close of the preceding taxable year.
For purposes of paragraphs (2) and (3), the accumulated earnings and profits at the close of the preceding taxable year shall be reduced by the dividends which under section 563(a) (relating to dividends paid after the close of the taxable year) are considered as paid during such taxable year.
For limitation on credit provided in paragraph (2) or (3) in the case of certain controlled corporations, see section 1561.
For purposes of this part, if 10 percent or more of the earnings and profits of any foreign corporation for any taxable year—
is derived from sources within the United States, or
is effectively connected with the conduct of a trade or business within the United States,
any distribution out of such earnings and profits (and any interest payment) received (directly or through 1 or more other entities) by a United States-owned foreign corporation shall be treated as derived by such corporation from sources within the United States.
The term “United States-owned foreign corporation” has the meaning given to such term by section 904(h)(6).
Treasury Regulations
- Treas. Reg. §Treas. Reg. §1.535-1 Definition
- Treas. Reg. §Treas. Reg. §1.535-1(a) The accumulated earnings tax is imposed by section 531 on the accumulated taxable income.
- Treas. Reg. §Treas. Reg. §1.535-1(b) In the case of a foreign corporation, whether resident or nonresident, which files or causes to be filed a return, the accumulated taxable income shall be the taxable income from sources within the United States with the adjustments prescribed by section 535(b) and § 1.
- Treas. Reg. §Treas. Reg. §1.535-2 Adjustments to taxable income
- Treas. Reg. §Treas. Reg. §1.535-2(a) Taxes—(1) United States taxes.
- Treas. Reg. §Treas. Reg. §1.535-2(b) Charitable contributions.
- Treas. Reg. §Treas. Reg. §1.535-2(c) Special deductions disallowed.
- Treas. Reg. §Treas. Reg. §1.535-2(d) Net operating loss.
- Treas. Reg. §Treas. Reg. §1.535-2(e) Capital losses.
- Treas. Reg. §Treas. Reg. §1.535-2(f) Long-term capital gains.
- Treas. Reg. §Treas. Reg. §1.535-2(g) Capital loss carrybacks and carryovers.
- Treas. Reg. §Treas. Reg. §1.535-2(h) Bank affiliates.
- Treas. Reg. §Treas. Reg. §1.535-2(i) §1.535-2(i)
- Treas. Reg. §Treas. Reg. §1.535-3 Accumulated earnings credit
- Treas. Reg. §Treas. Reg. §1.535-3(a) In general.
- Treas. Reg. §Treas. Reg. §1.535-3(b) Corporation which is not a mere holding or investment company—(1) General rule.
- Treas. Reg. §Treas. Reg. §1.535-3(c) Holding and investment companies.
37 Citing Cases
Edison Co., supra, was overruled (retroactively to the effective date of the 1954 Code) by section 223 of the Revenue Act of 1964, Pub.
Petitioner’s interpretation of the subject regulation does not comport with the section 535 statutory phrase “accrued during the taxable year”.
In determining your accumulated earnings credit under the provisions of section 535 of the Internal Revenue Code, your failure or refusal to respond to the notification sent to you by certified mail on January 15, 1991 pursuant to [section] 534(b) explaining the capital needs of your business has been considered.
Section 535 provides for the deduction of Federal income tax accrued during the taxable year. Sec. 535(b)(1). For this purpose a tax liability is not treated as accrued during the taxable year if the taxpayer contested it at the time it was proposed. Dixie Pine Prods. Co. v. Commissioner, 320 U.S. 516 (1944); Goodall’s Estate v. - 56 - Commissione
In determining your accumulated earnings credit under the provisions of section 535 of the Internal Revenue Code, your failure or refusal to respond to the notification sent to you by certified mail on January 15, 1991 pursuant to [section] 534(b) explaining the capital needs of your business has been considered.
He contended that section 535, which applies to accumulated taxable income for purposes of the corporate accumulated income tax, allows him to accumulate a certain amount of taxable income.
On July 31, 2000, respondent issued to petitioner a notice of deficiency with respect to petitioner’s short taxable years ending December 31, 1996, and October 10, 1997, wherein respondent, relying on the provisions of section 535, calculated petitioner’s accumulated taxable income and accumulated earnings tax thereon as follows: - 16 - Short Taxable Accumulated Accumulated Year Ending Taxable Income Earnings Tax Dec.
Under section 535, accumulated taxable income is adjusted taxable income less a dividends paid deduction and the accumulated earnings credit. For corporations, - 25 - other than holding or investment companies, the credit is generally an amount equal to the part of earnings and profits that is retained for the reasonable needs of the business. See sec.
Reasonable Needs of Petitioner’s Business Whether a corporation has permitted its earnings and profits to accumulate beyond its reasonable needs is a question of fact. Helvering v. National Grocery Co., 304 U.S. 282 (1938); Bremerton Sun Publishing Co. v. Commissioner, 44 T.C. 566, 582 (1965). The mere magnitude of the accumulated earn