Question

1- Name at least two ways in which an organization could avoid being assessed with the accumulated earnings tax? (PHC)?

2- Phillip Morris, Inc. recently announced plans to buy the stock of Nabisco for $11 billion in cash and other assets. What type of reorganization, if any, will the transaction be?

Answer 1

Answer 1:

Accumulated Earning are actually retained earnings. These earnings belong to shareholders. But, company retains them for their future uncertainties. Some corporations purposely do not distribute dividends and accumulate high earnings which are retained for longer period. Thus, retained earnings accumulte at a place and that amount of money is not kept in circulation in the market. If many companies start doing so, a lot of money will be stuck with private people and government may have difficult time in managing the economics of country. Thus, it is a great practice of all governments to tax the Accumulated Earnings and force the corporations to distribute the dividends or pay higher taxes.

However, there are several ways to avoid being taxed under the head Accumulated Earnings Tax. Following are some:

• Increase the limit for retentions for unrealistic or uncertain events in the reserves.
• investment of personal nature
• Loans to shreholders
• Expenditure on shareholders for their benefit out of companies' business.
• Divident Payouts
• Expand Business and show accumulated earnings are pre-investments by shareholders for new project.

Answer 2:

The type of re-organisation is Acquisition. Phillip Morris acquired Nabisco under Purchase Method as it involves Cash and Assets.

Under this type of Re-organisation, the latter company (Nabisco) ceases to exist and becomes a integral part of acquiring company (Phillip Morris).

Hope these answers help.

All the best !!