A C Corporation is subject to the accumulated earnings tax. It has Accumulated Taxable Income of $200,000. It pays a dividend of $50,000 on March 1 of the following year. Can this dividend reduce the accumulated earnings tax liability for the prior year?

Answer options:

No, dividends must be paid within the tax year.

Yes, dividends paid within 2.5 months of year-end are considered paid in the prior year for AET purposes.

Yes, but only if the corporation is a personal holding company.

No, unless a consent dividend election is made.

How to approach this question

Identify AET Dividend Paid Deduction rule. Includes dividends paid within 2.5 months after year-end.

Full Answer

B.Yes, dividends paid within 2.5 months of year-end are considered paid in the prior year for AET purposes.✓ Correct

IRC §563(a). In the determination of the dividends paid deduction for purposes of the accumulated earnings tax, a dividend paid after the close of any taxable year and on or before the 15th day of the third month following the close of such taxable year shall be considered as paid during such taxable year.

Common mistakes

Assuming the strict year-end rule applies.

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