A corporations retained earnings are the portion of profits not distributed to shareholders as dividends. Over time, these retained earnings can accumulate. The IRS permits a corporation to retain excess earnings only for expansion or other necessary business reasons; however, if the corporation allows earnings to accumulate beyond reasonable business needs, it will be subject to an accumulated earnings tax (AET) penalty. According to the course text, this accumulated earnings tax is designed to encourage a corporation to distribute any excess profits so that shareholders will incur tax liabilities for dividends. Consider the following questions: What is the impact of accumulated earnings tax on corporations? Should the government change its policies on excess retained earnings?