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During a recent IRS audit, the revenue agent decided that Apple, an individual, used his closely-held corporation, Fruit Tree Inc., to avoid shareholder tax by

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During a recent IRS audit, the revenue agent decided that Apple, an individual, used his closely-held corporation, Fruit Tree Inc., to avoid shareholder tax by accumulating earnings beyond the reasonable needs of the business. Fruit Tree Inc.'s taxable income for the year was $612,500 and it paid no dividends. Compute Fruit Tree Inc.'s accumulated earnings tax, assuming that it had accumulated $159,250 after-tax income in prior years. Also assume that the accumulated earnings tax rate is 20% and up to $250,000 can be accumulated without incurring the accumulated earnings tax. $72,500 $122,500 $104,350 $104,125

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