Goss Corporation is a leading manufacturer of hangers for the laundry and dry cleaning

industry. The family-owned business has prospered for many years and has generated

approximately $100 million of sales and $8 million in after-tax profits. Your accounting

firm has performed the audit and tax work for Goss and its executives since the company

was created many years ago. The advent of plastic hangers and improved fabrics has kept

the company’s market share constant, and the corporation plans no major plant expansions

or additions. Salaries paid to corporate executives, most of whom are family members, are

above the national averages for similar officers. Dividend payments in recent years have not

exceeded 10% of the after-tax profits. On December 1 of the current year, you were

assigned to oversee the preparation of the current year Goss tax return. In undertaking the

assignment, you review Goss tax returns for the past three years. You note from Schedule L

(the balance sheet) that, during this period, the corporation made about $1.5 million in

loans to three executives and regularly increased the size of its stock portfolio. This increase

leads you to believe that Goss may be liable for the accumulated earnings tax in the current

year and prior years.

Required:

1. What responsibility do you have to make Goss or the partner in charge of the Goss

account aware of the potential accumulated earnings tax liability?

1. Should you advise the IRS of the potential liability for prior years? Should you disclose

the potential liability on the current year return?

1. Prepare a list of measures that can be taken to reduce or eliminate Goss’ liability for the

accumulated earnings tax.

 

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