Windsor Production Corporation - Page 12

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          Commissioner, supra at 472-474; Williford v. Commissioner, T.C.             
          Memo. 1994-135.                                                             
              d.    Respondent's Lack of Diligence                                    
              Respondent erroneously assumed that petitioner had no                   
          reasonable business needs to accumulate earnings or plans to                
          expand which would justify accumulations.  Respondent did not ask           
          to see petitioner's records or otherwise investigate petitioner's           
          needs to accumulate funds before issuing the notice of                      
          deficiency.  On July 1, 1981, Saul believed that the accumulated            
          earnings issue was not strong for respondent.  He told Hochheiser           
          that respondent would not pursue the accumulated earnings issue.            
          The Commissioner did not have a reasonable basis in fact and law            
          without diligently investigating the case.  Nicholson v.                    
          Commissioner, 60 F.3d at 1029; Lennox v. Commissioner, 998 F.2d             
          244, 248 (5th Cir. 1993), revg. and remanding T.C. Memo. 1992-              
          382; United States v. Estridge, 797 F.2d 1454, 1458 (8th Cir.               
          1986); Powers v. Commissioner, 100 T.C. at 473.                             
              The fact that respondent issued the accumulated earnings tax            
          notice under section 534(b) 1 day before respondent issued the              
          notice of deficiency suggests that respondent was not seriously             
          interested in investigating the accumulated earnings tax issue.3            

               3 Sec. 534(b) provides:                                                
               Before mailing the notice of deficiency referred to in                 
               subsection (a), the Secretary may send by certified                    
               mail or registered mail a notification informing the                   
                                                             (continued...)           



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