- 12 -
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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