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Section 534(c) is designed to enable a taxpayer to respond to
the Commissioner's section 534(b) notification before the
Commissioner determines a deficiency. Manson W. Corp. v.
Commissioner, 76 T.C. 1161, 1164 (1981). In that case we said:
[The Commissioner] admits that part of section 534's
function is to "encourag[e] the Internal Revenue Service
to be more deliberate than it had been in the past."
Such deliberation can result only if respondent reads
and considers a taxpayer's section 534(c) response
before issuing a notice of deficiency, and we are
confident that Congress intended for respondent to do
just that. [Id.; fn. ref. omitted.]
Respondent failed to request information about petitioner's
needs to accumulate earnings even though Hochheiser gave copies
of petitioner's tax returns to Saul in November of 1989 and Saul
knew in February 1991 that petitioner would not agree to extend
the time to assess tax. We conclude that respondent did not
diligently investigate this case before issuing the notice of
deficiency or filing the answer.
3(...continued)
taxpayer that the proposed notice of deficiency
includes an amount with respect to the accumulated
earnings tax imposed by section 531.
Sec. 534(c) provides:
Within such time (but not less than 30 days) after the
mailing of the notification described in subsection (b)
as the Secretary may prescribe by regulations, the
taxpayer may submit a statement of the grounds
(together with facts sufficient to show the basis
thereof) on which the taxpayer relies to establish that
all or any part of the earnings and profits have not
been permitted to accumulate beyond the reasonable
needs of the business.
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