- 43 -
“there was always funds set aside for the rainy days.”
Petitioner accumulated partly to provide for its own potential
needs. Evidently an understanding existed among companies within
the Mohney Group that any surplus accumulated by one member
should be made available to other members who needed the funds.
“We are all friends, we help each other out,” Hagerman explained.
Thus, through loans to its affiliates of over $1 million in TYE
8/31/90 and TYE 8/31/91, petitioner’s surpluses were applied to a
constructive use somewhere in the group.
Petitioner attempts to justify its policy by the observation
that commercial lending is essentially impossible for adult
entertainment businesses to obtain. This may well be true, but
it does not satisfactorily account for the retention of earnings
without specific, definite, and feasible plans to use them. By
consenting to the accumulation and pooling of earnings by
petitioner and other members of the Mohney Group, the common
owners were implicitly providing the financing that was
unavailable from commercial sources. If petitioner had regularly
distributed surplus funds, there is no reason to expect that its
shareholders would not have been willing to reinvest their
dividends in the Mohney Group wherever and whenever a definite
need arose. Petitioner’s explanation is not sufficient to rule
out the possibility that its policy was designed to serve tax
avoidance purposes as well. Petitioner has not carried its
burden of proof. Accordingly, it is liable for accumulated
Page: Previous 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 NextLast modified: May 25, 2011