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OPINION
Petitioners bear the burden of proof and must establish that
the determinations made in respondent's notices of deficiency are
erroneous. Rule 142(a); Welch v. Helvering, 290 U.S. 111 (1933).
I. Accumulated Earnings Tax
Section 532(a) provides that every corporation formed or
availed of for purposes of avoiding the income tax with respect
to its shareholders, by permitting earnings and profits to
accumulate instead of being divided or distributed, shall be
subject to the accumulated earnings tax imposed by section 531.
The accumulated earnings tax is a way of discouraging
corporations from accumulating earnings not needed in conducting
the business. Snow Manufacturing Co. v. Commissioner, 86 T.C.
260, 268 (1986). The tax is considered to be a penalty and,
therefore, is to be strictly construed. Ivan Allen Co. v. United
States, 422 U.S. 617, 626 (1975); see generally Technalysis Corp.
v. Commissioner, 101 T.C. 397, 402-403 (1993).
The most important factor in deciding if the accumulated
earnings tax applies is whether a corporation accumulates
earnings and profits beyond the reasonable needs of the business.
United States v. Donruss Co., 393 U.S. 297, 307 (1969). Section
533(a) establishes a presumption that a corporation that permits
earnings and profits to accumulate beyond the reasonable needs of
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