California Marine Cleaning, Inc. - Page 6

                                          6                                           
                     Computation of Accumulated Earnings Credit                       
                                         9/30/92       9/30/93     9/30/94            
          Minimum credit                $250,000     $250,000    $250,000             
          Less: Accumulated earnings                                                  
          as of close of prior year     339,981        431,171   508,836              
          Allowable minimum credit                                                    
          (sec. 535(c)(2))              -0-            -0-       -0-                  
          Current earnings and profits                                                
          retained for reasonable needs                                               
          of business                                                                 
          (sec. 535(c)(1)(A))           -0-            -0-       -0-                  
          Less: Deduction for LTCG                                                    
          (sec. 535(b)(6))     --    -- --                                            
          Allowable credit                                                            
          (sec. 535(c)(1))              -0-            -0-       -0-                  
               Respondent's only explanation for determining that                     
          petitioner was liable for accumulated earnings tax was that                 
          petitioner was "formed or availed of for the purpose of [its]               
          shareholders avoiding income tax".                                          
               Respondent did not state the basis for determining that                
          petitioner had no reasonable needs to retain earnings for the               
          years at issue.  The notice of deficiency contained no Bardahl6             
          computation or other analysis of petitioner's need for working              
          capital.  Respondent issued the notice of deficiency before                 


               5(...continued)                                                        
          the taxpayer's earnings and profits for the taxable year that is            
          retained for the reasonable needs of the business.  Sec.                    
          535(c)(1).  The accumulated earnings credit is subtracted from              
          the taxpayer's taxable income in calculating accumulated taxable            
          income.  Sec. 535(a).                                                       
               6 A Bardahl computation is an estimate of a taxpayer's                 
          working capital needs based on its business needs for one                   
          operating cycle.  Bardahl Manufacturing Corp. v. Commissioner,              
          T.C. Memo. 1965-200.                                                        




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