14
2. Basis in Fact
a. Whether Facts Known by Respondent Provide a Basis
in Fact
Respondent argues that respondent's position was
substantially justified on the basis of the following information
which respondent knew or reasonably believed when respondent sent
the notice of deficiency: (a) Petitioner was in the business of
cleaning ships; (b) petitioner was a cash basis taxpayer; (c)
petitioner reported unappropriated retained earnings of
$1,149,031 for FY 1992, $1,230,404 for FY 1993, and $1,197,598
for FY 1994; (d) petitioner reported gross receipts or sales of
$2,839,130 for FY 1992, $2,905,192 for FY 1993, and $2,822,943
for FY 1994; (e) petitioner reported total deductions of
$2,571,712 for FY 1992, $2,685,388 for FY 1993, and $2,679,903
for FY 1994; (f) petitioner paid no dividends in FY 1992, 1993,
and 1994; and (g) petitioner had no inventory in FY 1992, 1993,
and 1994.
These facts do not provide a basis in fact for respondent’s
position that petitioner intended to avoid tax for its
shareholders. Section 1.533-1(a)(2), Income Tax Regs., lists
factors to be considered in deciding whether a corporation
intended to avoid income tax of its shareholders, including: (1)
Dealings between the corporation and its shareholders for the
personal benefit of the shareholders; for example, personal
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