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loans; (2) corporate investment of undistributed assets in
unrelated businesses or investments; and (3) the corporation's
dividend history. Respondent has not shown that respondent had
any reason to believe that there were dealings between petitioner
and its shareholders for their personal benefit or that
petitioner had invested in unrelated businesses. Respondent knew
that petitioner did not pay dividends in the years in issue but
cites no authority that the absence of dividends, in isolation,
triggers liability for accumulated earnings tax.
The record does not show what respondent did, or learned
about petitioner, during the audit of this case. Petitioner's
returns suggest that petitioner had a significant ongoing
business. Petitioner's returns do not provide a basis in fact
for respondent's position that petitioner was formed or availed
of for the proscribed purpose. Respondent does not claim to have
had any information about the merits of the case other than
petitioner's returns before adopting the position at issue here.
See Powers v. Commissioner, supra at 472.
It has been held that the Government does not have a
reasonable basis in both fact and law if it does not diligently
investigate a case. United States v. Estridge, 797 F.2d 1454,
1458 (8th Cir. 1986) (award for litigation costs granted where
Commissioner did not diligently investigate which of several
persons was liable for tax of an employer under section 6672(a));
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