California Marine Cleaning, Inc. - Page 16

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          Powers v. Commissioner, supra at 473.  Respondent lacked a basis            
          in fact for determining that petitioner was liable for the                  
          accumulated earnings tax because respondent apparently had no               
          facts about petitioner's business plans and did not show whether            
          the case was diligently investigated.                                       
                    b.   Petitioner's Error in Reporting Accounts                     
                         Receivable                                                   
               Petitioner erroneously included accounts receivable of                 
          $662,000 in accumulated earnings on its tax return for 1991.                
          Respondent contends that petitioner's error led respondent to               
          determine that petitioner was liable for the accumulated earnings           
          tax.  Respondent contends that, if petitioner had reviewed its              
          books and records earlier, it might have been possible to avoid             
          the determination or resolve the issue earlier.                             
               We disagree.  Respondent did not explain why the                       
          determination that petitioner was liable for accumulated earnings           
          tax was substantially justified (e.g., that petitioner                      
          accumulated income with the purpose of avoiding shareholder                 
          taxes) even if petitioner had retained earnings of $1,149,031 in            
          FY 1992, $1,230,404 in FY 1993, and $1,197,598 in FY 1994.                  
                    c.   Whether Events Occurring After Respondent Took the           
                         Position Provide a Basis in Fact for Respondent's            
                         Position                                                     
               Respondent argues that respondent's position is                        
          substantially justified because of events occurring after that              







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