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remaining 90 percent by giving a 10-year note. We have
previously held that the Commissioner cannot effectively compel
taxpayers to incur debt rather than to utilize accumulated
earnings and profits and that the reasonableness of accumulations
should be judged without regard to the borrowing capacities of a
corporate taxpayer. See General Smelting Co. v. Commissioner, 4
T.C. 313, 323 (1944); C.E. Estes, Inc. v. Commissioner, T.C.
Memo. 1980-504. Once an expenditure is deemed to be a reasonable
need of the business, that a corporation chooses to finance the
expenditure from earnings and profits rather than from debt
should not place the corporation in a position of being subjected
to the accumulated earnings tax. See John P. Scripps Newspapers
v. Commissioner, 44 T.C. 453, 468 (1965). Based on petitioner’s
historical aversion to debt, conservative financial management
philosophy, and policy of redeeming the stock of stockholders
fully in cash, respondent cannot require petitioner to exercise
its safety net provision in its bylaws that allowed it to pay
10 percent down and incur debt for the remaining portion. In
this case, the working capital accumulation would not have
covered a full redemption of the stock of the Pedigo
stockholders, and petitioner might still have needed to exercise
the option of financing a portion of the redemption of stock to
ensure the survival of the business.
The events that were known to petitioner’s officers that
compelled them to retain earnings and profits for the redemption
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