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circumstances known to petitioner’s officers, a prudent
businessman would consider it appropriate to accumulate at least
$100,000 for the purpose of defending the lawsuit in the event
that the lawsuit was refiled. However, the lawsuit was not
refiled in 1996. The lawsuit then ceased to be a contingency for
petitioner, and the accumulation of earnings and profits for this
business purpose was no longer necessary.
4. Business Expansion Plans
Petitioner maintains that, even though not every contact
regarding its efforts to expand its business was reflected in the
board of directors minutes, it had a business plan to expand and
took active steps toward expanding its business.
Respondent contends that petitioner had no specific,
definite, and feasible business expansion plan during the years
in issue, but rather that petitioner’s expansion plan was vague,
undefined, and uncertain. Respondent contends that no plan of
expansion had been committed to and that no substantial steps had
been taken to achieve implementation.
A business may accumulate earnings and profits to provide
for the bona fide expansion of its business. See sec. 1.537-
2(b)(1), Income Tax Regs. Section 1.537-1(b), Income Tax Regs.,
explains, in part, how a corporation must justify the
accumulation of earnings and profits for reasonably anticipated
future needs:
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