- 32 -
determining whether or not retained earnings and profits exceeded
the reasonable needs of the business. See sec. 1.537-1(a),
Income Tax Regs. Respondent, accordingly, reduced petitioner’s
current taxable income by the amount of dividends that were
actually paid when respondent determined petitioner’s tax
deficiency. No further accumulation for this purpose has been
justified by petitioner.
C. Conclusion
Based upon the record before us, we conclude that
petitioner’s accumulated earnings and profits that were available
during the years in question did not exceed the reasonable needs
of its business. Petitioner’s reasonable needs are summarized in
the chart below:
1995 1996 1997
Net liquid assets $ 4,970,026 $ 4,732,151 $ 4,909,323
Less reasonable needs:
1. Operating cycle (3,735,858) (3,863,010) (3,737,075)
2. Stock redemption (1,975,750) (2,044,847) (1,697,657)
3. Class action lawsuit (100,000) -0- -0-
4. Business expansion -0- -0- -0-
5. Repairs & renovations (74,669) (70,445) (34,024)
Excess accumulated earnings
& profits $ (916,251) $(1,246,151) $ (559,433)
We are satisfied that the reasonably anticipated needs of
petitioner’s business substantially exceeded petitioner’s
available net liquid assets. We conclude that petitioner was not
availed of for the purpose of avoiding income tax with respect to
its shareholders and, thus, not subject to the accumulated
earnings tax imposed by section 531.
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