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argues that an accumulation for that purpose was a reasonable
business need. Respondent rejoins that an accumulation for that
purpose is not a reasonable need of petitioner’s business.
Petitioner takes no exception to respondent’s calculation of the
accumulated earnings tax but for its dispute as to the reasonable
needs of its business.
Section 531 imposes a penalty tax on the accumulated taxable
income of a corporation that is availed of for the purpose of
avoiding tax with respect to its shareholders by permitting
earnings and profits (earnings) to accumulate instead of
distributing them. Secs. 531 and 532(a). The purpose of the
penalty tax is to compel the corporation to distribute any
earnings not needed for its business so that its shareholders
will pay income taxes on the dividends received. See Ivan Allen
Co. v. United States, 422 U.S. 617, 626 (1975); United States v.
Donruss Co., 393 U.S. 297, 303 (1969); Helvering v. Chicago Stock
Yards Co., 318 U.S. 693, 699 (1943). The fact that earnings have
accumulated beyond the reasonable needs of a business establishes
a presumption that the accumulation was motivated by tax
avoidance. Sec. 533(a).
The reasonable needs of the business include reasonably
anticipated future needs. Sec. 1.537-1(a), Income Tax Regs. In
order to meet the reasonable needs of the business test, a need
to retain earnings must be directly connected with the needs of
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