Advanced Delivery and Chemical Systems Nevada, Inc. - Page 15

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          corporate tax return, petitioner reported the approximate                   
          $2.9 million in current year retained earnings, and petitioner              
          reflected the approximate $11.6 million in retained earnings                
          accumulated in prior years.  Similar to the situation in the                
          prior taxable year, essentially all of the earnings reported as             
          retained earnings in petitioner’s October 10, 1997, short taxable           
          year were merely allocated to petitioner from and through ADCS-             
          Limited, Holdings LLC, and Operating LLC.  None of the retained             
          earnings were actually distributed to petitioner.                           
               On audit, respondent determined that during petitioner’s               
          short taxable years ending December 31, 1996, and October 10,               
          1997, petitioner constituted a mere holding company, that                   
          petitioner did not establish reasonable business needs for                  
          retaining the approximate $1.9 million and $2.9 million in                  
          current year earnings allocated to petitioner from and through              
          ADCS-Limited, Holdings LLC, and Operating LLC, and that                     
          petitioner, therefore, was subject to the accumulated earnings              
          tax for each of the short taxable years in issue.                           
               On July 31, 2000, respondent issued to petitioner a notice             
          of deficiency with respect to petitioner’s short taxable years              
          ending December 31, 1996, and October 10, 1997, wherein                     
          respondent, relying on the provisions of section 535, calculated            
          petitioner’s accumulated taxable income and accumulated earnings            
          tax thereon as follows:                                                     






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