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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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