Advanced Delivery and Chemical Systems Nevada, Inc. - Page 24

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               Petitioner also effectively controlled and operated ADCS-              
          Korea.  Further, petitioner held certain patents and intangibles            
          relating to the business activities of its controlled entities.             
               On the facts of this case and for accumulated earnings tax             
          purposes, we conclude that petitioner is not to be regarded as a            
          mere holding company for purposes of the accumulated earnings               

          Reasonableness of Retained Earnings                                         
               In general, a corporation is allowed to retain earnings to             
          provide for the reasonable needs of its business without                    
          imposition of the accumulated earnings tax.  Secs. 533(a),                  
          535(c), 537(a)(1).                                                          
               Generally, for the following purposes, among others, a                 
          corporation may retain earnings without incurring an accumulated            
          earnings tax liability:  (1) To provide for bona fide business              
          expansion and plant replacement, sec. 1.537-2(b)(1), Income Tax             
          Regs.; (2) to provide necessary working capital for the business,           
          sec. 1.537-2(b)(4), Income Tax Regs.; (3) to provide for                    
          contingent business liabilities such as product liability losses,           
          sec. 537(b)(4); sec. 1.537-2(b)(6), Income Tax Regs.; and (4) to            
          provide for anticipated litigation involving intellectual                   
          property.  See Steelmasters, Inc. v. Commissioner, T.C. Memo.               
          1976-324; Fotocrafters, Inc. v. Commissioner, T.C. Memo. 1960-              

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