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and tax motivation of petitioner’s management and indicates that
petitioner’s management intended to avoid the shareholder level
Federal income tax with respect to petitioner’s corporate
earnings.
We do not regard the State tax planning of petitioner’s
management on behalf of petitioner and its affiliated companies
as establishing an intent on the part of petitioner’s management
to avoid the shareholder level tax on petitioner’s retained
earnings. To the contrary, and as we have explained, petitioner
operated during the second half of 1996 and during the first half
of 1997 (during most of the short taxable years in issue) with
the understanding of petitioner’s management that petitioner
qualified as an S corporation, under which only a single level
tax would be imposed. By the time petitioner’s management
discovered in mid-1997 that petitioner’s subchapter S status had
been inadvertently terminated, petitioner’s management was
restricted under the pending merger agreement with ATMI and under
generally accepted accounting principles from making any
significant dividend distributions to its shareholders. This
then extant and legitimate misunderstanding of petitioner’s
management with regard to petitioner’s subchapter S status and
the single level tax applicable thereto runs counter to
respondent’s argument that avoidance of the shareholder level tax
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