1979 Tax Ct. Memo LEXIS 429 | Tax Ct. | 1979
MEMORANDUM FINDINGS OF FACT AND OPINION
TANNENWALD,
| Docket No. | Taxable Year Ending | Deficiency |
| 1839-75 | April 30, 1969 | $168,641.85 |
| April 30, 1970 | 305,826.87 | |
| April 30, 1971 | 492,544.76 | |
| April 30, 1972 | 40,842.00 | |
| 1873-75 | July 31, 1969 | 13,653.06 |
| July 31, 1970 | 18,995.06 | |
| July 31, 1971 | 21,249.60 |
By an amendment to his answer, respondent claimed an increase of $56,366.01 in the deficiency in docket no. 1839-75 for the year ending April 30, 1969. The great bulk of the deficiencies originally determined and the entire claimed increase in deficiency involve the accumulated earnings1979 Tax Ct. Memo LEXIS 429">*433 tax. Respondent has not imposed the accumulated earnings tax on Wilcox Manufacturing Company for the year ending April 30, 1972.
The sole issue remaining for decision is whether petitioners were availed of for the purpose of avoiding the income tax on their shareholders by permitting their earnings and profits to accumulate instead of being divided or distributed, with the result that petitioners are subject to the accumulated earnings tax imposed by section 531. 1
FINDINGS OF FACT
Some of the facts have been stipulated and are found accordingly. The stipulations of facts and the exhibits attached thereto are incorporated herein by this reference.
Petitioner Wilcox Manufacturing Company, Inc. (Wilcox) is a West Virginia corporation which had its principal place of business at Raleigh, West Virginia, at the time the petition herein was filed. It filed its Federal income tax returns, on the accrual basis of accounting, for each of the years in question with the District Director1979 Tax Ct. Memo LEXIS 429">*434 of Internal Revenue, Parkersburg, West Virginia.
Wilcox is engaged in the manufacture of coal mining equipment. It manufactures the Wilcox electrically powered continuous machine for underground mining of coal, the Wilcox electricially powered roof bolting machine for use in the underground mining of coal to control roof conditions encountered in using mining machinery to extract coal, and electrically powered conveyors for underground transportation of mined materials. The miner and conveyors are manufactured under patents.
| T. G. Todd | 5 shares |
| Bertha Todd (T.G. Todd's mother) | 1 share |
| A. G. Wilcox, Jr. | 2 shares |
| Basil Wilcox | 2 shares |
During the same period, the corporate officers and directors were:
[SEE TABLE IN ORIGINAL]
The minutes of a stockholders meeting of Wilcox, held on January 15, 1957, reflect an undertaking by Wilcox's shareholders that, in order to insure that Wilcox would remain a closely held corporation: (1) in the event a stockholder wished to sell his stock in1979 Tax Ct. Memo LEXIS 429">*435 Wilcox during his lifetime, he or she would give Wilcox the right to buy his stock at a price based on evidence of the highest offered price made in good faith and (2) in the event of the death of a stockholder, the stock of the deceased stockholder would be sold to Wilcox at a price based on book value for all current asset accounts and on the opinion of three qualified appraisers for all noncurrent assets.
During the period April 30, 1967, through June 18, 1971, A. G. Wilcox, Jr., was vice-president and assistant general manager of Wilcox with basic responsibility for sales management. Beginning in mid-1970, he and T. G. Todd, Wilcox's president, had several disagreements regarding corporate policy. Because of these disagreements, A. G. Wilcox, Jr., wished to sell his stock in Wilcox and began negotiations with T. G. Todd in January 1971 for redemption of his two shares. Despite their disagreements, Todd considered A. G. Wilcox, Jr., a valuable employee and tried to dissuade him. Nevertheless, negotiations were finally concluded. In June 1971, Wilcox redeemed the two shares of stock owned by A. G. Wilcox, Jr., for $900,000 of which $225,000 was paid in cash and the balance1979 Tax Ct. Memo LEXIS 429">*436 was payable with interest in five equal annual installments of $135,000, each evidenced by a promissory note. At that time A. G. Wilcox, Jr., resigned as vice-president and director.
T. G. Todd was killed in an airplane crash on September 18, 1971. On December 30, 1971, Wilcox' redemption of A. G. Wilcox, Jr.'s shares was rescinded and cancelled. Two shares of stock were issued to him and he became president of Wilcox.
On December 30, 1971, Wilcox redeemed the five shares owned by Todd from his estate for $3,375,000.00. 2 On the same date, Wilcox redeemed the one share of stock owned by Bertha Todd for $675,000.00.
On April 26, 1974, the outstanding common stock of Wilcox was purchased by Fairchild Equipment and Supply Co., Inc., now known as Fairchild Incorporated (Fairchild) of Beckley, West Virginia. On April 30, 1974, Wilcox was liquidated and its assets were transferred to Fairchild.
| Shareholder | Percentage Paid |
| T.G. Todd | 5% |
| A. G. Wilcox, Jr. | 1% |
| Basil K. Wilcox | 1% |
Wilcox' payment of the above royalties was made pursuant to the original assignment of the patent rights to the Wilcox continuous1979 Tax Ct. Memo LEXIS 429">*438 miner by T. G. Todd and A. G. Wilcox, Sr. to Wilcox.
T. G. Todd, A. G. Wilcox, Jr. and Basil K. Wilcox received royalty income from Wilcox during the years at issue, as follows:
| Year | |||
| Ending | T.G. Todd | A.G. Wilcox, Jr. | Basil K. Wilcox |
| April 30, 1969 | $173,768.63 | $34,768.32 | $34,768.32 |
| April 30, 1970 | 178,146.10 | 35,644.18 | 35,644.18 |
| April 30, 1971 | 305,165.23 | 61,033.15 | 61,033.15 |
The following schedule shows the salaries of Wilcox' officers during the years at issue:
| Year | |||
| Ending | T.G. Todd | A. G. Wilcox, Jr. | Basil K. Wilcox |
| April 30, 1969 | $31,944.00 | $13,910.00 | $14,510.00 |
| April 30, 1970 | 35,138.40 | 16,561.00 | 16,561.00 |
| April 30, 1971 | 37,598.09 | 14,231.90 | 17,678.27 |
During the calendar year 1969, 1970 and 1971, T. G. Todd, A. G. Wilcox, Jr., and Basil K. Wilcox had taxable income in the following amounts:
| Year | T. G. Todd | A. G. Wilcox, Jr. | Basil K. Wilcox |
| 1969 | $127,591.57 | $ 42,541.51 | $ 41,457.56 |
| 1970 | 230,550.78 | 61,261.89 | 63,829.51 |
| 1971 | 340,908.10 | 641,530.25 | 105,045.39 |
The plant facilities rented by Wilcox from Orelite consisted of 22 buildings, 19 of which were built between 1900 and 1910, grouped into six units. The main manufacturing facility consisted of 10 buildings of heavy wood construction immediately adjacent to each other, which were used as foundry and machine shops with heat treating facilities, steel cutting, welding and other preassembly and assembly installations. The buildings, electrical wiring, roof, and floor structure were maintained substantially the same as when originally constructed. At Wilcox' request, Orelite built a new machine shop in Raleigh, West Virginia, in 1970 at a cost of about $100,000, which was borne by Orelite.
Raleigh, West Virginia, had no fire fighting facilities during1979 Tax Ct. Memo LEXIS 429">*440 the years at issue. Its residents depended on the volunteer fire department of Beaver, West Virginia, which took a minimum of ten to fifteen minutes to reach Wilcox (excluding time required for firemen to reach the station) and whose equipment consisted of a few auxiliary pumps. Wilcox had only a few fire extinguishers and had received citations from the Occupational Safety and Health Administration regarding the lack of fire fighting facilities.
Because of the age and construction of the buildings, the proximity of buildings within each unit and the lack of fire fighting facilities, any fire could easily have destroyed an entire unit, although all units would probably not have been destroyed by a single fire. The greatest fire hazard was in the machine shop located in the main manufacturing facility. Prior to the years in issue, Wilcox had never had a serious fire at its manufacturing facilities.
Prior to 1968, Wilcox carried commercial fire insurance covering the facilities rented from Orelite. After an inspection by the carrier, Wilcox stopped purchasing commercial insurance because the proposed premiums were considered prohibitively expensive. It decided to become a1979 Tax Ct. Memo LEXIS 429">*441 self-insurer, except with respect to an insignificant amount, 3 although it did not set up a specific reserve on its books for this purpose. During each of the taxable years in question, Wilcox was entitled to reserve $500,000 for self insurance against fire, covering destruction of its buildings and contents and debris removal.
Orelite had a capital investment in the buildings and machinery it rented to Wilcox totaling $405,937.99, $446,113.47, and $576,495.01 for its taxable years ended July 31, 1969, July 31, 1970, and July 31, 1971, respectively. Orelite had a reserve for depreciation relative to the buildings and machinery it rented to Wilcox totaling $259,359.56, $281,815.25, and $312,016.51 for the taxable years ended July 31, 1969, July 31, 1970, and July 31, 1971, respectively.
SECOND: Labor conditions in this area are deplorable. Each day it is becoming more difficult to secure trained1979 Tax Ct. Memo LEXIS 429">*442 workmen.
THIRD: The tax burden the State of West Virginia has placed on corporations is excessive and does not compare with the surrounding states. At this point, a general discussion was held in regard to the need for a new plant; however, it was the general feeling that due to the poor labor relations and excessive tax, it would not be practical to build a new plant in the State of West Virginia at this time, that the Company start making all plans necessary to construct a new plant within the next five to eight years. During this period, the Company will be able to determine whether the State of West Virginia will be able to determine whether the State of West Virginia is going to give corporations any relief from general taxation and improve labor relations.
* * *
Thereupon, on motion duly made, seconded, and carried: That in order for this Company to construct a new plant, set up a
The minutes also contain a request by Wilcox that Orelite construct a new machine shop at the Raleigh, West Virginia1979 Tax Ct. Memo LEXIS 429">*443 plant site at an approximate cost of $100,000.
The land and buildings at Raleigh were appraised in 1974 for $587,000 and the equipment was appraised in the same year for $509,815.
During the years at issue, T. G. Todd and A. G. Wilcox, Jr. made contacts to secure land in Virginia but made no purchases. In early 1974, Wilcox acquired an option to purchase land in Pembroke, Virginia, and the land was purchased by Fairchild after it acquired Wilcox. The production of the Wilcox conveyors was subsequently moved from Raleigh to Pembroke. The main manufacturing facilities were never moved from Raleigh, West Virginia.
Wilcox did not obtain outside architectural or engineering estimates concerning the cost of a new plant. However, T. G. Todd was in the construction business and was knowledgeable in the field. Wilcox also had staff who were capable of designing facilities under Todd's supervision. The new machine shop was designed by Wilcox' staff.
As a result of an accident involving a jackhead on the Wilcox continuous miner, Wilcox was sued on February 1, 1968, for damages in excess of $100,000. In May 1971, plaintiff in that suit received $40,000. Prior to the commencement of this litigation on February 1, 1968, Wilcox had never been named as a defendant in a major product liability action. As a result of an accident involving a Wilcox roof bolter on September 12, 1969, Wilcox was sued for damages of $800,000 in December 1969.Wilcox' attorney advised them that they might be held liable for the entire claim. However, after a trial in October 1972, the jury found no liability on the part of Wilcox.
The suits pending against Wilcox were discussed from time to time by management and caused a great deal of concern.
During the years 1966 through 1971, an average of three fatalities per year were caused by underground continuous auger-type mining machinery and approximately one-half of these fatalities were caused by Wilcox machinery. In1979 Tax Ct. Memo LEXIS 429">*445 1972 and 1973, there were 72 and 96 non-fatal injuries, respectively, caused by the same equipment, about one-half of which were attributable to Wilcox machinery. During the 1969 taxable year, Wilcox is entitled to a reserve of $100,000 and, in respect of its 1970 and 1971 taxable years, $540,000 to cover the cost associated with potential liability arising from severe injury to a miner. Such a reserve would cover payment on account of liability to the injured miner and litigation expenses but would not cover the cost of subsequent modifications to equipment.
From 1955 until passage of the Mine Safety Act, there were no significant changes in Federal regulation of mining equipment and all machinery manufactured by Wilcox was in compliance with applicable regulations. The Mine Safety Act made many changes, imposing significantly stricter noise, dust, electrical and operator safety standards on mining equipment. As a result of these changes, the Wilcox continuous mining machine, roof bolter and conveyor were not in compliance with Federal law. The conveyor ("lo-lo" belt) and roof bolter were brought into compliance shortly after passage of the Mine Safety Act. Although many improvements1979 Tax Ct. Memo LEXIS 429">*448 were made, the continuous mining machine was still not fully in compliance in 1977.
At the time the Mine Safety Act was passed, the necessary technological knowledge was not available to bring the Wilcox continuous mining machine into compliance with the law and it was not possible to estimate the cost of compliance with any certainty. The management of Wilcox was concerned that Wilcox might not be able to comply with the Mine Safety Act and might have to discontinue its manufacturing activities.
Enforcement was uneven following passage of the Mine Safety Act due to a shortage of mine inspectors, differing interpretations placed on the regulations, which were first promulgated in March 1970, and the technological inability of the industry to comply. Some mines using the Wilcox continuous miner were temporarily closed and the Virginia district threatened to close all such mines. Although there was a question as to when the law would be fully enforced, there was never any question that it would in time be so enforced.
Following passage of the Mine Safety Act, Wilcox considered development of a mining machine based on a new concept but this idea was abandoned. Had the new1979 Tax Ct. Memo LEXIS 429">*449 concept been successful, Wilcox would probably have abandoned the machine it was then manufacturing because of the difficulty of bringing it into compliance.
Wilcox incurred expenses to comply with the Mine Safety Act, which it deducted from its taxable income for the years incurred, as follows:
| Year Ending | Amount |
| April 30, 1970 | $ 62,923 |
| April 30, 1971 | 20,738 |
| April 30, 1972 | 40,462 |
| April 30, 1973 | 103,604 |
| April 30, 1974 | 161,184 |
| TOTAL | $388,911 |
Fairchild expended $138,475.00 in its year ending January 31, 1975, and $96,083.84 in its year ending January 31, 1976, on modifications to bring the Wilcox mining machine into compliance. Fairchild expects to spend an additional $400,000 placing in service a noise abatement package system that can be installed on Wilcox machines that are already in use.
The following schedule represents the total regular sales and total installment sales Wilcox made during the years at issue:
| Year Ending | Regular Sales | Installment Sales |
| April 30, 1969 | $1,543,580.56 | $2,162,243.61 |
| April 30, 1970 | 2,289,509.36 | 1,419,421.61 |
| April 30, 1971 | 4,016,401.27 | 2,103,675.23 |
Wilcox utilized a direct write-off method of deducting bad debts rather than a reserve for bad debts during each of the years at issue. Wilcox deducted bad debts in determining taxable income in the amounts of $12,266.26, $43,195.99, and $7,957.83 during the taxable years ended April 30, 1969, April 30, 1970, and April 30, 1971, respectively.
During the taxable years at issue, Wilcox elected the1979 Tax Ct. Memo LEXIS 429">*451 installment method of reporting income derived from installment sales. If the installment accounts receivable of Wilcox, which were outstanding at the end of each of the taxable years April 30, 1969, April 30, 1970, and April 30, 1971, had been fully collected as of the end of each of the aforesaid years, the income tax liability of Wilcox for each of said years would have been increased as follows:
| Year | Increased Tax Liability |
| April 30, 1969 | $876,716.39 |
| April 30, 1970 | 763,714.85 |
| April 30, 1971 | 696,771.66 |
The following schedule represents the total current year installment sales collections, the total prior year installment sales collections, and the total collections on all installment sales of Wilcox for the taxable years ended April 30, 1969, April 30, 1970, and April 30, 1971:
| 4/30/69 | 4/30/70 | 4/30/71 | |
| Current Year In- | |||
| stallment Sales | |||
| Collections | $ 365,865.24 | $ 430,616.48 | $ 777,742.43 |
| Prior Year In- | |||
| Stallment Sales | |||
| Collections | 900,879.04 | 1,117,189.41 | 1,377,263.41 |
| Total Col- | |||
| lections on | |||
| all install- | |||
| ment Sales | $1,266,744.28 | $1,547,805.89 | $2,155,005.84 |
Comparative balance sheets of Wilcox for the years at1979 Tax Ct. Memo LEXIS 429">*452 issue are as follows:
WILCOX MANUFACTURING CO. -- BALANCE SHEETS
| April 30, | April 30, | April 30, | |
| ASSETS | 1969 | 1970 | 1971 |
| Cash and certificates of deposits | $ 388,606.68 | $ 13,248.58 | $ (524,913.88) 1 |
| Deposit in savings bank | 0 | 828,429.17 | 1,500,147.63 |
| Tax exempt bonds | 938,018.28 | 894,010.55 | 1,918,838.31 |
| Cash & invested cash | 1,326,624.96 | 1,735,688.30 | 2,894,072.06 |
| Accounts receivable, regular | 210,825.09 | 431,625.67 | 330,238.23 |
| Accounts receivable, miscellaneous | 4,301.43 | 3,221.48 | 0 |
| Inventory | 396,632.93 | 548,863.33 | 597,775.84 |
| Accounts receivable, installment 2 | 3,776,210.52 | 3,333,136.43 | 3,097,156.74 |
| Less: unrealized gross profit | -1,660,447.70 | -1,468,372.95 | -1,439,578.28 |
| Rent receivable | 32,950.00 | 63,250.00 | 114,870.00 |
| Notes receivable | 0 | 0 | 0 |
| Current assets | $4,087,097.23 | $4,647,412.26 | $5,594,534.59 |
| Stock of Orelite | 0 | 0 | 419,248.77 |
| Buildings and machinery | 102,998.77 | 104,598.77 | 109,210.05 |
| Less: accumulated depreciation | - 58,439.70 | - 67,430.96 | - 70,468.84 |
| Patents | 225,462.08 | 263,295.66 | 400,245.74 |
| Less: accumulated amortization | - 158,637.24 | - 204,272.36 | - 349,023.98 |
| Land | 0 | 2,200.00 | 2,200.00 |
| Deposits and prepayments | 1,434.91 | 2,313.91 | 2,648.71 |
| TOTAL ASSETS | $4,199,916.05 | $4,748,117.28 | $6,108,595.04 |
| LIABILITIES AND | |||
| SHAREHOLDERS EQUITY | |||
| Accounts payable | $ 20,574.63 | $ 37,716.35 | $ 64,419.70 |
| Other liabilities | 19,610.07 | 28,051.00 | 29,411.11 |
| Federal income tax payable 3 | 526,453.31 | 232,922.39 | 244,234.08 |
| Current liabilities | $ 566,638.01 | $ 298,689.74 | $ 338,064.89 |
| Mortgages and notes payable | 0 | 0 | 0 |
| Total debt | $ 566,638.01 | $ 298,689.74 | $ 338,064.89 |
| Capital stock | 1,000.00 | 1,000.00 | 1,000.00 |
| Retained Earnings | 3,632,278.04 | 4,448,427.54 | 5,769,930.15 |
| Less: Treasury stock | 0 | 0 | 0 |
| Total Shareholders Equity | 3,633,278.04 4 | 4,449,427.54 | 5,770,930.15 |
| TOTAL LIABILITIES & | |||
| SHAREHOLDERS EQUITY | $4,199,916.05 | $4,748,117.28 | $6,108,995.04 |
Summary Profit and Loss Statements of Wilcox for the years at issue are as follows (in thousands):
| 4-30-69 | 4-30-70 | 4-30-71 | |
| Gross Receipts | $1,543.6 | $2,289.5 | $4,016.4 |
| Cost of Goods Sold | 313.5 | 672.8 | 1,604.0 |
| Gross Profit | 1,230.1 | 1,616.7 | 2,412.4 |
| Other Income | 770.1 | 917.5 | 1,356.3 |
| Total Income | 2,000.2 | 2,534.2 | 3,768.7 |
| General and Administrative | |||
| Expense | 702.6 | 961.6 | 1,391.1 |
| Net Income | 1,297.6 | 1,572.6 | 2,377.6 |
| Tax-Exempt Interest | 3.2 | 48.6 | 88.1 |
| Pre-tax Income | 1,300.8 | 1,621.2 | 2,465.7 |
| Provision for Federal | |||
| Income Tax | 677.9 | 810.9 | 1,144.2 |
| Net Income After Taxes | 622.8 | 810.3 | 1,321.5 |
1979 Tax Ct. Memo LEXIS 429">*454 Wilcox' liquidity position at the end of each year at issue, as stipulated by the parties was as follows:
| April 30, | April 30, | April 30, | |
| 1969 | 1970 | 1971 | |
| Assets: | |||
| Cash on Hand | $ 400.00 | $ 400.00 | $ 400.00 |
| Cash in Bank - Checking | 388,206.68 | 12,848.58 | (524,913.88) |
| Cash in Bank - Savings | 0 | 828,429.17 | 1,500,147.63 |
| Rent Receivable | 32,950.00 | 63,250.00 | 114,870.00 |
| Accounts Receivable - Regular | 210,825.09 | 431,625.67 | 330,238.23 |
| Accounts Receivable - Installment | 3,776,210.52 | 3,333,136.43 | 3,097,156.74 |
| Accounts Receivable - Other | 4,301.43 | 3,221.48 | 0 |
| Inventory | 396,632.03 | 548,863.33 | 597,775.84 |
| Tax Exempt Bonds | 938,018.28 | 894,010.55 | 1,918,838.31 |
| Total Current Assets | 1$5,747,544.03 | $6,115,785.21 | $7,034,512.87 |
| Liabilities: | |||
| Accounts Payable | 20,574.63 | 37,716.35 | 64,419.70 |
| Notes Payable | 19,610.07 | 28,051.00 | 29,411.11 |
| Federal Income Tax Payable | 526,453.31 | 232,922.39 | 244,234.08 |
| Total Current Liabilities | 566,638.01 | 298,689.74 | 338,064.89 |
| Net Liquid Assets | $5,817,095.47 | $6,696,447.98 |
Wilcox had accumulated1979 Tax Ct. Memo LEXIS 429">*455 earnings and profits of $3,632,278.04 on April 30, 1969, $4,448,427.54 on April 30, 1970, and $5,769,930.15 on April 30, 1971. 5 This represents increases of $576,405.21 in fiscal year 1969, $816,149.50 in fiscal year 1970, and $1,321,502.61 in fiscal year 1971.
Wilcox' operating cycle, i.e., the period it took to convert cash into raw materials, raw materials into inventory, inventory into sales and the time it took to collect for the sales, relative to its regular sales for the taxable years ended April 30, 1969, April 30, 1970, and April 30, 1971, totaled 7.61 months, 6.47 months, and 3.93 months, respectively.
Wilcox' operating cycle, i.e., the period of time it took to convert cash into raw materials, raw materials into inventory, inventory into sales and the time it took to collect for the sales, relative to its installment sales, totaled1979 Tax Ct. Memo LEXIS 429">*456 22.83 months, 34.34 months and 20.97 months for the years ended April 30, 1969, April 30, 1970, and April 30, 1971, respectively.
The parties have stipulated that Wilcox had a reasonable business need for working capital totaling $3,120,701.72, $3,511,092.43, and $3,248,546.42 for the taxable years ending April 30, 1969, April 30, 1970, and April 30, 1971.
Petitioner Orelite Manufacturing Company, Inc. (Orelite) is a West Virginia corporation and had its principal place of business at Raleigh, West Virginia, at the time its petition herein was filed. It filed its Federal income tax returns on the accrual basis of accounting for the years at issue with the District Director of Internal Revenue, Parkersburg, West Virginia.
During the years at issue, Orelite's sole business activity was the rental of real property, equipment, 1979 Tax Ct. Memo LEXIS 429">*457 and machinery to Wilcox. See pp. 8 and 11,
From June 28, 1956, through December 30, 1970, Orelite had 80 shares of common stock outstanding, which were owned equally by T.G. Todd and Wilcox Industries, Inc. During the years at issue the shares of Wilcox Industries, Inc., were owned by heirs or members of the A. G. Wilcox, Sr. family in the following proportions:
| Douglas C. Wilcox | 1,361 |
| Helen G. Anderson | 1,361 |
| A. G. Wilcox, Jr. | 851 |
| Erma M. Wilcox (wife of | |
| A. G. Wilcox, Jr.) | 1,023 |
| William A. Wilcox | 850 |
| Lorrene Wilcox | 1,023 |
| John L. Wilcox | 908 |
| Virginia F. Wilcox | 1,023 |
| Nina Dodd | 908 |
| Kenneth C. Gross | 1,023 |
| Ina Gross | 943 |
| Basil K. Wilcox | 851 |
| Ruth M. Wilcox (wife of | |
| Basil K. Wilcox) | 682 |
| TOTAL | 12,807 |
On December 31, 1970, Wilcox purchased all 80 outstanding shares of common stock of Orelite for $419,248.77. By virtue of its acquisition of Wilcox' stock on April 26, 1974, Fairchild acquired 100 percent ownership of Orelite. On April 30, 1974, Orelite was liquidated and its assets were transferred to Fairchild.
During the period August 1, 1968, through July 31, 1973, Orelite made capital expenditures with respect to its property1979 Tax Ct. Memo LEXIS 429">*458 at Releigh, West Virginia, which was rented to Wilcox, as follows:
| Year Ending | Amount |
| July 31, 1969 | $ 14,920.00 |
| July 31, 1970 | 40,175.48 |
| July 31, 1971 | 130,381.54 |
| July 31, 1972 | 2,496.35 |
| July 31, 1973 | 78,678.96 |
At Wilcox' request, Orelite built a new machine shop to be leased to Wilcox. Design of the shop was commenced in late 1969 and construction was completed by the end of 1970.
The following is a summary of Orelite's balance sheets for the years at issue:
| 7-31-69 | 7-31-70 | 7-31-71 | |
| Assets: | |||
| Cash on Hand and in Bank | $179,192.30 | $ 48,642.72 | $155,422.40 |
| Accounts Receivable | 26,918.19 | 14,857.32 | 20,605.38 |
| Building and Equipment | 405,937.99 | 446,113.47 | 576,495.01 |
| Reserve for Depreciation | (259,359.56) | (281.815.25) | (312.016.51) |
| Land | 3,200.00 | 3,200.00 | 3,500.00 |
| Tax Exempt Bonds [State of | |||
| W. Virginia] | 0 | 208,866.68 | 106,233.34 |
| Intangible Assets | 5,622.44 | 5,622.44 | 5,622.44 |
| Amortization | (4,902.35) | (5,268.93) | (5,622.44) |
| Other Assets | 241.91 | 241.91 | 241.91 |
| Total Assets | $356,850.92 | $440,460.36 | $550,481.53 |
| Accounts Payable | $ 1,444.15 | $ 1,444.15 | $ 12,302.05 |
| Capital Stock | 8,000.00 | 8,000.00 | 8,000.00 |
| Paid-in Capital | 8,750.00 | 8,750.00 | 8,750.00 |
| Retained Earnings | 338,656.77 | 422,266.21 | 521,429.48 |
| Total Liabilities and Capital | $356,850.92 | $440,460.36 | $550,481.53 |
Orelite's comparative profit and loss statements for the years at issue are as follows:
| 7-31-69 | 7-31-70 | 7-31-71 | |
| Income: | |||
| Other Interest | $ 5,981.44 | $ 7,472.04 | $ 3,402.17 |
| Gross Rents | 104,250.53 | 140,673.93 | 184,998.68 |
| Sale of Scrap | 0 | 0 | 1,509.00 |
| Total Income | $110,231.97 | $148,145.97 | $189,909.85 |
| Operating Expense: | |||
| Repairs | $ 369.79 | $0 | $ 1,386.00 |
| Taxes | 6,107.17 | 6,178.12 | 8,706.69 |
| Amortization | 366.58 | 366.58 | 353.51 |
| Depreciation | 22,843.83 | 22,455.69 | 30,201.26 |
| Other Deductions | 532.00 | 657.65 | 663.75 |
| Total Operating Expenses | $30,219.37 | $29,658.04 | $41,311.21 |
| Net Income from Operations | $80,012.60 | $118,487.93 | $148,598.64 |
| Other Income: | |||
| Tax Exempt Income | 0 | 0 | 5,366.66 |
| Subtotal | $80,012.60 | $118,487.93 | $153,965.30 |
| Less: Provisions for | |||
| Federal Income Tax | 34,878.49 | 53,734.78 | 71,327.35 |
| Net Income | $45,134.11 | $ 64,753.15 | $ 82,637.95 |
The following schedule shows Orelite's accumulated earnings and profits, increases therein, and net liquid assets during the years at1979 Tax Ct. Memo LEXIS 429">*460 issue:
| Accumulated | Net Liquid | ||
| Year Ending | Earnings & Profits | Increase | Assets |
| July 31, 1969 | $303,778.28 | $45,134.11 | $169,787.85 |
| July 31, 1970 | 368,531.43 | 64,753.15 | 217,187.79 |
| July 31, 1971 | 450,102.13 | 71,570.70 | 198,631.72 |
During the period July 31, 1968, through July 31, 1971, Orelite's officers 6 were:
[SEE TABLE IN ORIGINAL]
None of Orelite's officers were paid any compensation for services during the period July 31, 1956, through July 31, 1971, and Orelite had no other employees during that period.
From July 31, 1956, through July 31, 1971, Orelite paid no dividends.
ULTIMATE FINDINGS OF FACT
During the taxable years ending April 30, 1969, April 30, 1970, and April 30, 1971, Wilcox did not permit its earnings and profits to accumulate beyond the reasonable needs of its business.
During the taxable year ending July 31, 1969, Orelite did not permit its earnings and profits to accumulate beyond the reasonable needs of its business.
During the taxable years ending July 31, 1970, and July 31, 1971, Orelite did permit its earnings and1979 Tax Ct. Memo LEXIS 429">*461 profits to accumulate beyond the reasonable needs of its business and its failure to divide or distribute such earnings and profits was for the purpose of avoiding the income tax on its shareholders.
OPINION
Respondent determined that petitioners were availed of for the purpose of avoiding the income tax with respect to their shareholders by permitting earnings and profits to accumulate instead of being distributed, and are consequently subject to the accumulated earnings tax. See sections 531-537.Although the proscribed purpose of tax avoidance is an essential prerequisite to imposition of the tax, section 533(a) provides that, unless the taxpayer proves to the contrary by a preponderance of the evidence, the fact that its earnings and profits were permitted to accumulate "beyond the reasonable needs of the business" is determinative of such purpose. Such reasonable needs include reasonably anticipated needs. See section 537. Thus, resolution of the issue before us depends, first, upon whether petitioners accumulated earnings and profits beyond the reasonable needs of their businesses and, second, whether they did so with the purpose of tax avoidance.
1979 Tax Ct. Memo LEXIS 429">*463 The critical factor in determining whether a corporation
The parties have stipulated that Wilcox had net liquid assets of $5,180,906.92, $5,817,095.47, and $6,696,447.98 as of the close of taxable years ending April 30, 1969, April 30, 1970, and April 30, 1971, respectively, "without taking into consideration any potential Federal income tax liability on the unrealized profit attributable to Wilcox' installment1979 Tax Ct. Memo LEXIS 429">*464 sales and without taking into consideration any provision concerning a reserve for bad debts attributable to Wilcox' installment sales." On brief, however, Wilcox initially takes the position that accounts receivable with respect to installment sales should be included in net liquid assets only to the extent they are collectible within twelve months. Respondent, in reply, argues that he agreed to compute Wilcox' working capital needs using the
At the outset, we note that we do not lightly disregard matters to which the parties have stipulated.
1979 Tax Ct. Memo LEXIS 429">*467 In the alternative, Wilcox argues, in accordance with the reservation in the stipulation, that its accounts receivable from installment sales should be reduced by a ten percent reserve for bad debts and by the taxes that would be payable if the accounts receivable were collected in any one year. Respondent, in his amendment to answer, alleged that in computing net liquid assets in his statutory notice of deficiency, he erroneously allowed reserves for bad debts with respect to installment sales receivables in the amounts of $337,621.05, $333,313.64 and $309.715.67 for the years ending April 30, 1969, April 30, 1970, and April 30, 1971, respectively. At trial, respondent assumed the burden of proof with respect to lack of need for bad debt reserves in these amounts.See also
We reach a different conclusion as to the claimed offset of income taxes on the unrealized profit on installment sales receivables attributable to years other than the particular year with respect to which net liquid assets is being determined. Wilcox does not claim any adjustment with respect to taxes attributable to current year collections on installment accounts receivable. These have been taken into account in determining accumulated taxable income under sections 535(a) and 535(b)(1). With respect to the tax on collections in future years, respondent has confused the infusion of such taxes into the determination of working capital needs (relying on the rejection of such use in
1979 Tax Ct. Memo LEXIS 429">*472
We first consider the redemption of A. G. Wilcox, Jr.'s stock. The redemption of a dissenting minority shareholder's stock in order to promote harmony in the conduct of a business is a valid business purpose.
Although his shares were not redeemed until June 19, 1971, we are satisfied that by April 30, 1971, the end of the last year in issue, the handwriting was on the wall. We think the reasoning which justifies accumulations for contingent liabilities is applicable in light of the high likelihood that the contingency would materialize. 15 We hold that $900,000, the amount Wilcox agreed to pay to A.G. Wilcox, Jr., was a reasonable accumulation for this purpose at the close of Wilcox' fiscal year ending April 30, 1971. 16
We reach a different conclusion1979 Tax Ct. Memo LEXIS 429">*474 with respect to the redemption of T.G. Todd's stock. First, because the corporation was obligated to purchase the shares of every deceased shareholder without regard to the effect of his death on corporate operations, we have our doubts as to whether the agreement served a business purpose or merely the personal purpose of providing the deceased shareholder's estate with funds for taxes, administration expenses, etc., and its beneficiaries with liquid assets. See
Even putting aside the question of whether the requisite business purpose was present, we are satisfied that Wilcox did not retain its earnings for this purpose and think that no1979 Tax Ct. Memo LEXIS 429">*475 accumulation was reasonable. T.G. Todd was only 50 years old at the time of his death and there is no evidence that he was in poor health. Nor does the record contain any indication that Wilcox in fact accumulated its earnings and profits for this purpose. Moreover, we note the opportunity for abuse that would exist if a corporation could accumulate large amounts to redeem stock of deceased shareholders far in advance of the likelihood of their deaths, especially where life insurance is a realistic alternative. See Bittker & Eustice,
Finally, we note that, although section 537(a)(2) provides that "reasonable needs of the business" includes the "section 303 redemption needs of the business," section 537(b) defines "section 303 redemption needs" as the amount needed "with respect to the taxable year of the corporation in which a shareholder of the corporation died or any taxable year thereafter." T.G. Todd died in fiscal year 1972, a year after the years in issue.
Respondent admits that self-insurance against contingencies may be a reasonable purpose for accumulation of earnings.
He contends, however, that replacement of buildings and equipment destroyed by fire was a remote and unrealistic contingency because Wilcox had no legal responsibility to replace such property and had never had a significant fire in its facilities. Further, he argues that, since Wilcox had no reserve on its books for self-insurance, it did not have a specific and definite plan for self-insurance.
1979 Tax Ct. Memo LEXIS 429">*478 Nor do we think that the absence of a reserve on its books indicates that Wilcox had no plan of self-insurance Cf.
As to the amount that constitutes a reasonable accumulation for self-insurance against fire, we found the testimony of Dr. Douglas Olson, petitioners' expert, 18 very persuasive. However, his conclusion that a reserve of $800,000 was necessary was based on the premise that one unit of the facilities was to be insured. In light of the evidence that Wilcox intended to expand and perhaps relocate (see Pp. 11-12,
The reasonable needs of the business for purposes of the accumulated earnings tax include "the reasonably anticipated needs of the business." Section 537(a)(1). However, to justify such an accumulation the corporation must have "specific, definite, and feasible plans."
The record shows that Wilcox' facilities were inadequate, that relocation outside of West Virginia was considered desirable for tax and labor reasons, that the situation was discussed, that the shareholders resolved to set up a reserve for this purpose, and that attempts were made to secure a new site. We are mindful place (see
Nor do we agree with respondent that Orelite's construction of a new machine shop at Wilcox' request indicates Wilcox did not intend to relocate. The expenditure of $100,000 for a new machine shop was minor compared to the amount expected to be spent on a new plant and was a measure taken to meet immediate needs. Moreover, Orelite would presumably attempt to rent its facilities to another business if Wilcox relocated so the investment would not be lost.21
On the other hand, we cannot agree with Wilcox that $3,000,000 was a reasonable accumulation for relocation and expansion.Although the corporate minutes stated that $3,000,000 was to be set aside for relocation and expansion, A. G. Wilcox, Jr., testified that about $2,000,000 would be necessary, and the appraised value1979 Tax Ct. Memo LEXIS 429">*483 of the land, buildings, and equipment in Raleigh in 1974 was only $1,096,815. 22
Although the record herein is deficient in some respects, we are satisfied that respondent has not carried his burden of proof that less than $600,000 was needed to finance Wilcox' contemplated relocation and expansion. Indeed, if we were required to do so (see table p. 58,
Without consideration of other arguments made by Wilcox (e.g., relating to unionization, self-insurance to cover losses of equipment which collateralized installment accounts receivable and from the operation of its airplane), a comparison of its net liquid assets and its reasonable business needs1979 Tax Ct. Memo LEXIS 429">*486 reveals the following:
| April 30, 1969 | April 30, 1970 | April 30, 1971 | |
| Stipulated net liquid assets | |||
| without taking into account | |||
| petitioners' reservations | $5,180,906.92 | $5,817,095.47 | $6,696,447.98 |
| income tax liability in | |||
| respect of installment accounts' | |||
| receivable payable after the | |||
| close of fiscal year. | 876,716.39 | 763,714.85 | 696,771.66 |
| Net liquid assets available | $4,304,190.53 | $5,053,380.62 | $5,999,676.32 |
| Reasonable business needs | |||
| Working capital | $3,120,701.72 | $3,511,092.43 | $3,248,546.42 |
| Stock redemption | 0 | 0 | 900,000.00 |
| Fire insurance | 500,000.00 | 500,000.00 | 500,000.00 |
| Relocation and expansion | 600,000.00 | 600,000.00 | 600,000.00 |
| Product liability | 100,000.00 | 540,000.00 | 540,000.00 |
| $4,320,701.72 | $5,151,092.43 | $5,788,546.42 | |
| Excess or (Deficiency) | ($16,511.19) | ($97,711.81) | $211,129.90 |
From the foregoing table, it is apparent that the reasonable needs of Wilcox' business exceeded its available net liquid assets for the fiscal years 1969 and 1970 and showed a relatively small excess for fiscal year 1971. But, these calculations do not take into account the need for funds in order to comply with the Mine Safety Act.
1979 Tax Ct. Memo LEXIS 429">*487 The fact of the matter is that, during each of the taxable years at issue, Wilcox faced a pervasive impact on its business from pending mine safety legislation. To be sure, the Mine Safety Act was not enacted until December 30, 1969 -- well after the close of Wilcox' 1969 fiscal year. But, as our findings of fact show, the potential for drastic legislation came to the fore as early as September 1968 when President Johnson recommended such legislation, became a matter of further deep concern as a result of the Farmington mine accident in November 1968, and was the subject of extensive legislative investigation commencing as early as February 1969. Thus, we think it can fairly be said that Wilcox was justified in being concerned about the impact of such legislation prior to the close of its 1969 fiscal year.
The Mine Safety Act revolutionized standards in mining equipment and created turmoil in the industry, which lacked the necessary technology to meet the new standards. Wilcox has candidly admitted it could not with certainty estimate the cost of complying with the Act and we must conclude, as respondent contends, that it had no specific and definite plan (see
While it is true that, during the taxable years at issue, it was virtually impossible to place a dollar amount on the needs anticipated to meet the requirements of the Mine Safety Act, the fact remains that Wilcox (and its successor in interest, Fairchild) spent $623,469.84 and that the expenditure of another $400,000 was anticipated for research and development related to compliance with the Act. These amounts are far from1979 Tax Ct. Memo LEXIS 429">*489 insignificant and far in excess of normal amounts needed for research and development which might well be considered as part of the operating costs to be taken into account in determining Wilcox' working capital needs under the
In short, considering the testimony of the witnesses regarding the confusion and uncertainty in the mining industry following the passage of the Mine Safety Act, we are satisfied that prudent management on the part of Wilcox justified the retention of a substantial amount (at least $500,000 in each of the taxable years at issue) 25 to meet the requirements of the Mine Safety Act and that under the facts and circumstances herein, including the fact that petitioners have the burden of proof, we should not substitute our judgment for that of the officers and directors of Wilcox. 26 See
We think that respondent's divining rod operates with an unnatural precision. 1979 Tax Ct. Memo LEXIS 429">*491 We have a less sharply etched perception -- one perhaps more attuned to the real world. * * *
See also,
We are not unaware of the fact that Wilcox had very substantial amounts of liquid assets on hand at the close of each of the taxable years at issue and that this fact, coupled with the facts that it was a closely held corporation and had no dividend history, create strong suspicions of the proscribed motive of tax avoidance. But, given the situation regarding the split burden of proof and given the evidence of record, which admittedly is not as complete and tidy as it might have been if counsel for the parties had not so often wandered off into the periphery of the factual setting of the case, we are satisfied that, as our calculations show, the reasonable needs of the business substantially exceeded the available net liquid assets.27 Such being the case, we need not reach the issue of whether the proscribed motive of tax avoidance was present.
Respondent determined that Orelite was subject to the accumulated earnings tax for its fiscal years ended July 31, 1969, July 31, 1970, and July 31, 1971.He concedes that Orelite is not a mere holding or investing company within the meaning of section 533(b). Orelite contends that it was necessary for it to accumulate its earnings and profits in order to upgrade1979 Tax Ct. Memo LEXIS 429">*493 the facilities rented to Wilcox, to make modifications in such facilities to assist Wilcox in complying with the Mine Safety Act and to provide against economic vulnerability which resulted from its dependence on Wilcox and Wilcox' dependence on the mining industry.Orelite does not contend that it had a need for working capital.
In January 1969, Wilcox requested that Orelite build a new machine shop at an estimated cost of $100,000. During the years at issue, Orelite made capital expenditures with respect to its leased property totaling $185,477.02. Respondent concedes that such amount was spent in response to Wilcox' request for a new machine shop and that Orelite was justified in accumulating earnings and profits for this purpose, at the end of each year in issue, in an amount equal to $185,477.02 less the amount already expended. 28 Thus, Orelite was justified in accumulating the following amounts:
1979 Tax Ct. Memo LEXIS 429">*494
| 7/31/69 | 7/31/70 | 7/31/71 | |
| Total Need | $185,477.02 | $185,477.02 | $185,477.02 |
| Less cumulative | |||
| amount expended | 14,920.00 | 55,095.48 | 185,477.02 |
| Reasonable need | |||
| at end of year | $170,557.02 | $130,381.54 | 0 |
The new machine shop was completed in fiscal year 1971. Although Orelite made expenditures of $2,496.35 and $78,678.96 in fiscal years 1972 and 1973, respectively, there is no evidence that such expenditures were anticipated during the years at issue. Thus, Orelite is not entitled to an allowance for upgrading the property leased to Wilcox in excess of the amounts conceded by respondent.
As to Orelite's other claims, there is not a shred of evidence to support its position. While the record is replete with evidence of Wilcox' concern over the effect of the Mine Safety Act and its subsequent expenditures to bring its machinery into compliance, there is no suggestion that Wilcox expected assistance from Orelite, that Orelite anticipated such a request from Wilcox or that Orelite ever spent one cent as a result of the passage of the Mine Safety Act. Nor does the record contain any probative evidence that Wilcox, at any time during the taxable years1979 Tax Ct. Memo LEXIS 429">*495 at issue, otherwise looked to Orelite's earnings and profits or net liquid assets as a source of funds to meet Wilcox' business needs. Cf.
A comparison of Orelite's net liquid assets and reasonable business needs shows that it accumulated its earnings and profits beyond its reasonable needs in the years ending July 31, 1970 and July 31, 1971, but not in the year ending July 31, 1969:
| 7/31/69 | 7/31/70 | 7/31/71 | |
| Net liquid assets | $169,787.85 | $217,187.79 | $198,631.72 |
| Less: reasonable needs | 170,557.02 | 130,381.54 | 0 |
| Excess (deficiency) | $ ($769.17) | $ 86,806.25 | $198,631.72 |
Having determined that1979 Tax Ct. Memo LEXIS 429">*496 Orelite had unjustified accumulations of earnings and profits in the latter two years at issue, we turn to consider whether Orelite retained its earnings and profits "for the purpose of avoiding the income tax with respect to its shareholders or the shareholders of any other corporation." See section 532(a).
Initially, we note that on July 31, 1971, Wilcox was the sole shareholder of Orelite.Since only 15 percent of dividends payable to a corporate shareholder were taxable during that year, it is arguable whether the proscribed tax avoidance motive can exist as to such a shareholder. See section 243. The statutory language of section 532(a), however, which was first added by the Revenue Act of 1934, section 102 (Pub. L. 73-216, 48 Stat. 680, 702), specifically includes "the shareholders of any other corporation" and this language is intended to permit reference to shareholders of a parent corporation when a subsidiary's tax avoidance motive is at issue. H. Rept. 704, 73d Cong., 2d Sess. 12 (1934), 1939-1 (Part 2) C.B. 554. See
Section 533(a) provides that the fact that a corporation accumulates its earnings and profits beyond its reasonable needs shall be determinative of the purpose to avoid the income tax with respect to its shareholders unless the corporation proves to the contrary by a preponderance of the evidence. Orelite has presented no evidence to rebut this presumption or argued on brief that it had no tax avoidance motive. See
1979 Tax Ct. Memo LEXIS 429">*498
Footnotes
1. Unless otherwise indicated, all section references are to the Interral Revenue Code of 1954, as amended and in effect during the taxable years in issue.↩
2. Both Todd and A. G. Wilcox, Jr. had interests in royalty arrangements with Wilcox (see pp. 6-7,
infra↩ ) which were dealt with separately at the time of the redemption of their shares but the details of such separate treatment is not material herein.3. During the period May 1, 1968, through April 30, 1972, Wilcox maintained $5,000 fire and extended coverage insurance on machines and tools.↩
4. Pub. L. 91-173, 91st Cong. 1st Sess., 83 Stat. 742. For the legislative history of the Federal Coal Mine Health and Safety Act, see H. Rept. 91-563, 91st Cong., 1st Sess. (1969), reprinted in 1969 U.S. Code Cong. & Adm. News, p. 2503 et seq., and S. Rept. 91-411, 1st Cong., 1st Sess. (1969).↩
1. This apparently deficit figure was stipulated by the parties without explanation. ↩
2. The installment accounts receivable have been stipulated at the face value, with the parties reserving the question whether consideration should be given to the potential Federal income tax on unrealized profit and a provision for a bad debt reserve in respect of such accounts receivable. ↩
3. This item reflects only the Federal income tax payable for the current year and not the tax attributable to the deferred portion of the installment accounts receivable. ↩
4. This figure reflects our correction of the parties' arithmetic error in the amount of 5 cents.↩
5. These figures reflect the fact that Wilcox paid $46,424.07 in income tax deficiencies in the year ending April 30, 1969, but relating to prior years, and received a refund of $5,795.33 and paid a penalty of $12.00 in the year ended April 30, 1970.Such facts are not reflected in the profit and loss statements, p. 24,
supra↩ .6. The record does not reveal who were the directors of Orelite during this period.↩
7. Petitioners herein filed statements, pursuant to section 534(c), as to the claimed reasonable needs of their businesses, which the Court ruled, prior to trial, were insufficient to shift the burden of proof as to those needs.Thus, the burden of proof as to business needs remains with petitioners, except to the extent that respondent by way of amendment to his answer, filed at the time of trial, alleged that certain business needs were in lesser amounts than those allowed in the deficiency notice; as to those lesser amounts, respondent at the trial assumed the burden of proof. See also
Rule 142(a) , Rules of Practice and Procedure of this Court. With respect to the proscribed purpose (see section 532(a)), the burden of proof, in all events, remains on the petitioners. SeeSandy Estate Co. v. Commissioner, 43 T.C. 361">43 T.C. 3618. See
Bardahl Manufacturing Corp. v. Commissioner, T.C. Memo. 1965-200↩9. Petitioner does not argue that accounts receivable should not be included at all in computing available funds. For a discussion of this point, see Ziegler, "The 'New' Accumulated Earnings Tax: A Survey of Recent Developments,"
22 Tax L. Rev. 77">22 Tax L. Rev. 77 , 83-102↩ (1966).We note that the amount available for meeting the reasonable needs of the business does not always coincide with the amount available for distribution to shareholders. For example, assume a corporation has liquid assets consisting of cash of $100, securities valued at $100 and accounts receivable of $300. Further assume that it has no liabilities and that its only reasonable business need is working capital of $200. Although the corporation's accumulations available for meeting its reasonable business needs exceed such needs by $300, only $200 (cash and securities) is available for distribution to shareholders. However, if accounts receivable were not included in liquid assets for purposes of determining whether the corporation had accumulated earnings and profits beyond its reasonable needs, it would appear that it was not in a position to make any distribution at all.10. In
Bardahl, we stated:We have eliminated from our computation of funds necessary for petitioner's operating costs for one operating cycle any consideration of its anticipated Federal income taxes for the following year since this is not the kind of operating expense for which cash is needed in advance. Federal income taxes would be incurred in the following year only if there arises sufficient earnings from profitable future operations to require their imposition.
We note that this statement was made with reference to taxable years prior to the time when corporations were required to make payments of estimated taxes on a current basis and that its applicability to the years subsequent to the first year when estimated taxes first become payable by corporations may be open to question. See Comment, Accumulated Earnings Tax: An Appeal for Flexibility,
52 N.C. L. Rev. 1179">52 N.C. L. Rev. 1179 , 1215↩ (1974).11. In point of fact, the parties in that case agreed that a reduction for anticipated taxes was in order. See
Ivan Allen Co. v. United States, 422 U.S. 617">422 U.S. 61712. Moreover, we note that the decisions of this Court and the Court of Appeals in
Golconda Mining Corp. v. Commissioner, 58 T.C. 736">58 T.C. 736507 F.2d 594">507 F.2d 594 (9th Cir. 1974), preceded the Supreme Court's decision in422 U.S. 617"> Ivan Allen Co. v. United States, supra ,↩ footnote 11.13. We do not construe the exclusion of inventory and accounts receivable from the reasoning in
422 U.S. 617"> , militating against this conclusion. In our opinion, the Supreme Court at that point was simply leaving to another day the different and more difficult problem of valuing these types of current assets.Ivan Allen Co. v. United States, supra↩ at 629, n.914. See also
Farmers and Merchants Investment Co. v. Commissioner, T.C. Memo. 1970-161↩15. See e.g.
Steelmasters, Inc. v. Commissioner, T.C. Memo. 1976-324↩16. That Wilcox was not required to pay, and did not pay, the full purchase price in cash is not significant; an accumulation to pay debts falling due in future years is reasonable. See
Gazette Telegraph Co. v. Commissioner, 19 T.C. 692">19 T.C. 692209 F.2d 926">209 F.2d 926↩ (10th Cir. 1954).17. We note that, as we view the facts herein, Wilcox was not accumulating its earnings and profits to meet the needs of another business, i.e., Orelite. See
Latchis Theatres of Keene, Inc. v. Commissioner, 19 T.C. 1054">19 T.C. 1054214 F.2d 834">214 F. 2d 834 (1st Cir. 1954) ;Stanton Corporation v. Commissioner, 44 B.T.A. 56">44 B.T.A. 56138 F.2d 512">138 F. 2d 512 (2d Cir. 1943) . Rather, since Orelite made no provision for insurance, Wilcox' own business needs required that it make such provision in order to assure continued production in the event of a casualty. As to fiscal year 1971, when Wilcox owned Orelite, the distinction is unimportant. Seesection 1.537-3(b), Income Tax Regs.↩ 18. Respondent takes the position that Dr. Olson's testimony should be accorded no evidentiary value because it was based on an appraisal which was admitted in evidence only as an attachment to Dr. Olson's report. We think that appraisals such as that relied on by Dr. Olson are "reasonably relied upon by experts" on insurance in forming opinions or inferences and, therefore, need not be admissible in evidence. See
Rule 703, Federal Rules of Evidence.↩ Moreover, we note that respondent was aware of the Court's ruling before the last day of trial and was specifically advised by the Court to call the appraiser himself if he thought that questioning him was necessary.19. Even if we were to take a view of the record more favorable to respondent, we would be unable to conclude that he had carried
his↩ burden of proof that less than $450,000 was needed for this purpose.20. Compare
Vulcan Steam Forging Co. v. Commissioner, T.C. Memo. 1976-29↩21. Wilcox has claimed that the cost of constructing the new machine shop was a reasonable need of Wilcox. The shop was, however, constructed by Orelite and there is no evidence that Wilcox ever considered bearing the cost itself.↩
22. Formal resolutions do not per se substantiate a corporate objective to expand its business.
American Metal Products Corporation v. Commissioner, 287 F.2d 860">287 F.2d 86034 T.C. 89">34 T.C. 89↩ (1960).23. In reaching this conclusion, we would take into account the fact that Orelite owned the Raleigh plant and equipment and that, therefore, Wilcox would not be able to finance its relocation and expansion in part by the proceeds of a sale of Orelite's property at Raleigh.↩
24. Cf.
Steelmasters, Inc. v. Commissioner, supra ; Freedom Newspapers, Inc. v. Commissioner, T.C. Memo. 1965-248↩25. This amount substantially increases the deficit in liquidity for fiscal years 1969 and 1970 and exceeds by a wide margin the liquidity surplus for fiscal 1971. See p. 58,
supra. That situation would remain even if we were to reduce the $500,000 reserve by the amounts actually expended by Wilcox to comply with the Mine Safety Act in fiscal 1970 and 1971 (see p. 18,supra↩ ) on the ground that they have presumably been taken into account in computing working capital needs.26. We were unimpressed with the testimony of respondent's expert, a university business school professor, whose cash flow analysis was designed to convince us that we should defer to his judgment as to Wilcox' liquidity rather than discharge our judicial function to make our own analysis. We also question whether such "academic expertise" should, in any case, constitute a sounder basis for judging the reasonable needs of the business than the judgment of businessmen who stand daily on the firing line of the business actually involved. Compare
Moore v. Commissioner,↩ 71 T.C. (Jan. 11, 1979)27. Cf.
Ted Bates & Co. v. Commissioner, T.C. Memo. 1965-251↩28. Respondent rounded the total to $185,000. We have used the exact amount expended but this does not affect the outcome herein.We note that Orelite did not commence design of the new machine shop until late 1969 and, thus, amounts expended in fiscal 1969 were presumably not related to that shop. In view of respondent's concession, this does not affect the outcome, however, since the aggregate amounts expended in fiscal 1970 and 1971 are greater than Orelite's net liquid assets on July 31, 1969.↩
29. Prior to trial, the Court ruled that none of the grounds set forth in such statement were sufficient to shift the burden of proof to respondent. See footnote 7,
supra.↩ 30. Since Orelite had accumulated earnings and profits of $368,531.43 and $450,102.13 as of the taxable years ending July 31, 1970, and July 31, 1971, respectively, it is not entitled to any minimum accumulated earnings credit under section 535(c)(2).↩
