Snow Mfg. Co. v. Commissioner
86 T.C. 260, 86 T.C. No. 18, 1986 U.S. Tax Ct. LEXIS 147 (1986)
Premium Feature
Subscribe to Lexplug to listen to the Case Podcast.
Rule of Law:
A corporation's accumulation of earnings for future expansion is not considered a "reasonable business need" under IRC § 537 unless the corporation has specific, definite, and feasible plans for the use of such funds, demonstrated by more than vague discussions or preliminary investigations. A history of not paying dividends and making investments unrelated to the business can corroborate the tax-avoidance purpose presumed under IRC § 533 when earnings accumulate beyond reasonable needs.
Facts:
- Snow Manufacturing Co. (Snow) was a California corporation that reconditioned small automobile parts and was a wholly-owned subsidiary of Alma Piston Co.
- From at least 1973 through the tax years at issue (1979-1980), Snow experienced significant growth and suffered from a severe lack of operating and storage space, forcing it to store parts and materials outside.
- Lowell Lewis, Snow's on-site general manager, repeatedly informed the parent company's owner, E.E. Tracy, about the overcrowded conditions and the need for more space.
- Prior to 1979, Snow engaged in unsuccessful negotiations to purchase an adjacent property (the "Luben property") but considered the $50,000 asking price "ridiculous."
- During the tax years at issue, Lewis made informal inquiries about other properties and contacted real estate brokers, but no specific property was identified or pursued with formal negotiations.
- A December 1979 board meeting discussed the need for a new 30,000-square-foot building but did not identify a specific site or commit to a plan, despite a related company moving out of an adjacent building.
- Throughout its entire corporate existence, Snow never paid a dividend to its parent company, Alma Piston Co.
- In May 1979, Snow purchased a tax-exempt Michigan Housing bond for $904,239, an investment unrelated to its auto parts business.
Procedural Posture:
- The Commissioner of Internal Revenue (Respondent) determined deficiencies in Snow Manufacturing Co.'s (Petitioner) income tax for the taxable years ending in 1979 and 1980, asserting the accumulated earnings tax.
- On June 16, 1982, the Commissioner sent a letter to Snow notifying it of the proposed deficiency. Snow did not file a statement under IRC § 534(c) to shift the burden of proof.
- The Commissioner issued a formal notice of deficiency on August 3, 1982.
- Snow petitioned the United States Tax Court, a court of first instance for federal tax disputes, for a redetermination of the deficiencies.
Premium Content
Subscribe to Lexplug to view the complete brief
You're viewing a preview with Rule of Law, Facts, and Procedural Posture
Issue:
Does a corporation's accumulation of earnings and profits, ostensibly for future business expansion, subject it to the accumulated earnings tax under IRC § 531 when its expansion plans are not specific, definite, and feasible?
Opinions:
Majority - Gerber
Yes. A corporation's accumulation of earnings is subject to the accumulated earnings tax when its justification for the accumulation, such as future expansion, is not supported by a specific, definite, and feasible plan. The court determined that Snow's reasonable business needs included working capital and a reserve for prior tax deficiencies, but it rejected Snow's claimed need to reserve funds for expansion. Under Treasury Regulation § 1.537-1(b), a plan for future needs must be "specific, definite, and feasible," not vague or uncertain. Snow's efforts—which included failed negotiations years prior, informal inquiries, and vague corporate minutes—did not constitute a definite plan. The court stated that "discussions of possible options and incipient investigations are not a substitute for a clear plan coupled with action." Because Snow's accumulated earnings exceeded its actual reasonable business needs, a presumption arose under IRC § 533 that the accumulation was for the purpose of avoiding shareholder income tax. Snow failed to rebut this presumption, and the court found corroborating evidence of a tax-avoidance purpose, including that Snow had never paid a dividend and had invested a large sum in a bond unrelated to its business operations.
Analysis:
This case provides a critical illustration of the "specific, definite, and feasible" plan requirement for justifying the accumulation of corporate earnings for future needs. It clarifies that a genuine business need for expansion is insufficient on its own; management must manifest its intention to meet that need through concrete steps and a clear plan of action documented contemporaneously. The decision reinforces that courts will scrutinize claims of future needs to prevent corporations from using vague expansion goals as a post-hoc justification for hoarding profits to shield shareholders from taxes. It also highlights factors that strongly indicate a tax-avoidance motive, such as a consistent no-dividend policy and investments in assets unrelated to the core business.
