For the accumulated earnings tax to apply, tax avoidance need not be the sole or even the dominant purpose for the accumulation. Shareholder tax avoidance may be but one of several purposes. United States v. Donruss Co., 393 U.S. 297, 307-309 (1969). The subjective inquiry, that is whether the corporation was formed or availed of for the proscribed purpose, is made with respect to the state of mind of those who control the corporation. Helvering v. National Grocery Co., 304 U.S. 282, 292-294 (1938); Bahan Textile Machinery Co. v. United States, 453 F.2d 1100, 1101 (4th Cir. 1972). Section 533(a) establishes the presumption that a corporation with earnings and profits accumulated beyond the reasonable needs of its business was formed or availed of for the proscribed purpose. The presumption is rebuttable, however, if the corporation proves, by the preponderance of the evidence, to the contrary. Snow Manufacturing Co. v. Commissioner, 86 T.C. 260, 269 (1986); Bremerton Sun Publishing Co. v. Commissioner, 44 T.C. 566, 580-581 (1965).

The accumulated earnings tax is not imposed where a corporation has accumulated its earnings beyond the reasonable needs of its business but lacks the proscribed purpose. Snow Manufacturing Co. v. Commissioner, supra; Pelton Steel Casting Co. v. Commissioner, 28 T.C. 153, 173 (1957), affd. 251 F.2d 278 (7th Cir. 1958), cert. denied 356 U.S. 958 (1958). Furthermore, if it is determined that the corporation was formed or availed of for the proscribed purpose, the tax is applied only to that portion of the corporation's earnings and profits which exceeds the corporation's reasonable needs. Sec. 535(a) and (c). See Bremerton Sun Publishing Co. v. Commissioner, supra; John P. Scripps Newspapers v. Commissioner, 44 T.C. 453, 465 (1965).

Whether a corporation has permitted its earnings and profits to accumulate beyond its reasonable business needs and whether the corporation was availed of for taxavoidance purposes are both questions of fact. Helvering v. National Grocery Co., supra; Bremerton Sun Publishing Co. v. Commissioner, supra at 582. The reasonable needs of a business are usually determined by the officers and directors of the corporation and we are reluctant to substitute our business judgment for theirs unless the facts and circumstances require us to do so. Snow Manufacturing Co.

v. Commissioner, supra at 269; Atlantic Properties, Inc. v. Commissioner, 62 T.C. 644, 656 (1974), affd. 519 F.2d 1233 (1st Cir. 1975); Faber Cement Block Co. v. Commissioner, 50 T.C. 317, 329 (1968).

Burden of Proof

Initially we will address petitioner's motion regarding the burden of proof. Generally, petitioner bears the burden of proving that it was not formed or availed of for the proscribed purpose. Rule 142(a); American Metal Products Corp. v. Commissioner, 34 T.C. 89 (1960), affd. 287 F.2d 860 (8th Cir. 1961); Pelton Steel Casting Co. v. Commissioner, supra. However, the burden of proving that all or any part of the earnings and profits have been permitted to accumulate beyond the reasonable needs of the corporation is on respondent if (1) notification pursuant to section 534(b) has not been sent to the taxpayer prior to issuance of the statutory notice, or (2) in the event proper notification has been sent, if the taxpayer submits a statement, in response to such notice, of the grounds on which the taxpayer relies and sufficient facts to support such grounds, to establish that all or any part of the earnings have not been permitted to accumulate beyond the reasonable needs of the business. Sec. 534(a) (c).

In order to place the burden of proof on respondent under section 534(c), petitioner's statement:

must constitute more than mere notice of an intent to prove the reasonableness of the accumulation. Rather, the taxpayer must show its hand by stating with clarity and specificity the grounds on which it will rely to prove reasonable business needs, and by setting out the facts (not the evidence, but more than conclusions of law) that, if proven, support the alleged business needs for the accumulation. [Rutter v. Commissioner, 81 T.C. 937, 939 (1983), quoting B. Bittker & J. Eustice, Federal Income Taxation of Corporations and Shareholders, par. 8.08, at 8-33 (4th ed. 1979). Fn. ref. omitted.11]

The Fifth Circuit12 has stated the following with respect to section 534(c):

"Eden v. Commissioner, T.C. Memo. 1987-101, 53 T.C.M. 195, at 205, 56 P-H Memo T.C. par. 87,101, at 524.

12The 11th Circuit, to which this case is appealable, has not ruled with respect to the sufficiency of the contents of a statement made pursuant to sec. 534(c). However, in Bonner v. City of Prichard, 661 F.2d 1206 (11th Cir. 1981), the 11th Circuit adopted as binding precedent

We think §534's language indicates that the statement simply serves a notice function. Whether the "grounds" divulged in the statement subsequently prove convincing is irrelevant to this function. But just as the statement is not supposed to be legally sufficient on the question of definiteness, neither is it supposed to be a substitute for testimony at trial. Here, MFC sufficiently "showed its hand." We hold that this is all that §534 requires. [Motor Fuel Carriers, Inc. v. Commissioner, 559 F.2d 1348, 1352 (5th Cir. 1977), revg. a Memorandum Opinion of this Court. Citations omitted.]

In this case, respondent argues that the statement filed by petitioner alleging justification for its accumulation of earnings and profits is insufficient to place the burden of proof on him because, with the exception of the fourth ground for which expenditures were set out that were subsequently stipulated to by respondent, the assertions set forth in the statement are "vague, indefinite, and incomplete," and thus fail to provide facts sufficient to show the basis of the asserted grounds.

After examining the statement submitted by petitioner and considering respondent's arguments on brief concerning the claimed insufficiency of the statement, we have concluded that petitioner sufficiently set forth specific facts which, if proven, would support the alleged business needs for the accumulation with respect to grounds two, three, and four only. See Chatham Corp. v. Commissioner, 48 T.C. 145, 146-147 (1967). With respect to these grounds, we note that petitioner set out the facts which were subsequently presented at trial and argued on brief. Furthermore, petitioner specifically allocated the amount of earnings and profits required to purchase the Hughes Supply stock, to retire long-term debt, and to expand and repair existing facilities.

In contrast, with respect to grounds one and five, petitioner failed to allocate the specific amounts needed to purchase assets to diversify its business and required for operating capital. The only amount provided was the cost of one of the partnership interests.

In order to sufficiently "show its hand" petitioners must, when appropriate, provide details with respect to amounts

all of the decisions of the former 5th Circuit rendered prior to the close of business on Sep. 30, 1981.

so that respondent is not required to guess as to what they may be. Without these facts the statement is insufficient to place the burden of proof on respondent. We do not consider this requirement to conflict with the opinion expressed by the Fifth Circuit in Motor Fuel Carriers, Inc. In that case, the Fifth Circuit distinguished "between the substantive §533(a) inquiry as to whether the taxpayer's plan is definite and the procedural §534 inquiry as to whether his statement suffices 'to show the basis' of his claim of a need for earnings." 559 F.2d at 1351-1352. We are concerned with whether sufficient facts were provided in petitioner's section 534(c) statement to show the basis of the asserted grounds rather than with whether petitioner's grounds subsequently prove to be convincing.13 Petitioner has not provided adequate facts unless the amount of working capital required to meet its business needs is set forth in the statement when appropriate. Otherwise respondent has no way of comparing needs with earnings and profits in order to determine whether he will issue a statutory notice.

Based on the foregoing, the burden of proving that petitioner accumulated its earnings and profits beyond the reasonable needs of the business is on respondent with respect to grounds two, three, and four, and is on petitioner with respect to grounds one and five.14

Were earnings and profits permitted to accumulate beyond the reasonable needs of petitioner's business?

The critical factor in determining whether a corporation has accumulated its earnings and profits beyond the reasonable needs of its business is not the monetary size of the accumulated earnings and profits but the corporation's liquid position and the relation of that position to current

13See Michael DiPeppino, Inc. v. Commissioner, 83 T.C. 979, 982 (1984).

"Although petitioner did not set out the amounts required as working capital in the sec. 534(c) statement, the parties have stipulated to the amount of working capital necessary during the years in issue, and both parties included those amounts in their determination of reasonable needs.

Notwithstanding our discussion of the sufficiency of the sec. 534(c) statement, because the facts with respect to the amounts expended and retained are not in dispute and have all sufficiently been made a part of this record, our decision in this case is not based on burden of proof.

and anticipated needs. Faber Cement Block Co. v. Commissioner, 50 T.C. 317, 329 (1968).15

In this case, the parties both agree that to determine whether petitioner accumulated its earnings and profits beyond the reasonable needs of the business, the net liquid assets of the corporation must be compared to its business needs.16 However, they disagree with respect to which assets are to be considered liquid assets and with respect to the reasonable needs of the business.

Respondent contends that petitioner's net current assets greatly exceeded the business needs of the corporation in the years in issue and that therefore petitioner had no need to accumulate its current earnings and profits. To demonstrate the unreasonable accumulation respondent relies on the following computations:

15This entails examining the nature and availability of the prior years' accumulated surplus. When a corporation retains its accumulated surplus in the form of liquid assets, such surplus is available to meet business needs. If this surplus meets the current and reasonably anticipated needs of the corporation, there is a strong indication that any accumulation of profits of the current year is beyond the reasonable needs of the business. Atlantic Properties, Inc. v. Commissioner, 62 T.C. 644, 656 (1974), affd. 519 F.2d 1233 (1st Cir. 1975); Edward B. Wolf, Inc. v. Commissioner, T.C. Memo. 1987-562, 54 T.C.M. 1053, at 1058-1059, 56 P-H Memo T.C. par. 87,562, at 3019.

16In Snow Manufacturing Co. v. Commissioner, we noted that accumulated earnings and profits and net liquid assets are distinct concepts in tax law. 86 T.C. 260, 278 (1986). Accumulated earnings and profits is the historical net increase in a corporation's assets above stockholders' contributions to capital, while net liquid assets or working capital is the excess of current assets over current liabilities. 86 T.C. at 278. In Snow Manufacturing Co. the net liquid assets exceeded accumulated earnings and profits. We held that where net liquid assets exceed accumulated earnings and profits, net liquid assets are reflected in the full amount of accumulated earnings and profits, and that therefore reasonable needs of the business should be compared with accumulated earnings and profits. 86 T.C. at 279. We noted however that, in some cases (such as this case), where accumulated earnings and profits exceed net liquid assets, reasonable business needs have been compared against net liquid assets. 86 T.C. at 279 n. 18., citing for example, Alma Piston Co. v. Commissioner, T.C. Memo. 1976-107, affd. 579 F.2d 1000 (6th Cir. 1978); Bardahl Manufacturing Corp. v. Commissioner, T.C. Memo. 1965-200.

17See note 8 supra.