## Facts

- Victor A. Lamark operated Lamark Shipping Agency as a sole proprietorship beginning in 1925.
- On October 13, 1966, the business incorporated as Lamark Shipping Agency, Inc., a Pennsylvania corporation in the steamship/shipping-agency business, with principal offices in Pittsburgh, using the cash method of accounting.
- The corporation authorized and issued 2,000 shares, all initially owned by Victor Lamark.
- Over time, Victor transferred small blocks of shares to family members: 100 shares to his brother, Albert A. Lamark; 100 shares to his nephew, Joseph J. (“Jay”) Lamark, Jr.; and 30 shares to his sister, Rose Kozak—while Victor kept over 92% of the outstanding shares.
- In January and February 1975, the corporation redeemed 75 of Albert’s shares and 10 of Rose’s shares.
- For the taxable year ended September 30, 1976, the Commissioner determined deficiencies of (1) $286.88 in investment credit recapture tax and (2) $31,811 in accumulated earnings tax.
- The corporation conceded the investment credit recapture tax, leaving only the accumulated earnings tax in dispute.
- In 1976, the corporation redeemed all but one of Victor’s remaining shares and also redeemed all shares then owned by Albert and Rose.
- Victor received more than $283,000 as part of the redemption and reported the amount on his individual return as long-term capital gain rather than as a dividend, producing substantial tax savings.
- The value of the assets distributed in redeeming Victor’s stock exceeded the corporation’s current earnings and profits.
- Around the same time, Victor sold his final remaining share to his nephew Jay for $60,000, keeping control within the family.
- The Commissioner concluded the corporation permitted earnings and profits to accumulate beyond the reasonable needs of the business and did so to avoid shareholder-level income tax, and the corporation petitioned the Tax Court for redetermination.

## Issues

1. Whether Lamark Shipping Agency, Inc. was liable for the accumulated earnings tax for the taxable year ended September 30, 1976, because it permitted earnings and profits to accumulate beyond the reasonable needs of the business.  
2. If the accumulation exceeded reasonable business needs, whether Lamark Shipping proved that the accumulation was not for the purpose of avoiding income tax with respect to its shareholders under I.R.C. § 532(a).

## Decision

- The Tax Court sustained the Commissioner’s determination that Lamark Shipping was subject to the accumulated earnings tax for the taxable year ended September 30, 1976.
- The court found the corporation’s earnings and profits were accumulated beyond the reasonable needs of the business.
- Because an unreasonable accumulation triggers a statutory inference of a shareholder-tax-avoidance purpose, the court held Lamark Shipping did not carry its burden to prove the prohibited purpose was absent.
- The corporation’s concession resolved the investment credit recapture component; the accumulated earnings tax deficiency was upheld.

## Legal Principles

- A corporation is subject to the accumulated earnings tax when it is “availed of” for the purpose of avoiding shareholder income tax by permitting earnings and profits to accumulate rather than paying dividends. (I.R.C. §§ 531, 532(a))
- The key factual question is whether earnings and profits were accumulated beyond the reasonable needs of the business, including reasonably anticipated needs. (I.R.C. § 537)
- If earnings and profits are accumulated beyond the reasonable needs of the business, that fact is determinative of a tax-avoidance purpose unless the corporation proves otherwise by a preponderance of the evidence. (I.R.C. § 533(a))
- To justify accumulations based on future needs, a corporation generally must show specific, definite, and feasible plans for the use of retained earnings; general or indefinite intentions are insufficient.
- A closely held, family-controlled corporation’s use of accumulated funds to finance a redemption that yields capital-gain treatment to a dominant shareholder, instead of dividends, may support the finding of a shareholder-tax-avoidance purpose.

## Conclusion

Lamark Shipping Agency, Inc. was held liable for the accumulated earnings tax for its 1976 taxable year because it retained earnings beyond demonstrated business needs and failed to overcome the statutory inference that the accumulation served to avoid shareholder-level income tax, particularly given the large family-stock redemption that produced capital-gain treatment for Victor Lamark.


Lamark Shipping Agency, Inc. v. Commissioner of Internal Revenue, 42 T.C.M. (CCH) 38 (1981)