## Facts

- Two closely held corporations operated a Los Angeles ballroom and cocktail lounge on leased premises owned by an elderly lessor.
- The location was central to the business’s continued success, and the corporations feared losing the premises to a competing buyer.
- After a third party offered to buy the property for $300,000 cash, the corporations matched that offer and renewed it annually from 1963 through 1968; the lessor did not accept but indicated the corporations would have first choice if she decided to sell.
- The corporations estimated they needed about $100,000 in working capital and about $375,000 to purchase and remodel the property.
- The corporations retained substantial earnings during fiscal years 1966–1968 (approximately $316,000; $374,316; and $415,766).
- The IRS determined the corporations’ only reasonable need was working capital (which it calculated at no more than about $21,272) and imposed the accumulated earnings tax under I.R.C. §§ 531–537.
- The corporations paid the tax and sued for a refund, asserting the accumulations were needed for working capital and for the anticipated purchase and renovation.

## Issues

1. Whether retained earnings set aside to purchase and renovate key leased premises constituted “reasonable needs of the business,” including “reasonably anticipated” needs, under I.R.C. §§ 531–537.
2. Whether a plan contingent on a lessor’s decision to sell can be “specific, definite, and feasible” for purposes of I.R.C. § 537 and related regulations.
3. Whether a shareholder’s personal borrowing capacity may be considered to reduce a corporation’s reasonable accumulation needs.
4. Whether the corporations were “availed of” for the purpose of avoiding shareholder income tax under I.R.C. § 532.

## Decision

- The Ninth Circuit largely reversed the district court’s accumulated earnings determinations and rejected the IRS’s narrow working-capital-only view of reasonable needs.
- The court held the corporations had a specific, definite, and feasible plan to purchase and renovate the premises, supported by repeated purchase offers and a concrete cost estimate, satisfying “reasonably anticipated” business needs.
- The court held uncertainty arising from a third party’s decision to sell did not, by itself, make the plan too indefinite where the corporations’ conduct showed an active, good-faith pursuit of the transaction.
- The court held the principal shareholder’s ability to borrow personally was irrelevant to determining the corporations’ reasonable accumulation needs.
- The court concluded the record did not support a finding that the corporations accumulated earnings for the proscribed purpose of avoiding shareholder income tax, given the legitimate business justification.

## Legal Principles

- Accumulations may be justified by “reasonable needs of the business,” including “reasonably anticipated” needs, when supported by a specific, definite, and feasible plan.
- A plan may satisfy the specific/definite/feasible standard even if completion depends on a third party, so long as the taxpayer’s actions show a concrete, ongoing effort and the plan is rationally connected to business operations.
- The reasonableness of corporate accumulations is measured by the corporation’s business needs; shareholders’ personal financial resources or borrowing capacity do not reduce permissible corporate accumulations.
- A bona fide, well-documented business purpose for retention can defeat an inference that earnings were accumulated to avoid shareholder-level tax.

## Conclusion

The Ninth Circuit held that documented, actively pursued plans to acquire and improve essential business premises can justify substantial retained earnings under the accumulated earnings tax rules even when consummation depends on a lessor’s choice, and it rejected using shareholder borrowing capacity to diminish corporate needs; the government failed to show a tax-avoidance purpose on the record presented.


Myron’s Enters. v. United States, 548 F.2d 331 (9th Cir. 1977)