## Facts

- Snow Manufacturing Company was a California corporation that remanufactured automobile parts and operated as a wholly owned subsidiary of Alma Piston Company, a closely held corporation.
- The Commissioner determined accumulated-earnings tax deficiencies for Snow’s fiscal years ending June 30, 1979, and June 30, 1980, asserting that Snow accumulated earnings and profits beyond reasonable business needs.
- Snow paid no dividends during the years at issue.
- Snow claimed it needed to retain funds to expand or relocate its plant due to growth and space constraints.
- During 1979 and 1980, management discussed the need for more space, met with real estate brokers, and considered buying a building of roughly 30,000 square feet, but did not select or commit to a specific property.
- The parties disputed Snow’s working-capital needs under the Bardahl credit-cycle method and disputed whether reasonable needs should be measured against accumulated earnings and profits or net liquid assets.

## Issues

1. Whether Snow was liable for the accumulated-earnings tax under I.R.C. §§ 531–537 for fiscal years 1979 and 1980 because it accumulated earnings and profits beyond the reasonable needs of the business.
2. Whether Snow had a specific, definite, and feasible plan for plant expansion or relocation sufficient to justify accumulations as reasonably anticipated business needs under I.R.C. § 537.
3. How Snow’s reasonable working-capital needs should be computed under the Bardahl credit-cycle analysis for purposes of determining reasonable business needs.
4. For the I.R.C. § 533(a) proscribed-purpose presumption, whether reasonable business needs should be compared to accumulated earnings and profits or to net liquid assets when net liquid assets exceed accumulated earnings and profits.

## Decision

- The Tax Court held Snow was subject to the accumulated-earnings tax for fiscal years 1979 and 1980.
- The court found Snow lacked a specific, definite, and feasible plan for expansion or relocation during the years at issue.
- The court applied a Bardahl-style working-capital analysis and concluded Snow’s accumulations exceeded reasonable working-capital needs.
- The court held that when net liquid assets exceed accumulated earnings and profits, the proper comparison for the I.R.C. § 533(a) proscribed-purpose test is between reasonable business needs and accumulated earnings and profits.
- The deficiencies for both years were sustained subject to the parties’ concessions.

## Legal Principles

- I.R.C. § 531 imposes an accumulated-earnings tax on accumulated taxable income when a corporation is formed or availed of to avoid shareholder-level tax by retaining earnings rather than distributing them.
- Under I.R.C. § 533(a), accumulation beyond the reasonable needs of the business creates a presumption of a tax-avoidance purpose; the corporation bears the burden of rebutting that presumption.
- Under I.R.C. § 537, “reasonable needs of the business” include reasonably anticipated future needs, but justification based on anticipated needs requires a specific, definite, and feasible plan.
- General discussions, exploratory contacts, or nonspecific intentions to expand—without identified projects, commitments, or concrete implementation steps—do not satisfy the specific, definite, and feasible plan requirement.
- Working-capital needs may be evaluated using the Bardahl credit-cycle method, which estimates cash needed to fund the operating cycle.
- When net liquid assets exceed accumulated earnings and profits, the I.R.C. § 533(a) inquiry compares reasonable business needs to accumulated earnings and profits (not net liquid assets) in assessing whether earnings were accumulated beyond reasonable needs.

## Conclusion

Snow was liable for the accumulated-earnings tax for 1979 and 1980 because it accumulated earnings beyond reasonable business needs, failed to substantiate future expansion needs with a specific, definite, and feasible plan, and could not overcome the statutory presumption of a proscribed purpose under I.R.C. § 533(a).


Snow Mfg. Co. v. Comm’r, 86 T.C. 260 (1986)