26 C.F.R. § 1.533-1

Evidence of purpose to avoid income tax

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(a) In general. (1) The Commissioner's determination that a corporation was formed or availed of for the purpose of avoiding income tax with respect to shareholders is subject to disproof by competent evidence. Section 533(a) provides that the fact that earnings and profits of a corporation are permitted to accumulate beyond the reasonable needs of the business shall be determinative of the purpose to avoid the income tax with respect to shareholders unless the corporation, by the preponderance of the evidence, shall prove to the contrary. The burden of proving that earnings and profits have been permitted to accumulate beyond the reasonable needs of the business may be shifted to the Commissioner under section 534. See §§ 1.534-1 through 1.534-4. Section 533(b) provides that the fact that the taxpayer is a mere holding or investment company shall be prima facie evidence of the purpose to avoid income tax with respect to shareholders.

(2) The existence or nonexistence of the purpose to avoid income tax with respect to shareholders may be indicated by circumstances other than the conditions specified in section 533. Whether or not such purpose was present depends upon the particular circumstances of each case. All circumstances which might be construed as evidence of the purpose to avoid income tax with respect to shareholders cannot be outlined, but among other things, the following will be considered:

(i) Dealings between the corporation and its shareholders, such as withdrawals by the shareholders as personal loans or the expenditure of funds by the corporation for the personal benefit of the shareholders,

(ii) The investment by the corporation of undistributed earnings in assets having no reasonable connection with the business of the corporation (see § 1.537-3), and

(iii) The extent to which the corporation has distributed its earnings and profits.

The fact that a corporation is a mere holding or investment company or has an accumulation of earnings and profits in excess of the reasonable needs of the business is not absolutely conclusive against it if the taxpayer satisfies the Commissioner that the corporation was neither formed nor availed of for the purpose of avoiding income tax with respect to shareholders.

(b) General burden of proof and statutory presumptions. The Commissioner may determine that the taxpayer was formed or availed of to avoid income tax with respect to shareholders through the medium of permitting earnings and profits to accumulate. In the case of litigation involving any such determination (except where the burden of proof is on the Commissioner under section 534), the burden of proving such determination wrong by a preponderance of the evidence, together with the corresponding burden of first going forward with the evidence, is on the taxpayer under principles applicable to income tax cases generally. For the burden of proof in a proceeding before the Tax Court with respect to the allegation that earnings and profits have been permitted to accumulate beyond the reasonable needs of the business, see section 534 and §§ 1.534-2 through 1.534-4. For a definition of a holding or investment company, see paragraph (c) of this section. For determination of the reasonable needs of the business, see section 537 and §§ 1.537-1 through 1.537-3. If the taxpayer is a mere holding or investment company, and the Commissioner therefore determines that the corporation was formed or availed of for the purpose of avoiding income tax with respect to shareholders, then section 533(b) gives further weight to the presumption ofcorrectness already arising from the Commissioner's determination by expressly providing an additional presumption of the existence of a purpose to avoid income tax with respect to shareholders. Further, if it is established (after complying with section 534 where applicable) that earnings and profits were permitted to accumulate beyond the reasonable needs of the business and the Commissioner has therefore determined that the corporation was formed or availed of for the purpose of avoiding income tax with respect to shareholders, then section 533(a) adds still more weight to the Commissioner's determination. Under such circumstances, the existence of such an accumulation is made determinative of the purpose to avoid income tax with respect to shareholders unless the taxpayer proves to the contrary by the preponderance of the evidence.

(c) Holding or investment company. A corporation having practically no activities except holding property and collecting the income therefrom or investing therein shall be considered a holding company within the meaning of section 533(b). If the activities further include, or consist substantially of, buying and selling stocks, securities, real estate, or other investment property (whether upon an outright or marginal basis) so that the income is derived not only from the investment yield but also from profits upon market fluctuations, the corporation shall be considered an investment company within the meaning of section 533(b).

(d) Small business investment companies. A corporation which is licensed to operate as a small business investment company under the Small Business Investment Act of 1958 (15 U.S.C. ch. 14B) and the regulations thereunder (13 CFR part 107) will generally be considered to be a mere holding or investment company within the meaning of section 533(b). However, the presumption of the existence of the purpose to avoid income tax with respect to shareholders which results from the fact that such a company is a mere holding or investment company will be considered overcome so long as such company:

(1) Complies with all the provisions of the Small Business Investment Act of 1958 and the regulations thereunder; and

(2) Actively engages in the business of providing funds to small business concerns through investment in the equity capital of, or through the disbursement of long-term loans to, such concerns in such manner and under such terms as the company may fix in accordance with regulations promulgated by the Small Business Administration (see secs. 304 and 305 of the Small Business Investment Act of 1958, as amended (15 U.S.C. 684, 685)).

On the other hand, if such a company violates or fails to comply with any of the provisions of the Small Business Investment Act of 1958, as amended, or the regulations thereunder, or ceases to be actively engaged in the business of providing funds to small business concerns in the manner provided in subparagraph (2) of this paragraph, it will not be considered to have overcome the presumption by reason of any rules provided in this paragraph. [T.D. 6500, 25 FR 11737, Nov. 26, 1960, as amended by T.D. 6652, 28 FR 4786, May 14, 1963]

Notes of Decisions

Cited in 29 cases, 1962–2001 · leading case: Technalysis Corp. v. Comm'r, 101 T.C. 397 (Tax Ct. 1993).

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Technalysis Corp. v. Comm'r, 101 T.C. 397 (Tax Ct. 1993). · cites it 8× “In this case, the board of directors set the corporate policy.”

Proctor v. Comm'r, 42 T.C.M. 725 (Tax Ct. 1981). · cites it 4× “533-1(a)(2) of the regulations provides three indicia of the proscribed purpose-- § 1.533-1 Evidence of purpose to avoid income tax.”

Golconda Mining Corp. v. Comm'r, 58 T.C. 139 (Tax Ct. 1972). · cites it 4× “from 1,500 to 2,900 shareholders during the years in issue and petitioner's management group owned or controlled no more than approximately 12 to 17 percent of its issued and outstanding stock cannot preclude per se further inquiry into whether the *159 facts disclosed in this…”

John P. Scripps Newspapers v. Comm'r, 44 T.C. 453 (Tax Ct. 1965). · cites it 2× “While these factors are strong indications that the accumulations were not for the proscribed purpose, sec.”

Bremerton Sun Publ'g Co. v. Comm'r, 44 T.C. 566 (Tax Ct. 1965). · cites it 2× “In addition, the evidence introduced at the trial, as well as supporting those two grounds, reveals a third ground to wit, a history of substantial dividend payments. These factors are strong indications that the accumulations were not for the proscribed purpose, section 1.”

Atl. Props., Inc. v. Comm'r, 62 T.C. 644 (Tax Ct. 1974). · cites it 2× “In an attempt to rebut the presumption contained in section 533(a) , petitioner relies heavily on the conflict in management philosophy that existed between its shareholders and deadlocked its board of directors.”

Petrozello Co. v. Comm'r, 46 T.C.M. 63 (Tax Ct. 1983). · cites it 10× “Our finding that the accumulation was beyond petitioner's reasonable needs raises a rebuttable presumption that the accumulation was for the proscribed purpose.”

Rhombar Co. v. Comm'r, 47 T.C. 75 (Tax Ct. 1966). · cites it 2× “533-1(c) of the Income Tax Regulations provides: A corporation having practically no activities except holding property and collecting the income therefrom or investing therein shall be considered a holding company within the meaning of section *65 533(b). If the activities…”

Novelart Mfg. Co. v. Comm'r, 52 T.C. 794 (Tax Ct. 1969). · cites it 2× “3 The petitioner denies that it was a mere holding or investment company, contending that it was actively engaged in research and development, a search for diversification, and the acquisition of additional plants, even though the production was carried on through subsidiaries.”

Henry Van Hummell, Inc. v. Comm'r, 23 T.C.M. 1765 (Tax Ct. 1964). · cites it 8× “Willows was not engaged in business but rather was a holding or investment company as our Findings of Fact indicate.”

Robert R. Walker & Wanda A. Walker v. Comm'r of Internal Revenue, Robert R. Walker, Inc. v. Comm'r of Internal Revenue, 362 F.2d 140 (7th Cir. 1966). “533-l(a) (2), 26 C.F.R. § 1.533-1 . Since, under Section 534(b), the corporation was notified of the proposed deficiency based upon the unreasonable accumulation, and submitted no statement, under Section 534(c), to establish a permissive accumulation, it had the burden of…”

Edward B. Wolf, Inc. v. Comm'r, 54 T.C.M. 1053 (Tax Ct. 1987). · cites it 6× “The accumulated earnings tax is not imposed therefore where a corporation has made an unreasonable accumulation but lacks the proscribed purpose.”

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