(a) The business of a corporation is not merely that which it has previously carried on but includes, in general, any line of business which it may undertake.
(b) If one corporation owns the stock of another corporation and, in effect, operates the other corporation, the business of the latter corporation may be considered in substance, although not in legal form, the business of the first corporation. However, investment by a corporation of its earnings and profits in stock and securities of another corporation is not, of itself, to be regarded as employment of the earnings and profits in its business. Earnings and profits of the first corporation put into the second corporation through the purchase of stock or securities or otherwise, may, if a subsidiary relationship is established, constitute employment of the earnings and profits in its own business. Thus, the business of one corporation may be regarded as including the business of another corporation if such other corporation is a mere instrumentality of the first corporation; that may be established by showing that the first corporation owns at least 80 percent of the voting stock of the second corporation. If the taxpayer's ownership of stock is less than 80 percent in the other corporation, the determination of whether the funds are employed in a business operated by the taxpayer will depend upon the particular circumstances of the case. Moreover, the business of one corporation does not include the business of another corporation if such other corporation is a personal holding company, an investment company, or a corporation not engaged in the active conduct of a trade or business.
Notes of Decisions
Proctor v. Comm'r, 42 T.C.M. 725 (Tax Ct. 1981).
· cites it 4× “The term "active trade or business" connotes activities of such a nature and character as to qualitatively distinguish its operation from a mere passive investment.”
Alma Piston Co. v. Comm'r, 35 T.C.M. 464 (Tax Ct. 1976).
· cites it 4× “We view petitioner's entrance into the business of remanufacturing engines as a logical extension of its prior business as an auto parts manufacturer.”
Novelart Mfg. Co. v. Comm'r, 52 T.C. 794 (Tax Ct. 1969).
· cites it 4× “537-3 of the regulations 8 *116 *117 provides *808 that the business of a corporation may include the business of another corporation if such other corporation is a mere instrumentality *115 of the first corporation, and that this may be established by showing that the first…”
Montgomery Co. v. Comm'r, 54 T.C. 986 (Tax Ct. 1970).
· cites it 4× “On March 20, 1962, Motel was organized as a wholly owned subsidiary of petitioner to operate the Louisville Travelodge as a joint venture with TraveLodge Corp.”
Golconda Mining Corp. v. Comm'r, 58 T.C. 139 (Tax Ct. 1972).
· cites it 2× “It is also necessary to consider the nature of the surplus and whether the accumulation of earnings is reflected in liquid assets with a value in excess of the immediate or reasonably anticipated needs of petitioner's business.”
Mead's Bakery, Inc. v. Comm'r, 23 T.C.M. 607 (Tax Ct. 1964).
· cites it 6× “, 11 *265 petitioner asserts (1) that since it owned more than 80 percent of the outstanding stock in Angus, the business of Angus should be considered as petitioner's business and (2) that petitioner was entitled to utilize its earnings for the reasonable business needs of its…”
Eden v. Comm'r, 53 T.C.M. 195 (Tax Ct. 1987).
· cites it 2× “537-2(b)(1), Income Tax Regs. (providing that bona fide expansion of business may indicate that earnings and profits of a corporation are being accumulated for the reasonable needs of the business); section 1.”
Henry Van Hummell, Inc. v. Comm'r, 23 T.C.M. 1765 (Tax Ct. 1964).
· cites it 4× “537-3(b), Income Tax Regs. We must concur and conclude that the business of Willows was not the business of petitioner.”
Empire Land Corp. v. United States, 473 F. Supp. 1289 (E.D. La. 1979).
· cites it 3× “26 C.F.R. § 1.537-3 (b) 4 Thus, the activities of American Benefit and Co-ex must be considered in determining whether Universal was a holding or investment company.”
Suwannee Lumber Mfg. Co. v. Comm'r, 39 T.C.M. 572 (Tax Ct. 1979).
· cites it 2× “We have not allowed any increase in receivables or payables in fiscal 1974, however, for the same reasons we did not allow an increase in expenses for 1974 in our Bardahl computation.”
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