Court Opinion

ID: 4588818
Source: CourtListenerOpinion
Date Created: 2020-11-20 18:42:54.156671+00
Date Added: 2024-06-11T07:50:09.071353
License: Public Domain

The Factories Investment Corporation, Petitioner, v. Commissioner of Internal Revenue, RespondentFactories Inv. Corp. v. CommissionerDocket No. 93273United States Tax Court39 T.C. 908; 1963 U.S. Tax Ct. LEXIS 179; March 19, 1963, Filed *179 Decision will be entered for the respondent.  Held, that petitioner was availed of for the purpose of avoiding the income tax with respect to its shareholders, by permitting its earnings and profits to accumulate instead of being divided or distributed, for each of the taxable years here involved.  Respondent's imposition of the accumulated earnings tax under section 531 of of the 1954 Code is therefore approved.  Benjamin Nadel, C.P.A., and Norman Nadel, Esq., for the petitioner.Lawrence A. Wright, Esq., for the respondent.  Pierce, Judge.  PIERCE *908  The respondent determined a deficiency in the income tax of the petitioner corporation for each of its fiscal years ended June 30, 1958 and 1959, in the respective amounts of $ 6,432.05 and $ 6,474.52.  The sole issue is whether petitioner was availed of during said fiscal years for the purpose of avoiding the income tax with respect to its shareholders, by permitting earnings and profits to accumulate instead of being divided or distributed. If the petitioner was so availed of, then the respondent was justified in his imposition of the accumulated earnings tax under section 531 of the 1954 Code, which action gave rise to the entire amounts *180 of the deficiencies involved.FINDINGS OF FACT.Some of the facts were stipulated.  The stipulation of facts, together with the exhibits therein identified, is incorporated herein by reference.The petitioner corporation, the Factories Investment Corp., was organized in 1936 under the laws of the State of Connecticut.  At all times material it has kept its books of account and filed its Federal income tax returns on an accrual basis of accounting, for fiscal years ended June 30.  For the taxable fiscal years 1958 and 1959, which are here involved, it filed Federal corporation income tax returns with the district director of internal revenue at Hartford, Conn.Commencing in 1949 and continuing throughout the taxable years, the capital stock of the petitioner corporation, as well as of two other corporations (hereinafter more particularly described), Princeton Knitting Mills,  Inc., and Hamilton & Main, Inc., was owned principally by Max Doft and Harry Fleisher and members of their *909  families.  During said period the stock of the petitioner was owned, two-thirds by Max Doft and one-third by Harry Fleisher, while that of Princeton Knitting Mills (hereinafter called Princeton), was owned, two-thirds *181 by Max Doft and members of his family, and one-third by Harry Fleisher and the members of his family -- except for approximately 5 percent of the common stock in Princeton, which was owned by key executive employees of that corporation.  The stock of Hamilton & Main was owned, 50 percent by the Dofts and 50 percent by the Fleishers.Princeton was organized in 1932; and at all times since its organization, it has engaged in the business of manufacturing knitted fabrics.  In 1936, its plant and equipment were mortgaged; and the mortgagee was threatening to institute foreclosure proceedings with respect thereto.  Doft and Fleisher and another individual who was then a Princeton stockholder, thereupon caused petitioner to be organized for the purpose of purchasing the mortgagee's interest.  The purchase was made; and in due course, Princeton paid off its mortgage indebtedness to petitioner.Apparently until 1944, Princeton conducted its operations in Watertown, Conn.  In that year, it was desirous of enlarging its operations, and for that purpose required additional space.  Petitioner in 1944 purchased a rather dilapidated piece of industrial property, called the Mill Street building, in *182 Waterbury, Conn., which it promptly leased to Princeton at an annual rental of $ 35,000.  Petitioner paid $ 60,862.80 for said land and building on Mill Street.  Extensive renovations were required to make the Mill Street building suitable for Princeton's needs; and that corporation, the lessee, made such renovations and improvements to the leasehold with its own funds.  During the taxable years involved about 60 percent of Princeton's output was manufactured in the Mill Street building.From and after petitioner's acquisition and lease of the Mill Street building to Princeton, the former's principal business activity has been the leasing of said building to Princeton.  Petitioner also expended $ 7,000 in 1940, and approximately $ 47,500 in 1949, for the purchase of knitting machinery, which it has also leased to Princeton.  In 1953, petitioner expended approximately $ 28,400 in enlarging the Mill Street building; and for 1954 and subsequent years, the rental which it received from Princeton for use and possession of said building was increased to $ 40,000 per year.*910  The following condensed comparative balance sheets show the financial position of the petitioner, as of June 30, for the *183 years 1955 through 1959:Comparative balance sheetsFiscal years ended June 30 --195519561957ASSETSCash$ 33,787.85$ 62,408.40$ 212,678.17Notes and accounts receivable121,160.00125,960.00Other investments200.00200.00200.00Fixed assets (less accumulateddepreciation)82,229.5576,258.9370,288.31Land12,551.3612,551.3612,551.36Prepaid expenses4,741.53718.044,465.75Treasury stock6,600.006,600.006,600.00Organization expense94.6994.6994.69Total assets261,364.98284,791.42306,878.28LIABILITIES AND CAPITALAccounts payable2,500.002,500.002,500.00Accrued expenses150.24150.24150.24Reserve for taxes13,697.8714,525.9814,173.89Common capital stock1,000.001,000.001,000.00Earned surplus244,016.87266,615.20289,054.15Total liabilities and capital261,364.98284,791.42306,878.28Comparative balance sheetsFiscal years ended June 30 --19581959ASSETSCash$ 243,125.21$ 273,826.71Notes and accounts receivableOther investments200.00200.00Fixed assets (less accumulateddepreciation)64,317.6958,347.07Land12,551.3612,551.36Prepaid expenses3,887.764,180.77Treasury stock6,600.006,600.00Organization expense94.6994.69Total assets331,376.71355,800.60LIABILITIES AND CAPITALAccounts payable2,500.003,046.00Accrued expenses155.66310.47Reserve for taxes15,277.6415,457.01Common capital stock1,000.001,000.00Earned surplus312,443.41335,987.12Total liabilities and capital331,376.71355,800.60The *184 following condensed comparative income statements show the results of petitioner's operations for its fiscal years 1955 through 1959:Comparative statements of profit and lossFiscal years ended June 30195519561957Rent income$ 46,000.00$ 46,000.00$ 46,000.00Expenses:Property taxes7,102.617,378.927,786.80Depreciation5,970.625,970.625,970.62Other expenses519.79522.81539.19Total expenses13,593.0213,872.3514,296.61Profit from rents32,406.9832,127.6531,703.39Interest income3,319.994,996.664,909.45Total income35,726.9737,124.3136,612.84Provision for taxes on income13,697.8714,525.9814,173.89Net profit after taxes22,029.1022,598.3322,438.95Comparative statements of profit and lossFiscal years ended June 3019581959Rent income$ 46,000.00$ 46,000.00Expenses:Property taxes7,953.668,055.63Depreciation5,970.625,970.62Other expenses557.71886.37Total expenses14,481.9914,912.62Profit from rents31,518.0131,087.38Interest income7,148.897,913.34Total income38,666.9039,000.72Provision for taxes on income15,277.6415,457.01Net profit after taxes23,389.2623,543.71Petitioner has never declared or paid a dividend from the time of its organization in 1936, to and including June 30, 1959, the close of the last *185 taxable year here involved.*911  The following table shows petitioner's cash in bank at the several dates shown:July 31, 1957$ 16,503.50Aug. 31, 195720,336.83Sept. 30, 195716,271.29Oct. 31, 195720,104.62Nov. 30, 195723,937.95Dec. 31, 1957224,768.24Jan. 31, 195813,589.57Feb. 28, 195817,414.90Mar. 31, 195821,248.27Apr. 30, 195825,081.60May 31, 195821,165.21June 30, 1958243,725.21July 31, 195817,553.12Aug. 31, 195821,386.45Sept. 30, 195816,882.16Oct. 31, 195820,565.25Nov. 30, 195824,398.58Dec. 31, 1958255,116.23Jan. 31, 195918,949.56Feb. 28, 195922,774.89Mar. 31, 195926,608.26Apr. 30, 195930,441.59May 31, 195925,913.38June 30, 1959273,826.71 Commencing in August 1951, petitioner periodically made cash loans, at interest, to Princeton.  These loans were repaid from time to time, and new loans were made shortly after each repayment.  The following table sets forth with respect to said loans (1) the dates thereof; (2) the amounts thereof; and (3) the repayment dates:Date loan madeAmountDate repaidAug. 9, 1951$ 80,000Dec. 15, 1952Aug. 27, 1953120,000Dec. 16, 1953($ 40,000)Dec. 31, 1953($ 80,000)Feb. 9, 195490,000June 28, 1954July 20, 1954100,000Dec. 29, 1954Jan. 13, 1955120,000Apr.  6, 1955Apr. 23, 195640,000June 22, 1956July 11, 195650,000Dec. 26, 1956Sept. 26, 195680,000Dec. 26, 1956Jan. 31, 1957190,000June 21, 1957July 5, 1957200,000Dec. 17, 1957Jan. 10, 1958215,000June 19, 1958July 21, 1958230,000Dec. 29, 1958Jan. 16, 1959240,000June 19, 1959July 9, 1959260,000Dec. 18, 1959As *186 of June 30 and December 31 of each year, Princeton furnished financial statements to certain of its creditors and suppliers.  Princeton's custom was to repay the loans to petitioner just prior to said statement dates and to make new loans shortly after such dates.During 1957 and the years following, Princeton expanded its business by adding a new product, simulated fur; and it expended approximately $ 1,143,000 for the purchase of new machinery and equipment and increased its investment in merchandise inventory from $ 2,574,690 at June 30, 1957, to $ 4,848,734 at June 30, 1959.The following condensed comparative balance sheets show the financial position of Princeton, at June 30, for the years 1955 through 1959: *912 195519561957ASSETSCash$ 118,349.31$ 113,562.61$ 176,318.92Accounts receivable2,036.900.60944,188.74894,024.20Cash value of life insurance89,490.15101,963.89115,304.87Inventories1,870,649.542,558,946.342,574,690.08Total current assets4,115,389.603,718,661.583,760,338.07Land, buildings, and equipment3,219,034.463,462,813.753,762,565.47Reserve for depreciation1,410,352.541,645,955.881,896,697.30Depreciated value1,808,681.921,816,857.871,865,868.17Equipment under construction683.6613,093.8131,034.38Prepaid expenses, etc96,327.0879,801.2682,796.67Total fixed assets1,905,692.661,909,752.941,979,699.22Total assets6,021,082.265,628,414.525,740,037.29LIABILITIESAccrued labor and expenses154,370.30164,178.46179,774.16Accounts payable882,497.98905,566.55939,560.57Due to Commercial FactorsCorpDeposits payable21,271.5031,447.2049,121.06Taxes payable488,845.87102,317.31157,387.96Total current liabilities1,546,985.651,203,509.521,325,843.75Net worth2 4,474,096.614,424,905.004,414,193.54*187 19581959ASSETSCash$ 191,464.87$ 199,112.36Accounts receivable669,520.371,052,042.23Cash value of life insurance130,295.46108,586.50Inventories3,222,726.444,848,734.12Total current assets4,214,007.146,208,475.21Land, buildings, and equipment4,114,024.384,566,209.38Reserve for depreciation2,194,097.102,371,117.68Depreciated value1,919,927.282,195,091.70Equipment under construction12,003.1329,009.28Prepaid expenses, etc74,159.0284,987.11Total fixed assets2,006,089.432,309,088.09Total assets6,220,096.578,517,563.30LIABILITIESAccrued labor and expenses223,330.25325,220.52Accounts payable1,307,119.031,692,653.68Due to Commercial FactorsCorp1 932,451.58Deposits payable32,332.5833,436.33Taxes payable182,503.03631,584.89Total current liabilities1,745,284.893,615,347.00Net worth4,474,811.684,902,216.30The following condensed comparative income statements show the results of Princeton's operations for each of its fiscal years ended June 30, 1955 through 1959:195519561957Sales$ 14,649,800.66$ 15,275,832.72$ 14,454,373.09Cost of goods sold12,752,990.9713,837,802.2212,892,376.78Gross profit on sales1,896,809.691,438,030.501,561,996.31Selling and administrativeexpenses1,091,620.491,308,170.501,460,620.29Operating profit805,189.20129,860.00101,376.02Other income41,725.1978,612.8529,609.06Other charges50,344.715,219.3235,108.09Net profit796,569.68203,253.5395,876.99Provision for taxes on income409,513.0314,628.9520,761.48Net profit after taxes387,056.65188,624.5875,115.5119581959Sales$ 14,502,384.85$ 17,262,249.49Cost of goods sold12,780,578.8814,478,163.14Gross profit on sales1,721,805.972,784,086.35Selling and administrativeexpenses1,579,865.431,821,434.48Operating profit141,940.54962,651.87Other income50,071.5625,711.37Other charges6,323.1634,484.42Net profit185,688.94953,878.82Provision for taxes on income79,908.12488,935.82Net profit after taxes105,780.82464,943.00*188  In addition to the above-mentioned loans by petitioner to Princeton, petitioner in April 1955 also made a loan of $ 120,000 to the above-mentioned corporation, Hamilton & Main, to enable the latter to purchase a parcel of improved real estate known as the Bank Street building.  Hamilton & Main thereupon leased the Bank Street building to Princeton, for the latter's use as a warehouse.  Petitioner's loan to Hamilton & Main bore interest at the rate of 4 percent per annum; *913  and it was repaid to petitioner by Hamilton & Main in three installments as follows:Sept. 27, 1956$ 80,000Nov. 14, 195625,000Dec. 26, 195615,000Total120,000As above found as a fact, petitioner never paid a dividend during the 23 years of its existence from 1936 to 1959.  However, Princeton paid dividends to its shareholders in the following amounts for the fiscal years shown:Fiscal year ended June 30 --Preferred stockCommon stockTotal1955$ 12,862$ 34,920$ 47,782195610,47634,92045,396195710,47634,92045,396195810,47634,92045,396195910,47634,92045,396And in each of the years 1948 through 1955, Hamilton & Main paid dividends  to its shareholders in the amount of $ 22,500.The cash requirements of the petitioner for the *189 operation of its business amounted to about $ 24,000 per year.  Such amount was principally required for the payment of Federal income taxes and State and local property and income taxes.  Relatively minor amounts (between $ 500 and $ 800) were required each year to defray the cost of insurance on its properties and for legal and professional services rendered to the petitioner.  Petitioner paid no salary or other compensation to its officers, in either of the taxable years involved.Petitioner's net income, after Federal income taxes, for its fiscal years 1958 and 1959 was $ 23,389.26 and $ 23,543.71, respectively.Commencing on January 1, 1960, petitioner leased the Mill Street building to a subsidiary of a corporation known as Burlington Industries, 1 at an annual rental of $ 80,000.  Subsequently, in August 1960, petitioner sold the Mill Street building to Hamilton & Main for $ 250,000; and shortly thereafter, petitioner corporation was dissolved, and its assets distributed in liquidation to its stockholders. For the calendar years 1958 and 1959, Max Doft and his spouse reported *190 taxable income on their Federal income tax returns, and paid taxes thereon, in the following amounts:19581959Taxable income reported$ 131,954.95$ 139,849.04Taxes paid thereon71,707.7877,200.56*914  If the Dofts' taxable income for each such year were increased by two-thirds of the petitioner's net income after taxes, for its fiscal years 1958 and 1959, the Federal income tax liabilities of the Dofts would have been increased as shown in the following computation:19581959Taxable income reported$ 131,954.95$ 139,849.04Share (2/3) of income of petitioner corporation15,593.1115,695.81Total income147,548.06155,544.85Taxes on total amounts of income83,060.8688,730.58Taxes actually paid71,707.7877,200.56Increase in tax liabilities11,353.0811,530.02For the calendar years 1958 and 1959, Harry Fleisher and his spouse reported taxable income in their Federal income tax returns, and paid taxes thereon, in the following amounts:19581959Taxable income reported$ 65,287.82$ 74,663.78Taxes paid thereon29,130.8635,348.22 If the Fleishers' taxable income for each such year were increased by one-third of petitioner's net income after taxes, for its fiscal years 1958 and 1959, the Federal income tax liabilities *191 of the Fleishers would have been increased as shown in the following computation:19581959Taxable income reported$ 65,287.82$ 74,663.78Share (1/3) of income of petitioner corporation7,796.557,847.90Total income73,084.3782,511.68Taxes on total amount of income33,807.5240,276.71Taxes actually paid29,130.8635,348.22Increase in tax liabilities4,676.664,928.49On August 17, 1960, respondent, acting pursuant to the provisions of section 534(b) of the 1954 Code, sent a notification to the petitioner by certified mail, wherein it was stated that he proposed to issue a statutory notice of deficiency for the taxable years ended June 30, 1958 and 1959, which would include an amount with respect to the accumulated earnings tax imposed by section 531 of the 1954 Code.Thereafter on October 11, 1960, the petitioner, acting pursuant to section 534 of the 1954 Code, submitted a "statement" (incorporated herein by reference) to the respondent, wherein it set forth "the grounds (together with facts sufficient to show the basis thereof) on *915  which" it relied "to *192 establish that all or any part of the earnings and profits * * * [had] not been permitted to accumulate beyond the reasonable needs of the business."ULTIMATE FINDINGS OF FACT.During each of the taxable years involved, the petitioner permitted its earnings and profits to accumulate beyond the reasonable needs of its business.Petitioner was availed of during each of the taxable years involved for the purpose of avoiding the income tax with respect to its shareholders, by permitting its earnings and profits to accumulate instead of being divided or distributed.OPINION.Section 534 of the 1954 Code provides in substance that where the Commissioner notifies a taxpayer corporation of his intention to issue a notice of deficiency predicated in whole or in part upon an allegation that the earnings and profits of the taxpayer have been permited to accumulate beyond the reasonable needs of its business, and where the taxpayer submits to the Commissioner "a statement of the grounds (together with facts sufficient to show the basis thereof) on which the taxpayer relies to establish that all or any part of the earnings and profits have not been permitted to accumulate beyond the reasonable needs *193 of the business," then the burden of proof shall be on the Commissioner, with respect to the grounds set forth in the taxpayer's statement.  See sec. 534(a)(2).  In the instant case, the respondent issued such a notice and the petitioner filed its statement in response thereto.  We are satisfied, after a careful reading of petitioner's "statement," that it sufficed to shift the burden of proof to the respondent, to the extent provided by section 534 (a) (2) and (c).The section 534 statement which petitioner filed with respondent contains two grounds upon which it relies to establish that its earnings and profits had not been permitted to accumulate beyond the needs of the business.  These grounds may be summarized as follows:(1) Petitioner and Princeton were units in a single business enterprise, with petitioner furnishing space for carrying on manufacturing, and with Princeton actually carrying on manufacturing activities.  By reason of Princeton's addition of the new line of products (simulated fur), that corporation's working capital was depleted by its outlays for new equipment; and it was necessary for petitioner to use its earnings and profits, by way of loans to Princeton, to *194 supply Princeton's needs for working capital.(2) Petitioner was compelled to make loans to Princeton, its only tenant and its only source of income, in order to enable that corporation to modernize its equipment, so that Princeton could remain in *916  the Waterbury area and remain a tenant of petitioner.  Stated another way, loans by petitioner to Princeton were necessary, as a device to retain for petitioner its only customer and sole source of revenue.With respect to the first of the foregoing grounds, the evidence establishes that petitioner corporation did not own any of the capital stock of Princeton, nor did that corporation own any of the stock in petitioner.  Actually, as the findings show, the stock of each of the two corporations was owned by substantially the same individuals.  If we assume, for the sake of argument, that Princeton did require additional working capital, the question arises whether petitioner was justified in accumulating its earnings and profits in order to supply Princeton's assumed needs.  Respondent urges that retaining earnings and profits for such a purpose does not suffice to render petitioner immune to the charge that it was accumulating earnings beyond *195 the reasonable needs of its business.We think that the respondent is correct; and we find clear and persuasive support for respondent's position in the case of Latchis Theatres of Keene, Inc., 19 T.C. 1054, affd.  214 F. 2d. 834 (C.A.1, 1954).  In the Latchis case, members of the Latchis family were the owners of the stock of several corporations, with none of the corporations in the Latchis group owning stock of any other corporation in the group.  The taxpayers in that case, two of the corporations in the Latchis group, argued that they should be permitted to retain their earnings, in order to aid other corporations in the group.  We held such argument to be unavailing; and stated in part as follows:It must be borne in mind that each petitioner can escape the Commissioner's determination only if it shows that its accumulations for 1946 were reasonably needed in its business.  The fact that they might have been needed or that they were actually used in the business of some other entity is wholly immaterial unless it is shown that such needs or use were in fact reasonably necessary to the business of the petitioner.  Cf.  Stanton Corporation, 44 B.T.A. 56, 80, affd. per curiam 138 F. 2d 512. *196 * * * The Latchis family could have put all of their properties in one corporation and operated all of their businesses through that corporation.  Then the arguments they make here that the earnings of one activity can be retained to aid or develop another phase of the business would have more force.  But they chose, instead, to divide their holdings and business activities among a number of separate corporations in order to limit liabilities and perhaps to obtain other benefits.  They must be judged by what they did in this respect rather than by what they might have done.  Attention must be focused upon the petitioners.  The accumulation of the 1946 earnings of the petitioners, on top of the earnings and capital which they already had, can not be justified by various needs and purposes of other interests of the Latchis family businesses.* * * *The Latchis family could as well serve the interests of their other corporations and of their over-all business holdings and activities by distributing the earnings of the petitioners to their stockholders so that those individuals could use those funds in their other activities in any way that they desired.  Cf. *917 Stanton Corporation, supra; *197 Helvering v. National Grocery Co., 304 U.S. 282. The only disadvantage that this record shows in such a procedure is that it would have subjected the stockholders to additional taxes, the very result which section 102 was designed to promote. Helvering v. Chicago Stock Yards Co., 318 U.S. 693. * * * [Emphasis supplied.]To the same effect as the Court's holding in the Latchis, case, is the respondent's regulation issued under section 537 of the 1954 Code (dealing with "Reasonable Needs of the Business").  In section 1.537-2(c)(3), Income Tax Regs., it is provided:(c) Unreasonable accumulations of earnings and profits.  Although the following purposes are not exclusive, accumulations of earnings and profits to meet any one of such objectives may indicate that the earnings and profits of a corporation are being accumulated beyond the reasonable needs of the business: * * * *(3) Loans to another corporation, the business of which is not that of the taxpayer corporation, if the capital stock of such other corporation is owned, directly or indirectly, by the shareholder or shareholders of the taxpayer corporation and such shareholder or shareholders are in control of both corporations;The *198 business of Princeton, manufacturing knitted fabrics and simulated fur, can not, in our opinion, be considered to be the business of the petitioner, a separate corporate entity, which was engaged only in leasing the Mill Street building and certain equipment therein.Applying the principles embodied in the Latchis case, in the cases therein cited, and in the above-cited regulation, to the facts shown by the record bearing upon the ownership and business activities of Princeton and of petitioner, it is clear to us that petitioner's first ground for accumulating its earnings rather than distributing them is, as a matter of law, not a valid and sufficient one.Coming to the second ground urged by the petitioner in its section 534 statement -- that petitioner was required to lend funds to Princeton to enable that corporation to remain in business in Waterbury and continue as petitioner's sole tenant and its sole source of income -- it appears that petitioner is trying to bring itself within the respondent's regulation ( sec. 1.537-2(b)(5), Income Tax Regs.) which states:(b) Reasonable accumulation of earnings and profits.  Although the following grounds are not exclusive, one or more of *199 such grounds, if supported by sufficient facts, may indicate that the earnings and profits of a corporation are being accumulated for the reasonable needs of the business * * *: * * * *(5) To provide for investments or loans to suppliers or customers if necessary in order to maintain the business of the corporation.The evidence establishes, to our satisfaction: (1) That Princeton did not require loans from petitioner in order to stay in the Waterbury *918  area; and (2) that, even if Princeton had left the Waterbury area, petitioner could have found another tenant equally satisfactory.Princeton was a successful company that earned sizable profits, after taxes, in both taxable years here involved ($ 105,780.02 in fiscal 1958, and $ 464,943 in fiscal 1959) as well as for the previous 3 years.  Moreover, Princeton paid dividends on both its preferred and common stock in all 5 of such years, totaling almost $ 50,000 in each year.  Its balance sheets (reflected in summary form in our Findings of Fact) show that it enjoyed a ratio of current assets to current liabilities of over 2 to 1 and of over 1.5 to 1, at the end of its fiscal years 1958 and 1959, respectively, and that it had more than *200 $ 190,000 of cash at each such date.  We are fully satisfied that petitioner was not required, at the risk of losing its only customer, to lend Princeton funds, for that corporation appears to us to have been in a healthy financial condition.  2 To be sure, Princeton had been in straitened financial circumstances in 1936; but as its balance sheets and income statements (summarized in our Findings of Fact) show, it had long since recovered its financial health. Even if we assume that Princeton did require funds from petitioner, such loans as would have been required could easily have been made out of petitioner's accumulated earnings and profits of $ 289,054.15, as they existed at July 1, 1957, the beginning of the taxable years here involved.  It must be remembered that the accumulated earnings tax here sought to be imposed by respondent is upon the earnings of only 2 years of the petitioner, *201 fiscal 1958 and fiscal 1959.  The evidence convinces us that petitioner's earnings of such years were not required for loans to Princeton.Nor was Princeton the only possible tenant for petitioner.  In 1960, after "the business" of Princeton had been sold, petitioner leased the Mill Street building to another manufacturer at an annual rental of $ 80,000, which was twice the amount of the highest rental ever paid by Princeton.We conclude that respondent has carried his burden of proof to show that petitioner was not required to accumulate its earnings and profits for the reasons embraced in its second ground.The two grounds asserted by petitioner in its section 534 statement having been shown, for the reasons above stated in our discussion of said grounds, to be unavailing, and no new or different grounds having been pleaded or argued by petitioner, the result is that petitioner must *919  be found to have accumulated earnings and profits beyond the reasonable needs of its business.  When such is the fact, section 533(a) provides that it "shall be determinative of the purpose to avoid the income tax with respect to its shareholders, unless the corporation by the preponderance of the evidence *202 shall prove to the contrary." Petitioner has not produced any such preponderance of the evidence.  Rather the evidence leads to the conclusion that such accumulation was for the proscribed purpose.Petitioner had been in existence for over 21 years at the beginning of the taxable years involved.  As hereinbefore found as a fact, by the beginning of such taxable years, it had accumulated earnings and profits of over $ 289,000.  It had profits in each of such years, but it did not distribute any of such profits to its two shareholders, Doft and Fleisher.  Indeed it never declared or paid a dividend from the time of its organization to and including the end of fiscal 1959, the last taxable year here involved.  Nor did it even pay its officers a salary in either of said years.  Petitioner had cash on hand at June 30, 1958 and 1959, in the respective amounts of $ 243,125.21 and $ 273,826.71.  Petitioner's needs for funds for use in its own operations were, as shown by the findings, modest.  And, if its earnings and profits of the 2 years had been distributed as dividends to its stockholders, the income tax liabilities of those individuals would have been materially increased, as is also *203 shown in our Findings of Fact.Based upon a consideration and weighing of all the evidence, we have hereinabove found as an ultimate fact, and we here hold, that petitioner was availed of during the taxable years for the purpose of avoiding the income tax with respect to its shareholders, by permitting its earnings and profits to accumulate instead of being divided or distributed. Wherefore, we decide the case for the respondent.Decision will be entered for the respondent.  Footnotes2. Before charge to surplus for $ 200,000 -- as a reserve for contingencies for flood loss in Connecticut, August 1955.↩1. Cash advances received from the factor in excess of accounts receivable sold to the factor.↩1. The stockholders of Princeton "sold the business" to Burlington Industries on or about December 31, 1959.↩2. In this connection, the following testimony given on cross-examination at the trial herein, by Max Doft, president of both petitioner and of Princeton, is illuminating:"Q. Mr. Doft, Princeton Knitting Mills had established credit from other sources, however?"A. From the bank, from their factors."↩