Court Opinion

ID: 4483925
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:16:23.413468+00
Date Added: 2024-06-11T14:54:03.707362
License: Public Domain

Chabot, /., concurring: I agree with the majority’s analysis, but take this opportunity to emphasize one point that persuades me that the interpretation respondent gives the accumulated earnings tax provisions by his revised Rev. Proc. 72-11,72-1 C.B. 732, issued on April 3,1972, is inconsistent with the statute. Rev. Proc. 72-11 provides that where a corporate taxpayer permits its earnings and profits to unreasonably accumulate for a year, these accumulations will not be subject to the accumulated earnings tax if the corporation distributes the exact maximum amount of dividends allowed by the Guidelines for Dividend Payments. Rev. Proc. 72-42, 1972-2 C.B. 823, provides that, if a corporation distributes more than the maximum permitted by the guidelines, then it can obtain the protection of Rev. Proc. 72-11 only by repayment of the excess dividends on or before a certain date as a contribution to capital. The effect of these two revenue procedures is that a corporation that distributes $1 less than the maximum amount permitted by the guidelines, or $1 more than the maximum amount permitted by the guidelines (unless the excess is repaid), will expose its entire accumulation for the year to the accumulated earnings tax. Thus respondent has created a “notch” whereby a corporation that miscalculates its dividend distribution by $1 for whatever reason may be liable for an accumulated earnings tax that could be very large in dollar amount. I believe that the statute does not provide, and that the Congress did not intend, that so extreme a sanction be imposed because a corporation did not distribute the exact maximum allowed by the guidelines but instead distributed some lesser or greater amount no matter how small the variance. Section 531 of the Internal Revenue Code of 1954 imposes the accumulated earnings tax on “accumulated taxable income.” In general, section 535 of the Code defines “accumulated taxable income” as taxable income with certain adjustments less the accumulated earnings credit under section 535(c) of the Code for earnings and profits retained for the reasonable needs of the business1 and less the dividends paid deduction under section 561 of the Code. Thus, under this statutory scheme, each additional $1 of taxable income (or $1 of adjustments, or $1 of reasonable needs of the business, etc.) changes by only $1 the base for the accumulated earnings tax. Respondent’s revenue procedures have the effect that if a corporation does not distribute the exact amount that could be distributed under the guidelines, the portion of the accumulation that would otherwise be considered as having been retained for the reasonable needs of the business (by virtue of the guidelines) becomes subject to the tax. This result is inconsistent with the accumulated earnings credit provisions which provide a credit for earnings and profits retained for reasonable needs of the business. Thus, the “notch” concept that respondent has created through his revenue procedures is clearly at odds with the statutory scheme and should not be given effect.  The 1939 Code provided no credit or exclusion with respect to the accumulated earnings tax so that, if a corporation were held to be subject to the tax, then its entire undistributed net income (with minor adjustments) was subject to the tax. In enacting the Internal Revenue Code of 1954, the Congress, to alleviate this situation, provided for a credit for the profits of the taxable year which are retained for the reasonable needs of the business. The Senate Finance Committee report (S. Rept. 83-1622, to accompany H.R. 8300 (Pub. L. 83-591), p. 72 (1954)) described the purpose of the provision as follows: (2) Changes made by committee Your committee has substantially revised the accumulated earnings credit provided by the House bill. It has provided a credit for the profits of the taxable year which are retained for the reasonable needs of the business and provided that in no case is this credit to be less than the amount by which $60,000 exceeds the accumulated profits of the corporation as of the end of the prior year. This in effect provides two changes in present law. In the future this tax will apply only to the amount unreasonably accumulated. Moreover, in no case will the tax be imposed on any corporation which has not accumulated earnings to the extent of $60,000. However, earnings may, of course, be accumulated in excess of $60,000 where the accumulation is for the reasonable needs of the business. Your committee has provided that this tax is to be imposed only on the amount unreasonably accumulated because it sees no justification for imposing a penalty tax on accumulated earnings to the extent that the earnings were needed in the business. It is believed that it is this aspect of the tax which taxpayers generally find particularly alarming, because, while they may be confident that they can justify the accumulation of most of their earnings, they may feel less certain about a minor portion of their accumulations and fear that this will subject their entire accumulated earnings to tax. This Senate amendment (No. 125) was agreed to by the House of Representatives without change (H. Conf. Rept. 83-2543, to accompany H.R. 8300 (Pub. L. 83-591), pp. 1, 49-50 (1954)) and now appears as sec. 535(cXl) of the Code.