Moore, Smith and Anderson, Circuit Judges.
This is a petition for review of a decision of the Tax Court. The petitioning taxpayer, Sears Oil Co. (Sears), is a distributor of petroleum products in north-central New York State. The Commissioner of Internal Revenue asserted in a notice of deficiency that taxpayer underpaid its federal income tax for the years 1957 and 1958 by $60,637.40 and $51,560.74, respectively. The Commissioner maintained that taxpayer was subject to an accumulated earnings tax for the years in question, and in addition disallowed certain deductions taken for those years. Taxpayer petitioned the Tax Court for review of the asserted deficiencies. The Tax Court generally upheld the position of the Commissioner, although it reduced the amount of the deficiencies to $58,781.65 for 1957 and $41,414.43 for 1958. 24 CCH Tax Ct. Mem. 207 (1965).
1. Was Taxpayer Subject to Accumulated Earnings Tax for the Years 1957 and 1958 ?
Under Section 532(a) of the Internal Revenue Code of 1954, the accumulated earnings tax applies to every corporation "availed of for the purpose of avoiding the income tax with respect to its shareholders or the shareholders of any other corporation, by permitting earnings and profits to accumulate instead of being divided or distributed." Under Section 533(a),
"the fact that the 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."
Since taxpayer did not submit a statement under Section 534(c) after it received a notification under Section 534(b) that a proposed notice of deficiency included an amount with respect to the accumulated earnings tax, the burden of proof remained with taxpayer. See R. Gsell & Co. v. Commissioner, 294 F.2d 321 (2d Cir. 1961).
As in most accumulated earnings cases, the pivotal question is whether earnings were allowed to accumulate beyond the reasonable needs of the business. The question does not lend itself to punch card solution since every stencil is different. Each business has its own history, its own problems and managerial policies. Previous cases at best supply general principles for guidance. The record in the present case indicates the difficulty of the task and the need for care in the application of standards.
The stipulation of facts and the testimony at trial furnish the following picture of the activities of taxpayer and related companies. Sears and companies under common ownership with it (the affiliates) engage in the petroleum products business. One company, Sears Realty Co., Inc., holds title to 10 of 12 gasoline service stations operated by Sears under a lease. Another, Sears Apartments, Inc., held title to the office building where the companies were located. The sole asset of a third company (Rome Transportation Co.) is a barge used to transport petroleum products in the Hudson River and the Barge Canal, for Sears and other oil companies. A fourth company, Sears Petroleum and Transport Corporation, owns and operates a deep water terminal at Albany, N. Y., and a fifth, M.A. Co., a partnership, operates a gasoline service station. Neither Sears nor any of the affiliated companies ever has paid a dividend, except stock dividends. Sears' earned surplus rose steadily and uniformly from $549,699.67 in 1948 to $1,114,841.33 in 1958 (including transfers to capital).
Prior to 1953 Sears engaged mostly in the sale of gasoline through leased service stations and in the sale of kerosene and fuel oil for domestic use. Beginning in 1953, however, Sears determined to expand into the heavy fuel oil business, for sale to industrial and institutional customers. Accordingly, the related companies began construction of a barge terminal and heavy oil storage facility, completed in 1955 for lease to Sears, and a deep-water terminal and heavy oil storage facility in Albany, used to handle oil cargoes directly from oceangoing tankers. This facility was partially completed in 1957 and leased to Sears. Sears itself began construction of additional storage facilities with 400,000 barrel heavy oil capacity, and in 1957 purchased two oil barges, at a cost of about $450,000, and outfitted them.
Relevant financial data follow:
Notes & Fixed assets Cash &
Dec. Gross accounts after depre- unrelated
31 Sales Inventory receivable ciation investments
1948 Unavailable $701,269.64 $109,423.40 $143,754.16 $140,130.64
1949 Unavailable 502,535.70 233,749.51 204,684.08 163,885.76
1950 $1,801,457.17 722,176.16 280,538.67 266,271.19 188,677.28
1951 2,178,265.46 795,331.37 372,311.17 296,186.55 109,079.91
1952 2,502,698.87 794,658.38 393,508.86 247,278.59 92,197.70
1953 3,075,940.98 648,030.74 470,099.11 195,870.39 113,542.24
1954 3,537,630.94 899,555.30 426,057.16 180,461.27 99,694.66
1955 3,933,412.12 1,466,097.69 573,101.01 239,398.85 80,335.24
1956 4,522,959.43 2,121,040.96 421,923.52 209,166.06 125,863.00
1957 5,429,075.41 3,074,992.50 842,348.82 636,339.29 156,814.64
1958 6,945,519.32 3,085,925.67 747,680.01 ...