Corporation Challenges Accumulated Earnings Tax Liability

BAN & BHAT ENTERPRISE INC., 
Petitioner, 
COMMISSIONER OF INTERNAL REVENUE,
Respondent.

UNITED STATES TAX COURT

PETITION

Petitioner, Ban & Bhat Enterprise Inc., hereby petitions for a redetermination of the deficiencies set forth by the Commissioner of Internal Revenue in the Commissioner's notice of deficiency dated August 11, 2021. As the basis for the petition, petitioner alleges as follows:

1. Petitioner is an active, California corporation whose primary place of business is 294 Curie Drive, San Jose, CA 95119.

2. Petitioner timely filed Forms 1120, U.S. Corporation Income Tax Return, for the tax years ending November 30, 2018 and November 30, 2019.

3. The notice of deficiency was mailed to petitioner on August 11, 2021 and was issued by the Internal Revenue Service office located at 55 South Market Street, HQ 4630 90 Day, San Jose, CA 95113-2397. A copy of the notice of deficiency, including so much of the statement and schedules accompanying the notice as is material and redacted as provided by Rule 27, is attached to the petition as Exhibit A.

4. The deficiencies as determined by the Commissioner are in income tax for the taxable years 2018 and 2019 in the amounts of $86,276.00 and $81,233.00, respectively. Petitioner disputes the full amounts of the determined deficiencies.

5. The determination of the tax set forth in the said notice of deficiency is based upon the following errors:

a. Respondent erred in determining that petitioner is liable for an accumulated earnings tax in the amount of $86,276.00 for the 2018 tax year.

b. Respondent erred in determining that petitioner is liable for an accumulated earnings tax in the amount of $81,233.00 for the 2019 tax year.

6. The facts upon which petitioner relies, as the basis of petitioner's case, are as follows:

a. During the 2018 and 2019 tax years, petitioner had no accumulated taxable income.

b. During the 2018 and 2019 tax years, petitioner's earnings and profits did not accrue beyond the reasonable needs of the business.

i. During 2018 and 2019, petitioner was accruing earnings and profits so that it could purchase real property.

ii. Petitioner's intent to purchase such property is reflected in petitioner's corporate minutes recorded during such years.

iii. Moreover, petitioner, through its shareholder, inquired about acquiring such property during the years at issue.

iv. Petitioner provided contemporaneous documents reflecting such inquiries to respondent during the audit.

v. As any accumulation of earnings and profit were for the reasonable needs of the business, petitioner had no accumulated taxable income during the 2018 and 2019 tax years.

c. To the extent that petitioner accumulated income beyond the reasonable needs of its business, tax avoidance was not one of the purposes for the accumulation of income.

i. Petitioner's sole shareholder and officer is inexperienced in tax matters.

ii. Petitioner's sole shareholder formed petitioner in 2014.

iii. In 2014, marginal tax rates for corporations were as high as 39%.

iv. In setting up a part of her business within the corporation in 2014, petitioner's sole shareholder entered an inefficient tax arrangement.

v. As petitioner was formed and began to accumulate funds with a view towards acquiring real property prior to the 2018 tax rate reduction, petitioner's accumulation of income was not premised on tax avoidance.

vi. Because petitioner was not formed or availed for the purpose of avoiding the income tax with respect to its shareholder, respondent erred in determining that petitioner is liable for the accumulated earnings tax for the 2018 and 2019 tax years.

d. Respondent imposed an erroneous and excessive rate for the accumulated earnings tax.

i. For the 2018 tax year, respondent erroneously determined that petitioner's accumulated taxable income was $219,618.00.

ii. Respondent imposed an accumulated earnings tax rate of 39.6 percent on petitioner's erroneously determined accumulated taxable income for the 2018 tax year.

iii. The accumulated earnings tax rate for the 2018 tax year was 20 percent.

iv. For the 2019 tax year, respondent erroneously determined that petitioner's accumulated taxable income was $205,135.00.

v. Respondent imposed an accumulated earnings tax rate of 39.6 percent on petitioner's erroneously determined accumulated taxable income for the 2019 tax year.

vi. The accumulated earnings tax rate for the 2019 tax year was 20 percent.

vii. Respondent erred in imposing an accumulated earnings tax rate of 39.6 percent for the 2018 and 2019 tax years.

e. Respondent has the burden of proof as to his determination that all or any part of petitioner's earnings and profits have accumulated beyond the reasonable needs of the business; respondent improperly denied petitioner an Appeals conference, causing petitioner to incur unnecessary litigation costs.

i. On May 6, 2021, respondent issued petitioner a Letter 950, advising petitioner of respondent's intent to impose the taxes at issue in this case and advising petitioner of its right to request an Appeals conference on or before June 5, 2021.

ii. The May 6, 2021 Letter 950 was a notification described in I.R.C. § 534(b).

iii. By letter dated May 31, 2021, petitioner, through its representative, mailed to respondent, to the address shown on the Letter 950, a protest letter requesting an Appeals conference.

iv. Petitioner mailed its May 31, 2021 protest letter to respondent via certified mail, return receipt requested with a U.S. Postal Service (USPS) tracking number of 70203160000019211928.

v. The LISPS' records reflect that the protest letter was delivered to respondent on June 4, 2021.

vi. The burden of proof is therefore on respondent to establish that petitioner accumulated earnings and profits beyond the reasonable needs of the business with respect to the grounds set forth in the protest letter.

vii. While USPS' records indicate that respondent timely received the protest letter on June 4, 2021, respondent's revenue agent alleges in his activity report that the protest letter was received on
June 10, 2021.

viii. Respondent then "determined Protest Letter to be inadequate as Representative does not provide facts, law, or authority supporting the position for the issue. Representative also states that additional information will be provided to Appeals. Revenue Agent contacted Representative and stated the Protest Letter/Request for Appeals is inadequate based on the above and informed Representative that Appeals will not review information that was not provided during the exam. Revenue Agent also informed Representative the case will be closed to SNOD." Examining Officer's Activity Record, June 10, 2021.

ix. The protest letter raised the same ground that was raised previously during the audit — that the accumulated earnings were necessary to pay for legitimate business needs.

x. Moreover, the protest letter pointed out that respondent's calculation of the accumulated earnings tax was erroneous.

xi. Despite these clear grounds for the basis of the protest, respondent arbitrarily denied petitioner an Appeals conference.

xii. Respondent's arbitrary decision denied petitioner its right to an Appeals conference and caused petitioner to incur unnecessary litigation expenses.

WHEREFORE, petitioner prays that this Court hear this proceeding and order as follows:

(1) Finding and ordering that the deficiencies in tax that the Commissioner determined for the 2018 and 2019 tax years are erroneous; and

(2) Granting such other relief to petitioner as this Court may deem proper.

Date: October 22, 2021

Respectfully submitted,

Nicholas R. Rosado
Counsel for Petitioner
Tax Court Bar No. RN0128
111 North Market Street, Suite 300
San Jose, CA 95113
Telephone: 408-217-2476
Facsimile: 408-213-4167
Email: rosado@rosadotaxlaw.com