Rev. Proc. 56-11

SECTION 1. PURPOSE.

The purpose of this Revenue Procedure is to set forth procedures for the preparation and mailing of the notification letter provided for by section 534(b) of the Internal Revenue Code of 1954 in all cases where the examination of a corporation discloses evidence that its earnings and profits have been permitted to accumulate beyond the reasonable needs of the business.

SEC. 2. BACKGROUND.

.01 Section 534(a) of the Code provides, in general, that the burden of proof before the Tax Court of the United States, with respect to the allegation that a corporation has permitted earnings and profits to accumulate beyond its reasonable business needs, shall be on the Commissioner of Internal Revenue if a notification was not sent to the taxpayer in accordance with section 534(b). The notification must be sent by registered mail and must inform the taxpayer that the proposed notice of deficiency will include an amount with respect to the accumulated earnings tax imposed by section 531. Within thirty days (or such greater period as may be prescribed by regulations) after the mailing of the notification, the taxpayer may submit a statement of the grounds, together with sufficient supporting facts, on which it relies to establish that its earnings and profits had not been accumulated beyond the reasonable needs of the business.

.02 Section 4 of the Act of August 11, 1955, Public Law 367, 84th Cong., 69 Stat. 689, 26 U.S.C. 4218, C.B. 1955-2, 768, amended section 534 of the Code to provide that the notification requirement shall apply to all proceedings tried on the merits before the Tax Court after the date of enactment of the amendment. Accordingly, section 534 is now also applicable to taxable years to which section 102 of the Internal Revenue Code of 1939 applies.

SEC. 3. PROCEDURE.

.01 If it is determined upon examination that a corporation was formed or availed of for the purpose of avoiding income tax on its stockholders by permitting its earnings and profits to accumulate, the notification letter will be mailed prior to the mailing of the deficiency notice. As a general rule, the deficiency notice will not be issued until the period of time, including any extension thereof, for submission of the statement has elapsed. These procedures, however, will be appropriately modified in any case where the impending expiration of the statutory period of limitation, or similar compelling circumstances, require earlier issuance of the deficiency notice.

.02 Upon receipt in the office of a District Director of Internal Revenue or in the office of the Regional Appellate Division, of a timely statement submitted in response to the notification letter, the statement shall be carefully considered and, if the conclusion is reached that taxpayer has successfully demonstrated that its earnings and profits had not been accumulated beyond the reasonable needs of the business, the proposed allegation shall be abandoned.

.03 A separate notification letter need not be sent prior to the mailing of the notice of deficiency if a jeopardy assessment under section 273(a) of the 1939 Code or section 6861(a) of the 1954 Code is made. In such instances, the deficiency notice, which must be mailed within 60 days after the date of assessment, shall itself constitute the notification if it informs the taxpayer that the deficiency includes the tax imposed by section 102 (1939 Code) or section 531 (1954 Code). The taxpayer's statement may then be included in its petition to the Tax Court.

SEC. 4. AUTHORITY TO ISSUE NOTIFICATION LETTERS.

Operating officials who hold delegations or redelegations of authority to sign notices of deficiency are also empowered to sign notification letters, such authority being derived from Treasury Department Order 150-36, C.B. 1954-2, 733.

SEC. 5. INQUIRIES.

Inquiries relating to this Revenue Procedure should be addressed to the Assistant Commissioner (Operations), for the attention of O:A:PPr.