[Code of Federal Regulations]
[Title 26, Volume 7]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.537-2]

[Page 254]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.537-2  Grounds for accumulation of earnings and profits.

    (a) In general. Whether a particular ground or grounds for the 
accumulation of earnings and profits indicate that the earnings and 
profits have been accumulated for the reasonable needs of the business 
or beyond such needs is dependent upon the particular circumstances of 
the case. Listed below in paragraphs (b) and (c) of this section are 
some of the grounds which may be used as guides under ordinary 
circumstances.
    (b) Reasonable accumulation of earnings and profits. Although the 
following grounds are not exclusive, one or more of 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 provided the general requirements under Sec. Sec. 
1.537-1 and 1.537-3 are satisfied:
    (1) To provide for bona fide expansion of business or replacement of 
plant;
    (2) To acquire a business enterprise through purchasing stock or 
assets;
    (3) To provide for the retirement of bona fide indebtedness created 
in connection with the trade or business, such as the establishment of a 
sinking fund for the purpose of retiring bonds issued by the corporation 
in accordance with contract obligations incurred on issue;
    (4) To provide necessary working capital for the business, such as, 
for the procurement of inventories;
    (5) To provide for investments or loans to suppliers or customers if 
necessary in order to maintain the business of the corporation; or
    (6) To provide for the payment of reasonably anticipated product 
liability losses, as defined in section 172(j), Sec. 1.172-13(b)(1), 
and Sec. 1.537-1(f).
    (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:
    (1) Loans to shareholders, or the expenditure of funds of the 
corporation for the personal benefit of the shareholders;
    (2) Loans having no reasonable relation to the conduct of the 
business made to relatives or friends of shareholders, or to other 
persons;
    (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;
    (4) Investments in properties, or securities which are unrelated to 
the activities of the business of the taxpayer corporation; or
    (5) Retention of earnings and profits to provide against unrealistic 
hazards.

[T.D. 6500, 25 FR 11737, Nov. 26, 1960, as amended by T.D. 8096, 51 FR 
30484, Aug. 27, 1986]