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United States v. Donruss Co.

United States Supreme Court

393 U.S. 297 (1969)

Facts

Donruss Co. (plaintiff), a candy company, increased its earnings between 1955 and 1961. The earnings were not distributed. Donruss co-owner Don Wiener held all the company’s outstanding stock. The Commissioner of Internal Revenue assessed an accumulated-earnings tax—a penalty tax—against Donruss for 1960 and 1961. Wiener paid the tax and brought suit for a refund. Wiener’s argument was that Donruss accumulated earnings for various reasons unrelated to avoiding the shareholder income tax that would be triggered by a dividend distribution. These reasons included inventory and overhead costs, as well as general economic-risk factors. The court found in favor of Donruss, holding that the accumulated-earnings tax was not proper unless tax avoidance was the sole purpose of a company’s accumulation policy. The appellate court affirmed. The United States government (defendant) appealed. The United States Supreme Court granted certiorari.

Rule of Law

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Issue

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Holding and Reasoning (Marshall, J.)

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