(a) General Rule. -- The accumulated earnings tax imposed by section 531 shall apply to every corporation (other than those described in subsection (b)) 62 T.C. 644">*653 formed or availed of for the purpose of avoiding the income tax with1974 U.S. Tax Ct. LEXIS 61">*80 respect to its shareholders or the shareholders of any other corporation, by permitting earnings and profits to accumulate instead of being divided or distributed.

* * * *

SEC. 533. EVIDENCE OF PURPOSE TO AVOID INCOME TAX.

(a) Unreasonable Accumulation Determinative of Purpose. -- For purposes of section 532, 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.

* * * *

SEC. 537. REASONABLE NEEDS OF THE BUSINESS. -- For purposes of this part, the term "reasonable needs of the business" includes the reasonably anticipated needs of the business.

Before discussing the substantive issue, we shall first decide whether a certain letter is admissible into evidence as a vicarious admission of petitioner Atlantic Properties, Inc. During the cross-examination of Dr. Wolfson, president of petitioner, respondent offered into evidence a letter dated November 9, 1970, and addressed to Randolph Thrower, Commissioner, Internal Revenue Service, 1974 U.S. Tax Ct. LEXIS 61">*81 Boston, Mass. This letter was written by Mr. William H. Burke, Jr., in response to a letter he received from the Commissioner. Mr. Burke was a 25-percent stockholder in and a director of petitioner at the time he wrote the letter. Observing that Mr. Burke was not in the courtroom and, therefore, not available for cross-examination, petitioner objected to the letter as hearsay. Respondent argued that the letter was admissible as a vicarious admission of petitioner. Because of the importance of this letter to the instant case, we reserved ruling on admissibility and allowed the parties the opportunity to argue this point on brief.

On brief, respondent relies exclusively on rule 801(d)(2)(D) of the Rules of Evidence for United States Courts and Magistrates (Federal Rules of Evidence), which provides as follows:

(d) Statements which are not hearsay. A statement is not hearsay if --

* * * *

(2) Admission by party-opponent. The statement is offered against a party and is * * * (D) a statement by his agent or servant concerning a matter within the scope of his agency or employment, made during the existence of the relationship, * * *.

Adoption of the Federal Rules of Evidence1974 U.S. Tax Ct. LEXIS 61">*82 is under consideration by Congress. They have no force and effect at the present time. Pub. L. 93-12 (Mar. 30, 1973).

Rule 31(a), Tax Court Rules of Practice, in effect at the time this case was heard, and Rule 143(a) of our present Rules of Practice and 62 T.C. 644">*654 Procedure require use of the rules of evidence in trials without a jury in the United States District Court for the District of Columbia. The District of Columbia rules and our present Rule 143(a) incorporate by reference the Federal Rules of Civil Procedure. See Fed. R. Civ. P. 43.

Under the Federal Rules of Civil Procedure, the party relying on the concept of a vicarious admission of a principal by its agent must establish the agency relationship and prove further that the agent was authorized to make the statement, or if not so authorized, that the statement related to matters within the scope of the agency relationship. Wabisky v. D.C. Transit System, Inc., 309 F.2d 317 (C.A.D.C. 1962); Koninklijke Luchtvaart Maatschappij N.V. KLM v. Tuller, 292 F.2d 775 (C.A.D.C. 1961), certiorari denied 368 U.S. 921">368 U.S. 921 (1961); Arber v. American Airlines, Inc., 345 F.2d 1301974 U.S. Tax Ct. LEXIS 61">*83 (C.A. 1, 1965), certiorari denied 382 U.S. 907">382 U.S. 907 (1965).

Although respondent established that Mr. Burke was a shareholder and director of petitioner at the time he wrote the letter in question, respondent failed to show that Mr. Burke was an employee or agent of petitioner. Certainly Mr. Burke was not petitioner's agent in his capacity as a stockholder. Nor was he an agent of the petitioner in his capacity as a member of petitioner's board of directors. Restatement 2d, Agency, sec. 14C. Section 8 of article III of petitioner's bylaws specifically provides in part that:

No election, appointment or resolution by the Stockholders and no election, appointment, resolution, purchase, sale, lease, contract, contribution, compensation, proceeding or act by the Board of Directors or by any officer or officers shall be valid or binding upon the corporation until effected, passed, approved or ratified by an affirmative vote of eighty (80%) per cent of the capital stock issued outstanding and entitled to vote.

Petitioner's articles of organization contain similar restrictions with respect to the requirement of an 80-percent vote by the shareholders. Respondent1974 U.S. Tax Ct. LEXIS 61">*84 has not shown that Mr. Burke was expressly authorized by an 80-percent vote of the shareholders to speak for or otherwise represent the petitioner in any capacity. Certainly respondent's arguments regarding burden of proof under section 534 preclude any claim of ostensible authority or detrimental reliance. Since respondent failed to prove that Mr. Burke was an agent of the petitioner, Mr. Burke's letter is not admissible as a vicarious admission of petitioner. See 29 Am. Jur. 2d, Evidence, sec. 663; McCormick, Law of Evidence, sec. 244; 4 Wigmore, Evidence, sec. 1078, and authorities cited therein.

At the call of the case for trial, petitioner moved for a ruling that the burden of proof shifted to respondent under the provisions of 62 T.C. 644">*655 section 534² by reason of petitioner's statement filed pursuant to section 534(c). We held that petitioner had the burden of proving that the reasonable needs of the business required the accumulation of earnings and profits during the years in issue. See Chatham Corp., 48 T.C. 145">48 T.C. 145 (1967). Petitioner's charter and bylaws required an affirmative vote of 80 percent of the shareholders to authorize the performance1974 U.S. Tax Ct. LEXIS 61">*85 of any act which would bind the corporation. There is no evidence that the petitioner authorized Dr. Wolfson or anyone else to respond to the Commissioner's timely notice sent to petitioner on September 17, 1970, in accordance with section 534(b). Thus, neither Dr. Wolfson's nor Mr. Smith's letters (reproduced in our findings of fact) may be considered to be statements by the taxpayer for purposes of section 534(c). Assuming arguendo that such letters were statements by the taxpayer, insufficient facts were presented in support of the grounds set out as justification for the accumulations to shift the burden of proof with respect to such grounds to respondent. Wellman Operating Corporation, 33 T.C. 162">33 T.C. 162 (1959); I. A. Dress Co., 32 T.C. 93">32 T.C. 93 (1959), affd. 273 F.2d 543 (C.A. 2, 1960), certiorari denied 362 U.S. 976">362 U.S. 976 (1960); Dixie, Inc., 31 T.C. 415">31 T.C. 415 (1958), affd. 277 F.2d 526 (C.A. 2, 1960), certiorari denied 364 U.S. 827">364 U.S. 827 (1960). Furthermore, regardless of whether there was a shifting1974 U.S. Tax Ct. LEXIS 61">*86 of a limited burden of proof under section 534, we are satisfied on the evidence before us that the petitioner was availed of for the purpose of avoiding the income tax upon its shareholders by permitting earnings and profits to accumulate instead of being divided or distributed. See Pelton Steel Casting Co., 28 T.C. 153">28 T.C. 153 (1957), affd. 251 F.2d 278 (C.A. 7, 1958), certiorari denied 356 U.S. 958">356 U.S. 958 (1958).

1974 U.S. Tax Ct. LEXIS 61">*87

62 T.C. 644">*656 Whether a corporation has permitted its earnings and profits to accumulate beyond its reasonable needs and whether it was availed of for the purpose of avoiding the income tax with respect to its shareholders are both questions of fact. Helvering v. Nat. Grocery Co., 304 U.S. 282">304 U.S. 282 (1938). Since, in the first instance, it is for the corporate officers and directors to determine the reasonable needs of a particular business, we are reluctant to substitute our business judgment for that of corporate management unless the facts and circumstances, buttressed by the presumptive correctness of respondent's determination, require us to do so. Faber Cement Block Co., 50 T.C. 317">50 T.C. 317 (1968), acq. 1968-2 C.B. 2; Bremerton Sun Publishing Co., 44 T.C. 566">44 T.C. 566 (1965). We have consistently held that in determining whether the earnings and profits of any taxable year have been accumulated beyond the reasonable needs of the business, it is necessary to consider whether accumulated earnings and profits of prior years were sufficient to meet the taxpayer's reasonable business1974 U.S. Tax Ct. LEXIS 61">*88 needs (including reasonably anticipated needs) for the current year. Of course, the nature and availability of the prior year's accumulated surplus must be considered. To the extent accumulated surplus has been translated into plant expansion or inventories or other business-related assets, it is not available for meeting current or anticipated business needs. Conversely, when accumulated surplus is retained in the form of liquid assets, it is available to meet business needs, and if sufficient to meet the current and reasonably anticipated business needs of the corporation, there is a strong indication that any accumulation of profits of the current year is beyond the reasonable needs of the business. Novelart Manufacturing Co., 52 T.C. 794">52 T.C. 794 (1969), affd. 434 F.2d 1011 (C.A. 6, 1970), certiorari denied 403 U.S. 918">403 U.S. 918 (1971); John P. Scripps Newspapers, 44 T.C. 453">44 T.C. 453 (1965); Smoot Sand & Gravel Corporation v. Commissioner, 274 F.2d 495 (C.A. 4, 1960), affirming a Memorandum Opinion of this Court, certiorari denied 362 U.S. 976">362 U.S. 976 (1960);1974 U.S. Tax Ct. LEXIS 61">*89 sec. 1.535-3(b)(1)(ii), Income Tax Regs.

At the beginning of the taxable year ended November 30, 1965, petitioner had accumulated $ 256,626.86 in earnings and profits. Current assets ($ 177,385.69 of which $ 164,408.47 was in cash) exceeded current liabilities ($ 21,268.82) resulting in net current assets of $ 156,116.87 and an 8.3 to 1 current ratio. Based on the evidence presented and for the reasons discussed further, we conclude that petitioner failed to show a need to accumulate earnings during the years in controversy beyond such amounts accumulated as of the beginning of the taxable year ended November 30, 1965.

Dr. Wolfson, a 25-percent shareholder in and director and officer of petitioner, testified that since the petitioner's shareholders could not agree on what repairs or capital improvements needed to be performed 62 T.C. 644">*657 on petitioner's buildings, petitioner hired an engineering consulting firm in 1962 to make such determination and to estimate the costs thereof. The firm prepared a report dated June 5, 1962, which estimated the cost of recommended repairs and capital improvements to be $ 296,040. The first page of this report reads in part as follows:

A report 1974 U.S. Tax Ct. LEXIS 61">*90 covering a general survey of the buildings at the Atlantic Properties Incorporated, Endicott Street, Norwood, Massachusetts has been made by this office. These buildings are shown on a general plan in the survey report. The purpose of this survey is to determine whether the existing buildings require capital improvements to put them into rentable condition or whether minor repairs and a general "sprucing-up" will accomplish the same purpose. Also included is a general survey of the water service, plumbing, sprinklers, heating plant, electric service and roads.

In surveying each building we have made a cursory investigation of the conditions of the foundation, exterior walls, windows, doors, roof, including gutters and flashings, floors, elevators, plumbing, heating and sprinklers. We have not listed in the report what was found to be in good condition, only that which was found to require repairs or alteration.

Estimated costs noted throughout this report should be considered only as a guide to the costs of the various alterations or repairs. Actual costs can only be obtained from detailed examination of the various phases of the work to be done and bid prices based upon carefully1974 U.S. Tax Ct. LEXIS 61">*91 drawn-up plans and specifications. [Emphasis added.]

It is clear from the face of the report that the estimated costs were intended only as a guide. The engineer who performed the survey and prepared the report did not testify and thus we do not know what, if any, were his qualifications as a consulting engineer, nor can we be certain of all the assumptions he used and factors he considered in preparing the report. Under the circumstances, the $ 296,040 estimate is entitled to little weight, Dixie, Inc., 31 T.C. 415">31 T.C. 415 (1958), and was admitted into evidence for the limited purpose of showing that Dr. Wolfson partially relied on the report in forming his opinion as to the reasonable needs of petitioner's business.

On the basis of the consulting engineer's report and his own knowledge and experience in real estate, Dr. Wolfson testified that prior to and during the years in controversy he was of the opinion that necessary repairs and improvements would cost between $ 300,000 and $ 400,000. On close questioning by petitioner's counsel, Dr. Wolfson testified that by 1968 he was of the opinion that necessary repairs and improvements on petitioner's property1974 U.S. Tax Ct. LEXIS 61">*92 could be effected for $ 250,000. Such testimony is inconclusive at best. Dr. Wolfson failed to clearly and convincingly testify as to who would perform what work on which buildings and improvements, when the work would be performed, and how much it would cost. Paul T. Smith, a 25-percent shareholder in and director and officer of petitioner, testified that all shareholders, except Dr. Wolfson, favored payment of dividends during each of the 62 T.C. 644">*658 years in controversy and believed that at least some of the accumulation of earnings in each of the years in issue was beyond the reasonable needs of the petitioner's business. Stipulated transcripts of certain meetings of the petitioner's board of directors corroborate this testimony.

Section 537(a) provides that the reasonable needs of the business includes the reasonably anticipated needs of the business. Section 1.537-1(b)(1), Income Tax Regs., reads as follows:

(b) Reasonably anticipated needs. (1) In order for a corporation to justify an accumulation of earnings and profits for reasonably anticipated future needs, there must be an indication that the future needs of the business require such accumulation, and the corporation1974 U.S. Tax Ct. LEXIS 61">*93 must have specific, definite, and feasible plans for the use of such accumulation. Such an accumulation need not be used immediately, nor must the plans for its use be consummated within a short period after the close of the taxable year, provided that such accumulation will be used within a reasonable time depending upon all the facts and circumstances relating to the future needs of the business. Where the future needs of the business are uncertain or vague, where the plans for the future use of an accumulation are not specific, definite, and feasible, or where the execution of such a plan is postponed indefinitely, an accumulation cannot be justified on the grounds of reasonably anticipated needs of the business.

Were we to stop here, the record reveals that petitioner has failed to establish a reasonable need to accumulate its earnings and profits in each of the years in controversy. However, even if petitioner had shown that present and future needs of the business required the accumulations during the years in issue, the evidence shows that the petitioner lacked a specific, definite, and feasible plan during the years in issue which could be expected to be executed 1974 U.S. Tax Ct. LEXIS 61">*94 within a reasonable time. There is no evidence that petitioner's shareholders or board of directors formally or informally adopted such a plan. See 31 T.C. 415">Dixie, Inc., supra;Bremerton Sun Publishing Co., 44 T.C. 566">44 T.C. 566 (1965). In fact, Dr. Wolfson testified in part as follows:

The repairs that we did do were all done under sort of an emergency basis, that we had to do it whether we wanted to or not. We didn't actually go out and do anything that wasn't absolutely essential to exist for the place.

* * * *

I was against the policy of doing things only when it was absolutely demanding so that we can keep doing business, and I wanted to repair things ahead of time.

Whatever plan may have existed in Dr. Wolfson's mind was clearly not that of the petitioner and insufficient to justify the retention of earnings by petitioner over and above those already accumulated at the beginning of the taxable years in controversy. Hedberg-Freidheim Cont. Co. v. Commissioner, 251 F.2d 839 (C.A. 8, 1958), affirming a Memorandum Opinion of this Court; Nemours Corporation, 38 T.C. 585">38 T.C. 585 (1962),1974 U.S. Tax Ct. LEXIS 61">*95 affd. 325 F.2d 559 (C.A. 3, 1963).

62 T.C. 644">*659 Having decided that petitioner's accumulations during each of the years in issue were beyond the reasonable needs of the business, we must next decide whether petitioner was availed of for the proscribed purpose. Petitioner has the burden of showing by a preponderance of the evidence that it was not availed of for the purpose of avoiding the income tax with respect to its shareholders. Sec. 533(a), I.R.C. 1954; sec. 1.533-1(b), Income Tax Regs.

In an attempt to rebut the presumption contained in section 533(a), petitioner relies heavily on the conflict in management philosophy that existed between its shareholders and deadlocked its board of directors. Briefly, petitioner's charter and bylaws required an affirmative vote of 80 percent of the shares entitled to vote in order to approve any act which would bind the corporation. Accordingly, such vote was required to approve a resolution by the board of directors to pay dividends or to utilize earnings and profits to effect necessary repairs and capital improvements. Prior to, during, and after the years in controversy, shareholders owning 75 percent of the1974 U.S. Tax Ct. LEXIS 61">*96 stock voted in favor of payment of substantial dividends, but Dr. Wolfson who owned a 25-percent voting interest in petitioner consistently vetoed dividends allegedly because he was of the opinion that repairs and capital improvements were needed to ensure petitioner's continued financial success. Petitioner argues that since shareholders representing 75 percent of the voting stock consistently voted in favor of dividends any presumption of the prohibited purpose with respect to these shareholders is negated. On the basis of the record herein, we agree. With respect to Dr. Wolfson, petitioner argues that even assuming that his business judgment was incorrect there is nothing in the record to indicate the prohibited tax avoidance purpose. We disagree.

In addition to cases which are factually distinguishable from the case in issue, petitioner relies on Casey v. Commissioner, 267 F.2d 26 (C.A. 2, 1959), reversing a Memorandum Opinion of this Court, which involved a shareholder deadlock precluding distribution of dividends. In that case, the Second Circuit reversed our finding as to one of the years involved and held that the accumulation for that1974 U.S. Tax Ct. LEXIS 61">*97 year was for the reasonable needs of the business. The Court of Appeals never determined whether showing a shareholder deadlock precluding distribution of dividends, without more, was sufficient to rebut the section 533(a) presumption of the purpose to avoid income tax with respect to shareholders.

A corporation should not be liable for the accumulated earnings tax if it accumulates for reasons other than the forbidden purpose of section 532(a) even though earnings may have been accumulated out of caprice, spite, miserliness, or stupidity rather than for sound business 62 T.C. 644">*660 reasons. See 44 T.C. 566">Bremerton Sun Publishing Co., supra; Bittker & Eustice, Federal Income Taxation of Corporations and Shareholders, sec. 8.02 (3d ed. 1971). However, that proposition does not apply to this case because the petitioner has failed to prove by a preponderance of the evidence that during the years in issue the earnings and profits were not accumulated for the prohibited purpose.

The evidence clearly shows that during the years in controversy there was a consistent increase in retained earnings and working capital facilitated by petitioner's failure to pay dividends 1974 U.S. Tax Ct. LEXIS 61">*98 or salaries to its shareholders, directors, and officers resulting in substantial tax savings to the individual shareholders. See Factories Investment Corporation, 39 T.C. 908">39 T.C. 908 (1963), affd. 328 F.2d 781 (C.A. 2, 1964); Dixie, Inc., 31 T.C. 415">31 T.C. 415 (1958); Kerr-Cochran, Inc., 30 T.C. 69">30 T.C. 69 (1958). Excessive current ratios during the years in controversy constitute another factor damaging to petitioner's position. I. A. Dress Co., 32 T.C. 93">32 T.C. 93 (1959); 44 T.C. 566">Bremerton Sun Publishing Co., supra.

We conclude that Dr. Wolfson's refusal to permit the payment of dividends by petitioner was for the purpose of avoiding income tax he would be required to pay if petitioner paid dividends or salaries to him. While it is unusual for a minority shareholder to precipitate the unreasonable accumulation for avoidance of income tax on his income, it is also unusual for a corporate charter to require an 80-percent vote for almost all business decisions, including declaration of dividends. Because of his ownership of 25 percent of the1974 U.S. Tax Ct. LEXIS 61">*99 voting power, Dr. Wolfson was able to block the payment of dividends and effectively avoid payment of income tax. During each of the years in issue, Dr. Wolfson was in a high tax bracket and indicated a willingness to transfer his stock in petitioner to the Wolfson Foundation. This, plus Dr. Wolfson's lack of a specific, definite, feasible plan for the use of accumulated earnings leads us to conclude that tax avoidance was at least one purpose for Dr. Wolfson's consistent veto of resolutions favoring payment of dividends. See United States v. Donruss Co., 393 U.S. 297">393 U.S. 297 (1969). A tax avoidance motive need not be attributed to every shareholder in order to find that tax avoidance was one of the purposes for accumulation. Golconda Mining Corp., 58 T.C. 139">58 T.C. 139 (1972), on appeal (C.A. 9, Nov. 15, 1972).

Considering the entire record, we conclude that during the years in controversy, the petitioner allowed earnings and profits to accumulate beyond the reasonable needs of the business. Petitioner's showing of the shareholder deadlock, without more, is insufficient to rebut the section 533(a) presumption occasioned by this1974 U.S. Tax Ct. LEXIS 61">*100 conclusion. Since the petitioner has failed to prove by a preponderance of the 62 T.C. 644">*661 evidence that during the years in issue the earnings and profits were not accumulated for the purpose of avoiding the income tax with respect to its shareholders, we hold that for the taxable years before us petitioner is subject to the accumulated earnings tax imposed by section 531 of the Code, and the respondent's determination is sustained.

Decision will be entered for the respondent.