While diversification is now considered a legitimate corporate need authorizing the accumulation of earnings and profits, the present standards of the Regulations under section 531, which, in general, test the reasonableness of corporate accumulations by the requirement of "specific, definite, and feasible plans" for use of the funds, seem too restrictive in terms of the problems of diversification as outlined above. In light of this criticism and of recent developments, the purposes of this comment are (1) to indicate the basic principles of section 531, an understanding of which is vital to corporations anticipating retention of funds for the purpose of diversification; (2) to identify, with respect to the standards guiding the imposition of the accumulated earnings tax, the problems which Congress, the Internal Revenue Service, and the courts have for some time skirted but must now consider forthrightly; and (3) to outline a more realistic approach for testing the application of the accumulated earnings penalty tax.

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