Northwestern Indiana Telephone Company - Page 53

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            corporation's reasonable business needs.  In Smoot Sand & Gravel                           
            Corp. v. Commissioner, 274 F.2d at 500-501, the Court of Appeals                           
            for the Fourth Circuit explained:                                                          

                  the size of the accumulated earnings and profits or                                  
                  surplus is not the crucial factor; rather, it is the                                 
                  reasonableness and nature of the surplus.  * * *                                     
                  Again, to the extent the surplus has been translated                                 
                  into plant expansion, increased receivables, enlarged                                
                  inventories, or other assets related to its business,                                
                  the corporation may accumulate surplus with impunity.                                
                  * * *                                                                                

                  In Ivan Allen Co. v. United States, supra, the taxpayer had                          
            substantial accumulated earnings and profits and owned certain                             
            readily marketable securities that had considerably appreciated                            
            in value.  The issue presented to the Supreme Court was whether                            
            in determining the applicability of the rebuttable presumption                             
            provided in section 533(a) (i.e., whether the taxpayer's earnings                          
            had accumulated beyond the reasonable needs of the business so                             
            that the taxpayer should be presumed to have the purpose to avoid                          
            income with respect its shareholders), the taxpayer's securities                           
            were to be taken into account at their cost to the corporation or                          
            at their net liquidation value.  Id. at 619.                                               
                  In holding that the securities were to be taken into account                         
            at their net liquidation value, rather than cost, the Supreme                              
            Court recognized that a comparison of the taxpayer's liquidity to                          
            its business needs was highly significant in deciding the                                  
            reasonableness of the taxpayer's accumulation of earnings.  It                             
            explained:                                                                                 



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