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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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