- 53 - 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:Page: Previous 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 Next
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