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plainly, to use mathematical terminology, is a function
of a corporation's liquidity, that is, the amount of
idle current assets at its disposal. The question,
therefore, is not how much capital of all sorts, but
how much in the way of quick or liquid assets, it is
reasonable to keep on hand for the business. * * *
The taxpayer itself recognizes, and accepts, the
liquidity concept as a basic factor, for it "has agreed
that the full amount of its realized earnings invested
in its liquid assets--their cost--should be taken into
account in determining the applicability of Section
533(a)." * * * It concedes that if this were not so,
"the tax could be avoided by any form of investment of
earnings and profits." * * * But the taxpayer would
stop at the point of cost and, when it does so, is
compelled to compare earnings and profits--not the
amount of readily available liquid assets, net--with
reasonable business needs.
We disagree with the taxpayer and conclude that
cost is not the stopping point; that the application of
the accumulated earnings tax, in a given case, may well
depend on whether the corporation has available readily
marketable portfolio securities; and that the proper
measure of those securities, for purposes of the tax,
is their net realizable value. Cost of the marketable
securities on the assets side of the corporation's
balance sheet would appear to be largely an irrelevant
gauge of the taxpayer's true financial condition.
Certainly, a lender would not evaluate a potential
borrower's marketable securities at cost. Realistic
financial condition is the focus of the lender's
inquiry. It also must be the focus of the
Commissioner's inquiry in determining the applicability
of the accumulated earnings tax.
This taxpayer's securities, being liquid and
readily marketable, clearly were available for the
business needs of the corporation, and their fair
market value, net, was such that, according to the
stipulation, the taxpayer's undistributed earnings and
profits for the two fiscal years in question were
permitted to accumulate beyond the reasonable and
reasonably anticipated needs of the business.
Ivan Allen Co. v. United States, 422 U.S. at 629-630 (fn. refs.
omitted.)
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