Northwestern Indiana Telephone Company - Page 56

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            NITCO's Net Liquid Assets                                                                  

                  Petitioners contend that NITCO's accumulated earnings and                            
            profits are "irrelevant" and that only NITCO's net liquid assets                           
            should be considered in connection with NITCO's reasonable                                 
            business needs and its liability for accumulated earnings tax                              
            during the years in issue.  They argue that the accumulated                                
            earnings tax is directed at "economic reality" and that this                               
            relevant economic reality (NITCO's dividend-paying capacity) is                            
            to be determined solely by examining NITCO's available net liquid                          
            assets.                                                                                    
                  Respondent, on the other hand, asserts that NITCO's true                             
            dividend-paying capacity is not accurately reflected by NITCO's                            
            remaining net liquid assets, because of NITCO's substantial                                
            expenditures, during 1987 through 1989, for the personal benefit                           
            of Mr. Mussman's family.  We agree with respondent.                                        
                  We have no quarrel with, and the case law completely                                 
            supports, the proposition that where a corporation's net liquid                            
            assets have been invested in nonliquid, business-related assets,                           
            the corporation has appropriately diminished its dividend-paying                           
            capacity for accumulated earnings tax purposes.  In such                                   
            instances, the corporation's accumulated earnings have been                                
            applied to meet its reasonable business needs.  However, this is                           
            not the same situation that we are presented with in the instant                           
            cases.                                                                                     





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