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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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