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The accumulated earnings and profits of prior years are
taken into consideration in determining whether any amount of the
earnings and profits of the taxable year has been retained for
the reasonable needs of the business. See sec. 1.535-
3(b)(1)(ii), Income Tax Regs. The critical factor is not the
monetary size of the accumulated earnings and profits, but the
corporation’s liquid position and the relation of that position
to the corporation’s current and anticipated needs. See Ivan
Allen Co. v. United States, supra at 628; Faber Cement Block Co.
v. Commissioner, 50 T.C. 317, 329 (1968). Thus, the first step
is to determine petitioner’s net liquid assets for the purpose of
determining the funds available to petitioner to meet its
business needs. See Wilcox Manufacturing Co. v. Commissioner,
T.C. Memo. 1979-92 (citing Faber Cement Block Co. v.
Commissioner, supra at 330). Petitioner’s liquid assets
available are calculated as current assets less current
liabilities for each tax year in issue. The parties have
stipulated that the amounts of petitioner’s net liquid assets
were $4,970,026, $4,732,151, and $4,909,323 in 1995, 1996, and
1997, respectively.
Investments in properties or securities that are unrelated
to the activities of the business of the taxpayer corporation may
also indicate that earnings and profits of a corporation are
being accumulated beyond the reasonable needs of the business.
See sec. 1.537-2(c), Income Tax Regs. We have considered
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