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petitioner’s liquidity ratio and investments unrelated to its
business and are satisfied that these factors are included in the
above calculation of petitioner’s net liquid assets.
B. Reasonable Needs of the Business
The second step is to decide whether the grounds asserted by
petitioner justify the accumulation of earnings and profits for
its reasonable business needs. The term “reasonable needs of the
business” includes “the reasonably anticipated needs of the
business.” Sec. 537(a).
The need to retain earnings and profits must be directly
connected with the needs of the corporation, itself, and must be
for bona fide business purposes. See sec. 1.537-1, Income Tax
Regs. The regulations adopt a “prudent businessman” standard for
determining whether earnings have been accumulated beyond the
present and reasonably anticipated future needs of the business.
Section 1.537-1, Income Tax Regs., states, in part:
An accumulation of the earnings and profits * * * is in
excess of the reasonable needs of the business if it
exceeds the amount that a prudent businessman would
consider appropriate for the present business purposes
and for the reasonably anticipated future needs of the
business.
Thus, determining the reasonable needs of a business is, in first
instance, a question for the officers and directors of the
corporation. See Snow Manufacturing Co. v. Commissioner, 86 T.C.
260, 269 (1986); John P. Scripps Newspapers v. Commissioner, 44
T.C. 453, 468 (1965); Crawford County Printing & Publishing Co.,
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