Ivan Allen Co. v. United States

422 U.S. 617, 95 S. Ct. 2501, 45 L. Ed. 2d 435, 1975 U.S. LEXIS 144, 36 A.F.T.R.2d (RIA) 5200

Opinions

Mr. Justice Blackmun

delivered the opinion of the Court.

Sections 531-537, inclusive, of the Internal Revenue Code of 1954, as amended, 26 U. S. C. §§ 531-537, constitute Part I of subchapter G of the Income Tax Subtitle. These sections subject most corporations to an “accumulated earnings tax.” Section 531¹ imposes the tax upon the “accumulated taxable income” of every corporation that, as § 532 (a) states,² is “formed or availed of for the purpose of avoiding the income tax with respect to its shareholders ... by permitting earnings and profits to accumulate instead of being divided or distributed.” And § 533 (a) ³ provides that “the fact that the earnings and profits . . . are permitted to accumulate beyond the reasonable needs of the business shall be determinative of the purpose to avoid the income tax with respect to shareholders, unless the corporation by the preponderance of the evidence shall prove to the contrary.” ⁴

The issue here is whether, in determining the application of § 533 (a), listed and readily marketable securities owned by the corporation and purchased out of its earnings and profits, are to be taken into account at their cost to the corporation or at their net liquidation value, that is, fair market value less the expenses of, and taxes resulting from, their conversion into cash.

I

The pertinent facts are admitted by the pleadings or are stipulated:

The petitioner, Ivan Allen Company (the taxpayer), is a Georgia corporation incorporated in 1902 and actively engaged in the business of selling office furniture, equipment, and supplies in the metropolitan Atlanta area. It files its federal income tax returns on the accrual basis and for the fiscal year ended June 30.

For its fiscal years 1965 and 1966, the taxpayer paid in due course the federal corporation income taxes shown on its returns as filed. Taxable income so reported was $341,045.82 for 1965 and $629,512.19 for 1966. App. 59, 84. During fiscal 1965 the taxpayer paid dividends consisting of cash in the amount of $48,945.30 and 870 shares of Xerox Corporation common that had been carried on its books at a cost of $6,564.34. During fiscal 1966 the taxpayer paid cash dividends of $50,267.49'; it also declared a 10% stock dividend. Id., at 56. The dividends paid were substantially less than taxable income less federal income taxes for those years.

Throughout fiscal 1965 and 1966, the taxpayer owned various listed and unlisted marketable securities. Prominent among these were listed shares of common stock and listed convertible debentures of Xerox Corporation that, in prior years, had been purchased out of earnings and profits. Specifically, on June 30, 1965, the corporation owned 11,140 shares of Xerox common, with a cost of $116,701 and a then fair market value of $1,573,525, and $30,600 Xerox convertible debentures, with a cost to it of $30,625 and a then fair market value of $48,424. On June 30, 1966, the corporation owned 10,090 shares of Xerox common, with a cost of $102,479 and a then fair market value of $2,479,617, and the same $30,600 convertible debentures, with their cost of $30,625 and a then fair market value of $69,768. Id., at 55.

According to its returns as filed, the taxpayer’s undistributed earnings as of June 30, 1965, and June 30, 1966, were $2,200,184.77 and $2,360,146.52, respectively. Id., at 70, 91. The taxpayer points out that the marketable portfolio assets represented an investment, as measured by cost, of less than 7% of its undistributed earnings and of less than 5% of its total assets. Brief for Petitioner 4.

It is also apparent, however, that the Xerox debentures and common shares had proved to be an extraordinarily profitable investment, although, of course, because these securities continued to be retained, the gains thereon were unrealized for federal income tax purposes. The debentures had increased in fair market value more than 50% over cost by the end of June 1965, and more than 100% over cost one year later; the common shares had increased in fair market value more than 13 times their cost by June 30, 1965, and more than 24 times their cost by June 30, 1966.

Throughout fiscal 1965 and 1966 the taxpayer’s two major shareholders, Ivan Allen, Sr., and Ivan Allen, Jr., respectively owned 31.20% and 45.46% of the taxpayer’s outstanding voting stock. App. 78, 104.

Following an examination of the taxpayer’s federal income tax returns for fiscal 1965 and 1966, the Commissioner of Internal Revenue determined that the taxpayer had permitted its earnings and profits for each of those years to accumulate beyond the reasonable and reasonably anticipated needs of its business, and that one of the purposes of the accumulation for each year was to avoid income tax with respect to its shareholders. Based upon this determination, the Commissioner assessed against the corporation accumulated earnings taxes of $77,383.98 and $73,131.87 for 1965 and 1966, respectively.

The taxpayer paid these taxes and thereafter timely filed claims for refund. The claims were not allowed, and the taxpayer then instituted this refund suit in the United States District Court for the Northern District of Georgia.

It is agreed that the taxpayer had reasonable business needs for operating capital amounting to $1,198,309 and $1,455,222 at the close of fiscal 1965 and fiscal 1966, respectively. Id., at 56. It is stipulated, in particular, that if the taxpayer’s marketable securities are to be taken into account at cost, its net liquid assets (current assets less current liabilities), at the end of each of those taxable years, and fully available for use in its business, were then exactly equal to its reasonable business needs for operating capital, that is, the above-stated figures of $1,198,309 and $1,455,222. It would follow, accordingly, that the earnings and profits of the two taxable years had not been permitted to accumulate beyond the taxpayer’s reasonable and reasonably anticipated business needs, within the meaning of § 533 (a), App. 57, and no accumulated earnings taxes were incurred. It is still further stipulated, however, that if the taxpayer’s marketable securities are to be taken into account at fair market value (less the cost of converting them into cash), as of the ends of those fiscal years,⁵ the taxpayer’s net liquid assets would then be $2,235,029 and $3,152,009, respectively. Id., at 56. From this it would follow that the earnings and profits of the two taxable years had been permitted to accumulate beyond the taxpayer’s reasonable and reasonably anticipated business needs. Then, if those accumulations had been for “the purpose of avoiding the income tax with respect to its shareholders,” under § 532 (a), accumulated earnings taxes would be incurred.

The issue, therefore, is clear and precise: whether, for purposes of applying § 533 (a), the taxpayer’s readily marketable securities should be taken into account at cost, as the taxpayer contends, or at net liquidation value, as the Government contends.

The District Court held that the taxpayer’s readily marketable securities were to be taken into account at cost. Accordingly, it entered judgment for the petitioner-taxpayer. 349 F. Supp. 1075 (1972). The court observed:

“Corporate taxpayers should not be penalized for wise investments; they should be allowed to maximize their capital gains tax advantages in accordance with internal business policies and stock market conditions rather than being forced to sell securities which may have a high value on an arbitrarily selected date merely because the unrealized fair market value of the securities on that date would trigger the accumulated earnings tax.” Id., at 1077. (Footnote omitted.)

The United States Court of Appeals for the Fifth Circuit reversed. 493 F. 2d 426 (1974). It observed:

“[T]he securities involved in the case at bar are of such a highly liquid character as to be readily available for business needs that might arise. Thus the appreciated value of these securities should be taken into account when determining whether the corporation has accumulated profits in excess of reasonable business needs.

“This decision does not force the corporation to liquidate these securities at any time when a sale would be financially unwise, but only compels the corporation to comply with the proscriptions of the Code and refrain from accumulating excessive earnings and profits.” Id., at 428.

The case was remanded, as the parties had agreed, App. 57-58, “for the additional factual determination [under § 532 (a)] of whether one purpose for the accumulation was to avoid income tax on behalf of the shareholders.” 493 F. 2d, at 428.

Because this conclusion was claimed by the taxpayer to conflict in principle with American Trading & Production Corp. v. United States, 362 F. Supp. 801 (Md. 1972), aff’d without published opinion, 474 F. 2d 1341 (CA4 1973),⁶ and because of the importance of the issue in the administration of the accumulated earnings tax, we granted certiorari. 419 U. S. 1067 (1974).

II

Under our system of income taxation, corporate earnings are subject to tax at two levels. First, there is the tax imposed upon the income of the corporation. Second, when the corporation, by way of a dividend, distributes its earnings to its shareholders, the distribution is subject to the tax imposed upon the income of the shareholders. Because of the disparity between the corporate tax rates and the higher gradations of the rates on individuals,⁷ a corporation may be utilized to reduce significantly its shareholders’ overall tax liability by accumulating earnings beyond the reasonable needs of the business. Without some method to force the distribution of unneeded corporate earnings, a controlling shareholder would be able to postpone the full impact of income taxes on his share of the corporation’s earnings in excess of its needs. See B. Bittker & J. Eustice, Federal Income Taxation of Corporations and Shareholders ¶ 8.01 (3d ed. 1971); B. Wolfman, Federal Income Taxation of Business Enterprise 864 (1971).

In order to foreclose this possibility of using the corporation as a means of avoiding the income tax on dividends to the shareholders, every Revenue Act since the adoption of the Sixteenth Amendment in 1913 has imposed a tax upon unnecessary accumulations of corporate earnings effected for the purpose of insulating shareholders.⁸

The Court has acknowledged the obvious purpose of the accumulation provisions of the successive Acts:

“As the theory of the revenue acts has been to tax corporate profits to the corporation, and their receipt only when distributed to the stockholders, the purpose of the legislation is to compel the company to distribute any profits not needed for the conduct of its business so that, when so distributed, individual stockholders will become liable not only for normal but for surtax on the dividends received.” Helvering v. Chicago Stock Yards Co., 318 U. S. 693, 699 (1943).

This was reaffirmed in United States v. Donruss Co., 393 U. S. 297, 303 (1969).

It is to be noted that the focus and impositions of the accumulated earnings tax are upon “accumulated taxable income,” § 531. This is defined in § 535 (a) to mean the corporation’s “taxable income,” as adjusted. The adjustments consist of the various items described in § 535 (b), including federal income tax, the deduction for dividends paid, defined in § 561, and the accumulated earnings credit defined in § 535 (c). The adjustments prescribed by §§ 535 (a) and (b) are designed generally to assure that a corporation’s “accumulated taxable income” reflects more accurately than “taxable income” the amount actually available to the corporation for business purposes. This explains the deductions for dividends paid and for federal income taxes; neither of these enters into the computation of taxable income. Obviously, dividends paid and federal income taxes deplete corporate resources and must be recognized if the corporation’s economic condition is to be propérly perceived. Conversely, § 535 (b) (3) disallows, for example, the deduction, available to a corporation for income tax purposes under § 243, on account of dividends received ; dividends received are freely available for use in the corporation’s business.

The purport of the accumulated earnings tax structure established by §§ 531-537, therefore, is to determine the corporation’s true economic condition before its liability for tax upon “accumulated taxable income” is determined. The tax, although a penalty and therefore to be strictly construed, Commissioner v. Acker, 361 U. S. 87, 91 (1959), is directed at economic reality.

It is important to emphasize that we are concerned here with a tax on “accumulated taxable income,” § 531, and that the tax attaches only when a corporation has permitted “earnings and profits to accumulate instead of being divided or distributed,” § 532 (a). What is essential is that there be “income” and “earnings and profits.” This at once eliminates, from the measure of the tax itself, any unrealized appreciation in the value of the taxpayer’s portfolio securities over cost, for any such unrealized appreciation does not enter into the computation of the corporation’s “income” and “earnings and profits.”

The corporation’s readily marketable portfolio securities and their unrealized appreciation, nonetheless, are of profound importance in making the entirely discrete determination whether the corporation has permitted what, coneededly, are earnings and profits to accumulate beyond its reasonable business needs. If the securities, as here, are readily available as liquid assets, then the recognized earnings and profits that have been accumulated may well have been unnecessarily accumulated, so far as the reasonable needs of the business are concerned. On the other hand, if those portfolio securities are not liquid and are not readily available for the needs of the business, the accumulation of earnings and profits may be viewed in a different light. Upon this analysis, not only is such accumulation as has taken place important, but the liquidity otherwise available to the corporation is highly significant. In any event — and we repeat — the tax is directed at the accumulated taxable income and at earnings and profits. The tax itself is not directed at the unrealized appreciation of the liquid assets in the securities portfolio. The latter becomes important only-in measuring reasonableness of accumulation of the earnings and profits that otherwise independently exist. What we look at, then, in order to determine its reasonableness or unreasonableness, in the light of the needs of the business, is any failure on the part of the corporation to distribute the earnings and profits it has.

Accumulation beyond the reasonable needs of the business, by the language of § 533 (a), is “determinative of the purpose” to avoid tax with respect to shareholders unless the corporation proves the contrary by a preponderance of the evidence. The burden of proof, thus, is on the taxpayer. A rebuttable presumption is statutorily imposed. To be sure, we deal here, in a sense, with a state of mind. But it has been said that the statute, without the support of the presumption, would “be practically unenforceable . . . .” United Business Corp. v. Commissioner, 62 F. 2d 754, 755 (CA2), cert. denied, 290 U. S. 635 (1933). What is required, then, is a comparison of accumulated earnings and profits with “the reasonable needs of the business.” Business needs are critical. And need, 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. United Block Co. v. Helvering, 123 F. 2d 704, 705 (CA2 1941), cert. denied, 315 U. S. 812 (1942); Smoot Sand & Gravel Corp. v. Commissioner, 274 F. 2d 495, 501 (CA4), cert. denied, 362 U. S. 976 (1960) (liquid assets provide “a strong indication” of the purpose of the accumulation); Electric Regulator Corp. v. Commissioner, 336 F. 2d 339, 344 (CA2 1964); Novelart Mfg. Co. v. Commissioner, 52 T. C. 794, 806 (1969), aff’d, 434 F. 2d 1011 (CA6 1970), cert. denied, 403 U. S. 918 (1971); John P. Scripps Newspapers v. Commissioner, 44 T. C. 453, 467 (1965).⁹

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).” Brief for Petitioner 15. It concedes that if this were not so, “the tax could be avoided by any form of investment of earnings and profits.” Reply Brief for Petitioner 5. 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.¹⁰ 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.¹¹

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.

Ill

Bearing directly upon the issue before us is Helvering v. National Grocery Co., 304 U. S. 282 (1938). There the fact situation was the reverse of the present case inasmuch as that taxpayer corporation had unrealized losses in the value of marketable securities it was continuing to hold. After the Court upheld the accumulated earnings tax against constitutional attack, id., at , it observed: “Depreciation in any of the assets is evidence to be considered by the Commissioner and the Board [of Tax Appeals] in determining the issue of fact whether the accumulation of profits was in excess of the reasonable needs of the business.” Id., at 291. It went on to hold, however, that such depreciation “does not, as matter of law, preclude a finding that the accumulation of the year’s profits was in excess of the reasonable needs of the business.” Ibid. Indeed, the Court held that the evidence supported the Board’s finding that the accumulation of surplus by the taxpayer was to enable its sole shareholder to escape surtaxes. It focused on bonds and stocks held by the corporation, described them as in no way related to the business, and concluded that “there was no need of accumulating any part of the year’s earnings for the purpose of financing the business.” Id., at 291-292. That language forecloses the present taxpayer’s case.

The precedent of National Grocery has been applied in accumulated earnings tax cases, with courts taking into account the fair market value of liquid, appreciated securities. Battelstein Investment Co. v. United States, 442 F. 2d 87, 89 (CA5 1971); Cheyenne Newspapers, Inc. v. Commissioner, 494 F. 2d 429, 434-435 (CA10 1974); Henry Van Hummell, Inc. v. Commissioner, 23 T. C. M. 1765, 1779 (1964), aff’d, 364 F. 2d 746 (CA10 1966), cert. denied, 386 U. S. 956 (1967); Golconda Mining Corp. v. Commissioner, 58 T. C. 139, supplemental opinion, 58 T. C. 736, 737-739 (1972), rev’d on other grounds, 507 F. 2d 594 (CA9 1974); Ready Paving & Constr. Co. v. Commissioner, 61 T. C. 826, 840-841 (1974). But see Harry A. Koch Co. v. Vinal, 228 F. Supp. 782, 784 (Neb. 1964).

American Trading & Production Corp. v. United States, 362 F. Supp. 801 (Md. 1972), aff’d without pub-fished opinion, 474 F. 2d 1341 (CA4 1973), which the taxpayer continues to assert is in conflict with the present case, deserves mention. The taxpayer there had accumulated earnings and profits of something less than $10 million. Its anticipated business needs were about $12 million. But it owned stocks, primarily oil shares, having a total cost of $5,593,319 and an aggregate current market value in excess of $100 million. The District Court excluded these stocks in making its determination whether earnings had accumulated in excess of reasonable business needs. It did so on several grounds: that the shares constituted “original capital,” a term the court used in the sense that the stocks “were properly held and retained as an integral part of [the taxpayer’s] business and were utilized ... as a base for borrowings for the needs of other parts of its business,” 362 F. Supp., at 810; that the statute was not intended to require the conversion of assets of that kind into cash in order to meet business needs, even though that capital “has explosively increased in value,” id., at 808; and that “there was substantial evidence” that the stocks “were not readily saleable,” id., at 809.

Whatever may be the merit or demerit of the other grounds asserted by the District Court in American Trading — and we express no view thereon — we are satisfied that the court’s determination as to the absence of ready salability, under all the circumstances, provides a sufficient point of distinction of that case from this one, so that it provides meager, if any, contrary precedent of substance to our conclusion here.

IV

The arguments advanced by the taxpayer do not persuade us:

1. The taxpayer, of course, quite correctly insists that unrealized appreciation of portfolio securities does not enter into the determination of “earnings and profits,” within the meaning of § 533 (a). As noted above, we agree. The Government does not contend otherwise. It does not follow, however, that unrealized appreciation is never to be taken into account for purposes of the accumulated earnings tax.

As has been pointed out, the tax is imposed only upon accumulated taxable income, and this is defined to mean taxable income as adjusted by factors that have been described. The question is not whether unrealized appreciation enters into the determination of earnings and profits, which it does not, but whether the accumulated taxable income, in the determination of which earnings and profits have entered, justifiably may be retained rather than distributed as dividends. The tax focuses, therefore, on current income and its retention or distribution. If the corporation has freely available liquid assets in excess of its reasonable business needs, then accumulation of taxable income may be unreasonable and the tax may attach. Utilizable availability of the portfolio assets is measured realistically only at net realizable value. The fact that this value is not included in earnings and profits does not foreclose its being considered in determining whether the corporation is subject to the accumulated earnings tax.

2. We see nothing in the “realization of income” concept of Eisner v. Macomber, 252 U. S. 189 (1920), that has significance for the issue presently under consideration. There the Court held that a dividend of common shares issued by a corporation having only common outstanding was not includable in the shareholder’s gross income for income tax purposes. The decision may have prompted the shift, noted above and effected by the Revenue Act of 1921, of the incidence of the accumulated earnings tax from the shareholders to the corporation. The case also emphasizes the realization of income with respect to a tax on the shareholder. We note again, however, that the accumulated earnings tax is not on unrealized appreciation of the portfolio securities. It rests upon, and only upon, the corporation's current taxable income adjusted to constitute “accumulated taxable income.''

3. The taxpayer also argues that the effect of the Court of Appeals decision is to force the taxpayer to convert its appreciated assets in order to meet its business needs. It suggests that management should be entitled to finance business needs without resorting to unrealized appreciation. The argument, plainly, goes too far. On the taxpayer's own theory that marketable securities may be taken into account at their cost, a situation easily may be imagined where some conversion into cash becomes necessary, if the corporation is to avoid the accumulated earnings tax.

That our decision does not interfere with corporate management's exercise of sound business judgment, and that it does not amount to a dictation to management as to when appreciated assets are to be liquidated, was aptly answered by the Court of Appeals:

“This decision does not force the corporation to liquidate these securities at any time when a sale would be financially unwise, but only compels the corporation to comply with the proscriptions of the Code and refrain from accumulating excessive earnings and profits. That taxpayer, as a consequence of its own sound judgment in making profitable investments, must sell, exchange or distribute to the shareholders assets in order to avoid an excessive accumulation of earnings and thus comply with the Code’s requirements is no justification for precluding its application.” 493 F. 2d, at 428.

We might add that the existence of the Code’s provisions for the accumulated earnings tax, of course, will affect management’s decision. So, too, does the very existence of the corporate income tax itself. In this respect, the one is no more offensive than the other. Astute management in these tax-conscious days is not that helpless, and shrinkage, upon liquidation, of one-fourth of the appreciation hardly equates with loss. Such business decision as is necessitated was expressly intended by the Congress. All that is required is the disgorging, at the most, of the taxable year’s “accumulated taxable income.”

4. It is no answer to suggest that our decision here may conflict with standard accounting practice. The Court has not hesitated to apply congressional policy underlying a revenue statute even when it does conflict with an established accounting practice. See, e. g., Schlude v. Commissioner, 372 U. S. 128 (1963); American Automobile Assn. v. United States, 367 U. S. 687, 692-694 (1961). It is of some interest that the taxpayer itself, for the tax years under consideration, reflected the market value as well as the cost of its marketable securities on its balance sheets. App. 112, 118. This appears to be in line with presently accepted practice. See R. Kester, Advanced Accounting 117-118, 122-124 (4th ed. 1946).

The judgment of the Court of Appeals is affirmed.

It is so ordered.

1 Ҥ531. Imposition of accumulated earnings tax.

“In addition to other taxes imposed by this chapter, there is hereby imposed for each taxable year on the accumulated taxable income (as defined in section 535) of every corporation described in section 532, an accumulated earnings tax equal to the sum of—

“(1) 27% percent of the accumulated taxable income not in excess of $100,000, plus

“(2) 38% percent of the accumulated taxable income in excess of $100,000.”

² “§532. Corporations subject to accumulated earnings tax.

“(a) General rule.

“The accumulated earnings tax imposed by section 531 shall apply to every corporation (other than those described in subsection (b)) formed or availed of for the purpose of avoiding the income tax with respect to its shareholders or the shareholders of any other corporation, by permitting earnings and profits to accumulate instead of being divided or distributed.”

³ “§ 533. Evidence of purpose to avoid income tax.

“(a) Unreasonable accumulation determinative of purpose.

“For purposes of section 532, the fact that the earnings and profits of a corporation are permitted to accumulate beyond the reasonable needs of the business shall be determinative of the purpose to avoid the income tax with respect to shareholders, unless the corporation by the preponderance of the evidence shall prove to the contrary.”

4 In a proceeding before the United States Tax Court, § 534 allows the taxpayer to shift the burden of proof to the Commissioner of Internal Revenue. Section 535 defines “accumulated taxable income” to mean the corporation’s taxable income adjusted as specified; a credit is given for “such part of the earnings and profits for the taxable year as are retained for the reasonable needs of the business,” with a minimum “lifetime” credit of $100,000 ($150,000 for taxable years beginning after December 31, 1974, Pub. L. 9A-12, § 304, 89 Stat. 45, 26 U. S. C. § 535 (c) (2) (1970 ed., Supp. IV). Finally, § 537 provides that the term “reasonable needs of the business” includes “the reasonably anticipated needs of the business.”

5 It is stipulated that the cost of converting the taxpayer’s marketable securities into cash would have been the sum of a maximum of 6% of the fair market value of the securities (payable as a brokerage commission) and a maximum of 25% of such amount of the fair market value as exceeds the sum of the brokerage commission and the cost of the securities (payable as capital gains taxes). App. 55.

6 American Trading and Production Corporation, pursuant to our Rule 42, was granted permission to file a brief as amicus curiae in the present case. It asserts that no conflict exists between the decisions in this case and in its own case.

7 The income tax rates for a corporation are 22% of the first $25,000 of taxable income and 48% of the excess over $25,000. § 11 of the 1954 Code, 26 U. S. C. § 11. The graduated rates for an individual taxpayer range from 14% to 70%. § 1, 26 U. S. C. § 1.

8 The accumulated earnings tax originated in § II A, Subdivision 2, of the Tariff Act of October 3, 1913, 38 Stat. 166. This imposed a tax on the shareholders of a corporation “formed or fraudulently availed of for the purpose of preventing the imposition of such tax through the medium of permitting such gains and profits to accumulate instead of being divided or distributed.” Accumulations “beyond the reasonable needs of the business shall be prima facie evidence of a fraudulent purpose to escape such tax.” Id., at 167. The same provision appeared as § 3 of the Revenue Act of 1916, 39 Stat. 758, and again as § 220 of the Revenue Act of 1918, 40 Stat. 1072 (1919), except that in the 1918 Act the word “fraudulently” was deleted. This change was effected inasmuch as the Senate felt that the former phraseology “has proved to be of little value, because it was necessary to its application that intended fraud on the revenue be established in each case.” S. Rep. No. 617, 65th Cong., 3d Sess., 5 (1918).

This pattern of tax on the shareholders was changed with the Revenue Act of 1921, § 220, 42 Stat. 247. The incidence of the tax was shifted from the shareholders to the corporation itself. Judge Learned Hand opined that the change was due to doubts “as to the validity of taxing income which the taxpayers had never received, and in 1921 it was thought safer to tax the company itself.” United Business Corp. v. Commissioner, 62 F. 2d 754, 756 (CA2), cert. denied, 290 U. S. 635 (1933).

Although the statutory language has varied somewhat from time to time, the income tax law, since the change effected by the Revenue Act of 1921, consistently has imposed the tax on the corporation, rather than upon the shareholders. Revenue Act of 1924, § 220, 43 Stat. 277; Revenue Act of 1926, § 220, 44 Stat. 34; Revenue Act of 1928, § 104, 45 Stat. 814; Revenue Act of 1932, § 104, 47 Stat. 195; Revenue Act of 1934, § 102, 48 Stat. 702; Revenue Act of 1936, § 102, 49 Stat. 1676; Revenue Act of 1938, § 102, 52 Stat. 483; Internal Revenue Code of 1939, § 102.

9 In this case we are concerned only with readily marketable securities. We express no view with respect to items of a different kind, such as inventory or accounts receivable.

10 “The tax should be administered with its purpose in mind at all times, i. e., to prevent accumulations of income by the corporation for the purpose of avoiding the income tax ordinarily incident to the shareholders. It is not intended to serve as an obstacle to sound profit-oriented corporate management. The ultimate goal must be to administer the tax fairly, in light of the total economic reality of the corporation. Valuing liquid assets at cost invariably produces a poor and inaccurate picture of the corporate financial position. Adjusted fair market value may have shortcomings of its own, but it does, undeniably, come much closer to furthering the intent of the accumulated earnings tax.” Note, Accumulated Earnings Tax: Should Marketable Securities be Valued at Cost or at Fair Market Value in Determining the Reasonableness of Further Accumulations of Income?, 40 Brooklyn L. Rev. 192, 209-210 (1973).

11 We see little force in any observation that our emphasis on liquid assets means that a corporate taxpayer may avoid the accumulated earnings tax by merely investing in nonliquid assets. If such a step, in a given case, amounted to willful evasion of the accumulated earnings tax, it would be subject to criminal penalties. See, e. g., § 7201 of the 1954 Code, 26 U. S. C. § 7201.

2 The cost basis for petitioner’s Xerox securities for the 1966 tax year was some $14,000 less than for 1965, apparently reflecting the payment as a dividend of 870 shares of Xerox stock in 1965. The "appreciation” figures used herein come from Petitioner’s Brief and vary somewhat from the figures used by the Government, but the differences are insignificant in the context of this case. Rounded figures are used throughout this opinion.

3 The Court refers to net liquidation value, which reflects the asset’s current market price less the costs and expenses attendant to its liquidation. The Court thus seeks to identify the sum that would be made available by a hypothetical sale of the asset in question, although nothing in the statute requires such a liquidation. For the purpose of discussion, I will refer simply to market value or market price.