Ivan Allen Company v. United States – Oral Argument – April 15, 1975

Media for Ivan Allen Company v. United States

Audio Transcription for Opinion Announcement – June 26, 1975 in Ivan Allen Company v. United States
Audio Transcription for Oral Argument – April 16, 1975 in Ivan Allen Company v. United States

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Warren E. Burger:

We’ll hear arguments next in 74-22, Ivan Allen Company against the United States.

Mr. McAlpin, you may proceed whenever you’re ready.

Kirk M. McAlpin:

Mr. Chief Justice and may it please the Court.

The case before you today is in behalf for the taxpayer Ivan Allen Company.

This is a penalty tax case is that referred to you also is an accumulated earnings tax case had arises under Section 531, 537 Internal Revenue Code.

If the Court would permit, I might in one very brief moment spelled out the particular provision of 533 which is of issue in this case.

The very Section 533 portion which is particularly pertinent to the consideration says this, “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.”

I might state briefly that Ivan Allen Company is involved in this case by reason of the purchase of Xerox stock in 19 — for the years 1965-1966.

The issue here is whether or not Ivan Allen Company accumulated earnings beyond a reasonable needs of the business that we — to their earnings and profits succeed are reasonable business needs for those years.

The issue has been framed by stipulation to present a relatively simple issue insofar as the business figures of the corporation are concerned.

The amount of Xerox stock, which we claim and did so claim successfully in the District Court, which was purchased from earnings, the accumulated earnings was $154,000.00.

That is the amount of investment which we have in liquid assets.

That amount was reflected in the year 1965 as $154,000.00 and the year 1966 a taxable year in June of 30th that was reflected as $135,000.00 because some of that Xerox stocks have been sold in the year 1965.

The question here before this Court and it’s whether or not the earnings and profits in determining this question whether the earnings and profits exceed the reasonable business needs of the business are reasonable needs to be compared with the earnings and profits reflected in the liquid asset as we contend at cost or as the Government says, as total resources available including unrealized appreciation as the government contends.

The Xerox stock web from a basic cost of $154,000.00 in the year for the taxable year of 1965 to $1,640,000.00 rough years, and the year of 1966 as the records will show that same stock at that time $135,000.00 had a liquidation of market value less cost of your — well, market value of that time of $2,500,000.00.

William H. Rehnquist:

Mr. McAlpin, why does an office supply company buy a stock like Xerox?

Kirk M. McAlpin:

Alright, sir.

The reason was, they were, I don’t know if it’s in the record, they were in the 3M, they had the franchise for 3M Machine, this old machine which Minnesota mined.

They lost that franchise, they saw that Xerox on the market.

They are aware and they saw that Mr. Allen back in the 60’s.

He had some cash money, Your Honor, and this is accumulated earnings which a record will show was needed in operating capital stipulated that this cash, we agree as an operating capital.

He invested this in a security rather leave in oddly in the cash or just in the savings account.

William H. Rehnquist:

Do you say Mr. Allen had some money?

You —

Kirk M. McAlpin:

No, no, I’m saying he was part of the company as Mr. Ivan Allen I say —

William H. Rehnquist:

In corporation?

Kirk M. McAlpin:

It’s a corporation.

He was the President of the company at this time.

But it was a corporation —

William H. Rehnquist:

It was a substitute for putting the money in the bank?

Audio Transcription for Oral Argument – April 16, 1975 in Ivan Allen Company v. United States

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Kirk M. McAlpin:

Yes, sir.

As a matter of fact, this case would not be here today if Ivan Allen Company had just wanted to be safe and just leave the $154,000.00 in cash because it is stipulated by the Government that — we so state that the cost to our investment as it is invested — cost of our earnings that which is the investment of Xerox and liquid assets is available to meet reasonable business needs.

We say that the appreciation is not available that these are not earnings and that the amount earning so we paid tax of $154,000.00 which went into — which are accumulated earnings had we left and I don’t think the Government will contend otherwise, had we left that $154,000.00 just in cash have management which was hesitant to make decisions, hesitant to looked around and see what was a good investment for some temporary money while they are waiting to use as his operating capital, and this was and stipulated as to cost it was operating capital.

Have they left that $154,000.00 in cash as operating capital, there would be no claim because it is stipulated in this case that the amount of all reasonable business needs as an operated in capital $1,000,002.00 in 1965 and $1,000,004 in 1966 would equaled exactly the accumulated earnings for the years — the same years of 1965 and 1966 if the stock is treated as we respectfully submit in earnings that the investment that they had in liquid assets that would be $1,000,002.00 which will be the accumulated earnings, and $1,000,004.00.

So you see, we are saying that $154,000.00 and respectfully $135,000.00 of those two years.

In cash, that was all the earnings we had.

We put it into the liquid assets, it was proper operate in capital and available to meet the business needs.

Now, here’s the case and here’s what the Government says —

William O. Douglas:

Mr. McAlpin, before you go on, you’re talking about unrealized appreciation investment in stock market?

Kirk M. McAlpin:

That’s correct.

William O. Douglas:

As of what dates are we talking about that the Government take year in market value?

Kirk M. McAlpin:

Yes, sir.

The government —

William O. Douglas:

This year in as I recall.

Kirk M. McAlpin:

Yes, sir.

June of 30th of 65′ and June of 30th of 66′.

Now, the Government contends —

William O. Douglas:

Does the record show —

Kirk M. McAlpin:

Yes, sir.

I think —

William O. Douglas:

— the high and low market —

Kirk M. McAlpin:

State by attorney at page 70 and page 90 —

William O. Douglas:

Mr. McAlpin, I’m asking you another question.

Kirk M. McAlpin:

Excuse me.

William O. Douglas:

Does the record show the high and low market price of Xerox in each of fiscal years in question?

Kirk M. McAlpin:

I’m not certain it does, it only shows the — what the Government refers to as the net liquidation value.

They show the market and in the record shows the cost of conversion which will cost that showing does not show the variation.

William O. Douglas:

Is that taking into account the capital gain stocks?

Kirk M. McAlpin:

Yes, the cost of conversion —

William O. Douglas:

The cost of conversion is different from the —

Audio Transcription for Oral Argument – April 16, 1975 in Ivan Allen Company v. United States

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Kirk M. McAlpin:

Oh, no that’s the cost.

They have stipulated that there would be approximately — I believe 37.5% if we did sell the stock.

That would be all our capital gain stock, the 6% other tax and then the — some dispute about the Georgia tax but we claim that there is three taxes which would apply if we were forced to convert and therefore, we would not have the full value even under their theory available to meet business needs.

I think that is in the record Your Honor and stipulated.

William O. Douglas:

Mr. McAlpin, on page 55, I think there is a stipulation about the cost of converting and I suppose had the corporation on December 30th or two days before the end of the taxable year or maybe on fiscal year basis yes June 30th.

In June 28th if it had liquidated the Xerox stock without the net figure after capital gain and capital gain tax and brokerage commission, you wouldn’t be here arguing then there would be an improper accumulation of surplus?

Kirk M. McAlpin:

Had we converted it?

William O. Douglas:

Had you converted it?

Kirk M. McAlpin:

Yes, sir.

But what we have done we would naturally we would have paid the capital of the intersection, Your Honor at that time.

We would then have as we did when we saw the thousand shares of Xerox in 1966, we would put it into our business for operation.

We would earn money.

We would pay for the income tax on that as we did in 1966.

You’ll notice our earnings went up from $341,000.00 to $629,000.00 and we would have then — yes, we would have used it and put it in but the question Your Honor may be this, does that statute 531 to 37 and the legislative history require a conversion of what the Government is claiming and what’s he did successfully in the Fifth Circuit and prevailing upon the First Circuit to reverse Judge Moye with — Judge Moye the District Judge established a principles which we urging in this Court.

What they would do then is force a conversion or if they certain the last day of our taxable year.

It would be without reference at all as to whether or not business judgment the term, and the time, and the place, and the best conditions under which investment should be sold and whether or not it would be wise to sell it all over at that time.

Potter Stewart:

What was the Government’s theory, I thought it was — first of all I don’t think that the Government claims at all that this unrealized appreciation is itself earnings and profits.

But that the Government’s theory is that with the existence of this large unrealized profit in the investments you made in this company that your other earnings and profits were more than available to meet the needs of the business and therefore, where you stand were declared, you’re in trouble under the statute.

Kirk M. McAlpin:

But the Government says well, we —

Potter Stewart:

It doesn’t say you should’ve sold your stock or had to sell your stock —

Kirk M. McAlpin:

So much I would asked would be necessary to pay the amount of the dividends or let’s say claim we say we should pay all of our profit earnings and profits in the taxable years.

Now, Your Honor what they —

Byron R. White:

Often earnings and profits are not in cash.

That’s true, isn’t it?

Kirk M. McAlpin:

Oh, that’s correct.

That’s correct.

That would be reflected in property very frequently, yes sir.

Byron R. White:

Right.

Kirk M. McAlpin:

But the point is the statute makes a comparison.

We would submit that the statute makes a comparison as to earnings with the reasonable business needs for the taxable year.

Audio Transcription for Oral Argument – April 16, 1975 in Ivan Allen Company v. United States

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Kirk M. McAlpin:

Now, what they say is that they are not tax — that’s what they have taxing of that amount exceeds when you put market on it that that’s what they’re taxing.

But what they do, Your Honor, they go to liquid assets and they claim that all amounts which we are holding as investment in liquid assets under the Smoot case which we hold at cost, that is our cost a $154,000.00.

They take this and they put the appreciated value on it, and then they say, “You look at total sources of funds in making the comparison.”

Now, there is no statute, no regulation under 535 or 531 in anyway that ever adopts except in this case and in the Fifth Circuit.

They did this and they call it in the tax court which we say is wrong.

We ask this Court to disregard that decision but what they do is that they take that figure which is in total — which is in the liquid assets and they have interpreted that they say that all of your liquid assets, all the current liquid assets, that when you compare that with your business needs at a converted figure which would be the hundred to million sects that if that exceeds your reasonable business needs then you have accumulated earnings which you must pay tax on a county tax.

Now, —

Byron R. White:

Now, wait as minute.

Let’s assume that the company buys some stock at for a $100,000.00 and it didn’t enhances and that increases in value 10 times since it was a million.

Kirk M. McAlpin:

That’s right.

Byron R. White:

And there it is and but the Government doesn’t contend you have to pay any of that out any of that enhancement of?

Kirk M. McAlpin:

No, sir.

They say —

Byron R. White:

But if you — if the next year you have a dollars worth of earnings and profits you had to pay that up.

Kirk M. McAlpin:

That’s right.

They say we should —

Byron R. White:

But any year and which you have a loss you don’t have to pay anything else.

Kirk M. McAlpin:

That’s correct.

What they did —

Byron R. White:

So, it doesn’t say that certain that the enhancements of earnings and profits suppose must be converted and paid out.

Kirk M. McAlpin:

They have met that that is not earnings but Your Honor the way they go about it is this.

They have applied a different rule.

They have — they are forcing a conversion on your asset, your liquid — the so much to your liquid assets are at cost.

Byron R. White:

They don’t force the conversion.

They just say that your current year’s liquid asset — you current year’s earnings and profits must be paid out.

Kirk M. McAlpin:

Well, but Your Honor the measure there the comparison is under Section 533 of the Code and the comparison the words are “earnings and profits” as you measure, you compare your earnings and profits for that year the accumulate earnings and profits — your accumulate earnings and profits as against your reasonable business needs.

Now, if you look at cost, our reasonable business needs over $1,000,002.00 in 65′ are accumulated earnings of $1,000,002.00.

They agree then that’s exactly the same.

Now, what they’re saying that you take total resources, you take your liquid assets and when you take liquid asset you appreciate the stock which has a cost value reflected in liquid assets.

Now, we’ll come to that word, that is a very critical word because if misstated the rule we submit in the Smoot case.

Audio Transcription for Oral Argument – April 16, 1975 in Ivan Allen Company v. United States

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William O. Douglas:

Which is a critical word?

Kirk M. McAlpin:

The word “reflected” the Smoot case in 1960 —

William O. Douglas:

Incidentally, it is agreed that the Xerox stock is completely marketable it is liquid, I take it here.

Kirk M. McAlpin:

Yes, sir.

But this case would be establish in the rule though, in this particular instances it is liquid.

We would loss value in the courts we have come at par.

We would loss value of approximately from 30% to 37% or maybe by reason of conversion.

We will be forced to sell it is liquid but this would apply to closely held corporations in which one of the concerns would be evaluation, it would a closely held corporations stock be able to have an available ready sale.

Now, you see the Ninth Circuit in Golconda, they held that eventhough there’s tax Court, they held it was an applicable because it was a publicly held corporation.

So, the imposition that would be establish in this case under Fifth Circuit has established says that,” at the end of every taxable year that all your total, not your earnings and profits as the statute says, all your total resources must be look to, to see whether or not you can meet your reasonable business needs.”

Now, that means on December the 31st you have effect that they have been told that that market value whatever the stock is at that time stock market value at that time establishes that you have been told, you have that you will be in place of market value on it.

Now, let’s assume Your Honor and we say and you set it in this Court in Eisner in 1938, you have very — you expressed concern about force conversion, the American Trading Company Fourth Circuit did the same thing in 1973.

What you would do in December the 31st, you force — you make him determine a market value on that stock.

The question is and this is where the error is, there is no insurance that that will continued to be available into the next year even under January of 2nd, suppose in antitrust suits or some fraud suits were filed.

You say that where stock is worth a billion and a half dollars or in antitrust suit was filed against Xerox Corporation on January 1st.

You have established that not by business judgment but by the determination of the Government.

The Government has come in and told you when your sale is and on January the 2nd, the question is continue the availability to meet prior operating in business needs.

Now, on January the 2nd, something completely happens as to Judge Moye says secretary of State’s petitions it goes to Europe.

William H. Rehnquist:

Well, even if that doesn’t happen, isn’t one of your responses to Justice White’s earlier question that even though you’re not told by the government to liquidate your Xerox stock, if you have to distribute all of your earnings and profit to make up operating needs.

You’re going to have to liquidate some of your Xerox stock.

Kirk M. McAlpin:

Yes, sir.

But only, Your Honor, only to the extent of a hundred — yes, operating needs $154,000.00.

Now, we stipulate as part of our operating capital.

We would have to sell $154,000.00 worth to take care of it but we would have to sell all of it.

Now, what the Government — we would have to sell the whole thing we just have to sell that $154,000.00 of our amount.

What or maybe, it maybe more but what the Government is saying is when you measure it we had to — they have said we have to pay out the whole $600,000.00 of profits for the taxable years that we had dividend then we should pay all of that out.

Now, we did pay out a dividend and we have been paying our dividends but they said all of it should be because when you take your appreciated value, they say they’re not tax, and they have met they say appreciation is not an income.

But what they have done is they have converted earnings in some form or another to look equity, they used another equity test and which they say that you reach up in any total resources.

Now the question I want to make, the Smoot test, they say Smoot.

Smoot was a case in which was referred to is a pre-Smoot days and post-Smoot days, before, it was the size of the accumulated earnings; they look the accumulated earnings to determine whether or not you had accumulated in excess your reasonable the business needs.

Audio Transcription for Oral Argument – April 16, 1975 in Ivan Allen Company v. United States

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Kirk M. McAlpin:

In 1960, in the Smoot case, what they have did they separated, they said there are certain things while they are earnings.

There is no way you can use those for to me reasonable to business needs.

They are in your plant in your equipment.

So, they took that out.

They said, “To the extent your earnings to that you can accumulate with impunity.”

Then they came and said, “Now, what we should do for a practicality of this?”

And this as they establish a liquid assets and said that so much of surplus as it is reflected in the liquid assets so much of the earnings — earnings separate — you separate the same thing.

So much as it is reflected in liquid assets are to be measured against the reasonable needs and if you exceed that then you have violated the statute.

Byron R. White:

But wouldn’t you be here making the same argument if for some reason or another the company had liquidated its Xerox stock and were sitting there at the end of the year with the money in the bank having paid its capital against tax.

Wouldn’t you say that —

Kirk M. McAlpin:

No, we would pay to dividends Your Honor.

That what — if we have liquid —

Byron R. White:

No, wouldn’t you be still be making the argument that insofar as the cash that you now had, absolute cash, reflected in enhancement — in stock value that you wouldn’t — that it could not be and should not be considered in —

Kirk M. McAlpin:

No, sir.

We have agreed that the stock of our earnings are invested —

Byron R. White:

Well, it isn’t my point.

I know you’ve agreed that that to your stock costs —

Kirk M. McAlpin:

Is $154,000.00.

Byron R. White:

Yes, but —

Kirk M. McAlpin:

It’s probably reasonable business needs.

Byron R. White:

Yes, but now let’s assume that the stock had gone up to a million dollars and you sold it.

Kirk M. McAlpin:

We did do that in 1966.

Byron R. White:

Alright and let’s assume you sold it you had the cash in the bank.

Now, is that available to measure —

Kirk M. McAlpin:

That would be part of our liquid assets and to meet reasonable business needs.

Byron R. White:

And the Government then could take that into account?

Kirk M. McAlpin:

That would go into our earnings.

We did do just sell.

We sold a thousand shares and then put it in —

Byron R. White:

It was going to your earnings — it would be part of your earnings because it was gain, I mean, it was earnings, it was income because you sold the stock?

Audio Transcription for Oral Argument – April 16, 1975 in Ivan Allen Company v. United States

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Kirk M. McAlpin:

That’s correct.

No question about it but we elected and did to the converting.

It was a business judgment as to when it was desirable.

Byron R. White:

Alright, but now let’s assume that you paid the tax on it that year and you took it in the income that year.

Kirk M. McAlpin:

Alright, sir.

Byron R. White:

Next year, you still got the money in the bank and then you have some more earnings and profits, must you pay the amount?

Kirk M. McAlpin:

Absolutely, that would then be income and we would be —

Byron R. White:

So, you not still accumulated earnings and profits in it?

Kirk M. McAlpin:

But then, we would make the pay the dividends is the question here Your Honor is, when is it wise to do that?

I know we’re not trying to mean anyway technical.

Byron R. White:

So, you’re — and this is unrealized income?

Kirk M. McAlpin:

Unrealized income as unrealized appreciation.

William O. Douglas:

And this has to be your answer what you just gave to Mr. Justice White has to be your answer really and what your opinion your case on is that it is unrealized and liquidated —

Kirk M. McAlpin:

That’s correct.

William O. Douglas:

— and you want the privilege of a business judgment and as to one —

Kirk M. McAlpin:

That’s correct, Your Honor and while it maybe that we are following we say has good reason.

They stat — the legislative history of this particular Act since 1954 has been to favor of taxpayer, the language of words earnings were deliberate.

They are to determine the source and which the funds to be pay the legislative history shows that every amendment has been favor in the small businessmen, just this year the exemption is going from $60,000.00 to 1975 or $175,000.00.

The question of reasonable business needs, you used to have to have a specific plan.

It was amended at Section 537 to say reasonably forcible needs and here, we come right that now to include these new ideas which the Government is injecting and there is no word of liquidity, there is no — the statute then used liquidity test.

The liquid assets test which they have misconstrued in this brief, we’re saying to the Fifth Circuit.

Likewise, puts your evaluation on a basis of measuring of earnings and while the legislature has — the Congress has written in this way in Bronstein case in 1963.

You recognized that while it was a matter of taxation and that that’s the way the legislation was written and it was a matter — if that’s the way Congress did it and it didn’t appear to be a type of situation for the judicial determination.

We would submit, Your Honor that the question of a legislative interpretation is very deliberate here, it’s very much designed because they even recognize that they were concern about the Government harassing, it’s in our brief, harassing small businessmen and they have now took the penalty tax off, and another thing we must recognize that this is a penalty judge.

We pay the income tax and the rule of Goal versus Golez, in the case of penalty taxes that you must construe any enlargement of misconstruction or interpretation question as against the Government and for the taxpayer.

We say there is no ambiguity.

The term in 1936 the word “gain” was change to “earnings”, so, of the earnings and profit and every measure, every deliberate concern of the legis — of Congress has been on earnings and yet, they bring —

Byron R. White:

I don’t understand the government to be contending of course we’ll hear from them and due course, but I don’t understand then to be contending that this unrealized appreciation is earnings and profits.

Kirk M. McAlpin:

They contend that it is not, Your Honor.

But what they —

Audio Transcription for Oral Argument – April 16, 1975 in Ivan Allen Company v. United States

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Byron R. White:

You concede that it is not.

Kirk M. McAlpin:

They reach out for a new term called “total resources available.”

Byron R. White:

Yes.

Kirk M. McAlpin:

That’s not what the statute says, the statute says, “earnings and profits available.”

Byron R. White:

Well, did have earnings and profits —

Kirk M. McAlpin:

Yes, sir.

Byron R. White:

— and the Government’s position is where this unrealized appreciation of the Xerox stock, those earnings and profits were unreasonably accumulated if they weren’t paid out.

Kirk M. McAlpin:

But they —

Byron R. White:

Now also, I should point out that the dividends doesn’t have to be a cash dividend.

The dividend could’ve been paid out in the form of Xerox of stock —

Kirk M. McAlpin:

Well, Your Honor —

Byron R. White:

— to your shareholders.

Kirk M. McAlpin:

That’s very interest and I’m glad you mentioned it because one of the indications that cause a proper value is in regulations to 562 when you give your unrelated stock out they give you a credit only at cost.

They don’t give bucket.

Yes, what they trying to do is trigger us at market example in when we give — when we transfer 870 shares of Xerox to our shareholders in 1965, it had a market value approximately $87,000.00.

If you notice on your balance sheet that in that year, we were going to credit for $6,500.00, Section 312 of the Internal Revenue Code talked about earnings says that there must be that when there’s a recognition at the time that that is when the gain and that’s when earnings become indicative.

It is nothing in the statute —

Potter Stewart:

And it’s the shareholders’ basis on receipt of dividend in kind as the basis for each share, the corporation’s cost —

Kirk M. McAlpin:

He has to pay, when the shareholder gets it, they give the corporation only cost deduction but when he gets it he must pay market value.He pays tax on a basis of market value.

Potter Stewart:

That’s dividend, the market value and what’s the — and then his basis if he later sells at this market —

Kirk M. McAlpin:

It is a new market.

Potter Stewart:

Yes.

Kirk M. McAlpin:

And as American Trading you asked by the dividend American Trading — the Government made the same contention there.

They said what that would do is dissipate the entire thing that they would have — first, you loss 37.5%.

The Government determines when you sell your stock and on that very day, you loss up to 37.5% in your value which is not available to meet, then you get a cost deduction and if it’s treating you at market and then your stockholder has to pay the full value when he gets it.

Now, as the Court said in the Couch Nebraska 1964, I hate to say that to the Court but it’s on point and I think it’s very significant.

They say, “They hope that they don’t see day the courts said.”

When government invades business to such of extent, in this very issue, that they can determine when stocks are sold and therefore, they held in that case that force conversion was not desirable that whether was doing is put in Government in the back — into the management seat and all decisions are manageable will be trigger thereafter.

We submit as you have also said in Eisner that this was not the effect design and other issues I know I could treat but —

Warren E. Burger:

Very well, Mr. McAlpin.

Audio Transcription for Oral Argument – April 16, 1975 in Ivan Allen Company v. United States

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Warren E. Burger:

Mr. Crampton.

Scott P. Crampton:

Mr. Chief Justice and may it please the Court.

I’d like to start at the outset and try to put in focus our understanding of these statutes that we have before you.

The basic purpose of course is to avoid the so-called “incorporated pocket book.”

Congress determined that stockholder should not be permitted to accumulate idle funds in a corporation in order to avoid dividend taxes that they would otherwise have to pay themselves.

As we look at the statute, there is a two fold test here.

The first, Section 531 imposes the tax on the accumulated taxable income.

This is an additional tax on income for a given taxable year.

It applies only to that income which is permitted to accumulate in that particular year.

The income involved is determined basically from the books of the corporation and it is determined in much the same way as your regular corporate income is determined but then modified for certain adjustments.

And so far as we see it, this is simple book keeping, you come up with income that’s determined the way everyone understands it.

If you have no income, you have no problem under this statute.

If income does exist though, when you’ve done this computing and it is not distributed as dividends to the stockholders, then you look to see if this income can be distributed without a hardship to the company.

The statute speaks of the earnings and profits being permitted to accumulate beyond the reasonable needs of the business.

And I think the word “needs” here is the keyword for our second test.

It seems to us that this isn’t economic test.

Here, the statute departs from concepts of taxable income that we know under bookkeeping and it requires us to measure the resources of the corporation against its needs.

The case is construing the statute refer to this as “net liquid assets.”

If you take your current assets and your current liabilities and you see what are the economic resources that the corporation.

William O. Douglas:

Mr. Crampton.

Scott P. Crampton:

Yes, sir.

William O. Douglas:

What do you mean by liquid assets?

How did you define them for this purpose?

Scott P. Crampton:

I think those are read assets that can be readily converted to cash, probably inventory receivables things like that that would come into income within a year or less than a year.

William O. Douglas:

Suppose you had a highly marketable piece of real estate that you can sell any day.

Scott P. Crampton:

I think that would probably a liquid asset then assume in your premise.

William O. Douglas:

Right, how would you determine the value?

Scott P. Crampton:

I think you have to determine the value of these properties as the same way we determine values in many other areas like you would for estate tax purposes in the question of condemnation.

You have a question here it’s a fact question, that the Court would have to consider.

William O. Douglas:

And that means that the Government would get an appraiser and the taxpayer would get an appraiser and they would be miles apart and they compromise somewhere in the middle which is what is usually happens.

Audio Transcription for Oral Argument – April 16, 1975 in Ivan Allen Company v. United States

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Scott P. Crampton:

Well, I think Your Honor in the situation you gave or you said it was readily saleable, I doubt if you’d have much of evaluation problem there, if there somebody wanting to buy this property you probably have pretty good idea what the sales price would be.

William O. Douglas:

You have to sell it they would find it?

Scott P. Crampton:

That’s true.

But that’s true of your — of any security like the Xerox stock here it have to be sold or some fluctuation in the market from the day to day.

But we don’t think you need to get into that much of a refinement.

You look to see whether or not there is current assets here sufficient that the corporation could pay out these earnings and profits without disturbing its normal needs.

William O. Douglas:

Do you recall what the fluctuation in Xerox stock was in the year 1974?

Scott P. Crampton:

No sir,I don’t know.

I’ve got it here but I know it’s a volatile stock in 74′ —

William O. Douglas:

It arranged according to mode year from 55 to and 134.

Now, which day would the Government pick?

Scott P. Crampton:

I don’t think you pick a day on this as we view the case.

Your Honor, you would look at the situation over the year and if there’s a minimum value of 55 certainly that would be I think a realistic value to take.

If that is the law because we are — we’re not trying to force a conversion here.

We’re just saying it you know in a day to day market place you’ve got some assets here and if you’re sure that you can realize at least $55.00 of share on it, then that’s something we could look at.

William O. Douglas:

So, if there was a lower market value in the fiscal year in question the taxpayer could’ve taken that for purposes of this case.

Scott P. Crampton:

I would think that would be reasonable.

William O. Douglas:

I thought the — I thought you took the market value on the last day of the taxpayer’s of fiscal year.

Scott P. Crampton:

I don’t think it’s ever been refined to that point.

Byron R. White:

No, I thought that was your point in this case?

Scott P. Crampton:

No, we have stipulated what the values were with counsel.

We were trying to get out of the case some of these detail factual things and we have agreed with counsel for the taxpayer that these were the values and we have reduced those values by the capital gains tax and by the brokerage made of points, so as far as this case is concern, we have hard figures that these are the fair market values that both parties agreed they could use and then we have the cost figures which were equally refer.

William O. Douglas:

Mr. Crampton, before you go on, how would sound the accounting principles require a corporation to carry the value of this Xerox stock at any particular day?

Scott P. Crampton:

Oh, I think cost clearly.

William O. Douglas:

There’s no question about that, is there?

Scott P. Crampton:

Not in my mind but I do know that most accountants will also and this taxpayer did.

They showed the market value.

I think at the end of the year as not quite a footnote but parenthetical addition to their balance sheet.

William O. Douglas:

And if you file the registration statement with the SEC and undertook to show your assets at market you get deficiency immediately, wouldn’t you?

Scott P. Crampton:

You certainly — they wanted to explain very carefully how you determine that this was the value you were putting on it.

Audio Transcription for Oral Argument – April 16, 1975 in Ivan Allen Company v. United States

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William O. Douglas:

And the reason for that is that there’s nothing definite, really definite except cost.

Scott P. Crampton:

That’s true.

William O. Douglas:

Market value varies — it can’t vary in with respect to stocks from day to day very widely.

Scott P. Crampton:

I agree.

Warren E. Burger:

Mr. Crampton, what if this taxpayer had purchased Xerox that the highest points, whatever that was, and that you were dealing with it in terms of today’s market value, so that there would be an enormous unrealized loss.

How would that figure in the process of taking in to consideration and language of the regulation taking into consideration of the total picture?

Scott P. Crampton:

It’s our view that the rule works both ways if you bought at the higher figures, Your Honor suggest and now it is not worth that then it’s the existing market value that you look at in determining the needs of the business, and that was the holding of this Court in the National Grocery case which we referred in our briefs, in that case, they had earnings I think of some $800,000.00 and then admitted security losses of $2 million and the Court said, “You do look at the present value of those securities.”

And there’s a quotation in our brief it’s quite clear and I will come into it in a minute but the Court then went and had impose the tax because as you look over a 10-year average the had accumulated earnings and profits or something like $5 million that had never paid a dividend.

But the Court there announced the rule and we think this is just the opposite of it and we certainly say the rule works both ways.

Now, I think the pivotal question here, is how the resources of business should be measured?

The counsel for taxpayer has set forth some of the facts but I’d like to summarize them briefly against the statute as we’ve indicated the facts that have been stipulated.

This corporation had earnings after federal income taxes of about $180,000.00 in 1965 and almost $400,000.00 in 1966.

It paid less than a third of these amounts out in dividends.

In 1965, it paid $49,000.00 in cash dividend and distributed 870 shares of Xerox stock, in 1966, paid out $50,000.00 in cash dividends and a 10% stock dividend.

Its reasonable needs as I say have been stipulated for 1965 they need at almost $2 million, I mean, a $1,200,000.00 and in 1966, they needed practically a million and a half, and these are liquid assets taken at book value and the parties has agreed that these amounts equal in needs of the business.

If — these are the liquid assets and they are the needs if you look at the book figures.

Now —

Potter Stewart:

What are liquid assets taken at book value?

What are you talking about now, the earnings and profits of that year?

Scott P. Crampton:

No.

These are the assets on the books I have indicated, I think they would be realized within a year and the payables within a year.

It’s the readily receivable things that can be converted into cash if you need to, and that brings us right to the point of how you value the Xerox stock.

We have —

Potter Stewart:

As you can see that — have there been no appreciation in value of the Xerox stock? There could’ve been no violation of the statute —

Scott P. Crampton:

Under these facts, there been no liability at all.

We agree with that and I think that the stipulations were designed to point that up and the real question is, we have also stipulated that after allowance for the capital gain’s tax and the brokerage fees that the liquid assets of this corporation are practically double the figures that we stipulated as the corporate needs.

The liquid assets, if you look at fair market value or $2 million and two some in 1965 over $3 million in 1966, and here, 76% of the voting stock was owned by Ivan Allen Sr. and Ivan Allen Jr. and because of that, the commissioner of Internal Revenue determine this assessment.

Warren E. Burger:

I think we’ll resume there Mr. Crampton.