## Facts

- Ivan Allen Co. was a closely held, cash-rich corporation that invested substantial earnings and profits in listed, readily marketable securities.
- The securities’ market value exceeded their acquisition cost.
- The IRS asserted liability for the accumulated earnings tax under IRC §§ 531–537, alleging the corporation accumulated earnings beyond the reasonable needs of its business.
- The dispute focused on how to value the corporation’s marketable securities when assessing whether earnings were accumulated beyond reasonable business needs under § 533(a).
- The corporation argued the securities should be valued at cost (basis), which would reduce the appearance of excess liquid assets.
- The government argued the securities should be valued at net liquidation value (market value), reflecting current realizable liquidity.
- The lower courts ruled for the government; the court of appeals affirmed, and the Supreme Court granted review.

## Issues

1. Under IRC § 533(a), must listed and readily marketable securities acquired from earnings and profits be valued at cost or at net liquidation value when determining whether earnings were accumulated beyond the reasonable needs of the business?

## Decision

- The Supreme Court affirmed the judgment for the United States.
- The Court held that, for applying § 533(a), listed and readily marketable securities purchased out of earnings and profits must be taken into account at net liquidation value, not cost.
- Because valuation at net liquidation value increased the corporation’s apparent liquid resources, the IRS’s application of the accumulated earnings tax framework was upheld.

## Legal Principles

- The accumulated earnings tax applies when a corporation is formed or used to avoid shareholder income tax by retaining earnings rather than distributing them. (IRC § 532(a))
- Accumulating earnings beyond the reasonable needs of the business creates a rebuttable presumption of a shareholder tax-avoidance purpose, unless the corporation proves otherwise by a clear preponderance of the evidence. (IRC § 533(a))
- For determining whether earnings exceed reasonable business needs under § 533(a), listed and readily marketable securities are treated as liquid resources and valued at their net liquidation (market) value rather than historical cost.
- Cost-basis conventions used elsewhere in the Code for gain/loss computation do not control the separate § 533(a) inquiry into the corporation’s actual, currently available financial capacity.

## Conclusion

The Court required that readily marketable securities be valued at net liquidation value in assessing whether a corporation’s retained earnings exceed reasonable business needs under § 533(a), strengthening the accumulated earnings tax’s function against shareholder tax avoidance through retention of liquid, appreciating investments.


Ivan Allen Co. v. United States, 422 U.S. 617 (1975)