Ready Paving & Constr. Co. v. Comm'r of Internal Revenue
| Decision Date | 26 March 1974 |
| Docket Number | Docket No. 2324-72. |
| Citation | 61 T.C. 826 |
| Parties | READY PAVING & CONSTRUCTION CO., PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Barry E. Semer and Aaron Cohen, for petitioner.
Lewis M. Porter, Jr., for respondent.
Petitioner did paving contract work for municipalities and was paid interest-bearing warrants, the fair market value of which was 92 to 96 percent of face value. At the end of each of the years 1966 and 1967 petitioner had current assets as shown by its books which listed the warrants as current assets in excess of current liabilities in an amount more than required for its working capital needs and other reasonable needs of its business. If the warrants are eliminated from petitioner's current assets, its net available current assets are less than the reasonable needs of its business. Held, the warrants petitioner received in payment for its paving work are properly considered as current assets in determining whether petitioner permitted its earnings and profits to accumulate beyond the reasonable needs of its business. Held, further, petitioner did permit its earnings and profits to accumulate beyond the reasonable needs of its business and is subject to the tax imposed by sec. 531, I.R.C. 1954.
Respondent determined deficiencies in accumulated-earnings taxes of petitioner for the taxable years ending December 31, 1966 and 1967, in the respective amounts of $10,468.54 and $5,890.08. The only issue for decision is whether petitioner was availed of for the purpose of avoiding additional Federal income taxes with respect to its shareholders in each of the years in issue.
All the facts have been stipulated and all the stipulated facts together with the exhibits attached to the stipulation are found accordingly. We will, however, set forth herein those facts we consider helpful to an understanding of our opinion.
Petitioner is an Illinois corporation with its principal office in Chicago Ridge, Ill., at the time of the filing of the petition in this case. Petitioner filed its Federal corporate income tax returns for its taxable years ended December 31, 1966, and December 31, 1967, with the district director of internal revenue at Chicago, Ill. Its returns were filed on the completed-contract method of accounting.
Petitioner was organized in 1903 and has operated continuously since that date as a paving contractor, principally of streets and highways. Petitioner customarily performs the paving work but engages subcontractors to perform related work such as the installation of sewers, the placement of curbing, and site excavation.
Petitioner's authorized and issued capital stock consists of 750 shares of common stock having a par value of $100 per share. In 1951 petitioner reacquired 565 of its issued shares at a cost of $648,000. From that time, and throughout the years here in issue, these shares were held as Treasury stock. The remaining 185 shares continued as outstanding, and, during the years before us, were owned as follows:
+------------------------------------------------------------------------+
¦ ¦Number of shares ¦ ¦
+---------------------+---------------------------+----------------------¦
¦Shareholder ¦(common stock—$100 par) ¦Percentage ownership ¦
+---------------------+---------------------------+----------------------¦
¦ ¦ ¦ ¦
+---------------------+---------------------------+----------------------¦
¦Charles H. Ready ¦42 ¦22.7 ¦
+---------------------+---------------------------+----------------------¦
¦Robert J. Ready ¦72 ¦38.9 ¦
+---------------------+---------------------------+----------------------¦
¦Charlotte Ready Riley¦71 ¦38.4 ¦
+---------------------+---------------------------+----------------------¦
¦ ¦185 ¦100.0 ¦
+------------------------------------------------------------------------+
Petitioner's officers during the years in issue were Charles H. Ready, president; Robert J. Ready, vice president/treasurer; and Thomas Ready, secretary. Although a shareholder, Charlotte was not employed by petitioner and received no compensation from petitioner during the years in issue. Robert, Thomas, and Charlotte are the son, nephew, and daughter of Charles, respectively.
Petitioner's operating revenue (gross receipts) is derived principally from its paving contracts which it performs for both governmental bodies and private customers. The remainder of its operating revenue is derived from truck equipment rentals and sales of material. Petitioner's books, records, and financial statements disclose, with regard to its operating revenue and the composition thereof, the extent of its subcontract work and its direct costs for the years 1963 through 1967, the following:
+--------------------------------------------------------+
¦OPERATING REVENUE ¦
+--------------------------------------------------------¦
¦ ¦ ¦Paving and construction receipts ¦
+----+-------------+-------------------------------------¦
¦Year¦Total ¦ ¦Government contracts ¦
+----+-------------+----------+--------------------------¦
¦ ¦ ¦Total ¦ ¦
+----+-------------+----------+--------------------------¦
¦ ¦ ¦ ¦Receipts ¦Percent of total¦
+----+-------------+----------+---------+----------------¦
¦ ¦ ¦ ¦ ¦ ¦
+----+-------------+----------+---------+----------------¦
¦1963¦$1,539,455 ¦$1,445,398¦Not known¦Not known ¦
+----+-------------+----------+---------+----------------¦
¦1964¦2,102,462 ¦1,993,222 ¦$792,959 ¦40.0 ¦
+----+-------------+----------+---------+----------------¦
¦1965¦1 1,986,093¦1,915,328 ¦573,994 ¦30.0 ¦
+----+-------------+----------+---------+----------------¦
¦1966¦1,962,177 ¦1,917,312 ¦568,285 ¦29.6 ¦
+----+-------------+----------+---------+----------------¦
¦1967¦1,759,235 ¦1,677,336 ¦269,068 ¦16.0 ¦
+----+-------------+----------+---------+----------------¦
¦ ¦ ¦ ¦ ¦ ¦
+----+-------------+----------+---------+----------------¦
¦ ¦ ¦ ¦ ¦ ¦
+--------------------------------------------------------+
FN1 As revised, per 1966 financial statement.
+-----------------------------------------+
¦DIRECT COSTS ¦
+-----------------------------------------¦
¦ ¦ ¦Subcontract work ¦
+----+----------+-------------------------¦
¦Year¦Total 1 ¦ ¦
+----+----------+-------------------------¦
¦ ¦ ¦Costs ¦Percent of total¦
+----+----------+--------+----------------¦
¦ ¦ ¦ ¦ ¦
+----+----------+--------+----------------¦
¦1963¦$1,222,147¦$426,066¦34.8 ¦
+----+----------+--------+----------------¦
¦1964¦1,647,216 ¦519,961 ¦31.4 ¦
+----+----------+--------+----------------¦
¦1965¦1,702,533 ¦448,789 ¦26.3 ¦
+----+----------+--------+----------------¦
¦1966¦1,721,380 ¦518,727 ¦30.0 ¦
+----+----------+--------+----------------¦
¦1967¦1,500,483 ¦298,976 ¦19.9 ¦
+----+----------+--------+----------------¦
¦ ¦ ¦ ¦ ¦
+----+----------+--------+----------------¦
¦ ¦ ¦ ¦ ¦
+-----------------------------------------+
FN1 Includes direct costs of truck-equipment rentals and material sales.
Petitioner generally obtains its business through competitive bidding. It is not usually required to obtain bid and performance bonds for the work it performs for private customers. With respect to public contracts, however, petitioner must customarily submit bid bonds and qualify for a performance bond equal to the amount of the contract before its bid will be considered. The bid bond consists, in most instances, of a cash deposit which is retained by the appropriate governmental body no longer than 3 or 4 days. Usually, the bid is accompanied by a certified check amounting to 10 percent of the contract price. This check is also retained no more than 3 or 4 days, unless petitioner is the successful bidder or the second lowest bidder, in which event the check is customarily retained for 10 or 30 days until the contract is signed, at which time a performance bond is required of the successful bidder. The certified check is never negotiated. Petitioner had yearend cash deposits on bids and plans as follows:
+-----------------------+
¦Dec. 31— ¦ ¦
+-------------+---------¦
¦1964 ¦$6,779.50¦
+-------------+---------¦
¦1965 ¦9,224.60 ¦
+-------------+---------¦
¦1966 ¦12,910.00¦
+-------------+---------¦
¦1967 ¦25,040.00¦
+-------------+---------¦
¦1968 ¦25.00 ¦
+-----------------------+
Petitioner obtains bid and performance bonds through a member of the surety industry. The surety, before underwriting the bonds, generally requires either that a contractor's net current assets equal at least 10 percent of the total work program to be undertaken, including both work in progress and the new bid, or that its net worth amount to 20 percent of this total work program provided that the contractor's reputation, experience, and business organization are adequate.
Petitioner customarily completes approximately 75 percent of its jobs in the year the job is started. Its cost data of jobs in process at year-end 1965, 1966, and 1967 were as follows:
To continue reading
Request your trial
-
SUWANNEE LUMBER MANUFACTURING COMPANY v. Commissioner
...as a percentage of one year and by multiplying the total operating costs for one year by that percentage. Ready Paving & Construction Co.v. Commissioner Dec. 32,510, 61 T.C. 826 (1974); Magic Mart, Inc. v. Commissioner Dec. 29,456, 51 T.C. 775 (1969); Faber Cement Block Co., An operating cy......
-
Rutter v. Commissioner
...USTC ¶ 9294, 494 F.2d 429 (10th Cir. 1974), affg. a Memorandum Opinion of this Court Dec. 31,872(M); Ready Paving & Construction Co. v. Commissioner Dec. 32,510, 61 T.C. 826 (1974); Sandersville Railroad Co. v. United States 74-2 USTC ¶ 9584, 385 F.Supp. 59 (M.D. Ga. 1974).17 We find those ......
-
Ivan Allen Company v. United States 8212 22
...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. American Trading & Production Corp. v. United Stat......
-
Atlas Tool Co. v. Comm'r of Internal Revenue
...needs of the business. 23. See Bardahl Manufacturing Corp. v. Commissioner, T.C. Memo. 1965-200. See generally Ready Paving & Construction Co. v. Commissioner, 61 T.C. 826 (1974); Magic Mart v. Commissioner, 51 T.C. 775 (1969). 24. Petitioners' figure of 1.25 months was based on the use of ......