H. KALICAK CONSTRUCTION CO. v. Commissioner, Docket No. 5030-81
| Decision Date | 16 October 1984 |
| Docket Number | Docket No. 5030-81,5098-81,25040-81. |
| Citation | 48 TCM (CCH) 1403,1984 TC Memo 552 |
| Parties | H. Kalicak Construction Co., et al. v. Commissioner. |
| Court | U.S. Tax Court |
Paul K. Voelker, for the respondent.
Memorandum Findings of Fact and Opinion
Respondent determined deficiencies in Federal income taxes against petitioners in these cases, as follows:
Petitioners Docket No. Taxable year ended Deficiency
H. Kalicak Construction Co. ............ 5030-81 December 31, 1975 $109,627.99
Harold Kalicak ......................... 5098-81 December 31, 1975 54,205.98
H. Kalicak Construction Co. ............ 25040-81 December 31, 1977 73,005.00
After concessions, the issues remaining for our decision in Docket Nos. 5030-81 and 5098-81, are as follows:2
I. Docket No. 5030-81—H. Kalicak Construction Co.
(1) Whether petitioner is entitled to an additional net operating loss carryforward to 1975 in the amount of $31,776.71;
(2) whether petitioner is entitled to deductions in 1975 for cost of goods sold in respect of the following: (a) "Cash paid — Heeter" in the amount of $24,605; and (b) "Cash expense — H. Kalicak" in the amount of $32,563.65; and
(3) whether petitioner is entitled to an additional deduction in 1975 for legal and accounting expenses in the amount of $15,312.45.
II. Docket No. 5098-81 — Harold Kalicak
(1) Whether petitioner realized constructive dividend income in 1975 in respect of the following: (a) "Cash paid — Heeter" in the amount of $12,302.50; (b) in the amount of
$29,603.42; and (c) legal and accounting expenses in the amount of $4,554.63;
(2) whether, if petitioner realized dividend income in respect of any of the foregoing items, he is entitled to corresponding deductions under section 162(a);3 and
(3) whether petitioner is entitled to an exemption from taxation in 1975 in respect of income earned abroad by his now deceased wife, Dorothy, in the amount of $25,000.
H. Kalicak Construction Co. (hereinafter referred to as "HKCC"), petitioner in Docket No. 5030-81, is a Missouri corporation with its principal place of business at 1982 Congressional Drive, St. Louis County, Missouri, which filed corporate income tax returns (Forms 1120) for the years 1971 through 1975, inclusive.
Harold Kalicak (hereinafter referred to as "Harold"), petitioner in Docket No. 5098-81, is an individual whose legal residence is St. Louis County, Missouri and who filed a joint U.S. individual income tax return for the year 1975 with his wife Dorothy, who is now deceased. Harold and Dorothy have two children, Ronald and Steven, who were of the respective ages at the time of trial of 38 and 28.
HKCC was formed in or about 1965. Between 1971-1975, inclusive, Harold was the president of HKCC and owned between 51 percent and 89 percent of its stock. During the same period, Thomas Heeter (hereinafter referred to as "Thomas") was a vice-president of HKCC, and owned 11 percent of its stock. From its inception in 1965 through 1975, HKCC was involved in construction work within the United States, including bridge and building construction and renovation work.
Beginning in early 1970, Harold and Dorothy moved to and made their principal residence in West Africa. Harold remained in Africa until 1981, residing in the Republic of Zaire until 1976, and Dorothy generally remained there until April 1976. From 1970-1976, Steven lived in Zaire from time to time, when he was not attending school in the United States. From 1970-1973, Ronald also lived in Zaire from time to time, but during late 1974 and 1975, Ronald and his wife lived most of the time in Zaire.
During the period of his residence in Africa, Harold formed several foreign corporations in West Africa, including corporations in the Republic of Zaire, Gabon and Cameroon. These foreign corporations were assisted by HKCC, which supplied them with manpower, construction equipment, materials and insurance, in return for which HKCC received payment together with a service fee.
In 1970, Harold formed a corporation in Kinshasa, Zaire, known as Kalicak International RDZ (hereinafter referred to as "RDZ"). RDZ was nationalized by the government of Zaire in 1973.
During the period 1970-1975, HKCC had a business relationship with RDZ, whereby the former would assist the latter in its construction work by supplying manpower, equipment and materials. HKCC would recruit and hire American personnel to work for RDZ overseas, and would purchase construction equipment and materials and arrange for their shipment to Zaire.
During the same period, Harold worked for both HKCC and RDZ, making sure that HKCC met the service requirement of RDZ, and procuring and supervising RDZ's construction jobs in Zaire. Harold spent approximately 60 percent of his working time on RDZ work and 40 percent on HKCC work, but was compensated, at a salary which he determined, solely by HKCC. In September of 1975, two cashier's checks were drawn by HKCC upon the Hampton Bank, payable to the order of Harold. Both such checks were deposited into Harold's personal bank account.
During the foregoing period, living conditions in Zaire were variously described as ranging from "not to bad" to "miserable." There were, in any event, periodic absences of electricity and certain basic food products, it was consistently hot, and it was necessary to boil, filter and maintain one's own supply of water.
At all times here pertinent, Harold's son, Ronald, was employed as a vice-president of HKCC. During 1974, while he was working for HKCC in St. Louis, Ronald served as a liaison between HKCC and RDZ. After his move to Africa in 1974, Ronald worked for RDZ in Zaire.
In March of 1970, Harold hired a Greek national named Dimitri Kitsonidis to serve as business manager of RDZ. In this capacity, Kitsonidis managed payrolls, banking and miscellaneous office administration work. Kitsonidis was compensated by RDZ at an annual rate, as determined by Harold, which rose to the level of $50,000-$60,000, in American dollars, during his later years with RDZ. In addition, he was provided with health insurance and paid vacation leave, and his meals and lodging expenses were paid by RDZ. At an undisclosed time during 1974, Kitsonidis went on a vacation, but he unexpectedly failed to return therefrom to the employ of RDZ.
Dorothy began working for RDZ in 1970. However, with the unexpected departure of Kitsonidis, in 1974 and 1975, Dorothy additionally assumed the majority of his duties as the business manager of RDZ. Her responsibilities then included supervising native personnel who were in charge of the staff house used by RDZ to house and feed its employees, purchasing food for such employees, assisting such employees in obtaining health care, arranging for air travel for the American employees to return to the United States, overseeing payrolls and participating in the maintenance of corporate books and records. Dorothy spoke Lingala, the Zairean language, which increased the value of her services to the RDZ operations. Since she and her husband lived in the staff house, together with as many as forty employees, Dorothy had to be prepared to meet her foregoing responsibilities as the need arose, which might be at any time of the day or night.
In 1975, Dorothy was paid $25,000 by HKCC; she was never compensated by RDZ, and had not previously been compensated by HKCC. The compensation paid to Dorothy was billed by HKCC to RDZ.
On June 15, 1975, Dorothy returned to the United States as a result of ill health. At that time, she was diagnosed as having cancer and was operated upon and hospitalized for several weeks. In July 1975, after her release from the hospital, Dorothy returned to Africa where she resumed her duties on behalf of RDZ. In April of 1976, Dorothy returned to the United States where she remained until her death on December 15, 1976.
On December 28, 1967, Thomas caused to be incorporated in Missouri the Heeter Corporation (hereinafter referred to as "Heeter"), for the purpose of exploiting the North American production and sales rights to a toy known as the "Ride-A-Roo Kangaroo Jockey Ball."4 Such rights had been acquired from an English company by means of a contract executed by Harold, who was either the president or vice-president of Heeter.
Initially, Heeter's board of directors consisted of Thomas, Harold and Don Brown, and its officers included Thomas, Harold, Don Brown and one Leonard Yocum, who was both counsel to Heeter and part-time counsel to HKCC. Harold owned approximately 50 percent of Heeter's stock. Brown, who handled Heeter's marketing and sales, remained with the company up until early 1970, when he resigned. Brown was replaced by an individual who resigned after only two weeks, but such individual was not replaced.
The toy, which was originally manufactured in England, consisted of an inflatable round ball with a handle, which was constructed from a rubberized compound, and on which children (or adults) could sit and bounce along the ground.
During 1968, Heeter exhibited the toy ball at a toy trade show in New York City where it was favorably received by both potential buyers and distributors and by the press. After the show, Heeter selected approximately seven distributors who would together distribute the toy ball throughout the United States, including Eyerly Associates, Inc. in Chicago, and Julius Levensen, Inc. in New York.
Heeter paid its distributors a six percent commission on all sales of the toy balls. Such commissions were paid by Heeter in response to distributor invoices, and such invoices were typically sent to Heeter shortly following sales of the balls at the retail level. During early 1970, Eyerly Associates, Inc. and Julius Levensen, Inc., invoiced Heeter for the following sales commissions:
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