Laure v. Comm'r of Internal Revenue , Docket Nos. 1517-76
| Decision Date | 28 September 1978 |
| Docket Number | 1518-76.,Docket Nos. 1517-76 |
| Parties | GEORGE R. LAURE and ESTHER L. LAURE, PETITIONERS v. COMMISSIONER of INTERNAL REVENUE, RESPONDENTW-L MOLDING CO., PETITIONER v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Laure was sole stockholder of both W-L Molding Co. and Lakala Aviation, Inc. Both Laure and W-L Molding advanced funds to Lakala. Lakala suffered losses and its business was discontinued, purportedly through a merger into W-L Molding, which assumed its obligations.
Held: 1. Salary paid to Laure by W-L Molding Co. was reasonable compensation for services rendered and is fully deductible by W-L Molding Co.
2. Purported merger of Lakala Aviation, Inc., into W-L Molding Co. did not qualify as a statutory merger under sec. 368(a)(1)(A), I.R.C. 1954, and W-L Molding Co. may not deduct premerger net operating loss carryovers of Lakala Aviation, Inc.
3. W-L Molding Co.‘s assumption and payment of Lakala Aviation, Inc.‘s debt to Laure constituted a constructive dividend to Laure. W-L Molding Co.‘s assumption of Lakala's debt to it did not constitute a constructive dividend to Laure. D. Alden Newland, for the petitioners.
Peter M. Ritteman, for the respondent.
In these consolidated cases respondent determined deficiencies in Federal income taxes as follows:
Various issues have been settled, leaving for our decision these main questions:
(1) Whether under section 162(a)(1), I.R.C. 1954,1 amounts deducted by petitioner W-L Molding Co. as compensation for George R. Laure, its president and treasurer, were for services rendered and reasonable in amount.
(2) Whether petitioner W-L Molding Co. and Lakala Aviation, Inc., engaged in a statutory merger qualifying under section 368(a)(1)(A) so that pursuant to sections 381(a) and 172, W-L Molding Co., as the acquiring corporation, may deduct premerger net operating loss carryovers of Lakala Aviation, Inc.
(3) Whether petitioner George R. Laure received constructive dividends in 1972 to the extent certain debts of Lakala Aviation, Inc., were paid or canceled by W-L Molding Co.
Some of the facts have been stipulated and are so found.
Petitioners George R. Laure and Esther L. Laure (docket No. 1517-76), husband and wife, resided in Kalamazoo, Mich., when their petition was filed. They filed joint returns for calendar years 1971 and 1972 on the cash basis with the Central Service Center, Covington, Ky. Esther L. Laure is a petitioner solely because of the joint returns, and references herein to “Laure” are to George R. Laure alone.
Petitioner W-L Molding Co. (docket No. 1518-76) is a Michigan corporation with its principal offices at Kalamazoo, Mich., when its petition was filed.
W-L Molding Co. (W-L Molding) filed its returns for fiscal years ending June 30, 1972, and June 30, l973, on the accrual basis with the Central Service Center, Covington, Ky.
George R. Laure, founder, sole shareholder, president, and treasurer of petitioner W-L Molding, is a brilliant individual who through education and experience has become highly skilled in diverse technical fields.
Before entering college Laure acquired practical experience as a tool and diemaker and as an electrician.
Laure attended Notre Dame University and in 1937 received a chemical engineering degree majoring in organic chemistry. He minored in electrical and metallurgical engineering. While at Notre Dame he began experimenting, and this practice eventually made him a substantial inventor in his own right. As a student at Notre Dame, he participated in developing a 3-million volt X-ray machine used to X-ray automobile engines. He also did basic research with synthetic rubber.
After his college education and training in developing plastics, Laure worked briefly as a chemical engineer with Seagram's Distillery before moving to the Upjohn Chemical Co. where he developed several important, patentable items, including a basic wound package used by soldiers in World War II.
Laure became interested in the production of plastics and plastics molding and started a company in 1945 which was operated as a partnership until 1955. One of the first products produced by the firm was a “colorimeter disc” used to make color determinations for pharmaceuticals and medicine. The firm also produced the “potentiometer base” for the Chicago Telephone Co. The colorimeter and potentiometer were patented by the parties for whom they were produced.
Later in 1949 Laure received his first patent, for rollers used in the broilers of stoves, ovens, and other places requiring bearings that resist heat and pressure. Prior to Laure's invention of a plastic bearing, stove doors commonly became unworkable as metal bearings rusted.
Laure also developed and patented a plastic mold guard for rod-type furniture, which mold is used by 30 to 35 percent of manufacturers of such furniture.
The plastics and plastics molding company started by Laure 10 years earlier was incorporated in 1955 as W-L Molding Co.
From W-L Molding's formation in 1955 through the tax years in issue Laure continued to invent or participate in the invention of ingenious, highly-functional items. These items included a check valve used in lightweight water systems, a wheel assembly and plastic roller used in sliding hardware, a sheet metal screw thread and forming tool, a roller and retainer for a wire basket used in commercial dishwashers, and a display structure for pharmaceutical bottles. The patents for these items were assigned to W-L Molding.
As a result of Laure's ingenuity, W-L Molding has achieved high quality and production control. For better quality control, Laure invented an injection molding machine with an automatic control unit that can be programmed to give machine control over heat, pressure, time, and fill to plus or minus one-thousandth of a second. Also contributing to quality control is a chemical laboratory Laure designed to control density, flow factors, melting points, and K factors and to test wear, friction, and impact. For improved production control, Laure developed a “totalizing room,” which is connected to counting equipment, which in turn is connected to the plant's machinery. In this totalizing room, one can determine the number of units each machine has produced in its production run, what it is producing, and to whom the product is sent. This room controls 80 to 90 sophisticated machines. Because of these control features, W-L Molding has been able to obtain and retain national customers such as IBM, Zerox, Westinghouse, and General Electric. W-L Molding also made plastic parts for the NASA space program, which required high-precision molding.
Laure also devised a way whereby a mold can be used to produce parts for many different users. Through this and automation, Laure has produced significant cost savings for W-L Molding.
Largely due to Laure's efforts, W-L Molding produced over 6,000 items and had about $4-5 million in sales for each of the years in issue. Its taxable income before net operating loss deductions was $205,273 for fiscal 1972 and $208,826 for fiscal 1973.
Further evidence of Laure's research and development skills is his work (unrelated to W-L Molding) in molded plastic prosthetics. A Dr. Arthur Steffee and Laure have been pioneers in developing successful plastic prosthetics for artificial knuckles and other body parts.
As founder, sole shareholder, and principal officer of W-L Molding, Laure was active in all aspects of the corporation's business. Indeed a concern of W-L Molding's principal creditor was that Laure was irreplaceable. Laure performed the functions of a manager, chemical engineer, electrical engineer, sales engineer, production design engineer, and secondary operations engineer. He also is licensed to fly single- and multi-engine aircraft, and he did most of W-L Molding's flying at one time. Through Laure's use of air charter service, Laure and W-L Molding's employees were able to travel around the country delivering plastic parts and servicing customers. Laure's use of air service was an important part in W-L Molding's growth as a nationwide supplier of plastic products.
At W-L Molding's first board of directors' meeting in 1955, Laure was voted a salary of $30,000 per year. About a month later, his compensation was increased by allowing him to draw, in addition to his $30,000 salary, a sum equal to up to 25 percent of W-L Molding's net profits before taxes.
In July 1959 Laure's base salary was increased to $48,000 per year, in August 1967 to $60,000 per year, and in June 1973 to $72,000 per year.
In respondent's notice of deficiency to W-L Molding, he determined that $38,160 of Laure's compensation for fiscal years ending June 30, 1972, and June 30, 1973, was excessive. The amounts set forth in the notice of deficiency are as follows:
+-------------------------------------------------------+
¦ ¦6/30/72 ¦6/30/73 ¦
+-----------------------------------+---------+---------¦
¦Nondeferred compensation per return¦$138,445 ¦$121,245 ¦
+-----------------------------------+---------+---------¦
¦Deferred compensation per return ¦15,660 ¦15,660 ¦
+-----------------------------------+---------+---------¦
¦Total compensation claimed ¦154,105 ¦136,905 ¦
+-----------------------------------+---------+---------¦
¦Less: total allowed compensation ¦115,945 ¦98,745 ¦
+-----------------------------------+---------+---------¦...To continue reading
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