Mennuto v. Comm'r of Internal Revenue
| Decision Date | 02 August 1971 |
| Docket Number | 3001-70.,3000-70,Docket Nos. 2908-70— 2910-70,2924-70 |
| Citation | 56 T.C. 910 |
| Parties | ANTHONY MENNUTO AND STACIA MENNUTO, ET AL.,1 PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Alan M. Stark, for the petitioners.
Frank J. Smith, for the respondent.
1. Respondent determined that purported loans did not constitute bona fide indebtedness of petitioner corporation and that repayments thereof and payments of interest thereon constituted dividends. Held, the purported loans were bona fide indebtedness with the result that the repayments thereof were nontaxable and the interest was deductible by petitioner corporation.
2. Respondent determined that a portion of the salaries and bonuses paid to employee-stockholders by petitioner corporation was unreasonable and constituted nondeductible dividends. Held, amount of reasonable compensation determined.
3. Respondent sought to recompute the amount of an unused investment credit carryover available from a year for which assessment was barred by the period of limitations, in order to compute the amount of tax for an open year. Held respondent's right to make such recomputation sustained.
4. Further held, amount of charitable contributions of one of the individual petitioners determined.
5. Further held, expenses of installing a leeching pit, with a useful life of approximately 1 year, constitutes a deductible business expense.
6. Further held, amounts spent to replace inadequate piping constituted a nondeductible capital expenditure.
Respondent determined the following income tax deficiencies in these consolidated cases:
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¦ ¦ ¦Deficiency determined¦
+-----------------------------------------------+-------+---------------------¦
¦Petitioners ¦Docket ¦ ¦
+-----------------------------------------------+-------+---------------------¦
¦ ¦No. ¦1966 ¦1967 ¦
+-----------------------------------------------+-------+----------+----------¦
¦Anthony Mennuto and Stacia Mennuto ¦2908-70¦$2,693.20 ¦$2,836.29 ¦
+-----------------------------------------------+-------+----------+----------¦
¦Philip Russo and Concetta Russo ¦2909-70¦7,855.89 ¦ ¦
+-----------------------------------------------+-------+----------+----------¦
¦Martin J. Herman and Roslyn Herman ¦2910-70¦3,184.90 ¦2,789.82 ¦
+-----------------------------------------------+-------+----------+----------¦
¦Charles W. Muscarelle and Antoinette Muscarelle¦2924-70¦ ¦7,636.00 ¦
+-----------------------------------------------+-------+----------+----------¦
¦Irving Schornstein and Iris Schornstein ¦3000-70¦2,516.24 ¦2,483.39 ¦
+-----------------------------------------------+-------+----------+----------¦
¦Electro-Finish Corp ¦3001-70¦ ¦40,691.89 ¦
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The issues remaining for decision are:
(1) Whether certain advances made to the corporate petitioner in the form of loans were in reality contributions to capital.
(2) Whether amounts claimed by the corporate petitioner as compensation paid to its shareholder-employees were excessive and unreasonable.
(3) Whether respondent has the right to recompute the corporate petitioner's investment credit carryover from a year for which assessment is barred by section 6501(a)2 and section 6501(c)(4).
(4) Whether the petitioners in docket No. 3000-70 made charitable contributions in excess of the amounts allowed by respondent.
(5) Whether certain expenses incurred by the corporate petitioner should be capitalized or deducted from income in the year incurred.
Some of the facts have been stipulated and, along with the exhibits attached thereto, are incorporated herein by this reference.
Petitioners Anthony Mennuto (hereinafter referred to as Mennuto) and Stacia Mennuto are husband and wife who resided in Paramus, N.J., at the time their petition was filed herein. They filed joint Federal income tax returns for the calendar years 1966 and 1967 with the district director of internal revenue at Newark, N.J.
Petitioners Philip Russo (hereinafter referred to as Russo) and Concetta Russo are husband and wife who resided in Hohokus, N.J., at the time their petition was filed herein. They filed a joint Federal income tax return for the calendar year 1966 with the district director of internal revenue, Newark, N.J.
Petitioners Martin J. Herman (hereinafter referred to as Herman) and Roslyn Herman are husband and wife who resided in Emerson, N.J., at the time their petition was filed herein. They filed joint Federal income tax returns for the calendar years 1966 and 1967 with the district director of internal revenue at Newark, N.J.
Petitioners Charles W. Muscarelle (hereinafter referred to as Muscarelle) and Antoinette Muscarelle are husband and wife who resided in Saddle River, N.J., at the time their petition was filed herein. They filed a joint Federal income tax return for the taxable year ending July 31, 1967, with the district director of internal revenue at Newark, N.J.
Petitioners Irving Schornstein (hereinafter referred to as Schornstein) and Iris Schornstein are husband and wife who resided in Westfield, N.J., at the time their petitioner was filed herein. They filed joint Federal income tax returns for the calendar years 1966 and 1967 with the district director of internal revenue at Newark, N.J.
Electro-Finish Corp. (hereinafter referred to as EFC) is a New Jersey corporation whose principal place of business was located in Saddle Brook, N.J., at the time its petition was filed herein. EFC filed its corporate income tax returns for the taxable years ending March 31, 1966, and March 31, 1967, with the district director of internal revenue at Newark, N.J.
All of the petitioners except EFC utilized the cash disbursement and receipts methods of accounting on their returns for the years in question; EFC filed its returns on an accrual basis.
Issue 1. Debt-Equity Issue
For 14 years prior to 1963, Russo had been engaged in the business of manufacturing and selling aluminum storm windows and doors. From 1957 through 1963, he was president of Shield Products, Inc., a manufacturer of storm windows and doors.
A manufacturer of these products normally purchased strips of aluminum called extrusions and cut them in accordance with his particular needs. Russo was aware of a growing demand for painted extrusions, since metal thus treated offered a significantly greater resistance to atmospheric corrosion.
The process of applying paint electrostatically to aluminum extrusions starts by loading extrusions onto a conveyor for a wash cycle. After a degreasing spray, the extrusions are water-rinsed. Then, there is a spray application of Alodine solution, followed by another water rinse. The final pretreatment stage is a deoxylyte, acidulated rinse which provides extra corrosion resistance and adds adhesion power for subsequent painting. Residual moisture is evaporated in a dryoff oven before paint is applied. Then, automatically controlled spray guns apply an acrylic coating known as Duracron. After painting, the coating is solvent flashed-off and the extrusions are conveyed to an oven for a 7-minute bake at 440 degree Fahrenheit. One conveyor carries the extrusions through the entire processing cycle. After baking, the extrusions are unloaded from the conveyor for packing. The entire production cycle takes approximately 1 hour and produces a paint coating on the extrusions that is exceptional as to hardness, adhesion, and finish.
In 1963, only two major companies were engaged in the manufacture of painted extrusions and both businesses were operating on a 24-hour basis in order to satisfy the growing demand for their product. Russo and his competitors were experiencing great difficulty in securing a steady supply of painted extrusions, and Russo felt that the business of producing painted extrusions had unlimited profit potential. In addition, Russo felt that, because longer extrusions would be more efficient and involve less waste after cutting by the window manufacturer, he could quickly capture a share of the market by producing 16-foot extrusions as opposed to the 8-foot extrusions produced by his two major competitors.3
In 1962 and 1963, Russo and Mennuto spent a great deal of time talking to salesmen and manufacturers in an effort to secure the technical knowledge necessary to order the appropriate equipment for painting extrusions.
On August 15, 1963, EFC was incorporated under the laws of the State of New Jersey for the purpose of painting aluminum extrusions.
At all relevant times, EFC had 500 shares of capital stock issued and outstanding. At the time of its incorporation, it had five equal shareholders, namely, Russo, Mennuto, Herman, Lewis Warner, and Lawrence Oxley, each of whom contributed $5,000 in cash in exchange for 100 shares of stock. At the time of its incorporation and thereafter during all relevant times, Schornstein acted as its accountant and registered agent.
Shortly before November 4, 1963, Lewis Warner and Lawrence Oxley withdrew from EFC, and each surrendered his shares and received his $5,000 back. At or about the same time, Muscarelle and Schornstein replaced the withdrawing shareholders, and in turn, each received 100 shares of stock in exchange for a cash payment of $5,000. Schornstein allowed Martin Dinar, his partner in an accounting firm, to become a 50-percent partner in his shares. The agreement between Schornstein and Dinar was known to the other shareholders, but Schornstein remained the owner of record and only he actively participated in...
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