VUONO-LIONE, INCORPORATED v. Commissioner, Docket No. 2314-62
| Citation | 1965 TC Memo 96,24 TCM (CCH) 506 |
| Decision Date | 14 April 1965 |
| Docket Number | 2316-62.,Docket No. 2314-62 |
| Parties | Vuono-Lione, Incorporated (formerly The Vuono Construction Company) v. Commissioner. Anna Vuono v. Commissioner. |
| Court | United States Tax Court |
Jacquin D. Bierman, 666 5th Ave., New York, N. Y., and Stanley Pressment, for the petitioners. Frederick A. Griffen, for the respondent.
Memorandum Findings of Fact and Opinion
Respondent determined deficiencies in the income taxes of petitioners for the years and in the amounts as follows:
Dkt. No. 2314-62 Dkt. No. 2316-62
Year Vuono-Lione, Inc. Anna Vuono
1957 .......... $30,607.96 $7,154.55
1958 .......... 51,862.64 492.70
1959 .......... 4,361.08 7,210.80
Certain issues involving the corporate petitioner raised by the pleadings have been settled by stipulation which will be given effect under Rule 50. The remaining issues in these consolidated cases are: (1) Whether the corporate petitioner was availed of during the taxable years for the purpose of avoiding the income tax in respect of its shareholders by permitting earnings and profits to accumulate instead of being divided or distributed, and (2) whether the individual petitioner realized dividend income to the extent of net withdrawals from the corporate petitioner in the taxable years in issue.
Some of the facts have been stipulated and the stipulation, together with the exhibits attached thereto, are incorporated herein by this reference.
Petitioner Vuono-Lione, Incorporated (sometimes hereinafter referred to as the corporation), formerly named the Vuono Construction Company, is a corporation organized November 14, 1913, under the laws of the State of Connecticut, with its principal office at Stamford, Connecticut. Its Federal income tax returns for the taxable years 1957, 1958 and 1959 were filed with the district director of internal revenue at Hartford, Connecticut.
Petitioner Anna Vuono is an individual who resides in Stamford, Connecticut. Her Federal income tax returns for the calendar years 1957 to 1959, inclusive, were filed with the district director of internal revenue at Hartford, Connecticut.
The corporation is engaged in business as a general building contractor. Prior to its incorporation in 1913, its business was conducted as a partnership which was formed by two brothers, Charles Vuono and Joseph Vuono, Anna's husband. The corporation was formed with net assets of approximately $20,000 for which 800 shares of stock were issued, 400 shares to each of the two brothers. Charles was the president of the corporation and Joseph served as secretary and treasurer. In 1933 Joseph transferred by gift 398 of the 400 shares he owned in the corporation to Anna.
In October 1935 Charles died and Anna was elected president. Joseph continued to serve as secretary and treasurer until his death in 1936. Anna continued as president of the corporation until 1957, when she was 73 years of age. Frederick M. Lione, husband of Eva Vuono, one of Anna's daughters, has been associated with the corporation since 1935 and has been its president since 1957. From 1957, he has been its principal operating executive and has been in charge of all phases of the corporation's business activity. During 1957 to 1959, as well as for years prior and to the present, he has been principally responsible for obtaining new business for the corporation.
At the time of his death in 1936, Joseph owed the corporation $55,536.18. In 1954, this amount was cancelled and charged to surplus.
On January 21, 1936, the corporation retired 400 shares of capital stock held by the Estate of Charles D. Vuono thereby reducing the outstanding capital stock to 400 shares. The corporate minutes of that date, January 21, 1936, read as follows in regard to the retirement:
BE IT RESOLVED: that the capital stock of Vuono Construction Company be reduced by retiring four hundred (400) shares held by Mary C. Vuono, as administratrix of the Estate of Charles D. Vuono, deceased, and that the Vuono Construction Company pay to said Administratrix the sum of SIXTY-SIX THOUSAND SIX HUNDRED FORTY-SEVEN and 66/100 ($66,647.66), made up as follows: $36,766.35 in cash, and $29,881.31 by cancelling Charles D. Vuono's debt in that amount, which he owed to the Vuono Construction Company.
After the retirement of Charles' stock, 398 shares were owned by Anna and two shares were owned by Joseph. Subsequently Anna transferred small numbers of shares at various times to her family.
The outstanding capital stock of the corporation for the years involved was held by the following persons:
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Relationship
Shareholder to Anna 1957 1958 1959
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Anna ............................................ 205 205 175
Frederick M. Lione .............................. Son-in-law 1 1 7
Eva V. Lione .................................... Daughter 1 1 7
Frederick Lione and Arthur A. Mitchell
Trustees for Eva V. Lione ...................... Daughter 96 96 96
Eva V. Lione, Custodian Lois A. Lione ........... Granddaughter ... ... 6
Eva V. Lione, Custodian Lynn A. Lione ........... Granddaughter ... ... 6
Frederick Lione, Jr.............................. Grandson ... ... 6
Frederick Lione and Arthur A. Mitchell, Trustees
for Helen V. Mitchell ......................... Daughter 96 96 96
Frederick Lione and Arthur A. Mitchell, Trustees
for Helen V. Mitchell ......................... Daughter 1 1 1
___ ___ ___
Total issued and outstanding .................. 400 400 400
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Under the trusts noted in this paragraph, Eva V. Lione and Helen V. Mitchell were the income beneficiaries and remaindermen.
It is customary in the area in which the corporation conducts its business that in order for a general contractor to have its bid considered, it must submit a bid bond and qualify for a performance bond equal to the amount of the contract. In order to obtain a bid bond and qualify for a performance bond a rule of thumb adopted by most of the surety industry is that net liquid assets (or working capital) should be at least 10 percent of the work program contemplated expressed in dollars. For example, $100,000 of working capital would qualify for a work program of $1,000,000, including both the unfinished work on hand at the time of the bid and the amount of the bid, provided other related factors such as the contractor's reputation, credit rating, general experience, organizational set-up, and availability of required equipment also were acceptable. Working capital requirements of some surety companies regularly exceed the 10 percent rule of thumb while others may require more or even less on occasion, dependent in large part upon the hazards existing for a specific contract.
Performance bonds may be waived by the owner. A prudent contractor, however, will be prepared to provide a bond if required. Performance bonds generally are required on public works contracts.
The cost of a performance bond to a general contractor is one percent on the first $100,000 of an accepted bid, .0065 percent per each additional $100,000 up to $2,400,000, and .00525 percent for each additional $100,000. In any case where a performance bond is waived by the owner, the general contractor is able to reduce the cost of his bid and, therefore, the ultimate cost of the contract to the owner.
During the years 1957, 1959 and 1959, the corporation was not required by owners to obtain performance bonds and accordingly did not in fact obtain a performance bond for any contracts awarded during those years. In the case of the corporation, the various owners waived the necessity of obtaining performance bonds because of their belief in the corporation's financial structure, quality of work, and credit reputation. The corporation has a history of conservative management. It enjoys a good reputation with its surety company and is on a select list of general contractors maintained by local architects on the basis of integrity, financial ability and general excellence of performance.
The corporation's work program in force during each of the years 1957, 1958 and 1959 was as follows:
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1957
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Work remaining on prior years' contracts over $50,000, as at 1/1/57: Stamford
Rehabilitation Center ...................................................... $ 233,257
Contracts over $50,000 awarded to Vuono-Lione in 1957
Pitney Bowes .................................................. $4,058,028
Perkin Elmer .................................................. 908,530 4,966,558
_________ __________
Work program in force in 1957 with respect to contracts over $50,000 ........ 5,199,815
Work completed in 1957 on other contracts under $50,000 ..................... 332,605
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Total work program in force in 1957 ........................................ $5,532,420
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