Vuono-Lione, Inc. v. Commissioner
This text of 1965 T.C. Memo. 96 (Vuono-Lione, Inc. v. Commissioner) is published on Counsel Stack Legal Research, covering United States Tax Court primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.
Opinion
Held: (1) The corporate petitioner was not 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;
(2) Anna did not realize dividend income by reason of her net withdrawals from the corporation during the taxable years.
Memorandum Findings of Fact and Opinion
BRUCE, Judge: 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 *233 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.
Findings of Fact
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 *234 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 *235 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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Free access — add to your briefcase to read the full text and ask questions with AI Vuono-Lione, Incorporated (formerly The Vuono Construction Company) v. Commissioner. Anna Vuono v. Commissioner. Vuono-Lione, Inc. v. Commissioner Docket Nos. 2314-62, 2316-62. T.C. Memo 1965-96; 1965 Tax Ct. Memo LEXIS 232; 24 T.C.M. (CCH) 506; T.C.M. (RIA) 65096; *232 Held: (1) The corporate petitioner was not 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; (2) Anna did not realize dividend income by reason of her net withdrawals from the corporation during the taxable years. Jacquin D. Bierman, 666 5th Ave., New York, N. Y. , and Stanley Pressment, for the petitioners. Frederick A. Griffen, for the respondent. BRUCE Memorandum Findings of Fact and Opinion BRUCE, Judge: Respondent determined deficiencies in the income taxes of petitioners for the years and in the amounts as follows:
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 *233 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. Findings of Fact 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 *234 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 *235 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:
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 *237 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 *238 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:
The Pitney-Bowes contract was the largest contract ever awarded to the corporation. The corporation's first job for over $1,000,000 was obtained in 1945. The work on the Stamford Rehabilitation Center was completed in July 1957. The Perkin Elmer contract was bid on May 8, 1957, and the Pitney-Bowes contract was bid on May 9, 1957. Sometime during 1957, the corporation made a $3,000,000 bid on the Stamford Catholic High School which was not accepted.
*239 The amounts of $802,980.89 and $77,868.90 of the additional Perkin Elmer work, respectively, were bid in September and October 1958. The American Cyanamid job was begun in June 1958 and completed in September 1958. In June and August 1958, respectively, the corporation made bids in the amounts of $92,846 and $1,069,000 which were not accepted.
The original Pitney-Bowes contract was completed in March 1959, and the Perkin Elmer work was completed in April 1959. As of December 31, 1959, $3,240,696.13 of the total work program in force in 1959 was completed. The Villa Maria job was bid in March and in March a bid of $4,470,000 on the Stamford *240 High School was made but not accepted. Had this bid been accepted, the corporation would have been required to provide a performance bond and its surety wrote a bid bond for five percent of the amount of the bid. A total of 12 bids in the aggregate amount of $10,206,030 were bid and not accepted in 1959. Of these bids, one for $916,863 was made in May and two for over $1,000,000 were made in August and September, respectively. A total of $1,490,857 of these bids were made in October and November 1959. Twelve bids in the total amount of $9,177,300 were made and not accepted in the first six months of 1960. One of these bids was for $3,748,000 and two others were for over $1,000,000. The balance sheets of the corporation for the years 1956 through 1959 as shown on its Federal income tax returns were as follows:
*241
*242 The fair market value of the domestic stocks owned by the corporation and reflected on its balance sheets for the years 1956 through 1959 was as follows:
The profit and loss statements of the corporation for the years 1956 through 195 as shown on its Federal income tax returns were as follows:
*244 The corporation's total sales, net operating income and investment income for the years 1944 through 1963 and the working capital and earned surplus on December 31 of those years as shown on its books and records were as follows:
The working capital *245 of the corporation computed by substituting the fair market value of the domestic stocks for their value appearing on the corporation's balance sheets was as follows on December 31 of the following years:
The corporation's ratio of current assets to current liabilities in 1957, 1958 and 1959 was 7.5 to 1, 7.3 to 1 and 14 to 1, respectively. Computed with the fair market value of domestic stocks, this ratio in these years was 8.2 to 1, 8.6 to 1 and 16.9 to 1. As a general rule, the contract price of a construction job is paid to the general contractor on a monthly basis with an amount equal to 10 percent of the contract price being withheld by the owner until the completion of the job. The final 10 percent is usually due 30 days after completion and final payment may be made from 30 to 90 days after completion. Final payment on the Pitney-Bowes contract was made one day after completion. Many general contractors withhold 10 percent of the subcontract price from their subcontractors until completion of the entire job. The corporate petitioner generally pays its subcontractors the full subcontract price upon completion of the subcontracted *246 portion of the job. Many general contractors borrow to meet current expenses. The corporate petitioner borrowed no money during the years in issue after January 1957, and during 1957 and 1958 paid all its notes payable in the total amount of $55,000. In November 1958 the corporation requested and received a $200,000 advance on the 10 percent of contract price withheld until completion from Pitney-Bowes, Inc., because it needed cash to meet current expenses. The month-end cash balances shown on the corporation's checkbook for the years in issue were as follows:
The corporation maintained the following savings accounts on January 1, 1949:
Prior to 1958, the corporation *248 paid no dividends. In April 1956, a dividend of $2,000 was declared and subsequently cancelled. On October 28, 1958, the corporation declared and paid a dividend of $8,000. Respondent's investigation of the corporation began on November 13, 1959. On December 11, 1959, the corporation declared and paid a dividend of $8,000 and on February 15, 1960, a dividend of $16,000 was declared and paid on February 25, 1960. The dividend paid in 1960 qualifies for Federal income tax purposes as a dividend paid in 1959. The corporation paid additional dividends of $8,000 in 1960 and dividends of $8,000 in 1961 and $24,000 in 1962. The corporation's books and records reflect the following balances in the accounts of Anna and Frederick as of December 31 for the years indicated:
The following withdrawals and (credits) were made to Anna's account on the books and records of the corporation during the years 1957, 1958 and 1959:
The *249 withdrawals by Anna from the corporation of $15,400 on June 18, 1957, $39,674.48 on July 15, 1959, and $1,565 on October 8, 1959, were loaned by her to her grandson, Frederick Lione, Jr., who applied the funds toward the purchase of a new residence. The credit to Anna's account with the corporation on October 7, 1959, of $24,398.08 represented the proceeds received by Frederick, Jr., upon the sale of the residence purchased by him in 1957 which he turned over to Anna. On January 9, 1957, and January 7, 1959, Anna executed demand notes in favor of the corporation in the amounts of $20,000 and $18,000, respectively. Anna paid no interest to nor was charged any interest by the corporation during the years in issue. She provided no collateral securing the amounts of her withdrawals. Frederick's account on the corporation's books was charged with the following withdrawals and (credits) during 1957, 1958 and 1959:
*250 Frederick paid no interest to nor was charged any interest by the corporation during the years in issue. He executed no demand notes in favor of the corporation and put up no collateral securing his withdrawals. Salaries and bonuses paid to Anna and Frederick for the years 1944 through 1963 were as follows:
In the years 1957, 1958, and 1959, Frederick's highest reported income tax brackets were 30 percent, 43 percent, and 43 percent, respectively, and Anna's highest reported income tax brackets for those years were 38 percent, 43 percent, and 34 percent, respectively. Respondent's notice of deficiency was mailed on March 27, 1962. Prior to his notice of deficiency respondent notified the corporation *251 that he intended to impose the accumulated earnings tax under The statement set forth facts sufficient to show the basis of the grounds relied upon. The earnings and profits of the corporation were not permitted to accumulate beyond the reasonable needs of its business during the taxable years involved. The corporate petitioner was not 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 *252 instead of being divided or distributed. The amount of net withdrawals credited to Anna's account during each of the taxable years involved represented loans and did not constitute dividend income. Opinion Respondent determined that petitioner Vuono-Lione, Inc., is liable for the accumulated earnings tax imposed by Section 534 4*255 provides a method whereby the corporation may shift to respondent the burden of proof as to whether earnings were accumulated beyond the reasonable needs of the business. If after notification of respondent's intention to impose the accumulated earnings tax the corporation submits a statement of the grounds it relies upon to establish that its earnings and profits were not accumulated beyond its reasonable needs, together with facts sufficient to show the basis thereof, the burden of proof as to these grounds shifts to respondent. After notification of respondent's intention to impose the We think the statement submitted by the corporation is sufficient to shift the burden of proof to respondent, at least as to the first two grounds alleged. These allegations state grounds which, if true, would support a finding that the accumulation of earnings was for the corporation's reasonable business needs. See The second ground relied upon by the corporation in its section 534 statement is that the retention of earnings was required in order to provide necessary working capital for its business. The corporation's earned surplus on December 31, 1956, 1957, 1958 and 1959 was $428,719, $488,280, $561,460, and $604,223, respectively. Its working capital on each of these dates as shown on its books and records was $398,561, $453,987, $509,473, and $552,252, respectively. Computed by valuing the domestic stock at fair market value rather than at cost, as it appears on its balance sheets, its working capital on these dates, respectively, was $463,282, $501,429, $623,721, and $680,081. Respondent contends that the corporation's working capital on December 31, 1956, was sufficient to provide for its reasonable business needs, including future anticipated needs. The evidence establishes that in the area in which the corporation conducts its business it is customary for a contractor to be required to *258 provide a performance bond in order to obtain a job. In order to qualify for a performance bond, a rule of thumb adopted by most of the surety industry is that a contractor's working capital must be at least 10 percent of the contemplated work program. Some sureties require working capital equal to a larger percentage of the work program contemplated. The corporation's total work program in force in 1957 was $5,532,420. Part of this amount represents $233,257 work remaining from 1956 on the Stamford Rehabilitation Center which was completed in July. Part represents $332,605 of work completed on contracts for under $50,000 about which there is no evidence as to bid or completion dates. The remainder of the work program in force in 1957 consists of the Perkin Elmer contract for $908,530 bid on May 8, 1957, and the Pitney-Bowes contract for $4,058,028 bid on May 9, 1957. In order to qualify for performance bonds on these jobs under the standard 10 percent rule of thumb, the corporation needed working capital in the amounts of $90,853 and $405,803 on May 8 and 9, respectively, or a total of $496,656, plus 10 percent of the work remaining on the Stamford Rehabilitation Center and 10 percent *259 of any work then in progress on contracts under $50,000. Its working capital on December 31, 1956, in the amount of $463,282 was insufficient to meet this working capital requirement and its working capital of $501,429 on December 31, 1957, was not unreasonably in excess of this requirement. There is no evidence of what the working capital of the corporation was on May 8, 1957. However, since operating expenses in the construction industry are necessarily greatest during peak activity in the good weather months of the spring, summer and fall, it is reasonable to assume that working capital available during these months was less than in December. The corporation's balance of cash at the end of May 1957 was only $713.23, the lowest month-end balance of the year. Since the corporation needed the amount of working capital shown on December 31, 1957, during 1957, and since in light of its history of growth it could reasonably be expected to need working capital in that amount in 1958, its accumulation of earnings in 1957 was necessary to provide needed working capital for its business. The accumulation therefore was not in excess of the reasonable needs of its business. In 1958 the corporation's *260 total work program in force was $6,251,531. The corporation's working capital of $501,429 on December 31, 1957, was substantially below the requirement for the total work program in 1958. Of the total work program in force in 1958, $1,945,869 represents work on contracts over $50,000 remaining from 1957, $3,634,054 represents contracts for over $50,000 awarded during the year, and $671,608 represents work completed on contracts for under $50,000. There is little evidence of when bids were made in 1958, the work program in force on the bid dates, or the amount of working capital available on any bid date. What evidence is available indicates one contract for $802,980.89 was bid in September, one for $77,868.90 in October, and one for $217,304 was begun in June and completed in September. Also in June and August bids in the amount of $92,846 and $1,069,000, respectively, were made by not accepted. In October 1958, the corporation's month-end cash balance was a deficit of $27,317.12 and in November the corporation requested and received a $200,000 advance on the 10 percent withholding on contract price from Pitney-Bowes, Inc. On the evidence presented the corporation's working capital *261 in the amount of $623,721 on December 31, 1958, was not in excess of its reasonable needs in 1958. In 1959, the corporation clearly required working capital in excess of the $623,721 available on December 31, 1958. In March 1959 a bid in the amount of $326,430 was accepted and a bid in the amount of $4,470,000 was made and not accepted. Had the latter bid been accepted, the corporation would have been required to obtain a performance bond. Thus, the corporation required working capital to meet bonding requirements in March in the amount of $479,643 plus 10 percent of the amount of work remaining on prior years' contracts. On January 1, 1959, the corporation had work remaining on prior years' contracts in the amount of $2,892,103. The work remaining on the original Pitney-Bowes contract in the amount of $252,129 was completed in March and the work remaining on the additional Perkin Elmer job in the amount of $608,194 was completed in April, leaving $1,931,780 of the work remaining from the prior years uncompleted. Therefore, the corporation's working capital requirements in March 1957 were $479,643 plus approximately $193,178, or approximately $672,821. Only $943,259 worth of new contracts *262 for over $50,000 was awarded the corporation in 1959 so that its total work program in force for the year, $3,824,753, was less than that of the prior two years. However, the corporation made total bids of $10,206,030 which were not accepted in 1959. Its month-end cash balance showed deposits of $126,290.13, $96,849.84, $2,689.73 and $22,303.09 in April, May, August, and September, respectively. On the evidence presented, working capital of the corporation on December 31, 1959, in the amount of $680,081 was not unreasonably in excess of the amount needed in 1959 or anticipated in 1960 to be needed to meet the requirements for performance bonds. Therefore, as in 1957 and 1958, the retention of earnings was necessary in order to provide needed working capital and was not beyond the reasonable needs of the business. The fact that the corporation was not required to provide a performance bond on any of its jobs is immaterial since it had to be prepared to provide a bond if required. Moreover, it was not required to provide performance bonds largely because of its financial structure, including its working capital and its credit reputation. Even if the amount of working capital in each *263 of the years involved was in excess of the amount required to qualify for performance bonds on bids made during such year, it does not appear that the accumulation of earnings necessarily was unreasonable. The corporation had a history of conservative management and steady growth. In 1957 it received the largest award in its corporate existence, the $4,058,028 Pitney-Bowes contract. Its sales increased from $1,108,493 in 1956 to $3,586,551 in 1957. It had substantial net operating income in 1957 for the first time since suffering an operating loss of $10,293 in 1954. It is not our place to substitute our judgment for that of the corporation's management to require the corporation immediately to distribute the fruits of its gain. Respondent contends that the facts that the corporation made loans to its stockholders, invested a large part of its retained earnings in domestic stocks, and had a ratio of current assets to current liabilities of 8.2 to 1, 8.6 to 1 and 16.9 to 1 in *264 1957, 1958 and 1959, respectively, indicate that the retention of earnings in these years was not for the reasonable needs of the business. We recognize that each of these facts require careful consideration. The corporation's working capital requirements were not limited to needs for operating capital, but included also the need for capital to meet the standards for bondability required by sureties. The withdrawals made by or on behalf of Anna and Frederick appear on the corporation's balance sheets as notes and accounts receivable and constitute part of its working capital available to meet the requirements for bid and performance bonds. Both Anna and Frederick made substantial repayments of these withdrawals in the years in issue. The amount of Frederick's repayments *265 in these years exceeded his withdrawals. In addition to substantial credits to Anna's account in each of the taxable years, Anna executed demand notes to the corporation in the amounts of $20,000 in January 1957 and $18,000 in January 1959. The corporation's accountant testified both notes were given in anticipation of withdrawals which Anna expected to make in order to assist her grandson to purchase a residence. The $20,000 note was sufficient to cover all but $875.56 of the indebtedness shown on Anna's drawing account for 1957, and all but $1,247.59 of the indebtedness for 1958. In 1959 the $20,000 note and the additional $18,000 note given in that year exceeded the total indebtedness shown on the drawing account by $1,969.41. Thus, it appears that in the three years involved, Anna's indebtedness was substantially or (in the case of 1959) entirely covered by demand notes, which the evidence indicates could, if necessary, have been discounted at the bank. The nature and extent of the loans to the corporation's stockholders were not such as to render the retention of the earnings in the years involved as unreasonable. Also, since not all of the corporation's working capital requirements *266 were needed for operating capital, the fact that it invested part of its earnings in domestic stocks does not establish that it did not need the amount of its working capital in the years in issue. The corporation's ratio of current assets to current liabilities of 7.5 to 1, 7.3 to 1 and 14 to 1, respectively (or 8.2 to 1, 8.6 to 1, and 16.9 to 1, respectively, if the current market values of the securities are considered), in the taxable years in issue was not so high that, in light of the other evidence in the case, it indicates an accumulation of earnings beyond the corporation's reasonable business needs. Since, in order to qualify for performance bonds, the corporation was required to have working capital on its books of 10 percent of the work program contemplated regardless of its need for operating capital, this case is distinguishable from cases such as The evidence which establishes that the retention of the corporation's earnings was required to provide necessary working *267 capital also establishes that the earnings were necessary to provide for the bona fide expansion of the corporation's business, the first ground alleged by the corporation in its section 534 statement. The corporation had a history of steady growth from its incorporation. Its total work program in force increased in 1957 and 1958, and although its total work program decreased in 1959, the amount of new work bid in 1959 increased substantially over prior years. Since the corporation needed the amount of its working capital to qualify for performance bonds on the amount of work bid in the years in issue, and since the corporation's work program and work bid did in fact increase during the years in issue, it needed its working capital in each of the years in issue for the bona fide expansion of its business. Notwithstanding our finding that the earnings and profits of the corporation were not accumulated beyond the reasonable needs of its business, the burden still remains upon the corporate petitioner to establish in fact that the earnings and profits were not permitted to accumulate for the purpose of avoiding the income tax with respect to its shareholders. The fact that the accumulation of earnings is not unreasonable in light of the corporation's business needs is repugnant to the existence of a purpose to avoid tax and, although not conclusive, is substantial evidence that such a purpose did not exist. Another reason for holding that the corporation is not liable for the accumulated earnings tax is to be found in section 535 (a) and (c)(1). 5*270 Section 535(c)(1) *269 provides for a credit against the accumulated taxable income on which the The second issue is whether Anna realized dividend income to the extent of net withdrawals from the corporation in the taxable years involved. As we have previously pointed out in connection with the first issue, the withdrawals made by Anna and Frederick were carried on the corporation's balance sheets as notes and accounts receivable and constituted part of the working capital available to meet the sureties' requirements for bid and performance bonds. Anna not only made substantial repayments of the amounts withdrawn by her during the taxable years, but she executed demand notes sufficient to cover substantially all of the indebtedness shown on her drawing account for the years 1957 and 1958 and in excess of her withdrawals as of the end of 1959. We considered her net withdrawals as loans and a part of the working capital of the corporation for the purposes of the first issue. We reach the same conclusion for the purposes of the second issue. Accordingly, we hold that Anna did not realize *271 dividend income by reason of her net withdrawals from the corporation during the taxable years. Decisions will be entered under Rule 50. Footnotes
RelatedThe First National Bank of Kenosha, as Personal Representative of the Estate of Ethel M. Rudy v. United States 763 F.2d 891 (First Circuit, 1985) H. C. Jones, Individually, and Former Collector of Internal Revenue v. Koma, Incorporated 218 F.2d 530 (Tenth Circuit, 1955) Kerr-Cochran, Incorporated, a Nebraska Corporation v. Commissioner of Internal Revenue 253 F.2d 121 (Eighth Circuit, 1958) American Metal Products Corporation v. Commissioner of Internal Revenue, Adler Metal Products Corporation v. Commissioner of Internal Revenue 287 F.2d 860 (Eighth Circuit, 1961) James M. Pierce Corporation v. Commissioner of Internal Revenue 326 F.2d 67 (Eighth Circuit, 1964) Electric Regulator Corporation v. Commissioner of Internal Revenue 336 F.2d 339 (Second Circuit, 1964) United States v. R. C. Tway Coal Sales Co. 75 F.2d 336 (Sixth Circuit, 1935) Kerr-Cochran, Inc. v. Commissioner 30 T.C. 69 (U.S. Tax Court, 1958) American Metal Products Corp. v. Commissioner 34 T.C. 89 (U.S. Tax Court, 1960) James M. Pierce Corp. v. Commissioner 38 T.C. 643 (U.S. Tax Court, 1962) Electric Regulator Corp. v. Commissioner 40 T.C. 757 (U.S. Tax Court, 1963) Sandy Estate Co. v. Commissioner 43 T.C. 361 (U.S. Tax Court, 1964) The First National Bank of Kenosha, as Personal Representative of the Estate of Ethel M. Rudy v. United States First Circuit, 1985 price received for building 7 months after death
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