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WALSH CONSTR. CO. v. CHURCH

June 28, 1965

WALSH CONSTRUCTION COMPANY, Plaintiff,
v.
Charles A. CHURCH, District Director of Internal Revenue for the District of Manhattan, N.Y., Defendant


Levet, District Judge.


The opinion of the court was delivered by: LEVET

LEVET, District Judge.

This is a tax refund suit in which the plaintiff, Walsh Construction Company ("Walsh") seeks to recover $40,646.65 plus interest which it paid to the defendant pursuant to a determination by the Commissioner of Internal Revenue of a tax deficiency for the years 1950, 1951 and 1952.

 The principal issues are whether plaintiff is entitled to:

 1. An 85% intercorporate dividend deduction on certain dividends received by it from another corporation known as Allstates Constructors, Inc. ("Allstates") during the years 1950, 1951 and 1952;

 2. Claim income from certain construction jobs as capital gains to itself;

 3. Deduct monies paid over by it to certain so-called "investors."

 The case was tried to the court without a jury. After hearing the testimony of the parties, examining the exhibits, the pleadings, the stipulations of counsel, the briefs and proposed findings of fact and conclusions of law, this court makes the following Findings of Fact and Conclusions of Law: *fn1"

 1. Plaintiff is a corporation which was organized under the laws of the State of Iowa and has its principal place of business in the Borough of Manhattan, City of New York. (4-5)

 2. Since 1899, plaintiff has engaged in the heavy construction business throughout the United States and has frequently engaged jointly with other construction firms in carrying out extensive projects requiring large investments of capital. (5)

 3. The plaintiff during the years 1950, 1951 and 1952 was a closely held corporation whose stock was held by a small group of shareholders made up mostly of the Walsh and Durkin families. (Exs. B and C, Q & A 1C)

 4. At various dates hereinafter mentioned, plaintiff and other contractors entered into certain agreements as joint venturers:

 (a) On November 14, 1947, plaintiff and various other contractors entered into a contract as joint venturers, under the name Perini-Maney-Walsh-Rugo Construction Companies, with the Commonwealth of Massachusetts, Metropolitan District Commission, for the construction of certain tunnels in Newtown, Boston, Weston and Brookline, Massachusetts ("Boston Tunnel Project"). (Stipulation, 6)

 (b) On November 25, 1947, plaintiff and another contractor entered into a contract with the City of New York, Board of Water Supply for certain work to be done in connection with the Downsville Dam in the Town of Colchester, Delaware County, New York ("Downsville Dam Project"). The agreement was performed by the contractors as joint venturers under the name Walsh Construction Company and B. Perini & Sons, Inc. Walsh had a 60% interest in the joint venture. (Stipulation, 6)

 (c) On April 21, 1948, plaintiff and various other contractors entered into a contract with the United States Government for certain work to be done in connection with the Hungry Horse Dam in Montana ("Hungry Horse Dam Project"). The agreement was performed by the contractors as joint venturers under the name of General Construction and Shea and Morrison Knudsen Company, Inc. Plaintiff had a 10% interest in this joint venture. (Stipulation, 7)

 (d) On November 14, 1947, plaintiff and several construction contractors organized Allstates Constructors, Inc., a Delaware corporation, for the purpose of building the Clark Hill Dam on the Savannah River ("Clark Hill Dam Project"). (Stipulation, 6)

 5. On or about November 20, 1947, plaintiff and various other construction companies which had formed Allstates entered into a stockholders' agreement (Ex. A) providing in substance:

 (a) Allstates shall have 30,000 shares of capital stock with a par value of $100, aggregating $3,000,000 of capital, of which Walsh was to have 35% and the other companies certain other proportions;

 (b) If Allstates is not awarded the contract for the Clark Hill Dam Project, the stockholders' agreement would be null and void;

 (c) If Allstates received the contract for the Clark Hill Dam Project, the stockholders each agreed to pay in cash to Allstates 1/3 of the capital stock they had subscribed and pledged;

 (d) That as more capital or working funds are required by Allstates, each of the shareholders would be required to pay additional cash and receive additional shares of capital stock at the par value of $100 a share in the same proportion as originally subscribed.

 6. Pursuant to the Allstates stockholders' agreement, Walsh made three contributions totalling $700,000 on and before May 4, 1948. (Ex. 32)

 7. In May and early June 1948, Walsh negotiated with certain of its employee-officers, offering to sell 20% of its interest in the four projects. (Exs. H, I, J, K) 8. Between June 1, 1948 and July 26, 1948, plaintiff entered into substantially identical agreements with certain of its employee-officers and members of their families, to wit: Date of Contract Name of Investor and Relationship to Plaintiff June 1, 1948 F. B. Smith, New York, N.Y. - Asst. Secretary-Treasurer June 1, 1948 Mrs. L. G. Smith, New York, N.Y. - Wife of F. B. Smith June 2, 1948 J. S. MacDonald, Scarsdale, N.Y. - Vice President June 30, 1948 H. H. Dugan, Toledo, Ohio - Vice President June 30, 1948 J. J. Walsh, Mamaroneck, N.Y. - Employee July 8, 1948 C. H. Young, Davenport, Iowa - Vice President July 15, 1948 J. H. Gill, Burlingame, California - Vice President July 15, 1948 Mrs. N. P. Gill, Burlingame, California - Wife of J. H. Gill July 15, 1948 R. P. Gill, Burlingame, California - Son of J. H. Gill July 15, 1948 S. E. Gill, by N. P. Gill, trustee, Burlingame, California - Daughter of J. H. Gill July 26, 1948 Mrs. M. G. Ellis, Greenwich, Conn. - Daughter of J. H. Gill

 (7, 8; Exs. 1-11)

 Walsh had invested $1,921,250 in the four projects prior to this time. (Ex. 32)

 9. H. H. Dugan, vice president and investor, borrowed money from Walsh to finance his investments with Walsh. (Exs. 1-11, H, I, J, BL, B and C, Q & A 4, 5)

 10. These agreements entered into between plaintiff and the said investors recited in substance that Walsh is a co-contractor and one of the joint venturers in the following construction projects:

 (a) Downsville Dam Project in which Walsh's percentage of participation in the joint venture was 60%;

 (b) Boston Tunnel Project in which Walsh's percentage of participation in the joint venture was 27 1/2%;

 (c) Hungry Horse Dam Project in which Walsh's percentage of participation in the joint venture was 10%;

 (d) Clark Hill Dam Project in which Walsh's percentage of participation in the contracting corporation was 35%.

 They further provided in part:

 
"WHEREAS, Walsh desires to secure moneys to cover in part working capital provided by it or which it may hereafter be required to provide and also its subscriptions to capital of Allstates in connection with the foregoing projects; and
 
"WHEREAS, the Investor desires by providing moneys to cover a part of Walsh's investment in such projects to acquire an interest in the net avails of Walsh's participation in the projects referred to in the preceding Whereas Clauses subject to obligation to reimburse Walsh for losses as hereinafter provided and Walsh is willing to permit the Investor, in consideration of his providing funds as hereinafter provided to be used by it as part of the working capital for such projects, to acquire such an interest upon the terms and conditions hereinafter set forth, such interest allocated to said projects being hereinafter separately referred to as an 'investment' or 'participation.'"

 11. With reference to the agreement between Investor H. H. Dugan and plaintiff, the agreement provided: "Walsh hereby acknowledges the receipt of $38,425.00 from the Investor for and hereby grants to the Investor a participation in the net profits Walsh may receive from the aforesaid projects in the amount of 2%. Said sum of $38,425.00 represents 2% of the capital investment made by Walsh as of the date of this agreement in said projects and is allocated as follows: Investor's interest Capital Investment in Walsh's Capital Name of Project of Walsh to Date Investment (a) Downsville Dam $600,000.00 2% $12,000.00 (b) Boston Tunnel 371,250.00 2% 7,425.00 (c) Hungry Horse Dam 250,000.00 2% 5,000.00 (d) Clark Hill Dam 700,000.00 2% 14,000.00"

 The other investors contributed varying percentages of the capital required on the four projects. The total of the contributions and shares of participation of the investors was 20%. The initial contributions of the investors totalled $384,250, twenty ...


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