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herein by this reference. J. Michael Joly (Michael), Bonnie B.
Joly (Bonnie), and David Andrew Joly (David) resided in
Centerville, Ohio, and Jody Steven Joly (Jody) resided in
Kettering, Ohio, on the date the petition was filed in this case.
Michael and Bonnie were husband and wife during the taxable
years in issue. They have four sons, James, Jody, David, and
Adam.
Over the past 35 years, Michael has developed an excellent
reputation in the Dayton, Ohio, area for his development and
construction of custom homes. He has been listed as one of the
top 10 builders by the Home Builders Association for over 15
years. Because of his reputation, Michael does not need to
advertise for business but rather secures new customers by
referrals.
In the latter part of 1982, Michael decided to incorporate
his then sole proprietorship as J. Michael Joly, Inc. (the
corporation) to take advantage of both the perceived tax benefits
and the limitation of his personal liability. The corporation
elected to be treated as an S corporation for Federal income tax
purposes.
The corporation developed and constructed single-family,
custom homes. Michael served as the corporation's president
during its entire existence. He was the primary reason for the
corporation's success in attracting customers before and during
the taxable years in issue. He was responsible for negotiating
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