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In the late 1970s, petitioner experienced problems with the
business due to delayed projects and the bankruptcy of a general
contractor. Petitioner released all of its employees and scaled
back operations, and Richard, Sr. became the sole employee of
petitioner. Richard, Sr. changed the direction of the company in
the 1980s. Petitioner began to increase its retained earnings to
increase its bonding capacity in order to compete in the direct
bid market. To meet bonding requirements, petitioner needed to
have 10 percent of its revenue in liquid assets. To accomplish
this result, petitioner underpaid Richard, Sr. in order to keep
liquid assets in the company. Petitioner incrementally increased
its bonding capacity each year.
From April 30, 1986, until April 30, 1989, Richard, Sr.
transferred 220 of his 550 shares of common stock to his son,
Richard E. Devine, Jr. (Richard, Jr.). Discussion began before
December 27, 1993, regarding the sale of Richard, Sr.’s remaining
shares of common stock to Richard, Jr. On January 15, 1996,
Richard, Jr. purchased the remaining shares of petitioner for
$305,000. Richard, Jr. paid the purchase price to Richard, Sr.
with a note payable in monthly installments over 10 years at an
8-percent interest rate.
During the year in issue and continuing until January 1997,
Richard, Sr. was petitioner’s president and chairman of the board
of directors. Likewise, Richard, Jr. was petitioner’s vice
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