Opinion ID: 359617
Heading Depth: 2
Heading Rank: 2

Heading: Formation of the Corporation

Text: 4 Maguire was principally engaged in the design and construction supervision of highways, bridges, and sanitary projects and providing related consulting services. In 1967, the business experienced growing pains, and the partners retained the management consultant firm of Booz, Allen and Hamilton (Booz, Allen) to analyze the firm's organizational problems and make recommendations for its future operation. The partners and Coffey received a report from Booz, Allen in December, 1967. 5 The report described a healthy and rapidly expanding firm whose financial reporting and accounting method were inadequate to reflect its true earnings. One of the primary criticisms was the company's use of cash basis accounting which, because it did not match fees earned with expenses incurred, was particularly inappropriate for a service organization such as Maguire. The bank was also unhappy with the cash basis accounting method. 6 In the spring of 1968, based largely on recommendations contained in the Booz, Allen report, a decision was made to incorporate, effective January 1, 1969. The partnership was retained to facilitate liquidating the assets in a tax advantageous manner. The corporation was to complete pending contracts and to conduct all new business after December 31, 1968. Accounts receivable, retainages, and rights to payment for work performed before December 31, 1968, were retained by the partnership. The Maguire partners were to individually transfer their interests in certain partnership assets to the corporation in December 31, 1968, in exchange for the issuance of 850 shares of common stock: 350 shares for Holmes and 250 each for Bateson and Bronson. The partnership assets transferred included the right to perform new contracts and complete work in progress. Cash receipts were to be collected by the partnership and would be reportable as personal income for the partners. 7 The three shareholders of the corporation filed an election under Subchapter S of the Internal Revenue Code so that the tax attributes of the corporation would be reportable on their individual tax returns. This allowed the partners to offset their income with the expenses incurred by the corporation. The partners also transferred cash receipts from the partnership to the corporation as loans to the corporation from the individual partners in proportion to their interests in the corporation. This was the principal mechanism by which the corporation obtained working capital. Since the partnership was dependent on accounts receivable for its supply of cash, the funds were transferred as received rather than in one lump sum. Neff, the accountant, was in charge of this procedure. 8 Holmes's active participation in the business declined, due to an addiction to alcohol, prior to his death on April 9, 1969. There is no evidence that he actively participated in or had knowledge of any of the merger or acquisition attempts.