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Business Organizations Keyed to Allen
Smith v. Atlantic Properties, Inc.
Citation:422 N.E.2d 798 (Mass. App. 1981).
In December 1951, Wolfson purchased land for $350,000 with an initial cash payment of $50,000. Smith, Zimble and Burke were each offered a quarter interest in the land and each paid Wolfson $12,500, a quarter of the initial cash payment. At that time, Atlantic was organized to operate the real estate and Wolfson, Smith, Zimble, and Burke were each given twenty-five shares of stock in the corporation. Included also in the articles of organization, at Wolfson’s request, was an “80% provision.” This provision stated that “[n]o election, appointment, resolution, purchase, sale, lease, contract, contribution, compensation, proceeding or act . . . shall be valid . . . until . . . approved or ratified by an affirmative vote of eighty percent (80%) of the capital stock issued. . . ” and effectively gave one of the four shareholders veto power at all times.
From 1951 to 1969, the land was profitable. Salaries of $25,000 were paid only in 1959 and 1960 and dividends of $10,000 were paid in 1964 and 1970. By 1961, Atlantic had $172,000 in retained earnings. Disagreements arose between Wolfson and the other shareholders and, while Wolfson wished to see the earnings devoted to repairs and building improvements, the other shareholders wanted dividends declared to avoid IRS penalties. Wolfson steadily vetoed any dividends, even while other shareholders did agree to making urgent repairs on the buildings. Penalties were assessed on Atlantic for 1962, 1963, and 1964 resulting in $11,767.71 in taxes and interest. Wolfson paid these taxes. Despite the past penalties, Wolfson continued to refused to declare dividends and further penalties were assessed for 1965, 1966, 1967, and 1968. Wolfson’s continual refusal was apparently (according to the Tax Court) because he wished to avoid personal taxes.
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