In 1956, Auburn, Mosso and Avondo and others formed Engineering. At that time it was called Auburn Atomic Engineering. This company was formed to handle that part of Associates' business involving nuclear energy projects.
The testimony showed that Mosso and Avondo were the driving forces in both taxpayers. Both men appear to have worked tirelessly to insure the success of these firms. During the early years their salaries were small. The success of the two firms was rather dramatic. Associates' sales went from $179,689.55 in 1950 to $4,313,847.18 in 1965. Engineering's sales went from $327,889.81 in 1956 to $1,666,456.29 in 1965. Auburn had continued as president of Associates until 1961. That year he assumed the position of Chairman of the Board and Mosso became the president. Mr. Auburn moved to the west coast and from his correspondence in the form of monthly reports we conclude that he represented the firm on the West Coast and maintained an office there.
The office building in dispute was constructed in 1959. It was built by Parkway Land Company, a partnership consisting of Auburn, his wife Roxanne, Mosso, Avondo and Leech. Both Associates and Engineering needed ever increasing office space suitable for engineering work. Approximately three acres of ground were purchased for $30,000.00. The location is adjacent to the Parkway just east of Pittsburgh in an area where there are many research facilities and much commercial development. A building suitable for engineering offices was constructed for $430,000.00. Mr. Mosso testified that the partners effected substantial savings by acting as their own architect, engineer and contractor.
Gross rentals deducted by the taxpayer consisted of cash payments made to lessor plus certain supplies and maintenance of the building and depreciation on certain improvements. These rentals are set forth hereinafter. The government's Exhibit GG sets forth the deductions taken by taxpayer. The question was whether the deductions for rent taken by the taxpayer exceeded fair rental value of the property.
The question of fair rental value was contested at trial by expert testimony. Mr. Kane, who was called as an expert by Associates testified that $4.00 per square foot was comparable to other rentals in the area of Associates' building and was reasonable. Mr. Berman who testified as an expert for the government placed the fair rental value at approximately $3.00 per square foot.
Plaintiffs' evidence on the compensation issue was presented principally in the form of testimony by Mosso.
Defendant's case in reply in large part consisted of statistical evidence and testimony regarding salaries paid to officers by other engineering firms.
The corporate minutes of Associates emphasize the inadequacy of the salaries paid Mosso and Avondo during the first eight years of operation. The minutes after 1960 repeatedly allude to the need to compensate Mosso and Avondo for past as well as present services. In his testimony Mosso specified the amounts of compensation during the years here in issue which were intended as compensation for past services. With regard to salaries received from Associates in 1965, Mosso testified that $75,000.00 of his and $50,000.00 of Avondo's were for past services. As to 1964 salaries paid by Engineering, Mosso stated that $30,000.00 of his and $15,000.00 of Avondo's salary were for past services.
The minutes of the corporation and the monthly reports of Auburn reflect a long standing policy of the taxpayers to pay bonuses to their employees to reflect the efforts and abilities of the particular employee. Large bonuses were paid if the cash was available. Bonuses varied greatly in amount. Employees also received overtime pay but Mosso and Avondo, of course, did not receive pay for overtime.
During the years in issue Mosso and Avondo had the following ownership interest in Associates, Engineering and Parkway Land Company:
Parkway Land Company, a partnership:
Mr. and Mrs. Basil J. Auburn - 50 percent
Mr. and Mrs. A. J. Mosso - 25 percent
Mr. R. C. Avondo - 15 percent
Mr. W. A. Leech - 10 percent
TOTAL 100 percent
Auburn Engineering, Inc.
Basil J. Auburn - 50 percent
A. J. Mosso - 25 percent
R. C. Avondo - 15 percent
Other - 10 percent
TOTAL 100 percent
Auburn & Associates, Inc. 1965
Basil J. Auburn - 68 percent
A. J. Mosso - 8 percent
R. C. Avondo - 7 percent
Other - 17 percent
TOTAL 100 percent
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