# Zand v. Commissioner > United States Tax Court · January 23, 1996 · 71 T.C.M. 1758 URL: https://www.frixlaw.com/law-library/cases/4330353 ## Case - **Full name:** J.J. ZAND v. COMMISSIONER OF INTERNAL REVENUE, Respondent J.J. ZAND AND EVA C. ZAND v. COMMISSIONER OF INTERNAL REVENUE - **Court:** United States Tax Court - **Decided:** January 23, 1996 - **Citations:** 71 T.C.M. 1758; 1996 T.C. Memo. 19; 1996 Tax Ct. Memo LEXIS 23 - **Precedential status:** Unpublished - **Opinion:** Opinion - **Judges:** DAWSON - **Cited by:** 9 later opinions in the Frix Law Library ## Citator (automated) - No negative treatment found by the automated citator. That is not the same as a confirmation that the case is good law; read the citing cases. - Full citator and citing cases: https://www.frixlaw.com/law-library/cases/4330353 ## Opinion text T.C. Memo. 1996-19 UNITED STATES TAX COURT J.J. ZAND, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent J.J. ZAND AND EVA C. ZAND, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent Docket Nos. 32434-88, 32435-88. Filed January 23, 1996. Earl J. Silbert, David J. Curtin, and Kevin M. Dinan, for petitioners. Nancy B. Herbert, James W. Ruger, John J. Boyle and Mathew J. Fritz, for respondent. - 2 - TABLE OF CONTENTS Page Determinations of Deficiencies and Additions to Tax . . 7 Issues . . . . . . . . . . . . . . . . . . . . . . . . . 8 Findings of Fact . . . . . . . . . . . . . . . . . . . . 10 I. Preliminary Facts . . . . . . . . . . . . . . . . . . . 10 A. Background . . . . . . . . . . . . . . . . . . . . . 10 B. Ownership of Diesel Power . . . . . . . . . . . . . 12 C. Audits for Prior Years . . . . . . . . . . . . . . . 13 D. Preparation of Tax Returns . . . . . . . . . . . . . 14 E. Bank Accounts . . . . . . . . . . . . . . . . . . . 15 F. Sale of Diesel Power Stock . . . . . . . . . . . . . 19 II. Transactions With Manufacturers--Commission Income . . . 22 A. Lockheed . . . . . . . . . . . . . . . . . . . . . . 23 B. Payments by Lockheed . . . . . . . . . . . . . . . . 29 C. Ashland . . . . . . . . . . . . . . . . . . . . . . 34 D. Payments by Ashland . . . . . . . . . . . . . . . . 39 E. General Motors . . . . . . . . . . . . . . . . . . . 43 F. Payments Made by General Motors. . . . . . . . . . . 49 G. SEDCO/IMICO . . . . . . . . . . . . . . . . . . . . 54 H. Payments by SEDCO, IMICO, Stewart & Stevenson . . . 56 I. Ingersoll-Rand . . . . . . . . . . . . . . . . . . . 60 J. Payments by Ingersoll-Rand . . . . . . . . . . . . . 62 K. Morgan . . . . . . . . . . . . . . . . . . . . . . . 64 L. Payments by Morgan . . . . . . . . . . . . . . . . . 65 M. Harnischfeger . . . . . . . . . . . . . . . . . . . 66 N. Payments by Harnischfeger . . . . . . . . . . . . . 68 O. Pioneer . . . . . . . . . . . . . . . . . . . . . . 70 P. Payments by Pioneer . . . . . . . . . . . . . . . . 74 Q. Galion . . . . . . . . . . . . . . . . . . . . . . . 77 R. Payments by Galion . . . . . . . . . . . . . . . . . 81 S. Clark . . . . . . . . . . . . . . . . . . . . . . . 85 T. Payments by Clark . . . . . . . . . . . . . . . . . 90 U. Miscellaneous Commissions/Goodyear . . . . . . . . . 94 V. Payments by Miscellaneous Companies/Goodyear . . . . 95 III. Interest and Dividend Income--First National City Bank, London, England, and Crown Life Insurance Company. . . . 100 IV. Interest Income--WHIP Account at Barclays Bank Bahamas . 102 - 3 - V. Character of Gain on Disposition of Diesel Power Stock . 103 VI. Claimed Capital Losses for 1978 and 1979 . . . . . . . . 105 VII. Asserted Claim of Right for 1979 . . . . . . . . . . . . 106 VIII. Claimed Schedule C Expense Deductions . . . . . . . . . 108 A. Cost of Goods Sold for 1973 . . . . . . . . . . . . 108 B. Cost of Goods Sold for 1977 . . . . . . . . . . . . 110 C. Cost of Goods Sold for 1978, 1979, and 1981 . . . . 110 D. Claimed Deductions for Commission Expenses . . . . . 110 E. Claimed Deductions for Consulting Fees . . . . . . . 115 F. Claimed Deductions for Management Fees . . . . . . . 117 G. Claimed Deductions for Consulting Fees or Salary . . 120 H. Claimed Deductions for Legal and Professional Fees . 121 I. Claimed Deductions for Salaries and Wages . . . . . 124 J. Claimed Deductions for Office Expenses . . . . . . . 124 K. Claimed Deductions for Interest Expenses . . . . . . 129 L. Claimed Deductions for Insurance Expenses . . . . . 132 M. Claimed Deductions for Dues and Publications . . . . 132 N. Claimed Deductions for Depreciation . . . . . . . . 133 O. Claimed Rental Loss . . . . . . . . . . . . . . . . 135 P. Claimed Rent Expense--London . . . . . . . . . . . . 135 Q. Claimed Deduction for Loan Origination Fee . . . . . 135 R. Claimed Moving Expense Deduction . . . . . . . . . . 136 S. Investment Tax Credits . . . . . . . . . . . . . . . 136 T. Claimed Deductions for Travel and Entertainment Expenses . . . . . . . . . . . . . . . . . . . . . . 136 IX. Claimed Dependency Exemption and Charitable Contribution Deductions . . . . . . . . . . . . . . . . . . . . . . . 144 A. Dependency Exemption Deduction Claimed for Tara Daneshvari. . . . . . . . . . . . . . . . . . . 144 B. Deduction for Charitable Contribution Claimed for Property Transferred to the City of Columbus, Ohio. .144 C. Deduction for Charitable Contribution Claimed for Property Transferred to Kenyon College . . . . . . . 146 X. Claimed Losses From Trusts, Partnerships, Subchapter S Corporation, and Farming Operations . . . . . . . . . . 149 - 4 - Ultimate Findings of Fact . . . . . . . . . . . . . . . 154 Opinion . . . . . . . . . . . . . . . . . . . . . . . . 154 I. Preliminary Issues . . . . . . . . . . . . . . . . . . . 155 A. Burden of Proof . . . . . . . . . . . . . . . . . . 155 B. Evidentiary Matters . . . . . . . . . . . . . . . . 157 C. New Issues Raised by Petitioner on Brief . . . . . . 157 II. Issues 1,2,3, and 6--Commission and Miscellaneous Income . . . . . . . . . . . . . . . . . . . . . . . . . 160 A. Lockheed . . . . . . . . . . . . . . . . . . . . . . 166 B. Ashland . . . . . . . . . . . . . . . . . . . . . . 170 C. General Motors . . . . . . . . . . . . . . . . . . . 174 D. SEDCO, IMICO, IMISS . . . . . . . . . . . . . . . . 179 E. Ingersoll-Rand . . . . . . . . . . . . . . . . . . . 181 F. Morgan . . . . . . . . . . . . . . . . . . . . . . . 184 G. Harnischfeger . . . . . . . . . . . . . . . . . . . 186 H. Pioneer . . . . . . . . . . . . . . . . . . . . . . 187 I. Galion . . . . . . . . . . . . . . . . . . . . . . . 189 J. Clark . . . . . . . . . . . . . . . . . . . . . . . 192 K. Miscellaneous Companies/Goodyear . . . . . . . . . 197 L. Petitioner's Withdrawals From Bank Accounts . . . . 198 III. Issues 4 and 5--Interest Income on Foreign Bank Accounts. . . . . . . . . . . . . . . . . . . . . . 201 IV. Issue 7--Amount and Character of Gain on Sale of Diesel Power Stock . . . . . . . . . . . . . . . . . . . 203 V. Issues 8 and 9--Claimed Reduction in 1979 Reported Income Under a Claim of Right and Section 1341 Tax Computation for 1981 . . . . . . . . . . . . . . . . . . 207 VI. Issue 10--Claimed Schedule C Business Expense Deductions. . . . . . . . . . . . . . . . . . . . . . . 209 A. Cost of Goods Sold . . . . . . . . . . . . . . . . 212 B. Commission Expenses . . . . . . . . . . . . . . . . 212 C. Consulting Fees . . . . . . . . . . . . . . . . . . 216 D. Management Fees . . . . . . . . . . . . . . . . . . 218 E. Legal and Professional Fees . . . . . . . . . . . . 222 - 5 - F. Salaries and Wages . . . . . . . . . . . . . . . . 227 G. Office Expenses . . . . . . . . . . . . . . . . . . 227 H. Interest Expense . . . . . . . . . . . . . . . . . 230 I. Expenses for Insurance and Dues and Publications . 237 J. Depreciation . . . . . . . . . . . . . . . . . . . 237 K. Rental Loss and London Rent Expense . . . . . . . . 240 L. Loan Origination Fee . . . . . . . . . . . . . . . 240 M. Moving Expense and Investment Tax Credits . . . . . 241 N. Travel and Entertainment Expenses . . . . . . . . . 241 VII. Issue 11--Dependency Exemption and Charitable Contribution Deductions . . . . . . . . . . . . . . . . 254 A. Dependency Exemption . . . . . . . . . . . . . . . 254 B. Deduction for Charitable Contribution to City of Columbus . . . . . . . . . . . . . . . . . . . . . 256 C. Deduction for Charitable Contribution to Kenyon College . . . . . . . . . . . . . . . . . . . . . 259 VIII. Issue 12--Losses From Trusts, Partnerships, Subchapter S Corporation, and Farming Operations . . . . . . . . . 263 IX. Issue 13--Section 6653(b) Additions to Tax for Fraud . . 266 X. Issue 14--Statute of Limitations for 1972 . . . . . . . 281 XI. Issue 15 and 16--Section 6653(a) Additions to Tax for Negligence . . . . . . . . . . . . . . . . . . . . . . 281 XII. Conclusion . . . . . . . . . . . . . . . . . . . . . . . 287 - 6 - MEMORANDUM FINDINGS OF FACT AND OPINION DAWSON, Judge:1 In these consolidated cases respondent determined the following Federal income tax deficiencies and additions to tax in the notices of deficiencies dated September 22, 1988: J.J. Zand, Docket No. 32434-88 Additions to Tax Year Deficiency Sec. 6653(b) Sec. 6653(a)2 1972 $509,899.26 $265,584.61 --- 1973 615,949.53 326,663.06 --- 1974 1,859,675.64 929,837.82 --- 1975 2,941,539.51 1,789,151.60 --- 1976 2,647,211,47 1,349,444.24 --- 1977 1,408,023.34 $7,401.17 1 These cases were assigned to Judge Meade Whitaker on Oct. 6, 1989, for trial or other disposition. After extensive discovery by counsel for the parties, the cases were tried for 10 days beginning Aug. 19, 1991. The final brief was filed on June 15, 1993. Judge Whitaker did not dispose of the cases before he retired on permanent disability on Jan. 31, 1995. Chief Judge Hamblen ordered the parties on Feb. 8, 1995, to file a response to the proposed reassignment of the cases. Petitioners opposed the reassignment; respondent did not oppose the reassignment. At an informal conference with counsel for the parties on Apr. 5, 1995, the parties were offered a new trial, which was not accepted, and it was suggested that efforts be made to settle the cases. After being informed on Oct. 19, 1995, that the cases could not be settled, the Chief Judge reassigned the cases to Judge Howard A. Dawson, Jr., on Oct. 23, 1995, for opinion and decisions. On Nov. 3, 1995, petitioners filed an objection to the reassignment of the cases but did not move for or request a new trial. In these circumstances, where the trial Judge has become permanently disabled and cannot be recalled to decide the cases and where the parties have not moved for or requested a new trial or to reopen the record for submission of additional evidence, the Court has two options. It can order a new trial, although not requested by the parties, or it can reassign the cases to another judge for disposition on the record made before the trial Judge. The Court has chosen the latter. Therefore, the findings of fact and conclusions herein are based on the documentary and testimonial evidence contained in the record. 2 Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure. - 7 - J.J. Zand and Eva C. Zand, Docket No. 32435-88 Additions to Tax Year Deficiency Sec. 6653(a)(1) Sec. 6653(a)(2) 1 1978 $479,425.94 $23,971.30 --- 1 1979 754,569.20 37,728.46 --- 1 1980 171,510.84 8,575.54 --- 1981 246,218.55 12,310.93 50 percent of interest due on $246,218.55 1 The correct section is 6653(a). In an Amendment to Answer filed August 13, 1991, respondent asserted increased deficiencies in, and additions to, petitioner J.J. Zand's Federal income taxes as follows: Increase in Increase in Addition to Tax Year Deficiency Sec. 6653(b) 1973 $5,150.34 $2,575.17 1974 59,729.00 29,864.50 1975 305,317.94 152,658.94 1976 99,952.62 49,976.34 A substantial number of adjustments for most of the years in issue have been settled by concessions made by the parties. These concessions can ultimately be reflected in the Rule 155 computations. The following issues are presented for decision: 1. Whether J.J. Zand (petitioner) had unreported commission or fee income received from contracts for services between him or his sole proprietorship, Caspian Trading Company, and various manufacturers. 2. Whether petitioner had unreported commission or fee income received from contracts between various manufacturers and - 8 - Diesel Power Trading Company, whose earnings were controlled by petitioner or diverted to his use. 3. Whether petitioner had unreported income from amounts paid to WHIP, a shell corporation, over which he exercised dominion and control. 4. Whether petitioner had unreported interest income earned on First National City Bank of London, England, bank accounts in his name for the years 1974, 1975, and 1976. 5. Whether petitioner had unreported interest income earned on a Barclays Bank Bahamas account for the years 1974, 1975, and 1976. 6. Whether petitioner had taxable income from various miscellaneous items of income paid to him. 7. For the year 1977, whether petitioner's gain on the sale of his stock in Diesel Power Trading Company must be reported as a dividend under section 1248, rather than a long-term capital gain, and what is the correct amount of such gain. 8. Whether petitioner is entitled to reduce the gross income reported on his return for 1979 by the amount of $348,350 as set forth in an amended return filed for 1979. 9. Whether petitioner is entitled to use the tax computation of section 1341 for the year 1981. 10. Whether petitioner's taxable income for the years 1973 through 1981 should be increased by adjustments made by - 9 - respondent to claimed deductions on Schedule C for cost of goods sold, ordinary and necessary business expenses, travel and entertainment expenses, and depreciation. 11. Whether petitioner's taxable income for certain years should be increased by adjustments made by respondent to claimed deductions for a dependency exemption and charitable contributions. 12. Whether petitioner is entitled to losses claimed with respect to rental activities, trusts, partnerships, subchapter S corporations and farming activities for the years 1976 through 1981. 13. Whether any part of the underpayment of income tax for each of the years 1972 through 1976 was due to petitioner's fraud with intent to evade tax. 14. Whether the assessment and collection of petitioner's Federal income taxes for 1972 are barred by the statute of limitations. 15. Whether petitioner is liable for the addition to tax for negligence under section 6653(a) for the year 1977. 16. Whether petitioners are liable for additions to tax under section 6653(a) for years 1978 through 1980 due to negligence or intentional disregard of rules and regulations, and for the additions to tax under section 6653(a)(1) and (2) for the year 1981. - 10 - FINDINGS OF FACT Many facts have been stipulated and are so found. The stipulations of fact and supplemental stipulations and attached exhibits are incorporated herein by this reference. Petitioners J.J. Zand and Eva Zand3 resided in Naples, Florida, when the petitions were filed in these cases. I. Preliminary Facts A. Background Petitioner was born on June 14, 1923. He became a U.S. citizen in 1953 and remained so during the years at issue. Prior to becoming a U.S. citizen, he was a citizen of Iran. Petitioner moved to Columbus, Ohio, in 1946, where he lived with his family until 1957. Caspian Trading Company of Iran (Caspian Iran) was formed by four of petitioner's classmates in 1945, and owned by the Bakhtiar Brothers, who were not related to petitioner. Its purpose was to import American equipment into Iran and to become an Iranian distributor of U.S. products. From the mid-1950's, petitioner's business in the United States operated under the sole proprietorship name of Caspian Trading Company (CTC), located in Columbus, Ohio. CTC's role was to act as a liaison between Caspian Iran and certain 3 While Eva Zand is a petitioner for the years 1978 through 1981 because she filed joint returns with J.J. Zand, most of the adjustments at issue involve the activities of J.J. Zand, who is referred to throughout our findings of fact and opinion as petitioner. - 11 - manufacturers with which petitioner had a business relationship. During this period petitioner had an arrangement with Caspian Iran whereby he operated in Columbus, Ohio, what he referred to in his dealings with manufacturers as a U.S. "branch office" of Caspian Iran. Petitioner, through CTC, sought to act as a distributor on behalf of American manufacturers whose goods were then sold in Iran by Caspian Iran. The earnings of both Caspian Iran and petitioner were on a commission basis. There was an understanding between petitioner and Caspian Iran that all commissions earned would be split 60 percent for Caspian Iran and 40 percent for petitioner. Petitioner moved back to Iran from Columbus, Ohio, at the end of 1957. His connections with Caspian Iran were severed in approximately October 1957. In an agreement terminating the relationship, Caspian Iran and CTC agreed that commissions earned in pending transactions would be divided 60 percent for Caspian Iran and 40 percent for CTC. In 1958, Diesel Power Trading Company (Diesel Power) was established in Iran by petitioner, his father, Jamil Z. Irani, and Mr. Taleghani, a former classmate of petitioner. Petitioner subsequently acquired the Diesel Power stock of his father and Mr. Taleghani, and he owned 100 percent of Diesel Power from the late 1950's or early 1960's until the end of 1974. During the early period of Diesel Power's existence, petitioner's father was - 12 - highly involved in its operation. His father was Diesel Power's managing director until the mid-1960's, and the commercial license of Diesel Power at one time was issued in his name. Such license may only be issued to a resident of Iran. Sometime between 1958 and 1961, petitioner moved his family to nearby Beirut, Lebanon. While in Teheran and Beirut, petitioner worked on Diesel Power matters using either the Caspian Iran or CTC name. Petitioner also maintained an office in Columbus, Ohio, during these years with at least one employee. Regular communications from Diesel Power were received and passed on to various American manufacturers via the Columbus, Ohio, office; that office also expedited shipment and collected commissions earned. Petitioner returned to the United States in 1961. B. Ownership of Diesel Power Farshid Khalatbari (Mr. Khalatbari) joined Diesel Power in the mid-1960's and replaced petitioner's father as the managing director. Mr. Khalatbari married Diana Zand, petitioner's sister, who was then referred to as Diana Khalatbari. In 1971 a dispute arose between petitioner and Mr. Khalatbari; consequently, Mr. Khalatbari left Diesel Power for about 10 days. He agreed to return upon assurances from petitioner that he would become a part owner of Diesel Power. It was not until November 1974, that Diesel Power, which formerly had been a limited - 13 - partnership, was converted to a corporate form. In the course of that change, petitioner was paid 11,750,000 rials and decreased his ownership share of Diesel Power to less than 50 percent.4 On his original and amended income tax returns for 1974, 1975, and 1976, petitioner did not report disposition of any interest in Diesel Power. Petitioner, Mr. Khalatbari, and Diana Khalatbari were directors of Diesel Power during the years at issue. Petitioner's brother, I.J. Zand, was also employed by Diesel Power from 1971 to 1976 as parts director and sales director. From 1971 to 1976 petitioner owned the land on which the shops, offices, and warehouse of Diesel Power were located, but he did not report any rental income therefrom on his 1972, 1973, and 1974 returns. Petitioner sold this land to Diesel Power in 1976 and reported the gain therefrom. C. Audits for Prior Years Respondent made adjustments to petitioner's 1958 income for unreported commissions. The 1958 notice of deficiency indicated that 40 percent of the commissions earned for two of the items and 10 percent for one item constituted additional commission income. Petitioner's Federal income tax returns for the years 1959 to 1961 were also audited. His income for those years was increased for omitted commissions, again at the 40 percent and 10 percent rates. 4 It appears that petitioner's ownership of Diesel Power was 49 percent. - 14 - After petitioner consented to extend the period of limitations for the years 1964 to 1968, his returns for those years resulted in a "no change" letter. A previous audit of petitioner's income tax return for 1972 resulted in another "no change" letter. D. Preparation of Tax Returns Petitioner employed several different accountants to prepare his income tax returns during the years at issue. His returns for the years 1972 through 1976, as well as a first amended return for 1975 filed on December 20, 1976, were prepared by Robert E. Giffin. Mr. Giffin relied upon the CTC receipts journals for the preparation of these returns and was not made aware of petitioner's bank accounts or his interest in companies located in other countries. Mr. Giffin did not know at the time he prepared the returns that petitioner owned any portion of Diesel Power stock. A second amended return for the year 1975 and an amended return for the year 1976 filed on February 22, 1978, were prepared by Steven Dutton, a C.P.A. On the amended return for 1976 petitioner reported increased commission income of $134,378. Mr. Dutton worked for petitioner from September 1977 until June 1980. The returns prepared by Mr. Dutton were based upon the CTC receipts and disbursements journals. At times, Mr. Dutton reviewed the substantiation for certain claimed deductions. Petitioner's 1977 return was also prepared by Mr. - 15 - Dutton, who at that time worked for Deloitte, Haskins and Sells. Although no return preparer's name appears on petitioners' 1978 and 1979 returns, Mr. Dutton was involved in their preparation. An amended return for the year 1979 filed April 4, 1983, was prepared by Santen, Santen & Hughes Co., LPA. Deloitte, Haskins & Sells prepared the 1980 and 1981 Forms 1040 and 1040X. E. Bank Accounts There were a significant number of bank accounts under petitioner's control or into which his funds were deposited during the years at issue. The accounts in the names of either CTC or petitioner were located at First National City Bank, London; City National Bank & Trust Company, Columbus, Ohio; Bank One of Columbus, Ohio; Raiffeisen Bank, Kitzbuhel, Austria; Bank of America, New York; and First National City Bank, Channel Island. The accounts in the name of Diesel Power were located at City National Bank of Columbus, Ohio; Bank of Teheran, Iran; First National City Bank, Geneva, Switzerland; First National City Bank, New York; Bank of America, New York; Citibank, Channel Island; and Banque de Paris Et Des Pays-Bas (Suisse) S.A. (Banque de Paris), Geneva, Switzerland. An account in the name of WHIP was located at Barclays Bank, Freeport, Bahamas. An account in the name of All Patents was located at Banque de Paris, Geneva, Switzerland. An account in the name of IGOS was located at City National Bank & Trust Company, Columbus, Ohio. An account in the - 16 - name of Interrep was located at Banque de Paris, Geneva, Switzerland. For convenience we list below the major accounts, their years of existence, whether petitioner was an authorized signatory, and the names by which we refer to them herein: Petitioner Name on Years Authorized Name Account in Existence Signatory Used Petitioner 1973-1975 Yes Zand FNCB London Petitioner 1972-1976 Yes Zand CNB Columbus Petitioner 1972-1976 Yes Zand Kitzbuhel CTC 1973-1975 Yes CTC Bank of America CTC 1972-1976 Yes CTC CNB Petitioner 1975-1977 Yes CTC FNCB London c/o CTC CTC Unknown Unknown CTC Bank One Diesel Power 1971-1977 Yes Diesel Power CNB Columbus Diesel Power 1972-1976 Yes Diesel Power Bank of Teheran Diesel Power 1975-1978 Yes Diesel Power FNCB Geneva # 1 Diesel Power 1972-1976 Unknown Diesel Power FNCB Geneva # 2 Diesel Power/ 1974-? Yes Diesel Power FNCB J.J. Zand London Petitioner Name on Years Authorized Name Account in Existence Signatory Used Diesel Power 1972-1976 Yes Diesel Power Bank of c/o CTC America - 17 - Diesel Power 1972-1976 Yes Diesel Power Banque de Paris Diesel Power Unknown Unknown Diesel Power Channel Island WHIP 1972-1976 Yes WHIP Barclays Bahamas WHIP Unknown Unknown WHIP Banque de Paris All Patents 1972-1976 Yes All Patents Banque de Paris IGOS 1974 Yes IGOS CNB Columbus Interrep, S.A. 1973 Unknown Interrep Banque de Paris During 1973 petitioner wrote checks to himself on the Diesel Power Bank of America account5 in the amounts of $30,000, $75,000, $90,000, and $10,500. These checks were endorsed for deposit into either a CTC account or one of petitioner's personal accounts. An additional $50,000 was withdrawn from this account during 1973 and paid to petitioner/CTC. The CTC cash receipts journal reflects each of these amounts received as a loan. However, there is no other documentary evidence of a loan between petitioner and Diesel Power at this time, nor is there any documentary evidence that such a loan, if it existed, was ever repaid. Petitioner also wrote a check to himself in the amount 5 Although the account number that appears on the checks contained in Exh. 508-SN is different than the stipulated account number for the Diesel Power Bank of America account, the parties have stipulated that the checks contained in that exhibit were written on the same account. Therefore, we assume that the difference in account numbers is of no significance and that there was only one Diesel Power Bank of America account. - 18 - of $400,000 during 1973, which was endorsed for deposit to City National Bank & Trust Company; this check is not reflected on CTC's cash receipts journal. During 1974 petitioner wrote checks to himself on the Diesel Power Bank of America account in the total amount of $531,633.48. These checks were endorsed for deposit to either CTC or Zand personal accounts. All of these deposits are reflected in the CTC cash receipts journal as either loans or reimbursements with the exception of one deposit in the amount of $40,000, which is not reflected at all. There is no other documentary evidence of a loan in the record. During 1975 petitioner wrote five checks to himself on the Diesel Power Bank of America account. One check in the amount of $150,000 was endorsed for deposit to CTC but is not reflected in the CTC cash receipts journal. A second check in the amount of $375,000 was endorsed for deposit to a Zand account; it is reflected on the 1975 CTC receipts journal as a loan. However, there is no other documentary evidence in the record of such a loan. Petitioner wrote three additional checks on the Diesel Power Bank of America account during 1975 in the total amount of $76,652.03. Two of these checks were endorsed for deposit to CTC. The third check in the amount of $50,000 was endorsed to "I.D.S." to purchase stock. The first two checks were listed on CTC's 1975 cash receipts journal as reimbursements. The check - 19 - endorsed to I.D.S. does not appear on the 1975 CTC cash receipts journal. In 1976 petitioner wrote four checks to himself on the Diesel Power Bank of America account in the total amount of $265,000. Three of these checks in the total amount of $150,000 were endorsed for deposit to CTC or Zand personal accounts. The 1976 CTC receipts journal reflects these payments as a transfer or loans from Diesel Power. There is no other documentary evidence of loans in the record. The fourth check in the amount of $115,000 was endorsed to Ray Prussing. Although there is no documentary evidence of a loan at the time the check was endorsed, Ray Prussing paid $115,000 to petitioner in 1977. The 1977 CTC cash receipts journal lists a deposit of $115,000 as a Refund/Reimbursement. F. Sale of Diesel Power Stock In December 1977 petitioner sold the remainder of his Diesel Power stock to Mr. and Mrs. Khalatbari for $6 million, $3,300,000 of which was paid as a downpayment to petitioner at that time. The Shareholder Consent and Agreement to the sale states that, prior to the sale, petitioner owned 40 percent of Diesel Power stock, and that the Khalatbari family owned the remaining 60 percent. On petitioner's 1977 income tax return, petitioner reported the sale of a 40-percent stock interest in Diesel Power. Sometime after the sale of petitioner's Diesel Power stock in - 20 - 1977, Mr. Dutton prepared an analysis of petitioner's records in order to ascertain whether petitioner had received what he was entitled to for the sale of the stock. In the course of that analysis, Mr. Dutton summarized the total commissions received by CTC from manufacturers from January 1, 1973, to June 30, 1978, as reflected on the CTC receipts journal. He also reviewed the numerous commission payments between CTC and Diesel Power during those years. From his review, Mr. Dutton concluded that CTC had received a total of $6,849,743.23 in commissions, and Diesel Power actually had received $14,192,680.82 during this period. Based upon Mr. Dutton's computation of amounts due from commissions and his understanding of the commission splits, CTC was entitled to an additional $395,016.07 from Diesel Power. Mr. Dutton also concluded that the gross profits reported on petitioner's original returns were correct, except for 1975 and 1976, which had understated commission income in the amounts of $511,626.78 and $134,378, respectively. The understated commission income was reported on amended returns for those years. After these amended returns were filed, Mr. Dutton concluded that, based on information about petitioner's holdings available to him, all required amounts as reflected on the CTC receipts journal had been properly included in petitioner's income during 1975 and 1976. - 21 - In January 1978 Mr. Khalatbari withdrew all funds from and closed the Diesel Power FNCB Geneva # 1 account and Diesel Power Banque de Paris account. In March 1978 a second payment on the Diesel Power stock sale was made by Mr. Khalatbari in the amount of $625,000. The remaining payments due to petitioner under the stock sale agreement were $700,000 in December 1978 and $265,000 in December 1979. In May 1978 petitioner ordered a total of $240,000 transferred from an account at the Banque de Paris into the WHIP Barclays Bahamas account. After ordering these funds to be invested in a certificate of deposit, petitioner redeemed this certificate of deposit prior to its maturation, as well as another certificate of deposit in the amount of $361,211, and ordered that the proceeds be deposited in the WHIP Barclays Bahamas account. In December 1978 Mr. Dutton, on petitioner's instructions, flew to the Bahamas and withdrew $610,000 from the WHIP Barclays Bahamas account and deposited these funds into one of petitioner's accounts in Ohio. These funds were not recorded on the CTC receipts journal or petitioner's 1978 return or 1978 amended return. Mr. Dutton performed another analysis in 1979 from which he concluded that CTC was in possession of more than $1,600,000 in Diesel Power commissions. On his return for 1979 petitioner reported $1,617,761 as income, claiming that Diesel Power shareholders owed him a considerable amount on the sale - 22 - price of his Diesel Power stock, which was in excess of the amount held by CTC, and that he refused to pay amounts owed to Diesel Power under a claim of right. II. Transactions With Manufacturers--Commission Income During the years at issue there were numerous business relationships between various manufacturers and petitioner, CTC, or Diesel Power, which involved essentially three types of services performed for the manufacturers: (1) Distributorship, whereby the appointed distributor took title to the manufactured goods until sold to the end-use customer; (2) representation arrangements, whereby the representative promoted the sale of manufactured products; and (3) consultancies, whereby advice and expertise were provided in selling products. The income that arose out of these relationships is referred to by respondent in the notices of deficiency as "commission" income. The vast majority of adjustments in dispute involve commissions that were paid to CTC but treated as Diesel Power commissions on the CTC receipts journals. The activities leading up to the adjustments at issue with respect to each company are set forth below. - 23 - A. Lockheed Petitioner did business with Lockheed Aircraft Corporation (Lockheed)6 through four entities. One entity was a corporation located in the Bahamas called Western Hemisphere Industrial & Petroleum Corporation (WHIP), which was formed in 1969. WHIP share certificates were issued in the names of nominees for petitioner, although at one point WHIP is referred to by one company as a nominee for the National Iranian Oil Company (NIOC). Petitioner had an ownership interest in WHIP. Price Waterhouse, the resident agent for WHIP, was given instructions from petitioner and was paid by petitioner. The banking and other business activities of WHIP were handled by petitioner and his CTC employees. Petitioner's first expression of the idea to use the WHIP entity appeared in a letter dated January 14, 1969, from petitioner to Iran's then Prime Minister. Petitioner outlined the terms of an agreement that he proposed to negotiate for the purchase of oil by Iran, explaining that the "mechanics for implementation" of the arrangement would involve WHIP. Petitioner's letter also indicated that disposition of WHIP shares would be at the discretion of the Prime Minister and that, 6 Petitioner participated in business transactions with a number of companies and their affiliates. Respondent did not distinguish among these affiliates in the notices of deficiency. For purposes of this opinion, it is irrelevant which of the affiliates dealt with petitioner; therefore, we do not distinguish between them in the findings of fact. Each company and all of its relevant affiliates will be referred to under one generic name. - 24 - for interim purposes, petitioner and Dr. R. Fallah had been nominated to the Board of Directors. However, petitioner and his attorney later became WHIP directors. Dr. Fallah was a Director of NIOC. Although Occidental Petroleum Corporation (Occidental) referred to WHIP as a nominee of NIOC in a February 1969 letter to Dr. Fallah, in a subsequent letter to another client, petitioner referred to WHIP as "one of our operating companies". Petitioner was able to tie this oil purchase by Iran to the sale of Lockheed aircraft. In 1970 Lockheed indicated a willingness to sell 24 Lockheed C-130 airplanes, including ground support equipment, to the Imperial Iranian Air Force. The C-130 Hercules aircraft was a large military transport plane. While a direct sale was not implemented, in 1970 an agreement was entered into between petitioner's companies and Occidental; this agreement was related to another agreement of the same date between Occidental and NIOC. Pursuant to these agreements Occidental purchased oil from NIOC; Occidental then paid for the oil partly in cash and partly in C-130 Hercules aircraft that Occidental purchased from Lockheed. Furthermore, according to the agreement between petitioner and Occidental, Occidental was to pay a fee to WHIP of 1 cent per barrel of oil that Occidental purchased from NIOC. This fee to WHIP was "in consideration of services rendered to date and that will continue to be rendered - 25 - in reaching and the implementation of the agreement" between Occidental and NIOC. By another letter agreement dated September 28, 1970, and signed by petitioner on behalf of WHIP, Lockheed agreed to pay WHIP for services rendered an amount not to exceed $1,229,700 under the arrangement with the Government of Iran for the C-130 aircraft. By letters of the same date, Lockheed entered into three separate contracts with CTC, WHIP, and Diesel Power; petitioner signed all three contracts on behalf of each company. The payments due under each of these contracts were based upon a percentage of Iran's payments to Lockheed. On January 11, 1971, petitioner on behalf of CTC, WHIP, and Diesel Power signed amended contracts with Lockheed. These amended contracts provided that Lockheed would pay an additional advance payment to CTC of $200,000 "in lieu of current payments otherwise due and payable to Caspian, Western and Diesel under [the] * * * Agreements." On October 1, 1971, the agreement with CTC again was amended; Lockheed thereby agreed to pay CTC an additional fee for "special services and assistance". In October 1971 Lockheed also agreed to pay CTC 5 percent of the purchase price for the sale of a C-130 Flight Simulator Mobile Training Unit to the Iranian Government. After the value of the underlying contract was reduced, in December 1972, the earlier agreements were again - 26 - modified to maintain the previously stated commission to "Mr. Zand's companies" despite the reduction. Another company used by petitioner in his dealings with Lockheed was Sunvaco. Mr. Conley, a Lockheed official who had met petitioner in 1971, was aware that petitioner, through WHIP, already was Lockheed's representative for the sale of the C-130 aircraft. After this initial meeting, Mr. Conley and other Lockheed officials met with petitioner, who introduced them to Mr. Khalatbari and Mr. Zanganeh, and the three said they would work as a group under the name of Sunvaco.7 On June 1, 1971, Lockheed entered into a marketing consultant agreement with petitioner and Sunvaco. Initially, petitioner and Sunvaco were to receive a monthly retainer in the amount of $4,166.66. Commission payments were to be set forth later. Petitioner signed the agreement on behalf of himself and Sunvaco. On October 29, 1971, this marketing agreement was modified to provide a 3-percent commission to be paid on sales of Lockheed Model P-3 Export Type Aircraft, a military aircraft. Further amendments to this agreement and to the earlier agreement in 7 In 1981 petitioner wrote to Mr. Conley, who had been the president of Lockheed's Tehran division, indicating that petitioner needed confirmation of certain information in connection with an Internal Revenue Service investigation that Lockheed had engaged the services of at least three individuals when it retained Sunvaco. In response to petitioner's request, Mr. Conley confirmed in writing his recollection that petitioner "did not have all of the desirable capabilities to act as our marketing consultant in Iran" and that he understood Sunvaco to involve the services of at least Khalatbari, Zanganeh, and petitioner. - 27 - connection with the C-130 aircraft were made on December 7, 1972, May 1, 1973, June 8, 1973, and January 16, 1974. Each of these three amendments was signed by petitioner on behalf of himself and Sunvaco. Mr. Zanganeh was involved in Sunvaco transactions in some respect. A 1972 letter from Lockheed to Mr. Zanganeh discusses the terms and conditions contained in the agreement with Sunvaco in connection with the TriStar Model L-1011 aircraft purchased by Iran National Airlines. The letter asks Mr. Zanganeh to confirm these terms on behalf of Sunvaco. Another version of the same letter addressed to Mr. Zanganeh worded somewhat differently affirmed, "Pursuant to Mr. J. J. Zand's request", Lockheed's understanding of the fee arrangement with Sunvaco. The record contains what appears to be a draft of a response by petitioner to Lockheed's letter. Mr. Zanganeh was paid $80,000 out of the WHIP account in 1972 and $75,000 out of a CTC account in 1974. Petitioner reimbursed himself for the CTC payment by writing a check to himself on the Diesel Power Bank of America account. In addition to these payments to Mr. Zanganeh, petitioner and his employees instructed Lockheed how to allocate and where to mail commission payments required under the Lockheed contracts. In 1971 petitioner also instructed Price Waterhouse to transfer to an account in Switzerland $1,000,000 of the total amount of $1,229,700 expected to be received by WHIP from - 28 - Lockheed under the September 28, 1970, agreement. Petitioner further instructed Price Waterhouse that 80 percent of all other amounts expected to be received by WHIP from other sources should be transferred to the same account in Switzerland. Petitioner gave similar instructions to Barclays Bank, the location of the WHIP Barclays Bahamas account, that 80 percent of all future deposits should be transferred to an account in the name of WHIP at the Banque de Paris. There is no other evidence in the record concerning the disposition of funds to or from the WHIP Swiss account. In 1975 petitioner signed for Sunvaco and himself a certificate of compliance under the marketing and consulting agreement, certifying that the contract requirements had been satisfied and that payment of $481,600 was due and owing. As with the WHIP contracts, petitioner also directed how and to which company payments from Lockheed on the Sunvaco contracts were to be made. Petitioner expended considerable effort on behalf of Lockheed for the sale of military aircraft to the Government of Iran. Mr. Kotchian was the President of Lockheed who originally hired petitioner for the C-130 sale. Mr. Kotchian dealt extensively with petitioner with regard to attempts to sell Lockheed products in Iran, and he was under the impression that petitioner was Lockheed's Iranian consultant. He did not know of - 29 - CTC, Diesel Power, WHIP, or Sunvaco; he had heard of Mr. Khalatbari, but he did not know Mr. Zanganeh. By an agreement dated August 1, 1974, Diesel Power became a distributor for Lockheed Missiles & Space Company, Inc. Although the copy of this agreement in the record is unsigned, a handwritten note attached to a copy sent to a CTC employee indicates that Mr. Khalatbari had signed it on July 24, 1974. None of the amounts at issue were earned by Diesel Power under this agreement. B. Payments by Lockheed In the notice of deficiency for 1972 respondent adjusted petitioner's income from Lockheed in the amount of $1,013,084.34, which is equivalent to the two amounts Lockheed paid to WHIP and Diesel Power in 1972, as follows. During the taxable year 1972 Lockheed issued checks payable to CTC in the total amount of $418,111.59, which were recorded in CTC's cash receipts journal and were deposited in the CTC CNB account. This amount is not in dispute. During 1972 Lockheed also issued 12 checks to Diesel Power which totaled $594,972.75. All but one of these checks were deposited during 1972 into the Diesel Power Bank of America account. It is unknown where the remaining check was deposited. None of the amounts of these 12 checks was recorded in the 1972 CTC receipts journal. During 1972 Lockheed also issued 12 checks to WHIP which totaled $418,111.41. Four of these checks, - 30 - totaling $171,806.42, were deposited into the WHIP Barclays Bahamas account during 1972. The record does not indicate where the remaining checks were deposited. None of the amounts paid by Lockheed to WHIP during 1972 was recorded in the 1972 CTC receipts journals. Lockheed issued the checks in the names of CTC, Diesel Power, and WHIP in accordance with instructions from petitioner or a CTC employee. Petitioner reported no dividend or other gross income from WHIP on his income tax return for 1972. In the notice of deficiency for 1973 respondent increased petitioner's income from Lockheed by $657,735.96, which is the sum of amounts paid to WHIP and Diesel Power in 1973 as follows. During 1973 Lockheed paid Diesel Power a total of $466,147.55, which was deposited into the Diesel Power Bank of America account. None of this amount was recorded in the 1973 CTC receipts journal. During 1973 Lockheed made payments to WHIP in the total amount of $191,588.41, which were deposited into the WHIP Barclays Bahamas account. These payments were not recorded in CTC's cash receipts journal for 1973. Petitioner reported no income from WHIP on his income tax return for 1973. In the notice of deficiency for 1974 respondent increased petitioner's income from Lockheed by $995,543.23. During 1974 Lockheed paid CTC $226,920.17 in connection with the C-130 sales and $270,851.40 in connection with the P-3 aircraft sales, which were deposited into CTC's CNB account. These amounts were - 31 - recorded as commissions on the 1974 CTC receipts journal and are not at issue. During 1974 Lockheed issued checks to Diesel Power in the total amount of $995,543.23, all of which were deposited into the Diesel Power Bank of America account. Lockheed issued these checks payable to Diesel Power in accordance with petitioner's instructions. Lockheed, WHIP, and Sunvaco are not listed on Diesel Power's financial statements for the periods ending March 20, 1974, and March 20, 1975. None of these checks was reflected on the 1974 CTC cash receipts journal. In the notice of deficiency for 1975 respondent increased petitioner's income from Lockheed by $331,862.92. During the taxable year 1975 Lockheed issued checks payable to CTC in the total amount of $162,622.03. These checks were recorded in CTC's 1975 cash receipts journal; were deposited into CTC's CNB bank account; were reported by petitioner as gross income for 1975; and are not at issue. During the taxable year 1975 Lockheed issued checks payable to Diesel Power in the total amount of $331,862.92. These checks were issued in accordance with petitioner's instructions. At least some of these checks were payment in connection with the sale of P-3 aircraft. With the exception of one check in the amount of $6,618.86, all of these checks were deposited into the Diesel Power Bank of America account. None of these checks was included by petitioner in his 1975 gross income. - 32 - In a letter dated May 13, 1975, a senior vice president of Lockheed sent petitioner a letter expressing concern over communications that had been brought to his attention suggesting that the Government of Iran might refuse to do business with companies that used middlemen, such as petitioner, in offering products for sale to Iran. Petitioner responded to Lockheed by explaining that the policy of Iran was to continue doing business with legitimate representatives. In July 1975, petitioner was interviewed by U.S. Senate Foreign Relations Committee personnel concerning possible questionable payments to foreign government officials in connection with product sales. After this interview, the record shows no Lockheed commission payments to either Diesel Power or CTC. On January 28, 1976, the Lockheed/Zand/Sunvaco agreement was terminated effective October 10, 1975. The termination was a result of the U.S. investigation into Lockheed's use of consultants. The termination agreement was signed by petitioner on his own behalf and on behalf of Sunvaco. In the notice of deficiency for 1976 respondent increased petitioner's commission and fee income from Lockheed by $321,066. Lockheed issued a check dated January 26, 1976, to Sunvaco and petitioner in the amount of $481,600. This check was mailed to petitioner's Columbus, Ohio, address and was deposited in full into the CTC CNB account. Of this amount $100,000 was paid by - 33 - Lockheed in settlement of an outstanding obligation for the sales of the P-3 aircraft; $381,600 was attributable to a Lockheed contract obligation for the C-130 aircraft. The 1976 CTC cash receipts journal lists $321,066 of this payment (approximately two-thirds) as "Commissions-DPTC" and the remaining $160,533.34 as "Commissions-Caspian". Petitioner included $160,533.34 of this termination payment in his 1976 gross income and excluded the remaining $321,066. In an attachment to a letter dated June 20, 1979, from Mr. Stephen E. Dutton to Williams & Connolly, Mr. Dutton outlined the following summary of WHIP receipts and disbursements that he indicated he had prepared from bank statements: Receipts: Lockheed $1,476,786.58 Banque de Paris 240,000.00 Interest 111,211.00 Galion 110,000.00 Diesel Power 47,000.00 - 34 - Disbursements: Banque de Paris $880,000.00 Minora (DPC) 115,000.00 Galion 10,000.00 FK (Tonekaboni) 100,000.00 Zanganeh 80,000.00 Swiss Credit Bank #29934 83,000.00 Price Waterhouse 2,248.85 FNCB-London 2,500.00 Bank & Check Charges 135.19 C. Ashland On April 4, 1974, Ashland Bermuda Limited (Ashland) entered into an agreement with All Patents Corporation Limited (All Patents) whereby Ashland hired All Patents as a consultant in negotiations between Ashland and NIOC. These negotiations were in connection with the purchase of crude oil to be used in a joint venture involving the operation of refineries in the United States. The name of the signer for All Patents is unrecognizable. The agreement provided that Ashland would pay All Patents a fee of 3 cents per barrel of oil that NIOC sold to Ashland in exchange for, by its own terms, "personal services" provided by All Patents. Under this and other agreements with Ashland, All Patents was a consultant providing technical assistance and other services in connection with NIOC's supply of crude oil to Ashland. There were also previously in place two - 35 - agreements dated May 18, 1973, and December 7, 1973, between Ashland and the Banque de Paris. By these agreements Banque de Paris was to provide technical advice and assistance in connection with the joint venture in exchange for a fee. Although Ashland representatives did not know who the legal owners of All Patents were, it was understood by Ashland that All Patents was an affiliate of petitioner. Orin Atkins was the president of Ashland from 1964 to 1981. Mr. Atkins retained the services of petitioner in Ashland's efforts to purchase crude oil from Iran with the expectation that, because of petitioner's fluency with the language, his familiarity with the country, and his business success in both Iran and the United States, petitioner would help to facilitate the arrangement of meetings with Iranian officials and help to shape Ashland strategy in Iran. Petitioner was an intermediary who helped Ashland interpret the Iranian mood in Ashland's strategy development for these projects. Petitioner also participated in negotiations and helped to arrange and prepare for meetings with Iranian officials, including the Shah of Iran. Except for a meeting with the Shah, Mr. Atkins was accompanied by petitioner at almost all his meetings with Iranian officials. The primary contact person in the Iranian Government for these negotiations on behalf of Ashland was Dr. Fallah, who also had some involvement in petitioner's business dealings with - 36 - Lockheed. Petitioner wrote to Dr. Fallah on "J.J. Zand, Consultant" stationery in October 1973 concerning a meeting he had in New York pertaining to organizing a joint venture between Ashland, NIOC, and others. Petitioner was present during meetings between Ashland and Dr. Fallah, with whom Mr. Atkins believed petitioner had a close relationship. Petitioner sometimes met with Dr. Fallah on Ashland's behalf without other Ashland representatives. Mr. Atkins understood that petitioner also was well acquainted with Prime Minister Hoveyda, a relationship which was helpful to Ashland's business negotiations with Iran. While Dr. Fallah and Mr. Atkins were the principals in the negotiations between NIOC and Ashland, petitioner was the liaison between them. Petitioner was described in a 1973 memorandum by Mrs. Priscilla Meier, an employee of CTC, to a potential client as one of the creators of the entire Ashland/NIOC agreement. In another 1973 letter petitioner outlined to Mr. Atkins his plan for an Ashland/Iranian joint venture. Correspondence in 1974 concerning the Ashland relationship with NIOC came to petitioner personally. There is little or no evidence of participation by either All Patents or Diesel Power in any of the Ashland negotiations. Petitioner also was involved with an ultimately unsuccessful proposed joint venture between Lar Exploration, a subsidiary of Ashland, and NIOC involving a contract to explore for oil and gas - 37 - in Iran. Although the Lar Exploration consultancy agreement was signed by someone by the name of Betterman, petitioner performed the work by providing the contacts, advising strategy, and handling the negotiations. Petitioner's advice for this project continued for about 3 years, including multiple crude oil contracts. Petitioner was also involved in negotiations for two other unsuccessful refining and marketing joint ventures that Ashland was interested in developing with Iran. One was a refining joint venture owned by Ashland in Buffalo, New York, that reached the letter of understanding or letter of intent stage but never resulted in a definitive contract. In 1976 petitioner negotiated another barter arrangement between General Dynamics Corporation and Ashland. There was no involvement by Diesel Power employees in this arrangement. On April 18, 1975, petitioner was asked to sign a document at La Guardia Airport addressed to All Patents, c/o the Banque de Paris, which stated: During the period 1973 through 1974, Ashland's records show that firms or persons which you represent, received payments, including the following: Date Amount Payment received for Mr. James Zand June 6, 1973 $12,500 Date Amount Payment to account of Interrep, S.A. for the group represented by Mr. James Zand Sept. 30, 1973 $100,000 - 38 - Payment received for All Patents Corp. Ltd. Dec. 19, 1974 $200,000 Payments to All Patents pursuant to agreement dated April 4, 1974: March 28, 1974 $164,909 Sept, 13, 1974 $166,447 Dec. 9, 1974 $ 41,419 Feb. 19, 1975 $ 69,078 Payment to All Patents pursuant to agreement dated October 15, 1974 Oct. 1974 $900,000 Petitioner dated and signed his name on lines directly below a statement in the same document that read: The above information regarding payments made to firms or persons which I represent by Ashland or its subsidiaries is correct and I have no knowledge of any amounts received by me which were returned to Ashland, its subsidiaries, directors, employees or other representatives and I did not make any U. S. political contributions at the direction of Ashland. The same letter was sent to the Banque de Paris and signed by that bank's President, Mr. Michel. As discussed previously, during 1975 there was an investigation of Ashland by the Senate Foreign Relations Committee. On July 21, 1975, petitioner created an internal memorandum indicating that "Caspian must charge Diesel Power's account 40% of the moneys paid by Ashland to the account of All- Patent Corporation * * * . This 40% is to cover the expenses we have incurred in pursuit of the Ashland business for which they paid these expenses." In an "Aide Memoire" dated July 23, 1975, petitioner noted that he had told a member of the Senate Foreign - 39 - Relations Committee, which was looking into drafting legislation making it a crime to pay bribes to foreign officials, that he was not aware of any improper payments to foreign officials. He also stated: I emphasized the fact that it was I who sought Ashland and who prevailed upon them to come to Iran and who assisted them in developing their programs for Iran. * * * . * * * * * * * I stated that ever since the inception of my relationship with Ashland six years ago, my companies paid our own way * * * . Petitioner indicated that he had told the Committee that no one in the Government of Iran had made any demands for "under- the-table" payments. On January 6, 1976, petitioner signed an affidavit for an unknown purpose stating that he had not made, and in the future would not make, any payments from funds paid to him by Ashland that he knew or had reason to know were illegal in the jurisdiction in which the payment was made. D. Payments by Ashland In the notice of deficiency for 1973 respondent increased petitioner's income from Ashland by $120,900. In August 1973, Ashland issued a wire transfer of $100,000, payable to a bank account in the name of Interrep. S.A. (Interrep), account number 29893C. These funds were deposited in an account at the Banque de Paris. The stated purpose for this wire transfer was "Consulting done in relation to Iranian Venture". - 40 - With regard to Interrep and its relation to petitioner, an Ashland report to the Board of Directors dated June 26, 1975, in connection with an investigation of Ashland's political contributions, describes certain interactions between Ashland and Interrep but contains no reference to petitioner personally. There are only two documents in evidence that draw any link between petitioner and Interrep. The first document states that the $100,000 paid by Ashland to Interrep constituted "Prepayment of part of anticipated fees payable in respect to New York Venture". This document further states that there were four additional payments, as follows: Payee Date Amount Purpose J. J. Zand 6-6-73 $12,500 Fees related to Iranian participation project J. J. Zand 7-9-73 3,000 O. E. Atkins check for riyals Zand advanced to Atkins in Teheran J. J. Zand 7-11-73 400 Gifts for NIOC J. J. Zand 11-29-73 5,000 Reimburse for Teheran hotel bills, dinner party and entertainment of Ambd. & Dr. Fallah - 41 - The $5,000 payment to petitioner for reimbursement of certain items listed above is also referred to in a separate 1973 letter from Ashland to petitioner. This letter contained a check for $5,000 and described it as a reimbursement. The second document linking petitioner to Interrep is a letter from Ashland to All Patents requesting verification of payments received from Ashland and requesting confirmation that there was no knowledge on the part of the signer (who was petitioner) that he had made any U.S. political contributions on behalf of Ashland. Petitioner's signature appears at the bottom of this letter. One of the payments listed in the second document was a $100,000 "Payment to account of Interrep, S.A. for the group represented by Mr. James Zand". This amount from Interrep was neither included in CTC's cash receipts journal as a receipt nor reported as income by petitioner. In the notice of deficiency for 1974 respondent increased petitioner's income from Ashland by $1,472,775.68. In 1974 Ashland issued five checks in the total amount of $1,472,776.12 to or for All Patents. The stated purpose of four of the five checks was either "commission", "commission on crude oil purchased from NIOC", or "advice and services rendered to Ashland Oil, Inc., in connection with purchase of oil from National Iranian Oil Company and other business activities in Iran". The fifth check for $900,000 was a commission payment related to the - 42 - Lar Exploration project. None of the amounts of these checks was recorded on CTC's cash receipts journal or included in petitioner's 1974 gross income. In the notice of deficiency for 1975 respondent increased petitioner's income from Ashland by $452,328.45, which is the sum of $69,078.45 and $383,250. Ashland issued a check payable to the Banque de Paris for All Patents on February 20, 1975, in the amount of $69,078.45 and a check payable to All Patents in the amount of $383,250 on April 21, 1975. Both checks were deposited in the Diesel Power Banque de Paris account. Ashland is not reflected as a client or a source of income on Diesel Power's financial statements for the periods ending March 20, 1974, or March 20, 1975. Neither of these payments was included in petitioner's 1975 gross income. In the notice of deficiency for 1976 respondent increased petitioner's income from Ashland by $198,750. By an assignment agreement dated December 15, 1975, All Patents and the Banque de Paris assigned to petitioner their rights under the April 4, 1974, agreement with Ashland. The assignment agreement was signed by someone named "Betterman" on behalf of All Patents. By a letter agreement in December 1975, agreements between Ashland and All Patents were terminated. In December 1975, Ashland issued a check in the amount of $265,000 payable to petitioner. The payment was described in the particulars section - 43 - of the receipt stub as being "in consideration of release and termination of agreements with All Patents Corporation Limited and James J. Zand". An Ashland memorandum transmitting the request for this check states that this check "will be used in payment for the termination and settlement of all obligations to All Patents * * * and James J. Zand under Letter Agreements dated May 18, 1973, December 7, 1973, and April 4, 1974." This check was returned and, subsequently, in early 1976 Ashland reissued payment of the $265,000 to petitioner. This payment was deposited to the Zand CNB Columbus account. On the 1976 CTC receipts journal, 75 percent of this payment was allocated as a commission for Diesel Power; 25 percent was allocated as a commission for CTC. Petitioner reported 25 percent of this $265,000, or $66,250, on his return for the taxable year 1976; he did not report the balance of $198,750. E. General Motors In a document dated April 25, 1969, General Motors Overseas Operations Division of General Motors (GM) appointed CTC as Sales Representative to act in promoting the sale by GM of diesel locomotives, related spare parts, supplies, and equipment manufactured by GM for use in Iran. In consideration of CTC's services as sales representative, GM agreed to pay CTC a commission of 3 percent of the sales. The document also provided: - 44 - Neither this agreement nor any right or obligation hereunder nor the payment of any commission that Representative may hereafter accrue hereunder shall be transferable or assignable by Representative, or any assignee hereof, without GM's prior written approval. This document was signed by petitioner on June 16, 1969, and thus became what we refer to hereafter as the 1969 GM-Caspian agreement. On May 8, 1969, GM entered into a separate agreement with Diesel Power whereby Diesel Power agreed to act as a distributor of GM Detroit Diesel engines in Iran. This agreement was signed by petitioner as "Chairman" of Diesel Power. There was considerable correspondence between petitioner or CTC employees and GM over the next several years concerning such matters as where to send notices, various orders, and where commissions should be sent and in what amount. CTC also requested that Diesel Power furnish CTC with invoices for orders. Petitioner periodically provided GM with reviews of his negotiations on behalf of GM, and in a 1975 letter to GM reviewing the history of his relationship with GM, indicated that this relationship involved petitioner individually as well as his "associates". Petitioner kept track of all commissions received from GM. Diesel Power also had direct contact with GM. For example, a GM employee dealt with Mr. Khalatbari in the contract negotiations for the sale of 51 locomotives to the Iranian Government. This same employee also dealt with Mr. Khalatbari in - 45 - July 1970 to establish lines of credit with the Export-Import Bank and GM in favor of the Iranian Government in connection with the purchase of the 51 locomotives from GM. In 1974 GM again dealt with Diesel Power employees with regard to electrification of certain sections of the railroad lines in Iran and the possibility of substituting a GM electric locomotive for a diesel locomotive. However, GM viewed petitioner as being the ultimate responsible person. For example, a 1974 letter from GM to petitioner asks that petitioner confirm GM's understanding that petitioner and Mr. Khalatbari had agreed to pay certain extra expenses incurred in connection with negotiations leading to a contract for the sale of locomotives for the Iranian State Railways. On June 26, 1973, the Iranian State Railways sent a letter to GM asking if Diesel Power was GM's representative for transactions related to diesel electric locomotives and spare parts. A CTC employee responded to GM that "Mr. Zand does want you to reply indicating Diesel Power Trading Company is not your representative since, in fact, I believe Caspian (CTC) is the authorized distributor." Petitioner also responded personally with the following suggested language to be used by GM in replying to the Iranian State Railways, "inasmuch as, in fact, and in truth Diesel Power is neither your representative nor distributor in Iran": - 46 - In reply to your letter * * * , please be advised that the firm of Diesel Power Trading Company of Teheran mentioned in your letter are not our representatives in respect of transactions for Diesel electric locomotives and the relative spare parts that we conduct with you, sell you or ship to you. GM sent a response containing very similar language to the Iranian State Railways shortly thereafter. In a subsequent letter to CTC dated October 30, 1973, Diana Khalatbari (then Diana Zand) stated as follows: More and more, we are concluding transactions with government agencies. Before obtaining letters of credit, all government agencies require a statement from the manufacturers legalized by the Iranian Consulate certifying that we are their authorized sole distributors. * * * . Please ask the following companies to prepare such a statement * * * . 1. General Motors 2. Ingersoll-Rand 3. Galion 4. Clark Equipment Company (both ITD and CMD) 5. P&H The 3-percent sales commission rate in the 1969 GM-Caspian agreement was modified twice during 1974 to 3-3/4 percent and 4 percent in connection with the sale of additional locomotives. Both modification letters were accepted by petitioner on behalf of CTC. During 1976 even after he relinquished a portion of his Diesel Power stock, petitioner continued to represent to GM that he had control over Diesel Power. In February petitioner wrote a letter to GM stating: - 47 - In my capacity as chairman of Diesel Power Company and as owner and General Manager of Caspian Trading Company, I hereby authorize Detroit Diesel Allison to forward all statements of account and commission statements for both Diesel Power Company and Caspian Trading Company to Caspian Trading Company * * * . This letter will also serve as authorization for Caspian Trading Company to collect all commissions payable on a monthly basis on both Diesel Power Company's and Caspian Trading Company's commission accounts. * * * Shortly thereafter, GM terminated the 1969 GM-Caspian agreement with CTC. Petitioner agreed by signing the letter of termination on April 9, 1976. On November 1, 1976, Diesel Power and GM entered into another agreement for the distribution, sales, and servicing of GM engines and transmissions. This agreement was signed for Diesel Power by an unknown person other than petitioner, possibly Mr. Khalatbari, who was identified as "Managing Director". In addition to sales to Iran, petitioner also received payments from GM for certain sales to Pakistan. In February 1974, GM appointed CTC as sales representative to promote the sale of GM diesel locomotives in Pakistan. This agreement, by its terms, was to terminate on February 19, 1975, unless extended by mutual agreement. It was signed on March 14, 1974, by an unidentifiable person as attorney-in-fact for petitioner. The agreement contained the same non- assignability clause as is found in the 1969 GM-Caspian agreement. GM further communicated with petitioner in a February - 48 - 1974 letter about the Pakistani sale. Chatru Khilnani (Mr. Khilnani) also was a distributor for GM for the Pakistani market. Although petitioner indicated to Mr. Khilnani a willingness to pay Mr. Khilnani no more than 70 percent of the commission earned on the Pakistani locomotive sale and to pay for Mr. Khilnani's travel expenses in connection therewith, subsequently, there was a dispute about commissions. On July 13, 1974, petitioner met with Mr. Kandawalla, who was Mr. Khilnani's associate, and Mr. Kandawalla required at least 70 percent of the commissions earned in Pakistan. Petitioner dictated a memo to the file noting that he agreed to pay Mr. Khilnani the 70 percent requested because: Actually, on this job I never had to go to Pakistan and I did not put out a sales' effort (Sabety only went to Pakistan during the bid opening), and in all sincerity and fairness, I did not think we were entitled to more. Petitioner's diary indicates that he had conferences with Mr. Khilnani or Mr. Kandawalla on four occasions during 1974 and 1975, three prior to dictating this memo and one afterwards. On February 24, 1975, GM sent petitioner a letter on the subject of "Pakistan Railways 68 EMD Locomotives" which states: "For obvious reasons Caspian Tradings name was used as the official agent. Caspian Trading is only acting as a pass through account to the real agent who is Chatru Khilnani for these pass through services." Petitioner attended at least one meeting - 49 - during 1976 with Mr. Khilnani and Mr. Khalatbari at the London office concerning the Pakistani sale. Petitioner apparently hired Mr. Khilnani to do some other work for him in Pakistan on matters unrelated to this case. F. Payments Made by General Motors In the notice of deficiency for 1973 respondent increased petitioner's income from GM in the amount of $8,176.37. In the amendment to answer respondent asserted an increase in petitioner's 1973 income from GM to $17,943.61. During 1973 GM deposited £7,824.99 (British pounds) into the Zand FNCB London account, the equivalent of $18,146.15. This amount was not recorded in the 1973 CTC receipts journal. There are two GM commission amounts at issue for 1974. The first is a determination in the notice of deficiency for 1974 that there was $414,855.46 in unreported "per books" income from GM. This amount is a portion of certain checks paid by GM to CTC for the sale of locomotives to Iran in the total amount of $608,194.47. All of these checks were deposited in full into the CTC CNB account. The CTC cash receipts journal showed $166,353.43 of this total amount as commissions earned by CTC. Petitioner included this amount in his 1974 income. The balance of $441,841.04 is shown as commissions earned by Diesel Power and was not reported by petitioner on his 1974 return. The second amount from GM at issue for 1974 involves payments from GM that - 50 - were deposited into the Zand FNCB London account. In the notice of deficiency for 1974 respondent determined that there was $13,221.35 in "other unreported" income from GM. In the amendment to answer respondent asserted that petitioner failed to report 1974 income from GM in the amount of $25,260.24. During 1974 GM deposited a total of £10,760.20 into the Zand FNCB London account after CTC corrected the amount and gave instructions as to the deposit location. This was equivalent to $25,260.24. None of this amount was recorded in the CTC cash receipts journal for the taxable year 1974 or as 1974 income by petitioner. In the notice of deficiency for 1975 respondent determined that there was $1,589.04 in "other unreported" income. In the amendment to answer respondent asserted that the notice of deficiency incorrectly included $507.21 as unreported income and that the correct amount should have been $1,204.12. On April 25, 1975, GM deposited £507.21 into the Zand FNCB London account. Petitioner concedes that this amount was equivalent to $1,204.12. None of this amount was included in the CTC receipts journal for 1975. In the notice of deficiency for 1975 respondent also determined that petitioner had "Per Books Unreported" income from GM of $1,050,285.15. During 1975 GM paid CTC commissions in the total amount of $1,995,906.02, all of which were deposited into the CTC CNB account. Petitioner included $435,034.98 of this amount in gross income on his 1975 - 51 - return. However, petitioner did not include the remaining $1,560,871.04. Of this amount $1,049,244.20 was attributed in the CTC receipts journal to Diesel Power commissions. Moreover, at least two of GM's total 1975 commission payments, in the amounts of $334,333.17 and $396,562.22, were commissions for locomotives in Pakistan. CTC paid approximately 70 percent of these Pakistani commissions, in the amounts of $234,033.22 and $277,593.56,8 to Mr. Khilnani's Amelia Corporation. Petitioner did not include the amount of the payments to the Amelia Corporation as income in the 1975 CTC receipts journal or include them in his 1975 income. Petitioner did, however, later include the Amelia Corporation payments in an amended return.9 On the CTC cash receipts journal, the balance of $100,299.95 and $118,968.66 was split between CTC and Diesel Power, 40 percent for the former, 60 percent for the latter. 8 Payment was stopped on this check because it was lost in the mail, and, on Feb. 2, 1976, Mrs. Conway confirmed a telephone request to transfer $277,593.56 from the CTC CNB account to an account in the name of the Amelia Corporation in Geneva. 9 On Dec. 20, 1976, petitioner filed an Amended U.S. Individual Income Tax Return for the taxable year 1975 on matters unrelated to this issue. On Feb. 22, 1978, a second Amended U.S. Individual Income Tax Return was filed by petitioner for the taxable year 1975. On the latter return, petitioner increased his previously reported commission income by $511,627 which is equivalent to the sum of the two previously discussed 1975 payments to Amelia Corporation. On the 1975 second amended return, petitioner also increased his commission expense by this same amount. Adjustment a.3. of the notice of deficiency for 1975 decreased petitioner's reported commission expense in the amount $355,112.79. Of this adjustment $234,033.22 is attributable to payments made by CTC to the Amelia Corporation. - 52 - In the notice of deficiency for 1976 respondent made adjustments in connection with payments from GM for "per books unreported" income of $1,112,550.51, "other" income of $34,980.77, a "Deposit to F.N.C.B." of $38,585.50, and additional other income of $34,377.70.10 During 1976 a portion of the commissions paid by GM to CTC was equal to a total amount of $1,482,524.70. These payments were deposited to the CTC CNB account. The 1976 CTC receipts journal allocated $385,343.07 of this amount to CTC as commissions and $1,062,803.40 of this amount to Diesel Power as commissions. The remaining $34,377.70 was noted on the CTC cash receipts journal as "Trans" and is equivalent to an amount petitioner sent to the Amelia Corporation in 1976. GM also issued a commission check in 1976 payable to CTC in the amount of $11,581.51, and four checks to Diesel Power in the total amount of $121,926.94, for a total of $133,508.45. On CTC's cash receipts journal, these checks were allocated $53,402.77 to CTC and $80,105.08 to Diesel Power. The total amount allocated to Diesel Power on CTC's 1976 receipts journal 10 We are unable to explain the $30,357.89 difference between the amount recorded in the CTC receipts journal as attributable to Diesel Power and the amount alleged to be "per books unreported" by respondent in the notice of deficiency. Part of adjustment a.3. for 1976 also proposes an adjustment for commission expense in the amount of $361,971.26. - 53 - for the above amounts was $1,142,908.40, which was not included in petitioner's 1976 income.11 There also were payments from GM in 1976 that were not recorded in the CTC receipts journal. On February 3, 1976, a deposit from GM was made to the Zand FNCB London account in the amount of £38,585.50. Neither this deposit nor its dollar equivalent was recorded as a receipt on the CTC receipts journal. At the average monthly exchange rate for February 1976, £38,585.50 was equivalent to $78,058.47. Although the notice of deficiency lists this as an "Deposit to F.N.C.B." of $38,585.50 in U.S. currency, in the amendment to answer respondent asserts that there was a increased deficiency with respect to this deposit to reflect the correct amount in U.S. currency. On April 27, 1976, a deposit was made by GM to the same account in the amount of £34,980.77. Neither this deposit nor its dollar equivalent was recorded as a receipt in the CTC receipts journal. At the average monthly exchange rate for April 1976, this deposit was equivalent to $64,644.76. Although this deposit was listed in the notice of deficiency as $34,980.77 in the amendment to answer respondent asserts that there was an increased deficiency with respect to this deposit to reflect the correct amount in U.S. currency. 11 We are unable to explain the difference between this figure and the amount on the notice of deficiency for "Per Books Unreported" income of $1,112,550.51. - 54 - In the notice of deficiency for 1977 respondent determined that there was unreported income equivalent to all commissions attributed to Diesel Power on the CTC receipts journal, $17,878.24 of which was received from GM; and that petitioner had unreported commission income from "D.D.A."--a division of GM--in the amount of $94,743.27. During 1977 the CTC receipts journal shows receipt from GM of the total amount of $24,134.01. Of this amount $6,255.77 was recorded in the CTC receipts journal as CTC commissions; $17,878.24 was recorded as Diesel Power commissions. All but $7.93 of this total amount was deposited to the CTC CNB account. Furthermore, in December 1977, CTC received additional payments from GM in the total amount of $94,742.66. These payments were deposited in the CTC CNB account and were recorded on CTC's 1977 cash receipts journal as "Refunds/Reimbursements". G. SEDCO/IMICO Prior to 1973 CTC had sold equipment for one of its other customers to SEDCO International, S.A. (SEDCO) and to a related company called IMICO. During 1973 petitioner entered into a joint venture with a company called Stewart & Stevenson Services, Inc. (Stewart & Stevenson). Under this agreement, a stock of spare parts would be placed at a location in Iran for resale to SEDCO, IMICO, or any other customer in the Middle East. The parts were to be owned by the joint venture until sold. Payments for these parts - 55 - were to be deposited into the CTC CNB account. Although initially it was discussed as being a 50/50 arrangement between petitioner personally and Stewart & Stevenson, it later was decided to form the venture between Diesel Power and Stewart & Stevenson. At the same time, there was an agreement between IMICO and Diesel Power for IMICO to construct a warehouse for storage of the parts. Diesel Power was to pay IMICO rent for use of the warehouse. Petitioner signed this agreement on behalf of Diesel Power. However, Diesel Power was not actually involved in petitioner's agreements with SEDCO or IMICO. For example, a Diesel Power individual asked CTC to please inform IMICO with regard to the rental payments for which Diesel Power had received bills that "this is not a DPTC project". Subsequently, Stewart & Stevenson sold its interest in the joint venture to SEDCO. Although there is evidence that petitioner and his CTC employees were personally involved in the SEDCO joint venture project, there is no evidence of any involvement in this project by Diesel Power employees. Diesel Power was merely informed of the arrangement after it was established. Under this arrangement, CTC provided quotations to SEDCO for various types of equipment. Diesel Power was not involved in the preparation or presentation of these quotations, other than to be sent copies of them. - 56 - During 1976 petitioner arranged for IMICO to be appointed the dealer within a certain location in Iran for Detroit Diesel Allison spare parts and engines under Diesel Power's distributorship in Iran. Furthermore, in 1976 petitioner and CTC assisted SEDCO in obtaining for IMICO a full service dealership of Detroit Diesel Allison products in Iran. Diesel Power was not involved in negotiating these arrangements. It was understood between CTC and Diesel Power that Diesel Power was not entitled to any commissions earned in connection with the IMICO dealership project. In 1977 Mrs. Conway of CTC wrote a memorandum to the file in which she stated: Due to the upheaval caused by the Lockheed situation Detroit Diesel Allison and Ingersoll-Rand have advised that commissions payments issued in the name of Diesel Power Company can no longer be mailed to Caspian Trading Company. In fact regulations have become so stringent that both manufacturers are restricted to mailing commissions to the distributor in the country in which the distributorship is held. This if course means payments must be mailed directly to Diesel Power in Teheran. Since Farshid will be in the country next week, it will be necessary to establish procedure for Diesel Power to receive these commission checks and to return to Caspian its' share of the commission. Caspian, of course, will retain 100% of all commission on the dealership agreement with Imico. [Emphasis added.] H. Payments by SEDCO, IMICO, Stewart & Stevenson In the notice of deficiency for 1973 respondent increased petitioner's income from Stewart & Stevenson by $1,000. This alleged payment is not reflected on the 1973 CTC receipts - 57 - journal. In the notice of deficiency for 1973 respondent also increased petitioner's income from IMICO by $7,752.15. During 1973 the CTC receipts journal reflects receipts from IMICO or IMISS12 in the total amount of $52,777.81. This amount was deposited in the CTC CNB account and was allocated as $5,168.06 in commissions to CTC, $7,752.15 in commissions to Diesel Power, and $39,857.60 in costs of purchases. In the notice of deficiency for 1974 respondent increased petitioner's income from SEDCO by $64,394.40. During 1974 SEDCO issued checks payable to CTC in the total amount of $744,226.49, all of which were deposited in the CTC CNB account. This total amount was recorded in the 1974 CTC receipts journal as $42,929.60 in commissions for CTC, $64,394.40 in commissions for Diesel Power, and $636,902.49 in purchases. In the notice of deficiency for 1974 respondent also increased petitioner's income from Stewart & Stevenson by $13,002.61. The CTC receipts journal for 1974 lists payments from Stewart & Stevenson of a total amount of $21,671.01, which was deposited into the CTC CNB account. This Stewart & Stevenson amount was allocated in the CTC receipts journal as $8,668.40 in commissions to CTC, and $13,002.61 in commissions to Diesel Power. 12 Although we have been unable to identify the relationship, we assume that IMISS is an affiliate of IMICO. - 58 - In the notice of deficiency for 1974 respondent also increased petitioner's income from IMICO/IMISS by $581.27. The CTC receipts journal for 1974 reflects a payment from IMICO/IMISS of $16,468.68, which was deposited in the CTC CNB account. Of this amount, $387.51 was recorded as a commission for CTC, $581.27 was recorded as a commission for Diesel Power, and $15,499.90 was recorded as a purchase. In the notice of deficiency for 1975 respondent increased petitioner's income from SEDCO by $54,080.33. The CTC receipts journal for 1975 reflects payments from SEDCO in the total amount of $665,881.63, which were deposited in the CTC CNB account. That journal records $36,053.57 as commissions to CTC, $54,080.33 as commissions to Diesel Power, and $575,747.73 as purchases. In the notice of deficiency for 1975 respondent also increased petitioner's income from Stewart & Stevenson by $8,887.73, which consists of $7,409.42 in "per books unreported" income and $1,478.31 in "other unreported" income. The CTC receipts journal for 1975 reflects receipt in 1975 of a total of $12,349.04 from Stewart & Stevenson, which was deposited in the CTC CNB account. This amount was recorded in the CTC receipts journal as a total of $4,939.62 in commissions for CTC13 and a 13 We note that respondent alleges in the proposed findings of fact that petitioner reported $3,461.31 of the total amount received from Stewart & Stevenson during 1975, but we have found that the CTC books attributed $4,939.62 to CTC. - 59 - total of $7,409.42 in commissions for Diesel Power. The parties presented no evidence concerning the $1,489.31 of alleged "other unreported" income in the notice of deficiency. In the notice of deficiency for 1976 respondent made an adjustment to petitioner's income from IMICO/IMISS of $1,727.27. The CTC receipts journal for 1976 reflects receipt during 1976 of payments from IMICO in the total amount of $30,236.10, which were deposited in the CTC CNB account. The journal records $1,151.53 of this amount as commissions for CTC, $1,727.27 as commissions for Diesel Power, and $27,357.30 as purchases. In the notice of deficiency for 1976 respondent also proposes to increase petitioner's income from SEDCO by $92,058.39. The CTC receipts journal for 1976 reflects a total amount received from SEDCO of $678,941.33, which was deposited in the CTC CNB account. That journal records $61,372.27 as commissions to CTC, $92,058.39 as commissions to Diesel Power, and $525,510.67 as purchases. In the notice of deficiency for 1978 respondent increased petitioner's income from IMICO by $942.02, from SEDIRAN by $111,955.01, and from SEDCO by $38,033.49. CTC's 1978 receipts journal attributes no commissions from IMICO, SEDIRAN (apparently an affiliated company), or SEDCO to Diesel Power. Instead, all are attributed to CTC commissions or "purchases". - 60 - I. Ingersoll-Rand Diesel Power was the distributor in Iran for certain construction machinery and industrial equipment for Ingersoll- Rand Company (Ingersoll-Rand). Ingersoll-Rand operating companies included Ingersoll-Rand World Trade (IRWT), which handled equipment manufactured outside the United States and sold outside the United States, and Ingersoll-Rand, SA (IRSA), which handled sales of U.S. equipment outside the United States. Ingersoll-Rand had a relationship with Diesel Power whereby Ingersoll-Rand employees occupied Diesel Power offices until 1976. The Court is unaware of a written contract between Ingersoll-Rand and either Diesel Power or CTC. Ingersoll-Rand's primary contact at Diesel Power was Mr. Khalatbari, who negotiated certain changes made in 1974 to a distribution agreement with Diesel Power. Diesel Power performed the local on-site functions of obtaining equipment quotes and orders for Ingersoll-Rand. Petitioner was involved in some of the more high-level negotiations with the Iranian Government in connection with projects that would affect Ingersoll-Rand. CTC employees billed and collected Ingersoll-Rand commissions and directed to which accounts commissions should be paid. Originally, CTC employees instructed Ingersoll-Rand that commission payments be - 61 - made to the London Zand account, the Banque de Paris, and to CTC. However, during 1975 Mrs. Conway of CTC canceled her prior instructions and instructed Ingersoll-Rand to send commissions to the Diesel Power Banque de Paris account. In 1975 Mrs. Conway instructed Ingersoll-Rand to change the procedure again and to make certain commission checks payable to a company called International Gas & Oil Supply Company, Ltd. (IGOS). IGOS was formed in 1973, and petitioner had a one-third interest in IGOS. Mr. Khalatbari inquired from Ingersoll-Rand at that time about procedures for transferring the distributorship to IGOS, although it is unclear whether such a transfer occurred. During 1975 Mrs. Conway changed the IGOS bank mailing address to CTC's Ohio address, and IGOS bank statements were mailed to CTC at that address starting in 1975. In 1976 Mrs. Conway further instructed Ingersoll-Rand that commissions were to be sent to the Zand FNCB London account. At some time in 1977, Ingersoll-Rand was asked to have distributors provide confirmation that payment of commissions to locations outside their country of residence was appropriate under that country's laws. Therefore, Mrs. Conway told Ingersoll-Rand that commissions could no longer be sent directly to CTC. Instead, Mrs. Conway directed Ingersoll-Rand to hold the commission checks for pickup by a CTC representative. - 62 - J. Payments by Ingersoll-Rand In the notice of deficiency for 1973 respondent increased petitioner's income from Ingersoll-Rand by $48,222.04.14 During 1973 Ingersoll-Rand made payments of $41,129.39, which were deposited in the Diesel Power Bank of America account. Ingersoll-Rand also deposited £174.54 at Mrs. Conway's instruction in the Zand FNCB London account in September 1973. In 1973 the CTC receipts journal reflects receipt of payments of $976.86 from Ingersoll-Rand. These payments were recorded as commissions to Diesel Power of $586.12 and commissions to CTC of $390.74. In 1973 $976.86 was deposited in the CTC CNB account. Respondent concedes that petitioner is not liable for any increased 1973 commission income from Ingersoll-Rand except to the extent that petitioner withdrew funds from the Diesel Power Bank of America account. In the notice of deficiency for 1974 respondent increased petitioner's income from Ingersoll-Rand by $197,259.65. During 1974 Ingersoll-Rand issued checks or made wire transfers to the Diesel Power Bank of America account in the total amount of 14 We are unable to ascertain the basis for this figure originally determined by respondent. - 63 - $197,079.14.15 During 1974 $1,669.64 in commissions from Ingersoll-Rand was deposited to the IGOS CNB Columbus account. These payments were not included in the CTC receipts journal. Respondent now concedes that petitioner is not liable for any increased commission income from Ingersoll-Rand except to the extent that he withdrew funds from the Bank of America account. In the notice of deficiency for 1975 respondent increased petitioner's 1975 commission income from Ingersoll-Rand by $781,078.02. During 1975 Ingersoll-Rand issued checks or made wire transfers to the Diesel Power Bank of America account in the total amount of $781,078.02. In the amendment to answer respondent increased this amount by an additional $691,602.46. This additional figure was based in part upon deposits made by Ingersoll-Rand to the IGOS CNB Columbus account and the Banque de Paris, and payments mailed directly to Diesel Power. The additional figure is also based in part upon an alleged 1975 deposit to the Zand FNCB account in the amount of $197,513.88. Respondent now concedes all but the $197,513.88 that was allegedly deposited to the Zand FNCB account. In the notice of deficiency for 1976 respondent increased petitioner's commission income from Ingersoll-Rand by 15 We are unable to explain the reason that this figure differs slightly from the stipulated deposit. - 64 - $243,665.65. In the amendment to answer respondent increased this figure by an additional $144,812.48. During 1976, at the direction of Mrs. Conway, Ingersoll-Rand deposited commissions totaling £5,494.40 into the Zand FNCB London account. At the average monthly exchange rate for March 1976, this was equivalent to $10,688.05. (International Financial Statistics, March 1976.) In a sworn affidavit dated February 26, 1981, handwritten by one of the IGOS shareholders, Hossein Shirazi, (Mr. Shirazi), stated that during both 1976 and 1978 IGOS paid $120,000 to petitioner for Ingersoll-Rand commissions. Mr. Shirazi was not a witness in this proceeding. No income from IGOS was reported on petitioner's 1976 return. Petitioner reported $120,000 as income attributable to IGOS on his 1978 Federal income tax return. Respondent now concedes a portion of the earlier positions and contends only that petitioner failed to report $130,769.02 in 1976 commissions from Ingersoll-Rand. This amount consists of the alleged $120,000 distribution from IGOS described by Mr. Shirazi in his affidavit and the equivalent of $10,769.02 deposited in the form of British pounds in the Zand FNCB London account. K. Morgan Although there was no written agreement or contract between Morgan and Diesel Power, petitioner, or CTC, there apparently was - 65 - an understanding to combine resources in sales of equipment to certain companies, and to split evenly between Morgan, on the one hand, and Diesel Power or CTC, on the other, the net commissions resulting therefrom. This understanding was variously described internally by a Morgan employee as "a joint venture with Diesel Power", and by CTC employees as "the Morgan/Zand marriage" or the "Zand/Morgan agreement". During 1975 petitioner and CTC employees were involved in providing quotations and negotiating orders for equipment under this arrangement. However, Diesel Power employees furnished most of this service from Teheran. Petitioner and CTC employees kept track of Morgan commissions and made the decisions as to when Morgan commissions that were due would be paid, in what amounts, and to whom. Morgan sometimes corresponded with Diesel Power about orders and commissions, and Diesel Power employees also kept CTC informed about commissions that were due or had been paid. CTC also was involved in billing Morgan for its share of certain expenses that Morgan apparently had agreed to share with Diesel Power or CTC, sending a copy of one such bill to Diesel Power. L. Payments by Morgan In the notice of deficiency for 1976 respondent increased petitioner's income from Morgan by $473,552.70, $24,219.46 of which was itemized as "PER BOOKS UNREPORTED" and $449,333.24 of - 66 - which was itemized as "OTHER UNREPORTED". During 1975 or 1976 Morgan issued two checks totaling $200,000 to CTC, which were recorded on CTC's 1976 receipts journal as commissions for CTC and deposited in the CTC CNB account. These two checks are not at issue. Morgan also issued seven checks to Diesel Power totaling $525,786.48, which were not recorded in CTC's journal for either 1975 or 1976. These checks were deposited in either the Diesel Power Bank of America account or the Bank of Teheran in the name of Diesel Power. Four of the seven Diesel Power checks were issued by Morgan in accordance with explicit instructions from petitioner. In the notice of deficiency for 1977 respondent increased petitioner's income for "SALES COMMISSIONS D.P.T.C." in the amount of $179,224.28. Respondent contends that $56,302.97 of this increase was attributable to commissions for Diesel Power from Morgan. CTC's 1977 receipts journal reflects receipt from Morgan of a total of $85,594.63, all of which was deposited in the CTC CNB account. This amount is allocated in the CTC receipts journal as $29,291.66 in CTC commissions and $56,302.97 in Diesel Power commissions. M. Harnischfeger On July 17, 1972, Harnischfeger International Corporation S.A. (Harnischfeger) and Diesel Power entered into a distributor - 67 - agreement. Petitioner signed the agreement as chairman of Diesel Power. The agreement provided for Diesel Power to market Harnischfeger construction equipment in Iran. In a letter of the same date to petitioner, Harnischfeger proposed to amend certain provisions of the distributor agreement. Petitioner accepted these amendments on August 25, 1972. On May 24, 1976, a new distributor agreement very similar to the 1972 agreement was entered into between Harnischfeger and Diesel Power. Again, petitioner signed the new agreement as chairman of Diesel Power. From 1972 through 1976 there was considerable direct contact between Diesel Power employees and Harnischfeger. I.J. Zand of Diesel Power communicated directly with Harnischfeger concerning price quotes and sales of Harnischfeger equipment. However, CTC continued in its normal role of controlling the payment of commissions by issuing the bills. In 1975 CTC employees submitted a quotation for Harnischfeger equipment to a company in the United States and contacted Harnischfeger concerning trade fairs, where equipment would be displayed. Expressing dissatisfaction with the sales and service coverage by Diesel Power over the previous few years, Harnischfeger terminated the 1976 distributor agreement with Diesel Power by a letter addressed to petitioner dated September 1976, pursuant to the 30- day notification provision in the agreement. On at least four - 68 - occasions in 1977 Mrs. Conway, on behalf of CTC, sent letters to Harnischfeger requesting commission payments payable to Diesel Power. N. Payments by Harnischfeger In the notice of deficiency for 1974, respondent increased petitioner's "per books unreported" income from Harnischfeger by $525.41. No payments from Harnischfeger are reflected in the CTC receipts journal. That journal does reflect a payment from a company called Parker Hannifin (allegations pertaining to which will be discussed later under "Miscellaneous Companies") in the amount of $875.68. Of this payment $525.41 was recorded as a commission to Diesel Power, and $350.27 was listed as a commission to CTC. This payment from Parker Hannifin was deposited in the CTC CNB account. Respondent proposes to increase petitioner's income from Parker Hannifin by an amount which apparently does not include this payment. The parties do not address respondent's 1974 "per books" income from Harnischfeger in their briefs, nor do they explain why respondent alleges an amount from Harnischfeger that is equivalent to the amount of a stipulated payment from Parker Hannifin. In the notice of deficiency for 1975 respondent increased petitioner's income from Harnischfeger by $78,000. In March 1975, a bill for $130,000 in commissions with petitioner's - 69 - signature on CTC stationery was sent to Harnischfeger asking that payment be sent to CTC. In April 1975, Harnischfeger issued a check to CTC in the amount of $130,000, which was deposited into the CTC CNB account. This amount was recorded in CTC's 1975 cash receipts journal as $52,000 in commissions to CTC and $78,000 in commissions to Diesel Power. Neither CTC nor petitioner included the $78,000 amount attributed to Diesel Power in income for 1975. In the notice of deficiency for 1976 respondent increased petitioner's income from Harnischfeger by $33,809.71. During 1976 Harnischfeger, upon instructions from a CTC employee, issued checks payable to CTC in the total amount of $56,349.52. These checks were deposited into the CTC CNB account. They were recorded as commissions for CTC of $22,539.81 and for Diesel Power of $33,809.71. In the notice of deficiency for 1977, respondent increased petitioner's income for "SALES COMMISSIONS D.P.T.C." in the amount of $179,224.28. Of this amount $56,158.59 was attributable to commissions for Diesel Power from Harnischfeger. The CTC receipts journal for 1977 lists receipt from Harnischfeger of a total amount of $93,597.66, which was deposited into the CTC CNB account. That journal allocated $37,439.07 as commissions for CTC and $56,158.59 as commissions for Diesel Power. - 70 - O. Pioneer On March 3, 1958, Pioneer Engineering (Pioneer) and CTC entered into an export distributors agreement. This agreement was signed by petitioner as General Manager and proprietor of CTC. At that time, Pioneer was a division of Poor & Company, Inc. The distributors agreement between Pioneer and CTC was amended with regard to matters not at issue here by an addendum of June 12, 1964. Petitioner executed this amendment on behalf of CTC. Subsequently, Pioneer merged with Poor & Company to become Portec, Inc. (Portec), and Pioneer became a division of Portec. For convenience, we refer to Pioneer as the company with which the relevant transactions occurred. During the years at issue there was communication between Diesel Power and CTC about Pioneer because Diesel Power helped to process Pioneer orders. Most of the correspondence was about Pioneer orders and commissions. Some messages asked for follow- up on requests from Pioneer. In April 1976, Diana Khalatbari circulated a memo to several Diesel Power employees and to petitioner concerning the potential for increasing Pioneer asphalt equipment sales. There also were direct dealings between Pioneer and Diesel Power. Some letters were in appreciation for Diana and Farshid Khalatbari's time during trips by Pioneer executives to Iran. - 71 - Pioneer and Diesel Power also corresponded directly with each other concerning orders and customer requests. Correspondence between Pioneer and Diesel Power indicated that courtesy copies consistently were sent to CTC. In March 1975, Diesel Power directly sent a Pioneer price quotation to the Ministry of Commerce. In August 1976, Mrs. Meier, of CTC, informed Pioneer that Diesel Power had a new sales manager, Mr. A. Ryhani, and invited Portec to meet with Mr. Ryhani concerning Pioneer products. The general manager and vice president of Portec during the years 1973 to 1980 was under the impression that petitioner, CTC, and Diesel Power were one and the same. Pioneer listed CTC as a customer in the journal records Pioneer kept during 1975 and 1976. In correspondence from Pioneer to Diesel Power, Pioneer appeared to consider CTC and Diesel Power to be the same company. CTC helped to confirm this impression by corresponding on behalf of Diesel Power. Consequently, on matters of importance, Pioneer corresponded directly with CTC. In an April 1975 letter Pioneer informed CTC that all contracts in excess of $5 million had to be approved by Pioneer. In August 1975, Mrs. Meier asked Pioneer to have Iranian customers not correspond directly with Pioneer but through Diesel Power. In addition, Pioneer and CTC corresponded directly about orders and prices. - 72 - CTC also was responsible for Pioneer commissions. In October 1975, Pioneer confirmed a telephone conversation with Mrs. Meier concerning a commission and requested instructions regarding payment. CTC and Pioneer corresponded in December 1975 and the following month concerning commissions on certain orders. In a letter dated February 18, 1976, Mrs. Conway, of CTC, requested payment of a commission in the amount of $232,615.80 payable to Diesel Power and further stated: "There should be no mention of the source of this request, i.e., Caspian Trading Company." The letter also requests issuance of a commission check in the amount of $56,161.89 payable to CTC. A memo to the file dated June 1, 1976, summarizes commissions from Pioneer. Regardless of the direct dealings between Diesel Power and Pioneer, petitioner was in control of the distributor agreement with Pioneer. On December 19, 1974, Pioneer wrote to CTC as follows: we should bring the Distributor Agreements up to date; and in reviewing this, we note that our agreement form is the old form of Pioneer Engineering rather than Pioneer Division of PORTEC. This in itself would be OK; however, the existing agreement was executed between ourselves and Caspian Trading of Columbus. In the file on your company there is a letter dated July 30, 1959, to Diesel Power Trading pointing out that our distributor in Iran is actually Diesel Power Trading and because of this, it would be more proper to have the agreements made out in that name rather than Caspian Trading. - 73 - According to this older letter, new agreements making this change were sent with the letter; however, I am unable to locate them here. Rather than getting into piecemeal amendments, it would be more practical to do it all at once. I do feel that our earlier letter was correct in that our dealer is actually Diesel Power Trading, rather than Caspian Trading. Would you please check this out and confirm to us that we should make out new agreements listing Diesel Power Trading. At the bottom of this letter, there is a handwritten note in blue pen: "Mr. Zand: should new agreement be in name of Diesel PTC?" and another handwritten note in red pen indicating "Yes". In April 1975, Mrs. Meier asked Pioneer to send a letter addressed to "to whom it may concern", stating that "Diesel Power Company, Teheran, Iran, is your authorized and exclusive distributor in Iran." She explained in her letter that Mr. Khalatbari had informed her that "this is required for purposes of prequalifying Pioneer on some forthcoming inquiries being issued by various governmental departments." On April 25, 1975, a letter from Pioneer responded to Mrs. Meier's request as follows: "By means of this letter we confirm that our authorized and exclusive distributor in Iran is Diesel Power Company." The distributor agreement between CTC and Pioneer was never amended to replace CTC with Diesel Power as the authorized distributor. By letter dated July 14, 1978, Pioneer terminated its distributor agreement with CTC. Petitioner received and accepted the termination on behalf of CTC on July 17, 1978. In his - 74 - July 17, 1978, letter accepting termination, petitioner stated that he agreed with Pioneer that "until such time as we have created a substitute for Diesel Power, which has ceased to exist and operate as the company that I created in 1958, you had no choice but to cancel our agreement." He further stated: "I will be creating a representation outlet for your line in Iran * * * . We are not about to leave you without representation as we continue to feel obligated to serve your interests in Iran." In a letter dated May 18, 1979, petitioner represented to Pioneer that Diesel Power had no interest in or right to a sales commission of $121,813.43 earned on a particular order; that CTC was entitled to this commission; and that CTC would hold Pioneer harmless against any claim that Diesel Power might assert with regard to this commission. Along with a letter 1 week later, Pioneer sent a commission check to petitioner and expressed regret that this might be the last business transaction between Pioneer and CTC. P. Payments by Pioneer In the notice of deficiency for 1973 respondent increased petitioner's income from Pioneer in the amount of $1,440.47. The 1973 CTC receipts journal lists a payment from Pioneer of $16,838.31. This payment was deposited in the CTC CNB account. $1,156.75 of this payment is recorded in the CTC receipts journal - 75 - as a commission for Diesel Power; $771.17 is reported as a commission for CTC; and $14,891.74 is recorded as a "cost of purchase." The 1973 receipts journal also reflects a payment from Pioneer in the amount of $472.86. This payment was deposited in the CTC CNB account. Of this amount $283.72 was recorded in the CTC receipts journal as a commission for Diesel Power, and $189.14 was recorded as a commission for CTC. In the notice of deficiency for 1974 respondent determined an adjustment to income from Pioneer Portec in the amount of $269.31. The 1974 CTC receipts journal lists receipt of a payment from Pioneer in the amount of $448.85. This payment was deposited in the CTC CNB account. The CTC receipts journal records $269.31 of this payment as commissions for Diesel Power and $179.54 as commissions for CTC. In the notice of deficiency for 1975 respondent increased petitioner's income from Pioneer by $300,090.87. During the taxable year 1975 Pioneer issued two checks payable to CTC in the total amount of $400,121.15, both of which were deposited in the CTC CNB account. The 1975 CTC receipts journal records a total of $100,030.28 as Pioneer commissions for CTC and a total of $300,090.87 as Pioneer commissions for Diesel Power. Petitioner reported on his 1975 income tax return the $100,030.28 recorded - 76 - as CTC commissions. Petitioner did not report on his 1975 income tax return the $300,090.87 recorded as Diesel Power commissions. In the notice of deficiency for 1976 respondent increased petitioner's income from Pioneer by $876,850.39 in "Per books" unreported income and $232,640.80 in "Other" unreported income, for a total of $1,109,491.19. During the taxable year 1976 Pioneer issued checks payable to CTC in the total amount of $1,447,634.21. All of these checks were deposited in the CTC CNB account. The 1976 CTC receipts journal records a total of $570,783.82 as Pioneer commissions to CTC and $876,850.39 as Pioneer commissions to Diesel Power. Also during 1976, there was a wire transfer from Pioneer to the Diesel Power Bank of Teheran account in amount of $232,615.80, with an additional $25 listed on the check order for "Airmail or cable charge" and "Commission". Respondent concedes the additional $25. This wire transfer was not recorded in the 1976 CTC receipts journal. In the notice of deficiency for 1977 respondent increased petitioner's income from Pioneer by $12,201.80. The 1977 CTC receipts journal lists receipt from Pioneer of $20,336.34, which was deposited to the CTC CNB account. The journal records $12,201.80 as commissions to Diesel Power and $8,134.54 as commissions to CTC. - 77 - In the notice of deficiency for 1978 respondent increased petitioner's income from Pioneer by $84,293.45. The 1978 CTC receipts journal notes receipt from Pioneer of $84,293.45. Of this amount $50,576.07 is recorded as commissions to Diesel Power, and $33,717.38 is recorded as commissions to CTC. Q. Galion Diesel Power and the Galion Iron Works & Manufacturing Company (Galion) had a direct buyer-seller relationship prior to the years at issue. Galion sold equipment to Diesel Power by means of time drafts whereby Diesel Power would resell the Galion equipment to its customers and, with the payments from those customers, pay Galion for the time drafts. Diesel Power defaulted at one point on these time drafts. Mr. Khalatbari, as managing director of Diesel Power, negotiated and signed an agreement dated July 28, 1969, between Galion and Diesel Power restructuring the debt due from Diesel Power to Galion. Petitioner, as director, officer, and principal shareholder of Diesel Power, guaranteed payment under the provisions of the agreement. Neither Mr. Khalatbari nor Diana Zand gave a similar personal guarantee. Shortly thereafter, in a document dated December 1, 1969, an export, distributor, sales and service agreement was executed. The cover page states that the agreement was between Diesel Power and Galion, but the signature page - 78 - identifies CTC as the distributor. Petitioner signed this agreement as Owner and General Manager of CTC. Most of the direct correspondence between Diesel Power and Galion during the years at issue concerned quotes or orders for Galion equipment. Other direct correspondence involved minor matters, such as claims and exhibitions. Diesel Power corresponded with CTC concerning Galion equipment for orders, warranty and service procedures, and receipt of checks from Galion. CTC corresponded directly with Galion on more important matters, such as the cancellation of orders, new product lines, and the payment of commissions. Commissions earned on Galion equipment that had been shipped to Diesel Power were credited to CTC. In 1976 petitioner negotiated an additional commission from Galion with respect to a service fee. On one occasion in 1976, Mrs. Conway sent a letter to Galion requesting that a check be sent payable to the Diesel Power Bank of Teheran account and directed that the check be charged against CTC's commission account. The letter also contains the following statement: This transfer should be accompanied by the following explanation: "Re Galion Equipment." There should be no mention of the source of this request i.e. Caspian Trading Company. Diesel Power will handle all other details upon the Bank of Teheran's receipt of your bank transfer. - 79 - In addition to petitioner's direction of commission payments, petitioner ultimately was in charge of the Galion relationship. For example, when a question arose whether a change of control from one Iranian ministry to another would affect the acquisition of certain Galion equipment, CTC told Galion that the new Minister "is a good friend of Mr. Zand's, so there is no difficulty by this change." Petitioner personally handled Galion sales to a ministry. CTC employees also confirmed to others the impression that CTC was ultimately responsible for Galion sales by corresponding with a potential customer of Galion equipment with the following language: "Our company name in Iran is Diesel Power Company." In a letter to another purchaser of Galion equipment there was a reference to "our Teheran office Diesel Power". Petitioner's ultimate authority was understood among various CTC employees. At the bottom of a letter from Diesel Power to Mrs. Meier in 1976 concerning a rebate that had been negotiated on some cranes by Mr. Shirazi of Diesel Power, a handwritten note from "MA" says "ask JJZ"; an apparent response states "pay to us here 40/60". In 1978 there was evidence that petitioner still was in control of the Galion relationship. Mr. Khalatbari did not sign a contract for the sale of Galion equipment to the Iranian ministry and was described to a CTC employee by an Iranian business associate as "your man on the - 80 - spot" who was mismanaging petitioner's Iranian business. Petitioner discussed this problem with Galion and planned, if it became necessary, to arrange for someone else to sign the contract on Galion's behalf. There appears to have been some tension between petitioner and Diesel Power about the issue of control with respect to Galion commissions. Mr. Shirazi of Diesel Power sent a letter during 1975 to Galion stating: As a result of an organizational change in our company we have set up new procedures. One of these changes has been to deal directly with all the manufacturers we represent. This change has resulted because we have found Caspian to be over loaded [sic] with work and have been under tremendous pressure as of late. The letter indicates that a copy was sent to CTC. Shortly thereafter, Mrs. Meier wrote to Galion as follows: I have discussed this at length with Mr. Zand and will be advising Mr. Shirazi that while Diesel Power may and should correspond with Galion directly on spare parts matters, their direct communication should be limited to that and in all direct communications whether originating from your office or Diesel Power a blind copy should be sent to Caspian. At the request of Mr. Zand, all machinery orders will continue to be processed through Caspian. In a letter dated March 17, 1976, Mrs. Conway wrote to a Galion affiliate in Europe, stating: "As a result of negotiations held in Teheran in August 1975, between Mr. I. J. Zand of Diesel Power Company" and Galion, certain commission fees had been paid to - 81 - Diesel Power. The letter requests that the balance of the commission due be transferred to CTC. A 1975 Galion letter to one of its European affiliates states that, while the affiliate had provided commission funds directly to Diesel Power on certain past shipments, this procedure was "contrary to Caspian Trading's instructions to us. Mr. Zand called me the other day and advised me of this." The letter further stated that the correct procedure was to credit the affiliate's books in the name of Diesel Power, send a copy of the credit to CTC, and "Await notification from Caspian as to when and how dispersement is to be made." This letter shows that a copy was sent to petitioner but does not show that a copy was sent to Diesel Power. Petitioner's control over the earning of commissions also is reflected in a 1976 memo to the Galion file, which states: Mr. Zand suggested and Farshid graciously agreed that Caspian retain 100 percent of the profit on the Galion * * * parts and engine orders yearly until such time as Caspian covers their overhead. Once Caspian's overhead is satisfied, then the division is Caspian 75 percent and Diesel Power 25 percent. R. Payments by Galion In the notice of deficiency for 1973 respondent determined that there was unreported "Per books" income from Galion in the amount of $170,798.84 and "Other" income from Galion of $2,368.24. During the taxable year 1973 Galion issued checks payable to CTC totaling $284,664.74, all of which were deposited - 82 - in the CTC CNB account. The CTC receipts journal for 1973 records commissions from Galion for CTC in the amount of $113,865.90 and for Diesel Power in the amount of $170,798.84. The notice of deficiency for 1974 increased petitioner's commission income from Galion by $60,129.43. During the taxable year 1974 Galion issued checks payable to CTC in the total amount of $100,215.71, all of which were deposited in CTC's CNB account. The 1974 CTC receipts journal records the amount of $40,086.28 as CTC commissions and $60,129.43 as Diesel Power commissions. In the notice of deficiency for 1975 respondent increased petitioner's "Per books" income from Galion by $1,202,188.66 and "Other" income by $3,780. For the taxable year 1975 Galion issued checks payable to CTC in the total amount of $1,870,239.25. These checks were deposited to CTC's CNB account. Of this total amount $221,069.80 constituted reimbursement to CTC for costs of purchases. This amount was not included by petitioner as cost of goods sold on his 1975 return.16 The 1975 CTC receipts journal records $447,231.27 as commissions to CTC. The remaining $1,202,188.1817 was listed as commissions to Diesel 16 Thus, respondent made no adjustment to petitioner's total Schedule C income for $221,069.80 in the notice of deficiency for 1975. 17 We note that the stipulation states that the total amount included in income was $447,231.27 and that, consequently, the net total of the deposits not included in petitioner's income, as listed in the stipulation, is $1,201,938.18. We are unable to identify from the 1975 CTC cash receipts journal two of the deposits listed in the stipulation as having been included - 83 - Power. Respondent now claims that only the $1,201,938.20 is at issue for 1975, thus apparently conceding the alleged "Other" income in the notice of deficiency.18 In the notice of deficiency for 1976, respondent increased petitioner's "Per books" income from Galion by $12,845.78 and "Other" income by $391,286.34. Respondent now asserts that $390,843.54 is at issue. During the taxable year 1976, Galion paid Diesel Power a total amount of $390,843.54. These payments were deposited in the Diesel Power Bank of Teheran account and were made pursuant to letters from CTC to Galion requesting the payments. None of these payments was recorded in the CTC receipts journal for 1976. Petitioner did not include in his 1976 gross income any portion of the $390,843.54. On June 24, 1976, Galion made a payment to Diesel Power in the amount of $6,000, payable to the Diesel Power Bank of Teheran account. There is no record of this amount in CTC's receipts journal for 1976. Respondent appears to have conceded the adjustment in the notice of deficiency with respect to the $6,000 payment. in income; therefore, we are unable to ascertain whether the specific amounts listed in the stipulation are correct, but we assume for our findings that they are and that there was an error in addition. Because the total amount included in income is $250 [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/4330353. Public record. Not legal advice.