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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
Determinations of Deficiencies and Additions to Tax
Page
. .
7
Issues . . . . . . . . . . . . . . . . . . . . . . . . .
8
Findings of Fact . . . . . . . . . . . . . . . . . . . .
10
I.
Preliminary Facts . . . . . . . . . . . . . . . . . . .
A. Background . . . . . . . . . . . . . . . . . . . . .
B. Ownership of Diesel Power . . . . . . . . . . . . .
C. Audits for Prior Years . . . . . . . . . . . . . . .
D. Preparation of Tax Returns . . . . . . . . . . . . .
E. Bank Accounts . . . . . . . . . . . . . . . . . . .
F. Sale of Diesel Power Stock . . . . . . . . . . . . .
10
10
12
13
14
15
19
II.
Transactions With Manufacturers--Commission Income . . .
A. Lockheed . . . . . . . . . . . . . . . . . . . . . .
B. Payments by Lockheed . . . . . . . . . . . . . . . .
C. Ashland . . . . . . . . . . . . . . . . . . . . . .
D. Payments by Ashland . . . . . . . . . . . . . . . .
E. General Motors . . . . . . . . . . . . . . . . . . .
F. Payments Made by General Motors. . . . . . . . . . .
G. SEDCO/IMICO . . . . . . . . . . . . . . . . . . . .
H. Payments by SEDCO, IMICO, Stewart & Stevenson . . .
I. Ingersoll-Rand . . . . . . . . . . . . . . . . . . .
J. Payments by Ingersoll-Rand . . . . . . . . . . . . .
K. Morgan . . . . . . . . . . . . . . . . . . . . . . .
L. Payments by Morgan . . . . . . . . . . . . . . . . .
M. Harnischfeger . . . . . . . . . . . . . . . . . . .
N. Payments by Harnischfeger . . . . . . . . . . . . .
O. Pioneer . . . . . . . . . . . . . . . . . . . . . .
P. Payments by Pioneer . . . . . . . . . . . . . . . .
Q. Galion . . . . . . . . . . . . . . . . . . . . . . .
R. Payments by Galion . . . . . . . . . . . . . . . . .
S. Clark . . . . . . . . . . . . . . . . . . . . . . .
T. Payments by Clark . . . . . . . . . . . . . . . . .
U. Miscellaneous Commissions/Goodyear . . . . . . . . .
V. Payments by Miscellaneous Companies/Goodyear . . . .
22
23
29
34
39
43
49
54
56
60
62
64
65
66
68
70
74
77
81
85
90
94
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
Opinion
. . . . . . . . . . . . . . . 154
. . . . . . . . . . . . . . . . . . . . . . . . 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. . . . . . . . . . . . . . . . . . . . . . .
A. Cost of Goods Sold . . . . . . . . . . . . . . . .
B. Commission Expenses . . . . . . . . . . . . . . . .
C. Consulting Fees . . . . . . . . . . . . . . . . . .
D. Management Fees . . . . . . . . . . . . . . . . . .
E. Legal and Professional Fees . . . . . . . . . . . .
209
212
212
216
218
222
- 5 -
F.
G.
H.
I.
J.
K.
L.
M.
N.
Salaries and Wages . . . . . . . . . . . . . . . .
Office Expenses . . . . . . . . . . . . . . . . . .
Interest Expense . . . . . . . . . . . . . . . . .
Expenses for Insurance and Dues and Publications .
Depreciation . . . . . . . . . . . . . . . . . . .
Rental Loss and London Rent Expense . . . . . . . .
Loan Origination Fee . . . . . . . . . . . . . . .
Moving Expense and Investment Tax Credits . . . . .
Travel and Entertainment Expenses . . . . . . . . .
VII. Issue 11--Dependency Exemption and Charitable
Contribution Deductions . . . . . . . . . . . . . . . .
A. Dependency Exemption . . . . . . . . . . . . . . .
B. Deduction for Charitable Contribution to City of
Columbus . . . . . . . . . . . . . . . . . . . . .
C. Deduction for Charitable Contribution to Kenyon
College . . . . . . . . . . . . . . . . . . . . .
227
227
230
237
237
240
240
241
241
254
254
256
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
XI.
Issue 15 and 16--Section 6653(a) Additions to Tax for
Negligence . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . 281
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
Year
1972
1973
1974
1975
1976
1977
Deficiency
$509,899.26
615,949.53
1,859,675.64
2,941,539.51
2,647,211,47
1,408,023.34
Additions to Tax
Sec. 6653(b)
Sec. 6653(a)2
$265,584.61
--326,663.06
--929,837.82
--1,789,151.60
--1,349,444.24
--$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
Sec. 6653(a)(1)
Sec. 6653(a)(2)
1
$23,971.30
--1
37,728.46
--1
8,575.54
--12,310.93
50 percent of
interest due on
$246,218.55
The correct section is 6653(a).
Year
1978
1979
1980
1981
1
Deficiency
$479,425.94
754,569.20
171,510.84
246,218.55
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
Deficiency
$5,150.34
59,729.00
305,317.94
99,952.62
Year
1973
1974
1975
1976
Increase in Addition to Tax
Sec. 6653(b)
$2,575.17
29,864.50
152,658.94
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.
1.
The following issues are presented for decision:
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.
to becoming a U.S. citizen, he was a citizen of Iran.
Prior
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:
Name on
Account
Years
in Existence
Petitioner
Authorized
Signatory
Petitioner
1973-1975
Yes
Zand FNCB London
Petitioner
1972-1976
Yes
Zand CNB Columbus
Petitioner
1972-1976
Yes
Zand Kitzbuhel
CTC
CTC
1973-1975
1972-1976
Yes
Yes
CTC Bank of America
CTC CNB
Petitioner
c/o CTC
1975-1977
Yes
CTC FNCB London
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/
J.J. Zand
1974-?
Yes
Name on
Account
Years
in Existence
Petitioner
Authorized
Signatory
Diesel Power
c/o CTC
1972-1976
Yes
Name
Used
Diesel Power FNCB
Geneva # 2
Diesel Power FNCB
London
Name
Used
Diesel Power Bank of
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
Unknown
Interrep Banque
de Paris
Interrep, S.A. 1973
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.
5
Petitioner also wrote a check to himself in the amount
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.
CTC.
Two of these checks were endorsed for deposit to
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.
dispute.
This amount is not in
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
Banque de Paris
Interest
Galion
Diesel Power
$1,476,786.58
240,000.00
111,211.00
110,000.00
47,000.00
- 34 -
Disbursements:
Banque de Paris
Minora (DPC)
Galion
FK (Tonekaboni)
Zanganeh
Swiss Credit Bank #29934
Price Waterhouse
FNCB-London
Bank & Check Charges
$880,000.00
115,000.00
10,000.00
100,000.00
80,000.00
83,000.00
2,248.85
2,500.00
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:
Payment received for
Mr. James Zand
Payment to account of
Interrep, S.A. for the
group represented by
Mr. James Zand
Date
Amount
June 6, 1973
Date
$12,500
Amount
Sept. 30, 1973
$100,000
- 38 -
Payment received for All
Patents Corp. Ltd.
Payments to All Patents
pursuant to agreement
dated April 4, 1974:
Payment to All Patents
pursuant to agreement
dated October 15, 1974
Dec. 19, 1974
$200,000
March 28, 1974
Sept, 13, 1974
Dec. 9, 1974
Feb. 19, 1975
$164,909
$166,447
$ 41,419
$ 69,078
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 AllPatent 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 "underthe-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.
de Paris.
These funds were deposited in an account at the Banque
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
J. J. Zand
7-11-73
400
J. J. Zand
11-29-73
5,000
O. E. Atkins
check for
riyals Zand
advanced to
Atkins in
Teheran
Gifts for
NIOC
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.
of this letter.
Petitioner's signature appears at the bottom
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.
provided:
The document also
- 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.
2.
3.
4.
5.
General Motors
Ingersoll-Rand
Galion
Clark Equipment Company (both ITD and CMD)
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.
letter to GM stating:
In February petitioner wrote a
- 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.
$1,204.12.
Petitioner concedes that this amount was equivalent to
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.
account.
These payments were deposited to the CTC CNB
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.
alleged payment is not reflected on the 1973 CTC receipts
This
- 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.
are attributed to CTC commissions or "purchases".
Instead, all
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I. Ingersoll-Rand
Diesel Power was the distributor in Iran for certain
construction machinery and industrial equipment for IngersollRand 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
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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.
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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.
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$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.
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$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.
this proceeding.
Mr. Shirazi was not a witness in
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
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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.
at issue.
These two checks are not
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
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agreement.
Power.
Petitioner signed the agreement as chairman of Diesel
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.
these amendments on August 25, 1972.
Petitioner accepted
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 30day notification provision in the agreement.
On at least four
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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
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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.
checks were deposited into the CTC CNB account.
These
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.
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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.
of CTC.
Petitioner executed this amendment on behalf
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.
up on requests from Pioneer.
Some messages asked for follow-
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
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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.
deposited in the CTC CNB account.
This payment was
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.
deposited in the CTC CNB account.
This payment was
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
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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.
account.
All of these checks were deposited in the CTC CNB
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.
defaulted at one point on these time drafts.
Diesel Power
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."
handled Galion sales to a ministry.
Petitioner personally
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:
is Diesel Power Company."
"Our company name in Iran
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.
Khalatbari did not sign a contract for the sale of Galion
Mr.
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
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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.
me of this."
Mr. Zand called me the other day and advised
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
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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
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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.
$390,843.54 is at issue.
Respondent now asserts that
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 less than indicated in the stipulation, the total
amount not included is $250 higher.
18
We are unable to determine why the amount attributed to Diesel Power
on the CTC receipts journal of $1,202,188.18 differs from the amount at issue
according to respondent's brief by $250. We assume that respondent meant to
use the "Per books" figure in the notice of deficiency.
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Respondent increased petitioner's 1977 income from Galion by
$57,339.32.19
The 1977 CTC receipts journal lists two payments
from Galion.
Both payments were deposited to the CTC CNB
account.
One payment in the amount of $307.52 was allocated
$184.51 to Diesel Power commissions and $123.01 to CTC
commissions.
The other payment in the amount of $57,154.81 was
designated refunds/reimbursements.
On brief, respondent fails to
mention the $184.51 Diesel Power commission.
Furthermore, on
brief, respondent concedes that the $57,154.81 is a
reimbursement.
Therefore, the $57,339.32 is no longer at issue.
In the notice of deficiency for 1978 respondent increased
petitioner's commission income from Galion in the amount of
$671,394.73.
Respondent now contends that $415,896.98
constitutes unreported commission income to petitioner.
The CTC
receipts journal for 1978 lists a payment from Galion in the
amount of $32,560.36 in the "Other" column.
The CTC receipts
journal also shows a Galion payment in the amount of $638,894.37.
Of this payment $383,336.62 is designated as Diesel Power
commissions and $255,557.75 as CTC commissions.
19
There is a discrepancy between the stipulated figure of $57,339.32 and
the notice of deficiency. The notice of deficiency shows $57,154.81 as the
adjustment to 1977 income. We accept the stipulated figure.
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S. Clark
Petitioner's relationship with Clark International Marketing
S.A. and its affiliates (all of which will be referred to
collectively as Clark) dates back to at least 1966.
On June 6,
1966, petitioner signed an agreement designating Diesel Power as
sales representative for Clark products.
Petitioner signed this
agreement as Director General of Diesel Power.
In 1972
petitioner, on behalf of himself and CTC, agreed to honor all
unpaid obligations in the form of drafts or account charges
incurred by Diesel Power.
On May 1, 1973, Clark and Diesel Power
entered into a distributor agreement.
By this agreement, Diesel
Power would market Clark products, and Clark would sell its
products in Iran exclusively to Diesel Power.
Mr. Khalatbari
signed this agreement on behalf of Diesel Power.
On May 1, 1975,
another distributor agreement identical to the 1973 agreement was
entered into in the names of Diesel Power and CIMSA, a Clark
affiliate.
Mr. Khalatbari also signed that agreement on behalf
of Diesel Power.
Although Mr. Khalatbari signed the Clark agreements,
petitioner and CTC were in control of important matters and
policy decisions.
In August 1973, Mrs. Meier wrote to Clark on
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CTC letterhead discussing the possibility of sales of Clark
equipment to NIOC as follows:
"Members of Diesel Power are in
contact with NIOC on a regular basis" and would encourage
purchase of "our" products.
In November and December 1973, CTC
ordered Clark equipment for sale in Iran and requested that
commissions be paid.
Referring to Diesel Power as "our sister
company in Iran", CTC also instructed Clark's German affiliate to
send all monthly statements and copies of all correspondence,
invoices, and credit or debit notes pertaining to Diesel Power
accounts to CTC.
At various times from 1974 through 1977 CTC
employees contacted Clark asking for copies of invoices and
instructing Clark to forward commissions to Diesel Power bank
accounts in the Channel Islands, the Banque de Paris, and the
Zand London account.
directly to CTC.
CTC also instructed Clark to forward checks
There are no similar letters in the record from
Diesel Power directing Clark's payments.
In 1975 CTC wrote to
Clark discussing Diesel Power's proposal to exhibit Clark
equipment at the upcoming Teheran Trade Fair.
Furthermore, after
a dispute in March 1976, petitioner wrote a lengthy letter to
Clark's German affiliate expressing concern about discourteous
behavior by a Clark employee to a representative of the Iranian
- 87 -
Air Force.
Petitioner emphasized that such behavior was
particularly inappropriate because the largest forklift sale in
Clark history was involved.
In response to an allegation that
Diesel Power had not earned its commission in the forklift
transaction, petitioner explained that "Diesel Power" had
succeeded in negotiating the sale without public bids, and that
petitioner had met with the parties during the negotiations.
Petitioner further explained that CTC employees had written and
telephoned Clark employees on several occasions concerning a
letter of credit in favor of Clark and commission payments,
indicating that "both our offices in Iran and the U.S. continued
to give valuable support to the Clark organization".
Although
petitioner had little direct contact with Clark employees, these
employees understood that Diesel Power was petitioner's company.
Notwithstanding this understanding, Diesel Power was Clark's
contractual partner.
Clark issued a statement that Diesel Power
was its sole distributor.
However, as discussed previously,
Diana Zand had asked CTC to obtain statements from several
distributors stating that Diesel Power was their representative
in order to facilitate transactions with the Iranian Government.
At CTC's request, in a letter dated August 19, 1974, addressed
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"TO WHOM IT MAY CONCERN", Clark confirmed that Diesel Power was
its authorized sole distributor in Iran.
In certain respects,
this representation is supported by Diesel Power's considerable
contact with Clark.
Diesel Power provided quotes for Clark
equipment to local companies and, in one instance, asked a Clark
representative to travel to Iran about an order.
In November
1974, Mr. Ott, of Clark, sent a letter to Mr. Khalatbari
restating some of the main problems that Diana Zand had mentioned
during his recent visit to Teheran.
One of these problems Mr.
Ott mentioned involved tax issues:
The accrual of commissions in the manufacturing country
might be subject to taxation if the governmental tax
authorities have the last word in the pending negotiations.
However, a meeting of tax experts has been scheduled in
Strasbourg on 7 November 1974 for the purpose of working out
a satisfactory solution.
Diesel Power also notified a Clark German affiliate in 1975 of
the change in Diesel Power's organization from a partnership to a
"private joint stock company".
Thereafter, when Clark grew
dissatisfied with the level of sales in Iran, Clark canceled the
1975 distributor agreement with Diesel Power.
Both Mr.
Khalatbari and I.J. Zand wrote to Clark protesting the
cancellation and insisting that Diesel Power remain Clark's
authorized sole distributor in Iran.
Despite these contacts with
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Clark there is no evidence that Diesel Power employees directed
any payments from Clark.
In 1977 there was a disagreement between CTC and Mr.
Khalatbari about certain Clark and Ingersoll Rand commissions.
On May 24, 1977, Mrs. Conway and Mrs. Meier wrote a memorandum to
petitioner discussing the amount of commissions that CTC had
received from Diesel Power on the Clark and Ingersoll-Rand
orders.
They indicated that "many man hours were expended
servicing this order and in obtaining the actual commission for
Diesel Power".
They further noted that a 15-percent commission
was "more than equitable" because "CTC enjoyed a 60/40 split"
during the same time period for performing the same type of
services for other companies.
They also wrote that they had
approached Mr. Khalatbari about a 10-percent commission but Mr.
Khalatbari had responded that "Diesel Power was not in a position
to pay at that time."
The memorandum also indicates a belief
that Mr. Khalatbari was manipulating the form of orders in order
to minimize the amount of commission due to CTC.
The matter
apparently was resolved, and Mr. Khalatbari agreed to pay a
portion of the commissions to CTC.
However, by April 1977, the
$325,000 agreed upon had not been paid.
Mrs. Meier then sent a
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letter to Mr. Khalatbari reminding him of the agreement and
asking when payments could be expected.
from Mr. Khalatbari in June 1977.
CTC received $325,000
This amount was listed on the
CTC receipts journal as "Other" with a note indicating that this
was a commission "due CTC from DPC".20
By 1978 the relationship between CTC and Diesel Power was in
its last stages.
In a memo to the file dated April 24, 1978,
Mrs. Conway noted the receipt of three checks from Clark.
She
described therein the allocation of each check to the two
companies and concluded with the following postscript to Diesel
Power:
These checks are being treated in accordance with the
agreement between Caspian Trading Company and Diesel Power
Company and Diesel Power's share has been credited to Diesel
Power's account with Caspian, and will be disposed of under
the on-going negotiations.
T. Payments by Clark
In the notice of deficiency for 1973 respondent increased
petitioner's income from Clark by $35,300.29.
During 1973 Clark
issued two checks payable to CTC in the total amount of
$56,301.23.
Clark also issued one check payable to Diesel Power
in the total amount of $2,532.60.
20
This amount is not in dispute.
Thus, total commission
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receipts from Clark were $58,833.83.
CTC endorsed these checks
and all were deposited in the CTC CNB account.
The CTC 1973 cash
receipts journal records $35,300.29 of the total payments from
Clark as "DPTC" commissions and $23,533.54 as "Caspian"
commissions.
In the notice of deficiency for 1974 respondent increased
petitioner's income from Clark by $39,972.49 "Per books" income
and $17,925.58 for "Other" income for a total of $57,898.07.
In
the amendment to answer respondent asserts that there were Clark
payments deposited to the Zand FNCB London account of £17,141.67,
equivalent to $39,837.99.
During 1974 Clark issued total
payments to CTC of $8,621.92 and to Diesel Power of $57,991.50,
or a total of $66,613.42.
Mrs. Conway had requested that at
least some of the payments be made to the CTC CNB account, and
they were so deposited.
CTC's 1974 cash receipts journal lists
$26,645.37 of this amount as CTC commissions and $39,968.05 of
this amount as Diesel Power commissions.
Clark also paid the
following amounts that were not reflected on the CTC receipts
journal, and not reported as income by petitioner in 1974:
Amount
Account to which deposited
$12,175.75
10,949.35
Zand FNCB
Zand FNCB
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1,124.55
50,658.25
Zand FNCB
Mailed to Diesel Power or a Diesel Power
account
In the notice of deficiency for 1975 respondent increased
petitioner's income from Clark by $173,185.21 "Per books" income
and $1,009,165.22 "Other" income for a total of $1,182,350.43.
Respondent asserts in her answer that Clark paid petitioner
$1,095.63 in 1975.
In the amendment to answer respondent asserts
that Clark paid petitioner £1,095.63, equivalent to $2,622.94 in
1975.
During 1975 Clark issued checks to CTC in the total amount
of $285,260.12.
accounts.
These checks were deposited to CTC bank
In the 1975 CTC receipts journal $114,104.04 of the
total amount is recorded as CTC commissions, all of which was
included in CTC's 1975 income.
The remaining $171,156.08 was
recorded as Diesel Power commissions.
amount in income.
CTC did not include this
During 1975 Clark issued checks to Diesel
Power in the total amount of $1,011,451.47.
One of these checks,
in the amount of $3,381.88, was deposited to the CTC CNB account.
The remaining checks were deposited, at least in part, to Diesel
Power accounts at the Banque de Paris, Bank of America, or CNB at
CTC's request.
On the 1975 receipts journal $1,352.75 is
recorded as CTC commissions and $2,029.13 as Diesel Power
- 93 -
commissions.
Petitioner reported the $1,352.75 on his return,
but did not report the balance of the $1,011,451.47.
During 1975
Clark also deposited £1,095.63, equivalent to $2,622.94,21 into
the Zand FNCB London account.
This deposit was not recorded on
the CTC cash receipts journal.
During 1975 Clark also issued
payments directly to Diesel Power or to a Diesel Power bank
account in the total amount of $59,823.83.
These payments were
not recorded in the 1975 CTC receipts journal.
In the notice of deficiency for 1976 respondent increased
petitioner's income from Clark by $134,086.23 "Per books" income
and $253,173.06 "Other" income.
$19,754.24.
During 1976 Clark paid CTC
The 1976 CTC receipts journal allocates $11,852.54
to Diesel Power commissions and $7,901.70 to CTC commissions.
During 1976 Clark paid Diesel Power a total of $674,658.88.
Of
this amount $455,125.68 was deposited in the CTC CNB account.
The remaining $219,533.20 was not recorded in the 1976 CTC
receipts journal.
The 1976 CTC journal also lists $81,489.53 as
CTC commissions and $122,234.29 as Diesel Power commissions.
During 1976 Clark also made payments directly to Diesel Power or
21
Respondent's answer asserted that Clark paid $1,095.63 to petitioner
in 1975, but in the amended answer asserted that this was the figure in
pounds, not dollars.
- 94 -
to bank accounts in the name of Diesel Power in the total amount
of $681,783.24.
These payments were not recorded in the 1976 CTC
cash receipts journal.
In the notice of deficiency for 1977 respondent determined
additional income for "Sales commissions D.P.T.C.", $22,545.46 of
which was attributable to commissions from Clark.
During 1977
Clark issued checks payable to Diesel Power or to Diesel Power
bank accounts in the total amount of $38,569.34.
None of this
amount was recorded on CTC's cash receipts journal.
The journal
does list receipt from Clark of $22,723.98, all of which was
deposited in the CTC CNB account.
Of this amount $14,013.71 was
allocated to Diesel Power commissions and $8,710.27 to CTC
commissions.
In the notice of deficiency for 1978 respondent determined
additional income from Clark in the amount of $36,796.41.
The
1978 CTC receipts journal reflects a total of $21,831.24 received
from Clark, $6,640.14 of which was allocated to CTC and
$15,191.10 of which was allocated to Diesel Power.
U. Miscellaneous Commissions/Goodyear
Petitioner, CTC, and Diesel Power also had relationships
with many other companies resulting in the payment of numerous
- 95 -
other commissions.
CTC supplied quotations for some of the
orders with these companies.
CTC was asked to supply
instructions for payment of commissions, and CTC requested
payment of the commissions earned in the course of these
relationships.
Mrs. Meier corresponded with Goodyear during 1973
concerning petitioner's contacts in connection with sales of
certain equipment to the Iranian Air Force and instructed that
commission payments be made to the Zand FNCB London account.
On
August 9, 1973, petitioner prepared a memorandum of understanding
whereby petitioner agreed to help facilitate these sales, and
Goodyear agreed to pay petitioner an annual fee.
There also is
an unsigned distributor agreement dated August 1973 between
Diesel Power and Goodyear concerning the sale of Goodyear
products.
During 1974 and 1975 both Diesel Power and CTC
employees assisted in obtaining price quotes from Goodyear and
sales of Goodyear products.
V. Payments by Miscellaneous Companies/Goodyear
The following payments were recorded in the CTC receipts
journal for 1973:
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Payor
Rosco
Mfg. Co.
Euclid
American
Hoist
Iran
Aircraft
Morrison
Knudson
Parker-Hannifin
Atlantic
Richfield
Amount
CTC
Commission
Diesel Power
Commission
$1,003.32
106.02
$401.33
42.41
$601.99
63.61
116.97
46.79
70.18
24,181.00
2,648.39
3,972.58
18,377.47
917.37
11,537.00
275.95
366.95
591.35
413.92
550.42
887.03
All payments listed above were deposited into the CTC CNB account
during 1973, although the parties have not stipulated as to
deposit of the Atlantic Richfield check.
In the notice of
deficiency for 1973 respondent increased petitioner's income from
the companies listed above by the amounts, totaling $6,659.73,
attributed to Diesel Power commissions in the CTC receipts
journal.
The following payments were recorded in the CTC receipts
journal for 1974:
CTC
Commission
Diesel Power
Commission
Payor
Amount
GM-Lavan
G. PowerGould
$1,632.85
$170.71
$256.06
1,635.36
654.14
981.22
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ClemcoHolland
Rosco
Mfg. Co.
L.J. Stone
Atlantic
Richfield
Parker
Hannifin
446.22
267.73
178.49
1,263.76
609.17
505.50
243.67
758.26
365.50
19,171.30
967.20
1,450.80
2,315.04
926.01
1,389.03
All payments listed above were deposited to the CTC CNB account
during 1974.
In the notice of deficiency for 1974 respondent
increased petitioner's income from the above companies by the
total amounts attributed to Diesel Power in the CTC receipts
journal.22
In the notice of deficiency for 1974 respondent also
increased petitioner's income from Goodyear by $21,089.92 and
from Leopold (a Goodyear affiliate) by $4,545.72.
In the
amendment to answer respondent asserts that the £25,655.64
deposited to the Zand FNCB account in 1974 by Goodyear was
equivalent to $58,919.69.
During 1974 various Goodyear
affiliates deposited a total of £25,665.64 to the Zand FNCB
22
In the notice of deficiency for 1974, respondent made an adjustment to
income from Clemco-Holland in the amount of $27,178.49. Respondent now
appears to have abandoned the argument with respect to all but $178.49 of that
amount.
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London account.
These deposits were not recorded as receipts in
the CTC receipts journal.
The following payments were recorded in the CTC receipts
journal for 1975:
Payor
Amount
CTC
Commission
Diesel Power
Commission
Manchester
Machines
$1,632.02
$652.81
$979.21
Airoceanic
Motors
51,666.00
20,666.40
30,999.60
Rosco
13,190.28
5,141.74
8,048.54
Parker
Hannifin
6,145.51
2,458.18
3,687.33
Parsons
Jurdin
213,123.73
5,989.13
8,983.70
Bucyrus
Blade
$2,114.53
$794.35
$1,191.53
G.M. Terex
3,521.28
1,408.51
2,112.77 Exxon
149,413.00
4,490.00
6,735.00
With the exception of $5,296.68, all payments listed above were
deposited to the CTC CNB account during 1975.
In the notice of
deficiency for 1975 respondent increased petitioner's income from
the above companies by the total amounts attributed to Diesel
Power in the CTC receipts journal.
In the notice of deficiency for 1975 respondent determined
an increase in petitioner's income from Goodyear by $117,854.49.
In the amendment to answer respondent asserts that payments from
Goodyear in the total amount of $134,776.70 constituted
unreported gross income to petitioner.
During 1975 Goodyear
deposited checks in the total amount of $59,767.98 to the CTC
- 99 -
FNCB London account and the Zand FNCB London account.
During
1975 Goodyear also issued checks in the total amount of
$75,008.62 that were deposited to the Diesel Power Bank of
America account.
These amounts were not listed in the CTC
receipts journal for 1975.
The following payments were recorded in the CTC receipts
journal for 1976:
Amount
CTC
Commission
Diesel Power
Commission
$991.20
49,800.00
$396.48
3,984.00
$594.72
5,976.00
92.13
(3.68)
(5.52)
2,730.13
1,092.05
1,638.08
118,432.26
8,055.08
12,082.61
Payor
AtecoAmerican
Houston
Atlantic
Richfield
Parsons
Jurdin
Exxon/
Galion
All payments listed above were deposited to the CTC CNB account
during 1976.
In the notice of deficiency for 1976, with the
exception of Exxon, respondent increased petitioner's income from
the above companies by the total amounts attributed to Diesel
Power in the CTC receipts journal.
The proposed increase in
petitioner's income from Exxon is $12,302.95.23
During 1976
Goodyear deposited checks in the amount of $4,492.13 to the CTC
CNB account.
These payments were recorded in the CTC receipts
journal as $1,796.85 in CTC commissions and $2,695.28 in Diesel
Power commissions.
In the notice of deficiency for 1976
23
We are unable to explain why this amount is greater than the
stipulated Exxon amounts attributed to Diesel Power in the CTC receipts
journal.
- 100 -
respondent increased petitioner's income from Goodyear by
$2,695.28.
In the notice of deficiency for 1977 respondent determined
that petitioner had unreported income from Diesel Power sales
commissions.
Of these payments $10,952.15 is attributed to
Exxon, $3,000 to Orton, and 56 cents to Atlantic Richfield.
The
following payments were recorded in the CTC receipts journal for
1977:
Payor
Exxon
Orton
Atlantic
Richfield
Amount
CTC
Commission
$147,558.45
$7,301.43
5,000.00
2,000.00
2.88
Diesel Power
Commission
$10,952.15
3,000.00
.38
.56
All payments listed above were deposited to the CTC CNB account
during 1977.
III. Interest and Dividend Income--First National City Bank,
London, England, and Crown Life Insurance Company
During 1974 and 1975 petitioner maintained an account with
First National City Bank (FNCB) in London, England, account
number 1612131.
This account generated interest income of
$38,055.71 in 1974 and $43,641.69 in 1975.
Petitioner also
received payments from Crown Life Insurance Company of $436.50 in
1974 and $445.30 in 1975, which were recorded as "dividends" in
CTC's cash receipts journal.
Petitioner did not include the interest from the FNCB
account or the dividends from Crown Life on his 1974 or 1975
- 101 -
Federal income tax returns.
Petitioner did not disclose the
existence of foreign bank accounts in his name on those returns
or on the two amended 1975 returns filed in 1976 and 1978.
Mr. Giffin, who prepared petitioner's 1974 and 1975 tax
returns, was not aware that the FNCB account in London existed.
Furthermore, employees of CTC were not aware that some of the
foreign bank accounts in petitioner's name existed.
In 1976 petitioner earned interest on an FNCB account,
number 245925, in the amount of £27,466.39.
During 1976 he also
received payments from Crown Life of $459.05, which were recorded
as dividends in CTC's cash receipts journal. Petitioner did not
include either the interest on the FNCB account or the dividends
from Crown Life on 1976 Federal income tax return.
On Form 4683 filed with his 1976 return petitioner reported
that his financial interest in FNCB account number 245925 did not
exceed $50,000.
However, during 1976 General Motors paid over
$140,000 into FNCB account number 245925.
Petitioner's employee
requested these deposits.
To Diesel Power and to third parties (including General
Motors and Clark), CTC employees referred to FNCB accounts
numbers 1217690 and 245925 as petitioner's accounts.
Petitioner offered no documentation, such as statements or
policy notices, that the amounts paid to him by Crown Life were
returns of premiums.
- 102 -
The 1974 interest income earned on the London FNCB account
of $38,055.71 and dividends from Crown Life of $436.50 are
includable in petitioner's gross income.
The 1975 interest income earned on the London FNCB account
of $43,641.69 and dividends from Crown Life of $445.30 are
includable in petitioner's gross income.
The 1976 interest income earned on the London FNCB account
of £27,466.39 and dividends from Crown Life of $459.05 are
includable in petitioner's gross income.
IV.
Interest Income--WHIP Account at Barclays Bank Bahamas
During 1974, 1975, and 1976 interest was earned on bank
accounts or time deposits in the name of WHIP at the Barclays
Bank in Freeport, Bahamas, in the respective amounts of $25,025,
$29,338.94, and $16,998.06.
Petitioner, through his attorney, formed WHIP.
was the sole shareholder of WHIP.
nominees.
Petitioner
Named shareholders were
In 1975 petitioner paid $628.30 to Price Waterhouse
for account services to WHIP and claimed a deduction on his tax
return for this amount.
WHIP's banking and other business
activities were handled by petitioner and CTC employees.
Petitioner was sole signatory over WHIP's bank account at
Barclays Bank Bahamas. From the time of WHIP's formation in 1969
through at least 1978, WHIP did not carry on any independent
- 103 -
business activities.
Rather, WHIP served as a shell corporation
and was not an operating company.
In 1978, at petitioner's direction, Mr. Dutton, then an
employee of Caspian Development Company (CDC), withdrew $610,000
from the WHIP account at Barclays Bank Bahamas.
Mr. Dutton then
deposited these funds to petitioner's CNB account in Columbus,
Ohio.
Petitioner signed an agreement in July 1970 with Occidental
Petroleum under which payments were to be made to WHIP.
Petitioner directed all payments into the WHIP Barclays Bank
Bahamas account; he was the sole person who withdrew funds from
the account; and he unilaterally took the funds from the account
and deposited them to this own account in Columbus, Ohio.
Therefore, the interest on the Barclays Bank Bahamas account for
the WHIP shell entity of $25,025 in 1974, $29,338.94 in 1975, and
$16,998.06 in 1976 was earned and controlled by petitioner.
V.
Character of Gain on Disposition of Diesel Power Stock
Petitioner acquired all of Diesel Power's stock from his
father and Mr. Taleghani in 1958.
He paid nothing for it.
In December 1977 petitioner sold all of the stock he then
owned in Diesel Power to Mr. and Mrs. Khalatbari.
Under the sale
agreement, he was to be paid $3,300,000 on December 21, 1977,
$625,000 on March 1, 1978, $700,000 on or before December 15,
1978, and $265,000 on or before December 3, 1979.
The total cash
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payments amount to $4,890,000.
In addition, petitioner was to
receive 40 percent of any amounts paid from Diesel Power's
pending claim in arbitration against Clark.
Petitioner was to
also receive 40 percent of the claim by Diesel Power against
Ingersoll-Rand from the cancellation of the Ingersoll-Rand
franchise.
On his 1977 Federal income tax return petitioner reported a
long-term capital gain in the amount of $4,805,864 from the sale
of 200 shares of Diesel Power stock he had held since 1958.
claimed basis in the Diesel Power stock was $3,525,000.
His
The
gross sale price of $4,809,389 was approximately $80,000 less
than the contract sale price.
In the notice of deficiency for 1977 respondent determined,
pursuant to section 1248, that petitioner was required to treat
the gain from the sale of his Diesel Power Stock as ordinary
dividend income, rather than long-term capital gain.
Respondent
also determined that the gain from the stock sale was $3,925,000,
rather than $4,805,864 as reported on petitioner's 1977 return.
Petitioner satisfies all requirements for section 1248 to
apply.
Petitioner has been a U.S. citizen since 1953 and was a
citizen during the years at issue.
He owned 100 percent of
Diesel Power stock until late 1974, which was within Diesel
Power's 1974 fiscal year ending March 20, 1975.
over 40 percent thereafter until 1977.
Petitioner owned
For the period March 22,
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1972, through March 21, 1973, petitioner reported 100 percent
ownership of Diesel Power's voting stock on an Information Return
with Respect to Controlled Foreign Corporation (Form 2952) filed
with the Internal Revenue Service. Diesel Power's foreign
commission deposits from the Bank of America in New York City,
combined with the retained earnings and amounts due shareholders
on the Diesel Power financial statements, show that during its
fiscal year ending March 20, 1975, retained earnings and profits
exceeded $5 million.
VI.
Claimed Capital Losses for 1978 and 1979
Petitioner claimed capital losses for 1978 and 1979.
On his
1978 Federal income tax return petitioner reported a short-term
capital loss of $15,767 from the sale of commodity futures.
He
deducted $3,000 of the reported loss and carried over to his 1979
return a loss of $12,767.
For 1979 he applied the short-term
capital loss carryover of $12,767 against a short-term capital
gain of $7,500.
In 1979 he also reported a net long-term loss of
$8,229 from small business corporations.
He deducted $3,000 of
the claimed net losses in 1979.
In the notice of deficiency for 1978 and 1979 respondent
disallowed the claimed losses and determined that petitioner was
required to include the $7,500 short-term gain in his 1979
taxable income.
Respondent disallowed the losses because
petitioner did not establish that they were incurred, nor did
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petitioner establish his basis in the commodity futures reported
in 1978.
Petitioner presented no evidence, such as canceled checks,
brokerage statements, or sale agreements, to support the capital
losses claimed in 1978 and 1979.
Therefore, his taxable income
should be increased by $3,000 in 1978 and $10,500 in 1975.
VII.
Asserted Claim of Right for 1979
When petitioner sold his Diesel Power stock to the
Khalatbaris in 1977, the sale price was $4,890,000 plus 40
percent of certain additional commission income.
By March 1978
petitioner had received $3,925,000 for the stock sale.
On his
1977 income tax return petitioner reported his gross sale price
for the Diesel Power stock as $4,809,389, or $806,111 less than
the cash sale price, excluding the potential additional
commission income.
In 1975 and, thus, prior to petitioner's sale of the Diesel
Power stock, the following events occurred:
Clark canceled its
distribution agreement with Diesel Power; Ingersoll-Rand canceled
its agreement with Diesel Power; all commission agreements with
Lockheed were canceled; and the Ashland agreement for crude oil
purchases, joint refining ventures and exploration was
terminated.
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As of March 1979, prior to the time the original 1979 return
was filed, Special Agent Bennett had begun a criminal
investigation regarding petitioner's tax returns.
On petitioner's 1979 joint Federal income tax return, as
originally filed, petitioner included in income $1,617,761 which
he had received, had in his possession, and for which he claimed
ownership.
Petitioner filed an amended joint return for 1979,
claiming that his 1979 income should be reduced by $348,350.
Petitioner states that this amount is attributable to a lawsuit
involving the 1977 sale of his Diesel Power stock.
The record
contains no explanation as to how the $348,350 claimed reduction
was calculated.
On the joint 1981 tax return petitioner claimed that the
calculated tax due of $315,928 should be reduced to $0.
Petitioner states that he is entitled to deduct $735,000
previously included in income under a claim of right because that
amount had been repaid.
The only evidence offered in support of
the $735,000 calculation was Exhibit 556-UJ.
That exhibit was
admitted by the Court for the limited purpose of establishing
that litigation had occurred.
The 1977 sale of Diesel Power stock was a separate tax event
from the 1979 claim of right over commission income held by
petitioner.
Therefore, he is not entitled to reduce reported
1979 income by the $348,350 unexplained claim.
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VIII.
Claimed Schedule C Expense Deductions
For the years 1973 through 1981 respondent disallowed
claimed expense deductions in the deficiency notices because (1)
they had not been substantiated, (2) they were not shown to be
ordinary and necessary, or (3) they were not shown to be the
expenses of petitioner, but were those of another taxpayer.24
A.
Cost of Goods Sold for 1973
For the year 1973 petitioner had purchase debits
(expenditures) in the total amount of $100,966.70, computed as
follows:
Company
Purchase Debits
(Expenditures)
Portec-Pioneer
Kuehnennagel
Hobart Brothers
Hobart Brothers
Hobart Brothers
Intersoll Rand, SA
F. Khalatbari
Atlantic Richfield
Galion
$22,029.00
766.23
5,134.94
36.38
1,006.53
6,930.00
15,233.00
10,058.62
39,772.00
Total purchase debits
$100,966.70
For the year 1973 petitioner's purchase credits
(reimbursements of purchase expenditures) were in the total
amount of $122,888.07, computed as follows:
24
Certain adjustments have been resolved by the parties and can be
reflected in the Rule 155 computations.
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Company
Morrison-Knudson
Date
Purchase (CR)
01/04/73
03/12/73
04/13/73
$11,546.12
5,134.95
1,006.53
$17,687.60
Galion
05/11/73
Imico/Imiss
06/07/73
11/21/73
85.00
39,772.00
Company
07/12/73
07/12/73
Date
14,891.74
18.65
Purchase (CR)
Iran Aircraft
10/12/73
17,560.03
Atl. Richfield
11/01/73
10,058.62
Massey Insurance
Pioneer Ret. ck
Total purchase credits
03/20/73
449.50
22,029.00
$122,888.47
Pioneer-Portec
335.33
39,857.00
14,910.39
For the year 1973 petitioner's purchase credits of
$122,888.07 exceed purchase debits of $100,966.70 by $21,921.37.
On his 1973 income tax return petitioner claimed cost of goods
sold in the amount of $11,320.75.
According to this method of
computing cost of goods sold, purchase debits were goods
purchased, and purchase credits were reimbursements received.
For the year 1973 petitioner overstated cost of goods sold
by $33,242.12.
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B.
Cost of Goods Sold for 1977
For the year 1977 petitioner's total cost of goods sold was
$525,714.36.
Galion was the principal payee, but others were
listed as GMOO, GMODC, Clark, and Cantwell.
Petitioner claimed
cost of goods sold on his Schedule C for 1977 in the total amount
of $594,530.
Therefore, cost of goods sold for 1977 was
overstated by $68,815.64.
C.
Cost of Goods Sold for 1978, 1979, and 1981
For the years 1978, 1979, and 1981 respondent increased
petitioner's deductions for cost of goods sold in the amounts of
$148,706, $95,633.60 and $5,862, respectively, because they were
related to additional income respondent determined that
petitioner received from Galion.
Having found that petitioner's
taxable income should be increased by the amounts received from
Galion, respondent correctly increased petitioner's cost of goods
sold for those years.
D.
Claimed Deductions for Commission Expenses
Hillary Wood resided in Paris, France, during the 1970's.
The only service provided by Ms. Wood to petitioner was to
introduce him to Minister of Court Alam.
Petitioner met Ms. Wood
only once at a dinner party at which she accompanied an employee
of Continental Oil.
Petitioner made payments to Hillary Wood in
the amounts of $1,503.42, $18,041.04, $18,042.24, $18,043.44, and
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$18,043.44, respectively, for the years 1973 through 1977.
deducted these amounts.
He
These claimed commission expenses and
other business expenses with respect to Hillary Wood were not
ordinary and necessary business expenses of petitioner.
In 1973 and 1974 petitioner's brother, I.J. Zand, an
employee of Diesel Power, performed services for petitioner.
The
payments he made to I.J. Zand of $16,100 in 1973, $25,000 in
1974, and $2,130 in 1978 were made because Diesel Power could not
fully compensate I.J. Zand.
a commission expense.
Petitioner deducted these amounts as
The claimed commission expenses constitute
ordinary and necessary business expenses of petitioner.
Petitioner's brother, Monty Zand, assisted petitioner and
Diesel Power in selling some equipment in Iran.
Petitioner paid
him $15,000 in 1973 and deducted this amount on his 1973 income
tax return.
The commission expense paid to Monty Zand was an
ordinary and necessary business expense of petitioner.
Mehdi Sabety was an employee of Diesel Power.
employed by CTC.
petitioner.
He was not
He did not render any services to CTC or to
Therefore, the commission expenses in the amounts of
$11,000, $10,000, and $2,000 claimed by petitioner with respect
to Mehdi Sabety for the years 1973, 1974, and 1978, respectively,
were not his ordinary and necessary business expenses.
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The Bank of Minora was a small Iranian bank that would
exchange U.S. dollars for Iranian rials.
Petitioner and CTC
employees used the Bank of Minora to make transfers to Diesel
Power.
In 1973 and 1974 petitioner deducted as "commission
expense transfers" to the Bank of Minora the amounts of $23,686
and $30,000.
The conversion of currency from U.S. to Iranian was
an ordinary and necessary business expense of petitioner.
Petitioner's cash disbursements journal for 1973 lists a
payment of $35,000 on July 7, 1973, to an illegible payee.
amount was deducted as a commission expense.
This
It has not been
proven to be an ordinary and necessary business expense of
petitioner.
There is no evidence in the record to support unidentified
commission expenses in the amounts of $170 and $16,000 for the
years 1973 and 1975, respectively, that were claimed by
petitioner on his 1973 and 1975 income tax returns.
Petitioner paid Hossein Zanganeh $80,000 in 1973 and $75,000
in 1974 for assisting him in selling Lockheed aircraft in Iran.
The $80,000 payment is not at issue.
Petitioner deducted the
1974 payment as a commission expense.
However, Diesel Power
reimbursed petitioner for this payment.
Sadek Massey was an employee of Diesel Power.
Petitioner
paid Sadek Massey $2,000 in 1974 and deducted that amount on his
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1974 income tax return.
There is no evidence in the record of
any business purpose for this payment.
Ladham Alam was the daughter of Mr. Daftari.
provided her with funds for her schooling.
Petitioner
Petitioner paid
Ladham Alam $4,756 and recorded the payments as expenses of
Diesel Power.
Petitioner claimed a deduction of $5,250 on his
1974 return.
There is no evidence in the record of an ordinary
and necessary business purpose for the payments to Ladham Alam in
1974.
Thus, it is disallowed as an ordinary and necessary
business expense of petitioner.
Jack Rose of General Motors asked petitioner to be involved
in the efforts to sell GM locomotives to Pakistan.
During the
period March 10 through March 14, 1974, petitioner met with
associates of Mr. Khilnani with respect to the sale of GM
locomotives in Pakistan.
1974.
An agreement was reached on March 14,
Mr. Khilnani was employed by or affiliated with Amelia
Corporation.
Petitioner paid Amelia Corporation $234,033.42 in
1975 and $362,003.36 in 1976, and claimed deductions for these
amounts on his Federal income tax returns.
There is no evidence
that Diesel Power was involved in the sale of GM locomotives to
Pakistan; all items sold by Diesel Power were shipped exclusively
to Iran.
Consequently, the commission expenses in the amounts of
$234,033.42 and $362,003.36 claimed by petitioner with respect to
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Amelia Corporation for the years 1975 and 1976, respectively, are
his ordinary and necessary business expenses.
Mr. Emilian was the service manager of Diesel Power.
In
1975 petitioner paid lodging expenses, car rental, and medical
expenses for Mr. Emilian's son and $4,443 in unidentified cash
payments to Mr. Emilian.
These payments totaled $7,028.33 and
were deducted on petitioner's 1975 return.
Mr. Emilian was
accompanied by his family on a trip to the United States in 1975.
There are no receipts for the lodging, airfare, or car rental
expenses, nor is there any itemization of the $4,443 given to Mr.
Emilian in cash.
Therefore, the claimed commission expense is
disallowed as an ordinary and necessary business expense of
petitioner.
In 1975 petitioner paid $1,000 to Mr. Bolanhemat, a former
employee of the Iranian State Railways, who was in the United
States for a training session.
in 1975.
spent.
Petitioner deducted this amount
Petitioner presented no evidence of how the $1,000 was
Furthermore, petitioner presented no evidence of any
connection between Mr. Bolanhemat's training and petitioner's
business.
Therefore, the claimed commission expense was not an
ordinary and necessary business expense of petitioner.
Diesel Power attempted to market Lockheed's earth resources
program in Iran.
In 1976 petitioner paid $10,000 to Alfred
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Borsharpour, who assisted Diesel Power in this venture, and
petitioner deducted this amount on his 1976 Federal income tax
return.
This claimed commission expense was not an ordinary and
necessary business expense of petitioner.
In 1976 petitioner paid Don Kahler $1,500 and deducted it as
a commission expense on his 1976 Federal income tax return.
Mr.
Kahler was an interior decorator who assist
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