Zand v. Commissioner

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.
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TABLE OF CONTENTS Page

Determinations of Deficiencies and Additions to Tax . . 7

Issues . . . . . . . . . . . . . . . . . . . . . . . . . 8

Findings of Fact . . . . . . . . . . . . . . . . . . . . 10

I. Preliminary Facts . . . . . . . . . . . . . . . . . . . 10
A. Background . . . . . . . . . . . . . . . . . . . . . 10
B. Ownership of Diesel Power . . . . . . . . . . . . . 12
C. Audits for Prior Years . . . . . . . . . . . . . . . 13
D. Preparation of Tax Returns . . . . . . . . . . . . . 14
E. Bank Accounts . . . . . . . . . . . . . . . . . . . 15
F. Sale of Diesel Power Stock . . . . . . . . . . . . . 19

II. Transactions With Manufacturers--Commission Income . . . 22
A. Lockheed . . . . . . . . . . . . . . . . . . . . . . 23
B. Payments by Lockheed . . . . . . . . . . . . . . . . 29
C. Ashland . . . . . . . . . . . . . . . . . . . . . . 34
D. Payments by Ashland . . . . . . . . . . . . . . . . 39
E. General Motors . . . . . . . . . . . . . . . . . . . 43
F. Payments Made by General Motors. . . . . . . . . . . 49
G. SEDCO/IMICO . . . . . . . . . . . . . . . . . . . . 54
H. Payments by SEDCO, IMICO, Stewart & Stevenson . . . 56
I. Ingersoll-Rand . . . . . . . . . . . . . . . . . . . 60
J. Payments by Ingersoll-Rand . . . . . . . . . . . . . 62
K. Morgan . . . . . . . . . . . . . . . . . . . . . . . 64
L. Payments by Morgan . . . . . . . . . . . . . . . . . 65
M. Harnischfeger . . . . . . . . . . . . . . . . . . . 66
N. Payments by Harnischfeger . . . . . . . . . . . . . 68
O. Pioneer . . . . . . . . . . . . . . . . . . . . . . 70
P. Payments by Pioneer . . . . . . . . . . . . . . . . 74
Q. Galion . . . . . . . . . . . . . . . . . . . . . . . 77
R. Payments by Galion . . . . . . . . . . . . . . . . . 81
S. Clark . . . . . . . . . . . . . . . . . . . . . . . 85
T. Payments by Clark . . . . . . . . . . . . . . . . . 90
U. Miscellaneous Commissions/Goodyear . . . . . . . . . 94
V. Payments by Miscellaneous Companies/Goodyear . . . . 95

III. Interest and Dividend Income--First National City Bank,
London, England, and Crown Life Insurance Company. . . . 100

IV. Interest Income--WHIP Account at Barclays Bank Bahamas . 102
 - 3 -

V. Character of Gain on Disposition of Diesel Power Stock . 103

VI. Claimed Capital Losses for 1978 and 1979 . . . . . . . . 105

VII. Asserted Claim of Right for 1979 . . . . . . . . . . . . 106

VIII. Claimed Schedule C Expense Deductions . . . . . . . . . 108
A. Cost of Goods Sold for 1973 . . . . . . . . . . . . 108
B. Cost of Goods Sold for 1977 . . . . . . . . . . . . 110
C. Cost of Goods Sold for 1978, 1979, and 1981 . . . . 110
D. Claimed Deductions for Commission Expenses . . . . . 110
E. Claimed Deductions for Consulting Fees . . . . . . . 115
F. Claimed Deductions for Management Fees . . . . . . . 117
G. Claimed Deductions for Consulting Fees or Salary . . 120
H. Claimed Deductions for Legal and Professional Fees . 121
I. Claimed Deductions for Salaries and Wages . . . . . 124
J. Claimed Deductions for Office Expenses . . . . . . . 124
K. Claimed Deductions for Interest Expenses . . . . . . 129
L. Claimed Deductions for Insurance Expenses . . . . . 132
M. Claimed Deductions for Dues and Publications . . . . 132
N. Claimed Deductions for Depreciation . . . . . . . . 133
O. Claimed Rental Loss . . . . . . . . . . . . . . . . 135
P. Claimed Rent Expense--London . . . . . . . . . . . . 135
Q. Claimed Deduction for Loan Origination Fee . . . . . 135
R. Claimed Moving Expense Deduction . . . . . . . . . . 136
S. Investment Tax Credits . . . . . . . . . . . . . . . 136
T. Claimed Deductions for Travel and Entertainment
Expenses . . . . . . . . . . . . . . . . . . . . . . 136

IX. Claimed Dependency Exemption and Charitable Contribution
Deductions . . . . . . . . . . . . . . . . . . . . . . . 144
A. Dependency Exemption Deduction Claimed for
Tara Daneshvari. . . . . . . . . . . . . . . . . . . 144
B. Deduction for Charitable Contribution Claimed for
Property Transferred to the City of Columbus, Ohio. .144
C. Deduction for Charitable Contribution Claimed for
Property Transferred to Kenyon College . . . . . . . 146

X. Claimed Losses From Trusts, Partnerships, Subchapter S
Corporation, and Farming Operations . . . . . . . . . . 149
 - 4 -

Ultimate Findings of Fact . . . . . . . . . . . . . . . 154

Opinion . . . . . . . . . . . . . . . . . . . . . . . . 154

I. Preliminary Issues . . . . . . . . . . . . . . . . . . . 155
A. Burden of Proof . . . . . . . . . . . . . . . . . . 155
B. Evidentiary Matters . . . . . . . . . . . . . . . . 157
C. New Issues Raised by Petitioner on Brief . . . . . . 157

II. Issues 1,2,3, and 6--Commission and Miscellaneous
Income . . . . . . . . . . . . . . . . . . . . . . . . . 160
A. Lockheed . . . . . . . . . . . . . . . . . . . . . . 166
B. Ashland . . . . . . . . . . . . . . . . . . . . . . 170
C. General Motors . . . . . . . . . . . . . . . . . . . 174
D. SEDCO, IMICO, IMISS . . . . . . . . . . . . . . . . 179
E. Ingersoll-Rand . . . . . . . . . . . . . . . . . . . 181
F. Morgan . . . . . . . . . . . . . . . . . . . . . . . 184
G. Harnischfeger . . . . . . . . . . . . . . . . . . . 186
H. Pioneer . . . . . . . . . . . . . . . . . . . . . . 187
I. Galion . . . . . . . . . . . . . . . . . . . . . . . 189
J. Clark . . . . . . . . . . . . . . . . . . . . . . . 192
K. Miscellaneous Companies/Goodyear . . . . . . . . . 197
L. Petitioner's Withdrawals From Bank Accounts . . . . 198

III. Issues 4 and 5--Interest Income on Foreign
Bank Accounts. . . . . . . . . . . . . . . . . . . . . . 201

IV. Issue 7--Amount and Character of Gain on Sale of
Diesel Power Stock . . . . . . . . . . . . . . . . . . . 203

V. Issues 8 and 9--Claimed Reduction in 1979 Reported
Income Under a Claim of Right and Section 1341 Tax
Computation for 1981 . . . . . . . . . . . . . . . . . . 207

VI. Issue 10--Claimed Schedule C Business Expense
Deductions. . . . . . . . . . . . . . . . . . . . . . . 209
A. Cost of Goods Sold . . . . . . . . . . . . . . . . 212
B. Commission Expenses . . . . . . . . . . . . . . . . 212
C. Consulting Fees . . . . . . . . . . . . . . . . . . 216
D. Management Fees . . . . . . . . . . . . . . . . . . 218
E. Legal and Professional Fees . . . . . . . . . . . . 222
 - 5 -

F. Salaries and Wages . . . . . . . . . . . . . . . . 227
G. Office Expenses . . . . . . . . . . . . . . . . . . 227
H. Interest Expense . . . . . . . . . . . . . . . . . 230
I. Expenses for Insurance and Dues and Publications . 237
J. Depreciation . . . . . . . . . . . . . . . . . . . 237
K. Rental Loss and London Rent Expense . . . . . . . . 240
L. Loan Origination Fee . . . . . . . . . . . . . . . 240
M. Moving Expense and Investment Tax Credits . . . . . 241
N. Travel and Entertainment Expenses . . . . . . . . . 241

VII. Issue 11--Dependency Exemption and Charitable
Contribution Deductions . . . . . . . . . . . . . . . . 254
A. Dependency Exemption . . . . . . . . . . . . . . . 254
B. Deduction for Charitable Contribution to City of
Columbus . . . . . . . . . . . . . . . . . . . . . 256
C. Deduction for Charitable Contribution to Kenyon
College . . . . . . . . . . . . . . . . . . . . . 259

VIII. Issue 12--Losses From Trusts, Partnerships, Subchapter
S Corporation, and Farming Operations . . . . . . . . . 263

IX. Issue 13--Section 6653(b) Additions to Tax for Fraud . . 266

X. Issue 14--Statute of Limitations for 1972 . . . . . . . 281

XI. Issue 15 and 16--Section 6653(a) Additions to Tax for
Negligence . . . . . . . . . . . . . . . . . . . . . . 281

XII. Conclusion . . . . . . . . . . . . . . . . . . . . . . . 287
 - 6 -

MEMORANDUM FINDINGS OF FACT AND OPINION

DAWSON, Judge:1 In these consolidated cases respondent

determined the following Federal income tax deficiencies and

additions to tax in the notices of deficiencies dated September

22, 1988:

J.J. Zand, Docket No. 32434-88

Additions to Tax
Year Deficiency Sec. 6653(b) Sec. 6653(a)2
1972 $509,899.26 $265,584.61 ---
1973 615,949.53 326,663.06 ---
1974 1,859,675.64 929,837.82 ---
1975 2,941,539.51 1,789,151.60 ---
1976 2,647,211,47 1,349,444.24 ---
1977 1,408,023.34 $7,401.17

1
These cases were assigned to Judge Meade Whitaker on Oct. 6, 1989,
for trial or other disposition. After extensive discovery by counsel for the
parties, the cases were tried for 10 days beginning Aug. 19, 1991. The final
brief was filed on June 15, 1993. Judge Whitaker did not dispose of the cases
before he retired on permanent disability on Jan. 31, 1995. Chief Judge
Hamblen ordered the parties on Feb. 8, 1995, to file a response to the
proposed reassignment of the cases. Petitioners opposed the reassignment;
respondent did not oppose the reassignment. At an informal conference with
counsel for the parties on Apr. 5, 1995, the parties were offered a new trial,
which was not accepted, and it was suggested that efforts be made to settle
the cases. After being informed on Oct. 19, 1995, that the cases could not be
settled, the Chief Judge reassigned the cases to Judge Howard A. Dawson, Jr.,
on Oct. 23, 1995, for opinion and decisions. On Nov. 3, 1995, petitioners
filed an objection to the reassignment of the cases but did not move for or
request a new trial.
In these circumstances, where the trial Judge has become permanently
disabled and cannot be recalled to decide the cases and where the parties have
not moved for or requested a new trial or to reopen the record for submission
of additional evidence, the Court has two options. It can order a new trial,
although not requested by the parties, or it can reassign the cases to another
judge for disposition on the record made before the trial Judge. The Court
has chosen the latter. Therefore, the findings of fact and conclusions herein
are based on the documentary and testimonial evidence contained in the record.
2
Unless otherwise indicated, all section references are to the
Internal Revenue Code in effect for the years in issue, and all Rule
references are to the Tax Court Rules of Practice and Procedure.
 - 7 -

J.J. Zand and Eva C. Zand, Docket No. 32435-88

Additions to Tax
Year Deficiency Sec. 6653(a)(1) Sec. 6653(a)(2)
1
1978 $479,425.94 $23,971.30 ---
1
1979 754,569.20 37,728.46 ---
1
1980 171,510.84 8,575.54 ---
1981 246,218.55 12,310.93 50 percent of
interest due on
$246,218.55
1
The correct section is 6653(a).

In an Amendment to Answer filed August 13, 1991, respondent

asserted increased deficiencies in, and additions to, petitioner

J.J. Zand's Federal income taxes as follows:

Increase in Increase in Addition to Tax
Year Deficiency Sec. 6653(b)
1973 $5,150.34 $2,575.17
1974 59,729.00 29,864.50
1975 305,317.94 152,658.94
1976 99,952.62 49,976.34

A substantial number of adjustments for most of the years in

issue have been settled by concessions made by the parties.

These concessions can ultimately be reflected in the Rule 155

computations. The following issues are presented for decision:

1. Whether J.J. Zand (petitioner) had unreported commission

or fee income received from contracts for services between him or

his sole proprietorship, Caspian Trading Company, and various

manufacturers.

2. Whether petitioner had unreported commission or fee

income received from contracts between various manufacturers and
 - 8 -

Diesel Power Trading Company, whose earnings were controlled by

petitioner or diverted to his use.

3. Whether petitioner had unreported income from amounts

paid to WHIP, a shell corporation, over which he exercised

dominion and control.

4. Whether petitioner had unreported interest income earned

on First National City Bank of London, England, bank accounts in

his name for the years 1974, 1975, and 1976.

5. Whether petitioner had unreported interest income earned

on a Barclays Bank Bahamas account for the years 1974, 1975, and

1976.

6. Whether petitioner had taxable income from various

miscellaneous items of income paid to him.

7. For the year 1977, whether petitioner's gain on the sale

of his stock in Diesel Power Trading Company must be reported as

a dividend under section 1248, rather than a long-term capital

gain, and what is the correct amount of such gain.

8. Whether petitioner is entitled to reduce the gross

income reported on his return for 1979 by the amount of $348,350

as set forth in an amended return filed for 1979.

9. Whether petitioner is entitled to use the tax

computation of section 1341 for the year 1981.

10. Whether petitioner's taxable income for the years 1973

through 1981 should be increased by adjustments made by
 - 9 -

respondent to claimed deductions on Schedule C for cost of goods

sold, ordinary and necessary business expenses, travel and

entertainment expenses, and depreciation.

11. Whether petitioner's taxable income for certain years

should be increased by adjustments made by respondent to claimed

deductions for a dependency exemption and charitable

contributions.

12. Whether petitioner is entitled to losses claimed with

respect to rental activities, trusts, partnerships, subchapter S

corporations and farming activities for the years 1976 through

1981.

13. Whether any part of the underpayment of income tax for

each of the years 1972 through 1976 was due to petitioner's fraud

with intent to evade tax.

14. Whether the assessment and collection of petitioner's

Federal income taxes for 1972 are barred by the statute of

limitations.

15. Whether petitioner is liable for the addition to tax

for negligence under section 6653(a) for the year 1977.

16. Whether petitioners are liable for additions to tax

under section 6653(a) for years 1978 through 1980 due to

negligence or intentional disregard of rules and regulations, and

for the additions to tax under section 6653(a)(1) and (2) for the

year 1981.
 - 10 -

FINDINGS OF FACT

Many facts have been stipulated and are so found. The

stipulations of fact and supplemental stipulations and attached

exhibits are incorporated herein by this reference. Petitioners

J.J. Zand and Eva Zand3 resided in Naples, Florida, when the

petitions were filed in these cases.

I. Preliminary Facts

A. Background

Petitioner was born on June 14, 1923. He became a U.S.

citizen in 1953 and remained so during the years at issue. Prior

to becoming a U.S. citizen, he was a citizen of Iran. Petitioner

moved to Columbus, Ohio, in 1946, where he lived with his family

until 1957.

Caspian Trading Company of Iran (Caspian Iran) was formed by

four of petitioner's classmates in 1945, and owned by the

Bakhtiar Brothers, who were not related to petitioner. Its

purpose was to import American equipment into Iran and to become

an Iranian distributor of U.S. products.

From the mid-1950's, petitioner's business in the United

States operated under the sole proprietorship name of Caspian

Trading Company (CTC), located in Columbus, Ohio. CTC's role was

to act as a liaison between Caspian Iran and certain

3
While Eva Zand is a petitioner for the years 1978 through 1981
because she filed joint returns with J.J. Zand, most of the adjustments at
issue involve the activities of J.J. Zand, who is referred to throughout our
findings of fact and opinion as petitioner.
 - 11 -

manufacturers with which petitioner had a business relationship.

During this period petitioner had an arrangement with Caspian

Iran whereby he operated in Columbus, Ohio, what he referred to

in his dealings with manufacturers as a U.S. "branch office" of

Caspian Iran. Petitioner, through CTC, sought to act as a

distributor on behalf of American manufacturers whose goods were

then sold in Iran by Caspian Iran. The earnings of both Caspian

Iran and petitioner were on a commission basis. There was an

understanding between petitioner and Caspian Iran that all

commissions earned would be split 60 percent for Caspian Iran and

40 percent for petitioner.

Petitioner moved back to Iran from Columbus, Ohio, at the

end of 1957. His connections with Caspian Iran were severed in

approximately October 1957. In an agreement terminating the

relationship, Caspian Iran and CTC agreed that commissions earned

in pending transactions would be divided 60 percent for Caspian

Iran and 40 percent for CTC.

In 1958, Diesel Power Trading Company (Diesel Power) was

established in Iran by petitioner, his father, Jamil Z. Irani,

and Mr. Taleghani, a former classmate of petitioner. Petitioner

subsequently acquired the Diesel Power stock of his father and

Mr. Taleghani, and he owned 100 percent of Diesel Power from the

late 1950's or early 1960's until the end of 1974. During the

early period of Diesel Power's existence, petitioner's father was
 - 12 -

highly involved in its operation. His father was Diesel Power's

managing director until the mid-1960's, and the commercial

license of Diesel Power at one time was issued in his name. Such

license may only be issued to a resident of Iran.

Sometime between 1958 and 1961, petitioner moved his family

to nearby Beirut, Lebanon. While in Teheran and Beirut,

petitioner worked on Diesel Power matters using either the

Caspian Iran or CTC name.

Petitioner also maintained an office in Columbus, Ohio,

during these years with at least one employee. Regular

communications from Diesel Power were received and passed on to

various American manufacturers via the Columbus, Ohio, office;

that office also expedited shipment and collected commissions

earned. Petitioner returned to the United States in 1961.

B. Ownership of Diesel Power

Farshid Khalatbari (Mr. Khalatbari) joined Diesel Power in

the mid-1960's and replaced petitioner's father as the managing

director. Mr. Khalatbari married Diana Zand, petitioner's

sister, who was then referred to as Diana Khalatbari. In 1971 a

dispute arose between petitioner and Mr. Khalatbari;

consequently, Mr. Khalatbari left Diesel Power for about 10 days.

He agreed to return upon assurances from petitioner that he would

become a part owner of Diesel Power. It was not until November

1974, that Diesel Power, which formerly had been a limited
 - 13 -

partnership, was converted to a corporate form. In the course of

that change, petitioner was paid 11,750,000 rials and decreased

his ownership share of Diesel Power to less than 50 percent.4 On

his original and amended income tax returns for 1974, 1975, and

1976, petitioner did not report disposition of any interest in

Diesel Power. Petitioner, Mr. Khalatbari, and Diana Khalatbari

were directors of Diesel Power during the years at issue.

Petitioner's brother, I.J. Zand, was also employed by Diesel

Power from 1971 to 1976 as parts director and sales director.

From 1971 to 1976 petitioner owned the land on which the shops,

offices, and warehouse of Diesel Power were located, but he did

not report any rental income therefrom on his 1972, 1973, and

1974 returns. Petitioner sold this land to Diesel Power in 1976

and reported the gain therefrom.

C. Audits for Prior Years

Respondent made adjustments to petitioner's 1958 income for

unreported commissions. The 1958 notice of deficiency indicated

that 40 percent of the commissions earned for two of the items

and 10 percent for one item constituted additional commission

income. Petitioner's Federal income tax returns for the years

1959 to 1961 were also audited. His income for those years was

increased for omitted commissions, again at the 40 percent and 10

percent rates.

4
It appears that petitioner's ownership of Diesel Power was 49 percent.
 - 14 -

After petitioner consented to extend the period of

limitations for the years 1964 to 1968, his returns for those

years resulted in a "no change" letter. A previous audit of

petitioner's income tax return for 1972 resulted in another "no

change" letter.

D. Preparation of Tax Returns

Petitioner employed several different accountants to prepare

his income tax returns during the years at issue. His returns

for the years 1972 through 1976, as well as a first amended

return for 1975 filed on December 20, 1976, were prepared by

Robert E. Giffin. Mr. Giffin relied upon the CTC receipts

journals for the preparation of these returns and was not made

aware of petitioner's bank accounts or his interest in companies

located in other countries. Mr. Giffin did not know at the time

he prepared the returns that petitioner owned any portion of

Diesel Power stock. A second amended return for the year 1975

and an amended return for the year 1976 filed on February 22,

1978, were prepared by Steven Dutton, a C.P.A. On the amended

return for 1976 petitioner reported increased commission income

of $134,378. Mr. Dutton worked for petitioner from September

1977 until June 1980. The returns prepared by Mr. Dutton were

based upon the CTC receipts and disbursements journals. At

times, Mr. Dutton reviewed the substantiation for certain claimed

deductions. Petitioner's 1977 return was also prepared by Mr.
 - 15 -

Dutton, who at that time worked for Deloitte, Haskins and Sells.

Although no return preparer's name appears on petitioners' 1978

and 1979 returns, Mr. Dutton was involved in their preparation.

An amended return for the year 1979 filed April 4, 1983, was

prepared by Santen, Santen & Hughes Co., LPA. Deloitte, Haskins

& Sells prepared the 1980 and 1981 Forms 1040 and 1040X.

E. Bank Accounts

There were a significant number of bank accounts under

petitioner's control or into which his funds were deposited

during the years at issue. The accounts in the names of either

CTC or petitioner were located at First National City Bank,

London; City National Bank & Trust Company, Columbus, Ohio; Bank

One of Columbus, Ohio; Raiffeisen Bank, Kitzbuhel, Austria; Bank

of America, New York; and First National City Bank, Channel

Island. The accounts in the name of Diesel Power were located at

City National Bank of Columbus, Ohio; Bank of Teheran, Iran;

First National City Bank, Geneva, Switzerland; First National

City Bank, New York; Bank of America, New York; Citibank, Channel

Island; and Banque de Paris Et Des Pays-Bas (Suisse) S.A. (Banque

de Paris), Geneva, Switzerland. An account in the name of WHIP

was located at Barclays Bank, Freeport, Bahamas. An account in

the name of All Patents was located at Banque de Paris, Geneva,

Switzerland. An account in the name of IGOS was located at City

National Bank & Trust Company, Columbus, Ohio. An account in the
 - 16 -

name of Interrep was located at Banque de Paris, Geneva,

Switzerland. For convenience we list below the major accounts,

their years of existence, whether petitioner was an authorized

signatory, and the names by which we refer to them herein:

Petitioner
Name on Years Authorized Name
Account in Existence Signatory Used

Petitioner 1973-1975 Yes Zand FNCB London

Petitioner 1972-1976 Yes Zand CNB Columbus

Petitioner 1972-1976 Yes Zand Kitzbuhel

CTC 1973-1975 Yes CTC Bank of America
CTC 1972-1976 Yes CTC CNB

Petitioner 1975-1977 Yes CTC FNCB London
c/o CTC

CTC Unknown Unknown CTC Bank One

Diesel Power 1971-1977 Yes Diesel Power CNB
Columbus

Diesel Power 1972-1976 Yes Diesel Power Bank
of Teheran

Diesel Power 1975-1978 Yes Diesel Power FNCB
Geneva # 1

Diesel Power 1972-1976 Unknown Diesel Power FNCB
Geneva # 2
Diesel Power/ 1974-? Yes Diesel Power FNCB
J.J. Zand London

Petitioner
Name on Years Authorized Name
Account in Existence Signatory Used

Diesel Power 1972-1976 Yes Diesel Power Bank of
c/o CTC America
 - 17 -

Diesel Power 1972-1976 Yes Diesel Power Banque
de Paris

Diesel Power Unknown Unknown Diesel Power Channel
Island

WHIP 1972-1976 Yes WHIP Barclays
Bahamas

WHIP Unknown Unknown WHIP Banque de Paris

All Patents 1972-1976 Yes All Patents Banque
de Paris

IGOS 1974 Yes IGOS CNB Columbus

Interrep, S.A. 1973 Unknown Interrep Banque
de Paris

During 1973 petitioner wrote checks to himself on the Diesel

Power Bank of America account5 in the amounts of $30,000, $75,000,

$90,000, and $10,500. These checks were endorsed for deposit

into either a CTC account or one of petitioner's personal

accounts. An additional $50,000 was withdrawn from this account

during 1973 and paid to petitioner/CTC. The CTC cash receipts

journal reflects each of these amounts received as a loan.

However, there is no other documentary evidence of a loan between

petitioner and Diesel Power at this time, nor is there any

documentary evidence that such a loan, if it existed, was ever

repaid. Petitioner also wrote a check to himself in the amount

5
Although the account number that appears on the checks contained in
Exh. 508-SN is different than the stipulated account number for the Diesel
Power Bank of America account, the parties have stipulated that the checks
contained in that exhibit were written on the same account. Therefore, we
assume that the difference in account numbers is of no significance and that
there was only one Diesel Power Bank of America account.
 - 18 -

of $400,000 during 1973, which was endorsed for deposit to City

National Bank & Trust Company; this check is not reflected on

CTC's cash receipts journal.

During 1974 petitioner wrote checks to himself on the Diesel

Power Bank of America account in the total amount of $531,633.48.

These checks were endorsed for deposit to either CTC or Zand

personal accounts. All of these deposits are reflected in the

CTC cash receipts journal as either loans or reimbursements with

the exception of one deposit in the amount of $40,000, which is

not reflected at all. There is no other documentary evidence of

a loan in the record.

During 1975 petitioner wrote five checks to himself on the

Diesel Power Bank of America account. One check in the amount of

$150,000 was endorsed for deposit to CTC but is not reflected in

the CTC cash receipts journal. A second check in the amount of

$375,000 was endorsed for deposit to a Zand account; it is

reflected on the 1975 CTC receipts journal as a loan. However,

there is no other documentary evidence in the record of such a

loan. Petitioner wrote three additional checks on the Diesel

Power Bank of America account during 1975 in the total amount of

$76,652.03. Two of these checks were endorsed for deposit to

CTC. The third check in the amount of $50,000 was endorsed to

"I.D.S." to purchase stock. The first two checks were listed on

CTC's 1975 cash receipts journal as reimbursements. The check
 - 19 -

endorsed to I.D.S. does not appear on the 1975 CTC cash receipts

journal.

In 1976 petitioner wrote four checks to himself on the

Diesel Power Bank of America account in the total amount of

$265,000. Three of these checks in the total amount of $150,000

were endorsed for deposit to CTC or Zand personal accounts. The

1976 CTC receipts journal reflects these payments as a transfer

or loans from Diesel Power. There is no other documentary

evidence of loans in the record. The fourth check in the amount

of $115,000 was endorsed to Ray Prussing. Although there is no

documentary evidence of a loan at the time the check was

endorsed, Ray Prussing paid $115,000 to petitioner in 1977. The

1977 CTC cash receipts journal lists a deposit of $115,000 as a

Refund/Reimbursement.

F. Sale of Diesel Power Stock

In December 1977 petitioner sold the remainder of his Diesel

Power stock to Mr. and Mrs. Khalatbari for $6 million, $3,300,000

of which was paid as a downpayment to petitioner at that time.

The Shareholder Consent and Agreement to the sale states that,

prior to the sale, petitioner owned 40 percent of Diesel Power

stock, and that the Khalatbari family owned the remaining 60

percent. On petitioner's 1977 income tax return, petitioner

reported the sale of a 40-percent stock interest in Diesel Power.

Sometime after the sale of petitioner's Diesel Power stock in
 - 20 -

1977, Mr. Dutton prepared an analysis of petitioner's records in

order to ascertain whether petitioner had received what he was

entitled to for the sale of the stock. In the course of that

analysis, Mr. Dutton summarized the total commissions received by

CTC from manufacturers from January 1, 1973, to June 30, 1978, as

reflected on the CTC receipts journal. He also reviewed the

numerous commission payments between CTC and Diesel Power during

those years. From his review, Mr. Dutton concluded that CTC had

received a total of $6,849,743.23 in commissions, and Diesel

Power actually had received $14,192,680.82 during this period.

Based upon Mr. Dutton's computation of amounts due from

commissions and his understanding of the commission splits, CTC

was entitled to an additional $395,016.07 from Diesel Power. Mr.

Dutton also concluded that the gross profits reported on

petitioner's original returns were correct, except for 1975 and

1976, which had understated commission income in the amounts of

$511,626.78 and $134,378, respectively. The understated

commission income was reported on amended returns for those

years. After these amended returns were filed, Mr. Dutton

concluded that, based on information about petitioner's holdings

available to him, all required amounts as reflected on the CTC

receipts journal had been properly included in petitioner's

income during 1975 and 1976.
 - 21 -

In January 1978 Mr. Khalatbari withdrew all funds from and

closed the Diesel Power FNCB Geneva # 1 account and Diesel Power

Banque de Paris account. In March 1978 a second payment on the

Diesel Power stock sale was made by Mr. Khalatbari in the amount

of $625,000. The remaining payments due to petitioner under the

stock sale agreement were $700,000 in December 1978 and $265,000

in December 1979.

In May 1978 petitioner ordered a total of $240,000

transferred from an account at the Banque de Paris into the WHIP

Barclays Bahamas account. After ordering these funds to be

invested in a certificate of deposit, petitioner redeemed this

certificate of deposit prior to its maturation, as well as

another certificate of deposit in the amount of $361,211, and

ordered that the proceeds be deposited in the WHIP Barclays

Bahamas account. In December 1978 Mr. Dutton, on petitioner's

instructions, flew to the Bahamas and withdrew $610,000 from the

WHIP Barclays Bahamas account and deposited these funds into one

of petitioner's accounts in Ohio. These funds were not recorded

on the CTC receipts journal or petitioner's 1978 return or 1978

amended return. Mr. Dutton performed another analysis in 1979

from which he concluded that CTC was in possession of more than

$1,600,000 in Diesel Power commissions. On his return for 1979

petitioner reported $1,617,761 as income, claiming that Diesel

Power shareholders owed him a considerable amount on the sale
 - 22 -

price of his Diesel Power stock, which was in excess of the

amount held by CTC, and that he refused to pay amounts owed to

Diesel Power under a claim of right.

II. Transactions With Manufacturers--Commission Income

During the years at issue there were numerous business

relationships between various manufacturers and petitioner, CTC,

or Diesel Power, which involved essentially three types of

services performed for the manufacturers: (1) Distributorship,

whereby the appointed distributor took title to the manufactured

goods until sold to the end-use customer; (2) representation

arrangements, whereby the representative promoted the sale of

manufactured products; and (3) consultancies, whereby advice and

expertise were provided in selling products. The income that

arose out of these relationships is referred to by respondent in

the notices of deficiency as "commission" income. The vast

majority of adjustments in dispute involve commissions that were

paid to CTC but treated as Diesel Power commissions on the CTC

receipts journals. The activities leading up to the adjustments

at issue with respect to each company are set forth below.
 - 23 -

A. Lockheed

Petitioner did business with Lockheed Aircraft Corporation

(Lockheed)6 through four entities. One entity was a corporation

located in the Bahamas called Western Hemisphere Industrial &

Petroleum Corporation (WHIP), which was formed in 1969. WHIP

share certificates were issued in the names of nominees for

petitioner, although at one point WHIP is referred to by one

company as a nominee for the National Iranian Oil Company (NIOC).

Petitioner had an ownership interest in WHIP. Price Waterhouse,

the resident agent for WHIP, was given instructions from

petitioner and was paid by petitioner. The banking and other

business activities of WHIP were handled by petitioner and his

CTC employees.

Petitioner's first expression of the idea to use the WHIP

entity appeared in a letter dated January 14, 1969, from

petitioner to Iran's then Prime Minister. Petitioner outlined

the terms of an agreement that he proposed to negotiate for the

purchase of oil by Iran, explaining that the "mechanics for

implementation" of the arrangement would involve WHIP.

Petitioner's letter also indicated that disposition of WHIP

shares would be at the discretion of the Prime Minister and that,

6
Petitioner participated in business transactions with a number of
companies and their affiliates. Respondent did not distinguish among these
affiliates in the notices of deficiency. For purposes of this opinion, it is
irrelevant which of the affiliates dealt with petitioner; therefore, we do not
distinguish between them in the findings of fact. Each company and all of its
relevant affiliates will be referred to under one generic name.
 - 24 -

for interim purposes, petitioner and Dr. R. Fallah had been

nominated to the Board of Directors. However, petitioner and his

attorney later became WHIP directors. Dr. Fallah was a Director

of NIOC. Although Occidental Petroleum Corporation (Occidental)

referred to WHIP as a nominee of NIOC in a February 1969 letter

to Dr. Fallah, in a subsequent letter to another client,

petitioner referred to WHIP as "one of our operating companies".

Petitioner was able to tie this oil purchase by Iran to the

sale of Lockheed aircraft. In 1970 Lockheed indicated a

willingness to sell 24 Lockheed C-130 airplanes, including ground

support equipment, to the Imperial Iranian Air Force. The C-130

Hercules aircraft was a large military transport plane. While a

direct sale was not implemented, in 1970 an agreement was entered

into between petitioner's companies and Occidental; this

agreement was related to another agreement of the same date

between Occidental and NIOC. Pursuant to these agreements

Occidental purchased oil from NIOC; Occidental then paid for the

oil partly in cash and partly in C-130 Hercules aircraft that

Occidental purchased from Lockheed. Furthermore, according to

the agreement between petitioner and Occidental, Occidental was

to pay a fee to WHIP of 1 cent per barrel of oil that Occidental

purchased from NIOC. This fee to WHIP was "in consideration of

services rendered to date and that will continue to be rendered
 - 25 -

in reaching and the implementation of the agreement" between

Occidental and NIOC.

By another letter agreement dated September 28, 1970, and

signed by petitioner on behalf of WHIP, Lockheed agreed to pay

WHIP for services rendered an amount not to exceed $1,229,700

under the arrangement with the Government of Iran for the C-130

aircraft. By letters of the same date, Lockheed entered into

three separate contracts with CTC, WHIP, and Diesel Power;

petitioner signed all three contracts on behalf of each company.

The payments due under each of these contracts were based upon a

percentage of Iran's payments to Lockheed. On January 11, 1971,

petitioner on behalf of CTC, WHIP, and Diesel Power signed

amended contracts with Lockheed. These amended contracts

provided that Lockheed would pay an additional advance payment to

CTC of $200,000 "in lieu of current payments otherwise due and

payable to Caspian, Western and Diesel under [the] * * *

Agreements." On October 1, 1971, the agreement with CTC again

was amended; Lockheed thereby agreed to pay CTC an additional fee

for "special services and assistance". In October 1971 Lockheed

also agreed to pay CTC 5 percent of the purchase price for the

sale of a C-130 Flight Simulator Mobile Training Unit to the

Iranian Government. After the value of the underlying contract

was reduced, in December 1972, the earlier agreements were again
 - 26 -

modified to maintain the previously stated commission to "Mr.

Zand's companies" despite the reduction.

Another company used by petitioner in his dealings with

Lockheed was Sunvaco. Mr. Conley, a Lockheed official who had

met petitioner in 1971, was aware that petitioner, through WHIP,

already was Lockheed's representative for the sale of the C-130

aircraft. After this initial meeting, Mr. Conley and other

Lockheed officials met with petitioner, who introduced them to

Mr. Khalatbari and Mr. Zanganeh, and the three said they would

work as a group under the name of Sunvaco.7 On June 1, 1971,

Lockheed entered into a marketing consultant agreement with

petitioner and Sunvaco. Initially, petitioner and Sunvaco were

to receive a monthly retainer in the amount of $4,166.66.

Commission payments were to be set forth later. Petitioner

signed the agreement on behalf of himself and Sunvaco. On

October 29, 1971, this marketing agreement was modified to

provide a 3-percent commission to be paid on sales of Lockheed

Model P-3 Export Type Aircraft, a military aircraft. Further

amendments to this agreement and to the earlier agreement in

7
In 1981 petitioner wrote to Mr. Conley, who had been the president of
Lockheed's Tehran division, indicating that petitioner needed confirmation of
certain information in connection with an Internal Revenue Service
investigation that Lockheed had engaged the services of at least three
individuals when it retained Sunvaco. In response to petitioner's request,
Mr. Conley confirmed in writing his recollection that petitioner "did not have
all of the desirable capabilities to act as our marketing consultant in Iran"
and that he understood Sunvaco to involve the services of at least Khalatbari,
Zanganeh, and petitioner.
 - 27 -

connection with the C-130 aircraft were made on December 7, 1972,

May 1, 1973, June 8, 1973, and January 16, 1974. Each of these

three amendments was signed by petitioner on behalf of himself

and Sunvaco.

Mr. Zanganeh was involved in Sunvaco transactions in some

respect. A 1972 letter from Lockheed to Mr. Zanganeh discusses

the terms and conditions contained in the agreement with Sunvaco

in connection with the TriStar Model L-1011 aircraft purchased by

Iran National Airlines. The letter asks Mr. Zanganeh to confirm

these terms on behalf of Sunvaco. Another version of the same

letter addressed to Mr. Zanganeh worded somewhat differently

affirmed, "Pursuant to Mr. J. J. Zand's request", Lockheed's

understanding of the fee arrangement with Sunvaco. The record

contains what appears to be a draft of a response by petitioner

to Lockheed's letter. Mr. Zanganeh was paid $80,000 out of the

WHIP account in 1972 and $75,000 out of a CTC account in 1974.

Petitioner reimbursed himself for the CTC payment by writing a

check to himself on the Diesel Power Bank of America account.

In addition to these payments to Mr. Zanganeh, petitioner

and his employees instructed Lockheed how to allocate and where

to mail commission payments required under the Lockheed

contracts. In 1971 petitioner also instructed Price Waterhouse

to transfer to an account in Switzerland $1,000,000 of the total

amount of $1,229,700 expected to be received by WHIP from
 - 28 -

Lockheed under the September 28, 1970, agreement. Petitioner

further instructed Price Waterhouse that 80 percent of all other

amounts expected to be received by WHIP from other sources should

be transferred to the same account in Switzerland. Petitioner

gave similar instructions to Barclays Bank, the location of the

WHIP Barclays Bahamas account, that 80 percent of all future

deposits should be transferred to an account in the name of WHIP

at the Banque de Paris. There is no other evidence in the record

concerning the disposition of funds to or from the WHIP Swiss

account. In 1975 petitioner signed for Sunvaco and himself a

certificate of compliance under the marketing and consulting

agreement, certifying that the contract requirements had been

satisfied and that payment of $481,600 was due and owing. As

with the WHIP contracts, petitioner also directed how and to

which company payments from Lockheed on the Sunvaco contracts

were to be made.

Petitioner expended considerable effort on behalf of

Lockheed for the sale of military aircraft to the Government of

Iran. Mr. Kotchian was the President of Lockheed who originally

hired petitioner for the C-130 sale. Mr. Kotchian dealt

extensively with petitioner with regard to attempts to sell

Lockheed products in Iran, and he was under the impression that

petitioner was Lockheed's Iranian consultant. He did not know of
 - 29 -

CTC, Diesel Power, WHIP, or Sunvaco; he had heard of Mr.

Khalatbari, but he did not know Mr. Zanganeh.

By an agreement dated August 1, 1974, Diesel Power became a

distributor for Lockheed Missiles & Space Company, Inc. Although

the copy of this agreement in the record is unsigned, a

handwritten note attached to a copy sent to a CTC employee

indicates that Mr. Khalatbari had signed it on July 24, 1974.

None of the amounts at issue were earned by Diesel Power under

this agreement.

B. Payments by Lockheed

In the notice of deficiency for 1972 respondent adjusted

petitioner's income from Lockheed in the amount of $1,013,084.34,

which is equivalent to the two amounts Lockheed paid to WHIP and

Diesel Power in 1972, as follows. During the taxable year 1972

Lockheed issued checks payable to CTC in the total amount of

$418,111.59, which were recorded in CTC's cash receipts journal

and were deposited in the CTC CNB account. This amount is not in

dispute. During 1972 Lockheed also issued 12 checks to Diesel

Power which totaled $594,972.75. All but one of these checks

were deposited during 1972 into the Diesel Power Bank of America

account. It is unknown where the remaining check was deposited.

None of the amounts of these 12 checks was recorded in the 1972

CTC receipts journal. During 1972 Lockheed also issued 12 checks

to WHIP which totaled $418,111.41. Four of these checks,
 - 30 -

totaling $171,806.42, were deposited into the WHIP Barclays

Bahamas account during 1972. The record does not indicate where

the remaining checks were deposited. None of the amounts paid by

Lockheed to WHIP during 1972 was recorded in the 1972 CTC

receipts journals. Lockheed issued the checks in the names of

CTC, Diesel Power, and WHIP in accordance with instructions from

petitioner or a CTC employee. Petitioner reported no dividend or

other gross income from WHIP on his income tax return for 1972.

In the notice of deficiency for 1973 respondent increased

petitioner's income from Lockheed by $657,735.96, which is the

sum of amounts paid to WHIP and Diesel Power in 1973 as follows.

During 1973 Lockheed paid Diesel Power a total of $466,147.55,

which was deposited into the Diesel Power Bank of America

account. None of this amount was recorded in the 1973 CTC

receipts journal. During 1973 Lockheed made payments to WHIP in

the total amount of $191,588.41, which were deposited into the

WHIP Barclays Bahamas account. These payments were not recorded

in CTC's cash receipts journal for 1973. Petitioner reported no

income from WHIP on his income tax return for 1973.

In the notice of deficiency for 1974 respondent increased

petitioner's income from Lockheed by $995,543.23. During 1974

Lockheed paid CTC $226,920.17 in connection with the C-130 sales

and $270,851.40 in connection with the P-3 aircraft sales, which

were deposited into CTC's CNB account. These amounts were
 - 31 -

recorded as commissions on the 1974 CTC receipts journal and are

not at issue. During 1974 Lockheed issued checks to Diesel Power

in the total amount of $995,543.23, all of which were deposited

into the Diesel Power Bank of America account. Lockheed issued

these checks payable to Diesel Power in accordance with

petitioner's instructions. Lockheed, WHIP, and Sunvaco are not

listed on Diesel Power's financial statements for the periods

ending March 20, 1974, and March 20, 1975. None of these checks

was reflected on the 1974 CTC cash receipts journal.

In the notice of deficiency for 1975 respondent increased

petitioner's income from Lockheed by $331,862.92. During the

taxable year 1975 Lockheed issued checks payable to CTC in the

total amount of $162,622.03. These checks were recorded in CTC's

1975 cash receipts journal; were deposited into CTC's CNB bank

account; were reported by petitioner as gross income for 1975;

and are not at issue. During the taxable year 1975 Lockheed

issued checks payable to Diesel Power in the total amount of

$331,862.92. These checks were issued in accordance with

petitioner's instructions. At least some of these checks were

payment in connection with the sale of P-3 aircraft. With the

exception of one check in the amount of $6,618.86, all of these

checks were deposited into the Diesel Power Bank of America

account. None of these checks was included by petitioner in his

1975 gross income.
 - 32 -

In a letter dated May 13, 1975, a senior vice president of

Lockheed sent petitioner a letter expressing concern over

communications that had been brought to his attention suggesting

that the Government of Iran might refuse to do business with

companies that used middlemen, such as petitioner, in offering

products for sale to Iran. Petitioner responded to Lockheed by

explaining that the policy of Iran was to continue doing business

with legitimate representatives. In July 1975, petitioner was

interviewed by U.S. Senate Foreign Relations Committee personnel

concerning possible questionable payments to foreign government

officials in connection with product sales. After this

interview, the record shows no Lockheed commission payments to

either Diesel Power or CTC. On January 28, 1976, the

Lockheed/Zand/Sunvaco agreement was terminated effective

October 10, 1975. The termination was a result of the U.S.

investigation into Lockheed's use of consultants. The

termination agreement was signed by petitioner on his own behalf

and on behalf of Sunvaco.

In the notice of deficiency for 1976 respondent increased

petitioner's commission and fee income from Lockheed by $321,066.

Lockheed issued a check dated January 26, 1976, to Sunvaco and

petitioner in the amount of $481,600. This check was mailed to

petitioner's Columbus, Ohio, address and was deposited in full

into the CTC CNB account. Of this amount $100,000 was paid by
 - 33 -

Lockheed in settlement of an outstanding obligation for the sales

of the P-3 aircraft; $381,600 was attributable to a Lockheed

contract obligation for the C-130 aircraft. The 1976 CTC cash

receipts journal lists $321,066 of this payment (approximately

two-thirds) as "Commissions-DPTC" and the remaining $160,533.34

as "Commissions-Caspian". Petitioner included $160,533.34 of

this termination payment in his 1976 gross income and excluded

the remaining $321,066.

In an attachment to a letter dated June 20, 1979, from

Mr. Stephen E. Dutton to Williams & Connolly, Mr. Dutton outlined

the following summary of WHIP receipts and disbursements that he

indicated he had prepared from bank statements:

Receipts:

Lockheed $1,476,786.58
Banque de Paris 240,000.00
Interest 111,211.00
Galion 110,000.00
Diesel Power 47,000.00
 - 34 -

Disbursements:

Banque de Paris $880,000.00
Minora (DPC) 115,000.00
Galion 10,000.00
FK (Tonekaboni) 100,000.00
Zanganeh 80,000.00
Swiss Credit Bank #29934 83,000.00
Price Waterhouse 2,248.85
FNCB-London 2,500.00
Bank & Check Charges 135.19

C. Ashland

On April 4, 1974, Ashland Bermuda Limited (Ashland) entered

into an agreement with All Patents Corporation Limited (All

Patents) whereby Ashland hired All Patents as a consultant in

negotiations between Ashland and NIOC. These negotiations were

in connection with the purchase of crude oil to be used in a

joint venture involving the operation of refineries in the United

States. The name of the signer for All Patents is

unrecognizable. The agreement provided that Ashland would pay

All Patents a fee of 3 cents per barrel of oil that NIOC sold to

Ashland in exchange for, by its own terms, "personal services"

provided by All Patents. Under this and other agreements with

Ashland, All Patents was a consultant providing technical

assistance and other services in connection with NIOC's supply of

crude oil to Ashland. There were also previously in place two
 - 35 -

agreements dated May 18, 1973, and December 7, 1973, between

Ashland and the Banque de Paris. By these agreements Banque de

Paris was to provide technical advice and assistance in

connection with the joint venture in exchange for a fee.

Although Ashland representatives did not know who the legal

owners of All Patents were, it was understood by Ashland that All

Patents was an affiliate of petitioner. Orin Atkins was the

president of Ashland from 1964 to 1981. Mr. Atkins retained the

services of petitioner in Ashland's efforts to purchase crude oil

from Iran with the expectation that, because of petitioner's

fluency with the language, his familiarity with the country, and

his business success in both Iran and the United States,

petitioner would help to facilitate the arrangement of meetings

with Iranian officials and help to shape Ashland strategy in

Iran. Petitioner was an intermediary who helped Ashland

interpret the Iranian mood in Ashland's strategy development for

these projects. Petitioner also participated in negotiations and

helped to arrange and prepare for meetings with Iranian

officials, including the Shah of Iran. Except for a meeting with

the Shah, Mr. Atkins was accompanied by petitioner at almost all

his meetings with Iranian officials.

The primary contact person in the Iranian Government for

these negotiations on behalf of Ashland was Dr. Fallah, who also

had some involvement in petitioner's business dealings with
 - 36 -

Lockheed. Petitioner wrote to Dr. Fallah on "J.J. Zand,

Consultant" stationery in October 1973 concerning a meeting he

had in New York pertaining to organizing a joint venture between

Ashland, NIOC, and others. Petitioner was present during

meetings between Ashland and Dr. Fallah, with whom Mr. Atkins

believed petitioner had a close relationship. Petitioner

sometimes met with Dr. Fallah on Ashland's behalf without other

Ashland representatives. Mr. Atkins understood that petitioner

also was well acquainted with Prime Minister Hoveyda, a

relationship which was helpful to Ashland's business negotiations

with Iran. While Dr. Fallah and Mr. Atkins were the principals

in the negotiations between NIOC and Ashland, petitioner was the

liaison between them. Petitioner was described in a 1973

memorandum by Mrs. Priscilla Meier, an employee of CTC, to a

potential client as one of the creators of the entire

Ashland/NIOC agreement. In another 1973 letter petitioner

outlined to Mr. Atkins his plan for an Ashland/Iranian joint

venture. Correspondence in 1974 concerning the Ashland

relationship with NIOC came to petitioner personally. There is

little or no evidence of participation by either All Patents or

Diesel Power in any of the Ashland negotiations.

Petitioner also was involved with an ultimately unsuccessful

proposed joint venture between Lar Exploration, a subsidiary of

Ashland, and NIOC involving a contract to explore for oil and gas
 - 37 -

in Iran. Although the Lar Exploration consultancy agreement was

signed by someone by the name of Betterman, petitioner performed

the work by providing the contacts, advising strategy, and

handling the negotiations. Petitioner's advice for this project

continued for about 3 years, including multiple crude oil

contracts. Petitioner was also involved in negotiations for two

other unsuccessful refining and marketing joint ventures that

Ashland was interested in developing with Iran. One was a

refining joint venture owned by Ashland in Buffalo, New York,

that reached the letter of understanding or letter of intent

stage but never resulted in a definitive contract. In 1976

petitioner negotiated another barter arrangement between General

Dynamics Corporation and Ashland. There was no involvement by

Diesel Power employees in this arrangement.

On April 18, 1975, petitioner was asked to sign a document

at La Guardia Airport addressed to All Patents, c/o the Banque de

Paris, which stated:

During the period 1973 through 1974, Ashland's records
show that firms or persons which you represent, received
payments, including the following:

Date Amount
Payment received for
Mr. James Zand June 6, 1973 $12,500
Date Amount

Payment to account of
Interrep, S.A. for the
group represented by
Mr. James Zand Sept. 30, 1973 $100,000
 - 38 -

Payment received for All
Patents Corp. Ltd. Dec. 19, 1974 $200,000

Payments to All Patents
pursuant to agreement
dated April 4, 1974: March 28, 1974 $164,909
Sept, 13, 1974 $166,447
Dec. 9, 1974 $ 41,419
Feb. 19, 1975 $ 69,078
Payment to All Patents
pursuant to agreement
dated October 15, 1974 Oct. 1974 $900,000

Petitioner dated and signed his name on lines directly below a

statement in the same document that read:

The above information regarding payments made to firms
or persons which I represent by Ashland or its subsidiaries
is correct and I have no knowledge of any amounts received
by me which were returned to Ashland, its subsidiaries,
directors, employees or other representatives and I did not
make any U. S. political contributions at the direction of
Ashland.

The same letter was sent to the Banque de Paris and signed by

that bank's President, Mr. Michel.

As discussed previously, during 1975 there was an

investigation of Ashland by the Senate Foreign Relations

Committee. On July 21, 1975, petitioner created an internal

memorandum indicating that "Caspian must charge Diesel Power's

account 40% of the moneys paid by Ashland to the account of All-

Patent Corporation * * * . This 40% is to cover the expenses we

have incurred in pursuit of the Ashland business for which they

paid these expenses." In an "Aide Memoire" dated July 23, 1975,

petitioner noted that he had told a member of the Senate Foreign
 - 39 -

Relations Committee, which was looking into drafting legislation

making it a crime to pay bribes to foreign officials, that he was

not aware of any improper payments to foreign officials. He also

stated:

I emphasized the fact that it was I who sought Ashland and
who prevailed upon them to come to Iran and who assisted
them in developing their programs for Iran. * * * .

* * * * * * *

I stated that ever since the inception of my relationship
with Ashland six years ago, my companies paid our own way
* * * .

Petitioner indicated that he had told the Committee that no

one in the Government of Iran had made any demands for "under-

the-table" payments. On January 6, 1976, petitioner signed an

affidavit for an unknown purpose stating that he had not made,

and in the future would not make, any payments from funds paid to

him by Ashland that he knew or had reason to know were illegal in

the jurisdiction in which the payment was made.

D. Payments by Ashland

In the notice of deficiency for 1973 respondent increased

petitioner's income from Ashland by $120,900. In August 1973,

Ashland issued a wire transfer of $100,000, payable to a bank

account in the name of Interrep. S.A. (Interrep), account number

29893C. These funds were deposited in an account at the Banque

de Paris. The stated purpose for this wire transfer was

"Consulting done in relation to Iranian Venture".
 - 40 -

With regard to Interrep and its relation to petitioner, an

Ashland report to the Board of Directors dated June 26, 1975, in

connection with an investigation of Ashland's political

contributions, describes certain interactions between Ashland and

Interrep but contains no reference to petitioner personally.

There are only two documents in evidence that draw any link

between petitioner and Interrep. The first document states that

the $100,000 paid by Ashland to Interrep constituted "Prepayment

of part of anticipated fees payable in respect to New York

Venture". This document further states that there were four

additional payments, as follows:

Payee Date Amount Purpose

J. J. Zand 6-6-73 $12,500 Fees related to
Iranian
participation
project

J. J. Zand 7-9-73 3,000 O. E. Atkins
check for
riyals Zand
advanced to
Atkins in
Teheran

J. J. Zand 7-11-73 400 Gifts for
NIOC

J. J. Zand 11-29-73 5,000 Reimburse for
Teheran hotel
bills, dinner
party and
entertainment
of Ambd. & Dr.
Fallah
 - 41 -

The $5,000 payment to petitioner for reimbursement of certain

items listed above is also referred to in a separate 1973 letter

from Ashland to petitioner. This letter contained a check for

$5,000 and described it as a reimbursement.

The second document linking petitioner to Interrep is a

letter from Ashland to All Patents requesting verification of

payments received from Ashland and requesting confirmation that

there was no knowledge on the part of the signer (who was

petitioner) that he had made any U.S. political contributions on

behalf of Ashland. Petitioner's signature appears at the bottom

of this letter. One of the payments listed in the second

document was a $100,000 "Payment to account of Interrep, S.A. for

the group represented by Mr. James Zand". This amount from

Interrep was neither included in CTC's cash receipts journal as a

receipt nor reported as income by petitioner.

In the notice of deficiency for 1974 respondent increased

petitioner's income from Ashland by $1,472,775.68. In 1974

Ashland issued five checks in the total amount of $1,472,776.12

to or for All Patents. The stated purpose of four of the five

checks was either "commission", "commission on crude oil

purchased from NIOC", or "advice and services rendered to Ashland

Oil, Inc., in connection with purchase of oil from National

Iranian Oil Company and other business activities in Iran". The

fifth check for $900,000 was a commission payment related to the
 - 42 -

Lar Exploration project. None of the amounts of these checks was

recorded on CTC's cash receipts journal or included in

petitioner's 1974 gross income.

In the notice of deficiency for 1975 respondent increased

petitioner's income from Ashland by $452,328.45, which is the sum

of $69,078.45 and $383,250. Ashland issued a check payable to

the Banque de Paris for All Patents on February 20, 1975, in the

amount of $69,078.45 and a check payable to All Patents in the

amount of $383,250 on April 21, 1975. Both checks were deposited

in the Diesel Power Banque de Paris account. Ashland is not

reflected as a client or a source of income on Diesel Power's

financial statements for the periods ending March 20, 1974, or

March 20, 1975. Neither of these payments was included in

petitioner's 1975 gross income.

In the notice of deficiency for 1976 respondent increased

petitioner's income from Ashland by $198,750. By an assignment

agreement dated December 15, 1975, All Patents and the Banque de

Paris assigned to petitioner their rights under the

April 4, 1974, agreement with Ashland. The assignment agreement

was signed by someone named "Betterman" on behalf of All Patents.

By a letter agreement in December 1975, agreements between

Ashland and All Patents were terminated. In December 1975,

Ashland issued a check in the amount of $265,000 payable to

petitioner. The payment was described in the particulars section
 - 43 -

of the receipt stub as being "in consideration of release and

termination of agreements with All Patents Corporation Limited

and James J. Zand". An Ashland memorandum transmitting the

request for this check states that this check "will be used in

payment for the termination and settlement of all obligations to

All Patents * * * and James J. Zand under Letter Agreements dated

May 18, 1973, December 7, 1973, and April 4, 1974." This check

was returned and, subsequently, in early 1976 Ashland reissued

payment of the $265,000 to petitioner. This payment was

deposited to the Zand CNB Columbus account. On the 1976 CTC

receipts journal, 75 percent of this payment was allocated as a

commission for Diesel Power; 25 percent was allocated as a

commission for CTC. Petitioner reported 25 percent of this

$265,000, or $66,250, on his return for the taxable year 1976; he

did not report the balance of $198,750.

E. General Motors

In a document dated April 25, 1969, General Motors Overseas

Operations Division of General Motors (GM) appointed CTC as Sales

Representative to act in promoting the sale by GM of diesel

locomotives, related spare parts, supplies, and equipment

manufactured by GM for use in Iran. In consideration of CTC's

services as sales representative, GM agreed to pay CTC a

commission of 3 percent of the sales. The document also

provided:
 - 44 -

Neither this agreement nor any right or obligation hereunder
nor the payment of any commission that Representative may
hereafter accrue hereunder shall be transferable or
assignable by Representative, or any assignee hereof,
without GM's prior written approval.

This document was signed by petitioner on June 16, 1969, and thus

became what we refer to hereafter as the 1969 GM-Caspian

agreement. On May 8, 1969, GM entered into a separate agreement

with Diesel Power whereby Diesel Power agreed to act as a

distributor of GM Detroit Diesel engines in Iran. This agreement

was signed by petitioner as "Chairman" of Diesel Power.

There was considerable correspondence between petitioner or

CTC employees and GM over the next several years concerning such

matters as where to send notices, various orders, and where

commissions should be sent and in what amount. CTC also

requested that Diesel Power furnish CTC with invoices for orders.

Petitioner periodically provided GM with reviews of his

negotiations on behalf of GM, and in a 1975 letter to GM

reviewing the history of his relationship with GM, indicated that

this relationship involved petitioner individually as well as his

"associates". Petitioner kept track of all commissions received

from GM.

Diesel Power also had direct contact with GM. For example,

a GM employee dealt with Mr. Khalatbari in the contract

negotiations for the sale of 51 locomotives to the Iranian

Government. This same employee also dealt with Mr. Khalatbari in
 - 45 -

July 1970 to establish lines of credit with the Export-Import

Bank and GM in favor of the Iranian Government in connection with

the purchase of the 51 locomotives from GM. In 1974 GM again

dealt with Diesel Power employees with regard to electrification

of certain sections of the railroad lines in Iran and the

possibility of substituting a GM electric locomotive for a diesel

locomotive.

However, GM viewed petitioner as being the ultimate

responsible person. For example, a 1974 letter from GM to

petitioner asks that petitioner confirm GM's understanding that

petitioner and Mr. Khalatbari had agreed to pay certain extra

expenses incurred in connection with negotiations leading to a

contract for the sale of locomotives for the Iranian State

Railways. On June 26, 1973, the Iranian State Railways sent a

letter to GM asking if Diesel Power was GM's representative for

transactions related to diesel electric locomotives and spare

parts. A CTC employee responded to GM that "Mr. Zand does want

you to reply indicating Diesel Power Trading Company is not your

representative since, in fact, I believe Caspian (CTC) is the

authorized distributor." Petitioner also responded personally

with the following suggested language to be used by GM in

replying to the Iranian State Railways, "inasmuch as, in fact,

and in truth Diesel Power is neither your representative nor

distributor in Iran":
 - 46 -

In reply to your letter * * * , please be advised that the
firm of Diesel Power Trading Company of Teheran mentioned in
your letter are not our representatives in respect of
transactions for Diesel electric locomotives and the
relative spare parts that we conduct with you, sell you or
ship to you.

GM sent a response containing very similar language to the

Iranian State Railways shortly thereafter. In a subsequent

letter to CTC dated October 30, 1973, Diana Khalatbari (then

Diana Zand) stated as follows:

More and more, we are concluding transactions with
government agencies. Before obtaining letters of credit,
all government agencies require a statement from the
manufacturers legalized by the Iranian Consulate certifying
that we are their authorized sole distributors. * * * .
Please ask the following companies to prepare such a
statement * * * .

1. General Motors
2. Ingersoll-Rand
3. Galion
4. Clark Equipment Company (both ITD and CMD)
5. P&H

The 3-percent sales commission rate in the 1969 GM-Caspian

agreement was modified twice during 1974 to 3-3/4 percent and 4

percent in connection with the sale of additional locomotives.

Both modification letters were accepted by petitioner on behalf

of CTC.

During 1976 even after he relinquished a portion of his

Diesel Power stock, petitioner continued to represent to GM that

he had control over Diesel Power. In February petitioner wrote a

letter to GM stating:
 - 47 -

In my capacity as chairman of Diesel Power Company and as
owner and General Manager of Caspian Trading Company, I
hereby authorize Detroit Diesel Allison to forward all
statements of account and commission statements for both
Diesel Power Company and Caspian Trading Company to Caspian
Trading Company * * * .

This letter will also serve as authorization for Caspian
Trading Company to collect all commissions payable on a
monthly basis on both Diesel Power Company's and Caspian
Trading Company's commission accounts. * * *

Shortly thereafter, GM terminated the 1969 GM-Caspian agreement

with CTC. Petitioner agreed by signing the letter of termination

on April 9, 1976. On November 1, 1976, Diesel Power and GM

entered into another agreement for the distribution, sales, and

servicing of GM engines and transmissions. This agreement was

signed for Diesel Power by an unknown person other than

petitioner, possibly Mr. Khalatbari, who was identified as

"Managing Director".

In addition to sales to Iran, petitioner also received

payments from GM for certain sales to Pakistan. In

February 1974, GM appointed CTC as sales representative to

promote the sale of GM diesel locomotives in Pakistan. This

agreement, by its terms, was to terminate on February 19, 1975,

unless extended by mutual agreement. It was signed on

March 14, 1974, by an unidentifiable person as attorney-in-fact

for petitioner. The agreement contained the same non-

assignability clause as is found in the 1969 GM-Caspian

agreement. GM further communicated with petitioner in a February
 - 48 -

1974 letter about the Pakistani sale. Chatru Khilnani

(Mr. Khilnani) also was a distributor for GM for the Pakistani

market. Although petitioner indicated to Mr. Khilnani a

willingness to pay Mr. Khilnani no more than 70 percent of the

commission earned on the Pakistani locomotive sale and to pay for

Mr. Khilnani's travel expenses in connection therewith,

subsequently, there was a dispute about commissions. On

July 13, 1974, petitioner met with Mr. Kandawalla, who was

Mr. Khilnani's associate, and Mr. Kandawalla required at least 70

percent of the commissions earned in Pakistan. Petitioner

dictated a memo to the file noting that he agreed to pay Mr.

Khilnani the 70 percent requested because:

Actually, on this job I never had to go to Pakistan and I
did not put out a sales' effort (Sabety only went to
Pakistan during the bid opening), and in all sincerity and
fairness, I did not think we were entitled to more.

Petitioner's diary indicates that he had conferences with

Mr. Khilnani or Mr. Kandawalla on four occasions during 1974 and

1975, three prior to dictating this memo and one afterwards. On

February 24, 1975, GM sent petitioner a letter on the subject of

"Pakistan Railways 68 EMD Locomotives" which states:

"For obvious reasons Caspian Tradings name was used as the

official agent. Caspian Trading is only acting as a pass through

account to the real agent who is Chatru Khilnani for these pass

through services." Petitioner attended at least one meeting
 - 49 -

during 1976 with Mr. Khilnani and Mr. Khalatbari at the London

office concerning the Pakistani sale. Petitioner apparently

hired Mr. Khilnani to do some other work for him in Pakistan on

matters unrelated to this case.

F. Payments Made by General Motors

In the notice of deficiency for 1973 respondent increased

petitioner's income from GM in the amount of $8,176.37. In the

amendment to answer respondent asserted an increase in

petitioner's 1973 income from GM to $17,943.61. During 1973 GM

deposited £7,824.99 (British pounds) into the Zand FNCB London

account, the equivalent of $18,146.15. This amount was not

recorded in the 1973 CTC receipts journal.

There are two GM commission amounts at issue for 1974. The

first is a determination in the notice of deficiency for 1974

that there was $414,855.46 in unreported "per books" income from

GM. This amount is a portion of certain checks paid by GM to CTC

for the sale of locomotives to Iran in the total amount of

$608,194.47. All of these checks were deposited in full into the

CTC CNB account. The CTC cash receipts journal showed

$166,353.43 of this total amount as commissions earned by CTC.

Petitioner included this amount in his 1974 income. The balance

of $441,841.04 is shown as commissions earned by Diesel Power and

was not reported by petitioner on his 1974 return. The second

amount from GM at issue for 1974 involves payments from GM that
 - 50 -

were deposited into the Zand FNCB London account. In the notice

of deficiency for 1974 respondent determined that there was

$13,221.35 in "other unreported" income from GM. In the

amendment to answer respondent asserted that petitioner failed to

report 1974 income from GM in the amount of $25,260.24. During

1974 GM deposited a total of £10,760.20 into the Zand FNCB London

account after CTC corrected the amount and gave instructions as

to the deposit location. This was equivalent to $25,260.24.

None of this amount was recorded in the CTC cash receipts journal

for the taxable year 1974 or as 1974 income by petitioner.

In the notice of deficiency for 1975 respondent determined

that there was $1,589.04 in "other unreported" income. In the

amendment to answer respondent asserted that the notice of

deficiency incorrectly included $507.21 as unreported income and

that the correct amount should have been $1,204.12. On

April 25, 1975, GM deposited £507.21 into the Zand FNCB London

account. Petitioner concedes that this amount was equivalent to

$1,204.12. None of this amount was included in the CTC receipts

journal for 1975. In the notice of deficiency for 1975

respondent also determined that petitioner had "Per Books

Unreported" income from GM of $1,050,285.15. During 1975 GM paid

CTC commissions in the total amount of $1,995,906.02, all of

which were deposited into the CTC CNB account. Petitioner

included $435,034.98 of this amount in gross income on his 1975
 - 51 -

return. However, petitioner did not include the remaining

$1,560,871.04. Of this amount $1,049,244.20 was attributed in

the CTC receipts journal to Diesel Power commissions. Moreover,

at least two of GM's total 1975 commission payments, in the

amounts of $334,333.17 and $396,562.22, were commissions for

locomotives in Pakistan. CTC paid approximately 70 percent of

these Pakistani commissions, in the amounts of $234,033.22 and

$277,593.56,8 to Mr. Khilnani's Amelia Corporation. Petitioner

did not include the amount of the payments to the Amelia

Corporation as income in the 1975 CTC receipts journal or include

them in his 1975 income. Petitioner did, however, later include

the Amelia Corporation payments in an amended return.9 On the CTC

cash receipts journal, the balance of $100,299.95 and $118,968.66

was split between CTC and Diesel Power, 40 percent for the

former, 60 percent for the latter.

8
Payment was stopped on this check because it was lost in the mail, and,
on Feb. 2, 1976, Mrs. Conway confirmed a telephone request to transfer
$277,593.56 from the CTC CNB account to an account in the name of the Amelia
Corporation in Geneva.
9
On Dec. 20, 1976, petitioner filed an Amended U.S. Individual Income
Tax Return for the taxable year 1975 on matters unrelated to this issue. On
Feb. 22, 1978, a second Amended U.S. Individual Income Tax Return was filed by
petitioner for the taxable year 1975. On the latter return, petitioner
increased his previously reported commission income by $511,627 which is
equivalent to the sum of the two previously discussed 1975 payments to Amelia
Corporation. On the 1975 second amended return, petitioner also increased his
commission expense by this same amount. Adjustment a.3. of the notice of
deficiency for 1975 decreased petitioner's reported commission expense in the
amount $355,112.79. Of this adjustment $234,033.22 is attributable to
payments made by CTC to the Amelia Corporation.
 - 52 -

In the notice of deficiency for 1976 respondent made

adjustments in connection with payments from GM for "per books

unreported" income of $1,112,550.51, "other" income of

$34,980.77, a "Deposit to F.N.C.B." of $38,585.50, and additional

other income of $34,377.70.10 During 1976 a portion of the

commissions paid by GM to CTC was equal to a total amount of

$1,482,524.70. These payments were deposited to the CTC CNB

account. The 1976 CTC receipts journal allocated $385,343.07 of

this amount to CTC as commissions and $1,062,803.40 of this

amount to Diesel Power as commissions. The remaining $34,377.70

was noted on the CTC cash receipts journal as "Trans" and is

equivalent to an amount petitioner sent to the Amelia Corporation

in 1976. GM also issued a commission check in 1976 payable to

CTC in the amount of $11,581.51, and four checks to Diesel Power

in the total amount of $121,926.94, for a total of $133,508.45.

On CTC's cash receipts journal, these checks were allocated

$53,402.77 to CTC and $80,105.08 to Diesel Power. The total

amount allocated to Diesel Power on CTC's 1976 receipts journal

10
We are unable to explain the $30,357.89 difference between the amount
recorded in the CTC receipts journal as attributable to Diesel Power and the
amount alleged to be "per books unreported" by respondent in the notice of
deficiency. Part of adjustment a.3. for 1976 also proposes an adjustment for
commission expense in the amount of $361,971.26.
 - 53 -

for the above amounts was $1,142,908.40, which was not included

in petitioner's 1976 income.11

There also were payments from GM in 1976 that were not

recorded in the CTC receipts journal. On February 3, 1976, a

deposit from GM was made to the Zand FNCB London account in the

amount of £38,585.50. Neither this deposit nor its dollar

equivalent was recorded as a receipt on the CTC receipts journal.

At the average monthly exchange rate for February 1976,

£38,585.50 was equivalent to $78,058.47. Although the notice of

deficiency lists this as an "Deposit to F.N.C.B." of $38,585.50

in U.S. currency, in the amendment to answer respondent asserts

that there was a increased deficiency with respect to this

deposit to reflect the correct amount in U.S. currency. On April

27, 1976, a deposit was made by GM to the same account in the

amount of £34,980.77. Neither this deposit nor its dollar

equivalent was recorded as a receipt in the CTC receipts journal.

At the average monthly exchange rate for April 1976, this deposit

was equivalent to $64,644.76. Although this deposit was listed

in the notice of deficiency as $34,980.77 in the amendment to

answer respondent asserts that there was an increased deficiency

with respect to this deposit to reflect the correct amount in

U.S. currency.

11
We are unable to explain the difference between this figure and the
amount on the notice of deficiency for "Per Books Unreported" income of
$1,112,550.51.
 - 54 -

In the notice of deficiency for 1977 respondent determined

that there was unreported income equivalent to all commissions

attributed to Diesel Power on the CTC receipts journal,

$17,878.24 of which was received from GM; and that petitioner had

unreported commission income from "D.D.A."--a division of GM--in

the amount of $94,743.27. During 1977 the CTC receipts journal

shows receipt from GM of the total amount of $24,134.01. Of this

amount $6,255.77 was recorded in the CTC receipts journal as CTC

commissions; $17,878.24 was recorded as Diesel Power commissions.

All but $7.93 of this total amount was deposited to the CTC CNB

account. Furthermore, in December 1977, CTC received additional

payments from GM in the total amount of $94,742.66. These

payments were deposited in the CTC CNB account and were recorded

on CTC's 1977 cash receipts journal as "Refunds/Reimbursements".

G. SEDCO/IMICO

Prior to 1973 CTC had sold equipment for one of its other

customers to SEDCO International, S.A. (SEDCO) and to a related

company called IMICO.

During 1973 petitioner entered into a joint venture with a

company called Stewart & Stevenson Services, Inc. (Stewart &

Stevenson). Under this agreement, a stock of spare parts would

be placed at a location in Iran for resale to SEDCO, IMICO, or

any other customer in the Middle East. The parts were to be

owned by the joint venture until sold. Payments for these parts
 - 55 -

were to be deposited into the CTC CNB account. Although

initially it was discussed as being a 50/50 arrangement between

petitioner personally and Stewart & Stevenson, it later was

decided to form the venture between Diesel Power and Stewart &

Stevenson.

At the same time, there was an agreement between IMICO and

Diesel Power for IMICO to construct a warehouse for storage of

the parts. Diesel Power was to pay IMICO rent for use of the

warehouse. Petitioner signed this agreement on behalf of Diesel

Power. However, Diesel Power was not actually involved in

petitioner's agreements with SEDCO or IMICO. For example, a

Diesel Power individual asked CTC to please inform IMICO with

regard to the rental payments for which Diesel Power had received

bills that "this is not a DPTC project". Subsequently, Stewart &

Stevenson sold its interest in the joint venture to SEDCO.

Although there is evidence that petitioner and his CTC employees

were personally involved in the SEDCO joint venture project,

there is no evidence of any involvement in this project by Diesel

Power employees. Diesel Power was merely informed of the

arrangement after it was established. Under this arrangement,

CTC provided quotations to SEDCO for various types of equipment.

Diesel Power was not involved in the preparation or presentation

of these quotations, other than to be sent copies of them.
 - 56 -

During 1976 petitioner arranged for IMICO to be appointed

the dealer within a certain location in Iran for Detroit Diesel

Allison spare parts and engines under Diesel Power's

distributorship in Iran. Furthermore, in 1976 petitioner and CTC

assisted SEDCO in obtaining for IMICO a full service dealership

of Detroit Diesel Allison products in Iran. Diesel Power was not

involved in negotiating these arrangements. It was understood

between CTC and Diesel Power that Diesel Power was not entitled

to any commissions earned in connection with the IMICO dealership

project. In 1977 Mrs. Conway of CTC wrote a memorandum to the

file in which she stated:

Due to the upheaval caused by the Lockheed situation
Detroit Diesel Allison and Ingersoll-Rand have advised that
commissions payments issued in the name of Diesel Power
Company can no longer be mailed to Caspian Trading Company.
In fact regulations have become so stringent that both
manufacturers are restricted to mailing commissions to the
distributor in the country in which the distributorship is
held. This if course means payments must be mailed directly
to Diesel Power in Teheran.

Since Farshid will be in the country next week, it will
be necessary to establish procedure for Diesel Power to
receive these commission checks and to return to Caspian
its' share of the commission. Caspian, of course, will
retain 100% of all commission on the dealership agreement
with Imico. [Emphasis added.]

H. Payments by SEDCO, IMICO, Stewart & Stevenson

In the notice of deficiency for 1973 respondent increased

petitioner's income from Stewart & Stevenson by $1,000. This

alleged payment is not reflected on the 1973 CTC receipts
 - 57 -

journal. In the notice of deficiency for 1973 respondent also

increased petitioner's income from IMICO by $7,752.15. During

1973 the CTC receipts journal reflects receipts from IMICO or

IMISS12 in the total amount of $52,777.81. This amount was

deposited in the CTC CNB account and was allocated as $5,168.06

in commissions to CTC, $7,752.15 in commissions to Diesel Power,

and $39,857.60 in costs of purchases.

In the notice of deficiency for 1974 respondent increased

petitioner's income from SEDCO by $64,394.40. During 1974 SEDCO

issued checks payable to CTC in the total amount of $744,226.49,

all of which were deposited in the CTC CNB account. This total

amount was recorded in the 1974 CTC receipts journal as

$42,929.60 in commissions for CTC, $64,394.40 in commissions for

Diesel Power, and $636,902.49 in purchases.

In the notice of deficiency for 1974 respondent also

increased petitioner's income from Stewart & Stevenson by

$13,002.61. The CTC receipts journal for 1974 lists payments

from Stewart & Stevenson of a total amount of $21,671.01, which

was deposited into the CTC CNB account. This Stewart & Stevenson

amount was allocated in the CTC receipts journal as $8,668.40 in

commissions to CTC, and $13,002.61 in commissions to Diesel

Power.

12
Although we have been unable to identify the relationship, we assume
that IMISS is an affiliate of IMICO.
 - 58 -

In the notice of deficiency for 1974 respondent also

increased petitioner's income from IMICO/IMISS by $581.27. The

CTC receipts journal for 1974 reflects a payment from IMICO/IMISS

of $16,468.68, which was deposited in the CTC CNB account. Of

this amount, $387.51 was recorded as a commission for CTC,

$581.27 was recorded as a commission for Diesel Power, and

$15,499.90 was recorded as a purchase.

In the notice of deficiency for 1975 respondent increased

petitioner's income from SEDCO by $54,080.33. The CTC receipts

journal for 1975 reflects payments from SEDCO in the total amount

of $665,881.63, which were deposited in the CTC CNB account.

That journal records $36,053.57 as commissions to CTC, $54,080.33

as commissions to Diesel Power, and $575,747.73 as purchases.

In the notice of deficiency for 1975 respondent also

increased petitioner's income from Stewart & Stevenson by

$8,887.73, which consists of $7,409.42 in "per books unreported"

income and $1,478.31 in "other unreported" income. The CTC

receipts journal for 1975 reflects receipt in 1975 of a total of

$12,349.04 from Stewart & Stevenson, which was deposited in the

CTC CNB account. This amount was recorded in the CTC receipts

journal as a total of $4,939.62 in commissions for CTC13 and a

13
We note that respondent alleges in the proposed findings of fact that
petitioner reported $3,461.31 of the total amount received from Stewart &
Stevenson during 1975, but we have found that the CTC books attributed
$4,939.62 to CTC.
 - 59 -

total of $7,409.42 in commissions for Diesel Power. The parties

presented no evidence concerning the $1,489.31 of alleged "other

unreported" income in the notice of deficiency.

In the notice of deficiency for 1976 respondent made an

adjustment to petitioner's income from IMICO/IMISS of $1,727.27.

The CTC receipts journal for 1976 reflects receipt during 1976 of

payments from IMICO in the total amount of $30,236.10, which were

deposited in the CTC CNB account. The journal records $1,151.53

of this amount as commissions for CTC, $1,727.27 as commissions

for Diesel Power, and $27,357.30 as purchases.

In the notice of deficiency for 1976 respondent also

proposes to increase petitioner's income from SEDCO by

$92,058.39. The CTC receipts journal for 1976 reflects a total

amount received from SEDCO of $678,941.33, which was deposited in

the CTC CNB account. That journal records $61,372.27 as

commissions to CTC, $92,058.39 as commissions to Diesel Power,

and $525,510.67 as purchases.

In the notice of deficiency for 1978 respondent increased

petitioner's income from IMICO by $942.02, from SEDIRAN by

$111,955.01, and from SEDCO by $38,033.49. CTC's 1978 receipts

journal attributes no commissions from IMICO, SEDIRAN (apparently

an affiliated company), or SEDCO to Diesel Power. Instead, all

are attributed to CTC commissions or "purchases".
 - 60 -

I. Ingersoll-Rand

Diesel Power was the distributor in Iran for certain

construction machinery and industrial equipment for Ingersoll-

Rand Company (Ingersoll-Rand). Ingersoll-Rand operating

companies included Ingersoll-Rand World Trade (IRWT), which

handled equipment manufactured outside the United States and sold

outside the United States, and Ingersoll-Rand, SA (IRSA), which

handled sales of U.S. equipment outside the United States.

Ingersoll-Rand had a relationship with Diesel Power whereby

Ingersoll-Rand employees occupied Diesel Power offices until

1976.

The Court is unaware of a written contract between

Ingersoll-Rand and either Diesel Power or CTC. Ingersoll-Rand's

primary contact at Diesel Power was Mr. Khalatbari, who

negotiated certain changes made in 1974 to a distribution

agreement with Diesel Power. Diesel Power performed the local

on-site functions of obtaining equipment quotes and orders for

Ingersoll-Rand. Petitioner was involved in some of the more

high-level negotiations with the Iranian Government in connection

with projects that would affect Ingersoll-Rand. CTC employees

billed and collected Ingersoll-Rand commissions and directed to

which accounts commissions should be paid. Originally, CTC

employees instructed Ingersoll-Rand that commission payments be
 - 61 -

made to the London Zand account, the Banque de Paris, and to CTC.

However, during 1975 Mrs. Conway of CTC canceled her prior

instructions and instructed Ingersoll-Rand to send commissions to

the Diesel Power Banque de Paris account. In 1975 Mrs. Conway

instructed Ingersoll-Rand to change the procedure again and to

make certain commission checks payable to a company called

International Gas & Oil Supply Company, Ltd. (IGOS). IGOS was

formed in 1973, and petitioner had a one-third interest in IGOS.

Mr. Khalatbari inquired from Ingersoll-Rand at that time about

procedures for transferring the distributorship to IGOS, although

it is unclear whether such a transfer occurred. During 1975 Mrs.

Conway changed the IGOS bank mailing address to CTC's Ohio

address, and IGOS bank statements were mailed to CTC at that

address starting in 1975. In 1976 Mrs. Conway further instructed

Ingersoll-Rand that commissions were to be sent to the Zand FNCB

London account. At some time in 1977, Ingersoll-Rand was asked

to have distributors provide confirmation that payment of

commissions to locations outside their country of residence was

appropriate under that country's laws. Therefore, Mrs. Conway

told Ingersoll-Rand that commissions could no longer be sent

directly to CTC. Instead, Mrs. Conway directed Ingersoll-Rand to

hold the commission checks for pickup by a CTC representative.
 - 62 -

J. Payments by Ingersoll-Rand

In the notice of deficiency for 1973 respondent increased

petitioner's income from Ingersoll-Rand by $48,222.04.14 During

1973 Ingersoll-Rand made payments of $41,129.39, which were

deposited in the Diesel Power Bank of America account.

Ingersoll-Rand also deposited £174.54 at Mrs. Conway's

instruction in the Zand FNCB London account in September 1973.

In 1973 the CTC receipts journal reflects receipt of payments of

$976.86 from Ingersoll-Rand. These payments were recorded as

commissions to Diesel Power of $586.12 and commissions to CTC of

$390.74. In 1973 $976.86 was deposited in the CTC CNB account.

Respondent concedes that petitioner is not liable for any

increased 1973 commission income from Ingersoll-Rand except to

the extent that petitioner withdrew funds from the Diesel Power

Bank of America account.

In the notice of deficiency for 1974 respondent increased

petitioner's income from Ingersoll-Rand by $197,259.65. During

1974 Ingersoll-Rand issued checks or made wire transfers to the

Diesel Power Bank of America account in the total amount of

14
We are unable to ascertain the basis for this figure originally
determined by respondent.
 - 63 -

$197,079.14.15 During 1974 $1,669.64 in commissions from

Ingersoll-Rand was deposited to the IGOS CNB Columbus account.

These payments were not included in the CTC receipts journal.

Respondent now concedes that petitioner is not liable for any

increased commission income from Ingersoll-Rand except to the

extent that he withdrew funds from the Bank of America account.

In the notice of deficiency for 1975 respondent increased

petitioner's 1975 commission income from Ingersoll-Rand by

$781,078.02. During 1975 Ingersoll-Rand issued checks or made

wire transfers to the Diesel Power Bank of America account in the

total amount of $781,078.02. In the amendment to answer

respondent increased this amount by an additional $691,602.46.

This additional figure was based in part upon deposits made by

Ingersoll-Rand to the IGOS CNB Columbus account and the Banque de

Paris, and payments mailed directly to Diesel Power. The

additional figure is also based in part upon an alleged 1975

deposit to the Zand FNCB account in the amount of $197,513.88.

Respondent now concedes all but the $197,513.88 that was

allegedly deposited to the Zand FNCB account.

In the notice of deficiency for 1976 respondent increased

petitioner's commission income from Ingersoll-Rand by

15
We are unable to explain the reason that this figure differs slightly
from the stipulated deposit.
 - 64 -

$243,665.65. In the amendment to answer respondent increased

this figure by an additional $144,812.48. During 1976, at the

direction of Mrs. Conway, Ingersoll-Rand deposited commissions

totaling £5,494.40 into the Zand FNCB London account. At the

average monthly exchange rate for March 1976, this was equivalent

to $10,688.05. (International Financial Statistics, March 1976.)

In a sworn affidavit dated February 26, 1981, handwritten by one

of the IGOS shareholders, Hossein Shirazi, (Mr. Shirazi), stated

that during both 1976 and 1978 IGOS paid $120,000 to petitioner

for Ingersoll-Rand commissions. Mr. Shirazi was not a witness in

this proceeding. No income from IGOS was reported on

petitioner's 1976 return. Petitioner reported $120,000 as income

attributable to IGOS on his 1978 Federal income tax return.

Respondent now concedes a portion of the earlier positions and

contends only that petitioner failed to report $130,769.02 in

1976 commissions from Ingersoll-Rand. This amount consists of

the alleged $120,000 distribution from IGOS described by Mr.

Shirazi in his affidavit and the equivalent of $10,769.02

deposited in the form of British pounds in the Zand FNCB London

account.

K. Morgan

Although there was no written agreement or contract between

Morgan and Diesel Power, petitioner, or CTC, there apparently was
 - 65 -

an understanding to combine resources in sales of equipment to

certain companies, and to split evenly between Morgan, on the one

hand, and Diesel Power or CTC, on the other, the net commissions

resulting therefrom. This understanding was variously described

internally by a Morgan employee as "a joint venture with Diesel

Power", and by CTC employees as "the Morgan/Zand marriage" or the

"Zand/Morgan agreement". During 1975 petitioner and CTC

employees were involved in providing quotations and negotiating

orders for equipment under this arrangement. However, Diesel

Power employees furnished most of this service from Teheran.

Petitioner and CTC employees kept track of Morgan commissions and

made the decisions as to when Morgan commissions that were due

would be paid, in what amounts, and to whom. Morgan sometimes

corresponded with Diesel Power about orders and commissions, and

Diesel Power employees also kept CTC informed about commissions

that were due or had been paid. CTC also was involved in billing

Morgan for its share of certain expenses that Morgan apparently

had agreed to share with Diesel Power or CTC, sending a copy of

one such bill to Diesel Power.

L. Payments by Morgan

In the notice of deficiency for 1976 respondent increased

petitioner's income from Morgan by $473,552.70, $24,219.46 of

which was itemized as "PER BOOKS UNREPORTED" and $449,333.24 of
 - 66 -

which was itemized as "OTHER UNREPORTED". During 1975 or 1976

Morgan issued two checks totaling $200,000 to CTC, which were

recorded on CTC's 1976 receipts journal as commissions for CTC

and deposited in the CTC CNB account. These two checks are not

at issue. Morgan also issued seven checks to Diesel Power

totaling $525,786.48, which were not recorded in CTC's journal

for either 1975 or 1976. These checks were deposited in either

the Diesel Power Bank of America account or the Bank of Teheran

in the name of Diesel Power. Four of the seven Diesel Power

checks were issued by Morgan in accordance with explicit

instructions from petitioner.

In the notice of deficiency for 1977 respondent increased

petitioner's income for "SALES COMMISSIONS D.P.T.C." in the

amount of $179,224.28. Respondent contends that $56,302.97 of

this increase was attributable to commissions for Diesel Power

from Morgan. CTC's 1977 receipts journal reflects receipt from

Morgan of a total of $85,594.63, all of which was deposited in

the CTC CNB account. This amount is allocated in the CTC

receipts journal as $29,291.66 in CTC commissions and $56,302.97

in Diesel Power commissions.

M. Harnischfeger

On July 17, 1972, Harnischfeger International Corporation

S.A. (Harnischfeger) and Diesel Power entered into a distributor
 - 67 -

agreement. Petitioner signed the agreement as chairman of Diesel

Power. The agreement provided for Diesel Power to market

Harnischfeger construction equipment in Iran. In a letter of the

same date to petitioner, Harnischfeger proposed to amend certain

provisions of the distributor agreement. Petitioner accepted

these amendments on August 25, 1972. On May 24, 1976, a new

distributor agreement very similar to the 1972 agreement was

entered into between Harnischfeger and Diesel Power. Again,

petitioner signed the new agreement as chairman of Diesel Power.

From 1972 through 1976 there was considerable direct contact

between Diesel Power employees and Harnischfeger. I.J. Zand of

Diesel Power communicated directly with Harnischfeger concerning

price quotes and sales of Harnischfeger equipment. However, CTC

continued in its normal role of controlling the payment of

commissions by issuing the bills. In 1975 CTC employees

submitted a quotation for Harnischfeger equipment to a company in

the United States and contacted Harnischfeger concerning trade

fairs, where equipment would be displayed. Expressing

dissatisfaction with the sales and service coverage by Diesel

Power over the previous few years, Harnischfeger terminated the

1976 distributor agreement with Diesel Power by a letter

addressed to petitioner dated September 1976, pursuant to the 30-

day notification provision in the agreement. On at least four
 - 68 -

occasions in 1977 Mrs. Conway, on behalf of CTC, sent letters to

Harnischfeger requesting commission payments payable to Diesel

Power.

N. Payments by Harnischfeger

In the notice of deficiency for 1974, respondent increased

petitioner's "per books unreported" income from Harnischfeger by

$525.41. No payments from Harnischfeger are reflected in the CTC

receipts journal. That journal does reflect a payment from a

company called Parker Hannifin (allegations pertaining to which

will be discussed later under "Miscellaneous Companies") in the

amount of $875.68. Of this payment $525.41 was recorded as a

commission to Diesel Power, and $350.27 was listed as a

commission to CTC. This payment from Parker Hannifin was

deposited in the CTC CNB account. Respondent proposes to

increase petitioner's income from Parker Hannifin by an amount

which apparently does not include this payment. The parties do

not address respondent's 1974 "per books" income from

Harnischfeger in their briefs, nor do they explain why respondent

alleges an amount from Harnischfeger that is equivalent to the

amount of a stipulated payment from Parker Hannifin.

In the notice of deficiency for 1975 respondent increased

petitioner's income from Harnischfeger by $78,000. In March

1975, a bill for $130,000 in commissions with petitioner's
 - 69 -

signature on CTC stationery was sent to Harnischfeger asking that

payment be sent to CTC. In April 1975, Harnischfeger issued a

check to CTC in the amount of $130,000, which was deposited into

the CTC CNB account. This amount was recorded in CTC's 1975 cash

receipts journal as $52,000 in commissions to CTC and $78,000 in

commissions to Diesel Power. Neither CTC nor petitioner included

the $78,000 amount attributed to Diesel Power in income for 1975.

In the notice of deficiency for 1976 respondent increased

petitioner's income from Harnischfeger by $33,809.71. During

1976 Harnischfeger, upon instructions from a CTC employee, issued

checks payable to CTC in the total amount of $56,349.52. These

checks were deposited into the CTC CNB account. They were

recorded as commissions for CTC of $22,539.81 and for Diesel

Power of $33,809.71.

In the notice of deficiency for 1977, respondent increased

petitioner's income for "SALES COMMISSIONS D.P.T.C." in the

amount of $179,224.28. Of this amount $56,158.59 was

attributable to commissions for Diesel Power from Harnischfeger.

The CTC receipts journal for 1977 lists receipt from

Harnischfeger of a total amount of $93,597.66, which was

deposited into the CTC CNB account. That journal allocated

$37,439.07 as commissions for CTC and $56,158.59 as commissions

for Diesel Power.
 - 70 -

O. Pioneer

On March 3, 1958, Pioneer Engineering (Pioneer) and CTC

entered into an export distributors agreement. This agreement

was signed by petitioner as General Manager and proprietor of

CTC. At that time, Pioneer was a division of Poor & Company,

Inc. The distributors agreement between Pioneer and CTC was

amended with regard to matters not at issue here by an addendum

of June 12, 1964. Petitioner executed this amendment on behalf

of CTC. Subsequently, Pioneer merged with Poor & Company to

become Portec, Inc. (Portec), and Pioneer became a division of

Portec. For convenience, we refer to Pioneer as the company with

which the relevant transactions occurred.

During the years at issue there was communication between

Diesel Power and CTC about Pioneer because Diesel Power helped to

process Pioneer orders. Most of the correspondence was about

Pioneer orders and commissions. Some messages asked for follow-

up on requests from Pioneer. In April 1976, Diana Khalatbari

circulated a memo to several Diesel Power employees and to

petitioner concerning the potential for increasing Pioneer

asphalt equipment sales.

There also were direct dealings between Pioneer and Diesel

Power. Some letters were in appreciation for Diana and Farshid

Khalatbari's time during trips by Pioneer executives to Iran.
 - 71 -

Pioneer and Diesel Power also corresponded directly with each

other concerning orders and customer requests. Correspondence

between Pioneer and Diesel Power indicated that courtesy copies

consistently were sent to CTC. In March 1975, Diesel Power

directly sent a Pioneer price quotation to the Ministry of

Commerce. In August 1976, Mrs. Meier, of CTC, informed Pioneer

that Diesel Power had a new sales manager, Mr. A. Ryhani, and

invited Portec to meet with Mr. Ryhani concerning Pioneer

products.

The general manager and vice president of Portec during the

years 1973 to 1980 was under the impression that petitioner, CTC,

and Diesel Power were one and the same. Pioneer listed CTC as a

customer in the journal records Pioneer kept during 1975 and

1976. In correspondence from Pioneer to Diesel Power, Pioneer

appeared to consider CTC and Diesel Power to be the same company.

CTC helped to confirm this impression by corresponding on behalf

of Diesel Power. Consequently, on matters of importance, Pioneer

corresponded directly with CTC. In an April 1975 letter Pioneer

informed CTC that all contracts in excess of $5 million had to be

approved by Pioneer. In August 1975, Mrs. Meier asked Pioneer to

have Iranian customers not correspond directly with Pioneer but

through Diesel Power. In addition, Pioneer and CTC corresponded

directly about orders and prices.
 - 72 -

CTC also was responsible for Pioneer commissions. In

October 1975, Pioneer confirmed a telephone conversation with

Mrs. Meier concerning a commission and requested instructions

regarding payment. CTC and Pioneer corresponded in December 1975

and the following month concerning commissions on certain orders.

In a letter dated February 18, 1976, Mrs. Conway, of CTC,

requested payment of a commission in the amount of $232,615.80

payable to Diesel Power and further stated: "There should be no

mention of the source of this request, i.e., Caspian Trading

Company." The letter also requests issuance of a commission

check in the amount of $56,161.89 payable to CTC. A memo to the

file dated June 1, 1976, summarizes commissions from Pioneer.

Regardless of the direct dealings between Diesel Power and

Pioneer, petitioner was in control of the distributor agreement

with Pioneer. On December 19, 1974, Pioneer wrote to CTC as

follows:

we should bring the Distributor Agreements up to date; and
in reviewing this, we note that our agreement form is the
old form of Pioneer Engineering rather than Pioneer Division
of PORTEC. This in itself would be OK; however, the
existing agreement was executed between ourselves and
Caspian Trading of Columbus.

In the file on your company there is a letter dated
July 30, 1959, to Diesel Power Trading pointing out that our
distributor in Iran is actually Diesel Power Trading and
because of this, it would be more proper to have the
agreements made out in that name rather than Caspian
Trading.
 - 73 -

According to this older letter, new agreements making this
change were sent with the letter; however, I am unable to
locate them here.

Rather than getting into piecemeal amendments, it would be
more practical to do it all at once. I do feel that our
earlier letter was correct in that our dealer is actually
Diesel Power Trading, rather than Caspian Trading. Would
you please check this out and confirm to us that we should
make out new agreements listing Diesel Power Trading.

At the bottom of this letter, there is a handwritten note in blue

pen: "Mr. Zand: should new agreement be in name of Diesel PTC?"

and another handwritten note in red pen indicating "Yes". In

April 1975, Mrs. Meier asked Pioneer to send a letter addressed

to "to whom it may concern", stating that "Diesel Power Company,

Teheran, Iran, is your authorized and exclusive distributor in

Iran." She explained in her letter that Mr. Khalatbari had

informed her that "this is required for purposes of prequalifying

Pioneer on some forthcoming inquiries being issued by various

governmental departments." On April 25, 1975, a letter from

Pioneer responded to Mrs. Meier's request as follows: "By means

of this letter we confirm that our authorized and exclusive

distributor in Iran is Diesel Power Company." The distributor

agreement between CTC and Pioneer was never amended to replace

CTC with Diesel Power as the authorized distributor.

By letter dated July 14, 1978, Pioneer terminated its

distributor agreement with CTC. Petitioner received and accepted

the termination on behalf of CTC on July 17, 1978. In his
 - 74 -

July 17, 1978, letter accepting termination, petitioner stated

that he agreed with Pioneer that "until such time as we have

created a substitute for Diesel Power, which has ceased to exist

and operate as the company that I created in 1958, you had no

choice but to cancel our agreement." He further stated: "I will

be creating a representation outlet for your line in Iran * * * .

We are not about to leave you without representation as we

continue to feel obligated to serve your interests in Iran." In

a letter dated May 18, 1979, petitioner represented to Pioneer

that Diesel Power had no interest in or right to a sales

commission of $121,813.43 earned on a particular order; that CTC

was entitled to this commission; and that CTC would hold Pioneer

harmless against any claim that Diesel Power might assert with

regard to this commission. Along with a letter 1 week later,

Pioneer sent a commission check to petitioner and expressed

regret that this might be the last business transaction between

Pioneer and CTC.

P. Payments by Pioneer

In the notice of deficiency for 1973 respondent increased

petitioner's income from Pioneer in the amount of $1,440.47. The

1973 CTC receipts journal lists a payment from Pioneer of

$16,838.31. This payment was deposited in the CTC CNB account.

$1,156.75 of this payment is recorded in the CTC receipts journal
 - 75 -

as a commission for Diesel Power; $771.17 is reported as a

commission for CTC; and $14,891.74 is recorded as a "cost of

purchase." The 1973 receipts journal also reflects a payment

from Pioneer in the amount of $472.86. This payment was

deposited in the CTC CNB account. Of this amount $283.72 was

recorded in the CTC receipts journal as a commission for Diesel

Power, and $189.14 was recorded as a commission for CTC.

In the notice of deficiency for 1974 respondent determined

an adjustment to income from Pioneer Portec in the amount of

$269.31. The 1974 CTC receipts journal lists receipt of a

payment from Pioneer in the amount of $448.85. This payment was

deposited in the CTC CNB account. The CTC receipts journal

records $269.31 of this payment as commissions for Diesel Power

and $179.54 as commissions for CTC.

In the notice of deficiency for 1975 respondent increased

petitioner's income from Pioneer by $300,090.87. During the

taxable year 1975 Pioneer issued two checks payable to CTC in the

total amount of $400,121.15, both of which were deposited in the

CTC CNB account. The 1975 CTC receipts journal records a total

of $100,030.28 as Pioneer commissions for CTC and a total of

$300,090.87 as Pioneer commissions for Diesel Power. Petitioner

reported on his 1975 income tax return the $100,030.28 recorded
 - 76 -

as CTC commissions. Petitioner did not report on his 1975 income

tax return the $300,090.87 recorded as Diesel Power commissions.

In the notice of deficiency for 1976 respondent increased

petitioner's income from Pioneer by $876,850.39 in "Per books"

unreported income and $232,640.80 in "Other" unreported income,

for a total of $1,109,491.19. During the taxable year 1976

Pioneer issued checks payable to CTC in the total amount of

$1,447,634.21. All of these checks were deposited in the CTC CNB

account. The 1976 CTC receipts journal records a total of

$570,783.82 as Pioneer commissions to CTC and $876,850.39 as

Pioneer commissions to Diesel Power. Also during 1976, there was

a wire transfer from Pioneer to the Diesel Power Bank of Teheran

account in amount of $232,615.80, with an additional $25 listed

on the check order for "Airmail or cable charge" and

"Commission". Respondent concedes the additional $25. This wire

transfer was not recorded in the 1976 CTC receipts journal.

In the notice of deficiency for 1977 respondent increased

petitioner's income from Pioneer by $12,201.80. The 1977 CTC

receipts journal lists receipt from Pioneer of $20,336.34, which

was deposited to the CTC CNB account. The journal records

$12,201.80 as commissions to Diesel Power and $8,134.54 as

commissions to CTC.
 - 77 -

In the notice of deficiency for 1978 respondent increased

petitioner's income from Pioneer by $84,293.45. The 1978 CTC

receipts journal notes receipt from Pioneer of $84,293.45. Of

this amount $50,576.07 is recorded as commissions to Diesel

Power, and $33,717.38 is recorded as commissions to CTC.

Q. Galion

Diesel Power and the Galion Iron Works & Manufacturing

Company (Galion) had a direct buyer-seller relationship prior to

the years at issue. Galion sold equipment to Diesel Power by

means of time drafts whereby Diesel Power would resell the Galion

equipment to its customers and, with the payments from those

customers, pay Galion for the time drafts. Diesel Power

defaulted at one point on these time drafts. Mr. Khalatbari, as

managing director of Diesel Power, negotiated and signed an

agreement dated July 28, 1969, between Galion and Diesel Power

restructuring the debt due from Diesel Power to Galion.

Petitioner, as director, officer, and principal shareholder of

Diesel Power, guaranteed payment under the provisions of the

agreement. Neither Mr. Khalatbari nor Diana Zand gave a similar

personal guarantee. Shortly thereafter, in a document dated

December 1, 1969, an export, distributor, sales and service

agreement was executed. The cover page states that the agreement

was between Diesel Power and Galion, but the signature page
 - 78 -

identifies CTC as the distributor. Petitioner signed this

agreement as Owner and General Manager of CTC.

Most of the direct correspondence between Diesel Power and

Galion during the years at issue concerned quotes or orders for

Galion equipment. Other direct correspondence involved minor

matters, such as claims and exhibitions. Diesel Power

corresponded with CTC concerning Galion equipment for orders,

warranty and service procedures, and receipt of checks from

Galion.

CTC corresponded directly with Galion on more important

matters, such as the cancellation of orders, new product lines,

and the payment of commissions. Commissions earned on Galion

equipment that had been shipped to Diesel Power were credited to

CTC. In 1976 petitioner negotiated an additional commission from

Galion with respect to a service fee. On one occasion in 1976,

Mrs. Conway sent a letter to Galion requesting that a check be

sent payable to the Diesel Power Bank of Teheran account and

directed that the check be charged against CTC's commission

account. The letter also contains the following statement:

This transfer should be accompanied by the following
explanation: "Re Galion Equipment." There should be no
mention of the source of this request i.e. Caspian Trading
Company. Diesel Power will handle all other details upon
the Bank of Teheran's receipt of your bank transfer.
 - 79 -

In addition to petitioner's direction of commission

payments, petitioner ultimately was in charge of the Galion

relationship. For example, when a question arose whether a

change of control from one Iranian ministry to another would

affect the acquisition of certain Galion equipment, CTC told

Galion that the new Minister "is a good friend of Mr. Zand's, so

there is no difficulty by this change." Petitioner personally

handled Galion sales to a ministry. CTC employees also confirmed

to others the impression that CTC was ultimately responsible for

Galion sales by corresponding with a potential customer of Galion

equipment with the following language: "Our company name in Iran

is Diesel Power Company." In a letter to another purchaser of

Galion equipment there was a reference to "our Teheran office

Diesel Power". Petitioner's ultimate authority was understood

among various CTC employees. At the bottom of a letter from

Diesel Power to Mrs. Meier in 1976 concerning a rebate that had

been negotiated on some cranes by Mr. Shirazi of Diesel Power, a

handwritten note from "MA" says "ask JJZ"; an apparent response

states "pay to us here 40/60". In 1978 there was evidence that

petitioner still was in control of the Galion relationship. Mr.

Khalatbari did not sign a contract for the sale of Galion

equipment to the Iranian ministry and was described to a CTC

employee by an Iranian business associate as "your man on the
 - 80 -

spot" who was mismanaging petitioner's Iranian business.

Petitioner discussed this problem with Galion and planned, if it

became necessary, to arrange for someone else to sign the

contract on Galion's behalf.

There appears to have been some tension between petitioner

and Diesel Power about the issue of control with respect to

Galion commissions. Mr. Shirazi of Diesel Power sent a letter

during 1975 to Galion stating:

As a result of an organizational change in our company
we have set up new procedures. One of these changes has
been to deal directly with all the manufacturers we
represent. This change has resulted because we have found
Caspian to be over loaded [sic] with work and have been
under tremendous pressure as of late.

The letter indicates that a copy was sent to CTC. Shortly

thereafter, Mrs. Meier wrote to Galion as follows:

I have discussed this at length with Mr. Zand and will be
advising Mr. Shirazi that while Diesel Power may and should
correspond with Galion directly on spare parts matters,
their direct communication should be limited to that and in
all direct communications whether originating from your
office or Diesel Power a blind copy should be sent to
Caspian.

At the request of Mr. Zand, all machinery orders will
continue to be processed through Caspian.

In a letter dated March 17, 1976, Mrs. Conway wrote to a Galion

affiliate in Europe, stating: "As a result of negotiations held

in Teheran in August 1975, between Mr. I. J. Zand of Diesel Power

Company" and Galion, certain commission fees had been paid to
 - 81 -

Diesel Power. The letter requests that the balance of the

commission due be transferred to CTC. A 1975 Galion letter to

one of its European affiliates states that, while the affiliate

had provided commission funds directly to Diesel Power on certain

past shipments, this procedure was "contrary to Caspian Trading's

instructions to us. Mr. Zand called me the other day and advised

me of this." The letter further stated that the correct

procedure was to credit the affiliate's books in the name of

Diesel Power, send a copy of the credit to CTC, and "Await

notification from Caspian as to when and how dispersement is to

be made." This letter shows that a copy was sent to petitioner

but does not show that a copy was sent to Diesel Power.

Petitioner's control over the earning of commissions also is

reflected in a 1976 memo to the Galion file, which states:

Mr. Zand suggested and Farshid graciously agreed that
Caspian retain 100 percent of the profit on the Galion * * *
parts and engine orders yearly until such time as Caspian
covers their overhead. Once Caspian's overhead is
satisfied, then the division is Caspian 75 percent and
Diesel Power 25 percent.

R. Payments by Galion

In the notice of deficiency for 1973 respondent determined

that there was unreported "Per books" income from Galion in the

amount of $170,798.84 and "Other" income from Galion of

$2,368.24. During the taxable year 1973 Galion issued checks

payable to CTC totaling $284,664.74, all of which were deposited
 - 82 -

in the CTC CNB account. The CTC receipts journal for 1973

records commissions from Galion for CTC in the amount of

$113,865.90 and for Diesel Power in the amount of $170,798.84.

The notice of deficiency for 1974 increased petitioner's

commission income from Galion by $60,129.43. During the taxable

year 1974 Galion issued checks payable to CTC in the total amount

of $100,215.71, all of which were deposited in CTC's CNB account.

The 1974 CTC receipts journal records the amount of $40,086.28 as

CTC commissions and $60,129.43 as Diesel Power commissions.

In the notice of deficiency for 1975 respondent increased

petitioner's "Per books" income from Galion by $1,202,188.66 and

"Other" income by $3,780. For the taxable year 1975 Galion

issued checks payable to CTC in the total amount of

$1,870,239.25. These checks were deposited to CTC's CNB account.

Of this total amount $221,069.80 constituted reimbursement to CTC

for costs of purchases. This amount was not included by

petitioner as cost of goods sold on his 1975 return.16 The 1975

CTC receipts journal records $447,231.27 as commissions to CTC.

The remaining $1,202,188.1817 was listed as commissions to Diesel

16
Thus, respondent made no adjustment to petitioner's total Schedule C
income for $221,069.80 in the notice of deficiency for 1975.
17
We note that the stipulation states that the total amount included in
income was $447,231.27 and that, consequently, the net total of the deposits
not included in petitioner's income, as listed in the stipulation, is
$1,201,938.18. We are unable to identify from the 1975 CTC cash receipts
journal two of the deposits listed in the stipulation as having been included
 - 83 -

Power. Respondent now claims that only the $1,201,938.20 is at

issue for 1975, thus apparently conceding the alleged "Other"

income in the notice of deficiency.18

In the notice of deficiency for 1976, respondent increased

petitioner's "Per books" income from Galion by $12,845.78 and

"Other" income by $391,286.34. Respondent now asserts that

$390,843.54 is at issue. During the taxable year 1976, Galion

paid Diesel Power a total amount of $390,843.54. These payments

were deposited in the Diesel Power Bank of Teheran account and

were made pursuant to letters from CTC to Galion requesting the

payments. None of these payments was recorded in the CTC

receipts journal for 1976. Petitioner did not include in his

1976 gross income any portion of the $390,843.54. On June 24,

1976, Galion made a payment to Diesel Power in the amount of

$6,000, payable to the Diesel Power Bank of Teheran account.

There is no record of this amount in CTC's receipts journal for

1976. Respondent appears to have conceded the adjustment in the

notice of deficiency with respect to the $6,000 payment.

in income; therefore, we are unable to ascertain whether the specific amounts
listed in the stipulation are correct, but we assume for our findings that
they are and that there was an error in addition. Because the total amount
included in income is $250 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.
 - 84 -

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.
 - 85 -

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
 - 86 -

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. CTC also instructed Clark to forward checks

directly to CTC. 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
 - 88 -

"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
 - 89 -

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
 - 90 -

letter to Mr. Khalatbari reminding him of the agreement and

asking when payments could be expected. CTC received $325,000

from Mr. Khalatbari in June 1977. 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. Thus, total commission

20
This amount is not in dispute.
 - 91 -

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 Zand FNCB
10,949.35 Zand FNCB
 - 92 -

1,124.55 Zand FNCB
50,658.25 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. These checks were deposited to CTC bank

accounts. 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. CTC did not include this

amount in income. 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. During 1976 Clark paid CTC

$19,754.24. 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:
 - 96 -

CTC Diesel Power
Payor Amount Commission Commission

Rosco
Mfg. Co. $1,003.32 $401.33 $601.99
Euclid 106.02 42.41 63.61
American
Hoist 116.97 46.79 70.18
Iran
Aircraft 24,181.00 2,648.39 3,972.58
Morrison
Knudson 18,377.47 275.95 413.92
Parker-Hannifin 917.37 366.95 550.42
Atlantic 11,537.00 591.35 887.03
Richfield

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 Diesel Power
Payor Amount Commission Commission

GM-Lavan $1,632.85 $170.71 $256.06
G. Power-
Gould 1,635.36 654.14 981.22
 - 97 -

Clemco-
Holland 446.22 267.73 178.49
Rosco
Mfg. Co. 1,263.76 505.50 758.26
L.J. Stone 609.17 243.67 365.50
Atlantic
Richfield 19,171.30 967.20 1,450.80
Parker
Hannifin 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.
 - 98 -

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:

CTC Diesel Power
Payor Amount Commission 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:

CTC Diesel Power
Payor Amount Commission Commission

Ateco-
American $991.20 $396.48 $594.72
Houston 49,800.00 3,984.00 5,976.00
Atlantic
Richfield 92.13 (3.68) (5.52)
Parsons
Jurdin 2,730.13 1,092.05 1,638.08
Exxon/
Galion 118,432.26 8,055.08 12,082.61

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:

CTC Diesel Power
Payor Amount Commission Commission

Exxon $147,558.45 $7,301.43 $10,952.15
Orton 5,000.00 2,000.00 3,000.00
Atlantic
Richfield 2.88 .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. Petitioner

was the sole shareholder of WHIP. Named shareholders were

nominees. 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
 - 104 -

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. His

claimed basis in the Diesel Power stock was $3,525,000. 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. Petitioner owned

over 40 percent thereafter until 1977. For the period March 22,
 - 105 -

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
 - 106 -

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.
 - 107 -

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.
 - 108 -

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:
Purchase Debits
Company (Expenditures)

Portec-Pioneer $22,029.00
Kuehnennagel 766.23
Hobart Brothers 5,134.94
Hobart Brothers 36.38
Hobart Brothers 1,006.53
Intersoll Rand, SA 6,930.00
F. Khalatbari 15,233.00
Atlantic Richfield 10,058.62
Galion 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.
 - 109 -

Company Date Purchase (CR)

Morrison-Knudson 01/04/73 $11,546.12
03/12/73 5,134.95
04/13/73 1,006.53
$17,687.60

Galion 05/11/73 335.33

Imico/Imiss 06/07/73 85.00
11/21/73 39,772.00 39,857.00

Pioneer-Portec 07/12/73 14,891.74
07/12/73 18.65 14,910.39
Company Date Purchase (CR)

Iran Aircraft 10/12/73 17,560.03

Atl. Richfield 11/01/73 10,058.62

Massey Insurance 449.50
Pioneer Ret. ck 03/20/73 22,029.00
Total purchase credits $122,888.47

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.
 - 110 -

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
 - 111 -

$18,043.44, respectively, for the years 1973 through 1977. He

deducted these amounts. 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. Petitioner deducted these amounts as

a commission expense. 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. He was not

employed by CTC. He did not render any services to CTC or to

petitioner. 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.
 - 112 -

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. This

amount was deducted as a commission expense. 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
 - 113 -

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. Petitioner

provided her with funds for her schooling. 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. An agreement was reached on March 14,

1974. 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
 - 114 -

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. Petitioner deducted this amount

in 1975. Petitioner presented no evidence of how the $1,000 was

spent. 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
 - 115 -

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 assisted in redecorating

CTC's offices, kitchen, and conference room. The payment of

$1,500 was in settlement of a disputed bill. Although not a

commission expense, it was an ordinary and necessary business of

CTC, petitioner's sole proprietorship.

In 1978 petitioner paid $500 to Celia Longenbaker, an

employee of Caspian Development Company (CDC), and $736.54 to TWA

for a Mr. Rayhanni's travel expenses to Chicago. Petitioner

deducted these amounts as commission expenses in 1978. There is

no evidence in the record of the business purpose of Mr.

Rayhanni's travel to Chicago nor an explanation why the $500

check was written to Celia Longenbaker. Therefore, this claimed

commission expense is not an ordinary and necessary business

expense of petitioner.

E. Claimed Deductions for Consulting Fees

Larry Castoe was a stockbroker who provided brokerage and

financial services to petitioner, Diesel Power, and others.

Petitioner purchased stock through Mr. Castoe on one or two

occasions as did Mr. Khalatbari. Petitioner provided Mr. Castoe
 - 116 -

with office space and paid him a monthly fee; petitioner also

paid for various office supplies, stock exchange fees, and

financial publications and services. Petitioner claimed

professional fee deductions of $9,312.49 in 1976 for payments

made on behalf of Mr. Castoe. Petitioner also claimed consulting

fee deductions in the amounts of $18,266.10 in 1977, $14,377.13

in 1978, and $12,445.39 in 1979 for fees paid to or on behalf of

Mr. Castoe. Petitioner did not have an extensive investment

portfolio during the years at issue. Other than through earnings

and capital gains on his investments, there is no evidence

showing how petitioner was to personally profit from Mr. Castoe's

activities. Therefore, the claimed deductions for consulting

fees and professional fees were not ordinary and necessary

business expenses of petitioner.

In 1978 petitioner and Harris Corporation reached an

agreement whereby he would provide aid and assistance to Harris

Corporation in its areas of foreign operations for a period of 10

years for which he would be compensated $300,000 per year. The

agreement provided that all matters with respect to Harris'

operations would remain confidential; petitioner had no authority

to bind or obligate Harris without specific written

authorization. Petitioner engaged his brother, I.J. Zand, to

assist him in providing services to Harris Corporation and agreed

to split the fees to be paid by Harris Corporation with his
 - 117 -

brother. Petitioner paid I.J. Zand $100,000 in 1978 and deducted

that amount on his 1978 Federal income tax return. Respondent

has conceded that this payment was deductible in 1978. CTC's

1979 disbursement journal lists an account payable to I.J. Zand

on June 15, 1979, in the amount of $50,000. However, neither

petitioner's books nor other evidence show when this account

payable to I.J. Zand was paid, if at all. Petitioner deducted

the $50,000 on his 1979 income tax return. Therefore, the

consulting fee in the amount of $50,000 to I.J. Zand is not

deductible by petitioner in 1979 because he has not shown that

the amount was paid.

F. Claimed Deductions for Management Fees

Caspian Development Company (CDC) was incorporated on

September 17, 1976, and 100 shares of stock were issued.

Petitioner held 51 voting shares, Mr. Khalatbari held 24 voting

shares, Diana Khalatbari held 24 nonvoting shares, and Priscilla

Meier held 1 nonvoting share. The officers of CDC were

petitioner, president; Joe Dinunzio (petitioner's son-in-law),

vice president; Clem Meier, vice president; and Priscilla Meier,

secretary.

CDC was described as a payroll company. CDC had a number of

subsidiaries during the years at issue, including Caspian

Electric Company, Caspian Farms Systems, Caspian Machinery, and

Charleston, Inc. In addition, CDC owned Madison County Farm.
 - 118 -

CDC was also a 70 percent partner in Green Prairie Partnership,

whose principal asset was a farm in Alabama; and CDC was a 50-

percent partner in Franklin Green Partnership whose principal

assets were buildings on the Bowling Green Farm (another farm

partnership). Petitioner and Clem Meier each held a 25-percent

partnership interest in the Franklin Green Partnership.

Petitioner claimed a CDC management fee expense on his 1977

Federal income tax return in the amount of $96,396. There is no

evidence showing either how this amount was determined or what

services CDC rendered to petitioner for this fee. Furthermore,

Mr. Dutton, petitioner's 1977 return preparer, could not confirm

that a disbursement on June 22, 1977, in the amount of $100,000

to CDC was for a management fee or for any other specific

services. Therefore, the claimed management fee deduction of

$96,396 neither is an ordinary and necessary business expense of

petitioner nor was paid.

The CDC management fee expense claimed for the year 1978 in

the amount of $72,609 consists of wages, payroll taxes on wages,

a management fee equal to 10 percent of the wage expense, and

rent, less a rent credit. There is nothing in the record to show

that the purpose of the wage expense percentage was a management

fee. Furthermore, instead of reporting the rent credit (the rent

expense of CDC to petitioner) on his 1978 Federal income tax
 - 119 -

return, petitioner offset the amount claimed as a management fee

expense by the amount of the rent credit received.

During 1979 petitioner computed a management fee payable to

CDC in the amount of $67,943 in a similar manner. However,

petitioner failed to offset the amount claimed as a management

fee expense by the rent credit, which was $16,269. Petitioner

also did not report the rent credit as rental income on his 1979

tax return. The computation of the management fee for 1979 lists

two accounts payable to CDC in the amounts of $44,475.29 and

$7,198.69.

Petitioner has not substantiated that the alleged management

fees claimed in 1978 and 1979 to CDC were actually paid.

Although petitioner's cash disbursements journal for 1978 lists a

number of payments to CDC, the purpose for most of the payments

is not identified, and none of the listed payments match the

amounts reflected in Exhibit 3138. Furthermore, during 1978 CDC

owed petitioner $1,303,460 for loans or similar debts. Certain

other payments reflected in the 1978 disbursements journal are

listed under a column identified as rent. These amounts pertain

to the deduction claimed on petitioner's Schedule C for 1978 rent

expense of $31,842.

During 1979 petitioner did not issue any checks to CDC in

payment of the claimed management fees. The cash disbursements
 - 120 -

journal for 1979 does not list any disbursements from CTC to CDC

as payment of management fees.

Thus, petitioner presented no evidence that the management

fees for 1978 and 1979 were paid; likewise, there is no evidence

of specific offsets made in payment of the management fees for

which the deductions were claimed. Therefore, these claimed

management fees for 1978 and 1979 are not deductible by

petitioner because they are not his ordinary and necessary

business expenses; furthermore, the amounts claimed were not

shown to have been paid.

G. Claimed Deductions for Consulting Fees or Salary

CDC issued two invoices to CTC, dated February 29, 1980, in

the amount of $6,487.83, and April 9, 1980, in the amount of

$461.73. These invoices were offered in support of deductions

claimed for consulting fees and salaries of $102,101 and for

investment counsel fees of $4,500. Petitioner's cash

disbursements journal for 1980 does not reflect payment of these

amounts. Therefore, petitioner is not entitled to deductions

claimed for consulting fees and salaries of $102,101 and

investment counsel fees of $4,500 for 1980 because these amounts

are not his ordinary and necessary business expenses and the

amounts were not paid.
 - 121 -

H. Claimed Deductions for Legal and Professional Fees

In 1975 petitioner paid DuBois Jansson $2,907.34 for

services rendered with respect to acquiring railroad equipment

that would be sold to the Iranian State Railway. Petitioner

deducted this amount on his 1975 Federal income tax return. On

his tax returns and in his books and records for the years 1973

through 1977 petitioner took the position that the income from

only 40 percent of the products sold to Iranian State Railways

was taxable to him. Petitioner contends that the income from the

remaining 60 percent of the products sold constituted income of

Diesel Power. Because we have found that all of the income was

petitioner's, he is entitled to deduct professional fees of

$2,907.34 paid to DuBois Jansson for 1975.

During the years 1976, 1977, and 1978 petitioner deducted

legal fees paid to the law firm of George, Greek, King, McMahon &

McConnaughey in amounts that were at least $57,921.08,

$57,419.26, and $25,059.21, respectively. These fees were paid

for a variety of services, including acquisitions of real estate,

matters involving the Harris Corporation, handling the

arbitration of a dispute between Clark and Diesel Power, handling

a home purchase matter for petitioner's brother, Monty Zand,

landlord-tenant issues, research concerning joint ventures,

matters involving insurance and pension plans, tax matters,

preparations of a will and trust, and a number of conferences
 - 122 -

concerning various farms. Of the total amounts paid to the

George, Greek law firm for the years 1976, 1977, and 1978, the

amounts of $20,607,58 (1976), $17,950.59 (1977), and $6,315.68

(1978) were paid with respect to the Clark arbitration involving

Diesel Power.

Other legal and professional fees paid by petitioner with

respect to the Clark arbitration matter involving Diesel Power

were payments to the law firm of Walder, Wyss, & Maier in the

amounts of $1,400.85 for 1976 and $761.71 for 1977, Coudert

Freres in the amount of $500 in 1976, and a deposit paid to A.

Sarasin & Cie in the amount of $22,500 in 1977.

When Clark canceled its distributorship with Diesel Power,

Diesel Power was left with Clark equipment inventory on hand that

it could not sell. The distributorship agreement provided for

arbitration to resolve such disputes. In this matter Diesel

Power was represented by the George, Greek, law firm.

The legal and professional fees claimed by petitioner as

paid to George, Greek in the amounts of $57,921.08, $57,419.26,

and $25,059.21 for the years 1976, 1977, and 1978, respectively,

are not deductible because it has not been shown that these

amounts were ordinary and necessary business expenses of

petitioner. The legal and professional fees deducted by

petitioner concerning the Clark arbitration matter and paid to

Walder, Wyss & Maier in the amount of $1,485 for 1976 and $761.71
 - 123 -

for 1977, and to Coudert Freres in the amount of $22,500 in 1977

are not deductible because they were not ordinary and necessary

business expenses of petitioner.

The professional fee claimed by petitioner in the amount of

$9,312.49 in 1976 paid to Larry Castoe was not his ordinary and

necessary business expense.

During 1976 petitioner paid $19,799.12 to J. Foley, an

architect. This amount is includes $4,779.12 paid with respect

to a housing project for General Dynamics and $15,000 paid with

respect to the purchase and construction of the building on

Riverside Drive that housed CTC's operations. For the years at

issue petitioner reported no income from General Dynamics or a

housing project. These professional fees were not ordinary and

necessary business expenses of petitioner. Instead, they were

capital expenditures.

In 1977 petitioner paid the accounting firm of Price

Waterhouse & Company the amount of $2,425.20 for Price

Waterhouse's annual fees as resident agent for WHIP, a Bahamian

corporation. He deducted this amount on his 1977 return. This

payment was an ordinary and necessary business expense of

petitioner because WHIP was merely a shell corporation.

In 1978 petitioner issued two checks in the total amount of

$5,000 to Sandra Rossi and Celia Longenbaker. These payments

were recorded in CTC's journal as payment for Mr. Shamloo, an
 - 124 -

Iranian lawyer. Petitioner deducted these two payments in 1978.

There is no evidence as to the business purpose of these payments

or why they were made to Sandra Rossi and Celia Longenbaker

instead of Mr. Shamloo. Therefore, they are disallowed.

In 1979 petitioner deducted legal fees paid to the New York

law firm of White & Case in the amount of $3,710. Of this amount

$2,660 represents fees paid in connection with the purchase of a

cooperative apartment in New York City for petitioner's daughter.

This amount ($2,660) is disallowed as an ordinary and necessary

business expense of petitioner.

In 1979 petitioner deducted a legal fee paid to the law firm

Chester, Saxbe, Hoffman & Wilcox in the amount of $910. There is

no evidence in the record of the business purpose for this

payment. Therefore, it is disallowed.

I. Claimed Deductions for Salaries and Wages

In 1974 and 1976 petitioner paid his brother, I.J. Zand,

$9,000 and $5,000, respectively. Petitioner deducted these

amounts as salaries or wages. I.J. Zand was not paid the amounts

due to any employment by CTC or petitioner. Rather, I.J. Zand

was an employee of Diesel Power from 1971 through 1976.

Therefore, the deducted amounts are disallowed.

J. Claimed Deductions for Office Expenses

In 1973 petitioner acquired a desk costing $1,202.24 and

other furniture costing $296.25. He expensed these purchases and
 - 125 -

claimed depreciation on a desk with a basis of $1,202.24 and on

furniture with a basis of $296.25. These furniture costs were

not an ordinary and necessary business expenses. Instead, they

were capital expenses.

In 1974 petitioner acquired a Morgan desk costing $592.28, a

Lazarus office machine costing $258.76, a Morgan desk costing

$954.97, an IBM typewriter costing $696, and telephone equipment

costing $1,518.40. He deducted these items on his 1974 return.

They were not ordinary and necessary business expenses; they were

capital expenses.

For the years 1975 and 1976 petitioner claimed deductions

for office furniture and equipment in the amounts of $16,873.59

and $4,407.96, respectively. There is no evidence in the record

regarding these expenditures. In the notice of deficiency for

the years 1975 and 1976 respondent capitalized various items of

office furniture and equipment, and these amounts were set forth

in the depreciation schedule attached to the notice. These

expenditures were not ordinary and necessary business expenses

but were capital expenditures.

In 1973 petitioner purchased briefcases from Albanese in the

amount of $1,500 and Bruni in the amount of $350 that were given

to various Iranians. He deducted these purchases. He also

claimed a deduction in 1973 for Christmas gifts in the amount of

$404.80. There is no evidence in the record regarding the
 - 126 -

recipients of the Christmas gifts and briefcases, the business

purpose for the gifts, or the amount in gifts to any one

individual for the year. Therefore, the claimed deductions are

disallowed.

In 1975 petitioner made a payment to Ohio Bell in the amount

of $7,359.75 for a telephone bill dated November 14, 1975, which

contains a one-time charge of $6,626.30 and other charges for

services of $661.16. Petitioner deducted the entire bill of

$7,359.75 on his 1975 return. There is no evidence in the record

as to the type of equipment or service or the business purpose

for the one time charge of $6,626.30. Therefore, it is

disallowed. Respondent concedes the remainder ($661.16).

In 1975 petitioner claimed a deduction for office expenses

of $1,121.29 paid to American Express, a refund of $174.05, a

bank overcharge of $102.36, and insurance premiums of $1,000.

For the year 1977 petitioner claimed office expenses for $25 paid

to the University Club, $85 paid to Susie Strong, $211.05 paid to

Mehdi Sabety, and $100 paid to Donna Stone. There is no evidence

in the record of the business purposes for these payments.

Therefore, they are disallowed.

Petitioner claimed deductions for dues paid to the Columbus

Country Club in the amounts of $45, $585, and $468, and to the

OSU Faculty Club in the amounts of $77, $108, and $99, for the

years 1975, 1976, and 1977. Petitioner also paid golf club dues
 - 127 -

of $250 in 1977. In 1976 his daughter's wedding reception was

held at the Columbus Country Club, and he was billed $7,631.77

for the reception. Petitioner maintained no records comparing

his business use to his personal use of these clubs, nor did he

keep records of the dates that he used the clubs for business

purposes or the nature of their business use. Hence, the office

expenses claimed for the dues paid to the Columbus Country Club

and the OSU Faculty Club are disallowed.

In 1977 petitioner deducted as office expenses $215.22 paid

to Standard Oil and $358.17 paid to Ed Potter. In 1977 he paid

several Standard Oil charges incurred by his son-in-law, Joe

Dinunzio. In 1977 also he paid two auto repair bills made out to

C.J. Maier. The bill dated November 28, 1977, is noted CDC.

These claimed deductions are disallowed.

In 1977 and 1978 petitioner deducted payments to Eva Carlson

in the amounts of $830.11 and $468.12. Eva Carlson later became

Eva Zand. There is no evidence showing the purpose of these

payments. Therefore, they are disallowed.

In 1978 petitioner deducted $9,000 paid as prepaid rent for

the year 1979 for the rental of his son-in-law's, Joe Dinunzio's,

condominium in Naples, Florida. The amount of the rent paid was

based on the estimated fair rental value of the condominium plus

the cost of furnishing it. Mr. Dinunzio acquired the condominium

in the fall of 1978 from the Riviera Condominium Company of
 - 128 -

Naples. Petitioner was a shareholder of the Riveria Condominium

Company of Naples. In 1979 and 1980 petitioner owned two

condominiums in the Riveria Condominium Complex. Clem and

Priscilla Meier also owned a condominium in the same area.

Mr. Dinunzio was no stranger to petitioner. In 1976, at age

20 and while still in college, Mr. Dinunzio married petitioner's

daughter, Sherie. After graduating from college, he began

working for some of the entities that petitioner controlled. For

example, Mr. Dinunzio was vice-president of CDC, Caspian

Machinery, Caspian Electric, and Caspian Florida. Furthermore,

petitioner purchased a home in Columbus for Mr. Dinunzio and his

daughter. Petitioner also provided Mr. Dinunzio with a Cadillac.

Mr. Dinunzio maintained diaries showing who used the

condominium during the years 1979 and 1980. Some of the persons

who used Mr. Dinunzio's condominium were employees of CDC, such

as Cindy Seaman, Celia Longenbaker, Priscilla Meier, Jane

Kellermeyer, Steve Dutton, and Mr. Dinunzio; others who used the

condominium included business associates who wished to bid on

work that was to be done on a building being constructed by CDC,

clients of petitioner, and friends of Mr. Dinunzio.

In addition, for the year 1980 petitioner substantiated

payments in the amount of $3,360.74 for Mr. Dinunzio's Florida

condominium. However, petitioner deducted $4,022.68 with respect

to this condominium as rent expense.
 - 129 -

The rent expenses claimed by petitioner with respect to Mr.

Dinunzio's Florida condominium--$9,000 in 1978 and $4,022.68 in

1980--were not shown to be petitioner's ordinary and necessary

business expenses. Moreover, he has not substantiated that he

paid more than $3,360.74 for 1980.

Additionally, for the year 1980 petitioner deducted as rent

expense $6,451.86 paid for a New York city condominium for his

daughter. This claimed deduction is disallowed.

K. Claimed Deductions for Interest Expenses

In 1967 Mehdi Sabety invested $20,000 through petitioner in

fast-moving General Motors parts or in an entity known as Caspian

International Jordan. Petitioner did not sign a note or incur

personal liability to Mr. Sabety. At the rate of $250 per month

beginning in 1967, Mr. Sabety would receive, in principal and/or

interest, 15 percent of his investment each year the payments

continued.

Petitioner made payments to Mehdi Sabety in the amounts of

$3,000 for 1973, $3,000 for 1974, $2,950.96 for 1975, $3,000 for

1976, and $1,000 for 1977. He claimed interest expense paid to

Mr. Sabety of $3,250 in 1973, $3,000 in 1974, $2,950.96 in 1975,

$3,000 in 1976, and $2,404.80 in 1977. Because petitioner has

failed to prove what part of the payments represented interest

and what part represented principal, these amounts claimed as

interest expenses are disallowed.
 - 130 -

For the year 1975 petitioner claimed an interest expense

paid to Diesel Power in the amount of $137,500.17 on his original

income tax return. Petitioner's amended tax return for 1975

reduced the interest expense paid to Diesel Power by $41,245.39.

On December 30, 1975, petitioner paid Diesel Power $125,000.

This amount is listed in CTC's cash disbursements journal under

the transfer column; it is noted as "interest on loan" drawn by

petitioner. In 1978 his accountant listed this payment as a

transfer.

Petitioner did not introduce into evidence any notes or

other loan documents evidencing a debtor-creditor relationship

between himself and Diesel Power. Testimony presented at trial

with respect to moneys borrowed by petitioner from Diesel Power

was not specific with respect to the amounts of such alleged

loans, dates of such loans, interest rates, or repayment

schedules. Therefore, petitioner is not entitled to any interest

deduction in 1975 for the amount paid to Diesel Power in 1975.

On June 1, 1976, petitioner paid W.P. Glass $24,400.87.

This amount was deducted as interest expense. This payment was

for the purchase of real estate for the A-Z Ranch Partnership.

Therefore, it is not deductible as interest expense.

In 1976 petitioner made three payments to Crown Life

Insurance totaling $178.80. In 1976 he deducted $219.80 as
 - 131 -

interest paid to Crown Life. There is no evidence that these

payments were for interest. Thus, they are disallowed.

On September 10, 1979, three members of the Mirhosseini

family each lent petitioner $80,000. Petitioner agreed to invest

a total sum of $240,000 in his operating companies and to provide

the Mirhosseini family with a return on the principal of 25

percent per year, payable quarterly in advance. During

approximately the same time period petitioner borrowed other

funds at interest rates of 8 percent to 12-1/2 percent. He

deducted as interest paid to the Mirhosseini family $15,000 in

1979, $43,879 in 1980, and $36,000 in 1981. However,

petitioner's journals show no payments to the Mirhosseinis in

1979, 1980, and 1981. Therefore, petitioner is not entitled to

any deduction for interest expense for payments to the

Mirhosseini family in 1979, 1980, and 1981.

In 1977 petitioner created six trusts, two for each of his

three daughters. The two trusts for each daughter were funded

with $25,000 and $75,000. Each of the trusts was for a term of

10 years and 1 day. The three trustees of the trusts were

Priscilla Meier, George Hairston, and David Johnston. The terms

of the trust agreements granted the three trustees investment

discretion. In 1977 trust funds were lent to CDC, a corporation

in which petitioner held a controlling interest. The loans were

repaid to the trusts. On February 5, 1980, the corpus of each
 - 132 -

trust was lent to petitioner with a rate of return of 12 percent

per annum. Petitioner gave a mortgage on his residence and

condominium as security for the loans.

Petitioner claimed deductions for interest paid to the

trusts in the amounts of $30,000 in 1980 and $45,000 in 1981.

Priscilla Meier was an employee of petitioner or CDC.

George Hairston and David Johnston, the other trustees, were

attorneys. The funds in the trusts were invested in entities

controlled by petitioner. The trustees, acting in unison, were

independent and not subordinate or subservient to petitioner, the

grantor. Petitioner is entitled to the deductions for interest

paid to the J.J. Zand trusts for the years 1980 and 1981.

L. Claimed Deductions for Insurance Expenses

Petitioner is entitled to deduct insurance expenses of $825

for 1974 and $1,458 for 1975. He is not entitled to deduct

$1,365 for 1977 because the amount was not identified. In 1980

petitioner paid insurance premiums to McElroy-Minister in the

amount of $5,385. The policy with McElroy-Minister was a

liability policy covering various companies owned by him,

including CDC, CDC's four subsidiaries, and CTC. This amount is

deductible.

M. Claimed Deductions for Dues and Publications

In the notice of deficiency for 1978, 1979, and 1980, and

1981 respondent disallowed deductions claimed for dues and
 - 133 -

publications in the amounts of $2,211, $4,168, $1,979, and

$1,873, respectively. On brief petitioner conceded the amounts

of $1,734.08 for 1978, $624 for 1979, and $624 for 1981.

Respondent conceded $926 for 1979 and $234 for 1980. The

remaining amounts of $476.08 for 1978, $2,618 for 1979, $1,745

for 1980, and $1,249 for 1981 were not ordinary and necessary

business expenses of petitioner, and are, therefore, disallowed.

N. Claimed Deductions for Depreciation

In the notice of deficiency for the years 1973 and 1976

respondent disallowed depreciation claimed by petitioner in the

amounts of $560.90 and $10,902.44, respectively. Petitioner

presented no evidence to refute respondent's determination.

Therefore, the amounts are disallowed.

From 1974 through 1976 petitioner owned an apartment in

Kitzbuhel, an Austrian village located in the Tirol Mountains

noted for its skiing. Petitioner skied in Kitzbuhel and took

skiing lessons there. Petitioner, his family, and his friends

used the Kitzbuhel apartment for personal vacations.

Petitioner claimed depreciation expenses on the Kitzbuhel

apartment in the amounts of $3,366.90 in 1974 and $3,990.91 in

1975. He did not keep any records of the number of days the

Kitzbuhel apartment was used for business compared to the number

of days of personal use. Therefore, he is not entitled to any

depreciation expenses on the Kitzbuhel apartment for the years
 - 134 -

1974 and 1975 because he has not shown that it was an asset used

in his trade or business or for the production of income.

In 1978 petitioner provided Cadillacs to Mr. Dinunzio (his

son-in-law), Mr. Dutton, and Clem and Priscilla Meier, each of

whom was a CDC employee. Petitioner also had an automobile. He

claimed depreciation on automobiles in the amounts of $9,311.30

in 1974, $8,280.80 in 1975, $7,339 in 1977, $13,865 in 1978,

$12,000 in 1979, $12,000 in 1980, and $645 in 1981.

In the notices of deficiency respondent allowed automobile

depreciation of $4,072 in 1974 and $2,068 for each of the years

1978 through 1980.

Petitioner presented no evidence with respect to the basis

claimed for the various automobiles reflected on his depreciation

schedules. He and the employees admitted that the automobiles

were often used for personal purposes. Mr. Dinunzio, Mr. Dutton,

and the Meiers sometimes used the automobiles provided by

petitioner in their employment for CDC or its subsidiaries.

Petitioner is not entitled to depreciation expenses on the

automobiles in excess of the amounts allowed by respondent

because he has not shown the extent to which the automobiles were

used in his trade or business or his bases in the automobiles.

Petitioner is not entitled to a loss of $2,716 claimed on

the trade-in of automobiles for 1978.
 - 135 -

O. Claimed Rental Loss

In 1975 petitioner claimed a rental loss of $41,049.53. In

the notice of deficiency respondent reduced the loss by $35,228.

There is no evidence to support rental expenses claimed by

petitioner in computing his rental loss for the year 1975.

Therefore, it is not allowed.

P. Claimed Rent Expense--London

In 1976 petitioner deducted $10,000 paid to his brother-in-

law and sister, Farshid and Diana Khalatbari, for the use of

their London apartment, limousine, and chauffeur. He did not

present any evidence to show the number of days he used the

London apartment or the business purpose for such use.

Therefore, because petitioner has not shown that this $10,000

rental expense was an ordinary and necessary business expense or

that he satisfied the record-keeping requirements of section 274

with respect to foreign travel, he is not entitled to a deduction

for rental expense.

Q. Claimed Deduction for Loan Origination Fee

On May 25, 1978, petitioner paid W. Lyman Case & Company

$7,000 as a loan origination fee for the purchase of the Madison

County Farm. He deducted this payment in 1978. The Madison

County Farm was owned by CDC in 1978. Therefore, petitioner is

not entitled to the claimed deduction for the loan fee because
 - 136 -

the amount was a capital expense of CDC; it was neither an

ordinary and necessary business expense nor an interest expense

of petitioner.

R. Claimed Moving Expense Deduction

In 1979 petitioner deducted a moving expense paid for Mr.

Dutton in the amount of $1,227. Mr. Dutton was an employee of

CDC. Therefore, it is disallowed because it was not an ordinary

and necessary business expense of petitioner.

S. Investment Tax Credits

In the notices of deficiency respondent allowed additional

investment tax credits in the amounts of $280.60 for 1974,

$1,353.53 for 1975, and $695.15 for 1977. Respondent disallowed

investment tax credits in the amounts of $475.89 for 1976,

$688.24 for 1978, and $599.60 for 1979. Respondent determined

that petitioner is liable for investment tax credit recapture of

$344.58 for 1973. Petitioner presented no evidence with respect

to the investment tax credits set forth in the notices of

deficiency. Therefore, he is not entitled to those investment

tax credits disallowed by respondent, and he is liable for the

investment tax credit recapture.

T. Claimed Deductions for Travel and Entertainment Expenses

For the years 1973 through 1981 petitioner's claimed,

allowed, and disallowed travel and entertainment expenses were as

follows:
 - 137 -

Amount Claimed Amount Allowed Amount Disallowed
Year by Petitioner by Respondent by Respondent

1973 $98,481.64 $78,568.27 $19,913.37
1974 126,068.79 50,784.39 75,284.40
1975 157,946.48 80,631.47 77,315.01
1976 98,578.45 78,578.45 20,000.00
1977 60,184.00 -0- 60,184.00
1978 74,970.00 -0- 74,970.00
1979 41,444.00 -0- 41,444.00
1980 28,368.00 -0- 28,368.00
1981 19,604.00 -0- 19,604.00

Respondent disallowed the above travel and entertainment

expenses on the grounds that (1) they were not petitioner's

ordinary and necessary business expenses, (2) they were not

expended for the purposes designated, or (3) they were not

substantiated in accordance with the requirements of section 274.

For each of the years 1973 through 1979 petitioner kept a

travel diary that reflected both his location and the names of

individuals he met with and entertained. However, in most

instances the business purpose and the place of lodging or

entertainment are omitted. Many of the individuals named in the

diaries, particularly those for 1973 through 1976, had business

relationships with Diesel Power, WHIP, All Patents, and IGOS. No

witnesses named in petitioner's diaries provided testimony

corroborating any specific meeting, entertainment, or expense

reflected in the diaries. Furthermore, petitioner's employees

and office personnel acted pursuant to his directions; hence,
 - 138 -

none of them had independent knowledge pertaining to his

underlying claimed expenses for travel and entertainment.

By the Court's Order dated October 9, 1992, summaries of the

diaries for 1973 (Pet. Exh. 3114), 1974 (Pet. Exh. 3116), 1975

(Pet Exh. 3118), 1976 (Pet. Exh. 3119), 1977 (Pet. Exh. 3120),

1978 (Pet. Exh. 3195), and 1979 (Pet. Exhs. 3202 and 3206), were

not received in evidence. Additionally, because there were no

diaries for 1980 and 1981, the Court did not receive in evidence

petitioner's summaries (Exhs. 3209, 3211, and 3214) of travel and

entertainment expenses claimed for those years.

Petitioner's diaries do not meet the "adequate records"

substantiation requirements necessary to deduct travel and

entertainment expenses pursuant to section 274.

1973

Although petitioner claimed a deduction of $98,481.64 on his

1973 tax return for travel and entertainment expenses, only

$80,192.81 was recorded in CTC's disbursements journal.

Petitioner claimed cash expenses of $17,500, but his travel diary

showed no more than $8,154 in cash expenses. Some of these were

for personal rather than business expenses. His return preparer

estimated petitioner's cash expenses by comparing the number of

checks petitioner wrote for cash with the number of days his

diary shows he was out of the United States. No allowance was

made for any personal travel. Hence, petitioner is not entitled
 - 139 -

to a deduction for travel and entertainment expenses for 1973 in

excess of the amount allowed by respondent.

1974

Although petitioner claimed a deduction of $126,068.70 on

his 1974 tax return for travel and entertainment expenses, only

$76,347.25 was recorded in CTC's disbursements journal.

Petitioner claimed cash expenses of $24,500, but his travel diary

showed no more than $7,495 in cash expenses. Some of these were

for personal rather than business expenses. One of the claimed

travel expenses was a check dated November 22, 1974, to Diesel

Power for $27,618.39 and reflected on petitioner's workpapers as

"Hotel Bill". Again, the return preparer estimated cash expenses

in the same manner as he did for 1973.

Furthermore, petitioner also claimed a $24,000 deduction for

Kitzbuhel office expenses. There is no evidence to support such

claimed expense on Schedule C of his 1974 tax return.

Thus, petitioner is not entitled to a total deduction for

1974 travel and entertainment expenses in excess of the amount

allowed by respondent.

1975

Although petitioner claimed a deduction of $157,946.48 on

his 1975 tax return for travel and entertainment expenses, only

$108,446.48 was recorded in CTC's disbursements journal.

Included in the total amount that he deducted, petitioner claimed
 - 140 -

$24,500 for cash expenses, $15,000 for a London apartment, and

$10,000 for his Kitzbuhel apartment. Also included were resident

membership dues for the Columbus Country Club as well as airline

tickets and hotel bills for Diesel Power employees and their

families. While petitioner claimed $24,500 for cash expenses,

his travel diary showed no more than $9,946 in cash expenses.

Some of these were for personal rather than business expenses.

Petitioner's 1975 workpapers failed to show the amounts of

the checks that he wrote for cash in 1975. Instead, the cash

expense was an estimate based on 270 travel days.

Additionally, the return preparer saw no supporting records,

canceled checks, or other documents to support the $15,000

claimed for the London apartment or the $10,000 claimed for the

Kitzbuhel apartment.

Therefore, petitioner is not entitled to a deduction for

1975 travel and entertainment expenses in excess of the amount

allowed by respondent.

1976

Although petitioner claimed a deduction of $98,578.45 for

travel and entertainment expenses on his 1976 tax return, only

$71,565.24 was recorded in CTC's disbursements journal.

Petitioner claimed cash expenses of $15,000, but his travel diary

showed no more than $7,430 in cash expenses. Similarly, expenses

of $5,000 claimed for Kitzbuhel are not substantiated.
 - 141 -

Some of petitioner's claimed travel and entertainment

expenses were personal. His workpapers do not show the amounts

of the checks for cash that he wrote in 1976.

Consequently, petitioner is not entitled to a deduction for

1976 travel and entertainment expenses in excess of the amount

allowed by respondent.

1977

Although petitioner claimed a deduction of $60,184.24 on his

1977 income tax return for travel and entertainment expenses,

only $42,631.31 was recorded in CTC's disbursements journal.

Petitioner claimed cash expenses of $17,380, but only $6,470 was

shown in his travel diary. At least $4,212.96 was unidentified.

Many of the claimed expenses were personal. Some of the

claimed expenses related to meetings with Bill McCabe concerning

various Florida real estate projects and exploration of business

opportunities in Naples, Florida.

Petitioner has not shown which travel and entertainment

expenses for 1977 were personal and which were business related.

Therefore, he is not entitled to the claimed deduction for that

year.

1978

Petitioner claimed deductions in 1978 for travel and

entertainment of $74,970, cash expenses of $20,000, and car

expenses of $1,537.03. Respondent disallowed all of the
 - 142 -

deductions that petitioner claimed for travel and entertainment,

cash expenses, and car expenses in that year. Only $67,686.10

was recorded on CTC's disbursements journal. Petitioner's travel

diary reflects cash expenses of no more than $6,888. Many of the

cash expenses were personal.

Petitioner's travel and entertainment expenses claimed in

1978 included expenses with respect to his various activities in

Naples, Florida, including activities of the separate

corporations and partnerships of Caspian Development, dealings

with Bill McCabe, and the Gramercy. His claimed travel and

entertainment expenses in 1978 also included expenses relating to

the sale of his Diesel Power stock and his arbitration with Mr.

Khalatbari.

Petitioner has not established which travel and

entertainment expenses for 1978 were personal and which were

business related. Therefore, he is not entitled to the claimed

deduction for that year.

1979

Although petitioner claimed a deduction for 1979 of $41,444

for travel and entertainment expenses and for automobile expenses

of $3,936, only $33,406.04 is recorded in CTC's disbursements

journal. Petitioner conceded $2,141.25 as unidentified.

Travel and entertainment expenses that petitioner claimed in

1979 included expenses relating to various projects in Naples,
 - 143 -

Florida, dealings with Bill McCabe, WHIP and CDC employees, and

his litigation with Mr. Khalatbari concerning petitioner's Diesel

Power stock.

Petitioner has not established that he is entitled to the

claimed deductions for travel and entertainment expenses and

automobile expenses for 1979.

1980

Petitioner claimed a deduction on the 1980 tax return for

travel and entertainment expenses of $28,368 and a deduction for

car expenses of $1,926. Only $10,477.76 is reflected on CTC's

1980 disbursements journal. Petitioner conceded that $7,560.22

of the travel and entertainment expenses claimed on the 1980 tax

return is unidentified. No travel diary is in evidence for 1980.

Petitioner has not established that he is entitled to the

claimed deductions for travel and entertainment expenses and

automobile expenses for 1980.

1981

Petitioner claimed a deduction on the 1981 tax return of

$19,604 for travel and entertainment expenses and $231 for car

expenses. Only $554.88 was recorded in CTC's disbursements

journal. Petitioner conceded that $82 of travel and

entertainment expenses claimed on the 1981 return is

unidentified. No travel diary is in evidence for 1981.
 - 144 -

Petitioner has not proven that he is entitled to the claimed

deductions for travel and entertainment expenses and for

automobile expenses for 1981.

IX. Claimed Dependency Exemption and Charitable Contribution
Deductions

A. Dependency Exemption Deduction Claimed for Tara Daneshvari

For each of the years 1973 and 1974 petitioner claimed a

dependency exemption for Tara Daneshvari. She was the daughter

of Dr. and Mrs. Daneshvari, Iranians who were living in Columbus,

Ohio.

There is no evidence in the record documenting the period of

time that Tara resided with petitioner, the amount of support

provided by him to her, the amount of support provided by Tara's

parents to her, or facts concerning her status as a resident or

nonresident alien. Therefore, petitioner is not entitled to

dependency exemption deductions claimed for Tara for the years

1973 and 1974.

B. Deduction for Charitable Contribution Claimed for Property
Transferred to the City of Columbus, Ohio

On Schedule A of his 1976 Federal income tax return

petitioner claimed $51,662.62 as a charitable contribution

arising from the transfer of a house located on 3404 Riverside

Drive, Columbus, Ohio, to the City of Columbus. Included in the

amount claimed was $13,000 paid by CTC check dated December 22,

1976. This $13,000 check was issued at petitioner's direction to
 - 145 -

the City of Columbus, Department of Recreation and Parks, as a

donation to move the house to the other side of the river where

it was used as a public place. The city did not move the

building until 1977. On December 20, 1976, the City of Columbus

passed an ordinance accepting petitioner's donation of a single

family stucco house containing about 2,300 square feet plus an

attached garage, located at 3404 Riverside Drive, and dedicating

it to public use for recreation and park purposes.

The depreciation schedule attached to petitioner's 1975

income tax return shows that petitioner acquired the house

(identified as adjoining building) and land in October 1975 at a

total cost of $57,334.41. The cost for depreciation purposes was

allocated as $27,333.41 to the house and $30,000 to the land.

This allocation was not challenged by respondent. When the house

was donated to the City of Columbus 14 months later it had a fair

market value of at least $27,333.41. The house was rented

sometime during the period before it was donated to the City of

Columbus. Therefore, petitioner is entitled to a charitable

contribution deduction of $40,333.41 ($27,333.41 plus $13,000) in

1976. No greater deduction is allowed because petitioner did not

prove a fair market value for the house in excess of $27,333.41.

In the notice of deficiency for 1976 respondent determined

that no charitable contribution deduction was allowable because

the property was purchased with the intent to demolish the house.
 - 146 -

C. Deduction for Charitable Contribution Claimed for
Property Transferred to Kenyon College

On the 1979 income tax return petitioner claimed a

charitable contribution deduction in the amount of $657,000

arising out of real estate donated to Kenyon College. This

deduction was reduced to zero in the notice of deficiency by

ordinary income realized.

The claimed charitable contribution consisted of property

owned by the McZand Corporation, a subchapter S corporation, and

listed on its tax return as being acquired for the following

amounts and on dates of purchase indicated:

Land Date Amount

Stoneridge Land 09/77 $511,000
Westgrove Land 05/78 438,000
Pickerington Land 05/78 411,000

The $657,000 amount of the charitable contribution claimed

by petitioner was calculated by determining that the fair market

value of the Stoneridge, Westgrove, and Pickerington tracts was

$1,360,000 (the sum of the properties' costs) less mortgages of

$703,000 for a net value after debt of $657,000.

The McZand Corporation was involved in real estate

development. Initially, petitioner and his children owned 50

percent of McZand Corporation's stock, and David William McCabe,

in his individual capacity or as custodian for his children,

owned the remaining 50 percent. Subsequently, on October 22,
 - 147 -

1979, petitioner acquired all 360 outstanding shares of McZand

Corporation stock. The only amount that the McZand Corporation

characterized as shareholder contribution to capital was $500.

However, as of December 31, 1977, the McZand Corporation

financial records show $324,145.50 of claimed debt due each to

Bill McCabe and the same amount of claimed debt due

(collectively) to petitioner and his children. At the time of

these advances by McCabe and petitioner in September 1977,

additional capital contributions, also in the form of advances,

were contemplated. As of July 1978 the claimed debt amount from

McZand Corporation to McCabe was $532,545.50, with the same

amount shown as a claimed debt to petitioner and his children.

As of December 1979 the claimed debt due from McZand

Corporation to petitioner and his children was $772,827.69, the

same amount claimed due to McCabe. The claimed McZand

Corporation debt to McCabe and to petitioner and his children was

subordinated to bank and development loans. At all times prior

to October 1979 the claimed McZand Corporation debt to

petitioner's family and McCabe was in the same proportion as

McCabe's and petitioner's family's stock holdings. None of the

notes evidencing these debts was secured, nor was there

collateral for them. Although McZand did not pay interest on the

claimed debt, the claimed interest rate was 6 percent. As of

February 1978 the McZand corporate debt to CNB was 8.75 percent.
 - 148 -

McZand Corporation's 1977 financial statement shows that

while the corporation's equity was less than $30,000, its debt

exceeded $725,000. The corporation's December 1978 financial

statement shows that while McZand Corporation's equity was less

than $85,000, its debt exceeded $3 million.

On December 26, 1979, McZand Corporation executed deeds

transferring the Stoneridge, Westgrove, and Pickerington tracts

from McZand's name to petitioner. On the same date petitioner

signed deeds transferring the property to Kenyon College. There

are no documents of record to indicate that petitioner assumed

the mortgage indebtedness on the real estate transferred from

McZand Corporation to petitioner and from petitioner to Kenyon

College.

In computing its taxable income for 1979, McZand Corporation

failed to take into account any realized gain upon the

disposition of one of the three parcels of property transferred

from McZand to petitioner.

According to the McZand Corporation's trial balance

workpapers, the transfer of the properties to petitioner was in

full payment of the note due him. However, at the same time,

petitioner allegedly purchased McZand Corporation's note to

McCabe at less than fair market value.

In March 1980 petitioner transferred his 100-percent

ownership in McZand Corporation to Caspian Florida, a subsidiary
 - 149 -

of CDC. As of March 31, 1980, the McZand note payable to McCabe

in the amount of $772,827.69 had been assigned to petitioner.

Furthermore, as of the March 31, 1980, trial balance the value of

McZand's common stock, all of which was owned by petitioner,

constituted the sole contribution of $500 to McZand's capital.

The claimed debt from McZand Corporation to petitioner and

his children was a capital contribution rather than a loan.

The Stoneridge, Westgrove, and Pickerington properties were

distributed to petitioner for no consideration. As of December

1979 petitioner's disposition of the Stoneridge, Westgrove, and

Pickerington properties would have produced $657,000 of short-

term gain.

Petitioner's claimed deduction for the transfer of property

to Kenyon College is reduced by $657,000; i.e., the amount of

ordinary income or short-term capital gain that would have been

recognized had petitioner sold the property.

X. Claimed Losses From Trusts, Partnerships,
Subchapter S Corporation, and Farming Operations

On his 1976 tax return petitioner claimed a loss of $1,518

for the Yanson Trust which respondent disallowed. There is no

evidence in the record showing that any loss was incurred in 1976

or the amount thereof. Therefore, petitioner is not entitled to

a 1976 loss of $1,518 from the Yanson Trust.
 - 150 -

On the amended tax return for 1979 petitioner claimed a loss

of $23,709. There is no evidence establishing the entity for

which the loss was claimed or any substantiation for it.

Therefore, it is disallowed.

Both the Bowling Green and Franklin Green partnerships were

on the cash method of accounting for tax purposes.

Petitioner claimed Bowling Green partnership losses of

$12,768 in 1979 and $19,073 in 1980. There are no canceled

checks, invoices, or any primary records in evidence for the

Bowling Green partnership for those years. Hence, it cannot be

determined that expenditures were made, producing the claimed

losses. Moreover, the Caspian Farm Systems' corporate journal

shows that Caspian Farm Systems disbursed or paid expenses of

Bowling Green.

Additionally, based on the Schedule K-1 of Bowling Green's

1979 return, all reported debt of $48,749 (excluding accounts

payable) was nonrecourse.

Consequently, there is no evidence of record to establish

either petitioner's basis in the Bowling Green partnership for

the years 1979 or 1980, or that he was economically at risk for

any amount contributed to the partnership. Therefore, petitioner

is not entitled to the Bowling Green partnership losses claimed

for 1979 and 1980.
 - 151 -

Petitioner also claimed losses of $3,596 for 1979 and $4,140

for 1980 from the Franklin Green partnership. However, there are

no invoices, canceled checks, or other primary records of the

Franklin Green partnership in evidence for 1979 and 1980. Hence,

it cannot be established that Franklin Green partnership paid

expenses that were ordinary and necessary expenses resulting in

distributive partnership losses. Therefore, petitioner is not

entitled to the claimed losses from Franklin Green partnership in

computing 1979 and 1980 taxable income.

Similarly, petitioner claimed losses from the McZand

Corporation, a subchapter S corporation, of $11,997 for 1979 and

$39,147 for 1980. He became the sole shareholder of McZand

Corporation in 1979. No canceled checks, invoices, or other

primary records of McZand Corporation for 1979 and 1980 are of

record for these claimed losses. The McZand Corporation's return

for 1979 reported an $85,317 gain from the sale of Westgrove real

estate to petitioner as sole shareholder. However, McZand

Corporation did not include that amount in calculating its

income.

In March 1980 petitioner transferred 100 percent of his

ownership in McZand Corporation to Caspian Florida, a subsidiary

of CDC.

Petitioner is not entitled to McZand Corporation losses of

$11,997 and $39,147 in computing 1979 and 1980 income.
 - 152 -

Likewise, no primary records of Southern Florida Real Estate

Sales Corporation, such as invoices and canceled checks, are in

evidence for the 1979 activity of Southern Florida Real Estate

Sales Corporation or for the loss petitioner claimed from that

entity. Therefore, petitioner is not entitled to a $3,228 loss

from Southern Florida Real Estate Sales in computing 1979 taxable

income.

The only evidence of record for the claimed 1979 Admiralty

Point Trust loss of $2,933 is a $3,000 check payable to Oscar

Yanson with the notation "Admiralty Point venture". There is no

evidence of when any loss was incurred on this real estate

venture. Therefore, petitioner failed to establish that he

incurred a loss of $2,933 from the Admiralty Point Trust in

computing 1979 taxable income.

On the 1979 tax return petitioner claimed a section 1244

loss of $20,895 from Danny's Hideaway. Respondent agrees that

the evidence shows that petitioner incurred a loss when he sold

his stock in Danny's Hideaway during 1979, but there is no

evidence that the ordinary loss provisions of section 1244 are

applicable. There is no evidence that petitioner incurred a

claimed loss from Danny's Hideaway in the year 1980 in the amount

of $5,771. Therefore, that claimed loss is disallowed.

On the 1979 tax return petitioner claimed a farm loss of

$128,458 attributable to a farm called Madison County Farm. On
 - 153 -

the 1980 tax return he claimed deductions for Schedule F farm

expenses of $249,204 for the same farm, all of which were

disallowed by respondent.

The journals and chart of accounts of Caspian Farm Systems

are the only records in evidence for the 1979 disallowed net farm

loss and the 1980 disallowed expenses adjusting the 1980 reported

farm loss to positive farm income. In 1979 and 1980 Caspian Farm

Systems was a corporation and filed consolidated tax returns with

CDC. There are no invoices, canceled checks, or other records in

evidence of payment for the amounts claimed on petitioner's

Schedule F as losses and deductions for 1979 and 1980. There is

also no evidence of record that any portion of the disallowed

expenses paid by petitioner in 1979 and 1980 for the Madison

County Farm were ordinary and necessary expenses currently

deductible. Petitioner presented no evidence that he, as a cash

basis taxpayer, paid any amount during the years 1979 and 1980

for the claimed Madison County deductions. Therefore, in

computing 1979 taxable income, petitioner is not entitled to a

farm loss of $128,458 and, in computing 1980 taxable income, he

is not entitled to deduct unsubstantiated farm expenses of

$249,204.
 - 154 -

ULTIMATE FINDINGS OF FACT

1. Petitioner substantially understated his taxable income

for the years 1972 through 1977.

2. Petitioner substantially overstated his business

expenses, losses, and deductions for the years 1973 through 1981.

3. The underpayments of income taxes which were required to

be included in petitioner's Federal income tax returns for the

years 1972 through 1976 were due to fraud with intent to evade

tax.

4. The assessment and collection of petitioner's Federal

income taxes for 1972 are not barred by the statute of

limitations.

5. Petitioner's omission of substantial amounts of income

and overstatement of expenses and deductions for 1977 were due to

negligence or intentional disregard of rules and regulations.

6. Petitioner's overstatements of business expenses,

deductions, and losses for the years 1978 through 1981 were due

to negligence or intentional disregard of rules and regulations.

OPINION

It is no doubt apparent that these cases involve some

measure of factual and legal complexity. That complexity is

reflected in the magnitude of the record and is exacerbated by

the contentions and arguments of the parties. Not surprisingly,
 - 155 -

our task of finding the facts has been laborious and sometimes

frustrating. We have plodded through 1,917 pages of testimony

from 32 witnesses. The stipulations of fact contain 1,191

paragraphs, and there are over 1,800 exhibits of documentary

evidence in the record. There are some factual inconsistencies

and contradictions which the parties have exploited to their

advantage in 933 pages of briefs. Nevertheless, we have done the

best we can to reconcile conflicting portions of the record,

although we acknowledge that perfect harmony has not been

attainable.

Before considering the substantive issues involved in these

cases, we will address some preliminary issues relating to

procedural and evidentiary matters.

I. Preliminary Issues

A. Burden of Proof

As a general rule, the Commissioner's determinations are

presumed correct, and the taxpayer bears the burden of proving

that those determinations are erroneous. Rule 142(a); United

States v. Janis, 428 U.S. 433, 440-441 (1976); Welch v.

Helvering, 290 U.S. 111, 115 (1933). In addition, deductions are

a matter of legislative grace, and the taxpayer bears the burden

of proving that he is entitled to any deduction claimed. Rule

142(a); New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440

(1934). This includes the burden of substantiation. Hradesky v.
 - 156 -

Commissioner, 65 T.C. 87 (1975), affd. per curiam 540 F.2d 821

(5th Cir. 1976). By contrast, the Commissioner has the burden of

proof with respect to the issue of fraud with intent to evade

tax, and that burden of proof must be carried by clear and

convincing evidence. Sec. 7454(a); Rule 142(b). The

Commissioner also has the burden of proof as to the assertion of

an additional deficiency. Rule 142(a).

Petitioners contend that they have presented sufficient

evidence to establish that respondent's determinations were

erroneous, and, therefore, the burden shifted to respondent to go

forward with the evidence. We disagree. Petitioners have failed

to show on this record that respondent's deficiency

determinations were arbitrary and excessive or, for that matter,

erroneous. Respondent's determinations were made after extensive

and comprehensive audits and after investigation by special

agents of the Internal Revenue Service for possible criminal

income tax evasion. Judged by any standard, respondent's

determinations were reasonable. Consequently, the burden of

going forward with the evidence did not shift to respondent. The

burden of proof with respect to the deficiencies remained with

petitioners. See Marcello v. Commissioner, 380 F.2d 499, 507

(5th Cir. 1967).
 - 157 -

B. Evidentiary Matters

In some respects the parties have indicated disagreement

with, or taken exception to, certain evidentiary rulings made by

Judge Whitaker. While there may be some support for the views

expressed by counsel for the parties, the Court is not inclined

to modify or reverse rulings made by him with regard to

evidentiary matters.

C. New Issues Raised by Petitioner on Brief

For the first time in his brief, petitioner raised three new

issues: (1) A $10,000 charitable contribution to the Teheran

National University in 1974; (2) losses totaling $5,369 in 1975

from IDS/McCullough Oil Programs; and (3) deductions claimed for

business use of automobiles which he has asserted should be

allowed as fringe benefits to employees. These issues were not

raised in any pretrial or posttrial pleadings.

Petitioner did not present canceled checks, receipts, or

other primary records to show a payment of $10,000 to Teheran

National University in 1974. He also offered no evidence that

the Teheran National University was created or organized in the

United States or a possession thereof, or under the laws of the

United States, any State, the District of Columbia, or any

possession of the United States. Moreover, Mr. Giffin,
 - 158 -

petitioner's accountant, did not characterize the alleged $10,000

payment to Teheran National University as a charitable

contribution, as stated in petitioner's brief, but characterized

it as a business expense. There is no evidence to show the

alleged payment of $10,000 to Teheran National University in 1974

was an ordinary and necessary business expense. Accordingly,

petitioner is not entitled to deduct $10,000 as a charitable

contribution or as a business expense for a payment to Teheran

National University.

With respect to the losses claimed in 1975 for the

IDS/McCullough Oil Programs, there are no canceled checks,

invoices, or any primary records in evidence from which it can be

determined that any losses were incurred. There is no evidence

of record establishing petitioner's basis. Consequently, he is

not entitled to the claimed losses.

It is not surprising that petitioner has changed his

position in his brief with respect to the claimed automobile

expenses because the evidence presented shows that records were

not maintained to distinguish between personal and business use

of the automobiles, and that a significant portion of the

automobile use was for the business activities of CDC and other

entities, rather than those of petitioner or CTC. Thus, he
 - 159 -

failed to show that the automobile-related expenses and

depreciation claimed are deductible. Furthermore, on his income

tax returns, petitioner claimed deductions for automobile

expenses and automobile depreciation, not fringe benefits taxable

as compensation to his employees. His position did not change

through trial. But, on brief, petitioner cites cases and

sections of the Internal Revenue Code that hold that an

employee's use of an employer-provided automobile is compensation

to the employee, and that the employer is entitled to a deduction

for providing automobiles to his employees. However, petitioner

presented no evidence that the use of the automobiles by the

employees was intended as compensation. There is no evidence

that the employees' Forms W-2 included an amount for automobile

usage, or that the employees were issued any other income

documents to reflect compensation received as a result of the use

of the automobiles. None of the employees who testified about

their use of the automobiles provided by petitioner claimed that

any usage of the automobile was to be treated as compensation.

We view petitioner's belated argument that the automobile

expenses are taxable as fringe benefits to employees as having

been made because of his inability to show that the automobiles

were used in his trade or business. In short, this fringe
 - 160 -

benefit argument is not supported by any evidence that the

automobiles were intended to be treated as compensation.

Therefore, petitioner is not entitled to deduct the claimed

automobile expenses as fringe benefit payments to his employees.

II. Issues 1,2,3, and 6--Commission and Miscellaneous Income

Turning now to the substantive issues, we first address the

issue of commission income. Under the "assignment of income"

doctrine, it is a fundamental principle of income tax law that

income must be taxed to the person who earned it. United States

v. Basye, 410 U.S. 441, 449-451 (1973). Under this principle, we

must decide on this record who "earned" the commission income

received from the various companies involved with petitioner

during the years in question. In deciding this issue, we attempt

to put some substance into the concept of earning income. On one

hand, we recognize that because "the true earner cannot always be

identified simply by pointing 'to the one actually turning the

spade or dribbling the ball,' this Court has applied a more

refined test--that of who controls the earning of the income."

Fritschle v. Commissioner, 79 T.C. 152, 155 (1982).

But, on the other hand, "the existence of a corporation

formed for a valid business purpose should not be nullified

merely because the shareholders are actively interested in
 - 161 -

assuring the success of the corporation." Ross Glove Co. v.

Commissioner, 60 T.C. 569, 591 (1973). As these statements

demonstrate, particularly in cases involving closely held

corporations, such as is present here, or one-man personal

service corporations, there is a tension between the doctrine

prohibiting the assignment of income and the recognition of a

corporate business form as a separate legal entity from its

owners. Moline Properties, Inc. v. Commissioner, 319 U.S. 436,

438-439 (1943). Here too, in resolving the issue of whether the

individual or his wholly owned corporation is taxable on income

earned through the performance of personal services, the primary

focus is upon whether the individual or the corporation controls

the earning of the income. Bagley v. Commissioner, 85 T.C. 663,

675 (1985), affd. 806 F.2d 169 (8th Cir. 1986); Johnson v.

Commissioner, 78 T.C. 882, 890-891 (1982), affd. without

published opinion 734 F.2d 20 (9th Cir. 1984); Leavell v.

Commissioner, 104 T.C. 140 (1995). A two-prong test has been set

forth by this Court in order for the wholly owned or closely held

corporation, rather than the service-performer employee, to be

considered responsible for the income. First, the service-

performer employee must be an employee of the corporation whom

the corporation has the right to direct or control in some

meaningful sense; and, second, there must exist between the
 - 162 -

corporation and the person or entity using the services a

contract or similar indicium recognizing the corporation's

controlling position. Johnson v. Commissioner, supra at 891.

The essential factor in all of the tests used is control over the

earning of the income in question.25

Before applying these principles to the facts before us, we

will first discuss some of petitioner's contentions. First, he

has spent a significant portion of his brief trying to establish

that Diesel Power did in fact exist, that it had employees and

offices, and that it actually conducted business. He cites at

least one case in his legal argument that deals with "sham"

corporations. Hospital Corp. of America v. Commissioner, 81 T.C.

520 (1983). Respondent has not contended that Diesel Power was a

"sham" or shell corporation, and we, therefore, do not consider

25
We note that this line of cases was expressly created in a situation
where a service-performer employee is supplying most or all of the services
that produce the income in question. The situation before us at first blush
appears to be somewhat different in that many individuals working at Diesel
Power and CTC provided services to carry out the functions of the various
relationships at issue, whether the relationships constituted consultancies,
promotional or representative arrangements, or distributor agreements.
However, at least until the end of 1974, and, in many cases, significantly
after that date, all of these individuals were acting under petitioner's
direction and control, and we conclude therefrom that the services were
performed on his behalf. This would be no different than, for example, the
situation where a physician who forms a personal service corporation employs
assistants, secretaries, and nurses to help earn the income received in
providing medical care. Therefore, the principles expressed in Johnson v.
Commissioner, 78 T.C. 882 (1982), affd. without published opinion 734 F.2d 20
(9th Cir. 1984), and other cases following it are appropriately applied here.
The issue is who controlled the earning of the income, not whose personal
efforts produced it. See Fritschle v. Commissioner, 79 T.C. 152, 155-156
(1982); American Savings Bank v. Commissioner, 56 T.C. 828, 839-842 (1971).
 - 163 -

this aspect of petitioner's contentions because it is not at

issue.

Second, petitioner contends that there was an "agreement"

between himself or CTC and Diesel Power to split commissions in

various percentages. This is the primary theory by means of

which petitioner attempts to justify attributing much of the

income in question on the CTC receipts journal to Diesel Power.

We note that there were a significant number of transfers of

commissions between Diesel Power and CTC during the years at

issue, which tends to support petitioner's argument that there

was some kind of unwritten understanding between Diesel Power and

CTC concerning the splitting of commissions. However, this

"agreement", even if it did exist, is irrelevant to the issue

before us. A voluntary agreement to relinquish the right to

receive income is insufficient. In Lucas v. Earl, 281 U.S. 111

(1930), the taxpayer entered into a contract with his wife

whereby she was entitled to one-half of his income. The Supreme

Court held that under assignment of income principles the entire

amount was taxable to the taxpayer because he could not assign

away income that he earned. Id. at 115. Hence, if petitioner

earned the commissions involved herein, he could not assign them

to Diesel Power. Accordingly, the commission split understanding

was irrelevant. We also note in connection with this alleged

splitting of commissions that there were numerous payments
 - 164 -

directly to Diesel Power that were not reported as income by

petitioner and which respondent did not allocate to petitioner as

income in the deficiency notices. In other words, respondent

appears to concede that Diesel Power did actually earn a

considerable amount of commissions in its own right. The areas

of contention mostly involve commissions that were paid to CTC, a

portion of which were then attributed to Diesel Power on the CTC

receipts journal, as well as certain commissions that were issued

in the name of Diesel Power that were allegedly earned by CTC or

petitioner, but were not reflected on the CTC receipts journal.

Third, petitioner contends that he relinquished his

controlling interest in Diesel Power in 1971 or 1974. He

testified that in 1971 he and Mr. Khalatbari had a dispute

because Mr. Khalatbari wanted to be a Diesel Power shareholder

and that, as a result of this dispute, Mr. Khalatbari left Diesel

Power for a few days. Petitioner then indicated that, when Mr.

Khalatbari returned, petitioner agreed to transfer 60 percent of

his interest in Diesel Power to Mr. and Mrs. Khalatbari. This

agreement was allegedly not "formalized" until 1974. The record

shows that petitioner received 11,750,000 rials for the transfer

of his 60-percent interest. When petitioner transferred the

remainder of his stock to the Khalatbaris in 1977, there is no

disagreement that there was a payment of money. We conclude that

there was in fact a reduction of petitioner's ownership in Diesel
 - 165 -

Power, but that this reduction did not occur until the end of

1974 rather than 1971. Other than his testimony, petitioner did

not present any evidence to support a transfer of stock control

prior to 1974. Given the behavior of petitioner and the

employees involved, as well as the apparent attitudes of those

who dealt with them in business transactions between 1971 and

1974, we question whether petitioner gave up full ownership of

Diesel Power without documentary support before November 1974,

when petitioner sold 60 percent of his interest in Diesel Power

to the Khalatbaris. While this was a "family" business where a

certain amount of informality is to be expected, we think a

transaction of such magnitude, if it had occurred in 1971, would

have been accompanied by some written evidence. Petitioner has

presented none. Therefore, we conclude that petitioner continued

to own 100 percent of Diesel Power until at least November 1974.26

However, it is still possible that petitioner was

sufficiently subject to the direction and control of Diesel Power

in a meaningful sense even prior to the end of 1974, so that it

would be correct to allow its income to be taxed separately from

petitioner within the meaning of Johnson v. Commissioner, 78 T.C.

at 891. Similarly, it also is possible that petitioner retained

26
Similarly, petitioner's statements at trial that Diesel Power
"instructed" CTC to "pursue receipt of commissions and to transfer them to
Diesel Power" is not supported by any contemporaneous documentary evidence.
Documents reviewed by the Court indicate instead that it was at petitioner's
instructions that such pursuit of commissions was accomplished.
 - 166 -

sufficient control over Diesel Power even after he sold his

remaining 40-percent interest in 1977 to be taxed on its income.

Petitioner's relationships with Diesel Power vis-a-vis each

business arrangement differed substantially, and we have

concluded that ownership of Diesel Power was by no means the only

test by which to ascertain control over its earnings. Therefore,

we will examine the facts related to each company with which

petitioner dealt to determine the extent to which petitioner or

Diesel Power was in a meaningful sense independently in control

of the earning of the income in question.

A. Lockheed

The income with respect to payments from Lockheed involves

payments Lockheed made to WHIP, Diesel Power, and Sunvaco during

the years 1972 through 1976.

Petitioner contends that WHIP was intended to be a

completely separate entity that was created at the direction of

Dr. Fallah. Petitioner further contends that he had been

instructed to deposit 80 percent of WHIP's earnings to a Swiss

bank account for Dr. Fallah; the remaining 20 percent was to be

deposited to an account for the benefit of Diesel Power.

Petitioner indicated that neither he nor Diesel Power received

any of the WHIP funds. He also stated that the $610,000 he

withdrew from the WHIP account in 1978 was the Diesel Power share

remaining from the WHIP arrangement.
 - 167 -

However, petitioner's stated belief about these funds has

little to do with the issue of who earned the income. We are

unwilling to base a finding solely upon petitioner's testimony

that there was a WHIP Swiss bank account for the benefit of an

Iranian Government official to which most of the Lockheed

commissions were sent (an arrangement which, we note, may have

been illegal) and that these commissions were directed to such an

account merely because petitioner was following that official's

instructions. Aside from the $610,000 withdrawal in 1978,

petitioner has failed to convince us that he did not actually

receive any of the WHIP funds.

Moreover, regardless of where the WHIP funds actually went,

they were earned primarily through the efforts of petitioner via

his contacts with the Iranian Government. First, WHIP was

entirely subject to petitioner's control: The formation of this

entity was his idea (or so he informed the then Prime Minister of

Iran); he set up the entity; and he managed the entity in that

Price Waterhouse was subject to his control in connection with

the management of WHIP. There is no evidence that Diesel Power

earned these funds. Second, petitioner handled the WHIP accounts

as if they were his own, moving funds around from location to

location at will, and finally withdrawing the remaining $610,000

for himself in 1978 in an attempt to obtain disputed funds from

Diesel Power. This is hardly the behavior that petitioner would
 - 168 -

exhibit if the funds in the WHIP Barclays Bahamas bank account

were subject to the control of Dr. Fallah, Diesel Power, or the

WHIP entity itself. Accordingly, the WHIP funds should have been

reported as income by petitioner.

A significant amount of the Lockheed fees was paid to Diesel

Power on petitioner's instructions and were, therefore, not

included in the CTC receipts journal. Some of these payments

were commissions from the P-3 aircraft sale, and some were not.

To the extent that the payments were based upon the P-3 aircraft

sale, we discuss them in the following paragraph. To the extent

that the payments were not based on the P-3 aircraft, there is

little evidence in the record showing Diesel Power's involvement

in earning the commissions. Petitioner did virtually all of the

planning and implementing of the C-130 Lockheed sales. He signed

the consulting agreements and he modified them to adjust

commissions. There is very little evidence that Diesel Power had

anything to do with these transactions other than to be the named

recipient of some of the checks. Accordingly, we hold that the

entire amount of the Lockheed payments to Diesel Power that

involved anything except the P-3 aircraft sales should have been

reported by petitioner as income.

Both Sunvaco and Diesel Power received commissions from

Lockheed for the sale of P-3 aircraft. The only fee that appears

to be at issue with regard to Sunvaco is the termination fee paid
 - 169 -

in 1976. We think some of the funds paid to Sunvaco as well as

payments to Diesel Power that involved the P-3 aircraft sales

were not entirely petitioner's income. Petitioner contends that

he did not have sufficient experience to market the P-3 airplanes

alone and, in support thereof, directs our attention to a

Lockheed letter stating that it was not Lockheed's intention to

hire only petitioner to market the P-3 aircraft. That letter was

written in response to petitioner's request. Although it was

written in preparation for tax litigation, the letter does

confirm that Lockheed hired not merely petitioner to do this

consulting work to market the P-3 aircraft, but also Mr. Zanganeh

and Mr. Khalatbari as well. This indicates that these two

gentlemen actually performed some of the work for the P-3

aircraft sales independently and at their own expense. We do not

agree with respondent that Mr. Zanganeh and Mr. Khalatbari were

merely petitioner's employees who were compensated for their

services. Hence, Mr. Zanganeh and Mr. Khalatbari earned a

portion of the income. In the absence of any evidence as to what

percentage of the work each man performed, we assume that they

worked equally. Thus, we hold that the portion of the

termination payment to Sunvaco attributable to the sale of the P-

3 aircraft ($100,000) was not income solely to petitioner; he

realized income of only one-third of that amount. With regard to

the payments to Diesel Power involving the P-3 aircraft, we also
 - 170 -

hold that petitioner realized only one-third of the income. The

balance of the Sunvaco termination payment ($381,600) and the

balance of the Diesel Power payments that were not attributable

to the P-3 aircraft should have been entirely reported as

petitioner's income because he was the sole earner.

B. Ashland

Respondent asserts that during the 1973 taxable year Ashland

issued checks payable to petitioner in the amounts of $400,

$5,000, $12,500 and $3,000. However, the exhibit upon which

these allegations are based was admitted into evidence by the

Court's Order of October 9, 1992, only as a summary; hence, we

are not willing to use it as substantive evidence that such

payments were made without any proof that the contents of this

exhibit are correct. However, we note that the $5,000 payment

referred to in the summary was independently confirmed to be a

reimbursement in a letter accompanying the check from Ashland.

Therefore, that amount was not required to be included in

petitioner's income.

With regard to the 1973 payments from Ashland to Interrep,

one of the two documents drawing any link between petitioner and

Interrep was this same summary noted above. For the same reason,

we are unwilling to use it as substantive evidence. The only

other link between petitioner and Interrep is a letter from

Ashland addressed to All Patents and affirmed by petitioner,
 - 171 -

seeking verification that certain payments had been made and had

not been improperly used. One of the payments listed in this

letter was a "Payment to account of Interrep, S.A. for the group

represented by Mr. James Zand". Petitioner testified that he

signed the letter at the airport when he was in a hurry, read the

affirmation at the end of the letter, and did not read the rest

of the letter. He also indicated that he did not recall

receiving any money from Interrep; there is no evidence to the

contrary. We conclude that the record does not contain adequate

evidence that petitioner was sufficiently related to Interrep

that he should be taxed on its income.

With regard to the Ashland's commission payments to All

Patents in 1974 and 1975, we conclude that, although the Ashland

consultancy agreement was in All Patents' name, not petitioner's,

it was for the "personal services" of petitioner. Ashland

representatives testified at trial that they were under the

impression they had hired petitioner to act as an intermediary

between Ashland and NIOC. Furthermore, Ashland understood that

petitioner owned All Patents, at least in part, although there is

no concrete evidence to that effect in the record. While

petitioner testified that he understood Ashland's payments to All

Patents were for the benefit of NIOC, there is no indication that

Ashland intended to receive services from Dr. Fallah or any other

NIOC representative under the consultancy agreement.
 - 172 -

In addition, petitioner held himself out to the U.S. Senate

Foreign Relations Committee as Ashland's representative through

"his companies". While petitioner might have had a certain

incentive to increase his own business stature by holding himself

out as the owner of those companies, we think that his

representation was not based on a factual foundation. At the

trial, in response to a question about who received the funds

from the All Patents account petitioner testified, "I have

absolutely no knowledge and I didn't want to have any." By this

he appeared to be implying that there may have been something

improper or illegal about the arrangement between NIOC and

Ashland via All Patents. But there is evidence that petitioner

was Ashland's actual representative and performed the services

for which payments were made. Accordingly, we hold that

petitioner earned the funds received pursuant to the Ashland

consulting agreement.

Lastly, we note that Ashland's 1975 payments in All Patents'

name were deposited to the Diesel Power Banque de Paris account,

of which petitioner was an authorized signatory, rather than to

an All Patents account. However, there is no evidence that

Diesel Power was involved in the Ashland negotiations. We find

no significance in the fact that petitioner relinquished part of

his interest in Diesel Power in late 1974. If, as petitioner

contends, the Ashland payments to All Patents did not belong to
 - 173 -

him, he would have been misappropriating NIOC funds by depositing

them into a Diesel Power account. Therefore, we conclude that

petitioner was simply using the Diesel Power Account to receive

the 1975 Ashland funds he had earned.

We conclude that petitioner earned Ashland's 1974 and 1975

payments to All Patents and, therefore, such payments constitute

his income.

With regard to Ashland's 1976 payment in the amount of

$265,000 attributed to Diesel Power on the CTC receipts journal,

the evidence as previously discussed shows very little

involvement in Ashland matters by Diesel Power. Petitioner

testified that the 1976 payment was for his services in obtaining

the release from All Patents. While both an Ashland witness and

petitioner stated that Ashland also met with Mr. Khalatbari and

I.J. Zand on several occasions, there is no indication that

either Mr. Khalatbari or I.J. Zand believed that Diesel Power was

Ashland's representative. To the contrary, Mr. Khalatbari and

I.J. Zand believed petitioner was Ashland's representative. The

documentary evidence also shows a significant amount of

correspondence between petitioner and Ashland representatives;

yet, there is no correspondence in the record between Ashland

representatives and either Mr. Khalatbari or any other Diesel

Power employee. Hence, in our judgment, petitioner was the

primary (if not the only) independent participant in the Ashland
 - 174 -

negotiations and was the person who arranged and was involved in

many meetings between Ashland and NIOC. We also conclude that

petitioner's relinquishment of part of his Diesel Power stock in

late 1974 does not alter the fact that he earned the 1976 Ashland

commissions that were paid to Diesel Power's name. Accordingly,

the portion of Ashland's 1976 payment attributed to Diesel Power

on the CTC receipts journal was income to petitioner.

C. General Motors

We note a preliminary issue that affects 3 of the years at

issue. The parties have stipulated that GM deposited British

pounds equivalent to $18,146.15 into the Zand FNCB London account

during 1973. Although respondent asserts in a proposed finding

of fact that petitioner failed to include $18,337.08 from GM in

1973 income, respondent has not properly asserted this higher

figure in a timely fashion. This Court has jurisdiction to

determine additional amounts in excess of the amount determined

in the notice of deficiency only "if claim therefor is asserted

by the Secretary at or before the hearing". Sec. 6214(a).

Respondent neither asserted this increased amount in an amended

answer nor raised it at trial. Thus, we lack jurisdiction over

the amount in excess of the amount determined in the notice of

deficiency and will disregard such excess. Jasionowski v.

Commissioner, 66 T.C. 312, 317 (1976). In addition, the Court's

consideration of respondent's assertion of the increased amount
 - 175 -

would result in unfair surprise to petitioner where it was raised

for the first time on brief. See Aero Rental v. Commissioner, 64

T.C. 331, 338 (1975). Since respondent has not asserted the

higher stipulated figure, we are limited to the $17,943.61

alleged in the amendment to answer. We are similarly limited

with respect to certain of respondent's assertions for 1974 and

1976. With regard to 1974, the notice of deficiency determined

that there was $414,855.46 in unreported "per books" income from

GM. Although the facts indicate that there were payments listed

on the CTC receipts journal attributed to Diesel Power in excess

of that amount, respondent did not assert a higher amount for

that portion of the deficiency. Respondent will be limited to

the asserted amount. For 1976, the total amount attributed to

Diesel Power on the 1976 CTC receipts journal was $1,142,908.40.

The notice of deficiency, however, determined "per books

unreported" income of $1,112,550.51. Respondent will be limited

to assertions for the latter amount.

Respondent contends that all GM payments to the Zand FNCB

London account and all GM payments attributed to Diesel Power on

the CTC receipts journal should have been included in

petitioner's income for 1973 through 1977. Petitioner, on the

other hand, claims that Diesel Power was GM's Iranian distributor

and that the payments to the Zand FNCB London account during 1973

through 1977 belonged only to Diesel Power. We disagree with
 - 176 -

petitioner. The facts indicate otherwise. Not only did

petitioner overtly state to GM that Diesel Power was not GM's

authorized representative, but his behavior also indicated the

same. The record shows that petitioner was in control of

negotiations concerning the amount of commissions and that he

earned those commissions by performing the work for them. He or

one of his CTC employees also directed GM where to make

commission payments. Petitioner argues that, when the agreement

was first signed with GM, GM did not distinguish between CTC of

Iran and CTC of Ohio. After Diesel Power was established, he

argues, no one thought to change it, and in fact Diesel Power was

GM's representative for the sale of locomotives. He also

contends that the Zand FNCB London account was a Diesel Power

account used for the receipt of commissions in pounds sterling

from, among others, GM. This appears to be inconsistent with the

contemporaneous written material in evidence, to which we are

inclined to give greater weight. The Zand FNCB London account

was in petitioner's name, and instructions came from CTC to

deposit funds therein. We also point out that Diana Khalatbari

in a note to CTC called this account "JJ's London account", not

"Diesel Power's account". There also was ample evidence that

petitioner held himself out to GM as GM's representative,

referring to CTC and Diesel Power employees as his "associates".

We also emphasize that, by the specific terms of the agreement
 - 177 -

between GM and CTC, petitioner's rights to commission fees were

nonassignable. Even though some of the payments were made to

Diesel Power, it is clear that GM viewed Diesel Power and

petitioner as one and the same. As with the commission payments

made directly to CTC, the record shows that petitioner did much

of the work involved in earning these commissions and, to the

extent that Diesel Power employees were also involved, the

earning of these commissions was subject to petitioner's control.

Although petitioner relinquished ownership of some of his Diesel

Power stock in late 1974, the evidence shows that his control

over the earning of commissions from GM did not change after that

date. Accordingly, we hold that the GM commissions were all

income to petitioner.

This is likewise true with regard to commissions from the

Pakistani sales. Respondent contends that the 1975 payments in

the amounts of $334,333.17 and $396,562.22 in connection with the

Pakistani sales are income to petitioner based upon the GM-

Caspian agreement. Amounts equivalent to the 1975 payments to

Mr. Khilnani of 70 percent of the Pakistani commissions were

included in income by petitioner in an amended return and thus

are not at issue. The remaining 30 percent was split between CTC

and Diesel Power on the CTC receipts journal. We agree with

respondent that the portion of Pakistani commissions allocated to

Diesel Power on the CTC receipts journal was petitioner's income.
 - 178 -

Diesel Power appears to have had little or no involvement in the

Pakistani sale and, therefore, did not earn the commissions in

relation to it. Petitioner, on the other hand, earned all of the

GM commissions attributed to Diesel Power on the CTC receipts

journal. Petitioner appears to have negotiated the Pakistani

locomotive sale and he was in control of the arrangement. A

letter from petitioner to Mr. Khilnani indicates that petitioner

was willing to pay for Mr. Khilnani's travel expenses, which he

apparently was not required to do. Diesel Power does not appear

to have had any involvement in these arrangements. There is also

testimony that Diesel Power never sold anything that was not

shipped to Iran. There is persuasive evidence that petitioner

was responsible for and controlled the Pakistani arrangement.

Therefore, we conclude that petitioner earned the commissions

paid in connection therewith.

For the same reason, we conclude that respondent's

allocation in the notice of deficiency for 1976 of "other" income

in the amount of $34,377.70, which is equivalent to payments to

Mr. Khilnani, also was correct. However, the payments made to

Mr. Khilnani and the Amelia Corporation, to the extent proven,

would also constitute deductible commission expenses. All

payments to Amelia Corporation but one were sufficiently proven

and constitute deductible expenses. With respect to this one

payment, petitioner stated that $50,000 was paid in 1976 to
 - 179 -

Amelia Corporation. The record contains a 1976 memo to the file

in which it is stated that there was a $50,000 payment to Amelia

Corporation, which petitioner stated was for "expenses".

However, the record does not reveal when this payment was made,

if at all, or for what. Therefore, the payment has not been

proven to be a deductible expense.

D. SEDCO, IMICO, IMISS

Although the joint venture and dealership agreements at

issue were between Diesel Power and Stewart & Stevenson, SEDCO,

and IMICO, the record shows that there was virtually no

involvement in these arrangements by Diesel Power; rather, they

were agreements with Diesel Power in name only. Petitioner and

his CTC employees made all the arrangements to create and

implement these ventures; Diesel Power was simply informed about

them after the fact. While petitioner's testimony attempts to

convince us that CTC merely assisted with some of the paperwork

involved, the contemporaneous documents indicate otherwise; i.e.,

they show that petitioner was actively involved in this venture

and that Diesel Power was not. Therefore, petitioner's income

includes all commissions received from SEDCO, SEDIRAN, IMICO, and

Stewart & Stevenson during 1973, 1974, 1975, and 1976 which are

recorded on the CTC receipts journal as Diesel Power commissions.

With regard to the allegation in the 1973 notice of

deficiency of $1,000 in unreported income from Stewart &
 - 180 -

Stevenson, there is no evidence of this payment on the CTC

receipts journal, and there is no other evidence presented by

either party. Petitioner merely states in a proposed finding of

fact pertaining to it that his accountant had reviewed all

commissions received by CTC and petitioner for the pertinent

years, and petitioner had reported all income. Respondent does

not address this amount on brief. We assume that respondent has

conceded this issue and hold for petitioner.

With regard to the alleged "unreported income" in the amount

of $1,478.31 from Stewart & Stevenson in 1976, neither party

presented any evidence. In a proposed finding of fact petitioner

implies that it was paid directly to Diesel Power. Whether it

was or not, we hold for respondent with respect to this amount.

If it was paid to Diesel Power, it was petitioner's income for

the reasons stated above; if it was not paid to Diesel Power,

petitioner has failed to meet his burden of proof that it was not

his income. Rule 142(a).

With regard to the allegation of income from IMICO, SEDIRAN,

and SEDCO in 1978, the parties presented no evidence other than

the 1978 receipts journal. We note that, while the 1978 CTC

receipts journal lists numerous receipts from IMICO, SEDIRAN, and

SEDCO in that year, the receipts are all recorded as either

"Purchases" or commissions to CTC, the latter having been

reported by petitioner as income. As to the amounts for 1978,
 - 181 -

however, we can see no rationale under which they constitute

income, and we therefore hold for petitioner.

E. Ingersoll-Rand

Petitioner argues that he is not liable for any unreported

commission income from Ingersoll-Rand. At trial he and his

witnesses testified that neither he nor CTC sold any Ingersoll

Rand products during the period at issue, that Diesel Power was

the representative for Ingersoll Rand, and therefore, that none

of the commissions from that company was earned by him. Although

respondent originally took the position that commissions from

Ingersoll-Rand should have been included in petitioner's gross

income, respondent on brief has partially conceded this issue,

concluding that there was an agreement between Ingersoll-Rand and

Diesel Power whereby Diesel Power was Ingersoll-Rand's

representative in Iran. The record supports this position.

Respondent contends now that petitioner is required to include in

income all Ingersoll-Rand commissions that "he diverted from

Diesel Power to his dominion and control."

With regard to 1973 and 1974, respondent concedes the

amounts of $48,222.04 and $197,259.65, respectively. However, in

the ultimate proposed findings respondent asserts in a type of

"dominion and control" argument that petitioner has income for

these years to the extent of petitioner's withdrawals from the

Diesel Power Bank of America account. Respondent claims that the
 - 182 -

withdrawals in the years 1973 through 1976 in excess of $3

million, which were not included in petitioner's income for those

years, constituted income in the years of the withdrawals. We

will discuss this issue later.

With regard to 1975, respondent on brief has conceded all

previous determinations in the notice of deficiency and

allegations in the amendment to answer and states that "It is now

respondent's position that, in 1975, Zand failed to include

$197,513.88 in income from Ingersoll-Rand that was deposited to

Zand's FNCB account." The only support that respondent cites for

this $197,513.88 deposit is a document that is stipulated to be a

"Schedule of Commissions by Manufacturer showing where deposited"

written by an unknown author. We are not willing to find that

this deposit was in fact made based solely upon this document.

We have serious hearsay concerns about a list of numbers that the

Court knows nothing else about, including the author of those

numbers, and no reason to believe that the document's contents

are accurate. Accordingly, we do not rely upon it for the truth

of its contents without any other evidence in support of this

deposit.27 There being no persuasive evidence of record that the

27
Nor does petitioner admit that this payment was made. Petitioner in
his proposed findings of fact merely states that "those payments did not
constitute income to Petitioner." We are unwilling to interpret this as an
admission that this payment was made.
 - 183 -

deposit was made to petitioner's FNCB account, we hold for

petitioner with respect to this alleged 1975 payment.

With regard to the stipulated 1976 payment from Ingersoll-

Rand of £5,494.40 to the Zand FNCB London account, respondent

asserts that the average monthly exchange rate for British pounds

to dollars in March 1976 was £1.960 to $1. Respondent offers no

support for this exchange rate. Accordingly, respondent's

allegation that £5,494.40 was equivalent to $10,769.02 is

unsubstantiated. Our research indicates that the correct

exchange rate was £1.9454 to $1; accordingly, the £5,494.40

stipulated to have been deposited into the Zand FNCB account were

equivalent to $10,688.05. Petitioner contends that this

stipulated payment did not constitute income to him because it

belonged to Diesel Power. To the contrary, respondent contends

that these funds were transferred at the direction of

petitioner's employee and thus, were income to him. We conclude

that, although petitioner's employee may have directed the

payment of these commissions, the record indicates that most of

the effort involved in earning them was performed by Diesel

Power. Accordingly, we hold for petitioner with respect to the

$10,688.05.

Respondent also claims that there was an unreported $120,000

payment from IGOS to petitioner in 1976 for commissions from

Ingersoll-Rand. In support thereof, respondent cites only to a
 - 184 -

1981 sworn affidavit of one of the IGOS shareholders, Hossein

Shirazi, indicating that there was such a payment in 1976. Mr.

Shirazi was not a witness in this proceeding and thus was not

subject to cross-examination for the statements made in his

affidavit. Therefore, despite Mr. Shirazi's sworn statement that

he believed the contents of his affidavit to be true, we are

unwilling to rely solely upon this document as evidence that the

$120,000 was actually paid. We hold for petitioner for this

amount.

F. Morgan

As a preliminary matter with regard to the stipulated 1976

receipts from Morgan of $525,786.48, petitioner correctly points

out that respondent determined $449,333.24 in "other income" in

the notice of deficiency but that respondent did not file an

amended answer proposing to increase petitioner's 1976 income

from the Morgan arrangement to a higher amount. See sec.

6214(a). Accordingly, we consider only the amount of $449,333.24

listed in the notice of deficiency as "other unreported" income.

With regard to the properly determined amount for 1976 and

the full amount determined for 1977, the evidence does establish

that Diesel Power employees and petitioner worked together to

earn the Morgan income. Diesel Power employees assisted in

earning the commissions by providing price quotes, negotiating

orders, and keeping track of certain payments. Petitioner also
 - 185 -

was involved in earning this income, both personally and through

the actions of his CTC employees. At petitioner's instructions,

some of the Morgan payments were issued directly to Diesel Power

and some directly to CTC. Petitioner recorded the CTC payments

as CTC commissions on the receipts journal, and petitioner did

not report as income any of the checks issued to Diesel Power in

1976. This arrangement effectively resulted in the split of

commissions for 1976. The 1977 payments were split on the CTC

receipts journal. We conclude that the split of the commissions

such as was made here reflected the understanding of petitioner

and Diesel Power as to the work involved in earning the Morgan

commissions. By the time these payments were made, petitioner

had relinquished ownership of some of his Diesel Power stock.

The actual division of commissions for 1976 and 1977 appears to

have adequately reflected the evidence of division of effort on

the part of Diesel Power and petitioner or CTC to implement the

Morgan arrangement. Accordingly, we hold for petitioner on the

Morgan amounts.

G. Harnischfeger

There is no discussion in the parties' briefs concerning

respondent's determination in the 1974 notice of deficiency for

Harnischfeger. The amount of $525.41 is determined as income

from Harnischfeger. However, there is no evidence in the record

of income from that company, although it precisely matches an
 - 186 -

amount that appears on the CTC receipts journal from Parker-

Hannifin. In the absence of any explanation for this by

respondent, we conclude that respondent has conceded this amount.

With respect to the years 1975 through 1977, we note that by

this time petitioner had relinquished a portion of his Diesel

Power stock. A contract existed directly between Diesel Power

and Harnischfeger, and the record shows that the Harnischfeger

commissions were earned by the efforts of Diesel Power and CTC.

While petitioner or a CTC employee personally signed the

distributor agreements, supervised the receipt of commissions

thereunder, and directed the accounts to which they were payable,

Diesel Power employees performed the work required in Iran to

obtain orders for Harnischfeger equipment. The division of

commissions on the CTC receipts journal between CTC and Diesel

Power appears to adequately reflect the efforts of both companies

and, therefore, will be respected. We hold for petitioner with

respect to the Harnischfeger amounts for these years.

H. Pioneer

Petitioner's only argument with respect to Pioneer in

general is that there was a commission-splitting agreement

between CTC and Diesel Power. Respondent contends that the

distributor agreement was between Pioneer and CTC and that

petitioner remained in control of the earning of commissions

pursuant to that agreement. We agree with respondent. While the

record shows that Pioneer issued a "To whom it may concern"
 - 187 -

letter indicating that Diesel Power was its representative in

Iran, there is no indication that the earlier agreement with CTC

was terminated or that an agreement with Diesel Power was ever

executed. There is also evidence that this letter was issued at

the request of a CTC employee to facilitate obtaining business

with the Iranian Government and was not intended to replace the

Pioneer-CTC distributor agreement. Moreover, even if Diesel

Power were Pioneer's distributor, petitioner clearly maintained

control over the earning of Pioneer commissions. Petitioner and

CTC employees corresponded with Pioneer on matters of importance.

CTC gave Pioneer instructions on the payment of commissions.

Petitioner and CTC created and continued the impression that

Diesel Power and CTC were one and the same. Although petitioner

relinquished ownership of some of his Diesel Power stock in late

1974, he does not appear to have relinquished his control over

the earning of commissions. When Pioneer in 1974 expressed a

willingness (at Mrs. Meier's suggestion) to amend the distributor

agreement to Diesel Power's name, petitioner was asked whether

this should be done, indicating that he had the power to prevent

such a revision. Accordingly, we sustain respondent's

determinations for the years 1973 through 1977.

With regard to 1978, the parties have made no stipulations

and respondent has made no assertions apart from the notice of

deficiency in connection therewith. We assume this to be an
 - 188 -

oversight. The CTC receipts journal recorded receipt from

Pioneer of $84,293.45. However, $33,717.38 of this amount was

allocated on the receipts journal as commissions for CTC. We see

no reason why respondent has asserted the full amount received as

unreported income in this instance when in all other cases

respondent has accepted the amounts listed on the CTC receipts

journal as CTC commissions. Petitioner did report as income

amounts listed as CTC commissions. Hence, those amounts did not

constitute unreported income. Respondent has not explained this

on brief. Therefore, we hold that the only amount at issue is

the $50,576.07 allocated to Diesel Power on the 1978 CTC receipts

journal. We hold for petitioner with respect to the $33,717.38

allocated as commissions to CTC, and which he reported as income.

We conclude that all of the remaining $50,576.07 allocated

as commissions to Diesel Power constitutes petitioner's

unreported income from Pioneer for 1978. Despite the fact that

petitioner had sold his interest in Diesel Power prior to that

year, the evidence shows that petitioner still was in control of

the earning of commissions from Pioneer at that time. This is

particularly evidenced by the correspondence between petitioner

and Pioneer concerning the cancellation of Pioneer's agreement in

1978. That correspondence reveals that Pioneer had no intention

to deal with Diesel Power apart from petitioner and that

petitioner was planning to devise another means by which to do
 - 189 -

business with Pioneer, because the Diesel Power he had created

had "ceased to exist". We conclude therefrom that petitioner

earned the entire commission reflected on the CTC receipts

journal as having been paid by Pioneer during 1978.

I. Galion

We note initially that, in the notice of deficiency,

respondent determined unreported "Other" income from Galion in

1973 in the amount of $2,368.24. Petitioner in his brief

contends that this was a part of direct payments to Diesel Power

that are not taxable to him. Because respondent does not make

any reference to this amount on brief, we conclude that

respondent has conceded this determination, and we hold for

petitioner with respect to this amount.

All other determinations pertaining to Galion involve the

question of whether petitioner must include in income for the

years 1973 through 1978 payments from Galion that were made to

CTC at the instructions of petitioner or a CTC employee, some of

which were attributed to Diesel Power on the CTC receipts

journals. We conclude that he must. There were direct dealings

between Diesel Power and Galion prior to the years at issue, as

evidenced by the existence in 1969 of a sales relationship

between the two companies and a negotiated settlement concerning

overdue time drafts signed by Mr. Khalatbari. However, the 1969

distributorship contract between Diesel Power and Galion, which
 - 190 -

gave rise to the commissions at issue, was signed by petitioner

on behalf of CTC and was in fact with CTC. The evidence shows

that Galion did business with CTC and dealt with Diesel Power as

CTC's Iranian affiliate. There is also evidence that Galion

employees believed that Diesel Power, CTC, and petitioner were

essentially the same. Petitioner and CTC employees controlled

the timing and payment of commissions from Galion by issuing

bills and directing payment. On a number of occasions there were

payments made directly to Diesel Power without such instructions

from CTC. Petitioner and CTC employees corrected this by

advising Galion of the correct procedures to be used, which

usually included direct payments to CTC. When other important

problems arose, such as a changeover of power in an Iranian

ministry, or the failure of Mr. Khalatbari to sign a contract in

1978, petitioner was expected to resolve them.

There is evidence that Diesel Power employees performed some

of the legwork required to earn the commissions by obtaining

price quotations and arranging for sales in Iran. However,

unlike work performed for other companies, it appears that all of

this work was performed at petitioner's direction and control,

and that Diesel Power was considered to be an Iranian branch of

CTC for Galion sales. Therefore, we conclude that petitioner

earned all of the Galion commissions that were paid or attributed

to Diesel Power and that petitioner should have reported them as
 - 191 -

income. In addition to these amounts, respondent asserts an

amount of $32,560.36 in 1978 which was listed as "Other" on the

CTC receipts journal. Petitioner presented no evidence that this

was not income; therefore, we conclude that it was.

In the notice of deficiency for 1978, 1979, and 1981

respondent determined that petitioner was entitled to additional

offsets for cost of goods sold in the amounts of $148,706.31,

$95,633.62, and $5,862, respectively. According to respondent's

statement on brief, these additional amounts were a result of

respondent's determination that additional Galion commissions

were includable in income in those years. Having found that

petitioner's taxable income for those years should be increased

by the amounts received by Galion, it follows that respondent

correctly increased petitioner's cost of goods sold for those

years.

J. Clark

We note initially some matters pertaining to evidence and

pleading for certain years. In addition to the amounts that were

stipulated by the parties, respondent asserts in the proposed

findings of fact that there were deposits by Clark during 1973 to

the Zand FNCB London account of amounts in excess of $16,545, and

that there was unreported income in a similar (but not identical)

amount. However, either the record materials cited by respondent

in support thereof in appendix B relate to deposits in 1974 or
 - 192 -

respondent cites an exhibit the accuracy of which we are unable

to identify. Therefore, we cannot determine that the total

amount of asserted deposits to the Zand FNCB London account of

$16,547.29 in respondent's appendix B is correct. We therefore

do not rely on appendix B for these asserted additional deposits

during 1973.

Respondent also asserts in appendix B that an additional

amount of $2,420.47 was deposited during 1976 to the Bank of

Teheran. However, respondent did not provide any support for

this amount. We also note that respondent has not filed a timely

amendment to answer with respect to this additional amount.

Respondent further asserts in appendix B that there was a 1977

payment in the amount of $3,221.00 to an unknown payee. However,

respondent provides no record support therefor.

Thus, there is no evidence that certain payments asserted in

the appendix B were made. Hence, we conclude that the stipulated

amounts constitute the correct figures. In addition, we hold for

petitioner with respect to respondent's assertions on brief that

there was additional 1976 income from Clark in the amount of

$681,783.24. Although this amount was stipulated to have been

paid to Diesel Power in 1976, respondent first made assertions

concerning these commissions on brief.

We now reach the issue of the Clark commission income for

the years 1973 through 1977. As an initial observation, we think
 - 193 -

the 1974 representation from Clark that Diesel Power was Clark's

distributor in Iran is without significance. This representation

is based on a letter obtained at Mrs. Khalatbari's request in

order to facilitate the processing of transactions with Iran as a

procedural matter. It was not intended to be an indication of

who actually did the work or who controlled commissions earned in

connection with Clark. Therefore, we give this document little

weight.

With respect to the remainder of the evidence concerning

Clark, the Clark distribution contracts were with Diesel Power,

and thus the requirement that there be a contractual relationship

between the wholly owned (for years prior to 1975) corporation

and the payor is satisfied. Johnson v. Commissioner, 78 T.C. at

891. The issue of control, however, is more complex. Petitioner

testified that I.J. Zand and Mr. Khalatbari did all of the work

in connection with Clark, but there is other evidence that the

Clark contracts were implemented by employees of both CTC and

Diesel Power. Diesel Power employees provided local information,

made price quotes to companies in Iran, and acted as the local

representative. CTC employees performed all the billing and

collecting tasks. However, petitioner still appears to have been

ultimately responsible for the Clark contract. He negotiated a

large forklift sale for Clark. There also was a perception by

Clark employees that Diesel Power was petitioner's company.
 - 194 -

When, in 1976, Iranian Air Force officials had been treated

rudely by a Clark employee, it was petitioner, not a Diesel Power

representative, who chastised Clark by letter. In the course of

this letter petitioner emphasized that, without his services,

Clark never would have even had a chance of receiving the large

forklift order. Petitioner further emphasized that his CTC

employees had spent considerable time working out the details of

the letter of credit and payment of commissions. During the

years 1973 through 1977 petitioner and his CTC employees did all

of the billing, and the directing of funds. We conclude that

throughout most of the relationship with Clark, at least through

1977, petitioner was in control of the commissions earned.

Therefore, petitioner is taxable on the Diesel Power commissions

properly alleged by respondent for all years through 1977.

The allegations pertaining to 1977 require special

discussion. Respondent determined in the notice of deficiency

that there was $22,545.46 in unreported income from Clark as

reflected on the CTC receipts journal. The stipulations indicate

that the CTC receipts journal records $14,013.71 as Diesel Power

commissions, which is close to the figure requested by respondent

in her proposed findings. For the reasons stated above, we

conclude that $14,013.71 constitutes unreported income for 1977.

Respondent also asserts on brief an additional amount of

$37,359.91 that was not recorded on the CTC receipts journal for
 - 195 -

deposits to "Diesel Power's FNCB Geneva account". The

stipulations state that there were additional checks payable to

Diesel Power or to Diesel Power bank accounts in the total amount

of $38,569.34. However, respondent failed to either determine in

the notice of deficiency or to assert in the amendment to answer

an amount in excess of $22,545.46. In addition, that figure

represents alleged amounts that were reflected on the CTC

receipts journal and does not include funds that were not

recorded there. Respondent may not assert for the first time on

brief that these payments to Diesel Power or Diesel Power bank

accounts were income.

While the notice of deficiency determined additional income

from Clark in 1978 of $36,796.41, the CTC receipts journal shows

commissions allocated to Diesel Power of only $15,191.10. We

note that respondent makes no assertions on brief concerning

Clark commissions in 1978 other than the latter amount. Thus,

there is no record support for the remaining $21,605.31. We hold

for petitioner with respect to $21,605.31. With respect to the

balance of the $36,796.41 determined in the notice of deficiency,

or $15,191.10, there is sufficient evidence to hold for

petitioner as well. Petitioner no longer owned Diesel Power

stock in 1978 because he transferred it to the Khalatbaris in

December 1977. Nor by that point did petitioner control Diesel

Power in any meaningful sense. In 1977 a dispute had arisen
 - 196 -

between CTC and Diesel Power over Clark commissions when Mr.

Khalatbari began to be assertive about commissions. The sense of

the 1977 letter from Mrs. Conway and Mrs. Meier to petitioner

about the dispute concerning Clark commissions is that

petitioner's former control was being challenged. The evidence

shows that this question was resolved when Mr. Khalatbari paid

approximately $325,000 to CTC in June of that year. Thus, by the

end of 1977, and particularly after the transfer of petitioner's

last 40 percent of Diesel Power stock to the Khalatbaris,

petitioner had lost his control over Diesel Power. We conclude

that the $15,191.10 of commissions allocated to Diesel Power on

the 1978 CTC receipts journal were not taxable to petitioner.

K. Miscellaneous Companies/Goodyear

Petitioner's only argument with respect to the relatively

small commissions received from various companies was that a

commission-splitting agreement existed between CTC and Diesel

Power, and that the allocation of commissions on the CTC receipts

journal was in accordance with that agreement. As we have

discussed, petitioner's alleged agreement, even if it existed, is

irrelevant to the question before us of who actually earned the

commissions at issue. Although there is little record evidence

of the dealings with these particular companies, the record as a
 - 197 -

whole shows that until 1978 petitioner for the most part was in

control of Diesel Power and is taxable on most payments made or

attributed to Diesel Power. Where the evidence is lacking as to

which employees performed work for these companies, petitioner

has failed to meet his burden of proof. We therefore hold that

with the exception of the 1976 Exxon allegation, petitioner has

failed to meet his burden of proof for these miscellaneous

commissions. With respect to Exxon, respondent asserted an

amount for 1976 greater than the stipulated amounts attributed to

Diesel Power on the CTC receipts journal. We hold that the

stipulated amount of $12,082.61 constitutes the amount of

unreported 1976 income received from Exxon.

L. Petitioner's Withdrawals from Bank Accounts

Respondent makes a further argument that petitioner's income

includes amounts withdrawn from a Diesel Power account and from

the WHIP account at the times the withdrawals were made. Thus,

respondent contends that in the event that we do not hold that

petitioner had unreported commission income in the form of funds

received from Lockheed, Goodyear, Clark, Galion, and Morgan that

were deposited in the Diesel Power Bank of America account, as

well as Lockheed funds that were deposited in the WHIP Barclays

Bahamas account, petitioner had unreported income to the extent
 - 198 -

of his withdrawals from those accounts. Respondent further

contends that because of respondent's concessions in connection

with Ingersoll-Rand payments deposited to the Diesel Power Bank

of America account, petitioner's withdrawals from that account

constitute unreported income in any event.

Respondent asserts first on brief that petitioner withdrew

the following amounts from the Diesel Power Bank of America

account:

Year Amount

1973 $655,500.00
1974 531,633.48
1975 1,345,766.60
1976 665,000.00

In our findings of fact, we found that the evidence supported

withdrawals by petitioner from that account in amounts somewhat

smaller than respondent's assertion, namely:

Year Amount

1973 $655,500.00
1974 531,633.48
1975 601,652.03
1976 265,000.00

Subsequently, on brief respondent asserts that the amounts to be

considered income to petitioner because they were converted to

his personal use were as follows:
 - 199 -

Year Amount

1973 $605,500.00
1974 387,876.45
1975 575,000.00
1976 265,000.00

We assume that respondent has conceded both higher sets of

figures and now argues for only those sums that were converted to

petitioner's personal use. These are the figures that are the

basis for our holding.

Petitioner argues that these withdrawals were not income

because they constituted loans to him allegedly with the "full

knowledge and agreement of Mr. Khalatbari". However, there is no

documentary evidence in the record to support such an argument.

Furthermore, Diesel Power financial statements do not reflect any

loans made to shareholders. Petitioner testified that the amount

that was owed became a part of the litigation with Diesel Power

and was part of the claim of right which he subsequently reported

as income. As we stated in Gilbert v. Commissioner, 74 T.C. 60,

65 (1980), the critical question in resolving the issue of

whether there is a loan "is whether there was a genuine intention

to create a debt, which, in turn, depends upon weighing such

objective factors as reasonable expectation of repayment and the

economic reality of the claimed debtor-creditor relationship."

Petitioner has not presented any evidence other than his

testimony or that of his employees to convince us that these

withdrawals were loans. There is no loan agreement or promissory
 - 200 -

note; there is no stated interest; there is no fixed maturity

date; there is no payment schedule; there is no collateral; and

there is no evidence that such loans were repaid. While

petitioner testified that these withdrawals were part of the

claim of right later asserted by him and which he included in

income, petitioner has not provided any documentary evidence to

support his self-serving testimony. Some sort of objective

factors demonstrating economic reality are required. See Wilkof

v. Commissioner, 636 F.2d 1139 (6th Cir. 1981), affg. T.C. Memo.

1978-496. There are no such factors present here. Accordingly,

we hold that, to the extent that commissions received from

Lockheed, Goodyear, Clark, Galion, Morgan, or Ingersoll-Rand did

not constitute income to petitioner in the years they were paid,

the withdrawals from the Diesel Power Bank of America account

which were converted to petitioner's personal use constituted

either constructive dividends or converted funds. In either

case, those withdrawals constituted income to petitioner in the

years of withdrawal.

III. Issues 4 and 5--Interest Income on Foreign Bank Accounts

In the years 1974 and 1975 petitioner had a bank account

with First National City Bank in London (FNCB), account number

1612131. The account earned interest for those years in the

amounts of $38,055.71 and $43,641,69, respectively. Petitioner

owned the account; he was the sole signatory to the account; he
 - 201 -

had unfettered access to the account; his name was on the

account; and he directed the activities of the account.

Similarly, in 1976 petitioner's FNCB account number 245925 earned

interest in the amount of £27,466.39, the equivalent of

$44,127.50. He owned the account, he was a signatory, and he had

unfettered access to the account. Petitioner did not show that

his accounts had any restriction or were in any way controlled by

any person other than himself. He asserted through his testimony

and the testimony of other witnesses that he considered the

London accounts in his name to be those of Diesel Power.

However, in 1974 and 1975 Diesel Power also had an FNCB account

in London as well as FNCB accounts in Geneva, Switzerland.

According to the testimony, all Diesel Power officers were

signatories to the Diesel Power accounts. Petitioner's accounts

were separate. We hold, pursuant to section 61, that the

interest income on such accounts is taxable to petitioner. See

Marcus v. Commissioner, T.C. Memo. 1992-234.

In 1974, 1975, and 1976 the bank account or time deposits in

the name of WHIP at the Barclays Bank Bahamas also earned

interest in the respective amounts of $25,025, $29,338.94, and

$16,998.06. As set forth in our findings of fact, WHIP was

simply a repository for the receipt of commissions earned from

Lockheed for petitioner's performance of services. Petitioner

was the sole shareholder of WHIP and exercised full control over
 - 202 -

the funds in the Bahamian bank account. Respondent contends that

the separate corporate status of WHIP, whose sole business

activity was the bank account, should be ignored. We agree.

Although generally a corporation can only act through its

shareholders or officers and the distinction between the

corporation and its sole shareholder must be respected, this

particular situation is different. Petitioner, WHIP's sole

shareholder, testified that WHIP had no operations. Instead,

WHIP was merely a paper corporation whose only purpose was to

hold funds in a tax haven jurisdiction so that the funds would

escape scrutiny for tax and other purposes. Since WHIP was a

mere skeleton, its existence is disregarded. See Noonan v.

Commissioner, 52 T.C. 907, 909-910 (1969), affd. per curiam 451

F.2d 992 (9th Cir. 1971); Aldon Homes, Inc. v. Commissioner, 33

T.C. 582, 597 (1959). Therefore, we hold that the interest

earned on the WHIP account is includable in petitioner's gross

income for the years in question.

IV. Issue 7--Amount and Character of Gain on Sale of Diesel
Power Stock

On his 1977 Federal income tax return petitioner reported a

long-term capital gain of $4,805,864 from the sale of Diesel

Power stock that he had held since 1958. Respondent determined,

pursuant to section 1248, that petitioner was required to treat

gain from the sale of his Diesel Power stock as ordinary dividend

income rather than long-term capital gain. Respondent also
 - 203 -

determined that his gain from the stock sale was $3,925,000

rather than $4,805,864.

Section 1248 was intended to tax foreign accumulated income

at ordinary, as opposed to capital gain, rates. Teller v.

Commissioner, T.C. Memo. 1992-402. Section 1248(a) provides that

gain from the sale of stock in a foreign corporation is to be

treated as a dividend (to the extent of earnings and profits

attributable to such stock which were accumulated while the

corporation was a "controlled foreign corporation") if the stock

is sold by a United States person who owned 10 percent or more of

all classes of stock entitled to vote during the 5-year period

ending on the date of the sale or exchange when the foreign

corporation was a controlled foreign corporation.

Although petitioner contends otherwise, we think the

requirements necessary to invoke section 1248 are present here.

For purposes of section 1248 the term "United States person"

includes a U.S. citizen, section 1.1248-1(a), Income Tax Regs.;

section 7701(a)(30), which petitioner has been since 1953. A

"controlled foreign corporation" is any foreign corporation in

which more than 50 percent of the total voting stock is owned or

considered owned by a U.S. shareholder on any day during the

foreign corporation's taxable year. Sec. 957(a).

Diesel Power was an Iranian corporation. Petitioner

acquired 100 percent of Diesel Power's stock for nothing in 1958
 - 204 -

and owned 100 percent of Diesel Power's stock until at least

November 1974. Thus, Diesel Power was a controlled foreign

corporation until at least Diesel Power's fiscal (or Iranian

calendar) year, which ended March 20, 1975. Moreover, it is

agreed that petitioner owned at least 40 percent of Diesel

Power's voting stock until December 1977. Thus, the requirements

of section 1248(a) are met; i.e., the stock was sold by a United

States person who owned at least 10 percent of the foreign

corporation's voting stock, and he owned that stock at a time

when the foreign corporation was a controlled foreign corporation

and which fell within the 5-year period ending on the date of the

sale.

The only remaining question is the extent of Diesel Power's

accumulated earning and profits for purposes of section 1248

through Diesel Power's March 20, 1975, fiscal year. As reflected

on Diesel Power's financial statement, as of March 20, 1975, the

amount of retained earnings and the amount due shareholders

totaled $2,483,188.73. The March 20, 1975, fiscal year is the

appropriate date because during that year Diesel Power was a

controlled foreign corporation at least 1 day, as is required for

section 1248 to apply. Sec. 957(a). However, Diesel Power's

financial statements do not reflect foreign assets or amounts in

foreign bank accounts. In 1972, commission payments in excess of

$550,000 were deposited into the Bank of America account in
 - 205 -

Diesel Power's name in New York City. At least $2,470,000 was

placed in Diesel Power's foreign accounts in 1973 and 1974.

Other commission payments were deposited to Diesel Power's

FNCB accounts and to the Banque de Paris accounts in Geneva,

Switzerland. With respect to the Swiss accounts, the evidence

shows that there were substantial sums deposited. While the

burden of proof is on petitioner to show the lack of accumulated

earnings and profits in his controlled foreign corporation under

section 1248(h), the evidence shows that Diesel Power's earnings

and profits were far in excess of the $2,483,188 shown on its

financial statements as of the close of its fiscal year ended

March 20, 1975. Many of the funds deposited to the Bank of

America account disappeared into the secrecy of Swiss bank

accounts, leaving no trace as to whether they were ever

transferred into Teheran and possibly included on the financial

statements as earnings and profits of Diesel Power. However,

since Diesel Power did not want to have funds deposited to

Teheran banks, it is likely that such amounts did not end up in

Teheran or on Diesel Power's financial statements.

We conclude that Diesel Power's earnings and profits through

1974 included not only the $2,483,188 reflected on its financial

statements, but also the funds deposited to the Swiss bank

accounts and the Bank of America account. Adding the commissions

deposited to bank accounts in the name of Diesel Power outside
 - 206 -

Iran to the reported retained earnings per the financial

statements approximates $5 million in earnings and profits.

Because Diesel Power's earnings and profits through 1974

were in excess of $5 million, the $3,925,000 amount determined by

respondent to be petitioner's gain from the sale of his Diesel

Power stock is deemed to be ordinary dividend income, rather than

long-term capital gain, pursuant to section 1248.

We note that petitioner does not contend that Diesel Power

lacked sufficient earnings and profits. It is not mentioned in

his brief. Instead, petitioner claims that section 1248 is

inapplicable because he sold 60 percent of his Diesel Power stock

in 1971; therefore, Diesel Power was not a controlled foreign

corporation within 5 years of petitioner's 1977 stock sale. This

in incorrect. The parties stipulated that petitioner owned 100

percent of Diesel Power's stock until at least Novemer 1974;

petitioner filed Forms 2952 to that effect; and petitioner

testified that he owned 100 percent of Diesel Power until at

least June 1974.

Accordingly, we hold that petitioner had a gain of

$3,925,000 on the sale of his Diesel Power stock in 1977 and that

such gain is taxable as ordinary income.

V. Issues 8 and 9--Claimed Reduction in 1979 Reported Income
Under a Claim of Right and Section 1341 Tax Computation for
1981
 - 207 -

Although petitioner does not argue on brief in support of

his position that 1979 reported income should be reduced by

$348,350 attributable to a "claim of right" adjustment or that

his 1981 income tax calculation should be based upon section

1341, he requests the Court to so find in his proposed findings

of fact. An analysis clearly shows that petitioner is not

entitled to a reduction in 1979 nor to tax computation relief in

1981.

The parties agree that on petitioner's 1979 tax return he

included in income approximately $1.6 million that he had in his

possession representing commission income he received from

manufacturers in prior years. On the return he reported that

this amount was includable in income because he had determined

that he would not transmit the funds to Mr. Khalatbari or Diesel

Power because of their disputes. In an amended return petitioner

claims the income previously reported should be reduced by

$348,350, with the explanation that he did not receive as much as

he thought he would in the sale of Diesel Power stock. The fact

that there was a dispute over the sale price for the Diesel Power

stock has nothing to do with the claim of right petitioner

exercised over commissions that he earned and held in his

possession during 1979 and prior years. They are two separate

items. Petitioner still retained the commission funds; the stock

sale dispute was over the price for disposition of his capital
 - 208 -

asset; i.e., his stock in the company. Furthermore, in the

notice of deficiency respondent reduced petitioner's reported

gain from the sale of the Diesel Power stock to reflect what

respondent then understood petitioner had received.

Similarly, for 1981 petitioner claimed on his return that

his tax was zero, also due to his claim of right theory, even

though taxable income shown on the filed return was $315,928.

There is no evidence in the record of what amount petitioner paid

to Mr. Khalatbari in settlement of the litigation or to what

items the repayment was attributable. The only evidence is the

return and some vague statements by the return preparer that he

determined an amount had been paid that could give rise to a

section 1341 calculation. There is no evidence of record of how

the amount was calculated because the Court did not admit Joint

Exhibit 556-UJ into evidence. Accordingly, we hold that

petitioner is not entitled to reduce 1979 reported income by

$348,350.

VI. Issue 10--Claimed Schedule C Business Expense Deductions

In the notices of deficiency covering the years 1973 through

1981 respondent disallowed substantial business expense

deductions on three grounds, namely: (1) That they had not been

substantiated; (2) that they were not shown to be ordinary and

necessary; or (3) that they were not shown to be petitioner's

expenses, but were those of another taxpayer. Petitioner
 - 209 -

contends that the evidence presented with respect to the business

expense deductions was virtually unchallenged by respondent. It

is our view that, for the most part, there was no need for

respondent to challenge the evidence offered by petitioner on the

deduction issues because the evidence presented failed to show

that the majority of the business expenses claimed were

petitioner's ordinary and necessary business expenses or that he

was otherwise entitled to the various amounts claimed. He also

contends that respondent's reasons for disallowing various

deductions were not clear in every instance. To the contrary,

the notices of deficiency specifically set forth which deductions

were allowed and disallowed, and provide a narrative explanation

for the disallowance.

We have made detailed and specific findings of fact with

respect to the claimed business expense deductions. We think no

useful purpose would be served by reiterating each and every fact

in this opinion. However, we will discuss the major disputed

items.

Section 162(a) provides that "There shall be allowed as a

deduction all the ordinary and necessary expenses paid or

incurred during the taxable year in carrying on any trade or

business". The regulations promulgated under section 162 clarify

that only those ordinary and necessary business expenses
 - 210 -

"directly connected with or pertaining to the taxpayer's trade or

business" may be deducted. Sec. 1.162-1(a), Income Tax Regs.

Whether an expenditure is ordinary and necessary is

generally a question of fact. Commissioner v. Heininger, 320

U.S. 467, 475 (1943). To be "necessary" within the meaning of

section 162, an expense need only be "appropriate and helpful" to

the taxpayer's business. Welch v. Helvering, 290 U.S. at 113.

For an expense to be "ordinary", "the transaction which gives

rise to it must be of common or frequent occurrence in the type

of business involved." Deputy v. du Pont, 308 U.S. 488, 495

(1940) (citing Welch v. Helvering, supra at 114).

Section 6001 and the regulations promulgated thereunder

require taxpayers to maintain records sufficient to permit

verification of income and expenses. As a general rule, if the

trial record provides sufficient evidence that the taxpayer has

incurred a deductible expense, but the taxpayer is unable to

adequately substantiate the amount of the deduction to which he

or she is otherwise entitled, the Court may estimate the amount

of such expense and allow the deduction to that extent. Cohan v.

Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930). However, in

order for the Court to estimate the amount of an expense, we must

have some basis upon which an estimate may be made. Vanicek v.

Commissioner, 85 T.C. 731, 743 (1985). Without such a basis, any
 - 211 -

allowance would amount to unguided largesse. Williams v. United

States, 245 F.2d 559, 560 (5th Cir. 1957).

Expenditures for items that are capital in nature are not

deductible by the taxpayer. Sec. 263. However, the cost of

capital expenditures may be recoverable through depreciation or

amortization. Business expenses, like other deductions claimed

on a tax return, must be substantiated by the taxpayer, who bears

the burden of proof. Rule 142(a). In order to be deductible,

business expenses must be those incurred by the taxpayer in his

trade or business, and not expenses of another individual or

entity. Bistrup v. Commissioner, T.C. Memo. 1980-402.

The underlying issues involving the cost of goods sold and

business expense deductions claimed by petitioner fall within one

or more of the three areas mentioned above.

A. Cost of Goods Sold

As reflected in our findings of fact, we conclude that

petitioner overstated cost of goods sold by $33,242.12 for 1973.

His taxable income should be increased by that amount.

Petitioner has conceded the adjustment of $32,704.82 in cost of

goods sold for 1974, and $57,154.81 of $68,815.64 claimed for

1977. We sustain respondent's determination with respect to the

remaining amount ($11,660.83) for 1977.
 - 212 -

In the notice of deficiency for the taxable years 1978,

1979, and 1981 respondent increased petitioner's cost of goods

sold in the amounts of $145,706, $95,633.60, and $5,862,

respectively. These amounts are related to additional income

from Galion that was included in the notice of deficiency for

these taxable years. Having decided that petitioner's taxable

income should be increased by the amounts from Galion, it follows

that respondent correctly increased petitioner's cost of goods

sold for those years.

B. Commission Expenses

For some of the commission expenses claimed as deductions

for the years 1973 through 1978 petitioner failed to substantiate

the business purpose and that the expenditures were his ordinary

and necessary business expenses. Other than the unidentified

amounts of $170 in 1973 and $16,000 in 1975, respondent concedes

that the claimed amounts were paid.

As to the amounts petitioner paid to Hillary Wood during the

years 1973 through 1977, petitioner raises on brief the

possibility that respondent would argue that the payments to

Hillary Wood were illegal payments to Iranian Government

officials or employees. Respondent has not taken that position.

The reason for disallowing the payments to Hillary Wood in the

notice of deficiency and in respondent's brief is that such
 - 213 -

payments were not ordinary and necessary business expenses.

Petitioner, however, attempts to show that the payments to Ms.

Wood were ordinary and necessary business expenses. Over a

period of 4 years and 1 month petitioner paid Hillary Wood about

$73,500. Ms. Wood resided in Paris, while petitioner resided in

Columbus, Ohio, and carried on most of his business activities in

Iran. Petitioner was able to point to only one Iranian

Government official to whom he received an introduction through

Ms. Wood. Further, he was already well connected with several

high ranking officials in the Iranian Government. Therefore, it

is unlikely that petitioner needed someone from France to assist

him in meeting Iranian Government officials. We think it is

clear that very few, if any, of the services Hillary Wood

provided to petitioner qualify as ordinary and necessary business

expenses for payments of $1,500 per month for 49 consecutive

months. Therefore, we sustain respondent's determination.

Petitioner claimed that the amounts of $16,100 in 1973,

$25,000 in 1974, and $2,130 in 1978, paid to his brother, I.J.

Zand, are deductible. As reflected in our findings of fact, we

hold that the amounts paid as commissions are petitioner's

ordinary and necessary business expenses. The same thing is true

with respect to $15,000 in commissions paid to petitioner's
 - 214 -

brother, Monty Zand, in 1973. However, the amounts paid to Mr.

Sabety in 1973, 1974, and 1978 are not allowable.

The claimed "commission expense transfer payments" of

$23,686 in 1973 and $30,000 in 1974 to the Bank of Minora are

petitioner's ordinary and necessary business expenses and

therefore deductible.

Respondent has conceded a commission expense payment of

$10,000 to A.K. Said in 1973. Petitioner has conceded a payment

of $75,000 to Stewart & Stevenson in 1975.

The July 7, 1973, payment to an illegible payee in the

amount of $35,000 has not been proven to be an ordinary and

necessary expense of petitioner. Thus, it is disallowed.

Similarly, the $170 payment in 1973, and the $16,000 payment in

1975 were unidentified. Both deductions are disallowed.

For the year 1974 petitioner claimed a commission expense in

the amount of $75,000 paid to Hossein Zanganeh. Petitioner

reimbursed himself from Diesel Power's Bank of America account

for this amount. Mr. Zanganeh earned this commission for

assisting petitioner in selling Lockheed aircraft in Iran.

Respondent agrees that Mr. Zanganeh was paid for assisting

petitioner in the sale of the Lockheed aircraft and spare parts

to the Iranian Government. However, petitioner is not entitled
 - 215 -

to any deduction for 1974 because he was reimbursed from Diesel

Power's Bank of America account for that payment.

No business purpose was shown for either the $2,000 payment

to Sadek Massey in 1974, or the $4,756 payment to Ladham Alam in

1974. (We note that petitioner claimed a deduction of $5,250 for

the $4,756 payment to Ms. Alam.) Thus, both deductions are

disallowed.

Having found that all the commissions paid by General Motors

with respect to the sale of locomotives to Pakistan constitute

income to petitioner, we conclude, and respondent agrees, that

commission expenses paid to Amelia Corporation of $234,033.42 in

1975 and $362,003.36 in 1976 are deductible by petitioner.

Petitioner failed to show a business purpose to substantiate

the lodging expenses, car rental, and medical expenses for Mr.

Emelian's son. Petitioner failed to itemize the $4,443 cash

payment to Mr. Emelian. Hence, the total deduction of $7,028.33

is disallowed.

Petitioner failed to prove that the $1,000 payment to Mr.

Bolanhemat in 1975 was his ordinary and necessary business

expense. Thus, this deduction is disallowed.

For the year 1976, petitioner deducted a commission expense

of $10,000 paid to Alfred Borsharpour, who assisted Diesel Power

in attempting to market Lockheed's earth resources program in
 - 216 -

Iran. This program was not successful. Since earth resources

was a Diesel Power program, the amounts paid by petitioner to Mr.

Borsharpour were not his ordinary and necessary business

expenses.

The 1976 payment of $1,500 to Don Kahler in settlement of a

disputed bill was an ordinary and necessary business expense of

CTC, petitionner's sole proprietorship. Therefore, this

deduction is allowed.

There was no business purpose shown for either the 1978 $500

payment to Celia Longenbaker or the 1978 payment in the amount of

$736.54 to TWA for Mr. Rayhanni's Chicago travel expenses.

Hence, both deductions are disallowed.

C. Consulting Fees

For the years 1977, 1978, and 1979 petitioner made payments

of $18,266.10, $14,377.13, and $12,445.39, respectively, to Larry

Castoe. Included in the payments made on behalf of Mr. Castoe

are payments to CDC, stock exchanges fees, expenses for financial

publications and services, and expenses for items for which the

business purpose is not readily apparent.

Mr. Castoe was a stockbroker in Columbus, Ohio, who made his

services available to CTC, Diesel Power, petitioner and other

Iranians to make investments in stock on their behalf. Mr.

Khalatbari also purchased stock through Mr. Castoe. Petitioner
 - 217 -

purchased stock through Mr. Castoe on one or two occasions.

Petitioner has failed to show how the payments made to or on

behalf of Mr. Castoe constitute his ordinary and necessary

business expense. He has not shown how Mr. Castoe's activities

relate to his trade or business of representing U.S.

manufacturers selling machinery or developing real estate.

Commissions paid to a stockbroker are taken into account in

computing the gain or loss on the sale of stock. Such amounts

are not ordinary and necessary business expenses because the

expenses of an investor are not trade or business expenses.

Higgins v. Commissioner, 312 U.S. 212 (1941). In addition,

petitioner has not established a relationship between the

payments made to or on behalf of Mr. Castoe and any investments

he may have made through Mr. Castoe. For these reasons, we

sustain respondent's determination.

For the years 1978 and 1979 petitioner deducted fees paid to

his brother, I.J. Zand, in the amounts of $100,000 and $50,000,

respectively. Petitioner maintains that these payments are

deductible due to a fee splitting arrangement he had with his

brother concerning an agreement petitioner had with Harris

Corporation. Petitioner substantiated the payment to I.J. Zand

in the amount of $100,000 for the year 1978, and respondent

concedes that amount. However, petitioner has failed to
 - 218 -

establish when the $50,000 claimed for the year 1979 was paid.

CTC's 1979 disbursements journal reflects an account payable to

I.J. Zand on June 15, 1979, of $50,000. However, petitioner's

books and other evidence fail to show when or whether this

account payable to I.J. Zand was paid. Since petitioner is a

cash basis taxpayer, he may not claim a deduction for an account

payable. Sec. 461; sec. 1.461-1(a)(1), Income Tax Regs. Because

he has not shown that the $50,000 was paid in 1979, he is not

entitled to the deduction claimed.

D. Management Fees

For the years 1977, 1978, and 1979 respondent disallowed

management fees in the amounts of $96,396, $72,609, and $67,943,

respectively. For the year 1980 respondent disallowed the amount

of $106,601, which consists of payments for investment counsel

totaling $4,500 and payments for consulting and salaries totaling

$102,101.

The majority of the amounts at issue consist of alleged

payments to CDC for management fees. CDC was incorporated on

September 27, 1976. Petitioner held a controlling interest in

CDC.

For the year 1977 petitioner presented no evidence as to how

the amount of the management fee paid was determined or what

services were rendered by CDC to him in exchange for the fee.
 - 219 -

Instead, to support this deduction, petitioner relies on a June

22, 1977, entry in CTC's cash disbursements journal of $100,000

paid to CDC. His accountant, Mr. Dutton, could not confirm that

this payment was for a management fee or any other specific

services, nor was Mr. Dutton able to describe how the amount of

the payment was determined. Petitioner also offers no

explanation for the difference between the $100,000 payment made

June 22, 1977, and the claimed deduction of $96,369.

Accordingly, we hold that petitioner has not established that the

claimed management fee was paid or was an ordinary and necessary

business expense. Thus, he is not entitled to the deduction

claimed.

For the years 1978 and 1979 petitioner offered time

allocation reports and summary workpapers prepared by his

employees in support of the management fees claimed.

For 1978 the first page of Exh. 3138 lists the items which

make up the expense claimed. These items are wages allocable to

CDC, payroll taxes for such wages, a management fee equal to 10

percent of the wage expense, rents received, and rent credit. No

justification was given for either the purpose or the percentage

of the management fee. Furthermore, the time allocation reports

indicate that petitioner's employees merely wore different hats
 - 220 -

at different times in various businesses. This is not sufficient

justification for deducting a management fee.

In 1979 the alleged management fee was increased to 15

percent. A similar method of keeping track of the services

rendered by the employees was utilized. Additionally, in

computing the deduction claimed for 1979 petitioner failed to

offset the management fee claimed by the rent credit, a total

amount of $16,269. Petitioner also failed to report the rental

income on his 1979 income tax return.

As substantiation for payment of the management fee claimed,

petitioner again offered workpapers. Although the first page of

these workpapers lists two accounts payable to CDC in the amounts

of $44,475.29 and $7,198.69, petitioner failed to prove that the

alleged management fees claimed in 1978 and 1979 in the amounts

of $72,609 and $67,943 were actually paid. His cash

disbursements journal for 1978 does reflect a number of payments

to CDC. However, the purpose of most of these payments is not

identified, and none of the payments match the amounts reflected

in the summary workpapers. Furthermore, no checks were issued by

petitioner to CDC for management fees. Certain other payments

recorded in petitioner's 1978 disbursements journal are listed

under a column identified as rent. These payments pertain to the

deduction of $31,842 claimed on petitioner's Schedule C for 1978
 - 221 -

as rent. Other payments identified in the cash disbursements

journal as made to CDC were paid on behalf of Mr. Castoe.

On brief petitioner does not point to any specific amounts

in the record that would substantiate the payments to CDC for

management fees in 1978 and 1979. Instead, he claims that the

payments may have been made by offsetting amounts due him from

CDC. However, petitioner has provided no reconciliations or

other workpapers documenting when and in what amounts any such

offsets were made. Accordingly, the management fees for 1978 and

1979 are disallowed.

For the year 1980 petitioner provided little documentation

in support of expenses claimed for investment counseling in the

amount of $4,500 and consulting and salaries in the amount of

$102,101. He presented only invoices to CTC from CDC dated

February 29, 1980, in the amount of $6,487.83 and April 9, 1980,

in the amount of $461.73. Petitioner's cash disbursements

journal for 1980 does not reflect payment of the amounts claimed.

Therefore, we hold that he has failed to substantiate these

amounts, and they are not deductible.
 - 222 -

E. Legal and Professional Fees

Petitioner claimed a deduction for the amount of $2,097.34

on his 1975 Federal income tax return. The deduction claimed was

for a payment to DuBois Jansson for Mr. Jansson's services in

connection with products to be sold to Iranian State Railways.

Because we have previously held that petitioner is taxable on the

income from the sales to Iranian State Railways, he is entitled

to deduct the $2,097.34 paid to Mr. Jansson

Respondent disallowed legal fees paid to George, Greek,

King, McMahon & McConnaughey, a Columbus, Ohio, law firm in the

amounts of $57,921.08 in 1976, $57,419.26 in 1977, and $25,059.21

in 1978. Petitioner offered a variety of bills from the law firm

in support of the business purpose of these fees. However, the

bills do not itemize the particular services rendered, the time

spent for particular services, and the corresponding charge.

Instead, they list the general nature of the matter for which

services were rendered. Included in the services rendered are

acquisition of real estate, conferences concerning Harris

Corporation, work on the Clark arbitration matter, drafting

leases, a dispute involving property purchased, services

concerning joint ventures, a corporate liquidation, conferences

with representatives of insurance companies on insurance and

pension matters, and tax issues. The legal fees petitioner
 - 223 -

incurred with respect to the purchases and sales of real estate,

the joint ventures, the fees concerning Harris Corporation if

they dealt with a long-term contract for services, and the

corporate liquidation are capital expenditures rather than

ordinary and necessary business expenses. See Collins v.

Commissioner, 54 T.C. 1656 (1970); Bilar Tool & Die Corp. v.

Commissioner, 530 F.2d 708 (6th Cir. 1976). Furthermore, the

legal fees petitioner incurred with respect to insurance and

pension matters are his personal expenses rather than ordinary

and necessary business expenses. In contrast, respondent agrees

that any fees incurred for tax matters and landlord-tenant

problems are petitioner's ordinary and necessary business

expenses. Finally, as will be discussed in more detail below,

the fees paid in the arbitration between Clark Equipment and

Diesel Power are the expenses of Diesel Power, and not those of

petitioner. The payments to George, Greek pertaining to the

Clark arbitration involving Diesel Power were specifically set

forth as $20,607.58, $17,950.59, and $6,315.68 for the years

1976, 1977, and 1978, respectively.

Thus, petitioner's legal expenses include both deductible

and nondeductible items. Problematically, petitioner's

supporting documentation, the law firm bills, lacks the requisite

specificity to demonstrate what amount of the fees is reallocable
 - 224 -

to deductible items versus nondeductible items. Consequently,

petitioner has failed to meet his burden of proof as to the

amount of such fees that is deductible for Federal income tax

purposes. Merians v. Commissioner, 60 T.C. 187 (1973). In

addition to these fees, we note that other expenses for 1976 and

1977 also relate to the same arbitration. When Clark Equipment

Company canceled its distributorship with Diesel Power, Diesel

Power was left with Clark Equipment inventory on hand that it

could not sell. The distributorship agreement provided for

arbitration to resolve such disputes. Diesel Power was

represented in this matter by George, Greek. The other fees paid

to Walder, Wyss, & Maier, Coudert Freres, and A. Sarisin & Cie

represented deposits and arbitrator fees that Diesel Power was

required to pay. Since the dispute concerned a distributorship

agreement and inventory of Diesel Power rather than petitioner,

the legal fees and other arbitration expenses are those of Diesel

Power and not those of petitioner.

Petitioner claimed a deduction in the amount of $9,312.49 on

his 1976 income tax return for payment to Larry Castoe for

professional services. Because petitioner has not shown that Mr.

Castoe's fee was petitioner's ordinary and necessary business

expense, this deduction is disallowed.
 - 225 -

For the year 1976 petitioner claimed a deduction for legal

and professional fees in the amount of $19,799.12 paid to

architect J. Foley. This amount comprises $4,779.12 paid with

respect to a housing project for General Dynamics and $15,000

paid with respect to the purchase and construction of the

building on Riverside Drive which housed CTC's operations. The

amount paid pertaining to the housing project for General

Dynamics employees is not an ordinary and necessary business

expense of petitioner. For the years at issue, he reported no

income from General Dynamics. Thus, any fees paid for services

rendered by Mr. Foley to General Dynamics would be a business

expense of General Dynamics, not petitioner. Furthermore, these

fees are capital in nature. The fees paid for the services

rendered with respect to the purchase and construction of CTC's

office building are clearly capital expenditures and not current

deductions. Sec. 263(a).

Petitioner deducted $2,425.20 as a professional fee paid to

Price Waterhouse for its services rendered as resident agent of

WHIP, a Bahamian corporation. Because WHIP was a shell

corporation, this payment was petitioner's ordinary and necessary

business expense. Hence, the deduction is allowed.

On his 1978 income tax return, petitioner deducted payments

totaling $5,000 made to Sandra Rossi and Celia Longenbaker.
 - 226 -

However, these payments were recorded in CTC's journal as made to

Mr. Shamloo, an Iranian lawyer. No business purpose for the

payments was shown. No explanation was given for why the

payments were made to Sandra Rossi and Celia Longenbaker instead

of Mr. Shamloo. Hence, the $5,000 deduction is disallowed.

For the year 1979 respondent disallowed legal and

professional fees in the amount of $10,082 claimed by petitioner.

Of this amount, $3,710 was paid to the New York law firm of White

& Case. Respondent concedes that $850 of the amount paid is

deductible by petitioner. However, the remaining amounts paid to

White & Case represent fees paid in connection with the purchase

of a cooperative apartment in New York City for petitioner's

daughter. That amount is petitioner's personal expense and is,

therefore, not deductible as a business expense.

Petitioner deducted $910 on his 1979 income tax return for

legal fees paid to Chester, Saxbe, Hoffman & Wilcox. Because the

business purpose of this payment was not shown, the $910

deduction is disallowed.

F. Salaries and Wages

There remain in dispute for 1974 and 1976 payments to

petitioner's brother, I.J. Zand, in the amounts of $9,000 and

$5,000, respectively, claimed as salaries and wages. Unlike the

commission expenses, the payments to I.J. Zand claimed as
 - 227 -

salaries and wages in 1974 and 1976 are not deductible by

petitioner. I.J. Zand was a Diesel Power employee.

Consequently, the salaries and wages paid to him are not

deductible by petitioner because he has not established his

business purpose for the amounts paid to his brother or that the

expenses were not those of Diesel Power.

G. Office Expenses

Respondent disallowed various office expenses claimed for

the years 1973 through 1978. The issues are factual and many of

the amounts are small. Our findings are dispositive of the items

involved. We will comment only on the larger items; i.e., office

furniture and equipment, an Ohio Bell telephone expense, and

condominium rent.

The expense claimed in 1973 for office furniture in the

amount of $1,498.49 is a duplication of business assets

depreciated by petitioner. The depreciation schedule attached to

his 1973 tax return shows the acquisition in 1973 of furniture in

the amount of $296.25 and a desk in the amount of $1,202.24.

These two items total $1,498.49, the same amount petitioner tried

to expense as office furniture. The deduction is disallowed.

For the year 1974 respondent capitalized office furniture

purchases which totaled $4,020.41. The individual items are set

forth in the depreciation schedule attached to the notice of
 - 228 -

deficiency. The items are a Morgan desk ($592.28), Lazarus

office machine ($258.76), a Morgan desk ($954.97), an IBM

typewriter ($696), and telephone equipment ($1,518.40). Each of

these items clearly has a useful life of more than 1 year, and,

consequently, for Federal income tax purposes, their cost must be

recovered through depreciation rather than as an expense.

The deductions claimed for office furniture and equipment

for the years 1975 and 1976 are in the amounts of $16,873.59 and

$4,407.96. There is no evidence in the record to show the items

for which these expenditures were incurred. The depreciation

schedule attached to the notice of deficiency sets forth items of

furniture and equipment that respondent determined were capital

expenses rather than ordinary expenses, and which petitioner

substantiated. Thus, because there is no evidence to show that

the items claimed constitute ordinary expenses, we sustain

respondent's determination.

For the year 1975 respondent disallowed a payment to Ohio

Bell in the amount of $7,359.75. This payment is for a CTC

telephone bill dated November 14, 1975, which consists of a one-

time charge in the amount of $6,626.30 and other charges for

services totaling $661.16. Respondent concedes that petitioner

is entitled to deduct the other charges in the amount of $661.16.

However, petitioner has failed to verify the type of equipment or
 - 229 -

service provided, or the business purpose of the one-time charge

of $6,262.30. Thus, since petitioner has not established the

business purpose for this expense or that it is an ordinary

rather than a capital expense, no deduction is allowed.

For the year 1978, petitioner deducted $9,000 for

condominium rent paid to his son-in-law, Joseph Dinunzio. The

rent was prepaid in 1978 for the year 1979, and was based on the

estimated fair rental value of the condominium plus the cost of

furnishing it. Mr. Dinunzio acquired the condominium in the fall

of 1978 from the Riviera Condominium Company of Naples, financing

the purchase with a 100-percent mortgage from Dollar Savings of

Ohio. Petitioner was a shareholder in the Riviera Condominium

Company of Naples.

The amount paid to Mr. Dinunzio for the use of this

condominium does not constitute an ordinary and necessary

business expense of petitioner. Rather, the evidence shows that

petitioner was merely continuing to help his daughter and her new

husband get established. Petitioner had already provided his

son-in-law with employment immediately after Mr. Dinunzio

graduated from college. Furthermore, shortly thereafter, Mr.

Dinunzio's duties were expanded to include the vice presidency at

no less than four business entities controlled by petitioner;

i.e., CDC, Caspian Machinery, Caspian Electric, and Caspian
 - 230 -

Florida. Petitioner also purchased a home in Columbus, Ohio, for

his daughter and Mr. Dinunzio and bought him a Cadillac.

Accordingly, we hold that the $9,000 paid by petitioner to

Mr. Dinunzio did not constitute an ordinary and necessary

business expense, and, therefore, the deduction is disallowed.

Additionally, petitioner's 1980 rent expense deduction in the

amount of $6,451.86 is disallowed. The expense was personal;

i.e., rent paid for a New York City condominium for petitioner's

daughter.

H. Interest Expense

For the years 1973 through 1980 respondent disallowed

deductions claimed by petitioner for interest expenses of $3,250,

$3,000, $142,500.17, $27,579.67, $3,093.12, $20,034, and $74,879,

respectively.

With respect to the amounts claimed as interest expense to

Mr. Sabety, petitioner substantiated payments in the amounts of

$3,000 for 1973, $3,000 for 1974, $2,950.96 for 1975, $3,000 for

1976 and $1,000 for 1977. However, petitioner presented no

evidence to show a debtor-creditor relationship between himself

and Mr. Sabety. In 1967, Mr. Sabety invested $20,000 through

petitioner in an entity known as Caspian International Jordan.

Petitioner did not incur personal liability to Mr. Sabety for the

amount invested, nor did he sign a note. From this investment
 - 231 -

Mr. Sabety was to receive a monthly payment of at least $250.

There is no further evidence in the record of this investment.

Since petitioner has failed to establish that the payments to Mr.

Sabety constitute his interest expense, the deduction is

disallowed.

For the year 1975 petitioner claimed interest expense paid

to Diesel Power in the amount of $137,500.17. Petitioner filed

an amended income tax return for 1975 reducing the interest

expense paid to Diesel Power by $41,245.39. Thus, the remaining

amount in dispute is $96,254.78.

Petitioner paid Diesel Power $125,000 on December 30, 1975.

In CTC's cash disbursements journal this amount is listed under

the transfer column and is noted "interest on loan drawn by Zand

since 1973." In 1978, when petitioner was attempting to

determine where he stood financially with Diesel Power, the

$125,000 payment was treated no differently than other CTC

transfers to Diesel Power. In addition, by filing the amended

return petitioner admitted that the claimed interest expense was

no more than $96,254.78. Moreover, he has presented no notes or

other loan documents evidencing a debtor-creditor relationship

between himself and Diesel Power.

Testimony was presented that petitioner borrowed moneys from

Diesel Power. However, this testimony was not specific with
 - 232 -

respect to amounts of such loans, dates of such loans, interest

rates, or payment schedules. Since petitioner has failed to

establish that $96,254.78 or any portion of the $125,000 paid to

Diesel Power on December 30, 1975, is interest expense, the

deduction is not allowed.

For the years 1975 and 1977, petitioner deducted interest

expenses in the amounts of $2,049.04 and $688.32, respectively.

Neither payment can be identified. Therefore, petitioner has

failed to meet his burden of proof with respect to these amounts,

and the deductions are disallowed.

For the year 1976 petitioner deducted $24,400.87 paid to

W.P. Glass on June 1, 1976, as interest expense. This amount was

recorded in CTC's cash disbursements journal as an interest

payment for a ranch. However, the entry in this journal is not

accurate. In fact, the payment of $24,400.87 to Mr. Glass was

for the acquisition of real estate, a ranch purchased as an asset

of the A-Z Ranch Partnership. Petitioner admits that the payment

to Mr. Glass was a portion of the purchase price of real property

that was an asset of the partnership. Thus, this amount does not

constitute interest expense. Sec. 163.

For the years 1979, 1980, and 1981 petitioner claimed

interest expenses paid to the Mirhosseini family in the amounts

of $15,000, $44,879, and $36,000, respectively. On or about

September 10, 1979, three members of the Mirhosseini family each
 - 233 -

lent petitioner $80,000. He agreed to invest the total sum of

$240,000 in his operating companies and to provide the

Mirhosseini family with a 25-percent-per-year return on the

principal, payable quarterly, in advance. At approximately the

same period of time, petitioner borrowed other funds at interest

rates of 8 percent and 12 1/2 percent.

The parties stipulated that CTC's or petitioner's 1979 and

1980 journals reflected payments to the Mirhosseini family. This

stipulation was in error and is in conflict with the documentary

evidence of record. The disbursements journals do not reflect

the claimed interest payments to the Mirhosseini family for the

years 1979, 1980, and 1981. Stipulations contrary to the actual

facts disclosed by the record may be disregarded. Mead's Bakery,

Inc. v. Commissioner, 364 F.2d 101, 106 (5th Cir. 1966), revg.

T.C. Memo. 1964-104. Furthermore, the workpapers recapping 1980

interest expense are not sufficient documentation that payment

was made or that the amounts shown are interest. Thus,

petitioner has not substantiated any payments to the

Mirhosseinis. Moreover, he has not shown in which of his

operating companies the funds were invested. Therefore, we hold

that the amounts paid to the Mirhosseini family are not

deductible as interest expense.

The $30,000 and $45,000 of interest expenses claimed in 1980

and 1981 for payments to the J.J. Zand Trust are attributable to
 - 234 -

loans made by trusts established for the benefit of petitioner's

three daughters. In 1977 petitioner established these six

trusts, two for each of his three daughters. The two trusts for

each daughter were in the amounts of $25,000 and $75,000. Each

of the trusts was for a term of 10 years and 1 day. The three

trustees were Priscilla Meier, petitioner's longtime employee,

and George Hairston and David Johnston, attorneys in the law firm

of George, Greek. The terms of the trust agreements placed

investment discretion solely in the hands of the three trustees

acting in unison and not separately.

In 1977 the trust funds were lent to CDC, a corporation in

which petitioner held a controlling interest. The loans were

repaid to the trusts. On February 5, 1980, the corpus of each

trust was lent to petitioner personally with a rate of return of

12 percent per annum. As security for the loans, petitioner gave

mortgages on his residence and condominium. He claimed interest

paid to the trusts in the amounts of $30,000 and $45,000 for the

years 1980 and 1981, respectively. At the end of the years 1980

and 1981, the loans had not been repaid. The funds in the trusts

were paid to petitioner personally or were invested in entities

that he controlled.

Respondent contends that the claimed interest deductions of

$30,000 for 1980 and $45,000 for 1981 should be disallowed

because petitioner should be treated as the "owner" of the
 - 235 -

trusts' assets. It is asserted that petitioner has failed to

comply with the safe harbor provisions of section 675(3). To the

contrary, petitioner contends that the provisions of section

675(3) are met and that he is entitled to the claimed interest

deductions. We agree with petitioner.

Section 675(3) provides that the grantor shall be treated as

the owner of any portion of a trust in respect of which the

grantor has directly or indirectly borrowed the corpus or income

and has not completely repaid the loan, including the interest,

before the beginning of the taxable year. However, the section

also provides that this requirement does not apply to a loan

which provides for adequate interest and security and if the loan

is made by a trustee other than the grantor and other than a

related or subordinate trustee subservient to the grantor. Here

these three conditions are met: (1) The loans bore adequate

interest; (2) the loans were adequately secured; and (3) the

majority of the trustees (the two attorneys) were not related,

subordinate, or subservient to the grantor. Lawyers are not

proscribed by section 672(c) and thus may qualify as independent.

See Bittker & Lokken, Federal Taxation of Income, Estates and

Gifts, par. 80.1.4, at 18-19 (2d ed. 1991); 452-2nd T.M. Grantor

Trusts: Sections 671-679, A-14. See also Estate of Goodwyn v.

Commissioner, T.C. Memo. 1976-238. Moreover, even if section

675(3) did apply, its effect by its terms is to tax all or a
 - 236 -

portion of the trust income to petitioner. It does not provide

for the disallowance of the interest expenses claimed by him.

Indeed, the net result to the grantor may be no increase in tax

because the trusts' interest income taxed to the grantor may be

offset by a deduction for interest on the loans. See Bittker &

Lokken, Federal Taxation of Income, Estates and Gifts, par. 80.7

at 64.

Respondent relies on Benson v. Commissioner, 76 T.C. 1040

(1981); Bixby v. Commissioner, 58 T.C. 757 (1972); and Bennett v.

Commissioner, 79 T.C. 470 (1982). Such reliance is misplaced.

Those cases are distinguishable. In Benson the loan was

unsecured, and the grantor's spouse was the sole trustee. In

Bixby the settlors were held not to be the true grantors for

purposes of the grantor trust rules. Rather, the subsequent

transferors were the actual grantors. There was no discussion of

section 675(3) in the Bixby case. In Bennett the grantors were

the trustees, and the loan was unsecured.

Accordingly, as reflected in our findings of fact, we hold

that the interest deductions claimed by petitioner in 1980 and

1981 as paid to the trusts on the secured loans are deductible.
 - 237 -

I. Expenses for Insurance and Dues and Publications

Our findings of fact are dispositive of the expenses

disallowed by respondent for insurance and dues and publications.

It is not necessary to repeat them here.

J. Depreciation

For the years 1973 through 1980 respondent disallowed

depreciation expenses in the amounts of $560.90, $6,820.14,

$6,154.42, $10,902.44, $5,913, $13,652, $7,461, and $7,806.36,

respectively.

For the year 1981 respondent allowed depreciation in an

amount that is $2,494 greater than the amount claimed by

petitioner on his income tax return. Respondent's adjustments to

depreciation take into account items that petitioner expensed on

his income tax returns but that respondent determined were

capital expenditures subject to depreciation.

For the years 1973 and 1976 petitioner offered no evidence

to refute respondent's adjustments to the depreciation claimed.

Therefore, respondent's adjustments are sustained.

For the years 1974 and 1975 respondent disallowed

depreciation claimed on petitioner's apartment in Kitzbuhel,

Austria. Petitioner contends that the apartment was purchased as

a place to stay while in Europe in lieu of hotels. He transacted

business from the apartment, including meeting business

associates and making business-related telephone calls. He, his
 - 238 -

family, and his friends also used the Kitzbuhel apartment for

personal vacations. Petitioner engaged in skiing in Kitzbuhel

and received skiing lessons there. All of his daughters, his

son-in-law, and his wife used the Kitzbuhel apartment for

personal vacations. Petitioner was known to spend Christmas

vacation in Kitzbuhel skiing. He allowed many of his friends to

use the Kitzbuhel apartment for personal vacations.

Although petitioner may have conducted some business while

in Kitzbuhel, there is evidence that his apartment was used

extensively for personal vacations by him, his family, and his

friends. Furthermore, he failed to keep a record of the number

of days of business use as compared to the number of days of

personal use of the Kitzbuhel apartment. Moreover, he failed to

show that any business activities carried on while in Kitzbuhel

were not incidental to personal vacations. Petitioner has failed

to establish that he is entitled to the claimed depreciation with

respect to the Kitzbuhel apartment.

For the years 1974, 1975, 1977, 1978, 1979, and 1980

respondent disallowed the depreciation expenses claimed by

petitioner on various automobiles. The automobiles consisted of

cars driven by him and those provided to employees of CTC or CDC.

Neither petitioner nor the employees maintained any records to

differentiate between business and personal use of the

automobiles. He and the employees admitted that the cars were
 - 239 -

used for personal purposes, and they made only general comments

that the cars were used mostly for business.

Additionally, in 1976 petitioner formed CDC. His son-in-

law, Mr. Dinunzio, was employed by CDC and its various

subsidiaries. Mr. Dinunzio also worked on McZand Corporation

projects. He used the automobile provided by petitioner in his

employment for McZand Corporation and CDC and its subsidiaries.

Mr. Dutton was also provided with a car by petitioner, as were

Clem and Priscilla Meier. Each of these individuals used the

cars provided by petitioner in their employment with CDC,

subsidiaries of CDC, or partnerships in which CDC was a partner.

We conclude that petitioner failed to present sufficient

evidence to prove that he is entitled to depreciation on the

automobiles he purchased for his use and the use of others. No

records were maintained to show the business use of the

automobiles. There is also little evidence of petitioner's

business activities in and around the Columbus, Ohio, area. His

clients and customers were spread throughout the United States.

He claimed and was allowed significant amounts for travel

expenses in meeting with those clients. In addition, for the

years 1977 through 1980 the use of the automobiles by Mr.

Dinunzio, Mr. Dutton, and the Meiers was related to the

activities of McZand Corporation or CDC. Thus, any automobile

use on behalf of those entities would not constitute an ordinary
 - 240 -

and necessary business expense of petitioner. Accordingly, we

sustain respondent's determination on this issue.

K. Rental Loss and London Rent Expense

Again, our findings of fact are dispositive of respondent's

decreased rental loss of $35,228.13 claimed by petitioner for

1975, and the disallowance of $10,000 in 1976 for the rental of

the Khalatbaris' apartment in London. We sustain respondent's

determinations.

L. Loan Origination Fee

For the year 1978 respondent disallowed a deduction in the

amount of $7,000 paid as a loan origination fee. On May 25,

1978, petitioner paid W. Lyman Case and Company $7,000 as a loan

origination fee for the purchase of the Madison County Farm. The

Madison County Farm was not petitioner's personal residence.

Instead, it was a farm owned by CDC. Section 461(g) generally

requires that loan origination fees be charged to the capital

account and recovered over the period to which they are so

allocable. However, a loan origination fee is currently

deductible only if the loan is for the purchase of the taxpayer's

principal residence. Sec. 461(g)(2). Because the farm was owned

by CDC, rather than by petitioner, the deduction of the loan

origination fee is disallowed.
 - 241 -

M. Moving Expense and Investment Tax Credits

As to these two issues, our findings of fact are

dispositive. The claimed moving expense deduction for 1979 was

for Mr. Dutton, an employee of CDC. It was not petitioner's

ordinary and necessary business expense. The investment tax

credits for 1976, 1978, and 1979 were disallowed by respondent,

and petitioner presented no evidence with respect to them.

Therefore, respondent's determinations are sustained.

N. Travel and Entertainment Expenses

A major area of deductions for which payment is disputed is

travel and entertainment. Petitioner claimed enormous and

inflated expenses for travel and entertainment, as shown in our

findings of fact, for the years 1973 through 1981. Respondent

allowed sizable amounts for the years 1973 through 1976, and also

disallowed substantial amounts for those years. All amounts

claimed for the years 1977 through 1981 were disallowed by

respondent.

For the travel and entertainment expenses, not only is the

fact of actual payment in question, but also whether claimed

expenses were ordinary and necessary, whether they were incurred

by petitioner as a sole proprietor, or whether they were the

expenses of Diesel Power or, for later years in issue, a myriad

of other corporate entities with which petitioner was involved.

Also at issue is whether the substantiation requirements of
 - 242 -

section 274 have been met. Some of the disputed expenses involve

estimated cash expenditures, expenses relating to apartments in

the ski village of Kitzbuhel, Austria, and in London, England,

and reimbursements made to Diesel Power.

Section 162(a) permits a taxpayer to deduct "ordinary and

necessary expenses paid or incurred during the taxable year in

carrying on any trade or business," including travel and

entertainment expenses. However, even "ordinary and necessary"

expenses must have been incurred on behalf of the taxpayer's

business, not on behalf of another taxpayer's business. Deputy

v. DuPont, 308 U.S. 488 (1940).

Thus, petitioner must first show that his claimed travel and

entertainment expenses were ordinary and necessary and, if so,

petitioner must also show that the expenses were incurred in

furtherance of CTC's business rather than the business of another

taxpayer. Dietrick v. Commissioner, 881 F.2d 336, 339 (6th Cir.

1989), affg. T.C. Memo. 1988-180.

From 1972 through 1977 petitioner owned and operated CTC as

a sole proprietorship. He was also a shareholder (100 percent

until late 1974) as well as a director and chairman of Diesel

Power. During all or part of the earlier years, he was also

involved in various other entities, including WHIP, All Patents,

and IGOS.

Beginning in 1975, and for the remaining years, the

characterization of expenses becomes even more difficult. By

1975 Diesel Power and CTC's business relationship was winding
 - 243 -

down; the distributor agreements with the various U.S.

manufacturers were terminated; and in December 1977 petitioner

divested himself of any interest in Diesel Power.

Between 1976 and 1981, however, he became involved in

various closely held corporations and partnerships for real

estate development and farming operations. He formed CDC, which

filed corporate tax returns with its consolidated subsidiaries

including Caspian Electric Company, Caspian Farm Systems, Caspian

Machinery Company, and Charleston, Inc. CDC was generally in the

business of real estate and real estate development and

management. CDC owned 70 percent of Green Prairie, a partnership

consisting of an Alabama farming operation; a second partnership,

Franklin Green, owned a house on the Alabama farm; a third

partnership, the Bowling Green partnership, owned the farm-land.

Petitioner, directly or indirectly (in conjunction with CDC),

owned over 50 percent of these three partnerships. Petitioner

was also a shareholder in the following additional entities:

McZand Corporation, a subchapter S corporation, which held real

estate in the Columbus, Ohio, area; and Homestead Development and

Southern Florida Real Estate, both of which were involved in real

estate development and investment in Florida. By 1978 CTC

employees had become employees of CDC, and although CTC continued

as a Schedule C business, it is unclear on this record exactly

what business CTC engaged in after 1977.
 - 244 -

No attempt has been made to show that claimed travel and

entertainment expenses in any amounts greater than those allowed

by respondent were ordinary and necessary or were expended in

furtherance of CTC's business, rather than in furtherance of

Diesel Power's business or the business of other entities in

which petitioner was involved. Instead, petitioner ignores the

existence of any other entities on whose behalf he conducted

business and merely concludes that an expense was CTC related if

it was treated that way on CTC's books or by his tax return

preparers. None of petitioner's bookkeepers or return preparers

testified that they were present when any expense was incurred;

rather, petitioner simply directed how an expense was to be

treated on CTC's books. Accordingly, their testimony does

nothing to substantiate the business nature of travel and

entertainment amounts reflected on either CTC's books or

petitioner's tax returns. See Anderson v. Commissioner, T.C.

Memo. 1976-28 (testimony of bookkeeper who was not present when

expenses were incurred could not substantiate nature of claimed

travel and entertainment expenses).

In addition to the requirements that expenses be ordinary

and necessary as well as in furtherance of taxpayer's business,

section 274(d) imposes stringent substantiation criteria.

Section 274(d) prohibits a deduction for travel and entertainment

expenses unless the taxpayer substantiates by adequate records or
 - 245 -

by sufficient evidence, corroborating the taxpayer's own

statement: (1) The amount of the expense; (2) the time and place

of the travel or entertainment; (3) the business purpose of the

expense; and (4) the business relationship of the taxpayer to the

persons entertained. These four elements must be established for

each separate expenditure. Sec. 1.274-5(c)(1), Income Tax Regs.;

Dowell v. United States, 522 F.2d 708, 714 (5th Cir. 1975).

A taxpayer satisfies the substantiation requirements of

section 274(d) by meeting the adequate records test or through

substantiation by other sufficient evidence. Sec. 1.274-5(c)(1),

Income Tax Regs. Proof by "adequate records" requires the

taxpayer to maintain a contemporaneous account book, diary,

statement of expense, or similar record and documentary evidence

which, in combination, "are sufficient to establish each element

of an expenditure". Sec. 1.274-5(c)(2), Income Tax Regs. In

addition to an account book or diary, substantiation by adequate

records requires additional documentary evidence for expenditures

of $25 or more, except for transportation charges, if

documentation for such charges is not readily available. Sec.

1.274-5(c)(2)(iii)(b), Income Tax Regs. Acceptable documentary

evidence includes receipts, paid bills, or other similar evidence

which establish the amount, date, place, and essential character

of the expenditure. Sec. 1.274-5(c)(2)(iii), Income Tax Regs.

Failure to produce adequate documentary evidence results in
 - 246 -

disallowance of travel and entertainment deductions. Sanford v.

Commissioner, 50 T.C. 823, 828 (1968), affd. per curiam 412 F.2d

201 (2d Cir. 1969).

In our view petitioner's travel diaries do not meet the

substantiation requirements necessary for purposes of section

274. The diaries do not reflect the business purpose of the

meeting, entertainment or expense, the location where the

entertainment took place, or the business relationship of the

person entertained. Instead, the diaries contain a hodgepodge of

cities, names of persons and, in some instances, an amount

allegedly paid for hotel bills, dinners and entertainment,

transportation, and miscellaneous expenses.

Some meetings, entertainment, and expenses reflected in the

diaries are clearly personal. For example, the diaries include

expenditures for luggage and clothes and reflect meetings and

entertainment in Rome, Beirut, London, and Paris with Murat Seker

of Ingersoll-Rand in January, February, and April 1973, April and

August 1975, March and May 1976, and April 1977. Both petitioner

and Mr. Seker testified that they had no business relationship in

the 1970's. Moreover, the diaries reflect expenses for dinners

and entertainment of entire families or unnamed associates. In

many instances the individuals whose names appear in the diaries

were involved not only with CTC, but also with Diesel Power,

WHIP, All Patents, IGOS in the earlier years, and McZand
 - 247 -

Corporation, CDC, and various Florida real estate projects

involving other corporate entities in the later years. The more

frequently named individuals who fall into this category include

Mr. and Mrs. Khalatbari, Dr. Fallah, Olin Atkins, Hossein

Zanganeh, and Bill McCabe, as well as representatives of various

U.S. manufacturers who dealt with both Diesel Power and CTC.

Petitioner acknowledged that the diaries only generally

reflect his travel and entertainment expenses. The diaries do

not reflect sundry travel expenses or minimal amounts. Most of

the expenditures reflected in the diaries are for amounts in

excess of $25; many of the expenses shown for hotel bills,

dinners, and entertaining are for hundreds of dollars, with no

supporting documentation as to either the amount or the business

purpose.

Alternatively, the substantiation requirements of section

274(d) can be satisfied by a taxpayer's oral or written statement

supported by "other corroborative evidence". Other corroborative

evidence can take two forms: (1) Oral or written testimony of

third persons with actual knowledge of the expenditures or (2)

documentary evidence subject to the same requirements imposed

under the "adequate records" test. Sec. 1.274-5(c)(3), Income

Tax Regs. In our opinion petitioner has not complied with this

alternative substantiation method. Several persons named in his

diaries did testify at trial, but none corroborated any meeting
 - 248 -

or expenditure claimed in the diaries. In fact, the testimony of

Murat Seker and petitioner himself directly contradicts entries

in his diaries.

The unsupported testimony of a taxpayer at trial is not

sufficient to meet the stringent substantiation requirements of

section 274(d). To adequately substantiate the deductibility of

travel and entertainment expenses, specificity is imperative.

Dowell v. United States, supra at 714; Hatch v. Commissioner,

T.C. Memo. 1980-110; Gras v. Commissioner, T.C. Memo. 1974-230.

Petitioner attempts to surmount this specificity requirement

by contending in his brief that this case does not involve a

shoebox full of receipts, and that the sheer number of exhibits,

the length of trial, the mass of petitioner's brief, and

petitioner's selective testimony prove his entitlement to the

claimed travel and entertainment expenses. We reject his

contention. This same argument was rejected in Dowell v. United

States, 522 F.2d at 708, where the Court of Appeals for the Fifth

Circuit reversed the District Court's finding that the "blizzard"

of bills and chits established the amounts, dates, and places of

expenditures necessary to substantiate the taxpayer's claimed

travel and entertainment expenses. As recognized by the Court of

Appeals in Dowell, such an approach is contrary to the stringent

substantiation requirements imposed by section 274(d). Id. at

714.
 - 249 -

The only years for which petitioner specifically testified

as to receipts, invoices, or underlying documents relating to

claimed expenses were 1977, 1978, and 1979. However, for the

years 1978 and 1979, as well as 1980 and 1981, his exhibits

containing checks, receipts, or other underlying documents were

not received in evidence. Furthermore, his testimony with

respect to his travel in those years can best be described as

vague with respect to both business purpose and the business

relationship of the persons with whom he allegedly met. It

appears that his testimony confirms that the majority of his

travel in those years related to the business of Diesel Power,

IGOS, CDC and its various subsidiaries and partnerships, real

estate development projects in Florida (Homestead Development and

Southern Florida Real Estate), the exploration of new business

opportunities, startup expenses related to new ventures, and the

sale and subsequent arbitration and litigation with Mr.

Khalatbari regarding his Diesel Power stock. Moreover, while

receipts, invoices and other documents for 1977 are in evidence,

they establish no more than the fact of payment; these documents

do not establish the elements necessary to corroborate

petitioner's testimony for purposes of substantiating his

entitlement to the deductions under section 274.

As part of his travel and entertainment expenses, petitioner

claimed cash expenses that are not reflected as part of travel
 - 250 -

and entertainment on CTC's disbursements journals.

Significantly, the cash expenses claimed on the returns cannot be

reconciled with the diaries and are in substantially greater

amounts than the expenses recorded in the diaries. For the years

1973 through 1976 the amounts of the cash expenses claimed were

estimates that the return preparer, Mr. Giffin, derived from the

number of checks that petitioner wrote to cash and the number of

days that he was out of the country, based on his diaries. No

evidence was presented concerning any specific cash expenditures

from 1973 through 1976. Moreover, estimated expenses for travel

and entertainment expenses are not allowable because section 274

expressly overrides the Cohan rule, Cohan v. Commissioner, 39

F.2d 540 (2d Cir. 1930); see Sanford v. Commissioner, 50 T.C. at

827.

For the years 1977 through 1981 it is unclear how the cash

expenses were determined. Aside from testimony that the return

preparers reviewed the cash expenses claimed on the returns,

there is no evidence of business purpose or that any cash

expenses claimed in 1977 through 1981 were incurred for CTC's

business. Nor, as noted previously, is any check, receipt or

document underlying the cash expenses claimed in 1978 through

1981 in evidence.28 For 1977 the workpapers show only a list of

28
In this regard, the Court in its order dated Oct. 9, 1992,
specifically stated that Exhs. 3195 through 3215, which include documentation
for claimed travel and entertainment expenses in 1978 through 1981, would not
be received in evidence.
 - 251 -

amounts that add up to the $17,380 in cash expenses claimed on

the 1977 tax return. It appears that alleged cash expenses

included on the 1978 through 1981 returns include payments to

petitioner's housekeeper, payments for cablevision, payments to a

CDC employee, American Express and VISA payments, payments to

Ohio State University, payments to the Port Royal Club and the

Columbus Country Club, a number of payments for flowers and

gifts, at least $12,500 in checks to "cash" or "J.J. Zand" and a

$5,000 wire transfer to Austria near the Christmas holidays.

However, no cash expenses claimed for 1978 through 1981 have been

reconciled with petitioner's tax returns for those years, and no

business purpose for any claimed cash expenditures in those years

has been disclosed on the record.

In 1974, 1975, and 1976 petitioner claimed, either

separately or as part of his travel and entertainment, various

expenses attributable to his apartment in Kitzbuhel, Austria. He

and his family used Kitzbuhel personally for Christmas skiing

vacations, and CTC employees considered Kitzbuhel as petitioner's

personal rather than business location.

In 1975 and 1976 petitioner included $10,000 and $5,000 in

expenses for Kitzbuhel as part of his claimed travel and

entertainment expenses. Neither the fact of payment nor the

business purpose for any expense attributable to Kitzbuhel has

been proven. All of the expenses claimed for Kitzbuhel were
 - 252 -

included on the returns without the benefit of supporting records

or documentation. Rather, in support of the Kitzbuhel expenses,

petitioner relies on telephone calls and meetings ascribed to

Kitzbuhel in his diaries. While the diaries reflect telephone

calls and meetings at Kitzbuhel, they also reflect visits by

family members and the fact that petitioner went to Kitzbuhel to

rest. His 1974 diary shows that petitioner was in Kitzbuhel for

55 days, 9 of which were for rest, and that his daughters,

housekeeper, and girlfriend were in Kitzbuhel for 42 days.

In 1975 petitioner also claimed travel and entertainment

expenses for a London apartment in the amount of $15,000. The

return preparer did not question petitioner or see any underlying

documentation regarding this claim. He simply took petitioner's

word for the $15,000 expense. The workpapers for 1975 show that

$5,000 of the total expenses claimed for the London apartment was

for a car and chauffeur. However, no documentation underlying

the $15,000 in expenses claimed for the London apartment has been

provided. Furthermore, the amount claimed is contrary to

petitioner's testimony that he paid Mr. Khalatbari a flat sum of

$10,000 for the use of his London apartment, including the maid,

car and chauffeur.

Finally, petitioner claims that part of the total travel and

entertainment expenses claimed in 1974 is a $27,618.39 payment to

Diesel Power that was allegedly paid to reimburse it for payment
 - 253 -

of petitioner's hotel expenses in that year. The only evidence

to support the business purpose for this payment is petitioner's

testimony that Diesel Power paid his hotel expenses in all but 1

year, and notations on CTC's 1974 disbursements journal and

workpapers. Moreover, there is no breakdown of this total amount

by date or place, nor is there evidence establishing that any

portion of the payment was incurred for a business purpose of

CTC, rather than of Diesel Power. In these circumstances, we

hold that the $27,618.39 payment is not a deductible expense.

In his brief petitioner makes no legitimate argument in

support of his claimed travel and entertainment expenses. He

merely asserts that the respondent's disallowance of the expenses

was arbitrary because respondent allowed the amounts set forth on

CTC's journals in 1974 and 1976, but subsequently took a

"shotgun" approach, disallowing one-half of the amounts on CTC's

journals in 1975 and completely disallowing the amounts reflected

on the journals for the years 1977 through 1981. Contrary to

petitioner's claim, CTC's 1975 disbursements journal shows travel

and entertainment expenses of $108,446.48. However, on his 1975

return petitioner claimed a deduction in the total amount of

$157,946.48. For 1975 respondent allowed him $80,631.47 or

approximately 75 percent of the amount reflected on CTC's

journals. For the years 1977 through 1981 petitioner was

involved in a myriad of other entities in addition to CTC, his
 - 254 -

sole proprietorship. Although he continued to utilize CTC for

bookkeeping purposes, petitioner has not shown that any expenses

reflected in CTC's books bear any relationship to CTC's business.

Indeed, it is unclear in what, if any, business CTC engaged

during the years from 1978 through 1981.

It is established law that deductions are a matter of

legislative grace and the taxpayer must meet the specific

statutory requirements for any deduction claimed. Welch v.

Helvering, 290 U.S. at 115; New Colonial Ice Co. v. Helvering,

292 U.S. at 440. It was petitioner's burden to prove his

entitlement to the deductions at issue. Based on this record, we

hold that petitioner failed to prove that he is entitled to any

travel and entertainment expense deductions for the years in

issue other than those allowed by respondent.

VII. Issue 11--Dependency Exemption and Charitable Contribution
Deductions

A. Dependency Exemption

Respondent disallowed dependency exemption deductions for

Tara Daneshvari claimed by petitioner for 1973 and 1974. Tara

was the daughter of petitioner's Iranian friends who lived in

Columbus, Ohio. The issue is whether Tara qualified as

petitioner's dependent during those years.

Section 151(a) and (c) allows a taxpayer, subject to certain

requirements, a deduction for personal exemptions for each of his

dependents as defined in section 152. Pursuant to section
 - 255 -

152(b)(3), an individual, other than a child of the taxpayer, who

is not a citizen or national of the United States is excluded

from the definition of the term "dependent" unless the person is

a resident of the United States or of a country contiguous to the

United States.

Section 1.871-2(b), Income Tax Regs., contains guidelines

for determining the residence of alien individuals and provides

that an alien whose stay in the United States is limited to a

definite period by immigration laws normally is not considered a

resident. Section 1.871-4, Income Tax Regs., further contains a

presumption that aliens are nonresidents unless they have filed

declarations of their intention to become citizens, have filed a

Form 1078 or its equivalent, or have taken certain actions to

acquire residency. There is no evidence in the record as to

whether Tara was a resident of the United States within the

meaning of section 152(b)(3). The only evidence is that she was

an adopted daughter of Dr. and Mrs. Daneshvari.

There was apparently some concern by her legally adoptive

parents that Tara would be sent back to Iran, thus indicating

that she was not a U.S. citizen or had not taken any other

actions required to establish residency. See Camilo v.

Commissioner, T.C. Memo. 1993-249. We note that petitioner does

not claim that Tara is a U.S. citizen, but instead relies upon

the fact that she lived in the United States as the basis for
 - 256 -

allowing the exemption. That is insufficient absent proof that

she was a resident of the United States (or of a contiguous

country). Accordingly, the dependency exemption deductions

claimed for both years are not allowed.

B. Deduction for Charitable Contribution to City of Columbus

On Schedule A of his 1976 income tax return, petitioner

claimed a deduction for a charitable contribution of $51,662.62

to the City of Columbus for a house that had been situated on the

lot he purchased in 1975 at 3404 Riverside Drive, Columbus, Ohio,

adjacent to CTC's office building. The house had been rented,

but petitioner decided to give it to the city by moving it across

the road on the other side of the river where it would be used as

a public place. He also gave the city $13,000 for the expense of

moving the house to the park. On December 20, 1976, the City of

Columbus passed an ordinance accepting petitioner's donation of

the single-family stucco house located at 3404 Riverside Drive

and the $13,000 paid to the city as a donation for moving the

house.

The claimed charitable deduction was disallowed by

respondent on the ground that the house was acquired with the

intention to remove or demolish it when it was acquired, and,

consequently, the cost should be considered land acquisition

cost, with the house having no fair market value at the time of

the transfer. Where property is purchased with the intent of
 - 257 -

demolishing an existing building, either immediately or

subsequently, the entire basis of the property is allocated to

the land, increased by the net cost of demolition, and no loss is

allowed for the demolition of the building. Sec. 1.165-3(a)(1),

Income Tax Regs.; Estate of Wilson v. Commissioner, T.C. Memo.

1990-514, and cases cited therein. The rationale for this is

that if a taxpayer buys property with the intention of

demolishing a building, the building can have no value to the

taxpayer and its demolition causes the taxpayer no loss. Ivey v.

Commissioner, 423 F.2d 862, 864 (2d Cir. 1970), affg. 52 T.C. 76

(1969).

Section 170(c) permits a deduction for a charitable

contribution to a State or political subdivision thereof,

provided the gift is made for exclusively public purposes.

Osborne v. Commissioner, 87 T.C. 575 (1986). However, the

measure of a charitable contribution of property is the fair

market value of such property. Withers v. Commissioner, 69 T.C.

900, 902 (1978).

We reject respondent's contention that petitioner intended

to demolish the house when he purchased it some 14 months before

he gave it to the City of Columbus, Department of Recreation and

Parks. The provisions of section 1.165-3, Income Tax Regs., are

inapplicable in these circumstances for two reasons. First, the

regulation applies only if the purchaser has the intent to
 - 258 -

demolish the building at the time it is purchased. The record

shows that petitioner had no such intention. An intent formed

after the acquisition does not suffice. Panhandle State Bank v.

Commissioner, 39 T.C. 813, 816 (1963). The second reason is that

the house was not demolished, but was removed to a park and

apparently is still being used.

Respondent also contends that petitioner, having claimed the

book value ($38,662.62) of the house on his return, did not

establish its fair market value when he donated it to the city.

We disagree. We have found in these circumstances that the house

had a fair market value of $27,333.41, which represents the cost

allocated by petitioner to the house for depreciation purposes in

1975. We regard this amount as being equivalent to its fair

market value. Consequently, we hold that petitioner is entitled

to a charitable contribution deduction of $40,333.41 ($27,333.41

plus $13,000) in 1976.

C. Deduction for Charitable Contribution to Kenyon College

On the 1979 income tax return petitioner claimed a

charitable contribution deduction of $657,000 that pertained to

real estate given by him to Kenyon College in honor of his friend

Bill McCabe, who was dying of cancer. The claimed deduction was

reduced to zero by respondent in the notice of deficiency on the

ground that petitioner realized ordinary income from the

transaction.
 - 259 -

Section 170(e)(1)(A) provides that deductions for claimed

charitable contributions are required to be reduced by the

ordinary income or short-term capital gain that would have been

realized if the property had been sold at its fair market value

on the date of contribution. Simply stated, a taxpayer's

allowable deduction is limited by his basis in such property. As

set forth in our findings of fact, the transaction at issue is

the December 1979 donation of real estate to Kenyon College with

a net value, after encumbrances, of $657,000. Petitioner owned

the properties donated to Kenyon College in 1979 for, at most,

one day, because the properties were transferred to him by deeds

from McZand, his wholly owned corporation, immediately before he

transferred the properties to Kenyon College. The narrow dispute

between the parties on this issue is whether these properties,

had they been sold by petitioner at fair market value, would have

produced any short-term capital gain or ordinary income, which

would have reduced petitioner's allowable amount for the

charitable contribution deduction.

Petitioner's main contention is that the property was given

to him in satisfaction of loans he purportedly made to the McZand

Corporation. He argues that he had a basis in the donated realty

equal to the loan notes of approximately $669,000 which exceeded

the net fair market value ($657,000) of the property after taking

into account the debt on the property. Thus, petitioner contends
 - 260 -

that there was no ordinary income or short-term gain to be

recognized upon his contribution to Kenyon College because his

basis exceeded fair market value.

To the contrary, respondent takes the position that the

purported loans by petitioner to McZand Corporation were actually

contributions by petitioner to McZand's capital. Thus, it is

argued, because the claimed debt was capital and petitioner owned

100 percent of McZand stock both before and after the

contribution, there was no consideration paid by petitioner for

receipt of the donated property. As set forth in Segel v.

Commissioner, 89 T.C. 816 (1987), when determining whether

shareholder advances are debt or equity, cases have generally

relied on various factors which include the common identity

between the shareholders and the putative creditors, the

extensive participation in management by such creditors, the

corporate ability to borrow from a commercial or nonrelated

source at similar rates, terms and other conditions, the thinness

of the capital structure of the corporation, and the relative

position of the putative creditors to other creditors. See

Estate of Mixon v. United States, 464 F.2d 394, 402 (5th Cir.

1972).

Here there was a 100-percent identity between shareholders

and putative creditors. Prior to October 1979 McZand stock was

owned 50 percent by the Zand family and 50 percent by the McCabe
 - 261 -

family. During this same period the claimed "debt" owed to each

family also remained exactly even. Petitioner and McCabe also

participated extensively in McZand management. They both had

positions as officers and/or directors of McZand, and CTC kept

the books and records for McZand.

In addition, the shareholder advances were under very

different terms than commercial lending. While there were

"notes" executed for at least some of the claimed debt, such

notes bore a stated interest rate of 6 percent and were not

secured. During the same period of time, commercial institutions

were lending funds to McZand Corporation at a rate in excess of 8

percent with such obligations secured by mortgages on the

underlying real estate. Also, interest on the claimed

Zand/McCabe "debt" was not paid but was allowed to accrue over

several years.

Finally, McZand Corporation was thinly capitalized with only

$500 in stock and little retained earnings. As of the close of

the tax year 1977, after taking into account the purported debt

from McCabe to petitioner, the debt-equity ratio was

approximately 25 to 1 with debts exceeding $725,000 and equity at

approximately $30,000. At the close of McZand's 1978 tax year,

the ratio had increased to 35 to 1 with debt in excess of $3

million and potential equity at approximately $85,000. This very

thin capitalization is further reflected by the fact that
 - 262 -

petitioner's accountant, Mr. Dutton, recognized in a memorandum

to the file in September 1977 that the advances by McCabe and

petitioner were contributions to capital and that further

contributions would be needed.

All of the objective indications are that the advances by

petitioner and McCabe were made under terms and conditions that a

commercial lender would not grant, were subordinated to such

commercial debt, and were in exact ratio to stockholdings. We

think such advances are properly characterized as contributions

to capital and not debt. When petitioner fleetingly received the

title to the properties before signing them over to Kenyon

College, he did not include the properties in his income as a

dividend or otherwise treat his receipt of the properties as an

occasion for recognizing gain. Therefore, he had no basis in

such properties. Having a zero basis in the realty, petitioner

would have had at least $657,000 of short-term gain if the realty

had been sold. Thus, his $657,000 contribution is reduced to

zero.

Accordingly, we conclude that the charitable contribution

limitations of section 170(e)(1) apply to reduce petitioner's

allowable charitable deduction to Kenyon College to zero.

VIII. Issue 12--Losses From Trusts, Partnerships, Subchapter S
Corporation, and Farming Operations

For the years 1979 and 1980 petitioner claimed losses on his

tax returns attributable to the Bowling Green partnership of
 - 263 -

$12,768 and $19,073, and for the Franklin Green partnership of

$3,596 and $4,140. In an amended return, he claimed an

additional 1979 partnership loss of $23,709. The only evidence

relied upon to support the Bowling Green and Franklin Green

claimed losses are the partnership agreements, testimony that

petitioner was a partner, testimony that he made unidentified

amounts of capital contributions, the partnership tax returns,

and tax trial balance workpapers. Reliance on partnership

returns to establish basis in a partnership or to establish a

loss generally is insufficient to prove the claimed losses.

Patterson v. Commissioner, T.C. Memo. 1984-58.

In addition, the claimed losses were disallowed in the

notice of deficiency on the ground that petitioner had not met

the at-risk rules of section 465. The 1979 Bowling Green

partnership return reflects over $448,000 of debt as nonrecourse.

No contrary showing has been made by petitioner.

Finally, the only evidence for the additional 1979 loss

claimed on the amended return is the return itself and the return

preparer's vague statement, which petitioner mischaracterizes.

Contrary to petitioner's assertion that Mr. Dutton calculated

basis and other items, Mr. Dutton had no recollection as to what

the loss was attributable to. The tax returns are insufficient

to prove the underlying claimed loss. The disallowance of the
 - 264 -

partnership losses, including the one claimed on the amended 1979

return, is sustained.

In addition to claimed partnership losses, petitioner

claimed losses in 1979 and 1980 for McZand, a subchapter S

corporation, of $11,997 and $39,147, respectively. Respondent

disallowed these losses. Also disallowed were claimed 1979

losses for Southern Florida Real Estate Sales ($3,228), Admiralty

Point Trust ($2,933), Homestead Development Corporation ($1,889),

and Danny's Hideaway ($5,771). For each of these entities, other

than McZand, the only evidence in the record consists of tax

returns for some of the entities and the general testimonial

statements that losses were incurred. No primary records

establishing actual loss were presented. Therefore, petitioner

has failed to meet his burden of proof.

Further, with respect to McZand and Danny's Hideaway, there

is affirmative evidence that the reported tax treatment was

incorrect. In 1979 McZand purported to sell real estate to

petitioner at a gain; however, McZand failed to include that gain

in income. For Danny's Hideaway, petitioner claimed a loss from

the disposition of all his stock in 1979; yet petitioner claimed

an unexplained additional loss in 1980 when he was no longer a

shareholder. In view of the lack of evidence to support the

claimed losses and the affirmative indications that these losses
 - 265 -

were incorrectly calculated, such partnership, trust, and

subchapter S losses are not allowable.

The only evidence in the record to support the deductions

claimed for the farm losses or expenses are petitioner's 1979 and

1980 returns and the general statements by Mr. Dutton, the return

preparer, that the farm showed a loss. We regard such evidence

as insufficient to sustain petitioner's burden of proof.

Moreover, one of petitioner's employees testified that the

records for the farm were included in the corporate records of

CDC through its subsidiary Caspian Farms. This is an indication

that the farm expenses were paid by CDC, and not by petitioner.

Because petitioner has failed to meet his burden of proving the

amounts of expenses or losses incurred or that they were his

expenses or losses, we hold that he is not entitled to the 1979

farm loss of $128,458 and the 1980 farm expenses of $249,204.

IX. Issue 13--Section 6653(b) Additions to Tax for Fraud

In the notice of deficiency covering the years 1972 through

1976 respondent determined additions to tax for fraud pursuant to

the provisions of section 6653(b) with respect to petitioner. In

an amendment to the answer filed herein, respondent asserted

increased additions to tax under section 6653(b) for the years

1973 through 1976. Section 6653(b), applicable for the years in

issue, provides that if any part of any underpayment of tax

required to be shown on a return is due to fraud, there shall be
 - 266 -

added to the tax on amount equal to 50 percent of the

underpayment. Thus, for the years 1972 through 1976, respondent

need only prove, by clear and convincing evidence, that some part

of each year's underpayment is due to fraud. If that burden is

met, then the addition to tax is calculated on the entire

underpayment for each year.

Petitioner relies upon, and we are well aware of, comments

that were made by Judge Whitaker at the conclusion of the trial

when the method and schedule for filing briefs were addressed.

Judge Whitaker stated that it was his "recollection of the

testimony, and this is not a decision on my part" that

petitioners' counsel "made a very strong case". With reference

to the fraud issue, the following colloquy occurred:

MS. HERBERT: Your Honor, you know we do still
have the affirmative allegation of fraud for a number
of the years.

THE COURT: I understand that. And if I were you,
I wouldn't waste a whole lot of time on that argument.
I don't think this is a fraud case, frankly.

* * * * * * *

THE COURT: You're perfectly -- obviously, you can
argue it. You should argue it. But point out those
parts of the record which you think support fraud,
because I have some trouble with it. I don't think
this ought to have been a fraud case to start with.
 - 267 -

This tentative and qualified reaction by the trial Judge was made

before a review of all the testimony and massive documentary

evidence and before any briefs were filed.29

We are not bound by the comments made by the trial Judge

about the fraud issue. They were of a preliminary or tentative

nature, and were not embodied in a ruling. In our view the

totality of the clear and convincing evidence contained in this

record establishes that petitioner's underpayment of tax for each

of the years 1972 through 1976 was due to fraud with intent to

evade tax. In the trial Judge's qualified reaction there was no

analysis of the indicia of fraud present in this record. By

contrast, our conclusion regarding the section 6653(b) additions

to tax is based on consideration of the indicia of fraud

discussed below.

The addition to tax in the case of fraud is a civil sanction

provided primarily as a safeguard for the protection of the

revenue and to reimburse the Government for the heavy expense of

investigation and the loss resulting from the taxpayer's fraud.

Helvering v. Mitchell, 303 U.S. 391, 401 (1938). The

Commissioner bears the burden of proof with respect to the

additions to tax for fraud, and that burden must be carried by

29
Compare North American Rayon Corp. v. Commissioner, 12 F.3d 583, 586
& n. 4 (6th Cir. 1993), affg. T.C. Memo. 1992-610, where the trial Judge wrote
a letter to counsel indicating that the Court was inclined to rule in favor of
the taxpayer, but in a subsequent opinion decided against the taxpayer. The
Court of Appeals affirmed the decision. See also Milbrew, Inc. v.
Commissioner, 710 F.2d 1302, 1308 (7th Cir. 1983), affg. T.C. Memo. 1981-610.
 - 268 -

clear and convincing evidence. Sec. 7454(a); Rule 142(b); Rowlee

v. Commissioner, 80 T.C. 1111, 1123 (1983). This burden is met

if it is shown that the taxpayer intended to evade taxes known to

be owing by conduct intended to conceal, mislead, or otherwise

prevent the collection of such taxes. Stoltzfus v. United

States, 398 F.2d 1002, 1004 (3d Cir. 1968).

The existence of fraud is a question of fact to be resolved

upon consideration of the entire record. Gajewski v.

Commissioner, 67 T.C. 181, 199 (1976), affd. without published

opinion 578 F.2d 1383 (8th Cir. 1978). Fraud is not presumed or

imputed; it must be established by independent evidence that

establishes a fraudulent intent on the taxpayer's part. Otsuki

v. Commissioner, 53 T.C. 96, 106 (1969). Because direct proof of

a taxpayer's intent is rarely available, fraud may be proved by

circumstantial evidence, and reasonable inferences may be drawn

from the relevant facts. Spies v. United States, 317 U.S. 492,

499 (1943); Stephenson v. Commissioner, 79 T.C. 995, 1006 (1982),

affd. 748 F.2d 331 (6th Cir. 1984). For example, an intent to

conceal or mislead may be inferred from a pattern of conduct,

Spies v. United States, supra at 499, or from a taxpayer's entire

course of conduct, Stone v. Commissioner, 56 T.C. 213, 223-224

(1971). Likewise, a pattern showing a consistent underreporting

of income, when accompanied by circumstances evidencing an intent
 - 269 -

to conceal, may justify a strong inference of fraud. Parks v.

Commissioner, 94 T.C. 654, 664 (1990).

Over the years, courts have developed a nonexclusive list of

factors that demonstrate fraudulent intent. These "badges of

fraud" include: (1) Understating income, (2) maintaining

inadequate records, (3) failing to file tax returns, (4)

implausible or inconsistent explanations of behavior, (5)

concealment of income or assets, (6) failing to cooperate with

tax authorities, (7) attempting to conceal illegal activities,

(8) failing to make estimated tax payments, and (9) filing false

documents. See Douge v. Commissioner, 899 F.2d 164, 168 (2d Cir.

1990); Bradford v. Commissioner, 796 F.2d 303, 307-308 (9th Cir.

1986), affg. T.C. Memo. 1984-601. Several of these indicia of

fraud are present herein.

1. Petitioner's Sophistication and Experience

The sophistication and experience of a taxpayer are relevant

in determining whether fraud exists. Stephenson v. Commissioner,

supra at 1006. Petitioner was a highly intelligent, astute, and

successful businessman. He was a consummate salesman. He dealt

frequently with executives of major corporations and prominent

Iranian officials. He was a strong negotiator. He was

thoroughly familiar with his vast business operations, and he

controlled them. Consequently, it is unlikely that he would not

have realized that his Federal income tax liabilities were
 - 270 -

consistently and substantially underreported for each of the

years 1972 through 1976.

2. Consistent and Substantial Understatements of Income

Consistent and substantial understatement of income may be

strong evidence of fraud. Marcus v. Commissioner, 70 T.C. 562,

577 (1978), affd. without published opinion 621 F.2d 439 (5th

Cir. 1980). Moreover, a pattern of consistent underreporting of

income, when accompanied by other circumstances indicating an

intent to conceal income, justifies the inference of fraud.

Holland v. United States, 348 U.S. 121, 137 (1954).

Although petitioner carefully kept track of the income he

generated, he did not disclose to Mr. Giffin, his accountant and

return preparer, substantial amounts that were not recorded in

the books and records of his sole proprietorship, CTC. For 1972,

1973, 1974, 1975, and 1976 business receipts directed to accounts

other than petitioner's or CTC's CNB accounts and not recorded in

CTC's books exceeded approximately $1,000,000, $750,000,

$2,500,000, $1,850,000 and $1,375,000, respectively. These

omitted amounts greatly exceeded the reported Schedule C gross

profit in every year except 1976; in that year the omitted amount

was 80 percent of the reported gross profit. Mr. Giffin did not

know about these deposits because he knew only what was recorded

in CTC's cash receipts journal. Furthermore, Mr. Giffin never
 - 271 -

saw or knew the terms of the underlying agreements with Lockheed

and Ashland.

Petitioner was the sole representative of Lockheed and

Ashland with respect to the business these companies transacted

with the Government of Iran. These two companies paid

commissions in excess of $5 million for the services rendered by

petitioner. As a part of his scheme to evade the payment of

taxes, petitioner directed the majority of the commissions to

bank accounts in the names of other entities. He directed

Lockheed to make commission payments he earned in the amounts of

$594,972, $466,147, $995,542, and $331,862 to Diesel Power's Bank

of America account during the years 1972 through 1975,

respectively. He also directed Lockheed to deposit commission

payments he earned to the WHIP bank account at Barclays Bank

Bahamas in the amounts of $418,111 in 1972 and $191,588 in 1973.

The amounts he directed to the Diesel Power and WHIP bank

accounts were not recorded in CTC's books, nor were Lockheed,

WHIP, or Sunvaco listed as customers of Diesel Power in the

latter's financial statements for the periods ending March 20,

1974 and March 20, 1975.

Petitioner had complete control over the Diesel Power and

WHIP bank accounts. He made significant withdrawals and

transfers from the accounts during the years 1972 through 1976

which he converted to his personal use. From the WHIP bank
 - 272 -

account, he paid Hossein Zanganeh $80,000 in 1972 for his

assistance in the Lockheed transactions. He transferred $880,000

from the WHIP account to a Swiss account at the Banque de Paris.

From the Diesel Power account at Bank of America, petitioner

withdrew $655,500 in 1973, $531,633 in 1974, $1,345,766.60 in

1975, and $665,000 in 1976.

With respect to Ashland, petitioner was paid commissions for

his consulting services in the amounts of $117,900 in 1973,

$1,472,776 in 1974, and $452,328 in 1975. In 1976, he was paid

$265,000 for the termination of the various consulting agreements

that existed with respect to Ashland's business in Iran. Yet he

reported only $66,250 of these amounts on his tax returns for

those years.

The payments by Ashland, like those by Lockheed, were made

to shell entities, primarily All Patents Corporation, through

1975. Some of the amounts made payable to All Patents were

deposited to Swiss accounts at the Banque de Paris for

petitioner's benefit. He alone performed the services for which

those commission payments were made. He transferred the funds

deposited to All Patents' Banque de Paris account to Diesel

Power's account. He also had some of the commissions made

payable to All Patents deposited directly to Diesel Power's

account. Diesel Power provided no consulting services to

Ashland, and it was not in a line of business that would have
 - 273 -

been of use to Ashland. These payments were not recorded in

CTC's books for 1973 through 1975, and Ashland and All Patents

were not listed as customers of Diesel Power in its financial

statements for the periods ending March 20, 1974, and March 20,

1975. The evidence is clear that Diesel Power did not earn the

commissions paid by Ashland during these periods, nor those paid

by Lockheed. The consultant agreements entered into by Lockheed

and Ashland for the sale of their products in Iran were

terminated once petitioner stopped traveling to Iran in 1975.

The termination payments were recorded in CTC's books only after

petitioner had to sign statements alleging compliance with the

consultant agreements. That occurred only after the Government's

probe into foreign business transactions.

In addition, petitioner understated substantial interest

income he received from foreign bank accounts in 1974, 1975, and

1976. During those 3 years petitioner earned interest on the

bank accounts or time deposits in the name of WHIP at the

Barclays Bank Bahamas in the amounts of $25,025, $29,338, and

$16,998, respectively. He admitted that WHIP was merely a shell

corporation that conducted no business of its own. Petitioner

directed all activities of WHIP and invested the funds of WHIP

for his personal benefit in time deposits at the Barclays Bank.

He closed WHIP's bank accounts in 1978 when he withdrew the
 - 274 -

remaining balance of $610,000 and deposited it in his personal

bank account in Columbus, Ohio.

Petitioner also omitted interest income earned on his own

accounts at the First National City Bank in London. In 1974 and

1975 he earned interest of $38,055 and $43,641, respectively. In

1976 he earned interest of $44,127.50. Although petitioner

testified that the account in his name at the FNCB London was an

account of Diesel Power, the documentary evidence shows

otherwise. First, Diesel Power had a separate bank account, FNCB

London. No plausible reason was shown for it to have an account

in petitioner's name at that bank. Second, petitioner had

complete access to and control of the accounts in his own name.

He directed payments to the accounts and invested sums on deposit

in the accounts. He was the signatory on the accounts and the

accounts had no restrictions.

3. Overstatements of Business Expenses and Itemized
Deductions

It is well settled that a fraudulent understatement of

income can be accomplished by overstatements of business expenses

and deductions. See Drobny v. Commissioner, 86 T.C. 1326, 1349

(1986), and cases cited therein; Pettit v. Commissioner, T.C.

Memo. 1984-460, affd. without published opinion 792 F.2d 1122

(9th Cir. 1986); Gano v. Commissioner, 19 B.T.A. 518, 533 (1930).

Here petitioner consistently followed a pattern of claiming

excessive business expenses and deductions for all the years in
 - 275 -

issue, particularly during the years for which respondent

determined fraud. For example, travel and entertainment expenses

were overstated by $19,913.37 in 1973, $75,284.40 in 1974,

$77,315.01 in 1975, and $20,000 in 1976. In addition, for some

of the years there were overstatements of some commission

expenses, consulting fees, legal and professional fees, salaries

and wages, interest expenses, depreciation, and rental expenses.

4. Failure to Maintain Adequate Books and Records

Failure to maintain adequate books and records of income

generally and failure to keep records of income diverted and

unreported are both indicative of fraud. Truesdell v.

Commissioner, 89 T.C. 1280, 1302 (1987); Gajewski v.

Commissioner, 67 T.C. at 200.

The record contains evidence showing that petitioner's books

and records with respect to income and expenses were inadequate,

incomplete, and sometimes misleading. Substantial income was

unreported and claimed expenses were overstated or not

substantiated.

5. Concealment of Income or Assets

The concealment of income or assets is an indicium of fraud.

Bradford v. Commissioner, 796 F.2d at 307-308.

Petitioner handled the transactions involving Lockheed and

Ashland to conceal from respondent the large sums of money paid
 - 276 -

by these companies to him. Petitioner had access to the funds

through his signatory powers over the accounts. He withdrew

moneys from the WHIP and Bank of America accounts to which the

Lockheed sums were paid. Such withdrawals exceeded $2.9 million.

He had access to the deposits made to All Patents' account at the

Banque de Paris, and he transferred funds from that account to

the Diesel Power account. He also had payments made in the name

of All Patents deposited directly to Diesel Power's account at

the Banque de Paris. He had signatory authority over the

accounts. Diesel Power provided no services to Lockheed and

Ashland from 1972 through 1976.

As a part of his effort to conceal the commissions earned

from Lockheed and Ashland and the interest income earned on the

accounts at Barclays Bank Bahamas and FNCB London, petitioner

concealed this information from Mr. Giffin, his accountant and

return preparer. This is evidence of fraud. Korecky v.

Commissioner, 781 F.2d 1566, 1569 (11th Cir. 1986), affg. T.C.

Memo. 1985-63. Mr. Giffin had instructed CTC's employees to

include all income and disbursements of CTC and petitioner,

whether business or personal, on CTC's cash receipts and cash

disbursements journals. Mr. Giffin relied on the journals in

preparing petitioner's Federal income tax returns. If items did

not appear on the journals, Mr. Giffin was not aware of them. No

commission payments that petitioner directed to the foreign bank
 - 277 -

accounts or to Diesel Power's Bank of America account were

recorded in the journals. Mr. Giffin did not know about such

payments.

At the time he prepared petitioner's tax returns, Mr.

Giffin was unaware that petitioner had any ownership interest in

Diesel Power. He was similarly unaware that petitioner had an

interest in or affiliation with WHIP or All Patents. He also did

not know that petitioner had signatory authority on any foreign

bank accounts.

Because this information was concealed from Mr. Giffin,

petitioner's 1974 and 1975 income tax returns made several false

statements. Not only did the returns fail to include in income

the interest earned on petitioner's FNCB London and WHIP

accounts, but the returns were not accompanied by a Form 4683

disclosing petitioner's signatory authority over the foreign bank

accounts. Such a form was required to be attached to returns for

years after 1975. When Mr. Dutton, petitioner's subsequent

accountant, filed an amended 1975 return in 1978, still no

disclosure was made of the foreign bank accounts.

On his 1976 income tax return petitioner disclosed the

existence of one FNCB London account on Form 4683, but failed to

disclose the WHIP account. The 1976 foreign bank accounts

disclosure form is also false because it improperly stated that

petitioner's interests in foreign bank accounts was less than
 - 278 -

$50,000. The interest income alone earned on or deposited to the

foreign bank accounts in 1976 exceeded that amount.

After Mr. Giffin prepared petitioner's income tax returns,

Mr. Giffin, petitioner, and others would review the returns,

including the individual items that made up the total numbers

shown on the returns. If petitioner believed something on a

return was not correct, he would personally have it corrected.

Thus, petitioner signed the returns with knowledge of the

substantial omissions of income from Lockheed, Ashland, and

foreign bank accounts.

By not informing his accountant and return preparer about

interest income earned on bank accounts outside the United

States, by diverting the income he earned from Lockheed and

Ashland to accounts in the names of All Patents, WHIP, and Diesel

Power, and by not recording all fees earned from Lockheed and

Ashland, petitioner clearly evaded the payment of substantial

portions of his income tax liabilities for the years 1972 through

1976. Keeping this information from Mr. Giffin was an act of

concealment by petitioner. Reliance upon an accountant to

prepare accurate returns negates fraudulent intent only if the

accountant has been supplied with all the information necessary

to prepare the returns. Estate of Temple v. Commissioner, 67

T.C. 143, 162 (1976). Here petitioner was responsible for the
 - 279 -

substantial underreporting of his income tax liabilities for the

years in question.

6. Failure To Cooperate With Respondent in Determining
Liabilities

Failure to cooperate in the examination and investigation of

tax liabilities is an indicium of fraud. Powell v. Granquist,

252 F.2d 56, 59-60 (9th Cir. 1958); Gajewski v. Commissioner,

supra at 200. Although petitioner asserts that he was

cooperative, he was cooperative only to a limited extent. His

cooperation was a defensive measure and incomplete. When

respondent's investigation began, petitioner defended his prior

actions by appearing to cooperate. He provided some of his books

and records to respondent's agents and advised his employees to

work with them. However, the books and records provided did not

include the millions of dollars in omitted income from Lockheed

and Ashland. Respondent's agents had to go to Lockheed and

Ashland to complete records of payments to petitioner. Thus, he

concealed the same information from respondent that he had

concealed from Mr. Giffin.

Petitioner also did not disclose to respondent's agents

complete information about the foreign bank accounts in which he

had an interest or his interest in WHIP. In fact, he withheld

information, even in responding to formal discovery, with respect

to the British bank accounts, Banque de Paris accounts in the

name of Diesel Power, and ownership information in WHIP, until
 - 280 -

after respondent filed a motion to impose sanctions. Respondent

had to resort to this method to obtain the necessary facts, due

to petitioner's efforts to conceal these facts. He did not

volunteer complete and truthful information.

In 1979, after petitioner had Mr. Dutton withdraw the

$610,000 from WHIP's bank account in Barclays Bank Bahamas, Mr.

Dutton informed respondent's agent, who was investigating

potential criminal liability, that the $610,000 would be reported

on petitioner's 1978 income tax return. However, there is no

attachment to the tax return disclosing the withdrawal, and the

income was not reported on petitioner's return. All in all, it

is our view that petitioner did not truly cooperate with

respondent's agents. We think he only did what he thought was

necessary to keep respondent's agents from discovering the true

sources of his fraud.

Accordingly, after considering all the facts and

circumstances present in this record, we have found, and hold,

that petitioner is liable for the additions to tax for fraud

under section 6653(b) on the amounts of the underpayments for the

years 1972, 1973, 1974, 1975, and 1976.

X. Issue 14--Statute of Limitations for 1972

Petitioner has affirmatively pleaded and contends that the

assessment of additional taxes for the year 1972 is barred by the

3-year statute of limitations. Sec. 6501(a). However, as
 - 281 -

provided in section 6501(c)(1), the tax may be assessed at any

time in the case of a false or fraudulent return with intent to

evade tax. Because we have found that petitioner's 1972 Federal

income tax return was fraudulent, it follows that the assessment

of additional taxes for that year is not barred by the statute of

limitations.

XI. Issues 15 and 16--Section 6653(a) Additions to Tax for
Negligence

In the notices of deficiency for the years 1977 through 1981

respondent determined additions to tax for negligence. Section

6653(a), in effect for the years 1977 through 1980, provides that

if any part of the underpayment of tax is due to negligence or

intentional disregard of rules or regulations, there shall be

added to the tax an amount equal to 5 percent of the

underpayment. For the year 1981 the negligence addition to tax

includes two components: (1) 5 percent of the underpayment

(section 6653(a)(1)) and (2) 50 percent of the interest payable

under section 6601 on the portion of the underpayment

attributable to negligence (section 6653(a)(2)).

Negligence, as used in section 6653(a), is defined as the

"lack of due care or failure to do what a reasonable and

ordinarily prudent person would do under the circumstances."

Neely v. Commissioner, 85 T.C. 934, 947 (1985) (quoting Marcello

v. Commissioner, 380 F.2d at 506). Respondent's determination is

prima facie correct, and the burden is upon petitioners to prove
 - 282 -

that these additions to tax are erroneous. Betson v.

Commissioner, 802 F.2d 365, 372 (9th Cir. 1986), affg. in part

and revg. in part T.C. Memo. 1984-264; Enoch v. Commissioner, 57

T.C. 781, 802 (1972).

Petitioners contend that they are not liable for the

negligence additions to tax because they relied upon "tax

experts" to properly prepare their returns for the years in

issue. As a general rule, the duty of filing accurate returns

cannot be avoided by placing responsibility on a tax return

preparer. Metra Chem Corp. v. Commissioner, 88 T.C. 654, 662

(1987); Pritchett v. Commissioner, 63 T.C. 149, 174-175 (1974).

In some circumstances, however, good faith reliance on expert

advisers negates applicability of the addition to tax for

negligence. Ewing v. Commissioner, 91 T.C. 396, 423-424 (1988),

affd. without published opinion 940 F.2d 1534 (9th Cir. 1991).

To avoid liability, a taxpayer must establish the following: (1)

That the taxpayer provided the return preparer with complete and

accurate information from which the tax return could be properly

prepared; (2) that an incorrect return was the result of the

preparer's mistakes; and (3) that the taxpayer in good faith

relied on the advice of a competent return preparer. Jackson v.

Commissioner, 86 T.C. 492, 539-540 (1986), affd. 864 F.2d 1521

(10th Cir. 1989); Daugherty v. Commissioner, 78 T.C. 623, 641

(1982). In addition, taxpayers must show that they at least read
 - 283 -

or made a cursory review of the prepared returns. Metra Chem

Corp. v. Commissioner, supra at 662. Here petitioners have

failed to establish that the information provided to their

accountants and return preparers was complete or accurate.

Petitioners failed to maintain adequate books and records,

and substantially overstated expenses and deductions for a number

of items on their tax returns. These expenses and deductions

include travel and entertainment expenses, depreciation, office

expenses, legal fees, consulting fees, management fees, farm

losses, partnership losses, subchapter S corporation losses,

interest expense, rent expense, and omitted income. Their

failure to keep adequate records, coupled with the omission of

income and overstatement of expenses, shows negligence or

intentional disregard of rules or regulations.

Petitioner substantially overstated his deductions for

travel and entertainment expenses for each of the years 1977

through 1981. He estimated amounts for such expenditures and

claimed high cash expenses that are not reflected in CTC's books

and records. For each of the years 1977 through 1981 the

deductions claimed for travel and entertainment expenses

substantially exceed the amounts recorded in CTC's cash

disbursements journals and the cash expenditures recorded in his

diaries. Petitioner has been unable to substantiate the

expenses. The failure to adequately document expenses for travel
 - 284 -

and entertainment in light of the rules and regulations under

section 274 demonstrates negligence.

Several adjustments were made by respondent with respect to

depreciation, legal expenses, office expenses, consulting fees

and rent expense for the years 1977 through 1980. Such

adjustments were due to petitioner's failure to verify amounts

claimed or to establish that such amounts were ordinary and

necessary business expenses. He did not maintain records to

verify the adjusted bases of automobiles or the business use of

the automobiles for which depreciation was claimed. He claimed

deductions for legal expenses incurred by Diesel Power in excess

of $40,000 for which no substantiation was presented and for

which the business purpose was not shown. Business expenses were

claimed as consulting fees for payments to or on behalf of a

stockbroker who had no relationship to petitioner's trade or

business and who provided services to others. A business expense

in the amount of $50,000 claimed for a fee to petitioner's

brother was not paid. Rent expense was deducted for $6,451 paid

by petitioner for his daughter's apartment; $2,053 was deducted

that could not be identified; and over $13,000 was deducted for

his son-in-law and daughter's condominium. The failure to

maintain adequate records to verify business expenses or to show

that claimed amounts were paid is indicative of negligence.
 - 285 -

For the years 1977 through 1980 petitioner claimed

management fees to CDC, a corporation in which he held a majority

interest, in the amounts of $96,396, $72,609, $67,943, and

$102,101, respectively. He offered no evidence that these

amounts were paid and, in fact, stipulated that the 1979 amount

was not paid. He also was unable to show a legitimate business

purpose for a portion of the expenses claimed in each year. He

was negligent in failing to substantiate that the management fees

paid to his corporation were ordinary and necessary business

expenses.

For the years 1979 and 1980 petitioner claimed losses for

farming activities on Schedule F in the amounts of $128,458 and

$249,204, respectively. There is no evidence in the record to

support these large amounts. However, there is affirmative

evidence that CDC or its subsidiary, Caspian Farm Systems, paid

the expenses or amounts incurred. Petitioner's failure to

provide any documentation in support of these large losses was

due to negligence.

For the years 1979 and 1980 petitioner claimed partnership

and small business corporation losses in amounts in excess of

$55,000 and $69,000, respectively. Included in these amounts was

a loss claimed in 1980 of $5,771 for Danny's Hideaway, when in

fact petitioner had disposed of his entire interest in that

business in 1979. Petitioner presented virtually no evidence in
 - 286 -

support of numerous other losses claimed. The failure to

document such large losses constitutes negligence.

For the years 1979, 1980, and 1981 petitioner claimed

amounts of interest paid to the Mirhosseini family. He was

unable to show that a significant portion of the interest expense

claimed was actually paid to the Mirhosseini family or that

debtor/creditor relationships existed between him and the

Mirhosseini family.

For 1977 and 1978 petitioner had substantial amounts of

unreported income. Although he claimed the income belonged to

Diesel Power, it was under his dominion and control. It was

deposited to his bank account pursuant to directions he gave the

payors, and he performed the services for which the income was

paid. Furthermore, the manner in which the income was treated on

CTC's books and records was erroneous because it reflected the

unreported amounts as being the income of Diesel Power. His

return preparers relied on the books in preparing his tax

returns. The information relied upon by the return preparers was

not accurate, which is a further indication that petitioner was

negligent.

Accordingly, we sustain respondent's determinations with

respect to the additions to tax for negligence for each of the

years 1977 through 1981.
 - 287 -

XII. Conclusion

We think we have resolved all the disputed issues raised by

the parties. However, if there are any unresolved issues, they

will be treated as conceded or abandoned or as issues with

respect to which there has been a failure of proof.

To reflect concessions of the parties and our conclusions on

the disputed issues,

Decisions will be entered

under Rule 155.