Anastasato v. C.I.R., s. 85-5728

CourtUnited States Courts of Appeals. United States Court of Appeals (3rd Circuit)
Writing for the CourtBefore SEITZ, HUNTER, and MANSMANN; HUNTER
Citation794 F.2d 884
Parties-5349, 86-2 USTC P 9529 Pano ANASTASATO and Janice Anastasato v. COMMISSIONER OF INTERNAL REVENUE. Appeal of Pano ANASTASATO, Appellant in 85-5728. Appeal of Janice ANASTASATO, Appellant in 86-5143.
Docket NumberNos. 85-5728,86-5143,s. 85-5728
Decision Date08 July 1986

Page 884

794 F.2d 884
58 A.F.T.R.2d 86-5349, 86-2 USTC P 9529
Pano ANASTASATO and Janice Anastasato
Appeal of Pano ANASTASATO, Appellant in 85-5728.
Appeal of Janice ANASTASATO, Appellant in 86-5143.
Nos. 85-5728, 86-5143.
United States Court of Appeals,
Third Circuit.
Argued June 17, 1986.
Decided July 8, 1986.

Page 885

Alan H. Levine (argued), Frankfurt, Garbus, Klein & Selz, P.C., New York City, Edward H. Rosenthal, of counsel, for appellants.

Kathryn E. Rooklidge (argued), Michael L. Paup, Charles E. Brookhart, Roger M. Olsen, Acting Asst. Atty. Gen., Glenn L. Archer, Jr., Asst. Atty. Gen., Department of Justice, Tax Division, George M. Sellinger, Washington, D.C., for appellee.

Before SEITZ, HUNTER, and MANSMANN, Circuit Judges.


HUNTER, Circuit Judge.

Pano Anastasato, the taxpayer, has been involved in the travel business since 1954. In 1960, he established his own travel agency, Panmarc, Inc. ("Panmarc"), and a tour operation business, Wholesale Tours International ("WTI"). During the years 1974 through 1976, both companies were wholly owned by the taxpayer.

Panmarc purchased tickets for WTI's customers. Panmarc was licensed by the International Air Transport Association ("IATA"), a trade association of international carriers, to purchase tickets directly from the airlines. Under IATA regulations, the maximum commission that airlines could pay travel agents was ten percent of the ticket price. Compliance with these regulations was not required by law. Despite the regulations, it was common for airlines to pay excess commissions known as overrides or override commissions. Payment of overrides had to be made with strict confidentiality because IATA imposed severe sanctions for the violation of its regulations.

Panmarc did a large volume of business with KLM Royal Dutch Airlines ("KLM"). On April 15, 1981, the Commissioner issued statutory notices of deficiency to Anastasato totaling $633,468.00 for the years 1974, 1975, and 1976. The deficiency notice included additions to tax for fraud pursuant to I.R.C. Sec. 6653(b) (1982). The Commissioner alleged that KLM had paid override commissions to the taxpayer by making payments into a Swiss bank account identified by the code name "GIGE." This account contains over one million dollars.

The Tax Court heard the testimony of revenue agents, employees of Panmarc, and employees of KLM. The record reveals

Page 886

that, in 1970, the taxpayer and Arne Duyf, Manager for Passenger Sales of KLM in the United States, met several times at KLM's office to discuss override payments. Charles Bulterman, Duyf's assistant, often participated in the negotiations. In 1973, Bulterman was promoted to Duyf's position. Andre Luber was promoted to the position of Assistant Manager for Passenger Sales in the United States and given the responsibility for negotiating overrides.

In 1973, the taxpayer approached Luber seeking additional override commissions. From 1973 to 1975, the taxpayer and Luber engaged in negotiations. Bulterman, Gabriel Warshawsky, who was Executive Vice President of WTI, and Ray Masillo, another WTI employee, were often present at the meetings. From April 1974 to December 1974, override commissions were set at fifteen percent. From January 1975 to March 1975, they were set at twenty-one percent. The taxpayer often complained to his employees that KLM was not making its payments. The agreement was renegotiated and the override commissions set at eighteen percent for April 1975 through October 1975. Four million dollars worth of tickets were sold in 1974 and 1975 and were subject to the override commissions. For the period February 1976 to October 1976, override commissions were again set at eighteen percent.

Warshawsky and Luber both testified about the meetings held to negotiate the override commissions. Warshawsky stated that both sides sought to obtain the best deal. Luber would obtain Bulterman's approval and then prepare the supporting documentation for the KLM head office and accounting department.

In late 1979, Bohdan Huzar, a special agent with the Internal Revenue Service, began the investigation of the taxpayer. Huzar met with Paul Mifsud, general counsel to KLM in the United States, both in the United States and at the KLM headquarters in The Netherlands. Huzar also met with a Mr. Westpladt, an employee in the KLM accounting department in The Netherlands. Huzar did not take copies of any documents with him, but he recorded the contents of several in a notebook and prepared a report describing the documents. He described debit slips showing payments of approximately one million dollars from KLM to a Swiss bank account with the code name GIGE. He also saw KLM cash paid out slips totaling $26,000 signed by the taxpayer. Huzar's report stated that Westpladt had said that KLM made the payments to the Swiss bank account on behalf of the taxpayer. As hearsay, Huzar's report was admitted at trial only for the limited purpose of describing the methodology used by the Commissioner in issuing the notice of deficiency.

At trial, the taxpayer denied that he had ever received the override commissions. He admitted that he had discussed overrides with KLM officials, but he maintained that he never accepted overrides because he was worried about the IATA penalties. He seemed to imply that Bulterman was pocketing the overrides and that he merely went along with the scheme to maintain his business relationship with KLM.

On the basis of this evidence, the Tax Court upheld the Commissioner's determination of deficiencies and additions to tax in the amount of $641,288 for income tax liability for the years 1974, 1975, and 1976. However, the court held that the Commissioner had not proven fraud by the taxpayer.

The taxpayer claims that the Commissioner's deficiency determination was arbitrary and unreasonable. In addressing this contention, we first note that the government's...

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