Breen v. Commissioner

• Decision Date: 19 October 1983
• Docket Number: Docket No. 6612-77.
• Citation: 1983 TC Memo 645,47 TCM (CCH) 137
• Parties: Gilbert Breen and Ellen Breen v. Commissioner.
• Court: U.S. Tax Court

47 TCM (CCH) 137

1983 TC Memo 645

T.C. Memo. 1983-645.

Gilbert Breen and Ellen Breen v. Commissioner.

Docket No. 6612-77.

United States Tax Court.

Filed October 19, 1983.

Moe D. Karash, for the petitioners. Daniel O'Brien and Michael K. Phalin, for the respondent.

Memorandum Findings of Fact and Opinion

CHABOT, Judge:

Respondent determined a deficiency in Federal individual income tax against petitioners for 1966 in the amount of $32,581.40 and an addition to tax under section 6653(b)¹ (fraud) against petitioner-husband for 1966 in the amount of $16,290.70.

After a concession by respondent, the issues for decision are as follows:

(1) Whether the assessment and collection of a deficiency for 1966 are barred by the statute of limitations (section 6501(a)) or allowed under an exception to the general period of limitations (section 6501(c)(1)); and

(2) If assessment and collection are not barred, then:

(a) whether petitioners received unreported taxable income from unexplained bank deposits, constructive dividends, long-term capital gains, and interest from savings bank accounts; and

(b) whether petitioners are entitled to deductions for certain contributions and entertainment expenses; and

(c) whether petitioner-husband is liable for an addition to tax under section 6653(b).²

Findings of Fact

Some of the facts have been stipulated; the stipulations and the stipulated exhibits are incorporated herein by this reference.

When the petition in the instant case was filed, petitioners Gilbert Breen (hereinafter sometimes referred to as "Gilbert") and Ellen Breen, husband and wife, resided in Hollis Hills, New York.

Pacific Stock Litigation

Gilbert and his brother, Matthew Breen (hereinafter sometimes referred to as "Matthew"), each owned 50 percent of the stock of three corporations until at least July 1968.³ The three corporations were Aero Expediters, Inc. (hereinafter sometimes referred to as "Aero"), United Transfer Corporation (hereinafter sometimes referred to as "United"), and Breen Air Freight, Ltd. (hereinafter sometimes referred to as "Freight"). Aero, United, and Freight are hereinafter sometimes collectively referred to as "the Breens' companies."

During Aero's fiscal years ending January 31 of 1966 and 1967, Gilbert was president of Aero,⁴ which was located at 609 West 29th Street, New York City, New York. During United's fiscal years ending March 31 of 1966 and 1967, Gilbert was president of United, which was located at 624 West 24th Street, New York City, New York. During Freight's fiscal year ending November 30, 1966, Gilbert was president of Freight, which was located at 609 West 29th Street, New York City, New York.

For many years before April 1963, Gilbert, Matthew, and the Breens' companies acted as agents for air freight forwarders and were engaged in air freight trucking in the New York City metropolitan area. During these years, Pacific Air Freight, Inc. (hereinafter sometimes referred to as "Pacific"), an air freight forwarder incorporated under the laws of the State of Washington, used the services of Gilbert and the Breens' companies.

To induce Gilbert to give up his active participation in the air freight forwarding business and devote all of his time and energy to establishing an air freight forwarding business for Pacific in the New York City metropolitan area, Pacific offered to employ Gilbert on a full-time basis and grant him an option to buy Pacific stock. Pacific also offered to appoint one of the Breens' companies, which would continue to be operated by Matthew, as Pacific's exclusive agent in the New York City metropolitan area.

From April 1963 through November 15, 1965, Gilbert was employed by Pacific as vice-president of its eastern region. Gilbert was elected to Pacific's board of directors in or about February 1964.

On or about April 22, 1963, Pacific and Gilbert entered into an agreement whereby Pacific agreed, among other things, to grant Gilbert an option to buy 5,000 shares of authorized but unissued $1.00 par common stock of Pacific for $1.10 per share. Sometime in November 1963, this part of the agreement was modified. In accordance with an agreement entered into on or about February 27, 1964, Pacific granted Gilbert an option to buy 10,000 shares of Pacific common stock at $1.10 per share and a further option to buy 26,475 shares of Pacific common stock at a price to be determined by Pacific's board of directors at or before the time that option was exercised.

In February 1965, Gilbert exercised his options and entered into an agreement with Pacific to buy 36,475 shares of Pacific common stock for a total of $40,122.50 (which amounts to $1.10 per share). In accordance with this agreement, Gilbert delivered to Pacific a check in the amount of $4,000 and an installment note, dated February 18, 1965, in the amount of $36,122.50. At or about the time Gilbert purchased the 36,475 shares, their market value was close to $400,000.

On April 14, 1965, Gilbert executed an escrow pledge agreement whereby he pledged the 36,475 shares of Pacific stock, and his three shares of Aero stock, as security for the installment note given in partial payment of the 36,475 shares.

The 36,475 shares of Pacific stock were represented by certificate no. 255. Certificate no. 255 contained the following legend on its face:

These shares are issued pursuant to agreement that the said shares or any part thereof shall not be transferred, and no transfer shall be recognized, until Pacific Air Freight, Inc. (PAF) Pacific has been given a reasonable opportunity to purchase or otherwise acquire said shares upon terms at least equal to the terms upon which such shares are proposed to be transferred and in the event the holder of such shares shall cease to be a bona fide, full-time employee of PAF or a bona fide, full-time employee of an exclusive agent for PAF, PAF shall have the option to purchase all or any part of such shares at $1.10 per share or at the book value thereof as reflected on its books of account as determined by its regular auditor, whichever sum be higher.

During 1965, Gilbert made payments totalling $6,083 with respect to the purchase of the 36,475 shares.⁵

As of November 11, 1965, the 36,475 shares represented one-fourth of the voting shares of Pacific stock.

Pacific, Aero, Gilbert, and Matthew entered into a written agreement dated May 15, 1965, whereby they agreed, among other things, to the following:

1. The termination and cancellation of a written agreement dated March 1, 1965, between Pacific and Aero for the sale and handling of air freight transportation to and from the New York area.

2. The termination and cancellation of an oral agreement between Pacific and Aero for the sale and handling of air freight transportation to and from the Philadelphia area.

3. The withdrawal of Aero from the air freight forwarding business in the New York, Newark, and Philadelphia areas.

4. A covenant by Gilbert, Matthew, and Aero whereby they would not engage in a business like or similar to Pacific's within the commercial zones pertaining to New York City, Newark, and Philadelphia, for six years from the date of the agreement.

5. An agreement by Gilbert and Matthew to use their best efforts to obtain sales referrals and new business for Pacific.

Pacific agreed to pay Aero, Gilbert, and Matthew, as consideration for the covenant nine percent of the first $40,000 in net gross revenues from Pacific's operations in the New York City, Newark, and Philadelphia commercial zones each month, for 72 months. For the sales referrals, Pacific agreed to pay Gilbert and Matthew, "or order", three percent of the net gross revenues from Pacific's operations in the New York City, Newark, and Philadelphia zones above $40,000 and up to $80,000 for each month, plus one percent of such revenues above $80,000 each month, for the period May 15, 1965, to May 15, 1971. However, the sum of the payments on account of the sales referral agreement was not to exceed $90,000. Over the life of this agreement, the Breens' companies received between $200,000 and $300,000.

The May 15, 1965, agreement does not recite any money consideration for the termination of the agency agreements or Aero's agreement to withdraw from the air freight forwarding business in the New York City, Newark, and Philadelphia areas.

On November 16, 1965, Pacific fired Gilbert. Pursuant to the terms stated on the legend on the face of certificate no. 255, supra, Pacific then tried to exercise the option to purchase all of Gilbert's 36,475 shares for $1.10 per share. On or about November 29, 1965, Gilbert timely tendered the payment due under the installment note for the month of November, but this payment was rejected by Pacific.

On February 3, 1966, Gilbert began a suit against Pacific in the United States District Court, Southern District of New York. In his complaint, Gilbert asked the court to declare him the owner of the 36,475 shares of Pacific stock free and clear of any conflicting claim by Pacific and to enjoin Pacific (1) from taking any action which might tend to impair his rights in the stock or (2) from dealing with the stock as if Pacific were the owner. Gilbert was represented in this action by attorneys Harold Epstein (hereinafter sometimes referred to as "Epstein") and Murray Schwartz.

On February 16, 1966, Pacific began a suit against Gilbert in the United States District Court, Western District of Washington. In its complaint, Pacific asked the court to order specified performance of the agreement referred to in the legned on certificate no. 255, that Pacific was to have the right to purchase the 36,475 shares at a price of $1.10 per share.

Between the time these suits were started and April 20, 1966, Gilbert decided to settle the suits because he needed money to go back into the air freight trucking business and had no additional funds to spend on litigation. On April 20, 1966, Gilbert and Pacific executed an...