Foster v. CIR
| Decision Date | 01 February 1968 |
| Docket Number | No. 11250-11252.,11250-11252. |
| Citation | 391 F.2d 727 |
| Parties | Grant FOSTER and Barbara Dunn Foster, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. |
| Court | U.S. Court of Appeals — Fourth Circuit |
Deane E. McCormick, Jr., and George Cochran Doub, Washington, D. C., (Robert J. Bird, Washington, D. C., Weinberg & Green, Baltimore, Md., and Alvord & Alvord, Washington, D. C., on brief) for petitioners.
Bennet N. Hollander, Atty., Dept. of Justice (Mitchell Rogovin, Asst. Atty. Gen., Lee A. Jackson and Joseph M. Howard, Attys., Dept. of Justice, on brief) for respondent.
Before SOBELOFF and BRYAN, Circuit Judges, and MARVIN JONES, Senior Judge, U. S. Court of Claims.*
Grant Foster was born in 1915 in Fairview, Arizona. In 1939 he went to Venezuela to work for Martin Engineering Company, which was engaged in heavy construction work. He advanced from heavy equipment operator to foreman and job superintendent while working for Martin. In July 1946 he left that company to become the sole proprietor of his own construction business in Venezuela.
Early in 1949 an official of the Venezuelan Ministry of Public Works approached Foster with a plan under which he and two other public works officials would use their positions to give Foster's company advance information on construction contracts, special consideration in the award of these contracts, leniency in inspections of work, and prompt issuance of progress payments. Foster would be entitled to withdraw from the business a salary of $100,000 per year; each of the three officials would receive secret payments of $100,000 a year if the earnings of the company were sufficient. Foster and the Venezuelan officials agreed orally to this arrangement.
This clandestine agreement remained in effect from 1949 through 1956, during which time Foster Construction, C. A., prospered tremendously. Foster made a final settlement with the officials in 1964, when he met two of them in Switzerland and paid them $600,000 from a Swiss bank account which he had kept for that purpose.
In connection with the secret agreement, Foster had his business incorporated under the laws of Venezuela in February 1949. During the taxable years in question, Grant Foster was the president and principal stockholder1 of the corporation, which operated under the name Foster Construction, C. A. The articles of incorporation gave the president "full powers of decision and administration to carry out all kinds of operations," and, in practice, Foster was in complete charge of the corporation's affairs.
Grant Foster maintained a personal bank account at the Bank of London & South America, Ltd., New York Agency, from May 1, 1947 to August 2, 1949. On the latter date this account was closed and the balance of $12,102.32 transferred to a new account entitled Foster Construction, C. A. At the same time, $80,000 from the corporation's Venezuelan bank account was placed in this New York account. Both Grant Foster, as president, and his wife Barbara Dunn Foster, as vice president, were authorized to draw on the New York corporate account, but in practice only Grant Foster made withdrawals. From 1949 through 1956 large sums were transferred from the corporation's Caracas bank account to the New York account. During the same period, Grant Foster drew 1,109 checks totaling $5,281,480.91 on the New York account. The Commissioner's deficiency determinations were based on his conclusion that some of these checks had been used for Foster's personal purposes rather than for corporate purposes.
The personal or corporate nature of some of these withdrawals has been established by the respective concessions of the parties. Two hundred and fifty-four checks totaling $468,590.38 were expended in connection with the cost and operating expenses of corporate aircraft. Foster has conceded that $100,000.00 of these expenses were attributable to his personal use of the aircraft and were income to him.2 Foster has also conceded that 156 other checks totaling $585,806.30, and ranging in amount from $3.30 to $200,000.00 were used for personal purposes such as personal loans and gifts to his relatives; deposits in personal bank accounts; an allowance to Barbara Dunn Foster for personal or household purposes; purchases at department stores; purchases and rental of automobiles; medical expenses; personal travel, hotel and entertainment expenses; clothing; charitable contributions; cost of building a home in El Cajon, California; schooling for Foster's children; payment of personal income taxes; gifts to female friends; rent payments; cash for Foster; country club initiation fees and dues; personal investments; and creation of a $200,000.00 personal trust. The checks remaining in dispute after the concessions by both parties amounted to $1,711,764.53.3 The Tax Court considered each of the disputed checks separately and found that a substantial portion of them represented withdrawals or diversions of corporate funds for Foster's personal benefit. On this appeal, Foster leaves unchallenged the Tax Court's determinations with respect to these disputed checks except for those expended in connection with the Retsof Corporation. The latter issue is discussed infra.
In 1950 Foster retained T. A. Whiteside, a Miami, Florida, attorney, to handle his tax returns in the United States. He gave Whiteside copies of Venezuelan tax returns he had previously filed and discussed with Whiteside his salary arrangements with Foster Construction, C. A. and the various bank accounts on which he was authorized to draw. Whiteside remained Foster's attorney until May 25, 1956. The United States tax returns of Grant Foster and Barbara Dunn Foster for the years 1947 through 1954 were prepared by a Miami accountant, Otto Weber, at the request of Whiteside on the basis of information furnished by Whiteside. Another accountant, Charles D. Erwin, prepared the returns of Foster and his wife for 1955 and 1956 after the attorney-client relationship between Whiteside and Foster had terminated and the income tax investigation had begun. All the returns were joint returns of Grant and Barbara Dunn Foster. All except one were filed with the Internal Revenue Service; the 1951 return was prepared but was never filed. None of the returns made any mention of the substantial amounts Foster withdrew from the New York account and applied to his personal purposes. The only taxable income disclosed in the returns consisted of comparatively small amounts of capital gains, dividends, interest, and rents. The Foster's adjusted gross income as shown by the filed returns was as follows:
In the instant case, the parties stipulated the amounts of excludable "earned income" which Foster earned as salary from Foster Construction, C. A. during the taxable years in question. These amounts were the same as those reported by Foster in his individual income tax returns filed with the Venezuelan Government as "Salary or Other Remunerations" received from the corporation.
The parties stipulated in effect that the sums Foster withdrew from the New York account for his personal uses during each year may be applied against the amount of his excludable salary "for such year and/or his unpaid salary for prior years."6 Thus only the excess of the personal withdrawals above his excludable salary are to be taxed to Foster. The total withdrawals found personal by the Tax Court, Foster's stipulated excludable salary, and the taxable excess of withdrawals over salary are indicated in the following chart:
A B C
Withdrawals Amount taxable
found personal Foster's stipulated to Foster
by the Tax Court excludable salary (A minus B)
1949 $ 34,980.20 $ 18,656.25 $ 16,323.95
1950 80,950.30 124,951.15 0
1951 251,025.66 75,132.81 175,892.85
1952 416,979.36 108,330.46 308,648.90
1953 217,505.56 101,941.86 115,563.70
1954 92,116.04 104,162.71 0
1955 195,003.19 104,161.87 90,841.32
1956 94,790.75 99,995.64 0
It will be noticed that in three of the taxable years, 1950, 1954 and 1956, Foster's excludable salary exceeded the amount of his personal withdrawals. Thus no tax is owed for these three years. In the other five years, however, the excess of withdrawals over salary are substantial, ranging from $16,323.95 in 1949 to $308,648.90 in 1952. The Tax Court found that "the gap between the taxable amounts which the evidence shows were clearly * * * diverted and the insignificant amounts of gross income in the returns is too substantial to have been overlooked by Foster when he signed the returns." Furthermore, as we shall discuss presently, Foster had engaged in highly questionable activities and attempted on...
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