Polone v. Commissioner
| Decision Date | 16 December 2003 |
| Docket Number | Docket No. 12665-00. |
| Citation | 86 T.C.M. 698 |
| Parties | Gavin Polone v. Commissioner. |
| Court | U.S. Tax Court |
Edwin L. Norris, Jonathan M. Brenner, and Ethan D. Millar, for the petitioner.
Steven M. Roth, Mark A. Weiner, and Leslie B. Van Der Wal, for the respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
Respondent determined the following deficiencies in and penalties on petitioner's Federal income tax:
Penalty
Year Deficiency Sec. 6662
------------- ----- ------
1996 $407,880 $81,567
1997 407,880 81,567
1998 407,880 81,567
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.
The issues for decision are: (1) Which party bears the burden of proof; (2) whether four $1 million payments petitioner received from United Talent Agency, Inc. (UTA), in May 1996, November 1996, May 1997, and November 1998 are excludable from petitioner's gross income pursuant to section 104(a)(2); and (3) whether petitioner is liable for the accuracy-related penalty for 1996, 1997, and 1998.
Some of the facts have been stipulated and are so found. The stipulation of facts and the attached exhibits are incorporated herein by this reference. At the time he filed the petition, petitioner resided in Beverly Hills, California.
Talent agencies are regulated businesses in the State of California. They procure employment and negotiate deals for their clients. For these services, talent agencies receive a maximum commission of 10 percent. This industry is a very competitive business—every day someone tries to steal someone else's clients. To be a successful talent agent requires an aggressive personality.
After graduating from the University of California at Berkeley with a bachelor's degree in film, petitioner became a talent agent. Petitioner signed and represented many young writers for television shows that became "hits". Petitioner primarily represented clients who were in the television industry; however, he also represented clients in the feature film industry. His clients were directors, writers, producers, and actors. Some of petitioner's clients, who numbered over 75, included: Maria Conchita Alonso, Larry David (creator of "Seinfeld"), David Foley, Gregory Hines, David Koepp (whose credits include "Jurassic Park", "Carlito's Way", and "Mission Impossible"), Norm MacDonald, Conan O'Brien, Bronson Pinchot, John Singleton, and several writers from "The Simpsons" and "Seinfeld".
Martin Bauer and Peter Benedek owned the Bauer Benedek Agency (BBA).2 BBA was a talent agency. In the summer of 1989, after working at International Creative Management (ICM), one of the three largest Hollywood talent agencies,3 for 4 years, petitioner left ICM and began working at BBA.
Petitioner had offers to work for other agencies but chose BBA. BBA primarily had feature film clients. Petitioner went to BBA to build its television business. Petitioner's initial salary at BBA was $90,000. In 1990, BBA increased his salary to $150,000.
In 1991, Leading Artists Agency (LAA), primarily a television talent agency, merged with BBA to become UTA. James Berkus, a founding partner in LAA, is a talent agent at UTA and the chairman of UTA. Mr. Berkus, an attorney, has been in the entertainment industry for over 25 years.
From 1991 through 1998, with the exception of a short period in 1996, Mr. Bauer was the president of UTA. From sometime in 1996 through 1998, he was a cochairman of UTA. During April 1996, however, Mr. Bauer was not on good terms with the other people involved in the management of UTA.4
From its inception until April 21, 1996, petitioner worked as a talent agent for UTA. Petitioner's initial salary at UTA was $150,000.
Since its inception, UTA has grown in the number of its employees and the amount of revenue it has generated. In 1996, UTA was the fourth "most prestigious" talent agency in Hollywood. During 1995 and/or 1996, UTA "packaged" seven shows including "Cybil", , "The Drew Carey Show", and "Mad About You". During 1996, UTA represented high-profile stars including Sandra Bullock, Jim Carey, Lawrence Kasdan, Martin Lawrence, John Singleton, Jean-Claude Van Damme, and the Coen brothers.
During his employment at UTA, petitioner became "the de facto leader" of the television department— the largest earning department at UTA. By 1996, petitioner was the number one or number two revenue generator at UTA.
Petitioner worked extremely hard. He worked long hours 7 days a week. During the first 6 years of his career, he took a total of only 4 weeks' vacation. Petitioner fought aggressively for his clients. Petitioner was extremely successful in representing his clients.
On January 27, 1992, petitioner and UTA entered into an employment contract (employment agreement). The employment agreement provided petitioner with base compensation of $350,000 per year with a 10-percent annual increase and a discretionary bonus. The employment agreement had a term of 5 years.
The employment agreement provided that UTA could terminate petitioner at any time for "cause". The employment agreement defined "cause" as: (1) A conviction for any felony that was materially injurious to UTA; (2) any breach by petitioner of any of the material terms or covenants of the employment agreement; or (3) any fraudulent, illegal, or immoral activity by petitioner that materially and adversely affected UTA or UTA's reputation. Pursuant to the employment agreement, if UTA terminated petitioner for cause, UTA had no further liability to petitioner except for compensation accrued to the date of termination.
The employment agreement also provided that UTA was not required to use petitioner's services and had the unilateral right to terminate his employment without cause. In that event, UTA would be required to pay petitioner his base salary, petitioner would not be required to mitigate damages, and petitioner's income from other employment would not reduce the amount owed to him by UTA. In order to terminate petitioner without cause, the elected directors of UTA would have to approve the termination unanimously.
After its execution, the employment agreement was amended several times for various reasons, including to increase petitioner's base salary.
Wendy Casselith was employed by UTA as petitioner's assistant. Around April 1994, Ms. Casselith accused petitioner of verbally abusing and sexually harassing her. She hired an attorney to pursue claims against UTA. UTA resolved Ms. Casselith's claims by paying Ms. Casselith.
As of January 1995, petitioner's base salary at UTA was $1 million per year.
On May 1, 1995, UTA and petitioner amended the employment agreement (May 1995 amendment) to extend its term until March 30, 1998, and to increase petitioner's base salary to $2 million per year. The May 1995 amendment also provided that petitioner exchanged his interest in the UTA termination of employment plan for (1) 25 percent of the commissions received by UTA from package fees or profits (or advances on profits) from petitioner's clients' projects which were booked or being negotiated by UTA while petitioner was at UTA or were payable under the terms of agency agreements signed by petitioner's clients while he was at UTA, and (2) all revenue, not just package fees and profits, on Conan O'Brien's deal for "Late Night With Conan O'Brien" (altogether, the back-end payments).5 Additionally, petitioner agreed that his bonus would be at UTA's discretion and would be based upon his performance, his attitude, and the performance of UTA. Except as expressly modified therein, the terms of the employment agreement remained in effect.
Petitioner's interaction with UTA's management committee, partners,6 agents, assistants, and employees often was confrontational. Petitioner was tough on, and demanding of, other agents and assistants. During his employment at UTA, petitioner prided himself in being brash, outspoken, and aggressive. Petitioner's persona was eccentric, physically demonstrative, and intense.
During his employment at UTA, petitioner grew dissatisfied with some of UTA's practices. He felt the television department employees were undercompensated, compensation was not based on merit, money was being wasted, and UTA was not run efficiently. Petitioner believed that personal expenses of the partners were inappropriately being claimed as business expenses (such as country club memberships), that improper personal loans were being made to the partners, and that there were problems with drug use.
Petitioner repeatedly disagreed with and challenged the partners and management committee of UTA with respect to the way they ran the agency and regarding compensation. On at least two occasions, petitioner proposed that he either withdraw or be removed as a partner.
In March 1996, when he had 2 years left on his employment contract, petitioner met with UTA's principals to discuss problems petitioner had with how UTA conducted its business. In March 1996, the principals of UTA were Mr. Bauer, Mr. Berkus, Mr. Benedek, Gary Cosay, J.J. Harris, David Schiff, Nick Stevens, Jeremy Zimmer, and petitioner.7 At that time, UTA's board of directors and owners were Mr. Bauer, Mr. Berkus, Mr. Benedek, and Mr. Cosay. Although Mr. Harris and Mr. Schiff were partners, they did not have a say in the operation of UTA. During...
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