Vesco v. Commissioner
| Decision Date | 11 September 1979 |
| Docket Number | Docket No. 8872-73. |
| Citation | 39 TCM (CCH) 101,1979 TC Memo 369 |
| Parties | Robert L. Vesco v. Commissioner. |
| Court | U.S. Tax Court |
Myles J. Sachs, Robert D. Foglia, and Joseph A. Foglia, for the petitioner. Agatha L. Vorsanger, William J. Salica, Bernard S. Mark and Joseph T. Chalhoub, for the respondent.
Memorandum Findings of Fact and Opinion
Respondent determined a deficiency in petitioner's Federal income tax for the calendar year 1971 in the amount of $775,310 and an addition to tax under section 6653(a), I.R.C. 1954,1 in the amount of $38,765.50.
The issues for decision are:
(1) Whether respondent's determination of deficiency in this case is arbitrary and capricious;
(2) whether petitioner, who since February 1973 has continuously resided outside the United States, should be denied a redetermination of his tax liability for 1971 by this Court because he was indicted in June and July 1973 in three separate indictments by a Federal Grand Jury on felony charges and at a later time indicted for willfully disobeying and resisting a subpoena, all in the Southern District of New York;
(3) whether petitioner received income in the amount of $830,729.69 or any part thereof in 1971 by reason of his personal use for himself and for his family of a 707 aircraft owned by a corporate subsidiary of the corporation of which he was an officer;
(4) whether petitioner received income of $170,621.06 or any part thereof from payments and advances made to him or for his benefit during 1971 by the corporation of which he was an officer;
(5) whether petitioner received income of $28,170.58 or any part thereof during 1971 represented by unexplained deposits into his bank account at the American National Bank and Trust Company, Morristown, New Jersey;
(6) whether petitioner is entitled to a claimed long-term capital loss in 1971 and capital loss carryover from 1970 to 1971 as a result of loans to or investments in certain foreign entities; and
(7) whether petitioner is liable for the addition to tax under section 6653(a) for negligence or intentional disregard of rules and regulations.
Some of the facts have been stipulated and are found accordingly.
Petitioner, at the time of the filing of his petition in this case, resided in Nassau, N.P., Bahamas and San Jose, Costa Rica. Robert L. Vesco (petitioner) and his wife, Patricia J. Vesco, filed a joint Federal income tax return for the calendar year 1971 with the District Director of Internal Revenue, Newark, New Jersey. At the time of filing this return, petitioner and Mrs. Vesco resided on Old Denville Road, Boonton, New Jersey.
During the entire calendar year 1971, petitioner was employed by International Controls Corporation (ICC) and served as the chairman of its board of directors and chief executive officer. ICC is a Florida corporation which had its principal place of business during 1971 in Fairfield, New Jersey. It was engaged in various diversified business enterprises and had plants and offices throughout the United States. Its common stock was listed on the American Stock Exchange. During 1971 the board of directors of ICC consisted of the following:
Frank G. Beatty Richard E. Clay Stanley Hiller, Jr. Ralph P. Dodd Malcolm E. McAlpin Laurence B. Richardson, Jr. Wilbert J. Snipes Merle Thorpe, Jr. Robert L. Vesco
On August 31, 1970, ICC Investments, Ltd. (IIL), a subsidiary of ICC, entered into an agreement to purchase $5 million of promissory notes and stock warrants of Investors Overseas Services, Ltd. (IOS), a Canadian corporation. IOS was effectively a holding company which either directly or through subsidiaries had its principal offices in or near Geneva, Switzerland and had other offices or operations scattered throughout the world. Under the terms of the agreement dated August 31, 1970, with respect to financing entered into between ICC and IOS, ICC was entitled to designate two members of the board of directors, the finance committee and the executive committee of IOS. During the year 1971, petitioner and Milton S. Meissner were the directors and members of the finance and executive committees of IOS designated by ICC. During the year 1971, ICC, through a wholly owned foreign subsidiary, IIL, had an investment in IOS which amounted to 38 percent of the voting stock of IOS and constituted effective control of IOS.
Around February of 1971 petitioner became chairman of the board of IOS. In late 1970 and early 1971, IOS defaulted with respect to certain of the provisions of the agreement dated August 31, 1970, and because of these defaults ICC effectively obtained the authority to make appointments of officers in the subsidiary companies of IOS.
The various subsidiaries of IOS had interests in the fields of real estate, mutual funds, banking institutions and insurance companies. One subsidiary of IOS, through management contracts, managed numerous foreign mutual funds with assets of over $200 million. Another IOS subsidiary sold to the public nonvoting shares in the mutual funds that were managed by the other IOS subsidiaries. Other subsidiaries controlled various foreign insurance companies, banks and real estate companies.
In 1970, prior to entering into the agreement of August 31, 1970, petitioner and Mr. Meissner, with the assistance of other officers and employees of ICC, attorneys and accountants, had spent several months in Geneva, Switzerland investigating the financial condition and operations of IOS.
After petitioner's appointment to the board of directors of IOS, and particularly after he became chairman of that board, he spent time working on the affairs of IOS. ICC and IOS entered into an agreement that expenses incurred by petitioner on behalf of IOS and paid by ICC would be reimbursed to ICC by IOS.
Prior to June 1971, ICC had owned a two-engine Gulfstream G-1 airplane which had been used to fly various ICC executives and their business associates to various business appointments. In late 1970 and early 1971 this Gulfstream G-1 plane was used on occasions for transatlantic flights. The pilots employed by ICC complained that the use of the Gulfstream G-1 for transatlantic flights was unsafe and one copilot resigned his position because of being asked to fly this plane on transatlantic flights. In addition to being unsafe, the transatlantic flights took from 12 to 15 hours. By early 1971, because of the time spent by various executives of ICC in connection with the affairs of IOS, more transatlantic flights of these executives were required. Commercial airline service was not always adequate transportation for these officers for their various overseas appointments. The problems of the unsuitability of the Gulfstream G-1 for transatlantic flights and the inadequacy on occasion of commercial airline service were discussed at several ICC board meetings. Mr. Ralph Dodd, an officer of ICC, was directed to search for a plane for ICC which would have the range, speed and capabilities of overseas flights and have sufficient seating capacity for moving a number of people in a reasonable time over long distances. After comparing various aircraft, both with respect to price, operating costs and range, and having the various planes checked out by the ICC chief pilot, Nick Eisenhauer, Mr. Dodd determined that the best plane for the use of ICC which he had seen was a 10-to-12-year-old Boeing 707 which could be acquired from Pan American Airlines for $1,375,000. The Boeing 707 was more expensive to operate than a Gulfstream G-2 or comparable plane. However, the Gulfstream G-2 or comparable-sized plane which would carry only about 12 people and had a range from New Jersey no further than London would cost approximately $4 million.
During 1971, ICC had a wholly owned subsidiary, Fairfield General Corporation, and this corporation had a wholly owned subsidiary, Skyways Leasing Corporation. In late April or early May of 1971, Skyways Leasing Corporation purchased the used Boeing 707 which had been located by Mr. Dodd and leased the plane to ICC. Between the time that the Boeing 707 was acquired by the subsidiary of ICC and the early part of June 1971, the crew of the plane was in training first by representatives of Pan American and then on their own.
The 707 airplane cost about $2,000 an hour to operate, but it could fly across the Atlantic in about four hours. The following schedule shows the expenses attributable to the 707 for the period June 1 through September 30, 1971, as shown on the records of ICC:
June, July, August and September 1971
Pilot and crew payroll ............ $ 33,652
Employee benefits ................. 8,469
Pilot training .................... 16,950
Maintenance and repairs ........... 45,220
Line service ...................... 9,618
Landing fees ...................... 5,306
Gas and oil ....................... 119,550
Travel expense .................... 21,328
Depreciation ...................... 31,125
Insurance ......................... 47,343
Aircraft catering ................. $ 1,368
Navigation ........................ 224
Security guards ................... 158
Telephone ......................... 675
Beginning in October of 1971, after an actual lease agreement between Skyways Leasing Corporation and ICC was signed, ICC paid a monthly rental of $100,000 for the 707 and in addition paid the salaries of the crew and the upkeep of the plane. The following schedule shows the total expenditures on the 707 as shown on the books of ICC for the months of October, November and December of 1971:
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October, November and December 1971
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Rental .................................... $100,000.00
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