Askew v. Commissioner
This text of 1985 T.C. Memo. 100 (Askew v. Commissioner) is published on Counsel Stack Legal Research, covering United States Tax Court primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.
Opinion
MEMORANDUM FINDINGS OF FACT AND OPINION
FEATHERSTON,
| Addition to Tax | ||
| Sec. 6653(b), | ||
| Year | Deficiency | I.R.C. 1954 |
| 1970 | $126,161.00 | $63,080.50 |
| 1971 | 2,072,321.90 | 1,036,160.95 |
| 1972 | 12,130.00 |
After concessions, including the section 6653(b) 1 addition to tax, the issues for decision are as follows:
1. Whether $250,000 received in 1970 by petitioner John D. Askew, and $3,000,000 received in 1971 by NOARK, Ltd., a foreign corporation controlled by petitioners, under certain letter agreements between petitioner John D. Askew and Occidental Petroleum Corporation are includable*533 in petitioners' income for 1970 and 1971, respectively, under section 61; and, if so, whether petitioners are entitled to deduct all or any part of either the $250,000 or the $3,000,000 as business expenses for 1970 and 1971, respectively, under section 162(a);
2. Whether interest in the amount of $7,766 earned in 1971 on a portion of the $3,000,000 received by NOARK, Ltd., and deposited into an interest-bearing account by petitioner John D. Askew is taxable to petitioners; 2 and
3. Whether, if we find underpayments in petitioners' taxes for the years 1970 and/or 1971, any part of the underpayments was due to petitioners' negligence or intentional disregard of the rules and regulations within the meaning of section 6653(a). 3
*534 FINDINGS OF FACT
At the time they filed their petition in this case, petitioners John D. Askew (Askew) and Nona B. Askew (Mrs. Askew), husband and wife, resided in Venezuela. Petitioners were, during the years at issue, and are citizens of the United States with a domicile in Fayetteville, Arkansas.
Askew has worked and been involved in various business activities and ventures in Venezuela since 1945. From 1945 to approximately 1950, Askew worked as a welder for the Chicago Bridge Company. During 1951 and 1952, he was general manager of the Flint Construction and Service Company.
In 1952, Askew formed Constructora Nona, C.A.., which was engaged in construction, pipeline, and tank work for the several oil companies which operated in Venezuela at the time. In 1953, Askew organized Servicios Petroleros Nona, C.A., which provided general field services to the oil companies such as gravel packing, instrument reading, and dynometer work. In 1954, Askew organized Servicios Nona, C.A.., which engaged in the trucking business. In 1966, Askew organized and owned 90 percent of the stock of Nona Drilling,*535 C.A., which owned three small drilling rigs and engaged in both shallow water and land drilling. On or about September 7, 1971, the assets of Nona Drilling were absorbed by Perforaciones Alta Mar, C.A. (Alta Mar), a Venezuelan corporation.
Alta Mar was organized on or about September 15, 1970, by a group of Venezuelans. Askew, however, provided all of Alta Mar's capital; the Venezuelans held their shares in Alta Mar "for the account and to the order of" Askew. Askew was named president of Alta Mar on August 4, 1971, and Alta Mar records dated September 6, 1971, show Askew as the owner of 50 percent of Alta Mar's stock.
Alta Mar's capital was significantly increased on September 17, 1971, and on November 16, 1972. As of that date, Alta Mar's shares were held as follows:
| Percentage of | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Name | Number of Shares Owned | Ownership | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| John D. Askew | 4,700 | 47 percent | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Woodrow J. Wilson | 4,700 | 47 percent | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Jose Toro Hardy | 600 | 6 percent | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 10,000 | Free access — add to your briefcase to read the full text and ask questions with AI JOHN D. ASKEW AND NONA B. ASKEW, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent Askew v. Commissioner Docket No. 15898-80. T.C. Memo 1985-100; 1985 Tax Ct. Memo LEXIS 531; 49 T.C.M. (CCH) 876; T.C.M. (RIA) 85100; FEATHERSTON MEMORANDUM FINDINGS OF FACT AND OPINION FEATHERSTON,
After concessions, including the section 6653(b) 1 addition to tax, the issues for decision are as follows: 1. Whether $250,000 received in 1970 by petitioner John D. Askew, and $3,000,000 received in 1971 by NOARK, Ltd., a foreign corporation controlled by petitioners, under certain letter agreements between petitioner John D. Askew and Occidental Petroleum Corporation are includable*533 in petitioners' income for 1970 and 1971, respectively, under section 61; and, if so, whether petitioners are entitled to deduct all or any part of either the $250,000 or the $3,000,000 as business expenses for 1970 and 1971, respectively, under section 162(a); 2. Whether interest in the amount of $7,766 earned in 1971 on a portion of the $3,000,000 received by NOARK, Ltd., and deposited into an interest-bearing account by petitioner John D. Askew is taxable to petitioners; 2 and 3. Whether, if we find underpayments in petitioners' taxes for the years 1970 and/or 1971, any part of the underpayments was due to petitioners' negligence or intentional disregard of the rules and regulations within the meaning of section 6653(a). 3 *534 FINDINGS OF FACT At the time they filed their petition in this case, petitioners John D. Askew (Askew) and Nona B. Askew (Mrs. Askew), husband and wife, resided in Venezuela. Petitioners were, during the years at issue, and are citizens of the United States with a domicile in Fayetteville, Arkansas. Askew has worked and been involved in various business activities and ventures in Venezuela since 1945. From 1945 to approximately 1950, Askew worked as a welder for the Chicago Bridge Company. During 1951 and 1952, he was general manager of the Flint Construction and Service Company. In 1952, Askew formed Constructora Nona, C.A.., which was engaged in construction, pipeline, and tank work for the several oil companies which operated in Venezuela at the time. In 1953, Askew organized Servicios Petroleros Nona, C.A., which provided general field services to the oil companies such as gravel packing, instrument reading, and dynometer work. In 1954, Askew organized Servicios Nona, C.A.., which engaged in the trucking business. In 1966, Askew organized and owned 90 percent of the stock of Nona Drilling,*535 C.A., which owned three small drilling rigs and engaged in both shallow water and land drilling. On or about September 7, 1971, the assets of Nona Drilling were absorbed by Perforaciones Alta Mar, C.A. (Alta Mar), a Venezuelan corporation. Alta Mar was organized on or about September 15, 1970, by a group of Venezuelans. Askew, however, provided all of Alta Mar's capital; the Venezuelans held their shares in Alta Mar "for the account and to the order of" Askew. Askew was named president of Alta Mar on August 4, 1971, and Alta Mar records dated September 6, 1971, show Askew as the owner of 50 percent of Alta Mar's stock. Alta Mar's capital was significantly increased on September 17, 1971, and on November 16, 1972. As of that date, Alta Mar's shares were held as follows:
Until 1956, the Venezuelan government awarded oil drilling concessions in a manner similar to the awarding of offshore drilling leases in the United States. Various oil companies*536 would competitively bid for the right to drill on certain blocks offered by the government. A concessionaire was required to begin drilling operations and establish commercial oil production within a specified period of time. Once a concession was awarded, the concessionaire operated his concession independently as he saw fit, i.e., he drilled as many wells, produced as many barrels of oil, an sold as much oil on the international market as he would determine. The concessionaire would pay the Venezuelan government taxes according to a predetermined "reference price" based on the sale of the oil. The last oil concessions were awarded to the various oil companies then operating in Venezuela in 1956. Sometime after 1959, the Venezuelan government instituted a new system of oil production. The government formed a state-owned oil company, Corporacion Venezolana del Petroleo, known as CVP, to which the government awarded all oil production concession rights. In order to effectuate the new system and provide CVP with the capital, technology, and personnel which it lacked, the government discontinued the concession system and established a system of awarding service contracts. Under*537 the new system, private oil companies would enter into an agreement with CVP as an equal partner to provide capital, technology, and marketing know-how. The service contract concept met with resistance from the major private oil companies which were then operating in Venezuela under the concession system; thus, the Venezuelan government was required to solicit other independent oil companies which had refining and marketing capacity. Because of his long-time involvement in the Venezuelan petroleum industry, Askew was acquainted with Mr. Mobore (Mobore), Venezuela's Minister of Mines. In approximately 1966, Askew met with Mobore and they discussed the new system of service contracts. Mobore expressed his concern to Askew concerning the reluctance of the major oil companies which had been operating concessions in Venezuela to enter into service contracts with CVP, and he expressed his opinion that a new petroleum company must be brought into Venezuela to stimulate some competition among the oil companies in bidding for the service contracts. Sometime later, in mid-1967, Askew was contacted by two prominent Venezuelan citizens, Alberto Flores, Sr. (Flores) and Antonio Rivero (Rivero) *538 concerning their interest in locating an oil company not already operating in Venezuela to bid on service contracts for the exploration and development of five blocks of the South Lake Maracaibo region of Venezuela. Flores had been an employee of Standard Oil of New Jersey in Venezuela for many years, but was retired when he contacted Askew; Rivero was a retired general of the Venezuelan army, and, at the time he contacted Askew, was a well known businessman. As a result of a series of meetings with Flores and Rivero, Askew traveled to the United States in order to locate a major oil company which might be interested in entering into service contracts with CVP for the five blocks available. Askew contacted the D-X Sunray and Texas Pacific Oil Companies; however, neither was interested in undertaking the project. Askew was then introduced by the investment banking firm of Loeb, Rhoades to Dr. Armand Hammer (Hammer), then president and chairman of the board of Occidental Petroleum Corporation (Occidental) in Los Angeles, California. Askew and Hammer negotiated and executed an extensive series of letter agreements referenced by the heading "Pending Contractual Arrangements for*539 Hydrocarbon Substances Service Contracts (South Lake Maracaibo, Venezuela) by Corporacion Venezolana del Petroleo, a Public Corporation owned by Venezuela, with Occidental de Venezuela, Inc., a Delaware Corporation." The terms of the letter agreements, all of which are signed by Askew in his individual capacity and by Hammer in his capacity as president of Occidental, relevant to the issues in the instant case are summarized below. 1. |
| Check | ||||
| Item | No. | Date | Payee | Amount |
| 1 | 1 | 9/6/71 | Banco Latino Americana | $100,000 |
| 2 | 2 | 9/6/71 | Alberto E. Flores | 106,400 |
| 3 | 3 | 9/6/71 | Chandra Thakur | 46,100 |
| 4 | 4 | 9/6/71 | Carmen Rosa Cumare | 20,000 |
| 5 | 5 | 9/6/71 | Carmen Rosa Cumare | 40,000 |
| 6 | 6 | 9/6/71 | Raul Cumare Hernandez | 25,000 |
| 7 | 11 | 9/6/71 | Luisa Dolores de Rivero V. | 100,000 |
| 8 | 12 | 9/6/71 | Luisa Dolores de Rivero V. | 116,900 |
| 9 | 13 | 9/13/71 | Robert C. Thompson | 28,800 |
| 10 | 14 | 9/13/71 | Luis de Leon | 41,000 |
| 11 | 16 | 9/18/71 | Gabriel Antonio Rondon | 50,000 |
| 12 | 17 | 9/18/71 | Gabriel Antonio Rondon | 50,000 |
| $724,200 |
I, Luisa Dolores Rondon de Rivero Vasquez, have received from Mr. John Askew*555 the amount of Two Hundred Sixteen Thousand Nine Hundred Dollars ($216,900.) as payment for this contract. I hereby waive any further claim hereunder.
* * *
I, Alberto Eduardo Flores Troconis have received from Mr. John Askew the amount of One Hundred Six Thousand Four Hundred Dollars ($106,400.) as payment for this contract. I hereby waive any further claim hereunder.
In addition to the direct disbursements to those involved in the project listed above, Askew and/or Mrs. Askew disbursed the following additional amounts in reimbursement to Askew, Nona Drilling, and its successor, Alta Mar, for amounts previously advanced to the Venezuelan nationals and for Askew's expenses in connection with the project:
| Check | ||||
| Item | No. | Date | Payee | Amount |
| 1 | Wire | 8/27/71 | Nona Drilling | $500,000 |
| Transfer | ||||
| 2 | 10 | 9/6/71 | John Askew | 15,000 |
| 3 | Wire | 9/15/71 | Perforaciones Alta Mar | 232,000 |
| Transfer | ||||
| 4 | 18 | 10/7/71 | Perforaciones Alta Mar | 350,000 |
| 5 | 19 | 12/2/71 | Perforaciones Alta Mar | 200,000 |
| $1,297,000 |
Askew and/or Mrs. Askew also disbursed the following other amounts from the NOARK account:
| Check | ||||
| Item | No. | Date | Payee | Amount |
| 1 | Wire | 10/7/71 | Acct. No. 100050 CA FRA SA | $616,000 |
| Transfer | Swiss Bank Corp., Panama | |||
| 2 | Wire | 10/22/71 | Acct. No. 100080 CA FRA SA | 200,000 |
| Transfer | Swiss Bank Corp., Panama | |||
| 3 | Wire | 3/28/72 | E. J. Ball | 10,000 |
| Transfer | ||||
| 4 | 20 | 5/1/74 | J. L. Brandt | 20,000 |
| 5 | 21 | 5/30/74 | Gustavo Conde | 20,000 |
| 6 | 22 | 6/25/74 | Gustavo Conde | 14,000 |
| $880,000 |
*556
Petitioners tiemly filed a joint Federal income tax return dated April 13, 1971, for 1970, reporting gross income of $260,731. Petitioners did not include in gross income the $250,000 received by Askew under the nickel deposit letter agreement. On October 27, 1976, petitioners' attorney, E. J. Ball, executed a Form 872, Consent Fixing Period of Limitation Upon Assessment of Income Tax, by which petitioners consented to the extension of the statute of limitations for assessment of their 1970 income tax to June 30, 1978. Typed onto the Form 872 is the following restrictive language:
This consent is valid only if
Petitioners timely executed subsequent consent forms for 1970 on December 24, 1977, and March 1, 1979, extending the statute of limitations to June 30, 1979, and June 30, 1980, respectively.
Petitioners filed joint Federal income tax returns for 1971 and 1972 on June 15, 1972, and April 15, 1973, respectively. Petitioners did not report as income*557 on their 1971 return the $3,000,000 received by NOARK under the Occidental letter agreements. Prior to the expiration of the 3-year statute of limitations for the assessment of their 1971 and 1972 income taxes, petitioners timely executed Forms 872 on November 22, 1974, extending the period for assessment of their 1971 income tax to June 15, 1976, and on October 13, 1975, extending the period for assessment of their 1971 and 1972 income tax to June 30, 1977. Petitioners subsequently executed additional Forms 872 extending the period for assessment of both their 1971 and 1972 income taxes to June 30, 1980.
The notice of deficiency, setting forth respondent's determination of petitioners' income tax liability for the years 1970, 1971, and 1972, was sent to petitioners on May 23, 1980.
OPINION
1. Taxability of Amounts Received Under the Letter Agreements
A.
The first issue for decision is whether, and to what extent, petitioners must include in their gross income the $250,000 payment made in 1970 by Occidental to Askew under the nickel deposit letter agreement. As a general*558 rule, the burden of proof concerning this issue would be on petitioners,
As indicated in our findings, petitioners specifically agreed to extend the period of limitations on assessment of their 1970 income tax only if the 6-year statute of limitations under
After careful consideration of the evidence on this issue, we conclude that the $250,000 payment is includable in petitioners' income for 1970 and, therefore, petitioners did omit from gross income an amount in excess of 25 percent of the gross income which they reported in 1970. We sustain respondent's determination.
Respondent presented evidence to show that on August 31, 1970, Occidental, at Askew's request, advanced $250,000 under the nickel deposit letter agreement to Askew's account at the McIlroy Bank in Fayetteville, Arkansas, and that the next day, September 1, 1970, Askew deposited the advance into the account of his corporation, Nona Drilling, at the same bank. The nickel deposit letter agreement, entered into by Askew in his individual capacity, expressly provides that payments made thereunder constitute "compensation" to Askew, and Askew alone, for services rendered by him to Occidental's subsidiary in connection with its efforts to obtain a service contract for the nickel deposit. As such, therefore, the $250,000 advance under the letter agreement is includable*560 in Askew's gross income under section 61(a) which provides that "gross income means all income from whatever source derived, including * * * (1) Compensation for services * * *."
Petitioners do not dispute the basic facts presented by respondent, i.e., that Askew requested and received payment of $250,000 from Occidental and that such payment was deposited into the Nona Drilling account at the McIlroy Bank. They disagree with respondent, however, concerning the tax treatment to be accorded the transaction. Although their position on this issue is not altogether clear, petitioners appear to make two alternative arguments concerning the $250,000 payment. First, they contend that the payment to Askew is not includable in their gross income because Askew acted as the agent of Rivero and Flores in contracting the letter agreement and, thus, he was merely a conduit through which the money was ultimately paid to certain Venezuelan nationals who were associated with Rivero and Flores. Second, they contend that if the payment is includable in their gross income, it should be considered to have been used in its entirety as a deductible business expense under section 162(a).
At trial, *561 Askew testified that when Occidental informed him of its intention to cancel the nickel deposit project, "I told him [Hammer] I had been out $250,000, and I would like to recover my money." Askew further testified that he, through his corporation, Nona Drilling, had made payments totaling $250,000 to two Venezuelan nationals, Jose Maria de Castro Acosta and Israel Osorio Acosta, associates of Rivero and Flores, who had performed services in connection with the nickel deposit project. Askew described Jose Maria de Castro Acosta in general terms as "a man that was very much interested in the mineral mines of all kinds," and Israel Osorio Acosta as "an expert in the mining business." Askew did not identify, in his testimony, the type of services performed by either of the two men in connection with the nickel deposit project, or specify the dates on which the services were performed. Neither one of these individuals testified as witnesses. Askew stated that he thought the payments were made in cash taken from the Nona Drilling account, but he did not state when the payments were made.
In support of Askew's testimony concerning the cash payments made by Askew through Nona Drilling*562 to the two Venezuelan nationals, petitioners presented two documents in evidence. The first document is a letter dated November 17, 1970, written by Askew to Jose Maria de Castro Acosta and referenced: "In Re Letter dated February 14, 1970, from Occidental Petroleum Corporation to John D. Askew." This letter discusses a certain letter agreement between Occidental and Askew dated February 14, 1970; the substance of the letter agreement referred to is not identified. The letter also contains a notation stating that $100,000 has been paid to and received by Jose Maria de Castro Acosta and that such amount will be deducted from a final payment of $1,000,000. The letter is signed and marked "accepted" on March 10, 1971, by Jose Maria de Castro Acosta.
The second document is entitled "Final Release" which purports to have been granted on September 30, 1971, by Israel Osorio Acosta. In this document, Israel Osorio Acosta acknowledges receipt as "sufficient compensation" of a payment of $250,000 made "by John D. Askew, or by a company controlled by him," and he releases from any further claims Askew, Mrs. Askew, Nona Drilling, Alta Mar, and all other corporations in which the Askews*563 own a 10-percent or greater interest. The document does not specify the services performed by Israel Osorio Acosta for which such compensation was paid.
Petitioners' evidence on this issue is insufficient, in our view, to support either of their alternative legal theories. It is not corroborated by the testimony of any of the alleged recipients of these funds or any documentation showing specifically for what purposes they were expended.Essential to a conclusion either that Askew was only a conduit through which the $250,000 was paid to the Venezuelan nationals, 11 or that the $250,000 was reimbursement to Nona Drilling for expenses incurred in performance of the nickel deposit letter agreement, is a basic factual determination that payments totaling $250,000 were in fact made by Nona Drilling to the named Venezuelan nationals in connection with the Nickel deposit project. Askew's testimony and the documents presented in support thereof do not lead to such a determination.
*564 Askew's testimony concerning this issue can only be characterized as vague and contradictory at best. He could describe the two Venezuelan nationals to whom he claims to have made the payments only in general terms as persons "interested in the mineral mines of all kinds" and "an expert in the mining business," respectively; he failed to describe with any specificity either the services performed by the two men which would have warranted such large payments, or when the services were performed.
Askew's testimony is undermined by the fact that the documentary evidence set out in our findings makes clear that the nickel deposit letter agreement was still in force as of November 17, 1970, when the parties agreed to extend the time of performance of their February 14, 1970, letter agreement. This was some 3 months after the $250,000 payment was made by Occidental. Askew's assertion that the payment was made when Occidental decided to cancel the deal is in conflict with this evidence and leads us to question the accuracy of his testimony.
Further, the two documents presented by petitioners and described above actually weaken, rather than support, Askew's testimony. The documents*565 reflect payments to two Venezuelan nationals totaling $350,000, whereas Askew claims that only a total of $250,000 was paid to both men. Neither of the documents refers specifically to the nickel deposit project; nor do either of the documents reflect that payment was made for services rendered in connection with the project or under the nickel deposit letter agreement of February 14, 1970. The letter signed by Jose Maria de Castro Acosta refers to a February 14, 1970, agreement between Occidental and Askew; however, none of the letter agreements concerning the nickel deposit project contained in the record bear such a date. Given the fact that Askew and Hammer signed so many letter agreements on many different dates, it is quite possible that the February 14, 1970, letter agreement referred to in the Jose Maria de Castro Acosta letter may relate to a transaction other than the nickel deposit project.
The dates of the documents themselves also are inconsistent with Askew's testimony. Jose Maria de Castro Acosta accepted Askew's letter on March 10, 1971, and Israel Osorio Acosta signed the Final Release on September 30, 1971. Askew testified that he was "out" by $250,000 when*566 Occidental advanced him that sum in August 1970. The documents, both of which are dated 1971 by the Venezuelan nationals, suggest the possibility that Askew did not make payments to the two men until some months after August 1970.
We are aware that the $250,000 advance was intended, according to Hammer, to reimburse Askew for some expenses that he had incurred. We also recognize the likelihood that Askew did, in fact, use at least part of the money for reimbursement purposes. We have no way of knowing, however, in what year he paid or incurred the expenses, i.e., in 1970 when the letter agreement was signed and Occidental advanced the money or in 1971 when one of the two Venezuelan nationals gave the purported "Final Release." Nor do we have any way of knowing for what purposes the expenses were incurred. The complete absence of any documentation to support individual items of expense precludes an allowance under the rule of
In summary, respondent has shown that Occidental paid Askew $250,000 on August 31, 1970, pursuant to a letter agreement*567 in which Occidental obligated itself to pay Askew "compensation" for services rendered. This evidence is sufficient to establish a prima facie case that petitioner realized income in that amount in 1970 and that the bar of the statute of limitations on assessments was lifted under
B.
The next issue for consideration is whether, and to what extent, petitioners must include in their gross income the $3,000,000 payment made in 1971 by Occidental Worldwide to NOARK, petitioners' wholly owned corporation, under the series of oil drilling service contract letter agreements. The notice of deficiency for 1971 was timely mailed to petitioners within the 3-year statute of limitations period; petitioners, therefore, have the burden of proof on this*568 issue.
Again, the parties are in basic agreement concerning the pertinent facts with respect to the $3,000,000 payment. On August 23, 1971, Occidental Worldwide transferred $3,000,000 to NOARK's account at the Nassau, Bahamas, branch of the Canadian Imperial Bank of Commerce. This transfer was made pursuant to Occidental's obligations to Askew under the series of letter agreements entered into between Occidental and Askew with respect to Occidental's procurement from CVP of oil drilling service contracts for certain designated blocks of the South Lake Maracaibo region of Venezuela.The payment was made to NOARK pursuant to Askew's assignment of his rights under the letter agreements to NOARK, his wholly owned corporation, which he had formed for puposes of receiving and disbursing the payment from Occidental Worldwide. The parties again, however, disagree concerning the tax consequences flowing from Occidental's $3,000,000 payment to NOARK.
Respondent contends that the $3,000,000 payment to NOARK constitutes taxable income to petitioners in its entirety. He contends that Askew signed all of the letter*569 agreements in his individual capacity; that the agreements provide that payments made thereunder are specifically designated as compensation to Askew alone for his services to Occidental; and that Askew's assignment to NOARK of all rights under the letter agreements was merely an anticipatory assignment of income properly taxable to Askew himself under section 61(a).
Petitioners, on the other hand, contend that they are not taxable to any extent on the $3,000,000 payment from Occidental Worldwide to NOARK. At trial, Askew testified as follows: That he, at all times, acted in his fiduciary capacity as president of his corporation, Nona Drilling, when he dealt with Hammer and the Venezuelan nationals; that he acted as the agent of two groups of Venezuelan nationals, the Rivero-Flores group and a group consisting of Jose Luis Brandt, Emilio Conde Jahn, and Jose Toro Hardy (the Brandt-Jahn-Hardy group), in negotiating and contracting the letter agreements with Occidental with the understanding that the Venezuelan nationals would receive the $3,000,000 cash payment under the letter agreements and his corporation, Nona Drilling, would receive only the remaining 1-percent overriding royalty*570 and some drilling contracts from Occidental; that from 1968 through 1971, he advanced substantial sums through Nona Drilling to the Venezuelan nationals involved in the service contract project with the understanding that Nona Drilling would be repaid for the advances from the $3,000,000 payment; that Nona Drilling paid all of his personal expenses incurred in connection with the project; that when NOARK received the $3,000,000 payment from Occidental Worldwide, he treated the NOARK account as a trustee account, and he disbursed the bulk of the payment to the Venezuelan nationals to whom he was obligated under contract and to his corporations, Nona Drilling and its successor, Alta Mar, in reimbursement for sums previously advanced to the Venezuelan nationals and for his business expenses.
In sum, petitioners contend that Askew, through NOARK, acted only as the agent of Nona Drilling and the Venezuelan nationals, and consistent with his fiduciary duty, he was merely a conduit through which all of the $3,000,000 was ultimately passed on either to other individuals to whom he was obligated to make payment, or to his corporations for sums previously advanced. They contend that neither*571 Askew nor his corporations made any claim to, or benefited in any way from, any of the $3,000,000.
For the reasons discussed below, we conclude that the answer lies somewhere between the extreme positions advocated by the parties. We do not agree with respondent that petitioners are taxable on the entire amount; petitioners have succeeded in demonstrating that they are not taxable on at least a portion of the $3,000,000 payment. Petitioners have not, however, presented evidence sufficient to convince us that they are not taxable to any extent on the payment. Bearing in mind that petitioners have the burden of proof on this issue, we have redetermined the deficiency using our best judgment based on what we consider to be the credible evidence presented to us.
At the outset, we conclude, contrary to his assertions otherwise, that Askew acted on his own behalf when he negotiated and contracted the letter agreements with Occidental. Nothing in the letter agreements themselves, which we consider to be the most persuasive evidence concerning the substance of the agreement between Askew and Occidental, indicates that Askew was acting on behalf of either his corporation, Nona Drilling,*572 or any of the Venezuelan nationals. All of the agreements were signed by Askew in his individual capacity, whereas Hammer signed the letters on behalf of Occidental; the agreements provide that Askew will be compensated for services rendered by him to Occidental; there is nothing to suggest that services will be rendered to Occidental by any other individuals.
Further, there is no evidence, other than Askew's self-serving testimony, that Askew ever indicated to Hammer that he was acting on behalf of his corporation or of anyone else in entering into the letter agreements. Hammer, whose testimony was taken by deposition, has no such recollection. Askew told Hammer, according to Hammer's testimony, that he had friends in Venezuela who would be helping him in his efforts to gather information. Such a statement, however, by no means suggests thta Askew was acting as the agent for these "friends" in entering into the letter agreements.We find it hard to believe that Askew, who spent 90 percent of his time during the period from July 1968 through November 1970 working on the project, had no expectation of personal gain for his efforts except the residual overriding royalty interest*573 and some drilling contracts for his corporation, Nona Drilling.
Petitioners' contention that Askew was acting as agent for his corporation, Nona Drilling, is without merit. They cite
There is no evidence, other than Askew's bald assertion that everything he did was for Nona Drilling, to support a conclusion that Askew was acting on behalf of Nona Drilling during any of his dealings with Occidental. Nona Drilling was in the business of deep and shallow drilling, not of procuring service contracts for oil companies. The 1-percent overriding royalty which Askew claims to have obtained on behalf of his corporation has nothing whatever to do with Nona Drilling's*574 business. Although Askew's claim that in entering into negotiations with Occidental he also was interested in obtaining drilling contracts for Nona Drilling is related to Nona Drilling's business, none of the letter agreements in any way mention or suggest such a possibility. Thus, whether or not Askew did obtain such drilling contracts is a matter separate from his work under the letter agreements. Petitioners have presented no evidence to show that the personal services rendered by Askew to Occidental under the letter agreements, i.e., gathering information to assist Occidental in procuring the service contracts, were of the same type as he performed for Nona Drilling to carry on its oil drilling business. We think the evidence shows that Askew acted outside his capacity as president of Nona Drilling. We are thus unable to find that Askew received the entire $3,000,000 payment on behalf of Nona Drilling or its successor, Alta Mar.
Similarly without merit is petitioners' contention that Askew was acting as agent for two groups of Venezuelan nationals, the Rivero-Flores group and the Brandt-Jahn-Hardy group. In this regard, petitioners cite
Quoting from
Agency is a legal concept which depends upon the existence of required factual elements: the manifestation by the principal that the agent shall act for him, the agent's acceptance of the undertaking and the understanding of the parties that the principal is to be in control of the undertaking.
Askew's vague and uncorroborated testimony in this regard is insufficient to convince us that any of the foregoing factual elements of agency exist. In fact, as we view the evidence set forth in our findings, the description*576 of the relationship between Askew and both the Rivero-Flores group and the Brandt-Jahn-Hardy group could lead to quite the opposite conclusion, i.e., that it was Askew who was the principal in control of the project and the Venezuelan nationals who worked on Askew's behalf.
As to Rivero and Flores, the evidence shows that Askew was obligated, under written contract, to pay them a sum certain, $1,500,000, for their services rendered to Askew in connection with their information gathering efforts. The evidence is also clear that Hammer and Hatfield, Occidental officials, were aware of their involvement in the project and considered their efforts instrumental in Occidental's success in procuring the service contracts. None of the evidence, with the exception of Askew's self-serving statements, however, demonstrates an understanding between Askew and Rivero and Flores that Askew was to act on their behalf, oir that Rivero and Flores would be in control of the undertaking. As we view the evidence, Rivero and Flores had no role other than information gathering for which they were paid; petitioners have failed to prove that they were in control of the project.
Petitioners' evidence*577 with respect to the involvement of Brandt, Jahn, and Hardy as principals in the service contract project is even less convincing than their evidence concerning Rivero and Flores. Petitioners contend that Brandt, Jahn, and Hardy were also involved in gathering information for Occidental; however, Askew's testimony concerning their alleged involvement is too vague to support a conclusion that they were in control of Askew's activities. Askew testified that Hardy did an economic study for the project for which he was paid, but he failed to identify any services performed by either Brandt or Jahn. In contrast to the documentary evidence presented concerning Askew's obligation to pay Rivero and Flores, petitioners produced no written agreement or any other credible corroborating evidence which would demonstrate the involvement of Brandt, Jahn, and Hardy in the project to the degree claimed by Askew.
Petitioners also claim, with respect to Brandt, Jahn, and Hardy, that, in return for services rendered in connection with the service contract project, Askew, through Nona Drilling, advanced to Jahn and Hardy on September 9, 1970, 100,000 Venezuelan bolivars for the original capital of*578 Alta Mar and granted Alta Mar's incorporators an option to purchase the assets of Nona Drilling; and that during the period from September 9, 1970 to August 5, 1971, Askew, through Nona Drilling, advanced Jahn and Hardy a total of $100,000 for the account of Alta Mar with the understanding that Nona Drilling would be reimbursed from the $3,000,000 payment; and that on September 6, 1971, the option was canceled for nonpayment, and Askew merged Nona Drilling into and took control of Alta Mar. Although we accept Askew's testimony that Brandt, Jahn, and Hardy did provide some services in connection with the project and that in payment Askew helped them set up Alta Mar, Askew's testimony is insufficient to support a conclusion that Brandt, Jahn, and Hardy did anything more than provide services. There is no evidence to show that they were in control of the project. Thus, we do not accept petitioners' argument.
Having decided that Askew was not the agent of either his corporation or of the Venezuelan nationals, and that he acted on his own behalf, we do not conclude, however, that he is necessarily taxable on the entire $3,000,000 payment by Occidental as urged by respondent. We do*579 think it clear that petitioners are taxable on at least a portion of the payment. Under assignment of income principles, Askew's transfer of his rights under the letter agreements to NOARK and the eventual receipt of the $3,000,000 payment by NOARK will not allow petitioners to escape taxation on income paid as compensation for services rendered by Askew. See
Contrary to respondent's position, we are convinced that Rivero and Flores and Brandt, Jahn, and Hardy were involved with and did aid Askew in his efforts to gather information in connection with the service contract project; that Askew was initially obligated, under written contract, to pay Rivero and Flores $1,500,000, one-half of the $3,000,000, as compensation for their services; that Askew, through Nona Drilling, did advance certain amounts, much of it in cash, to them and their associates and to Brandt, Jahn, and Hardy with the understanding that Nona Drilling would be reimbursed; and that Nona Drilling paid Askew's significant*580 expenses incurred in connection with his activities for the project which he also expected to reimburse. To the extent that Askew actually paid the Venezuelan nationals for their services in connection with the project and reimbursed Nona Drilling and its successor Alta Mar for amounts previously advanced by Nona Drilling in connection with the project, we conclude that Askew paid deductible expenses or acted merely as a conduit. Petitioners need not, therefore, include those amounts in income. See
Petitioners contend that prior to the closing of the letter agreements, Askew and Nona Drilling advanced sums to the Venezuelan nationals and paid Askew's expenses in connection with the project in an amount totaling $1,262,685. Further, they claim that they disbursed from the $3,000,000 payment to NOARK a total amount of $2,901,691, reimbursing $1,065,000 to Alta Mar, Nona Drilling's successor, for amounts previously expended, and paying $1,836,691 to the Venezuelan nationals under Askew's contract with*581 Mrs. Rivero and Flores. Petitioners claim that, rather than having benefited from any portion of the $3,000,000, Alta Mar, Nona Drilling's successor, stood in a loss position with respect to the funds previously advanced by Nona Drilling. 12
*582 In support of their claimed payments, petitioners presented only Askew's testimony and certain summary schedules detailing, on a check-by-check basis, expenditures from the Nona Drilling and NOARK accounts with comments concerning the purposes for which the expenditures were made. We are unable to accept and adopt these summary exhibits as credible evidence that all of the expenditures were made for the purposes claimed. These summary schedules as such have no actual probative value. They are not business records of either Nona Drilling or NOARK; they were not prepared contemporaneously with the events at issue. Rather, they are merely a summary of checks written on the Nona Drilling and NOARK accounts with comments as to the purposes of the checks prepared by Askew, his attorney, and Luis de Leon, his former bookkeeper in preparation for trial some 15 years after the fact. When questioned about various items in the exhibits, Askew had no recall concerning the purpose of any of the expenditures. 13 Askew's vague testimony and the summary exhibits containing unsupported and uncorroborated comments intended to flesh out the vague testimony, in our view, fall short of carrying*583 entirely petitioners' burden of proof.
Based on our findings, we conclude that Nona Drilling advanced sums to the Venezuelan nationals and paid Askew's expenses in an amount totaling $1,282,000 which Askew was required to and did reimburse to Nona Drilling and its successor, Alta Mar. Further, we conclude that, from the $3,000,000 payment to NOARK, Askew paid an amount totaling $724,200 to the Venezuelan nationals in fulfillment of hs contract obligation with Mrs. Rivero and Flores, and he reimbursed $15,000 to himself for amounts he had advanced to Mrs. Rivero from his own funds. Askew was thus a conduit for funds or paid deductible expenses totaling $2,021,200. Petitioners' proof is insufficient to demonstrate that they are not taxable on the remaining $978,800 from the $3,000,000 payment received by NOARK. 14
*584 As to petitioners' contention that all amounts paid out of the NOARK account constitute deductible business expenses under section 162(a), we find their proof on this issue also insufficient to support a conclusion that any more than $2,021,200 was actually expended under Askew's obligations in connection with the project. The major portion of the balance of funds paid out of the NOARK account consists of two payments totaling $816,000 made in 1971 to two Swiss bank accounts, the ownership of which was not established by any credible evidence by either party, 15 and three payments totaling $54,000 made to Jose Luis Brandt and Gustavo Conde in 1974. Petitioners have simply not convinced us that the payments made to the two Swiss Bank accounts and to Brandt and Conde were made in connection with Askew's obligations under the service contract project.
*585 2.
On September 1, 1971, Askew deposited $1,000,000 from the $3,000,000 payment to NOARK in a time deposit account for 33 days at 9-percent interest. On October 4, 1971, Askew redeposited the $1,000,000 plus $8,136.99 interest earned into the NOARK checking account. Respondent determined that interest income in the amount of $7,766, i.e., interest of $8,136 minus bank charges of $470, is taxable to petitioners. On brief petitioners concede that if we conclude that the $3,000,000 payment constitutes their taxable income, they are taxable as well on the interest income. Because we have concluded above that petitioners must include in gross income at least $978,800 of the payment from Occidental, we likewise conclude that they are taxable for 1971 on the interest earned on that income as well.
3. Additions to Tax
In the notice of deficiency, respondent determined an addition to tax for fraud under section 6653(b) with the alternative position that if it is determined that the section 6653(b) addition is inapplicable, then the addition to tax for negligence under section 6653(a) is applicable. In his answer, respondent conceded that the addition for*586 fraud under section 6653(b) is inapplicable. Petitioners contend that the issue of negligence is not properly before us because "the issue of the negligence penalty fell with the admission that respondent erred with respect to the 50 percent of tax fraud penalty"; that respondent should have affirmatively alleged the addition for negligence in his answer; and that they have been prejudiced by respondent's failure to plead the issue of negligence. We do not agree.
Respondent made an explicit determination of the addition for negligence in the notice of deficiency. The fact that such determination was made as an alternative to the addition for fraud does not in any way detract from the fact that petitioners were apprised of the determination in the notice of deficiency. Although respondent, in his answer, abandoned his claim as to the addition for fraud, he in no way indicated an intention to abandon the alternative determination of negligence. We do not see how petitioners can have been prejudiced when such determination was made in the notice of deficiency, which is the foundation for the issues in a Tax Court case. 16 Petitioners' claim that the issue of negligence was raised*587 for the first time by respondent on brief is refuted by the plain fact that the determination appears on the face of the notice of deficiency. The issue, therefore, is properly before us.
As to the merits of the issue, petitioners have the burden of proof to show that the underpayments in taxes determined above were not the result of their negligence or intentional*588 disregard of the rules and regulations.
Petitioners' utter failure to keep or produce adequate records of these transactions, involving millions of dollars, is evidence enough of their neglect or disregard of rules they should have known they were required to follow. Contrary to how he would have us view him, we think Askew is an astute businessman who has been involved for years in*589 various and sophisticated business deals. He should have known that his records were inadequate. The inadequacy of the records in this case only leads us to conclude that petitioners were negligent.
Askew did not indicate whether or not he sought legal advice concerning the tax treatment of the $250,000 payment in 1970, or whether he disclosed such payment to his attorney or accountant. He claims that he sought advice from his attorney with respect to the handling of the $3,000,000 payment to NOARK in 1971; however, as we view the record, we can only conclude that Askew went to some lengths to conceal its receipt and disbursal. He directed the law partner of his attorney to form NOARK, a foreign corporation, specifically to receive the payment. He failed to provide any information on his 1971 return that he had any interest in the NOARK account, although he did provide in the same return information on two other foreign corporations in which he had an interest. Only on his 1972 return did he indicate his interest in the NOARK account, after most of the $3,000,000 had been disbursed.
The foregoing facts, combined the Askew's failure affirmatively to convince us otherwise, *590 compel us to sustain as warranted respondent's determination of the addition to tax under section 6653(a) for 1970 and 1971.
To reflect the foregoing,
Footnotes
1. All section references are to the Internal Revenue Code of 1954, as amended, unless otherwise noted. All Rules references are to the Tax Court Rules of Practice and Procedure unless otherwise noted. ↩
2. Resolution of the income issues set forth above (Issues 1 and 2) will determine whether and to what extent amounts claimed by petitioners as charitable contribution deductions for 1970, 1971, and 1972 must be adjusted. ↩
3. In the notice of deficiency, respondent determined an addition to tax for fraud under sec. 6653(b), with the alternative position that if it is determined that the sec. 6653(b) addition is inapplicable, then the addition to tax for negligence under sec. 6653(a) is applicable. In his answer, respondent conceded that the sec. 6653(b) addition is inapplicable.↩
4. This letter of June 29, 1968, uses the term "concessions" rather than "service contracts." Such letter was amended by letter agreement dated Sept. 2, 1968, in which the parties agreed that the term "service contracts" should be substituted for the term "concessions."↩
5. In another letter bated June 29, 1968, Occidental informed Askew that its first choice was that designated as block "E" and its last choice was that designated block "A."↩
6. At trial, petitioners presented several letters purportedly written by Rivero to Hammer concerning the service contracts. By stipulation of the parties, the letters were admitted in evidence for the limited purpose of demonstrating contact between the parties named in the letters; the substance of the letters was treated as inadmissible hearsay.↩
7. Askew was not able to provide an explanation concerning why Mrs. Rivero entered into the agreement rather than her husband, Rivero, with whom Askew had been dealing, other than that Rivero was a "sick man" at the time.↩
8. When CVP first announced its intention to receive bids for the five blocks in the South Lake Maracaibo region, 22 different oil companies expressed an interest in bidding for service contracts. Only four companies actually got into the competitive bidding stage, Occidental, Texaco, Shell, and Mobil.↩
9. Occidental Petroleum Corporation of Los Angeles, through various subsidiaries, owned 100 percent of the shares of Occidental de Venezuela, Inc., a Delaware corporation, and Occidental Worldwide Investment Corporation. Occidental Worldwide Investment Corporation owned 100 percent of the shares of Occidental Petroleum de Venezuela, S.A., a Venezuelan corporation.↩
10. Respondent does not content that the fair market value of this royalty interest is taxable to petitioners. See 4 Mertens, Law of Federal Income Taxation, sec. 24.23a p. 110 (1980 rev.).↩
11. There is no evidence, other than petitioners' statements on brief and one isolated statement made in a letter from Rivero to Askew, the substance of which was ruled inadmissible at trial, to show that Rivero and Flores were involved with Askew in the nickel deposit project, or that either Jose Maria de Castro Acosta or Israel Osorio Acosta were associated with Rivero or Flores. Thus, we consider petitioners' agency arguments with respect to the $250,000 payment to be unfounded.
See discussion of the agency issue,
infra,↩ in connection with the $3,00,000 payment in 1971.12. Although there was some suggestion at the trial that Askew and his associates used these funds to bribe Venezuelan government officials, the trial record does not show that this is true. Our conclusion in this respect accords with a statement, as follows in
Askew v. United States, 680 F.2d 1206, 1208 (8th Cir. 1982)5 U.S.C. sec. 552a (1982 ed.) for alleged unlawful disclosure of tax records:In October 1975, both the judicial and legislative branches of the Venezuelan government began investigations into Ryan's charges of bribery. By February 1976, Akew had appeared once before the judicial investigating body and three times before the Bicameral Commission set up by the Venezuelan legislature. A climax, of sorts, was reached on February 15, 1976, when the President of Venezuela appeared in national television and announced that he had been conducting his own investigation and that he knew the names of the people who had accepted the bribes. The president also displayed a photocopy of a check for $106,400 that Askew had written on the Noark account to Alberto E. Flores T, dated September 6, 1971. But for the display of this check, no names were announced by the president during his televised address; over the following days, however, the names of payees appeared in various Venezuelan newspapers. These names corresponded to the payees of some of the checks Askew and written on the Noark account and had turned over to the IRS. Askew was later incarcerated in Venezuela by a criminal court which held him pending the outcome of its investigation. Initially he was charged with bribery; later the charge was changed to conspiracy; and finally, after having spent four months in jail (July 19, 1976 to November 16, 1976), he was released when the charge was dismissed. Both the criminal court and the Bicameral Commission concluded that although money had definitely changed hands, none of the recipients was a government official. Neither investigation was able to uncover any evidence that undue influence had been brought to bear on the negotiations between Occidental and the government. [Fn. refs. omitted.]↩
13. Askew testified at trial that his memory had been temporarily impaired due to bypass surgery which he had undergone at some time before trial. While we sympathize with Askew's health problems, they do not alter the fact that petitioners have the burden of proof on this issue.↩
14. Our conclusion, based on the record before us, is not inconsistent with the following factual statement in
Askew v. United States, supra at 1207In the late 1960's Askew determined to use the many contacts he had developed in Venezuela and assumed the role of a promoter. He and his attorney negotiated a series of letter agreements with Dr. Armand Hammer, president of Occidental Petroleum Co., under which Askew would attempt to secure on behalf of Occidental service contracts granting oil and gas exploitation rights to certain areas of Venezuela's Lake Maracaibo. Askew was successful in securing these rights for Occidental in 1971. The relevant aspect of this arrangement to this litigation is Askew's subsequent receipt of $3 million from Occidental, most of which he then distributed in September and October 1971 to various influential Venezuelans who had been instrumental in Askew's success in obtaining the service contracts. * * *↩
15. Concerning the two payments to the Swiss bank accounts, Askew testified that he was directed to send these payments by Mrs. Rivero and her attorney. Askew's testimony is unconvincing absent some corroborating evidence.
Respondent offered in evidence two reports issued by the Venezuelan government, a report of a special Bicameral Commission appointed to investigate the Occidental service contract deal and a report entitled "Report of Presumed Irregularities in the Granting of Service Contracts to Occidental Petroleum Company de Venezuela", both of which state that Alta Mar was the ultimate recipient of the funds paid to the two Swiss accounts. We do not base our conclusion with respect to the two accounts on these reports because we consider them hearsay.↩
16. See
Mississippi Steel Corp. v. Commissioner, T.C. Memo. 1971-18In Federal income tax cases filed in this Court, the notice of deficiency is the foundation for issues * * *. * * * [W]ithout the notice of deficiency it would be impossible for this Court to redetermine the correctness of the deficiencies determined by the Commissioner. Hence, it is clear that when a copy of the notice of deficiency is attached to the petition, * * * the notice of deficiency and any statement attached thereto becomes a part of the pleadings and/or record in a Tax Court case. * * *↩
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