Joseph D. & Elizabeth M. Dunne - Page 9

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          would be about $4.3 million.  Mr. Dunne also requested that FRC             
          continue its practice of depositing Mr. Dunne’s estimated tax               
          liability directly with respondent.  He did not believe that this           
          would be a problem because FRC had over $3 million in cash.  Mr.            
          Dunne signed this letter as “Co-Owner and Chairman of the Board”            
          of FRC.                                                                     
               On September 21, 1998, FRC filed a Form 1120S for 1997 and             
          attached Schedules K-1 for Mr. Dunne and Mr. Marcus.  The                   
          Schedules K-1 reported Mr. Dunne’s and Mr. Marcus’s shareholder             
          percentages for 1997 to be 50 percent each and reported their pro           
          rata shares of FRC’s income and loss as $2,116,600 of ordinary              
          income, $27,504 of interest income, and $1,953 of capital loss.             
          FRC sent Mr. Dunne a Schedule K-1 for 1997 identical to the                 
          Schedule K-1 it submitted to respondent.                                    
          The Arbitration Award                                                       
               In October of 1997, Mr. Marcus offered to pay Mr. Dunne $2.2           
          million in full satisfaction of all payments required by the                
          settlement agreement.  Mr. Dunne responded with a $2.6 million              
          counteroffer, which he withdrew.  Mr. Dunne decided to let the              
          arbitrator decide on the award because he thought he was entitled           
          to receive about $4.9 million under the settlement agreement.               
               The arbitrator entered an arbitration award (the arbitration           
          award) on June 8, 1998.  The arbitrator determined that Mr.                 
          Dunne’s share of the halon contract was $511,267.54, which was              

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