By: A.J. Cook


When William H. Callahan accidentally discovered his father's illegal activities, his dad

threatened to kill him if he didn't keep quiet. He didn't keep quiet.

As a youngster Callahan had lived with his family in large homes in affluent Scarsdale, N.Y., then on a five-acre estate in New Rochelle. The family had a staff of five to run the houses and took vacations in private planes.

His maternal grandfather, Charles Rao, founded Arc Electrical Construction Co. in New York City, which now employs 500 people. Officers and Board members were predominantly relatives of Rao, who served as Chairman of the Board.

Callahan started work for Arc at age 18 and advanced rapidly. At 24 he was promoted to project manager and supervised 50 employees on a major Wall Street job.

It didn't seem unusual at the time, but over the years his father, company executive vice president and treasurer, gave him money and various items like television sets, refrigerators and vacuum cleaners. Callahan considered them gifts from his dad and never asked any questions.

One day, while waiting alone in his father's office, Callahan discovered something that would embroil him for years in the legal system. He found evidence that Senior had improperly charged the gifts to the company and embezzled money from Arc. Junior confronted his father and was threatened and told to keep quiet. He ignored the threat. Shortly thereafter, he told his aunt, a member of the Arc board.

Meanwhile, a New York Grand Jury and the Internal Revenue Service began investigations. The Grand Jury, checking corruption in the electrical contracting industry, targeted several Arc officers including young Callahan. But he wasn't charged with any crime nor was his father, who by then had been mysteriously murdered.

As a result of its audit, the IRS increased Junior's taxable income by $104,000 for cash and appliances he had received, saying this was embezzlement income. It also added a fraud penalty. He appealed.

After considering the evidence on both sides, the court said the IRS didn't prove Callahan intentionally evaded taxes. Just because corruption was all around him didn't mean he was corrupt, the court said. The young man, only in his twenties, had no financial role in the company, and, importantly, he revealed the corruption in the firm. The court reversed the IRS fraud penalty. It also ruled he owed no taxes because the IRS assessment time had expired.

The Moral: Sometimes you should look a gift horse in the mouth.