Petition for a Writ of Certiorari — Danica Enterprises, Inc. v. Commissioner

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7 ne eT ides _— SduseNAbesaleanaai ASAE DSG CS RAMONES GALLE AI RACES TINE AST AAUE LE RIE LOTS

LIBRA RY oe Office-Supreme Court, U.

@tIPREMG COURT. U. i” a ne

, wet 15 1969.

IN THE

JOHN F. BAVIS, CLERK

Supreme Court of the United States

October Term, 1968.

No. 1 162

= | DANICA ENTERPRISES, INC.,

Petitioner,

COMMISSIONER OF INTERNAL REVENUE, :

Respondent.

Sen RAMONE

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT.

! | ede, “Wititum T. Coteman, JR.,

: ; 2600 The Fidelity Building, ‘

Philadelphia, Pennsylvania 19109

Minton Younes,

277 Park Avenue,

New York, New York 10017

3 Attorneys for Petitioner.

Of Counsel:

STEPHEN S. ZIEGLER,

Youne, Kapian & EpesTeIn,

RicHarp L. Levy,

Epwarp F’. Mannino, :

. DitwortaH, Paxson, Kauisu, Konn & Levy.

International, 711 So. 50th St., Phila, Pa. 19143—Tel. SA 7-8711 ‘Area Code 215

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II. STATEMENT OF Question Presentep erry eT ee eT ee

IV. STATUTE INVOLVED ................; See eran

V. ‘STATEMENT OF THE CASE ................. eridcaee.

_ VI. REASONS FoR GRANTING THE WRIT ................... .

A. There Is a Conflict in the Circuifs, Which the Court

of “Appeals Spectically Recognized, as to Whether,

When a Corporation Acquires a Business in Exchange

for a Controlling Interest in Its Stock, § 269 Author-

izes the Commissioner to Disallow Out-of-Pocket

Operating Losses the Corporation Thereafter Sustains

2. The First and Seventh Circuits ...........

3. The Second SE Ss cave ccees ieee is

B. The Issue Is of Great Public Importance and Is of

ee eee

C. The Decisions of the Court of Appeals for the Sixth

and Third Circuits Are Correct and the Decision of .

the Second ‘Circuit in This Case Is in Error .......

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APPENDIX. De sok Gatco ensues PRG PURER EMENY OE OOS RE ews

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TABLE OF CASES CITED.

Page

R. Pp. Collins & Co. v. United States, 303 F. 2d-142 (1st Cir.

_: ER MAY SeONE rR. ots Shvasenwas kee sie BRy bay aS

Herculite Protective Fabrics Corp. v. Commissioner, 387 F.

aa 473 (34 Cie. 19GB) ... 2... 6.005. Meeaweomeaen sca 9, 11, 12

J. T. Slocomb Co. v: Commissioner, 334 F. 2d 269 (2d Cir. ©

PA MT Pree ppm y Unease rs 13

Luke v. Commissioner, 351 F. 2d 568 (7th Cir. 1965) ....11, 12, 15

Zanesville Inv. Co. v. Commissioner, 335 F. 2d 507 (6th Cir.

WOME Uy cava aca abe beds arc ae kas ae ‘eave eee ee, 25 ©

AUTHORITIES CITED. .

he arin Page

AdIman,- Recent Cases Increasingly Extend Section . 269 to

Disallow Post-Acquisition Operating Losses, iF 3s. Taxa-

snap coe clt‘sig s § BE OTE PCIE IRE DAE 13

Bean, ‘Section 269 and Post- ~Acquisition Losses, 49 A. B.A. J-

907 (1963) ..... Vi dedee NANTES eA Sade De ee ee we keene io a

Bittker & Eustice, Federal Income Taxation of Corporations. -

and Shareholders Se WUD Paes eee dnead sparen 9

Comment, Section 269 of the Internal Revenue Code and the

Status of Postacquisition Losses, 33. U. Chi. L. 7.

577 (1966) ..... ReU bee Pied eas ke Ohad abode HASSE bee fe *

Dominianni, Zanesville Decision Places Much-Needed Brake

on IRS Misapplication of Section - 22 J. Taxation 88 : ,

SOE CRCARAWH eR Nevdu due as Manas ba sree: 13

Dunn, The New Consolidated Return Regulations May Pre-

empt the Field in Determining the Allowance of Oper- .

ation Losses, 23 Tax L. Rev. 185 (1968) POOPIE OER | 15, 16

Hagendorf, Zanesville Allows Tax Avoidance Through Use of

of Post-acquisition ape Losses, 21 J. Taxation 262

CEPEEE ndeesiaesn WEL DMN CE MM CERP UE CURR OED KER LE 8

ENE ne PE EEE EIT LIONS PE EDGE ON I GE OG TN SSS ON

° -

CODE AND REGULATIONS CITED.

Page

Internal Revenue Code of 1954: . hist

Pe has or yeas: perry Ol | dances Lehane 4,3"

§ 269, 68A Stat. 80, 26-U. S. C. Sa eae .3,7,8,9,10,

11, 12; 13, 14, 15

§ 270, 68A Stat. 81, oh ee |, See 3 Cay 8

| __ SORGNER NE TAS iid rice coh fe ena ea a

og GU TPE aE te Senna res Bt ine eee nee Piitees

Treas. Reg. 1.1502-15(a)(2) (1966) ....... POE TERT:

U.S: Si) 2.6.6... LOLA TO iE Be ete ake

MISCELLANEOUS.

Page

Hearings Before the Senate Committee on Finance on the Reve-

nue Act of 1943, 78th Cong., Ist Sess. (1943) .......... 14

H. R. Rep. No. 871, 78th Cong., ist Sess. (1943) ........ ae

Internal Revenue Service, General Counsel’s Last of Pending

Cases (October EP ora Sa nick wk 6 bes Sree 13

S. Rep. No. 627, 78th Cong., Ist Sess EDs evisu hood Gas 14

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ee eee eee Le ter Sa Sek oa. cownena 1) AA a i eS

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IN THE

‘Supreme Court of the United States - :

Octosek Term, 1968.

No.

DANICA: ENTERPRISES, INC.,

Petitioner,

Vv. 4

COMMISSIONER OF INTERNAL REVENUE,

Respondent.

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT. —

Taxpayer, Danica Enterprises, Inc. (‘‘Danica’’) hereby

petitions that a writ of certiorari issue to review the twe-

to-one judgment of the United States Court of Appeals for

the Second Circuit, entered in the above-entitled case on -

December 17, 1968.

2 Petition for Writ of Certiorari

| I.

OPINIONS BELOW.

The memorandum findings of fact and opinion of the

Tax Court (R. 48a-57a)! are reported in 26 CCH TC Mem.

— 816 and are printed in Appendix B hereto, infra, pp. 19a-

27a. The two-to-one opinion of the Court of Appeals, not

yet reported, is printed in Appendix B hereto, infra, pp.

da-18a. .

Il.

JURISDICTION.

The judgment of the Court of Appeals was entered on

December 17, 1968, and a timely petition for rehearing wa¥

denied on January 7, 1969, Appendix B, infra, pp. 28a-30a.

An extension of time until April 15, 1969 to file a petition

for certiorari herein was granted by Mr. Justice Harlan

on March 7, 1969, Appendix C, infra, p. 31a. The jurisdic-

tion of this Court’ is invoked under 28 U. S. C. § 1254(1).

III. ;

STATEMENT OF QUESTION PRESENTED.

‘In March 1958, Victor Borge (‘‘Borge’’) transferred

to Danica Enterprises, Inc. (‘‘Danica’’), the taxpayer, in

exchange for its stock, the assets of the rock cornish hen

business which Borge had previously owned and operated

as an individual. Borge had incurred losses in the hen

business in excess of $50,000 in each of the preceding four

years (1953-1957). In each of Danica’s three subsequent

fiscal years after its acquisition of the hen business from

Borge (1958-1961), Danica itself sustained out-of-pocket

annual operating losses in the hen business in excess of

1. As used herein, the letter “R” preceding specific pages refers

to.the “Appendix to Brief for Petitioners” in the Court of Appeals,

_ a copy of which has been: deposited with this Court.

seipisite Ai a elk ib eR ESN mai OK NA EEN SARL ARA RUS Cage. cians th RENT

Petition for Writ of Certiorari 3

$50,000 per annum. The Commissioner disallowetl Danica’s

deductions for its 1958-61 losses in the hen business to

the extent that they exceeded $50,000 per annum. He rea-

soned that if Borge, as an individual, had sustained in 1958

a fifth consecutive year of losses in excess of $50,000 per -

annum, § 270 of the Internal Revenue Code (which applies:

to individuals and not to corporations) would have required

Borge to recompute his income tax for all five years, so as

to limit his deductions for such losses to $50,000 per annum.

However, rather than recomputing Borge’s individual taxes

under § 270 for the earlier years in which he owned the hen

business, the Commissioner sought, under § 269, to deny

Danica its right to deduct its own subsequent out-of-pocket

operating losses incurred after it acquired the hen business

from Borge. The Commissioner was upheld by the Tax

Court and by a divided panel of the Court of Appeals for

the Second Circuit. However, the Court of Appeals ex-

plicitly noted that its decision was in conflict with the deci-

sions of the Court of Appeals for the Third and Sixth Cir-

cuits, which have held that post-acquisition operating

losses cannot be disallowed under § 269. Therefore, the

question presented is: : ; .

When persons acquire control of acorporation by trans-

ferring a business to it in exchange for stock, does § 269

authorize the Commissioner to disallow post-acquisition

real out-of-pocket operating losses the corporation subse-

quently sustains in the business?

IV.

_ STATUTE INVOLVED.

The statutory provision involved is 4 269 of the Inter-

nal Revenue Code of 1954, 68A Stat. 80, 26 U. S. C. § 269.

The Court of Appedls also referred to §270 thereof, 68A

Stat. 81, 21°'U. S. C. § 270, in its Opinion. Both sections. are

printed i in Appendix A hereto, infra, p pp. la-4a.

40 Petition for Writ of Certiorart

| v. ae

‘STATEMENT OF THE CASE.

The petitioner and taxpayer is Danica Enterprises,

Inc. (‘‘Danica’’), which was not formed until February

1958. The factual statement, however, must start with Vic- '

tor Borge (‘‘Borge’’) in 1952 since the Commissioner of

Internal Revenue attributed legal significance to events -

which occurred before Danica in.1958 acquired the business

in question from Borge. ae

Borge was, at all relevant times, and still is, a profes-

sional entertainer (R. 157a-159a). In addition, from April

1952 through February 28, 1958, Borge engaged as an in-

dividual proprietor in the business of processing and selling

rock cornish hens under the trade name of ViBo Farms

(“ViBo”) (R. 49a-50a).? Borge was a pioneer in this

business and made extensive efforts to develop it (R. 49a-

' 50a, 139a, 143a-149a). However, he sustained losses in this

business in excess of $50,000 in each of his taxable years

1954 through 1957. (Appendix B, mfra, p. 7a). Sections

162 through 167 of the Internal Revenue Code permitted

Borge to deduct in full the costs and expenses giving rise

to these losses and he did so. tee

_ On March 1, 1958, Borge transferred to a new corpora-

tion, Danica, all of the assets of the hen business having a

total co of about $81,000, in exchange for all of Danica’s

stock and a loan payable (R. 5la, 68a, 69a; Appendix B,

imfra,p. 8a). : :

Borge also entered into an agreement with Danica

whereby Danica would pay Borge an annual salary of

_ $50,000 for five years and would produce certain entertain-

ment ventures featuring Borge. Borge agreed to perform

in such ventures as an employee of Danica and to appear

2. ViBo’s processing operations which included killing, scald-

ing, eviscerating and packaging, involved plant and facilities having

an aggregate cost of in excess of $250,000 (R. 127a-128a, 148a).

Petition’ for Writ of Certiorari 5

an unlimited number of times in radio cammercials spon-

- soring the hens sold by Danica (R. 70a-80a). Borge’s.

entertainment services were utilized by Danica to adver- _

tise and otherwise advance the hen business (R, 109a, 110a,

150a-57a, 163a-66a). | ; a

‘By the time the hen business was transferred to

Danica, its sales had increased, its processing and mar-

keting had become more large scale and efficient and its

losses were therefore declining (R. 49a-50a, 139a, 147a,

149a). In 1958-1959, however, after Danica’s acquisition, a

severe recession began in the poultry industry which lasted

for several years (R. 142a-43a). Moreover, the market was

flooded with a great numbex of inferior, cheaper birds

labelled as rock cornish hens by the Department of Agri-

culture under an expanded definition which Danica had un-

successfully opposed (R. 144a-45a, 176a-78a). Thus, the

price for cornish hens declined drastically and Danica,

based exclusively upon Daniea’s operation, sustained losses

in the hen business as follows:

: Hen Business ©

Fiscal Year - Net Income

Ending February 28 (Loss)

1959° ($309,557 )

1960 ( 194,346)

1961 | ( 69,473)

1962 : ( 29,797)

( $603,173) (R. 48a-57a)

All of these losses were operating losses paid out-of-

pocket by Danica in the day-to-day purchase, processing

and sale of hens after it acquired the hen business.2 (R. 54a,

67a, 140a-144a, 147a).

_ 3. The total cost of the assets Danica acquired from Borge was

about $81,000. Thus, even assuming that these assets, were totally

lost (and they were not), no less than $522.000 of Danica’s hen

business losses necessarily represented fresh expenditures of funds

by Danica (R. 51a, 60a, 68a, 69a).

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Pe NIA CET Gy TUN ge hoe ON ROT ale

6 Petition for Writ of Certiorart

The Commissioner disallowed: Danica’s deductions of

the hen losses in the fiscal years ending February 28, 1959

through 1961 to the extent that said losses exceeded

$50,000 per annum. This ruling was upheld both by, the

Tax Court, whose jurisdiction was invoked by Danica’s

petition for redetermination of the deficiencies, and, in a

two-to-one vote, by the Court of Appeals, on a petition for

review of the Tax Court’s decision’ (R. 26a-33a, 48a-57a,

Appendix B, infra, pp. 5a-27a).

The Tax Court and the Court of Appeals reasoned as

follows: Since the hen business losses exceeded $50,000 in

each of the four years 1953 through 1957, § 270 of the Inter-

nal Revenue Code would have been invoked if Borge had

continued to conduct the business as an individual in 1958,

and had sustained in that year a loss in excess of $50,000,

and Borge’s deductions for the 1953-1958 losses would have

been disallowed to the extent they exceeded $50,000 per

annum.’ Hence, the courts concluded (and indeed Danica

conceded) that Borge had transferred the hen business

to Danica to avoid the recomputation and increase in

4. The Commissioner also determined, and was sustained by

the Tax Court and the Court of Appeals in determining, that there

should be allocated to Borge, under § 482 of the Code, as additional

compensation for his entertainment services, the excess of:

(a) the arm’s length salary of $75,000 per annum which

the Tax Court determined that Borge would have demanded

from an unrelated party; over

(b) the amount of compensation that Danica actually paid

him in the particular taxable year (R. 7a-18a, 48a- 57a, Appen-

dix B, infra, pp. 9a-13a). ‘

Borge has not sought review af this ruling.

5. Section 270 provides that if, in each of five consecutive tax-

able years, an individual sustains a loss of an excess of $50,000 per -

annum in a particular business, the excess may be disallowed in each

of said five years and in any subsequent consecutive taxable years

in which the loss of such business exceeds $50,000. An extension

of the statute of limitations is provided in order to permit the Com-

- missioner to assert deficiencies for the earlier desta (Appendix A,

“— pp. 3a, 4a)..

Petition for Writ “i Certiorart 7

‘his taxes that would have bask seauiied by § 270 had

he continued to operate the business individually through

1958.

However, as Judge natiean noted in his dined in

the Court of, Appeals, rather than recomputing Borge’s

individual tax for 1953-1957, the years prior to the transfer

of the hen business to Danica, the Commissioner illogically

disallowed .Danica’s own actual post-acquisition operat- |

ing losses for the next three years (i.e., the fiscal years

‘ending February 28, 1959 through 1961), to the extent that

they exceeded $50,000 per annum. Thus the Commissioner

and the majority in the Court of Appeals tacked on to

Borge’s four years of losses Danica’s losses for the next

three years, and then denied Danica, not Borge, its” can-

' eeded: deduction, even though both admitted that ¢ 270

does not apply to corporaticns (Appendix B, infra, pp. 14a,

15a). The sole authority advanced for this ruling was

§ 269 of the Code, which permits the disallowance of a de-

‘duction or other benefit which has been secured by acquir-

ing control of a corporation, where the principal purpose

of the acquisition was tax evasion cr avoidance (Appendix

A, infra, pp. 1a, %a).

| The Court of Appeals explicitly stated that ite disal-

lowance of such post-acquisition operating losses of Danica

under § 269 was in conflict with decisions of the Third and

Sixth Circuits (Appendix B, infra, p. 16a). Nevertheless -

it affirmed, over Judge Kaufman’s dissent, on the basis

of what it erroneously considered to be the contrary view

of the First ahd Seventh — on the issue (Appendix

B, infra, p. 16a).

It is on the basis of this conflict and of the importance

for the proper administration of the Federal tax laws of

clarifying the application of § 269 to post-acquisition oper-

ating losses, that a writ of certiorari is sought herein...

8 ; Petition for Writ of Certiorarc -

oo *

REASONS FOR GRANTING THE WRIT.

A. There Is a Conflict in the Circuits, Which the Court of

Appeals Specifically Recognized, as to Whether, When

a Corporation Acquires a Business in Exchange for a

. Controlling Interest in Its Stock, § 269 Authorizes the

Commissioner to Disallow Out-of-Pocket Operating

Losses the Corporation Thereafter Snstains in Its

Business.

The basic issue presented in this case is whether, when

a corporation acquires a business in exchange for a con-

trolling interest in its stock, § 269 vests the Commissioner

with the authority to disallow the corporation’s deductions

for out-of-pocket operating losses such corporation there-

. efter sustains in the business, based exclusively upon. post-

acquisition operations and events.

It was conceded by the Ceinmissioner that §¢§ 162-

167 of the Code permitted Danica, as.a corporate tax-

payer, to deduct all the costs and expenses it incurred in-

the hen business based upon its operations after it acquired

the business from Borge. Moreover, the Commissioner

also necessarily conceded that the recomputation. provisions

of §.270 have no applicability whatsoever to Danica, since

§ 270 applies only to individuals (Appendix B, infra, pp.

15a,. 16a).

Hence, the Commissioner based his disallowance 6f

deductions to Danica for its hen business losses exclusively

upon § 269(a) which, in-relevant part, provides that:

If—

(1) any person or persons acquire . . ., diréctly ©

or, indirectly, control of a corporation, . . .

and the principal purpose for which such ac-

quisition was made is evasion or avoidance of

Federal income tax by securing the benefit of a

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‘ani leii Subibie Wet tas

Li Pana neh ame Bi BS th al OE Fa Le Oe LS COR IRD ie tt let he ne Pats

Petition for Writ of Certiorari 9

deduction, credit or other allowance which sych

person or corporation would not otherwise

enjoy, then the Secretary or his delegate may

disallow such deduction, credit, or other allow-

ance. (Italics supplied.)

Traditiona!ly, § 269 has been utilized to prohibit a cor-

poration from carrying over nét operating losses previously

reported by another business which the taxpayer corpora-

tion acquired in exchange for a.controlling interest in its

stock. (See, Brrrker & Kustice, FepEraL Income Taxation

ar CoRPORATIONS AND SHAREHOLDERS, §§ 13.20-21, at 629, 630,

632 (2d ed. 1966) ). In the last few years, however, the Com- ©

missioher has taken the position that § 269 is broad enough

to prohibit the taxpayer corporation not only from carrying

over pre-existing riet operating losses of the acquired busi-

ness (‘‘pre-acquisition losses’’), but also to bar the tax-

‘payer corporation from deducting losses it incurs in its

own operation of the acquired business after the acquisition

(‘‘ post-acquisition losses’’). |

To date, five Federal Courts of Appeals have con-

sidered this important and recurring issue and have .

evolved at least three distinct positions on the status of such

post-acquisition losses under § 269:

1, The Third and Sizth Circuite.

The Courts of Appeals for the Third and Sixth Cir-

- cuits have squarely held that post-acquisition losses may -

not be disallowed under *{ 269 when they are actual out-of-_

pocket operating losses. Zanesville Investment Co. v.°

Commissioner, 335 F. 2d'507 (6th Cir. 1964); Herculite

Protective Fabrics Corp. v. Commissioner, 387 F. 2d 475

(3d Cir. 1968).° These cases explicitly hold that ‘post-

6. The Zanesville case went on to hold that Section 269 might

be applied to a post-acquisition loss which was not of an operating

and out-of-pocket nature, i.e., a loss which was already “built-in”

10 Petition for Writ of Cértiorari

affiliation operating losses standing by themselves are not |

within the coverage of Section 269.’’ Zanesville Invest-

ment Co, v. Commissioner, supra at p. 511. In fact the

Zanesville opinion at 335 F. 2d at p. 514, explicitly stated

that § 269 could not be utilized to disallow such losses even

when they were ‘‘anticipated’’ at the time of the acqui-

sition.’

These Cireuits ruled that. ¢ 269 is limited to situations

in which the taxpayer corporation is attempting to ‘‘dis-

tort’’ its income, and realize. an undeserved ‘‘benefit,”’ by

utilizing a loss realized in an economic sense before it owned

the business in question. Under this view clearly, there

is no ‘‘distortion”’ or ‘‘benefit’’ in permitting a corporation

to deduct an out- of-pocket loss it sustained from its own

funds after it acquires a business. .

2. The First and Seventh Circuits.

By éontrast, the Courts of Appeal for the First and

Seventh Circuits have held that post-acquisition operating

losses may be disallowed. under Section 269, but only when:

to the assets: ot. the business when the corporation acquired it, _

although not yet recognized for tax purposes. A good example of

a built-in loss is that involved in the Zanesville case, namely,-a loss.

tesulting from the sale by the acquiring corporation of fixed assets

which had already declined in value at the time of the acquisition

(see also the definition of a “built-in” loss in Treas. Reg. 1.1502-

15(a)(2) (1966), discussed at p. 15, infra).

The Commissioner did not contend in this case that Danica’s

hen business losses were “built-in” to the assets it acquired from

Borge. Rather, it argued the case on the contrary premise. Indeed,

as noted above, the total cost of the assets Danica acquired’ from

_ Borge was only $81,000 as-against its total hen business losses of

$603,000. The difference of $522,000 in the loss was necessarily

funded by Danica’s out-of-pocket operating expenditures.

7. This was also the position of Judge, now Chief Judge, Aldrich

of the First Circuit, dissenting in R. P. Collins & Co. v. United

States, 303 F. 2d 142, 147 (1st Cir. 1962).

ne ee

Petition for Writ of Certiorari ere

(a) the acquiring ,corporation also deducts far more

substantial pre-acquisition losses (as net operating

loss carryovers) ;* and ;

(b) it was necessary in view of other provisions of the

Code, for the acquiring corporation to continue the

business (and, therefore, incur the post-acquisition |

operating losses) in order to obtain the benefit. of

the far more substantial pre-acquisition losses.’ |

R. P. Collins & Co. v. United States, 303 F. 2d 142 (1st

Cir. 1962) ; Luke v. Commissioner, 351 F. 2d 568 (7th Cir.

1965). |

In view of the hoped-for preservation of the substan-

tial pre-acquisition losses sought to be deducted in Collins

_and Luke, there was a ‘‘benefit’’ to the acquiring corpo-

ration, and its shareholders, in incurring the post-acquisi-

tion losses in these circumstances. In the words of the

majority opinion .in Collins, the post-acquisition losses

‘were ‘‘tarred with the same. brush’’ which disallowed the

pre-acquisition losses. 303 F. 2d at 146.”

8. In Luke @. Commissioner, 351 F. 2d 568 (7th Cir. 1965), the

pre-acquisition, losses were $390,000, whereas the post-acquisition

losses were only $97,000. Similarly, in R. P. Collins & €o. v.

United States, 303 F. 2d 142 (1st Cir. 1962), the primary benefits

sought to be achieved were $223,000 in pre-acquisition net operating

loss carryovers and a $150,000 “built-in loss” on the sale of certain

fixed assets which had already declined in value. The $19,000 sub-

" sequent operating loss .was incurred merely as an incident of con-

tinuing the business for long enough to sell the fixed assets.

9. For example, Section 382, which was involved in Luke,

provides that when a 50% or greater change in the stock owner-

ship in the corporation takes place, pre-existing net operating losses

can be carried over only if the business which’ sustained the losses

is continued. This is why it was necessary to continue the acquired

business in Collins and in Luke (thereby sustaining the post-acquisi-

tion losses) in order to achieve deductions for the far more sub-

stantial pre-acquisition net operating losses.

10. It should be noted that the Third Circuit in the Herculite

case, supra, refused to disallow a post-acquisition loss of $11,000

even in the face of the carryover of pre-acquisition losses of $77,000.

See also R. P. Collins & Co. v. United States, 303 F. 2d 142, 147 (1st

Cir. 1962) (Aldrich, J. dissenting). | :. Sgeaty

12. Petition for Writ of Certiorari

3. The Second Circuit.

Finally, the Court of Appeals for the Second Circuit

ruled, in the present case, that post-acquisition losses may

“be disallowed under Section 269, even when they are out-of-

pocket operating losses (i.e., not ‘‘built-in’’ losses: ‘‘built-

in’’ losses are ‘‘losses which had economically accrued

prior to the [acquisition] but which had: not as yet been

realized in a tax sense.’’ Zanesville at p. 508), and even

when they were not incurred in order to maintain carry-

over deductions for any pre-acquisition losses. |

The Second Circuit’s opinion explicitly notes that its

ruling conflicts with the decisions of the Third and Sixth

Circuit Courts of Appeals (Appendix B, infra, p. 16a). In

fact, as shown above, the Second Circuit’s decision ac-

tually conflicts with the decisions of the First and Seventh

Circuit Courts as well. Thus, this case.represents the first

q : in which post-acquisition operating losses were disallowed

in the complete absence of any pre-acquisition loss carry-

‘ overs. Nevertheless, the Court of Appeals for the Second

Circuit rejected the taxpayer’s claim simply stating:

; ‘‘While there is authority to thé contrary (Herculite

. Protective Fabrics Corp. v. Commissioner, 387 F. 2d

) _ 475 (8d Cir. 1968); Zanesville Inv. Co. v. Commis-

sioner, 335 F. 2d 507 (6th Cir. 1964)), the better view

: permits the disallowance of deductions for post-acqui-

. sition losses of.an acquired. corporation where those

‘deductions were a part of the purpose for which the

corporation was acquired. Luke v.. Commissioner, 351

F. 2d 568 (7th Cir. 1965) ; R. P. Collins & Co. v. United

States, 303 F. 2d 142 (1st Cir. 1962). See also, J. T.

Slocomb Co. v. Commissioner, 334 F. 2d 269 (2d Cir. - ~

_ -1964).’’ (Appendix B, infra, p. 16a).

* @s

;

A te Re eR MOOT i ny OR . op tR Ia Steet re ate

Petition for Writ of Certiorari 13

B. The Issue Is of Great Public Importance and Is of Far-

reaching Significance. . ' :

The importance for the proper administration of the

Federal tax laws of authoritatively determining whether, or

under what circumstances, § 269 may be utilized to disallow

_ out-of-pocket operating. losses realized by a taxpayer cor-

poration in an acquired. business is graphically demon-

strated by the fact that in the past six years five Fed-

eral Courts of Appeals have been called upon to decide

the question and have reached three different answers, and _

also by the spate of legal commentary those decisions. -

have evoked." is este .

In addition, resolution of the problem by this Court

would go far to determine the proper role of § 269 in the

Federal tax laws. Although § 269 is merely one of several

statutory and judicial devices for preventing tax avoidance,

the Commissioner had increasingly in the past few years

put aside the use of the more settled provisions to utilize

the vague and general terms of § 269. Thus, the records of

the Internal Revenue Service disclose 53 reported decisions

under § 269 in the past five years, and more than 500 cases

pending in which itis involved. Internal Revenue Service,

‘General. Counsel’s List of Pending Cases (October 25,.

1968). BF

11. E.g., Comment, Section 269 of the Internal Revenue ode

and the Status of Postacquisition Losses, 33 U. Chi. L. Rev. 577

(1966) ; Adlman, Recent Cases Increasingly Extend Section 269:

to Disallow Post-Acquisition Operating Losses, 17 J. Taxation. 282

- (1962) ; Bean, Section 269 and Postacquisition Losses, 49 A. B. A. J.. .

907 (1963) ; Dominianni, Zanesville Decision Places Much-Needed

Brake on IRS’ Misapplication of Section 269, 22 J. Taxation 88

(1965); Dunn, The New Consolidated Return Regulations May

Preempt the Field in Determining the Allowance of Operation

Losses, 23 Tax L. Rev. 185, 201-09 (1968}; Hagendorf, Zanesville .

Allows Tax Avoidance Through Use of Post-acquisition Operating

Losses, 21 J. Taxation 262 (1964) ; Loss Carryovers, 21 The Tax

Lawyer 790, 792-93 (1968). : ane

14 Petition for Writ of Certiorart

C. The Decisions of the Court of Appeals for the Sixth and

Third Circuits Are Correct and the Decision of the

_ Second Circuit in This Case Is in Error.

The decision of the Second Circuit in this case com-

pletely disregards the legislative intent in enacting § 269.

' The Senate report regarding the Section stated:

‘‘The objective of the section, as stated in the report

yof the House bill, is to prevent the distortion through

tax avoidance of the deduction, credit, or allowance

provisions of the Code . . . The House report also

recognizes that the legal effect of the section is . .-.

to codify . . . the general principle . . . as to the in-

effectiveness of arrangements distorting or perverting

deductions ... . so that they no longer bear a reason-

able business relationship to the interests or enterprises

which produced them and for the benefit of which they

_ were provided.’’ (Italics supplied.) S. Rep. No. 627,

78th Cong., 1st Sess. 58 (1943). See also H. R. Rep.

No. 871, 75th Cong., Ist Sess. 49 (1943) (‘‘reduetion

through artifice’’) ; Testimony of Randolph Paul, Gen- —

eral Counsel, Hearings Before the Senate Committee

on Finance on the Revenue Act of 1943, 78th Seat 1st

Sess. 45 (1943).

As recognized by all the Circuits, a ‘‘distortion’’ may

result if a corporation is permitted to carry over a loss sus-

tained in a business before the corporation acquired the

business. Likewise, as recognized by the Third and Sixth

Circuits, a ‘‘distortion’’ may. result if a corporation is per-

mitted to deduct: a loss which is already ‘‘built-in’’ to the

assets of a business when it acquired it, although it is not

yet realized for tax purposes. However, as the Third and

Sixth Circyits have held, there can scarcely be any ‘‘dis-

tortion’’ in permitting a corporation to deduct an operat-

ing loss it incurs, out-of-pocket, with its own funds.

Petition for Writ of Certiorari “15

The specific statutory support for the Third and Sixth

Circuit decisions denying the applicability of Section 269

to post-acquisition operating losses is that the Section by

its terms applies solely to disallow deductions of which the

acquiring shareholders could not have otherwise ‘‘enjoyed

the benefit.’’ As decided by the First and Seventh Circuits

in Collins and Luke, there may be such a ‘‘benefit’’ in post-

acquisition operating losses when they are incurred in

order to preserve the carryover of far larger pre-acquisi-

tion losses which were not really incurred by the acquiring .

. corporation. However, in the case of a post-acquisition,

out-of-pocket operating loss, standing by itself, as in this

case, no “‘benefit’’ exists at all, since the taxpayer has

_ made an out-of-pocket expenditure of $1 and received a tax

saving of only 52¢.

Indeed, the propriety of limiting § 269 to only such

post-acquisition losses as are ‘‘built-in’’ has been recog-

nized by the Service’s own regulations. In both the Collins

~ and Zanesville cases, the acquiring corporation deducted the

post-acquisition losses on a consqlidated return. Yet, after

both these decisions were rendered, the Service issued new

consolidated return regulations which, in so many words,

adopted the ‘‘built-in’’ loss standard of Zanesville. These

regulations bar a parent from utilizing post-acquisition

losses of a newly acquired subsidiary only when said losses

are ‘‘built-in’’ at the time of the acquisition Treas. Reg.

§ 1.1502-15(a) (2) (1966). Thus, it is highly inconsistent

for the Service now to urge the application of § 269 to

post-acquisition operating losses which are not of:a ‘‘built-

in’’ character. Zanesville Investment Co. v. Commissioner,

supra, at’ p. 510, see Dunn, The New Consolidated Return

Regulations May Preempt the Field in Determining the AL-.

lowance of Operating Losses, 23 Tax L. Rev. 185, 201-09

(1968).

16 Petition for Writ of Certiorart

' CONCLUSION.

For the reasons given above, it is respectfully sub-

mitted that this Court should grant the petition for a writ

of certiorari to review the judgment of the Court of Appeals

for the Second Circuit.

Wituiam T. CoLemMan, JR.,

2600 Fidelity Building,

Philadelphia, Pennsylvania. 19109

Mitton Youne,

277 Park Avenue,

New York, New York. 10017

Attorneys for Petitioner.

Of Counsel:

STEPHEN S. ZIEGLER,

Younc, Kapuan & Kpe.stEry,

‘Ricuarp L. Levy,

Evwarp F. Mannrvno,

DitwortH, Paxson, Kaussu, Koun & es

Dinted: March 14, 1969

APPENDIX A.

_ Internal Revenue Code of 1954.

-§ 269. Acquisitions made to evade or avoid income tax.

(a) In general.—lIf

( 1) any person or persons acquire, or acquired on

or after October 8, 1940, directly or indirectly, control

of a corporation, or

(2) any corporation acquires, or acquired on or :

after October 8, 1940, directly-or indirectly, property of j

‘another corporation, not controlled, directly or indi-—

rectly, immediately before such acquisition, by such.

acquiring corporation or its stockholders, the basis of

which property, in the hands of the acquiring corpora-

tion, is determined by reference to the basis in the hands

of the transferor corporation, and the principal purpose —_

for which such acquisition was made is evasion oravoid- _

ance of Federal income tax by securing the benefit of a

deduction, credit, or other allowance which such per-

son or corporation would not otherwise enjoy, then -

the Secretary or his delegate may disallow such deduc-

tion, cMdit, or other allowance. For purposes of para-

graphs (1) and (2), control means the ownership of

stock possessing at least 50 percent of the total com-

bined voting power of all classes of stock entitled to.

vote or at least 50 percent of the total value of shares

of all classes of stock of the corporation.

(b) Power of Secretary or his delegate to allow deduc- ©

tion, etc., in part.— —In any case to which subsection (a) ap-

plies the Secretary or his delegate is authorized—

(1) to allow as a deduction, credit, or ioncmee

any part of any amount disallowed by such subsection,

(la)

2a alppendia «1

if he determines that such allowance will not result in

the evasion or avoidance of Federal income tax for .

which the acquisition was made; or

-(2) to, distribute, apportion, or allocate gross in-. °

come, and distribute, apportion, or allocate the deduc-

tions, credits, or allowances the benefit of which was

sought to be secured, between or among the corpora-

tions, or properties, or parts thereof, involved, and to

allow such deductions, credits, or allowances so dis-

- tributed, apportioned, or allocated, but to give effect to

such allowance only to such extent as he determines will

not result in the evasion or avoidance of Federal income

_ tax. for which the acquisition was made; or .

(3) to exercise his powers in part under para-

graph (1) and in part under paragraph (2).

_(c) Presumption in case of disproportionate purchase

price.—The fact that the consideration paid upon an acqui-

sition by.any person or corporation described in subsection

(a) is substantially disproportionate to the aggregate—

(1) of the adjusted basis of the property of the

corporation (to the extent attributable to the interest

acquired specified in paragraph (1) of subsection (a)),

or of the preperty acquired specified in paragraph (2)

of subsection (a) ; and

(2) of the tax benefits (to the-extent not reflected

in the adjusted basis of the property) not available to

such person or corporation otherwise than as a result

of such acquisition, ;

‘shall be prima facie evidence of the principal purpose of.

evasion or avoidance of Federal income tax. This subsec-

tion shall apply only with respect to acquisitions after

MAMIE SONS Lal SOS i COE DER LEANER OE NYA till tie Sas laa ig ea i So act i nse attic Laake Be ere

Appendix A pe

March 1, 1954.- Aug. 16, 1954, c. 736, 68A Stat. 80; Feb. 26,

1964, Pub. L. 88-272, Title IT, § 235(c) (2), 78 Stat. 126.

§ 270. Limitation on deductions allowable to. individuals

in certain cases. |

(a) Recomputation of taxable income.—If the deduc-

tions allowed by this chapter or the corresponding provisions

of prior revenue laws (other than specially treated deduc-

tions, as defined. in subsection (b)) allowable to an individ-

ual (except for the provisions of this section or the corre-

sponding provisions of prior revenue laws) and attributable

to a trade or business carried on by him for 5 consecutive

taxable years have, in each of such years (including at least

one year to which this subtitle applies), exceeded by more

than $50,000 the gross income derived from such trade or

business, the taxable income (computed under section 63 or

the corresponding provisions.of prior revenue laws) of such

" individual for each of such years shall be recomputed. For

_ the purpose of such recomputation in the casé of any such

taxable year, such deductions shall be allowed only to the

extent of $50,000 plus the gross income attributable to such

_ trade or business, except that the net operating loss deduc-

tion, to the extent attributable to such trade or business,

shall not be allowed.

(b). Specially treated deductions.—For the purpose of

' subsection (a) the specially treated deductions shall be

taxes, interest, casualty and abandonment losses connected

with a trade or business deductible under section 165(c) (1),

losses and expenses of the trade or business of farming

which are directly attributable to drought, the net operating

loss deduction allowed by section 172, and expenditures as

to which taxpayers are given the option, under law or regu-

lations, either (1) to deduct as expenses when incurred or

(2) to defer or capitalize. : |

4a, | ; Appendix A

income computed under the provisions of subsection (a) for

each of the 5 consecutive taxable years specified in such

subsection, the tax impased by this subtitle or the corres-

ponding provisions of prior revenue laws shall be redeter-

mined for each such taxable year. If for any such taxable

year assessment of a deficiency is prevented (except for the

provisions of section 1311 and following) by the operation

of any law or rule of law (other than Section 7122, relpting

to compromises), any increase in the.tax previously deter-

mined for such taxable year shall be considered a deficiency

for purposes of this section. For purposes of this section,

the term ‘‘tax previously determined’’ shall have the mean-

ing assigned to such term by section 1314(a) (1).

(d) Extension of statute of limitations—Notwith-

standing any law or rule of law (other than section 7122,

relating to compromises), any amount determined as a de- *

ficiency under subsection (c), or which would be so deter-

mined if assessment were prevented in the manner described

-in. subsection (c), with respect t6 any taxable year may be

assessed as if on the date of the expiration of the time

prescribed by law for the assessment of a deficiency for the

fifth taxable year of the 5 consecutive taxable vears specified

in subsection (a), 1 year temained before the expiration of

the period of limitation upon assessment for any such tax-

able year. Aug. 16, 1954, c. 736, 68A Stat. 81.

Boe FOIE CL pal Tet A Nes wt cca PATS el RS Ral RaE DEANE NOS Saath delNibliBie Sae tlt ec

APPENDIX B.

UNITED STATES COURT OF APPEALS.

-For- THE. SEconp Circurr

Nos. 15: and 16—September Term, 1968.

(Argued September 30, 1968 Decided December 17, 1968.)

Docket Nos. 31903, 31904

Victor Borer, Sanna Borce, and °

Danica ENTERPRISES, INC.,

Petitioners,

Vv.

CoMMISSIONER OF INTERNAL ReEvENUE,

Respondent.

Before:

SmitH, Kavurman and Hays,

Circuit Judges.

Petition for review of a decision of the Tax Court,.

J. E. Murdock, Judge, sustaining the,Commission’s deter-

mination of deficiencies in taxpayers’ income tax payments

for the years 1958 through 1962, inclusive. The Tax Court

held (1) that the Commissioner, acting under Section 482

of the Internal Revenue Code of 1954, 26 U. S. OC. § 482.

(1964), properly ‘allocated to Borge a portion of the com-

pensation paid to Borge’s wholly owned corporation for

services performed by him, and (2) that the Commissioner,

acting under Section 269 of the Interna] Revenue Code of

(5a)

6a : ' Appendix B

1954, 26 U. S. C. § 269 (1964), properly denied as deduc-

tions the corporation’s losses in excess of $50,000 per year

and its loss carry-overs. |

Affirmed as modified and remanded for recomputation

of the deficiency. |

Mirror Youn, New York, N. Y. (Stephen S.

Ziegler and* Robert D. Howard, on the

brief), for Petitioners.

Louis M. Kauper, Attorney, Department of Jus-

tice (Mitchell Rogovin, Assistant Attorney

General and Lee A. Jackson ‘and Harry

Baum, Attorneys, Department of Justice,

on the brief), for Respondent.

Hays, ¢ Circuit Judge:

Petitioners seek review of a decision of the Tax Court

sustaining the Commissioner’s determination of deficien-

. se a5 : A

. Sanaa hye,

cies in their income tax payments for the years 1958 »

through 1962, inclusive. The Tax Court upheld both the

Commissioner’s allocation to Borge '. under Section 482 of

the Internal Revenue Code of 1954, 26 U. S. C. § 482 (1964),

of a portion of the compensation received by Danica Enter-

prises, Inc., Bor'ge’s wholly owned corporation, for services

performed by Borge as an entertainer, and the Commis-

sioner’s disallowance, under Section 269: of the Internal

_ Revenue Code of 1954, 26 U.S. C. § 269 (1964), of Danica’s

deduction of losses from its rock cornish hen business in

1. “Borge” refers herein to Victor Borge. His wife has been

- included as a party to the action solely because of the filing of joint

returns.

2. The Commissioner has filed a protective petition for review

to assure that Danica will not be permitted to deduct the compensa-

tion allocated to Borge pf the decision of the Tax Court is reversed.

Ponte vane WPNti eames cay to ce

Appendix B Hea 3 Ta

excess of $50,000 per year, and of its loss carryovers.? We

affirm. - ?

From April 1952 through February 28, 1959, Borge

conducted a poultry business on a 400-acre farm in Con-,

necticut under the name of ViBo Farms. The farm busi-

ness centered on and -pioneered .in the development and .

commercial sale of processed, quality chickens called rock

cornish hens. se ae

_° Borge incurred substantial losses in his poffitry busi-

ness.’ For each of the years 1954 through 1957 the poultry

losses exceeded $50,000. In the first two months of 1958

the poultry losses amounted to $23,133, and market con-

ditions were unfavorable. Borge’s tax consultant advised —

him that if the poultry losses’ for 1958 exceeded $50,000

the Commissioner would prebably recompute Borge’s taxes

for each year that the losses had exceeded $50,000, pur- |

suant to Section 270 of the Internal Revenue Code of 1954,

26 U.S. C. § 270 (1964).* In an effort to avoid the applica-

3. Borge’s net losses from the poultry business were as follows :

Calendar Year.. . Net Loss

1953 $ 26,665 .

1954 62,159

1955 79,486

1956 © 345,879

1957 ; 220,146

1958 (through February 28) 23,183

4. §270. Limitation on deductions allowable to individuals in

certain cases. de ;

(a) Recomputation of taxalie income.

If the deductions allowed by ihis chapter . . . and attributable

to a trade or business carried on by him for 5 consecutive taxable

years have, in each of such years . . ., exceeded by more than

$50,000 the gross income derived from such trade or business, the

‘taxable income . . . of such individual for each.of such years shall

‘be recomputed. For the purpose of such recomputation in the case

of any such taxable year, such deductions shall be allowed only to the

extent of $50,000 plus the gross income attributable to such trade

or business, except that the net operating loss deduction, to the extent

attributable to such trade or business, shall not be allowed.

BES ln was

ee ee tera

SP ct CR a I he nln al te 8

ef tA Nea wt arn Bid i

_— ee Be eh olan a

8a ; _ Appendix B

tion of Section 270, Borge organized Danica and, on March

1, 1958, transferred to the corporation, in exchange for

+ all of its stock and a loan payable, the assets of the poultry

business (except the farm real property).

Borge is a well-known professional entertainer. ur-

ing the years preceding the organization of Danica he made

* large sums from television, stage and motion picture en-

gagements. .

Since Danica had no means of meeting the expected

- losses from the poultry business, Borge and Danica entered

into a contract at the time of the organization of the cor-

poration under which Borge agreed to perform entertain- _

_ment and ‘promotional services for the corporation for a

5-year period for compensation from Danica of $50,000

per year.’ Danica offset the poultry losses® against the

entertainment profits, which far exceeded the $50,000 per

year it had contracted to pay Borge.* Borge obviously

would not have entered into such’ a contract with an un- |

related party. . ae ;

Danica did nothing to aid Borge in his entertainment

business. Those who contracted with Danica for Borge’s

5. Danica’s net poultry losses. for the tax years here in dispute

were as follows:

Fiscal Year (ending February 28) Net Loss

1959 $309,557

1960 194,346,

1961 69,473

1962 29,797

1963 ‘ | 57,586

6. Danica’s net entertainment income for the years in dispute,

before deducting Borge’s salary, averaged $166,465. The annual {

net entertainment income was as*tonlows :

Net Entertainment

Fiscal Year hella February 28) Income

1959 $141,441

' 1960 146,402

: 1961. - 143,826

< Se:

1963 - ° : 117,340 -

? Appendia B “ 9a. -

entertainment services required Borge personally to guar-

‘antee the contracts. Danica’s entertainment earnings were

attributable solely to the services of Borge, and Danica’s

- profits were from the entertainment business.

The only year during the period in dispute in which

Danica actually paid Borge anything for his services was

1962, when Borge was paid the full $50,000.

The issues in controversy are (1) whether the Com-

missioner,.acting under Section 482 of the Internal Reve-

nue Code of 1954, 26 U. S. C. § 482 (1964), properly allo-

cated to Borge from Danica $75,000 per year from 1958

through 1961 and $25,000 for 1962, and (2) whether the

Commissioner, acting under Section 269 of -the Internal

‘Revenue Code of 1954, 26 U. S. C. § 269 (1964), properly

disallowed Danica’s loss deductions in excess of $50,000 per

year for fiscal years 1959 through 1961 and of its net loss

earryovers for fiscal years 1960 through 1962.

When two or more organizations, trades or businesses,

whether or not incorporated, are owned or .controlled by

the same interests, Section 482 of the Internal Revenue

Code of 1954, 26 U. S. C. § 482 (1964), authorizes the Com-

missioner to apportion gross income between or among

such organizations, trades or businesses if he deems that

apportionment is necessary clearly to reflect income or to

prevent evasion of tax.’ We conclude that the Commis-

7..§ 482. Allocation of income and deductions among taxpayers.

In any case of two or more organizations, trades, or businesses

(whether or not incorporated, whether or not organized in the

United States, and whether or not affiliated) owned or controlled

directly or indirectly by the same interests, the Secretary or his

delegate may distribute, aportion, or allocate gross income, deduc-

tions, credits, or allowances between or among such organizations,

trades, or businesses; if he determines that such distribution, appor-

tionment, or allocation is necessary in order to prevent evasion of

taxes or clearly to reflect the income of any such organizations,

trades, or businesses.

& 3

ak HO iN tet ow asl otc Mow

10a . Appendix B

sioner could properly have found that for purposes of

Section 482 Borge owned or controlled two businesses, ah

entertainment business and a poultry business, and that

the allocation to Borge of part of the entertainment com-

pensation paid to the corporation was not error.’

We accept, as supported by the record, the Tax Court’s

finding: that Borge operated an entertainment business

and merely assigned to Danica a portion of his income

from that business; that Danica did nothing to earn or to

assist in the earning of the entertainment income; that

Borge would not have contracted for.$50,000 per year with

an unrelated party to perform the services referred to

in his contract with Danica. Thus Borge was correctly

held to be in the entertainment business. |

At the same time Danica, Borge’s wholly owned \corpo-

ration, was in the poultry business?

Petitioners, relying primarily on Whipple v. Commis-

_sioner, 373 U. S. 193 (1963), argue that Borge is not an

‘‘organization, trade or business’’ and that Section 482°is

therefore inapposite. © ,

In Whipple the Supreme Court held only that where

one/renders services to a corporation as an investment, he

is not engaging in a trade or business: |

‘‘Devoting one’s time and energies to the affairs

of a corporation is not of itself, and without more, a

trade or business of the person so engaged. Though

such activities may produce income, profit or gain in

the form of dividends or enhancement in the value of

an investment, this return is distinctive to the process

of investing and is generated by the successful .opera-

tion of the corporation’s business as distinguished

8. We agree with petitioners’ contention that since Borge’s em-

ployment contract with Danica went into effect on March 1, 1958,

the 1958 allocation should: have been only $62,500 (5/6 of°$75,000).

A recomputation of Borge’s deficiency to this extent should be made.

be Asatte RNR lie CDSs Sane Aon oma Dae

Appendix B lla

from the trade or business of the taxpayer himself.

When the only return is that of an investor, the tax-

payer has not satisfied his burden of demonstrating

that he is engaged in a trade or business since invest-

ing is not a trade or business and the return to the’

taxpayer, though substantially the product of his serv-

ices, legally arises not from his own trade or -business

but from that of the corporation.’’ 373 U.S. at 202.

Here, however, Borge was in the business of entertain-

ing. He was not devoting his time and energies to the

corporation; he was carrying on his career _as an enter-

tainer, and merely channeling a part of his entertainment

income through the corporation. —

Moreover, in Whipple petitioner was devoting his time

and energies to a corporation in the hope of realizing -

capital gains treatment from the sale of appreciated stock.

When the hoped-for appreciation did not. materialize he °

attempted to deduct his losses as ordinary losses. The |

Court decided that where one stands to achieve capital

gains through an investment, any losses incurred in con-

nection with the investment are capital losses. Borge is

clearly earning ordinary income; the only question is who

should pay the taxes on it. Thus, Whipple is not apposite.

For somewhat similar reasons we find Commissioner

v. Gross, 236 F. 2d 612 (2d Cir. 1956), on which petitioner

also seeks to rely, also inapposite. —

Nor do we consider the other cases cited by petitioners

persuasive. The Commissioner is not arguing here, as he

did, for example, in Charles Laughton, 40 B. T. A. 101

(1939), remanded, 113 F. 2d 103 (9th Cir. 1940), that the’

taxpayer should be taxed on the entire amount: paid into

the wholly owned corporation, i.e. that the corporation

should be ignored. See also Pat O’Brien, 25 T. CO. 376

(1955) ; Fontaime Fox, 37 B. T. A. 271 (1938). Instead

he recognizes the existence of the corporation, but under

12a Appendix B

Section 482 allocates a portion of its.income to its sole

shareholder who alone was responsible for the production

of such income.

Petitioner contends that the Congress, in'enacting the ©

personal holding company and collapsible corporation pro-

visions of the Code, precluded the Commissioner’s action

in this case under Section 482. We do not read those pro-

visions, however, as the only available methods for dealing

with the situations there involved. As the Third Circuit

said in National Sec. Carp. v. Commissioner, 137 F. 2d 600,

602 (3d Cir.), cert. denied, 320 U. S. 794 (1943),

‘In every case in which [Section 482] is applied its ap-

plication will necessarily result in an apparent conflict

with the literal requirements of some other provision -

, of the [Internal Revenue Code]. If this were not so

- Section, [482] would be wholly superfluous.”’’

The fact that similar, but not identical, factual situa-

tions have been dealt with by legislation does not mean that

this situation, because it was not also specifically dealt with -

by legislation, cannot be reached even by a general code

provision. eo

We thus conclude that the Tax Court was correct in

upholding the Commissioner’s ruling that Borge controlled

two separate businesses. See Pauline W. Ach, 42 T. C. 114

(1964), aff’d, 358 F. 2d 342 (6th Cir.), cert. denied, 385

U.S. 899 (1966). .

The Commissioner’s action in allocating a part of

Danica’s income to Borge was based upon his conclusion

that such allocation was ne¢essary in order clearly to reflect

the income of the two businesses under Borge’s common

control. The Commissioner’s allocation has received the

approval of the Tax Court. As this Court held in dealing.

with the predecessor of Section 482, ‘‘Whether the Tax

Court was correct in allocating income to the petitioner

. Appendix B 13a

under §45 [of the Internal Revenue Code of 1939] is es-

sentially one of fact and the decision below must be affirmed

if supported by substantial evidence.’? Advance Mach.

Each. v. Commissioner, 196 F, 2d 1006, 1007-08 (2d Cir.),

cert. denied, 344 U. S. 835 (1952). See Int. Rev. Code of

1954, § 7482(a), 26 U.S. C. §7482(a) (1964). Here the de-

_ termination of the Commissioner and the decision of the

Tax Court are supported by substantial evidence that the

_income of Borge’s two businesses has been distorted through

Borge’s having arranged for Danica to receive a large part

. of his entertainment income although Danica did nothing

to earn that income, and the sole purpose of the arrange-

ment was to permit Danica to offset losses from the poultry

business with income from the entertainment business. The

amount allocated by the Commissioner ($75,000 per year)

was entirely reasonable—indeed, generous—in view of the

fact that Danica’s annual net income from Borge’s enter-

tainment services averaged $166,465 during the years in

question. |

II. ,

Section 269 of the Internal Revenue Code of 1954, 26

U.S. C. § 269 (1964), provides that where any person ac-

quires control of'a corporation for the principal purpose

of evading or avoiding federal income taxes by securing

the benefit of a deduction or other allowance not otherwise

available, the Commissioner may disallow the deduction or

allowance. |

9. '§ 269. Acquisitions made to evade or avoid income tax.

(a) In general.

If—.

(1) any person or persons acquire . . ., directly or in-

directly, control of a corporation, .

and the principal purpose for which such acquisition was made is

evasion or avoidance of Federal income tax by securing the benefit

of a deduction, credit, or other allowance which such person or corpo-

ration would not otherwise enjoy, then the Secretary or his delegate

may disallow ‘such deduction, credit, or other allowance. ;

Ida Appendix B

As we have pointed out above Borge organized Danica

in order to avoid the recomputation of taxes authorized by

Section 270 of the Internal Revenue Code of 1954, 26 U.S.C.

§270 (1964).1° The Tax Court found that ‘‘the Commis-

sioner had reason to hold that ‘the principal purpose for

which [Borge acquired control of Danica]’ was evasion of

Federal income tax within the meaning of section 269... .’’

‘That finding is not clearly erroneous and must, therefore,

. be accepted. Whipple v. Commissioner, supra, 373 at 203-

04; Commissioner v. Duberstein, 363 U. S. 278, 289-91

(1960) ; Ba T. Slocomb Co. v. Commissioner, 334 F. 2d 269,

273 (2d Cir. 1964) ; Advance Mach. Exch. v. Commissioner,

supra, 196 F. 2d at 1007-08. Indeed, petitioners do not

challenge the finding.

Since Borge’s purpose in organizing Danica was avoid-

ance of the $50,000 per year loss limitation of Section 270,

the Commissioner did not act unreasonably in disallowing,

under Section .269, deductions for subsequent years in ex-

cess of $50,000—deductions which Borge would have been

denied if Danica had not been organized.’

We find no merit in petitioner’s contention that, because

- Section 270 applies only to deductions ‘‘allowable to an

individual,’’ Section 269 cannot be used to disallow a deduc-

‘tion claimed by Danica. Section 269 is a general provision.

It was ‘‘designed to put an end promptly to any market for,

or dealings in, interests in corporations or property which -

have as their objective the reduction through artifice of the

income or excess profits tax liability.’’ H.R. Rep. No. 871,

78th Cong., Ist Sess. (1943), reprinted in 1944 Cum. Bull.

901, 938. As the Congress recognized,

‘‘[ T]he devices [by which taxes are avoided] take many

forms. Thus, the acquisition may be an acquisition of

the shares of a corporation, or it may be an acquisition —

which follows by operation of law in the case of a cer-

10. See ‘note 4 supra.

Appendia B a

poration resulting from a statutory merger or consoli-

dation. The person, or persons, making the acquisition

likewise vary, as do the forms or methods of utilization

under which tax avoidance is sought. Likewise, the tax

benefits sought may be one or more of several deduc-

tions or credits, including the utilization of excess profits

credits, carry-overs and carry-backs of losses or unused

excess profits credits, and anticipated expense of other

_ deductions. _ In the light of these considerations, the

section has not confined itself to a description of any

particular methods for carrying out such tax avoidance

schemes but has included within its scope these devices

in whatever form they may appear.’’ Jd.; accord, S.

Rep. No, 627, 78th Cong., 1st. Sess. (1943), reprinted i in

1944 Cum. Bull. 973, 1016-17.

It would subvert the purposes of Section 269 to deny the

Commissioner the power to disallow the deductions here.

It is argued that Danica’s deductions should be allowed

because Section 270 does not limit a corporation’s deduc-

tions to $50,000 regardless of how many years it loses more

than that amount. The fact that Danica might have been:

allowed an unlimited loss deduction had it run the poultry

business from its inception in no way tends to contradict

the finding that Danica was incorporated with the purpose

of evading or avoiding federal income taxes.. There is no

reason for giving taxpayers the benefit of an incorporation

which they did not themselves undertake.

Petitioner. also argues that Section 269 may not be used

to disallow any but built-in losses of the corporation. Noth-

ing in the language of the statute suggests any such limita-

tion on the deductions that may be disallowed. The only

requirement is that the deduction be one that the taxpayer

would not enjoy but for incorporation. Both the House and

the Senate reports specifically state that ‘anticipated’? or

ER? ER PRE 3

Re ee Ce Oe oe

AS St elicit ibs saben non

l6a Appendix B

‘‘prospective’’ losses were among those that the Commis-

sioner could disallow as deductions under Section 269.

H. R. Rep. No. 871, 78th Cong., Ist Sess. (1943), reprinted

in 1944 Cum. Bull. 901, 938; S. Rep. No. 627, 78th Cong.,

Ist Sess. (1943), reprinted in 1944 Cum. Bull. 973, 1016.

While there is authority to the contrary (Herculite Pro-

tective Fabrics Corp. v. Commissioner, 387 F. 2d 475 (3d

Cir., 1968) ; Zanesville Inv. Co. v. Commissioner, 335 F. 2d

507 (6th Cir. 1964)). the better view permits the disallow-

ance of deductions for post-acquisition losses of an acquired

corporation where those deductions were a part of the pur-

pose for which the corporation was acquired. Luke v. Com-

missioner, 351 F. 2d 568 (7th Cir. 1965) ; R. P. Collins & Co.

v. United States, 303 F. 2d 142 (1st Cir. 1962). See also

J. T. Slocomb Co. v. Commissioner, 334 F. 2d 269 (2d Cir..

1964). . | : :,

Petitioners’ final argument is that there could have been

no attempt to avoid or evade the application of Section 270.

because there were no five consecutive years in which the

poultry business’ deductions exceeded its gross ineome by

$50,000. It is sufficient to dispose of that contention to note

that the parties stipulated to the contrary.

Affirmed as modified and remanded for recomputation

of the deficiency.

Kaurman, Circuit Judge (dissenting in part) :

I dissent from that portion of the majority opinion af-

firming the Tax Court’s denial to Danica of deductions for

_business losses in excess of $50,000 under §{ 269 and 270.

I do not dispute the.correctness of the Tax Court’s find-

ings that Borge, as the sole proprietor of the ViBo business,

had sustained losses in excess of $50,000 in each of the

years 1954-1957, and that he incorporated the business for

Appendix BO | 17a

: =

the purpose of avoiding a recomputation of his income dis-

allowing loss deductien in excess of $50,000, which § 270

would have called into play had he sustained another such

loss in 1958. Nevertheless, I believe the application of § 270

to Danica through § 269 is improper in this case.

The purpose of § 270 is to limit the extent to which the

government will participate in the losses sustained by an

individual in the conduct of his trade or business—partici-

pation which may be greater than in the case of corporate

-losses because individual tax rates are higher than cor-

porate rates. It is perfectly clear that §270, of its own

force, has no application to corporate loss deductions and

" places no limit on the amount of such deductions which a

corporation may claim. Thugif the ViBo business had been

incorporated from its inception, §270 would have been of

no relevance to it. A problem midway between initial in-

corporation and the instant case would arise if, for instance,

'ViBo, while operated as an individual proprietorship, had

sustained losses in excess of $50,000 for at least five con-

secutive years, and after Borge had been disallowed deduc-

tions in excess of $50,000 for those years, he had then in-

corporated the enterprise, which continued to suffer such

losses. In such an instance, even if the incorporation was

for the purpose of avoiding further disallowance of loss

deductions under § 270, the corporation thenceforth should

be permitted to deduct the full amount of its losses other-

wise allowable. Since the enterprise has already been dis-

allowed any benefit it. might have obtained from its prior

operation as an individual proprietor$hip (i.e., the deduc-

tion of losses at the higher individual tax rate), there ap- °

pears no good reason why it should not now .be afforded

the same treatment as an enterprise incorporated ab initio.

From this it follows that where, as here, the business is

incorporated just before § 270 would be called into play: for

the purpose of avoiding its application, the proper remedy

a iaieaiaatiaas

OTE, "hbbaddDeg ab aR Rbeaiy q

18a Appendix B

under § 269 is to disallow the benefit actually obtained by

the enterprise while operated as an individual proprietor-

ship. And that benefit was the deduction of business losses

from individual income. Thus, the Commissioner should

have recomputed the loss deductions for the years ViBo

was- unincorporated; the remedy which he chose instead,

and of which the majority approves, bears no necessary

cerrelation to the deduction benefit which Borge obtained

by incorporating ViBo in avoidance of § 270.

Since the Commissioner did not thus seek to recompute

Borge’s income, but only that of Danica, I would reverse

on this issue.

noe Appendix B 19a

Victor Borge and Sanna Borge

: v.

Commissioner.

Danica Enterprises, Inc.

Commissioner.

Docket Nos. 6328-65, 6329-65.

T. C. Memo. 1967-173. Filed August 24, 1967.

MemoranpuM Finpines or Fact anp Opinion”

The Commissioner determined deficiencies in income

tax against the Borges and Danica as follows:

Year Borges Danica .

SET E RTE "$75,667.51 ‘calceketkn

ae eee eae . 62,983.39 $ 4,932.27

Sere. 58,178.00 “1,847.21

1961 ..... Tre Woe 56,892.00 5,632.80

ee ee 22,927.00 ‘60,713.00

~The issue for decision in the. Borge cases is whether the

Commissioner erred in allocating and taxing to Victor in

each of the first four tax years, under sections 61 and 482 of

the Internal Revenue Code of 1954, $75,000 and, in 1962,

$295,000 of income received by Danica Enterprises, Inc. and

never transferred to Victor.

The issue for decision in the Danica Enterprises, Inc.

cases is whether the Commissioner erred in disallowing a

deduction in each of its first three fiscal years ended Febru-

;

‘s

aa Cebit LMA E

ah mete. Pedal via Wn iene: ~

setaiiiaieiteteniniaminte nen eaten

— 20a et Appendix B

ary 28 or 29, 1959, 1960 and 1961 for that portion of its net

loss in excess of $50,000 in operating its poultry business,

and is disallowing net loss carry-overs from its fiscal years

(1) 1959 to 1960 (2) 1959 and 1960 to 1961, and (3) 1959

and 1960 to 1962 under section 269 of me Internal Revenue

Code of 1954.

: Finpines or Fact.

- The Borges are husband and wife who resided during

the tax years in. Connecticut and filed joint returns for 1958

and 1959 with the director of internal revenue for the dis-

trict of New York, New York, and for 1960, 1961 and 1962

’ with the director of internal revenue for the district of

Newark, New Jersey. They have five childern, :

Danica Enterprises, Inc. is a Connecticut corporation

which had its principal office during the tax years at New-

ark, New Jersey and filed its returns for its fiscal years.

_ director of internal revenue for the district of New York,

New York, and its returns for its fiscal years ended Febru-

ary 28, 1961 and 1962 with the director of internal revenue

for the district of Newark, New Jersey.

Victor is and was during the tax years a well-known

_and very successful professional entertainer. He had large’

income from that profession at all times material hereto.

He purchased a farm. property. of about 400 acres at 4

Poverty Road, Southbury, Connecticut in April 1952 and

resided in the main building there with his wife and children

from 1952 at least through the tax years. He sold some

pheasants and ducks raised on the farm and first learned of

the rock cornish hen from the farm foreman. Victor knew

nothing about the poultry business in 1952 or 1953, but he

began to think that he would like to sell a product which

he could sponsor. He conducted a poultry business on the

farm from April 1952 until March 1, 1959. The trade name

of that business was ‘‘ViBo Farms’’ and the registered

trademark of his poultry products was ‘'ViBo.’’

ise | GREER oi

Appendix B eas 2la

Victor employed a new manager for the ViBo business

- on two occasions in his efforts to improve production, proc-

essing and sales of the chickens, which he called rock cornish

game hens. A rock cornish game hen is a superior chicken

produced by a cornish rooster and a white rock hen. It

matures in from 5 to 6 weeks and has a high ratio of meat to

bone. It is not a game bird and need not be a hen, so far as

the record discloses.

Vietor met Allan Altman in 1953 and thereafter occa-

sionally received advice from him in régard to the ViBo

business. Altman was hired as manager at the beginning

of 1956.

Sales were being made by mail, directly to hotels and

restaurants, and to stores at wholesale.

Victor hired George Campbell in 1956 as his advance

press agent and general public relations man. This em--

_ ployment continued at all times material hereto without

change.

_ The following table shows the gross income earned by

Victor in each calendar year from entertainment and ViBo

losses claimed by him:

Gross ViBo

Year Income " Losses

1954 ........ $ 628,082.85 $ 62,158.71

SE San veens 496,655.17 79,486.40

ee 1,145,981.21 345,879.04

BPE <x essen 858,964.65 220,145.95

. ee 802,458.53° —- 23,133.48 (Jan. & Feb.)

eee 1,036,564.19 ........

on ce, Sn

ore a

ean (02,346.35 02—i.. Ss

ee a ° * en

* The figures shown for 1958 through 1963 include the amounts

received by Danica.

. .

a ne ae Aisin icdity ofA % ‘ range oN

22a. : Appendix B

Mortimer S. Rosenthal, a lawyer in New York City, ad-

vised Victor and acted as his counsel during the tax years.

He always considered Victor’s tax obligations. He advised

. Victor to form, the Danica corporation and’ did the legal

work in organizing it. He consulted a certified public ac-

' countant in regard to possible Federal income tax conse-

quences which might result from the transfer of the ViBo

business and Victor’s entertainment income to Danica.

Danica was incorporated in February 1958 and on

March 1, 1958 it issued its stock to Victor in exchange for

the assets of ViBo, subject: to its existing liabilities. Victor

has always been the President and sole stockholder of Dan-

ica. Victor retained title to the land and buildings.. The

operation of ViBo did not change after the transfer to Dan-

ica and the record does not show what, if anything, Danica

did in the operation. of the ViBo business.

Danica claimed deductions on its returns for. all losses

from the ViBo poultry business beginning March 1, 1958

and at least through February 28, 1963.. The Conimissioner

‘in determining the deficiencies against Danica disallowed

under section 269, Internal Revenue Code of 1954, deduc-

- tions for net losses claimed by Danica from the operation of

, its poultry business to the extent of $259,557.24 for the fiscal

year ended February 28, 1959, $144,346.53 for the fiscal year

_ended February 29, 1960 and $19,473.00 for the fiscal year

ended February 28, 1961.: The disallowance for each year

was the amount of the net loss claimed for that year less :

$50,000.

oy Victor, when he appeared professionally, was some-

times able to obtajy free advertising for himself and his

ViBo business in ious sections of local newspapers, in

supermarkets, and on radio and television. Occasionally a

magazine with national circulation would publish an article

relating to his profession and his ViBo poultry business. —

Appendix B | 23a

Victor and Danica entered into an agreement on March

1, 1958, to continue to February 28, 1963, in which, inter alia,

Danica employed Victor to help promote and publicize its

business activities and té perform artistic and professional

services on television, radio and theatrical presentations.

Danica agreed to pay Victor $50,000 per year for his artistic

and professional services under the contract and for his

promotional work for ViBo products. Victor would not

have entered into such a contract with an unrelated party.

Victor was free to and did perform and appear profession-

ally on his own behalf aside from the contract. A copy of

the contract is incorporated herein by this reference.

Victor, to advertise Pontiac automobiles, performed in

‘‘The Victor Borge Skow”’ for which he received $200,000

net under a contract dated October. 22, 1957. :

Danica entered into a contract dated July 24, 1958 to

furnish the entertainment portion of television spectaculars

starring Victor on behalf of the Pontiac Division of General

Motors Corporation for $225,000 net for each performance.

Such spectaculars were telecast in November 1958, October

1959, March and October 1960, October 1961 and February

1963. Danica received $226,000 for each of the first two,

$225,000 for each of the next two and $250,000 for each of

the last two. Victor guaranteed that contract.

The only compensation which Danica paid Victor was.

$50,000 in 1962 and $50,000 in 1963. It deductéd those pay-

ments as officer’s ancora on its fiscal year returns for

1962 and 1963.

The record does not iki sisi done by Danica

to earn or assist in the earning of the entertainment i income

which it reported. ’

The only adjustment made in the Steines notice to

the Borges, which is in dispute herein, is the one explained

therein as follows:

LEELA OLD PILOT OLMIS EOE SLE BRIE

ee rer eae

4ati« ; | ‘Appendix B

(a) It has been determined that under the proyisions of Sections 61 and 482

of the Code of 1954 income from the phase of the business in the entertainment

field of Danica Enterprises, Inc., for the calendar years and in the amounts

shown in the table below be ascribed to you and be added to your taxable

income :

1958 1959. - 1960 1961 1902

Income subject ‘to allocation ... $75,000 $75,000 $75,060 $75,000 $75,000

Less compénsation received and ae

Weported 2... cence ccesecee —- ceceee vee nee aah Cet eons SOReO

ane” aid al ninatc GRU Keee $75,000 $75,000 $75,000 $75,000 $25,000

Victor’s and Danica’s poultry operations (pennies

omitted) were as follows:

Victor Borge ©

: 1/ 1/58

1953 1954 - TS 1956 1957 2/28/58

Sales—net ..... .... $5,637 $36,952 $118,973 $260,317 $682,560 —- $121,020

Cost ‘of sales ....... 20,599 69,785 136,129 428,181 567,448 84,091

Gross Profit (loss) . ( 14,962) ( 32,833) ( 17,156) ( 167,864) 115,112 36,929

Other deductions—net

of other income .._ 11,703 29,326 62,330 178,015 335,258 60,062

ge eeeeereree ($26,665) ($62,159) ($ 79,486) ($345,879) ($220,146) ($ 23,133)

Danica Enterprises, Inc.

Fiscal Years Ended February 28.

; 1959 1960 1961 1962 - 1963

ITE ayer eB es Bets lees . $745,592 $508,953 $1 11,567 $69,992 $28,046

Ne ia a sce ~SA7,529 388,895 145,644 69,946 37,563

<_ ; oon

Gross. Profit (loss) ............ 198,063 | 120,058 (34,077) 46 (9,517)

Sale of equip. ....... ie a gael por oe - emninw es 1 re

Other deductions—net of othet

income ..... pay a Tas, 507,620 314,404 35,396 37,843 48,069

Se SE at iil ate. Soewsckn dewey ($309,557)* ($194:346) ($ 69,473) ($29,797) ($57,586)

* Danica’s loss from the operation of ViBo farms for the last ten months of 1958 was

in excess of $50,000.

All stipulated facts are incorporated herein by this,

reference.

Appendix B | 2a

“OPINION.

Murpock, Judge: Victor Borge is a very talented man.

He is not only a great: pianist but a subtle entertaining

comedian too. He came to the United States from Denmark

_ and has made himself famous here. He has also made a

' great deal of money from personal appearances and per-

formances on T. V. and radio. He bought a farm in Connec-

ticut. and that led him to engage in a poultry business, soon

limited to what he called rock cornish game hens. He in-

curred large losses in that business which he deducted from

his much larger earnings as an entertainer.

Victor relied upon Rosenthal’s advice and guidance in

all legal and income tax matters. Rosenthal hoped to find

some means of establishing a corporation to be owned by

Victor which would make him secure financially aside from

his future earnings, ‘or lack of earnings, from professional

engagements. The petitioners claim that Danica was created

primarily for that purpose and was not created primarily to

avoid the effects of section 270 or other tax consequences.

Cf. Frank Spingolo Warehouse Co. [Dec: 25,067], 37 T. C. 1.

The determination of the Commissioner, limiting

Danica’s deductions for losses sustained by the ViBo busi-

ness to’$50,000 in each of its tax years, is presumed to be

correct and the petitioners have the burden of proving it

incorrect. They have failed to sustain that burden. The

most persuasive evidence supports the Commissioner’s de-

termination. | | ¢

Victor, as sole proprietor of his poultry business, had

sustained losses in that business in excess of $50,000 for the

years 1954, 1955, 1956 and 1957. If this had continued

through 1958, section 270 might have been applicable. Victor

_ continued to own and operate the business through the first

two months of 1958 and sustained a loss of $23,133.48 for

that period. Market conditions were unfavorable to ViBo

PPE Hela eT oes Ie

ELEMENT EAMONN NGS Acne mmNRT nt

Be a ng Sata

ARSENIC Nee Re MeN CARON OPY TR Wma UL OU NE

26a . Appendix B

in 1958. Rosenthal was aware of the impending tax conse-

quences and, in an effort to avoid or lessen them, advised

and arranged the incorporation of Danica and the transfer

_ of the ViBo business to it. Danica had no means of meeting

a large loss from the operation of the ViBo business which

could reasonably be expected and that difficulty was met by

providing for a part of Victor’s large earnings from enter-

ment of the ViBo losses.

The evidence does not show that Danica otherwise con-

tributed to, or took any part in, the conduct of the ViBo

business or that the conduct of that business changed in any

way after February 1958. Nor does the evidence show that

Danica aided Victor in his entertainment business. Those

who contracted with Danica and paid for Victor’s services

required him to guarantee personally the contract which

- was madewith Danica. There was no change in the conduct

of his entertainment business after February 1958. Its

earnings were attributable solely to the services of Victor.

The Commissioner did not err in denying Danica’s de-

ductions for ViBo losses'in each year in exéess of $50,000.

Victor acquired control of-Danica ‘‘after October 4, 1940”’

and the Commissioner had reason to hold that ‘‘the princi-

pal purpose for which such acquisition was made’’ was

evasion of Federal income tax within the meaning of section

269(a) (1), I. R. C. 1954. See also sec. 270(a), I. R. C. 1954.

Pauline W. Ach [Dece. 26,743], T. C. 114, aff’d [66-1 usre

1 9340], 358 F. 2d 342, certiorari denied 37 U. S. 205; James

Realty’Co. v. United States [60-2 ustc 9600], 280 F. 2d

394. Cf. L. M. Lockhart [Dee. 27,280], 43 T. C. 776; Thomas

E. Snyder Sons Co. [Dec.-24 210], 34 T. C. 400, affd. [61-1

ustc 9312] 288 F. 2d 36; Army Times Sales wis eta

24,637], 35 T. C. 688.

The contract between Danica and Victor provided that

Danica would pay Victor $50,000 annually for his services

Appendix B 27a

under the contract. It paid him nothing in 1958, 1959, 1960

and 1961 but paid him $50,000 in 1962 and in 1963. The

Commissioner determined that Victor should have received

* $75,000. from Danica in each tax year for his services. He

‘allowed Danica to deduct that amount each year and in-

creased Victor’s income to correspond. That action seems

conservative in view of the fact that Victor earned all of the

income which Danica received. Cf. Helvering v. Horst [40-2

ustc 9787], 311 U. S. 122; Pauline W. Ach, supra; Nat

Harrison Associates [ Dec. 26 858], 42 T. C. 601, 622. How-

ever, his allocation of the amounts to Victor’s taxable in-

come is clearly within section 482, I. R. C. 1954, as ‘‘neces-

sary in order to prevent evasion of taxes or clearly to reflect

the income of’’ Danica and Victor, the sole owner of Danica.

Lucas v. Earl [2 usre 496], 281 U. S. 111, 115. See see. Gl,

I. R. C. 1954.

Counsel for the petitioners devote a substantial part of

their briefs to questions not raised by the pleagings and

thus not properly raised or in issue here. Those questions

merit no discussion or answer by this court.

Decisions will be entered for the Commissioner.

SRP Te

JUDGMENT OF DECEMBER 17, 1968.

UNITED STATES COURT OF. APPEALS

SECOND ree.

At a Stated Term of the United States Court of Ap-

peals, in and for the Second Circuit, held at the United

@States Courthouse in the City of New York, on the seven-

téenth day of December, one thousand nine hundred and

- sixty-eight. :

Present: Hon. J. Josepn Smitn, Hon. Irvine R. Kaurman,

Hon. Pact R. Hays, Circuit Judges.

DANICA ENTERPRISES, INC.,,

Petitioner,

Vv.

COMMISSIONER OF INTERNAL REVENUE,

‘ Respondent.

—

‘COMMISSIONER OF INTERNAL REVENUE, |

Petitioner,

DANICA KNTERPRISES, INC.,

Respondent.

ApprEAL From THe Tax Court oF tHE Unitep States

Judgment (12/17/68) 29a

This cause came on to be heard on the transcript of

record from The Tax Court of the United States, and was

argued by counsel.

On CoNSIDERATION WHeError, it is now hereby ordered,

adjudged, and decreed that the order of said The Tax

Court of the United States be and it hereby is affirmed

as modified and that the action be and. it hereby is remanded

‘for recomputation of the deficiency in accordance with the

opinion of this court.

A. Dantrex Fusako,

* — Clerk.

SLOTS PR Ne Ee

gt sl eas rae a

30a * Order Deyying Rehearing

‘ORDER DENYING REHEARING

— 31903-4

UNITED STATES COURT OF APPEALS

SEconD CIRCUIT. _~

VICTOR BORGE AND SANNA BORGE,

o. Petitioners,

COMMISSIONER OF INTERNAL REVENUE,

pea Respondent.

DANICA ENTERPRISES, INC.,

v. Petitioner,

COMMISSIONER OF INTERNAL REVENUE,

— Respondent.

COMMISSIONER OF INTERNAL REVENUE,

». Petitioner,

DANICA ENTERPRISES, INC.,

Respondent.

A petition for a rehearing having been filed herein by

counsel for the petitioners Victor Borge and Sanna Borge ~

and Danica Enterprises, Inc.,

Upon consideration thereof, itis.

Ordered that said petition be and it hereby is denied.

J. JosEPH SMITH,

_ Irvine R. Kaurman,

Paut R. Hays,

. U.S.C. JJ.

January 7,1969 , ~— —

Order Extending Time 3la |

APPENDIX C.

SUPREME COURT OF THE UNITED STATES.

No. , OcToBER TERM, 1968.

VICTOR BORGE, SANNA BORGE anp

DANICA EN TERPRISES, INC.,

Petitioners;

Vv. :

COMMISSIONER OF INTERNAL REVENUE

ORDER EXTENDING TIME TO FILE PETITION FOR

WRIT OF CERTIORARI.

Upon Consmeration of the application of counsel for

petitioner(s),

Ir Is OrpErep that the time for filing a petition for

writ of certiorari in the above-entitled cause be, and the

same is viii extended to and 1 ae April 15th, 1969.

/s/ Joun M. Harti, |

Associate Justice of the Supreme

Court of the United States.

Dated this 7th day of March, 1969.

eesti

PE IP TL iE ee ean gE Bey

Sens EET

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