# Petition for Writ of Certiorari — B. Forman Co. v. Commissioner > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385606_0813%3A1 ## Record - **Collection:** Supreme Court brief - **Document type:** Petition for Writ of Certiorari - **Published:** January 1, 1972 - **Citation:** 407 U.S. 934 ## Text ates : ews - @ pyar a 4 vO ca | mee 12800 STi arr 6 1972 IN THE * Supreme Court of the UnitedSrates:. :2.ccenn October Term, 1971 B. FORMAN COMPANY, INC., Petitioner, VS. COMMISSIONER OF INTERNAL REVENUE, Respondent. Docket No.: McCURDY & COMPANY, INC., Petitioner, . vs. COMMISSIONER OF INTERNAL REVENUE, ' Respondent. Docket No.: ............. ‘PETITION FOR WRIT OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR | THE SECOND CIRCUIT ELLSWORTH A. VANGRAAFEILAND, PETER L. FABER, Attorneys for Petitioners, 700 Midtown Tower, Rochester, New York 14604. Wiser, SuHaw; FREEMAN, VanGRAAFEILAND, Harter & Secrest, Ricuarp B. Secrest, WituuM M. Corsy, of Counsel. —=== B. FORMAN COMPANY, INC., Petitioner, Vs. COMMISSIONER OF INTERNAL REVENUE, : Respondent. Docket OE es McCURDY & COMPANY, as _ Petitioner, ; _ Vs. COMMISSIONER OF INTERNAL REVENUE, Respondent. Docket No.: |... PETITION FOR WRIT OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR . THE SECOND CIRCUIT Petitioners ask that a writ of certiorari issue to review the judgment ‘of the United States Court of Appeals for the Second Circuit. Opinions Below ' The opinion of the Court of Appeals (Appendix, pp. A40ff.) is not yet officially reported but is unofficially 2 reported at 29 AFTR2d { 72-348 and 72-1 USTC { 9182. The opinion of the Tax Court (Appendix, pp. A17fl.; R. *25a-48a) is reported officially at 54 T, C. 913 (1970). Jurisdiction The deci§ion of the Court of Appeals was rendered on January 10, 1972, and the judgment was entered on the same day (Appendix, pp. A73ff.) The jurisdiction of this Court is invoked under 28 U.S. C. § 1254(1). Questions Presented for Review i) Whether the authority of the Commissioner of In- ternal Revenue under § 482 of the Internal Revenue Code to “distribute, apportion or allocate” items of income among related taxpayers permits him to in- crease the taxable income of the maker of an interest- free loan by a hypothetical arms-length interest charge without showing that the proceeds of the loan gener- ated net income for the borrower. 2) Whether a corporation and one of its shareholders are “owned or controlled directly or indirectly by the same interests” for purposes of applying § 482 of the Internal Revénue Code to a single transaction in which all shareholders of the corporation acted in concert, even though the shareholder, acting alone, could not control the corporation. Statute and Regulations Involved — The statute involved is {482 of the Internal Revenue Code of 1954, 26 U.S. C. § 482, which provides: * a a es AlZ from a series of transactions ix never, in fact, realized by the other members. (5) Section 482 may, when necessary to prevent the avoidance of taxes or to clearly reflect income, be applied! in circumstances deserile (A) The notes shall pay interest at the rate of five (5) percent per annum payable semi-annually on the first days of January and July in each year. (B) The notes shall be due and payable thirty (30) - years after issuance. ‘ (C) Midtown shall have the right to prepay the notes in whole or in part on any interest paying date prior to maturity upon the payment’of the principai amount thereof and accrued interest. (D) The notes may be-unsecured but shall not be subordinated _to the claims of any other unsecured creditor of Midtown. . (2) The notes shall be part of a series, and there shall be no preference between the parties hereto, as payment of the notes of a series. Midtown began construction of the shopping center in 1959. The costs of construction had initially been esti- mated at $8,000,000; they turned out to be far higher, eventualy amounting to about $18,000,000. A22 During 1958 and the first four months of 1959, each peti- tioner made a number of loans to Midtown. On May 1, 1959, these loans were consolidated into single obligations totalling $662,500 to each petitioner in the form of 30-year notes bearing interest at 5 percent. In July 1959, Midtown satisfied these notes, without payment of interest, from the proceeds of a $2,700,000 line of credit established by Midtown with the Lincoln Rochester Trust Company. On September 9, 1960, each petitioner loaned to Midtown $1,000,000, receiving in return a three-year note bearing interest at 3% percent. In April 1961, these notes were eancelled without payment of principal or interest and re- placed by three-year notes in the same principal amount, bearing no interest and dated back to September 9, 1960. When the notes fell due, on September 9, 1963, they were replaced by new three-year notes. These notes were in turn replaced by new three-year notes on September 9, 1966. None of these notes bore interest and no payments have ever heen made on any of them. The loans evidenced by these 1963 and 1966 notes are. the subject matter of the interest issue involved in this case. During 1961 through 1963, Forman’s loaned an additional $1,445,000 to Midtown, which was fully repaid in December 1964 from the proceeds of loans which Midtown secured from the Lincoln Rochester Trust Company. Also during 1961 through 1963, Gilbert J. C. MeCurdy, Virginia G. McCurdy, and Maurice Forman made various loans total- ling $1,895,000 to Midtown. These loans also were paid off in December 1964 with the proceeds of a Lincoln Rochester Trust Company loan. The enclosed mal! shopping center was named Midtown Plaza Shepping Center and is hereinafter referred to as Midtown Plaza. Midtown Plaza is constructed around a A23 mall which measures 300 feet north and south and is here- inafter referred to as the Mall. Over most of its length, the Mall is 110 feet wide, but in the northernmost 90 feet or so there is an aleove opening out to the east which «nakes ° the Mall close to 200 feet wide. The entire northern border » of the Mall is taken up by MeCurdy’s, except for an arcade going through to Euclid Street. Forman’s borders the Mall on the west, taking’ up approximately the northern half of the western border. _The remaining borders of the Mall are oceupied by a miscellany of different stores. The Mall is entirely roofed over; the decorated ceiling is 45 feet above the main level. There is a terrace level of stores which front on a broad baleony 16 feet above the main level. . Forman’s has 145 feet of frontage, three entrances, and seven display windows on the main level. On the terrace level, Forman’s has 145 feet. of frontage, two entrances (one blocked off), and eight display windows. MeCurdy’s has 214 feet of frontage (including frontage on the corridor leading off to the northeastern arcade), two entrances,-and six display windows on the main level and 76 feet of front- age and two display windows on the terrace level. Pillars approximately 18 inches square support the baleony’s inside edge. yas ’ One means of access to the terrace level is a pair of escalators athwart the open part of the Mall; at this point the Mall is bridged over by a causeway connecting the haleonies on either side of the Mall. The escalators de- bouch onto this causeway. The escalators and causeway effectively divide the Mall into two unequal parts. The southern part is approximately 90. feet by 110 feet and is referred to as the “South Mall”; the northern part is ap- proximately 180 feet by 110 feet (not including the alcove ele NS ss aR enlist es eed Saggy Rae Ge WiBac ale A24 at the northeast corner) and is referred to as the “North Mall.” The North Mall thus has roughly twice the area of - the South Mall. “e In addition ‘to the Mall itself, Midtown constructed and owns an 18-story building abutting the southern end of the Mall; one of the floors opens out onto the main level of the Mall. Midtown also constructed and owns a four-story building which abuts onto the alcove at the northeast corner of the Mall. An arcade goes through this building to Euclid Street, thus providing access to Midtown Plaza from the northeast. Below the southern end of Midtown Plaza is a three-level underground parking garage with a capacity of 1,700 automobiles. An escalator from the garage opens directly onto the South Mall. A bus terminal is located outside the southeastern corner of Midtown Plaza and there are pedestrian passageways leading directly into the South Mall. Buses using the terminal run frequently throughout © the day and service many suburban areas near Rochester. Midtown has constructed and rented four different kiosks in the South Mall; at any one time, however, there have been no more than three kiosks there. American Airlines rented a kiosk of 125 square feet at a rental of $26.10 per square foot during each of the years herein in issue. John - T. Nothnagle, Inc., a real estaté concern, rented a 60-foot kiosk at $40.35 per square foot during 1964 through 1966. The National Key Company rented a kiosk of 64 square feet during 1964-1967. The base rental in each year was $23.48 per square foot. The total’rental in each year was $67.16 per square foot in 1964, $58.13 in 1965, $69.37 in 1966, and $72.27 in 1967. In 1967, the Allstate Insurance Company ' rented 100 square feet of floor space at $54 per square foot. The North Mall contains a pool with a fountain, a large pit filled with earth and planted with indoor plants, and A25 a permanent exhibit known as the Clock of Nations. This clock is 25 feet high. Around its base are 4 series of cylinders containing animated dolls; these dolls are dressed in costumes characteristié of various foreign countries. At appropriate times, each cylinder is lit up, the dolls within move, and ‘music ‘characteristic of the particular country is played automatically. The Clock of Nations is con- sidered a focus of interest at Midtown Plaza and a signi- ficant attraction to tourists and shoppers. To be fully effectiv e, it was necessary that the clock be visible from as. large a part of the North Mall as possible. The North, Mall also contains a small structure which acts as a bulletin® board for advertisements and announcements of community events. The architect who designed Midtown Plaza initially econ- templated that both parts of the Mall would have kiosks. At a late stage in the construction, it was decided to save money by cutting out unnecessary costs. The possibility of making no provision at all for kiosks was explored. But construction was so far advanced that very little, if any, money would have heen saved by eliminating the utility pits for the kiosks. Ilowever, certain planned plumbing and lighting facilities for kiosks were omitted. The in- stallation and placement of utility pits did not commit Midtown to any particular number or placement of kiosks: . several kiosks could be serviced from one utility pit. The design of a kiosk varies w sdely with the type of tenant for which it is intended, so widely that there is no point in building the kiosk until the nature of the tenant is known. " . Midtown Plaza opened for business on April 10, 1962. At that time, there were no kiosks in the North Mall and none were contemplated. Midtown had decided to keep the Sov bey ala A26 North Mall available for non-commercial events and ex- hibits—civic, cultural, educational, social, ete. The presence of kiosks would have made the North Mall physically less useful for such activities, some of which would require a large open space. In addition, the presence of kiosks with mercantile tenants would have given the North Mall an excessively commercial aura, incompatible with many non-commercial activities. The North Mall has in fact been extensively used for ‘non-commercial activities, including a National Aeronautics and Space Administration exhibit, a high school dance, and a non-denominational Easter sunrise religious service. These events and exhibits have attracted considerable pedestrian traffic to Midtown Plaza. Even more import- antly, they have occasioned considerable publicity, which in turn, has made Midtown Plaza better known, kept Mid- town Plaza in the minds of the residents of the Rochester area, and generated good will. In effect, making the North Mall available for non-commercial purposes has served as a very effective. form of institutional advertising for Midtown Plaza as a whole. Space on the North Mall is normally made available for use free of charge, but Mid- town has occasionally charged and received a fee for. its use. The advertising, with the generalized good will it built up, made Midtown Plaza a more attractive business. loca- “ _ tion for merchants; the advertising thus had long-run hene- fits to Midtown, since it placed Midtown in a better posi- tion to charge higher rents in later years. Petitioners’ ‘businesses also benefited from this advertising, since their stores were identified with Midtown Plaza in the public mind. The businesses of the other mercantile tenants of Midtown Plaza benefited from this advertising. Since CAE RRA A27 s most such tenants were on percentage leases, Midtown. would in all probability immediately share in these benefits through increased rental receipts. From the point of view of Midtown’s independent economic interest, the use of the North Mall as it was in fact used, for non-commercial activities, was preferable to using it for commercial kiosks, even without payments by petitioners in lieu of kiosk rentals. The immediate and long-term benefits to Midtown from the advertising effect outweighed the loss of potential kiosk rental payments. From the point of view of the owner of an enclosed mall shopping center, kiosks are desirable, other things being equal, since they generally increase the total rental to be expected from the entire project. But from the point of view of a store tenant, they are undesirable in that they obstruct the free flow of pedestrian traffie and, under some circumstances, may block the vision of potential customers. Insofar as petitioners were concerned, the presence of _ kiosks would not have materially interfered with the vision of potential customers. In May 1968, Angelo Chiarella (hereinafter Chiarella), who had worked for the architect who designed Midtown Plaza, became vice president and general manager of Mid- town under an oral agreement as to his duties and com- pensation. A written employment contract was executed in August 1964 and was subsequently modified in 1966. Chiarella was entitled, in addition to a base salary, to honuses based on Midtown's “operating income.” In gen- eral, Midtown’s then current income had to increase sub- stantially before Chiarella would get any bonus at all. Such an increase in Midtown’s operating income would increase Chiarella’s bonus. Chiarella has, in fact, received bonuses under this formula (as modified in 1966). . =. . Pi @ ps By = ave Ver Te re {RRR RN ATE REY LPL TILE AEE LO ETO A28 Since the completion of construction, Midtown’s income has come largely from rental of space in Midtown Plaza. The owners of all stores adjoining the Mall, including | petitioners, made payments during the years in question -to Midtown to cover the cost of operating and maintaining the common mall area upon which their stores fronted. Midtown’s profit and loss statements are prepared on the basis of a fiscal year ending July 31. The profit and loss statement for each of the years herein relevant shows a net loss, except for the year ending July 31, 1967, as to which the statement shows a small profit. At least dur- ing 1964 and 1965, Midtown was in need of working capital. Midtown had no taxable income subject to Federal tax during the years herein in issue. | During the years in issue, MeCurdy’s reported. gross sales and taxable income as follows: Year ending ~ Gross sales Taxable income Jan. 30, -1965 $22,536,052.21 $ 780,137.30 | Jan. 29, 1966 24,116,410.91 © = 1,155,580.84 Jan. 28, 1967 = -.25,184,893.61 1,216,421.17 During the years in issue, Forman’s reported gross sales and taxable income as follows: Jan. 30, 1965 $10,077,631.00 $286,420.00 Jan. 29, 1966 10,807,663.00 420,264.00 . Jan. 28, 1967 11,041,748.00 425,144.00 On May 7, 1964; Chiarella wrote a letter to each peti- tioner, proposing that each petitioner pay Midtown $75,000 | per year not to rent out kiosks on the North Mall. The letter pointed out that petitioners benefited from. the non- commercial events held in the North Mall. To justify the amount requested, the letter argued that ten kiosks could A929 be put into the North Mall and that $150,000 per year could be obtained in rentals from ten kiosks in that loca- tion.. On November 6, 1964, petitioners and Midtown executed a written contract embodying this proposal. Under the contract, Midtown was to “retain complete control, di- ’ rection and management” of the North Mall. Each peti- tioner agreed to pay Midtown $75,000 per year, starting with the year beginning February 1, 1964. Each petitioner ‘paid Midtown $75,000 during each of the taxable years in- - volved herein. The sums were included in Midtown’s “oper- ating income” for the purpose of computing Chiarella’s bonus. None of Midtown’s tenants has ever been approach- ed by Midtown to make payments for the purpose of pre- venting the establishment of kiosks in the shopping mali, and no such. payments have ever been made. None of the leases prohibits the erection of kiosks and only oné lease re- stricts the placement of kiosks. Advertising expenses are ‘usually about 5 percent of the gross sales of department: stores. During the years in issue, McCurdy’s advertising and publicity expenditures, counting the $75,000 payments to Midtown as advertising, . ranged from 3.7 percent to 4.1 percent of gross salés. Dur- ing the years in issue, Forman’s advertising and publicity expenditures, counting the $75,000 payments to Midtown as advertising, ranged from 3.7 percent to 3.9 percent of gross sales. ULTIMATE FINDINGS OF FACT 1. Neither petitioner was directly or indirectly ¢on- trolled by the same interests, nor was Midtown and either of the petitioners so owned or controlled. : 9, Had Midtown decided to construct and rent kiosks ~ on the North Mall, it could have realized at least $150,000 ee ES LD eR ET IO ey a er Ee Bree Oe eet pay ad Cate A30 annually during the periods relevant herein in rents from ..such kiosks. 3. At least by April 10, 1962, when Midtown Plaza opened for business, Midtown had made a firm decision not to construct and rent kiosks on the North Mall and such decision continued in full force and effect during all -periods relevant herein. 4. The $75,000 paid to Midtown by each petitioner in each of the taxable years herein in issue did not constitute an ordinary and necessary business expense. ‘OPINION ' Tmputation.of Interest Income under Section 482 Each petitioner owns and operates a department store in downtown Rochester, New York. In 1958, petitioners organized Midtown Holdings Corporation as a vehicle for constructing and operating an enclosed mall shopping center abutting upon their department stores. It was hoped that the shopping center would not only revitalize their business, but also enhance the value of their real . estate investment. The project (know as Midtown Plaza) turned out to be far more expensive than expected. In consequence, peti- tioners from time to time made various loans to Midtown. As our findings of fact show, no interest was paid on these loans. With respect to $1,000,000 of such loans, originally made in equal amounts in September 1960 and renewed in ‘September 1963 and again’in September 1966, respondent has imputed interest income at 5 percent per annum to each petitioner. In so doing, respondent has relied on A31 - - @& section 482% and the regulations issued thereunder. See section 1.482-2(a), Income Tax Regs. At all relevant times Forman’s and McCurdy’s were the sole shareholders of Midtown, each owning 50 percent ‘of its issued and outstanding stock. Members of the Forman family controlled Forman’s and members of the McCurdy family controlled McCurdy’s. There is not the slightest suggestion in the record that any members of the McCurdy family and the Forman family were in any way related and respondent has made no contention in this respect. — Section 482 grants respondent authority to allocate income, deductions, credits, and allowances among two or more “organizations, trades or businesses * * * owned or controlled directly or indirectly by the same interests.” This means actual, practical control rather than any par- ticular percentage of stock ownership. South Texas Rice Warehouse Co. v. Commissioner, 366 F. 2d 890, 894-896 (C. A. 5, 1966), affirming 43 T. C. 540, 561-562 (1965) ; Jesse E. Hall, Sr., 32 T. C. 390,°409-410 (1959), affd. 294 F. 2d 82 (C. A. 5, 1961); section 1.482-1(a) (3), Income Tax Regs. Respondent contends, and petitioners deny, that the requisite control existed. We agree with petitioners. Each petitioner had only a 50-percent interest in Mid- town, but this, standing alone, would not enable it to Sec. 482. ALLocaTion or INcoME AND Depvuctions AMONG - TAXPAYERS. é; In any case of two or more organizations, adie or businesses (whether or not incorporated, whether or not organized in the Umted States, and whether or not affiliated) owned or controlled directly or indirectly by. the same interests, the Secretary or his delegate may distribute, apportion, or allocate gross income, deductions, credits, or allowanres between or among such organizations, trades. or businesses. if he determines that such distribution, apportionment, or allocation is necessary in order to prevent evasion of taxes or clearly to reflect the income of any of such organizations, trades, or businesses. a ~ A32 dominate or manipulate Midtown. With the possible ex- ception of forcing a dissolution (see N. Y. Bus. Corp. Law, see. 1104 (6 McKinney)), the best that either petitioner . acting alone could achieve was a deadlock. There was no relationship between the shareholders of petitioners which could form the basis for finding that any group of share- holdefs could be said to have control of hoth Forman’s and McCurdy’s and thus, control of Midtown as well. It was just such a relationship which supported a finding of control in Advance Machinery Exch. v. Commissioner, 196 F. 2d 1006 (C. A. 2, 1952), affirming a Memorandum Opinion of this Court, Grenada Industries, Inc., 17 T. C. 83 (1951), affd. 202 F. 2d 873 (C. A. 5, 1953), and Jesse FE. Hall, Sr., supra, heavily relied upon by respondent. In Advance Machinery and J/all, the necessary relationship rested on family solidarity, and in Grenada Industries, it stemmed from a -. proportional common ownership of the entities involved. These cases are consequently clearly distinguishable. In short, there was no ownership or control (in the usual sense of those terms) of “tio or more organizations, trades or businesses,” (Emphasis added.) Respondent does not seriously contest this conclusion. Rather, he argues that the requirements of section 482 are met because Forman’s and MeCurdy’s had a common inter- est as far as their department store businesses were con- cerned which dictated that they act in concert with respect to Midtown. In urging this expansive interpretation of section 482, respondent recognizes that our holding in Lake Erie & Pittsburgh Railroad Co., 5 T. C. 558 (1945), is di- rectly contrary to his position. ie urges us to overrule our prior decision and articulates on brief the analysis set forth in Rev. Rul. 65-142, 1965-1 C B. 223. .In essence, this analysis is premised on the assertion that, in organizing A33 and operating Midtown, Forman’s and McCurdy’s should be considered as acting as a partnership and that there is, therefore, ‘the requisite control of two entities, namely, the partnership and Midtown. * We have carefully reexamined our decision in Lake Erie & Pittsburg Railway Co., supra, and have concluded that it should be reaffirmed. The clear language of section 482 requires that there be two business entities with respect to which direct or indirect control by the same interests ean be found. If we look at Midtown and Forman’s or Midtown and MeCurdy’s, no such control- existed. To im- port a common objective test into section 482, and thereby create a theoretical partnership between Forman’s and MeCurdy’s, would require an unwarranted elasticized read- ing of the statutory language. Perhaps the absence of an obligation to pay interest on the loans produced a dis- tortion of income as between Midtown and petitioners, but we find nothing in the legislative history which would justify the interpretation of the phrase “same interests” urged by respondent. Congress clearly had in mind a finding of ownership or control of two or more businesses by the same interests. See HI. Rept. No. 2, 70th Cong., Ist Sess., pp. 16-17 (1927). See also Fred J. Sperapani, 42 T. C. 308, 336, n..6. The hard fact is that Congress did not design section 482 to cover every potential distortion of income and dedue- tion. To refer to MeCurdy’s shareholders and Forman’s shareholders as “the same interests” would be a distortion, not of income, but of words. We are reinforced in our * In enacting the 1954 Code, Congress explicitly stated it was making no substantive changes in section 482. See H. Rept. No. 13%? 23d Cong., 2d Sess., p. A165 (1954); S. Rept. No. 1622, 8%d Cong. 24 Sess., p. 310 (1954). - A34 conclusion by the fact that respondent acquiesced in our decision in Lake Erie & Pitisburgh Railway Co., supra, for twenty vears. See 1945 C. B. 5; acquiescence withdrawn 1965-1 C. B. 5; Rev. Rul. 65-142, supra. Such long-stand- ing administrative interpretation of statutory language may properly be taken into account. See Ianover Bank v. Commissioner, 369 U. S. 672, 686 (1962). In view of our conclusion that the requisite control under section 482 did not exist, we do not decide whether this ease would fall within the ambit of those decisions dealing with the question of the extent to which that section au- thorizes the allocation of income where no income is realized. See, ¢.g., Smith-Bridgman & Co., 16 T. C. 287, 293 (1951). Nor need we consider the impact on section 482 of the specifie provisions of section 483 dealing with imputed interest in certain situations. Compare also "J. Simpson Dean, 35 T. C. 1083, 1087-1090 (1961). Deductibility of Kiosk Prevention Payments During each of the years in question, each petitioner paid Midtown $75,000 to keep kiosks off the North Mall and deducted the payments as ordinary and necessary business _ expenses. Respondent has disallowed the deductions. Whether or not a payment constitutes an ordinary and necessary business expense constitutes primarily a ques- tion of fact. Commissioner r. Heininger, 320 U. S. 467, 475 (1943). See Welch r. IHelrering, 200 U. S. 111, 115 (1933). Clearly, there is no automatic barrier to resolv- ing that question in favor of a taxpayer even though the | payor and payee are in a corporation-shareholders rela- tionship. Compare Pay's Clothes, Inc., 22 T. C. 1332 A385 (1954). But where such a relationship exists, the payment should be subjected to close scrutiny to ensure that it is indeed what it purports to be. EF. g., Darco Realty Cor- poration v. Commissioner, 301 F. 2d 190 (C. A. 2, 1962). . A pair of escalators and a causeway divided the shop- ping mall of Midtown Plaza into two.unequal parts. The South Mall, the smaller of the two, had kiosks in it, tenanted by various commercial enterprises. The North Mall, which ‘had petitioners’ department stores along two of its sides, was kept clear of kiosks so that it could be used for non-commercial events. In eect, the North Mall fune- tioned as a sort of community center, The various events . held there drew people to Midtown Plaza who would not otherwise come. This extra traffic was of value to Mid- town, to petitioners’ department stores, and to all the commercial tenants of Midtown Plaza. Even more im- portant is the quite considerable publicity. generated by these events; this publicity served as a very effective form of institutional advertising. Petitioners posit their assertion of deductibility on the ground that the payments served an advertising function, since they made possible the use of the North Mall for promotional events from which they directly benefited. They further seek to support their claim by arguing that they, in effect, rented the North Mall from Midtown and that. since $150,000 constituted a reasonable rental, com- mensurate with what 4n independent lessee would pay, it follows that that amount was paid exclusively for the use of the Mall and is therefore deductible. Compare Polak’s Frutal Works, Inc. v. United States, 176 F. Supp. 521 (S. D. N. Y. 1959), affd. 281 F. 24 261 (C. A. 2, 1960). We have no quarrel with petitioners’ arguments as far as they go. ete ear hes vs ss 45Joes , * A386 ‘The difficulty is that they are not determinative of the question before us. Use of the North Mall as a sort of community center doubtless benefited the petitioners, but equally beyond doubt is the benefit to Midtown Plaza as a whole. Midtown stood to benefit immediately to the extent that it would share in the increased business through percentage leases. And beyond this immediate benefit, the attractiveness of Mid- town Plaza to business tenants ‘was increased, thereby enhancing the ability of. Midtown to obtain higher rentals in‘the future. These faetors made it in the interest of Midtown to keep the North Mall free of kiosks. Coneeded- ly, landlords of shopping centers may normally want to rent out kiosks in order to obtain additional rentals. But Midtown was not faced with a simple choice between kiosks and no kiosks; it had to choose between kiosks and an extremely effective form of institutional advertising. In short, Midtown was faced with a choice as to what was in its own: hest independent interests. In our opinion, as our findings of fact show, it made that chaice no later than April 10, 1962, the date on which Midtown Plaza. opened and*long before the contractual obligation to pay the $150,000 was undertaken by petitioners. As we see it, the test is whether the arrangements calling for the payment of the $150,000 were in fact what they purported to be, namely, an annual expenditure for a eur- rent benefit to petitioners which Midtown had to be indueed to eonfer. Clearly, the mere fact that petitioners were legally hound to make the payment is not determinative. See, e.g., Atlantic Monthly Co., 5 T. C. 1025, 1032 (1945). The question is: should petitioners he allowed a deduction as an ordinary and necessary business expense for reenr- A37 ring payments for a promise by the payee not to undertake an activity which it had already decided not to undertake in its own independent interests? While we have found no decision which furnishes us with direct guidance, we conclude that the question should be answered in the nega- tive. Cf. Swed Distributing Company v. Commissioner, 323 F. 2d 480 (C. A. 5, 1963), affirming a Memorandum Opinion of this Court on remand from 272 F. 2d 330 (C. A. 5, 1959), which, in turn, had reversed 31 T. C. 84 (1958) ; Ingle Coal Corporation v. Commissioner, 174 F. 2d 569 (C. A. 7, 1949), affirming 10 T. C. 1199 (1948); Ray's Clothes, Inc., supra; Granberg Equipment, Inc., 11 T. C. 704 (1948).5 Our conclusion that the afs#iagements were not what they purport to be is furthey reinforced by several additional elements present herein: (1) The fact that petitioners’ payments to Midtown were equal is highly suggestive. Petitioners’ sales volumes and income «differed markedly. The effect upon the revenue of their-department stores of the North Mall activities would almost certainly be different. If the decision to .. keep kiosks off the North Mall had been made in connec- tion with the department store businesses of petitioners, it would seem that the petitioner who could expect to reap a lesser benefit from the advertising would have demanded that payment be proportional to its expected benefit. Moreover, we note that none of Midtown’s tenants were asked to make such payments, although they henefited from the promotional events. Finally, the original agree- ment between petitioners required that their investment be equal. Thus, the equality of payments suggests that they were intended as eapital contributions. * (Compare also Mar J. Epstein, T. C. Memo. 1964-192. A38 (2) There were good reasons for artificially inflating . Midtown’s income at the expense of the department store businesses. Midtown needed cash; petitioners therefore had to make capital contributions or loans to Midtown. Petitioners had substantial taxable income against which deductions could be used, Midtown had substantial tax losses to soak up increases in income, and Chiarella’s bonus would be increased by increased rental income. To the extent that a capital contribution could be disguised as income to Midtown and business expense to the petitioners, everybody benefited-and no one was hurt significantly. While tax avoidance may be a permissible objective where the substance and form of the transaction coincide, the presence of -a pattern of tax benefits certainly constitutes a yellow caution signal on our road to decision. Cf. George L. Schultz, 50 T. C. 688, 694 (1968), affirmed per curiam 420 F. 2d 490 (C. A. 3, 1970). We again emphasize that we are not dealing with a situa- tion where the payment in question is for a benefit con- ferred which the payor was concerned it might lose through bona fide action action by the payee. Under such circumstances, the measurement of the value of the pay- ments against the benefit conferred in order to support the ‘ contention of a quasi rental,® or the justification of the pay- ments as an advertising expenditure, or the possibility of interference by the kiosks with the visibility of petitioners’ store windows, or whether the petitioners were under obli- gation to Chiarella to maximize the income of Midtown in order to enhance his bonus would have been highly relevant. * In this connection, we note that. under the agreement of November 6, 1964, Midtown was to “retain complete control, direction and management” of the North Mall. And when charges were made for the use of North Mall space. Midtown, not petitioners. received the money. A39 But in the posture of ‘this particular case, those considera- tions are totally beside the point. | a We conclude that the payments of $75,000 by each of ‘the petitioners to Midtown were disguised capital con- tributions and therefore not deductible expenses. In order to reflect certain adjustments made in the notices of deficiency and not contested in the . petitions, as well as our resolution of the first issue, Decisions will.be entered under Rule 50. Reviewed by the Court. A40 III. Opinion of the Court of Appeals for the Second Circuit UNITED STATES COURT OF APPEALS For tHE Seconp Circuit ae « - Nos. 768, 769, 770, 771—September Term, 1970. (Argued June 1, 1971 Decided January 10, 1972.) Docket Nos. 35434, 35839, 71-1026, 71-1027 B. FORMAN COMPANY, INC., . Petitioner- Appellee, against COMMISSIONER OF INTERNAL REVENUE, ; Hespondent- Appellant. ~* MeCURDY & COMPANY, INC., Petitioner-A ppelle e, against COMMISSION ER OF INTERNAL REVEN UE, Respondent-A ppellant. B. FORMAN COMPANY, INC., Petitioner-A ppellant, against COMMISSIONER OF INTERNAL REVENUE, Respondent-A ppellee. McCURDY & COMPANY, INC., Petitioner-A ppellant, against COMMISSIONER OF INTERNAL REVENUE, Respondent-A ppellee. Before: Clark, Associate Justice," Smith, Circuit Judge, Zavatt, District Judge.** * Retired Associate Justice of the Supreme Court, sitting by desig- ation. ** Senior District Judge for the Eastern District of New York, sitting by designation. A41 ’ Cross- —w froma aadiiieis of the Tax Court, Tannen- wald, Judge, 54 T. C. 913 (1970), holding that (1) § 482° of the. Internal Revenue Code of 1954 did not authorize the Commissioner to allocate to taxpayers interest income attributable to interest free loans made by taxpayers to ‘Midtown and (2) that annual payments made by taxpayers to Midtown were not ordinary and necessary business ex- penses deductible under ¢162 of the natornes Revenue Code of 1954. ; Reversed as to the first holding, affirmed as to the second holding. ; ' Ellsworth A. VanGraafeiland and Peter L. Faber (Wiser, Shaw, Freeman, VanGraafeiland, Harter & Se- - crest, Rochester, New York, Richard B. Secrest and William M. Colby, of counsel), for Taxpayers. ‘Stephen Schwarz, Attorney, Tax Division (Johnnie M. Walters, Assistant Attorney General, Meyer Rothwacks and Harry Baum, Attorneys, Tax Division, Department of Justice, Washington, D. C., of counsel), for the Com- missioner. . . ZAVATT, D.d.: These are cross-appeals from a decision of the Tax Court. 54 T. C. 913 (1970), holding (1) that 26 U.S. CG. 4 482 (the Internal Revenue Code of 1954, hereinafter the “Code’’) did not authorize the Commissioner to allocate to B. For- man Co., Ine. (Forman) and McCurdy & Co., Ine. (Me- Curdy) (both referred to herein as taxpayers) interest income attributable to interest free loans made by the taxpayers to Midtown Holdings Corp. (Midtown), because of the absence of the requisite § 482 control of Midtown by the taxpayers ; and (2) that annual payments of $75,000.00 each made by the taxpayers to Midtown were ‘not ordinary and necessary business expenses deductible under 26 U. A42 S. C. $162. The Commissioner appeals from the first of these holdings; the ‘taxpayers appeal -from the second. We reverse the decision of the Tax Court as to the first and affirm as to the second of these holdings. These consolidated cases involve the corporate income. tax liability of Forman and of MeCurdy for the fiscal years 1965, 1966 and 1967. Having disallowed the annual payments of $75,000.00 each year by the taxpayers to Mid- town and having allocated. as income to each taxpayer in- terest at the rate of 5% per annum on a $1,000,000.00 loan made by each taxpayer to Midtown prior to the fiscal years in question, the Commissioner assessed tax deficien- cies against each taxpayer (now in dispute) as follows: Forman McCurdy © 1965 $ 62,425.55 $ 59,181.99 1966 58,775.14 59,643.92 1967 59,692.00 — 62,343.56 Totals $180,892.69 $181,169.47 Following receipt of the Commissioner’s notices of these deficiencies and on January 31, 1969, each taxpayer filed a petition with the Tax Court for a review of the respective tax deficiency determinations of the Commissioner, hoth of which petitions were consolidated. | For several years prior to and as of the date of the in- corporation of Midtown, McCurdy (a New York corpora-. tion since 1901) operated a retail general department store at 285 Main Street East, Rochester, New York and For- man: (a New York corporation since 1912) operated a re- -tail department store, specializing in men’s and women’s apparel, at 46 Clinton Avenue South, Rochester, New York. All of the stock of McCurdy was owned by or in behalf: of ‘members of the McCurdy family. All of the stock of For- A43 man was owned by or in behalf of members of the- Forman family. McCurdy and Forman had no common share- holders, directors or officers. Both corporations were competitors. | In an effort to stem declining incomes, McCurdy and Forman caused Midtown to be formed in 1958. On March 23, 1959 they entered into an agreement with reference to their participation in the building and development of a midtown shopping center in, Rochester which would adjoin © the rear entrances to their respective stores. -By that time the Board of Directors and ‘officers of Midtown con- _ sisted of the following: ? Relationship to McCurdy and Forman Gilbert J. C. MeCurdy (President and Chairman of Board of. Directors of Midtown) Gordon W. McCurdy (Secretary and a Director of Midtown) —Chairman of the Board of ‘Directors and President of McCurdy —Vice-Chairman of the Board of Directors and Senior Vice-President of McCurdy Maurice R. Forman (Vice-President and a Director of Midtown) " Fred Forman (Treasurer and a Director of Midtown) Lynn Johnston ‘(Vice-President and General Manager of Midtown) —Chairman of the Board of Directors and President of Forman —Member of the Board of Directors and Senior Vice-President of Forman . At#4 It would appear from that agreement that when, in 1958, McCurdy and Fornian decided to form Midtown and erect a shopping center in downtown Rochester, they each entered into lease agreements (with options to purchase) with the owners of the property on which they contem- plated the construction of the shopping center. These properties are described in the appendices to the agree- ment of March 23,°1959. In and by that agreement Me- Curdy and Forman agreed to assign and transfer to Mid- town their respective interests in these leases and options and to convey title to any such property already vested. McCurdy: and Forman had already acquired 50% each of the issued and outstanding shares of Midtown. In ex- change for the real estate interests they were to assign and convey to Midtown, each of them was to receive an additional 810 common, no par value shares of Midtown, thus continuing their equal stock ownership in Midtown. If, prior to January 1, 1965, the Board of Directors of Midtown should determine, by resolution, that additional funds were netessary or advisable, McCurdy and Forman agreed to purchase additional shares of Midtown “so that their aggregate holding shall be One Million Dollars ($1,000,000) each, at any time, and from time to time . . .” In addition, each party to this agreement agreed to loan to Midtown additional amounts : “so that their aggregate loans to Midtown shall be One Million Dollars ($1,000,000) each, at any time and from time to time, if, prior to January 1, 1965, the Board of Directors of Midtown, by resolution, shall deter- — that such additional funds in the form of bor- are necessary or advisable. Loans shall he male equally by the parties. Such loans shall be represented by notes, or other evidence of indebtedness, of Midtown, the essential features of which shall be as follows : A45 (A) The notes shall pay interest at the rate of five (5) | yw per annum, payable semi-annually on the first day of January and July in each year. (B) The notes shall be due and payable thirty (30) years after issuance. . (C) Midtown shall have the right to prepay the notes in whole or in part on any interest paying date prior to maturity upon the payment of the principal amount thereof and acarund interest. (D) The notes may be unsecured but shall not be subordinated to the claims of any other unsecured creditor of Midtown. (E) The notes shall be part of a series, and there shall be no preference between the parties hereto as to payment of the notes of a series. This agreement also provided for the control of Mid- town by McCurdy and Forman by requiring each party thereto to vote its respective Midtown stock so as to pro- vide for a Board of Directors consisting of three Directors designated hy the Board of Directors of MeCurdy and three Directors designated by the Board of Directors of Forman. At the request of either MeCurdy or Forman, each party to the agreement undertook to vote its Midtown stock for a seventh Director. In,the-event they were un- able to agree upon the seventh Director, MeCurdy and Forman were to designate their respective representatives who would designate the seventh Director to be elected “by the parties hereto . . .” In the event that these representa- tives were unable to agree upon a seventh Director, a Justice of the Appellate Division of the Supreme Court, Fourth Judicial Department, was to act with the two rep- resentatives and the seventh Director of Midtown was then to be designated by majority vote of the Justice and the two representatives of the parties. A466 The agreement also limited the right of the parties to dispose of their Midtown stock to detailed conditions set forth therein. Although the agreement provided for the designation of three Midtown Directors each by the parties, there were - ‘only four. During all of the relevant times the officers and directors of Midtown were : Vice President and Director Gilbert J.C. MeCurdy Secretary and Director Maurice R. Forman Treasurer and Director Gordon W. McCurdy President and Director Fred Forman (until hix death) Robert Aex (after Fred Forman’sgleath ) Aex represented Forman’s . interests Vice President and Lynn Johnston (to April 1. General Manager 1963) Angelo Chiarella (from Mav 27, 1963 on) The shopping center, completed and opened for business in 1962, consisted of-an eighteen story building, a four story building (adjoining the Mall), and a three level under- ground parking garage. Each taxpayer initially invested a total of $1,000,000.00 in return for Midtown stock. ‘The orig- inal estimated cost of the shopping center was $8,000,000,00, The actual cost exceeded $18,000,000.00. Construction commenced in 1959. The record does not reveal all of the financing for this project. It does show that Midtown entered into a building loan agreement with. A47 Lincoln Rochester Trust Company (Lincoln), dated April 18, 1961, providing for advances not to exceed $11,000,000.00 to be evidenced by notes bearing interest at the rate of six percent per year, secured by the “personal guarantees of certain officers of the Company and others” and “a con- ditional assignment of rents of the premises.” During 1958 and 1959,-MeCurdy and Forman made several loans to Midtown, the amounts of which are not revealed by the record or stated in the stipulation of facts in the proceed- ing before the Tax Court. It was so stipulated, however, that, on May .1, 1959, the several loans were consolidated into single obligations of Midtown of $662,500.00 each to McCurdy and Fermin, represented by thirty-year notes of Midtown, each bearing interest at the rate of five per- cent per annum. (These notes were satisfied in July of 1959, without interest, from the proceeds of a $2,700,000.00 line of credit established by Midtown with Lincoln. The fact that MeCurdy and Forman each waived interest on these notes is not involved in the instant case.) Allocation of Interest Income under 26 U.S.C. 482 ’ The issue as to allocation of income to McCurdy and Forman for the fiscal years 1965, 1966 and 1967 stems from loans of $1,000,000.00 each by the taxpayers to Midtown on September 9, 1960, each represented by a three-year note of Midtown to each taxpayer, bearing interest at the rate of three and one-half percent per annum. These notes were cancelled in April 1961, without payment of any principal or interest. In lieu thereof, they were replaced by notes of $1,000,000.00 each, predated September 9, 1960 and bearing no interest. On their due date, September 9, 1963, they were replaced by three-year notes in the same principal amounts, bearing no interest—without any payment of - A48 principal or interest having been made thereon. These notes, dated September 9, 1963, were replaced on Septem-_ ber 9, 1966 by three-year notes in the same amounts, bear- ing no interest, without any payment of principal or inter- est having been paid thereon. No payments of principal or interest have ever been made on the notes dated, respec- tively, September 9, 1960, September 9, 1963 and September 9, 1966. The issue as to the Commissioner's allocation of income to MeCurdy and Forman relates to the notes dated September 9, 1963 and September 9, 1966. The Commissioner imputed interest income at the rate of five percent per annum on those $1,000,000.00 loans by McCurdy and Forman to Midtown ($50,000.00 of income to each taxpayer during their fiscal years 1965, 1206 and 1967), pursuant to 26 U.S. CL § 482, which provides: | “489 Alloeation 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 direetly or indirectly by the same interests, the Secretary or his delegate may distribute, apportion, or-allocate gross income, deduc- tions, credits, or allowances between or among such organizations, trades, or businesses, if he determines that such distribution, apportionment, or allocation is - necessary in order to prevent evasion of taxes or clearly to reflect the income of any of such organiza- tions, trades, or businesses.” The Tax Court reversed the Commissioner's determination, holding in effect that Midtown was not ‘controlled directly or indirectly” by either MeCurdy or by Forman and thet McCurdy and Forman may not be regarded as a single entity controlling Midtown. . “The clear language of section 482 requires that there be two business entities with respect to which direct or ~ _ se A49 indirect control by the same interests can be found. ‘If we look at Midtown and Forman’s or Midtown and MeCurdy’s, no such control existed. To import a com- mon objective test into section 482, and thereby create a theoretical partnership between Forman’s and Me- Curdy’s, would require- an- unwarranted elasticized reading of the statutory language.” 54 T. C. at 923. Legislative History 26.U. 8. C. § 482 derives from section 45 of the Internal Revenue Code of 1928. The House report with reference to section 45 of the 1928 Code explained that its purpose was to allow the Commissioner to ‘distribute the income or deductions between or among [commonly controlled taxpayers] . . ., as may be nee- essary in order to prevent evasion (by the shifting of profits, the making of fictitious sales, and other meth- ods frequently adopted for the purpose of ‘milking’), and in order clearly to reflect their trne tax liability.” H. Rep. No. 2, 70th Cong., Ist Sess., pp. 16-17 (1939-1 Cum. Bull. Part 2 384, 395). Provisions somewhat similar to those in section 45 were contained in prior Revenue Acts. Section 240 (d) of the Revenue Act of 1924, 43 Stat. 288, Internal Revenue Acts of 1924 to Date, 26 U. S. C. A. p. 45, authorized the Commis- sioner to consolidate the accounts of two or more related trades or businesses owned or controlled by the same inter- ests. It did not authorize him to distribute, apportion. or allocate, as in section 482. Section 240(f) of the Revenne Act of 1926, 44 Stat. 46, Internal Revenue Acts of 1924 to Date, 26 U.S. C. A. p. 191 contained the very same language as in section 240(d) of the Revenue Act of 1924. Section 45 of.the Revenue Act of 1928, 45 Stat. 806. Internal Revenue Acts of 1924 to Date, 26 U.S. C. A. p. 364, effeeted a change. A50 The sections of the prior acts were under the caption _ “Consolidated Returns of Corporations.” The caption of section 45 of the Revenue Act of 1928 was “Allocation of Income and Deductions.”’ Its language is substantially iden- tical to that in present section 482. The same is truc of section 45 of the Revenue Act of 1932, 47 Stat. 186, Internal Revenue Acts 1924 to Date, 26 U.S. C. A. p. 498; seetion 45 of the Revenue Act of 1934, 48 Stat. 695, Internal Revenue’ Acts of 1924 to Date, 26 U.S. C. A. p. 680; section 45 of the Revenue Act of 1936, 49 Stat. 1667, Internal Revenue Acts of 1924 to Date, 26 U.S. C. A. p. 840; section 45 of the Rev- enue Act of 1938, 52 Stat. 474, Internal Revenue Acts of 1924 to Date, 26 U. S. C. A. p. 1028 and section 45 of the Internal Revenue Code of 1939, 26 U.S. C. A. § 45; the Inter- nal Revenue Code of 1954, section 482. The Revenue Act of 1928 eliminated the right of affiliated corporations to file consolidated returns and the right of the Commissioner to consolidate the accounts of two or more related trades or businesses controlled by the same interests. In lieu thereof section 45 was inserted which “broadened consider: ably”: former section 240(f) of the 1926 Act “in order to afford adequate protection to the Government made neces- sary by the elimination of the consolidated return provi- sions of the 1926 Act.” National Securities Corp. v. Com- missioner, 137 F. 2d 600, 662 (3d Cir.), cert. denied, 320 ' U.S. 794, 64 S. Ct. 262, 88 L. Ed. 479 (1943): H. R. 2, 70th Cong., 1st Sess. Lake Eric The decision of the Tax Court in Lake Erie & Pittsburg Railway Co. v. Commissioner, 5 T. C. 558 (1945), is the only _ judicial determination based on facts substantially similar A51 to those in the instant case. The Tax Court reaffirmed that decision in the instant case. In Lake Erie, the New York Central Railroad and the Pennsylvania Railroad (two inde- pendent competing corporations, having no common stock- holders, officers or directors), formed a third corporation, the Lake Erie & Pittsburg Railway Co. (Lake Erie), for the purpose of acquiring, building, maintaining, leasing and operating a railroad between Lorain and Youngstown, Ohio. New York Central and Pennsylvania railroads were the sole, equal stockholders of Lake Erie. .They used the facili- ties of Lake Erie for which use they originally paid rent pursuant to a 1908 agreement and Lake Erie paid dividends to these two stockhekters. This agreement was modified in 1939 so as to release the two railroads from their obliga- tion to pay rent to Lake Erie and release Lake Erie of its . oblization to pay them (as stockholders) dividends. The .- Commissioner allocated to Lake Erie as income to it, dur- ing 1937, 1938, 1939 and 1940, from the gross income of the railroads an amount equal to the rent which the rail- roads were originally obligated. to pay to Lake Erie. Lake Erie had reported.no taxable net income for each of these years. The Tax Court reversed the determination ofthe’ Commissioner on the ground that he was without authority to make the questioned allocation pursuant to section 45 of the Internal Reverine Code of 1939: ‘ “The stockholders of the New York Central are not the ‘same interests’ as the stockholders of Pennsylvania and neither the New York Central nor the Pennsy]l- vania has control of the petitioner. Together they do © have. But that amounts to saying nothing more than that the stockholders of a corporation control it. We do not think that it can be said where two or more corporations owned by different sets of stockholders control another corporation such. other corporation is controlled by the same interests.” : 5 T. C. at 564-565. A52 The Commissioner acquiesced in the decision of the Tax Court in Lake Frrie. C. B. 1945, 5. In 1965, liowever, the Commissioner withdrew the prior acquiescence and sub- stituted nonacquiescence. Rev. Rul. 65-142, 1965-1- Cum. Bull. 223. The declared purpose of section 482 is “to prevent eva- sion of taxes or clearly to reflect the income of . . . organi- zations . . . owned or controlled directly or indirectly by the same interests.” This legislative purpose is reflected _in the Treasury Regulations where it is stated that: * “The purpose of section 482 is to place a controlled taxpayer on a tax parity with an uncontrolled tax- payer, by determining, according to the standard of an-uncontrolled taxpayer, the true taxable income from the property and business of a controlled taxpayer . . . The standard to be applied in every case is that of an uncontrolled taxpayer dealing at aftm’s length with another uncontrolled taxpayer . . . Transactions ‘he- tween one controlled taxpayer dnd another will be subjected to special scrutiny to ascertain whether the common control is being used to reduce, aveid, or es- cape taxes.”’ ‘Treas. Reg. § 1.482(b) (¢) The courts recognize the congressional purpose of sec- tion 482 to prevent evasion or avoidance of otherwise pay- able taxes by means of shifting profits or by other financial - devices and have. given broad scope to the Commissioner’s - diseretion in making reallocations of income, where the exercise of this power is not unreasonable or arbitrary... W. Braun Co. v. C. 1. R., 396 F. 2d 264, 266 (2d Cir. 1968). Similar recognition was given to, section 45 of the Rev- enue Act of 1928. Central Cuba Sugar Co. v. Commissioner,. 198 F. 2d 214, 216 (2d Cir.), cert. denied, 344 U. S. 874, 73 S.: Ct. 167 (1952). The courts have also construed this statute liberally in order to achieve the declared purpose —A53 of Congress. In Asiatic Petroleum ‘Co. v. Commissioner, 79 F. 2d 234 (2d Cir:), cert. denied, 296 U. S. 645, 56 S. Ct. 248, 80 L. Ed. 459 (1935), it was held that the phrase “evasion of taxes” in section 45 of the Reveriue Act of "1928 “is bread enough to include the avoidance of the realization for taxation of such a-profit through its trans- fer to another branch of the same business enterprise in a way which only changes its’ place in the business set up.” 79 F. 2d at 236. The court also gave a broad meaning to the term “gross income” in section 45. It referred to the progress of section 45 of the Revenue Act of 1928in support of its liberal interpretation of that statute. 79 F. 2d at 236. See also, Advance Machinery Exchange 1 Commissioner, 196 F. 2d 1006 (2d Cir.), cert. denied, 344 U.S. 835, 73 S. Ct. 45 (1952). Whether the Commissioner was a in allocating to McCurdy and Forman interest on their respective loans of $1,000,000.00 each is essentially one of fact, and his deci- sion must be affirmed if supported by substantial evidence. Advance Machinery Exchange, supra, at 1007. Whiere, as here however, the Tax Court-has reversed the Commis- ‘sioner, the decision of the Tax Court must be affirmed un- less clearly erroneots. Commissioner v. Duberstein, 363 U. S. 278, 80 S. Ct. 1190 (1960); Schley v. Commissioner, 375 F. 2d 747 (2d Cir. 1967) ; LaMont.v. Commissioner, 339 F. 2d 377 (2d Cir. 1964). In order to justify an allocating of income pursuant to section 482, the Commissioner must find that (1) there are two or more trades, businesses or organizations (2) owned-or controlled by the same inter- ests and (3) that it is necessary to allocate gross income, deductions, credits, or allowances among them in order to prevent evasion of taxes or in order to clearly reflect their — income. . . A54 Treasury Regulations Treasury regulations must be sustained unless unreason- able and plainly inconsistent with the revenue statutes. Commissioner v. South Texas Lumber ‘Co., 333 U. S. 496, 501, 68 S. Ct. 695, 698 (1948); Sanford v. Commissioner, 412 F. 2d 201, 202 (2d Cir.), cert. denied, 396 U.S. 841, 90 S. Ct. 104 (1969). Organization The terms “organization,” “trade,” “business” are broad- ly defined in Treas. Reg. § 1.482-1(a)(1) and (2). In Borge -v. Commisstoner, 405 F. 2d 673 (2d Cir. 1968), cert. denied, sub nom., Danica Enterprises, Inc. v. Commissioner, 395 U. S. 933, 89 S. Ct. 1994 (1969), this court found that an individual stockholder and his wholly owned corporation satisfied the two or more business prerequisite of .section 482. Certainly, Midtown, McCurdy and Forman satisfy this prerequisite. Control No definition of “control” is contained in section 482. It has been opined that this omission was intentional in order to allow for flexibility of administration. Plumb and Kapp, Reallocation of Income and Deductions Under Section 482, 41 Taxes 808, 811 (1963). : Guidelines for determining control are contained in’ Treas. Reg. 1.482-1(a) (3): : “The term ‘controlled’ includes any kind of control, di- rect or indirect, whether legally enforceable, and how- ever exercisable or exercised. It is the reality of the control which is decisive, not its form or the mode of its exercise. A presumption of control arises if income or deductions have been arbitrarily shifted.” A55d To the same effect see Treas. Regs. 39.45-1(a)(3) and annual Treasury regulations thereafter. As to “same interests,” there is no statutory definition and no Treasury regulations guidelines. In order to find control,-no percentage requirements are specified nor are any preeise requirements necessary. The trend:-in the recent ease law is to apply the realistic ap- proach. Borge v. Commissioner, supra; Hall v. Commis- stoner, 32 T. C. 390 (1959), aff’d., 294 F. 2d 82 (5th Cir. 1961); Grenada Industries, Inc. v..Commissioner, 17 T. C. 231 (1951), af?d., 202 F. 2d 873 (5th Cir.), cert. denied, 346 U.S. 819, 74S. Ct. 32 (1953). Despite the fact that these cases are all distinguishable on their facts, they lend support to the view that the Commissioner urges here. ‘In Borge v. Commissioner, supra, this Court held that an individual (the entertainer Victor Borge) and his wholly owned corporation, conducting a poultry business, were commonly controlled within the purview of § 482 and that the Commissioner was justified in allocating income from the corporation to Victor Borge, because the contract he- tween him and his wholly owned corporation would never have been made -between two unrelated parties dealing at arm’s length. In //all v. Commissioner, supra, the taxpayer (Hall) conducted a business indiyidually. Thereafter he formed a corporation and transferred nearly all of his shares of » stock of that corporation to his son. ‘The court upheld the allocation of income between Hall and the corporation under § 45 of the 1939 Code. It disregarded the issue of who actually owned the stock, holding that Hall, in fact, actively controlled the corporation, despite his contention that he had transferred ownership of the steck. The Tax A56 Court, in Ach v. Commissioner, 42 T. C. 114 (1964), aff’d., 358 F. 2d 342 (6th Cir.), cert. denied, 385 U. S. 899, 87 S. Ct. 205 (1966), restated its view that it is not the record ownership of stock which determines control; that control is to be determined by ascertaining who, in fact, has con- trol. In Grenada Industries, Inc. v. Commissioner, supra, two corporations and two partnerships were owned by four families in identical 35%-355-20%-10% proportions. In upholding an allocation of income among the four organi- zations, the court noted that it was immaterial that the record ownership of the ¢tock and the partnership inter. ests may not have been in the identical persons at the same time. Control was inferred from the actrons of the parties. If Midtown was the ereature of only one of the tax- payers, and all of its stock were owned by that single parent, ir., if Midtown were a strange creature having a father but no mother, the most rigid, literal wooden inter- pretation of section 482 woukl bring Miltown within the ambit of that section. It is the contention of the taxpayers. however, that section 482 is not applicable because Mil town is the normal chikl of a father and a mother, the product of an earthy relationship between MeCuniy and Forman, twentieth century parents exercising no control over their progeny. Midtown is the creation of a union of MeCunly and ‘Forman—not in holy matrimony but in a legitimate bes ness enterprise. Their interests in the existence and career of Midtown and the interests of Midtown are identical. To contend that these parents do not control their child is to fly in the face of reality. They have had complete control of Midtown from the day of conception (its in. | corporation) throughout the years relevant to this caer. A57 Every act of Midtown has been dictated by papa and momma who, directly or indirectly, have financed its ca- + reer and controlled its every move. In apparent disregard of the reality of the circumstances, the Tax Court helow looked only to the record ownership of Midtown. + Ignored was reality of the control of Mid- town. in withdrawing his acquiescence in Lake Erie, the Commissioner concluded that Lake Eric was inconsistent with the broad language of §482 and the trend of cases ‘liseussed supra, and noted that Lake Erie ignored the reality of the control in that case. ba if f Li 7 | ec Persil “This seems to be fallacious reasoning. One can \ardly maintain that the two railroads were competing with regarl to the arteies ( Fontmote comtumer! and was argued by counsel. ON CONSIDERATION WHEREOP, it is now hereby ordered, adjudged, and decreed that the order Aj4 of said The Tax Court of the United States be and it hereby is affirmed in part and reversed in part and that the action be and it hereby is remanded to said Tax Court for further proceedings in accordance with the opinion of this court with costs to be taxed against the petitioners-appellants, B. Forman Co. Ine., and MeCurdy & Co. Ine. A. DANTEL FUSARO, Clerk. United States Court of Appeals Second Circuit Filed, January 10, 1972 A. Daniel Fusaro, Clerk Cal. #’s 768-771 A true copy, /s/ A. Daniel Fusaro, Clerk. --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385606_0813%3A1. Public record. Not legal advice.