405 F.2d 673
This was an appeal from an order of the Tax Court which entered judgment in favor of respondent in an action alleging deficiencies in petitioners' income tax payments.
-Petitioners, husband and wife, sought review of a decision for respondent tax commissioner finding deficiencies in petitioners' income tax payments.
-Borge, the Plaintiff, produced and sold poultry.
-He sustained considerable losses each year.
-In 1958, Borge formed Danica Enterprises, Inc. (Danica) and transferred the poultry business to the corporation.
-At the time, Borge earned substantial income as an entertainer.
-Borge assigned to Danica the rights to his services as an entertainer for five years in exchange for a $50,000 annual salary.
-Danica received entertainment profits far greater than the $50,000 that was paid to Borge.
-Because of this, Danica was able to offset its losses from the poultry business against the entertainment profits that were received through Borge.
-During this period, Danica’s sole source of income was through Borge’s entertainment profits.
-However, Danica did not arrange any entertainment contracts for Borge nor did she provide any other assistance to Borge in his entertainment business.
-During the five-year period from 1958–1962, Borge made an average of $166,465 for Danica.
-Under 26 U.S.C. § 482, the Commissioner (the Defendant) designated $75,000 of Danica’s annual income from 1958–1961, as well as $25,000 of Danica’s income for 1962, as personal income to Borge.
The tax court held that petitioner husband controlled two separate businesses and the principal purpose for which petitioner husband acquired control of his newly formed corporation was evasion of federal income tax within the meaning of I.R.C. § 269 (1964).
-Since petitioner husband's purpose in organizing the new corporation was avoidance of the loss limitation of I.R.C. § 270 (1964), respondent did not act unreasonably in disallowing, under § 269, deductions for subsequent years in excess of the deductions which petitioner husband would have been denied if the new corporation had not been organized.
-Petitioner husband organized the new corporation in order to avoid the recomputation of taxes authorized by § 270.
OUTCOME: The judgment finding the principal purpose for which petitioner husband acquired control of his newly formed corporation was evasion of federal income tax was upheld, because the purpose in organizing the new corporation was, in fact, avoidance of the loss limitation.
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