Achiro v. Commissioner

*882 Respondent determined deficiencies*50 in petitioners' income taxes as follows:

The issues for decision are:

(1) Whether respondent properly allocated all of the income and deductions of A & R to Tahoe City Disposal and Kings Beach Disposal under:

(a) Section 482; ¹

(b) Section 269; or

(c) Section 61 (sham corporation theory or assignment of income doctrine);

(2) In the alternative, whether amounts paid by Tahoe City Disposal and Kings Beach Disposal to A & R and designated as *883 management fees were expended for the purpose designated and were ordinary and necessary business expenses;

(3) Whether the employees of Tahoe City Disposal should be aggregated pursuant to section 414(b) with the employees of A & R for purposes of applying*51 the antidiscrimination provisions of section 401 to A & R's pension and profit-sharing plans.

FINDINGS OF FACT

Some of the facts have been stipulated and are found accordingly.

All the petitioners resided in Tahoe City, Calif., at the time they filed their petitions in these cases. ²

Petitioner Silvano Achiro (Achiro) became involved in the scavenger business in 1954 as a truck driver in San Francisco, Calif. In 1964, Achiro moved to Lake Tahoe where he and his uncle formed Tahoe City Disposal Co. Petitioner Peter Rossi (Rossi) became associated with Tahoe City Disposal in 1970. During all times relevant to this case, Achiro served as president and Rossi served as vice president of Tahoe City Disposal, and each owned one-half of its capital stock. Tahoe City Disposal has, since its incorporation, been engaged in the waste*52 collection business in Tahoe City, Calif., and it has always been qualified as a subchapter S corporation.

On May 9, 1972, Tahoe City Disposal executed an agreement with Placer County to manage a landfill operation; this landfill operation was treated as a division of Tahoe City Disposal under the name North Tahoe Sanitary Landfill. Petitioners controlled and managed all aspects of Tahoe City Disposal's business during all relevant times.

In late 1973, Hubert Knoll asked petitioners whether they were interested in acquiring an interest in his scavenger company in Kings Beach, Calif. At that time, Knoll and his daughter Jill Shaffer owned the entire business. On or about October 1, 1973, each petitioner acquired a 25-percent interest in Knoll's business, and Bud Shaffer (Shaffer), Knoll's son-in-law, acquired the remaining 50-percent interest. Petitioners and Shaffer operated this business as a partnership from *884 October 1, 1973, until its incorporation as Kings Beach Disposal Co. on December 12, 1973. The following chart shows Kings Beach Disposal's officers and shareholders during all times pertinent to this case:

*53 Kings Beach Disposal, since its incorporation, has been engaged in the waste collection business in Kings Beach, Calif., and has been taxed as a regular corporation. ³

Shaffer did not want to be involved in the management of Kings Beach Disposal. Accordingly, petitioners bore the burden of managing Kings Beach Disposal from its inception.

Both petitioners received monthly salaries from Tahoe City Disposal and Kings Beach Disposal for their services as officers and employees. Petitioners' salaries from these companies continued until March 31, 1975, after which time they received no direct salaries or compensation from them.

The following chart shows the number of employees, exclusive of petitioners, of Tahoe City Disposal and Kings Beach Disposal on the dates indicated:

On November 14, *54 1974, Achiro, Rossi, Carol Achiro, and Renato Achiro, in their capacities as incorporators and first directors, formed A & R Enterprises, Inc. (A & R). The following chart shows A & R's officers and shareholders during all times pertinent to this case: *885

Petitioners contributed A & R's initial $ 500 capitalization.

Renato Achiro (Renato) is Silvano Achiro's brother and Peter Rossi's brother-in-law. Renato became a 52-percent shareholder of A & R at his brother's suggestion. Silvano Achiro contributed that portion of A & R's initial capital attributable to Renato's stock. At the time Renato acquired his interest in A & R, he was not looking for this type of investment in the Lake Tahoe area. Renato received no dividends from A & R in 1975 or 1976, and the stock had no value to him in those years. He knew he owned a controlling interest in A & R, but never exercised control. Renato offered business advice to petitioners both before and after the formation of*55 A & R, but never received any compensation for such advice. Renato has never made any suggestions to A & R that would result in his earning any income from his A & R stock. Renato recognized that he would not make any money from his A & R stock unless he moved to Lake Tahoe and became actively involved in the business. Renato has never been actively involved in A & R's business as a shareholder, officer, or employee.

As set out in its articles of incorporation, one of A & R's express purposes is to provide management, consulting, and advisory services. On November 14, 1974, in furtherance of this purpose, A & R entered into agreements for management services with Tahoe City Disposal and Kings Beach Disposal. During the 20-year terms ⁴ of these management services contracts, A & R agreed to manage all facets of the disposal companies' operations. ⁵ In exchange for these management *886 services, each disposal company agreed to pay A & R a management fee and to reimburse A & R for all direct costs and expenses incurred in the performance of the contracted services. The disposal companies paid all management fees required by these contracts (including subsequent increases) *56 during the years in issue. The management fees paid by Tahoe City Disposal to A & R were expended for the purpose designated and were reasonable in amount.

In addition, on November 14, 1974, A & R also executed employment contracts with petitioners. Each employment contract was for a 5-year term. Pursuant*57 to these contracts, A & R employed Achiro as its president and general manager and Rossi as its treasurer and management consultant. Each petitioner agreed to devote his full time and energy to the performance of his duties under his contract. In addition, each petitioner agreed not to render services of a business or commercial nature to any other person or firm and not to engage in any activities competitive with or adverse to A & R's business or welfare. In exchange for petitioners' services, A & R agreed to pay each petitioner a salary plus an annual bonus and, in addition, to provide a death benefit plan and a wage continuation plan. Petitioners received their first salary payments from A & R in March 1975, covering the period from December 1974 through March 1975. All subsequent salary payments required under these employment contracts have been made. Petitioners have been the only employees of A & R since its incorporation.

A & R's books and records consisted of a bank statement, a checkbook, and a bankbook. In addition, A & R's accountants kept a record of receipts and disbursements, payroll records, a summary general ledger, workpapers, and tax information. A & R *58 had no separate office, its name did not appear on any office door or building, it had no separate telephone number or listing, and it had no printed business cards bearing its name. A & R did, however, have stationery bearing its name on the letterhead.

The following chart is a summary of A & R's income and *887 expenses for its fiscal years ending November 30, 1975, and 1976:

Petitioners' scavenger businesses have grown substantially since Achiro first moved to Lake Tahoe and started Tahoe City Disposal in 1964. By the time petitioners incorporated A & R, they were devoting most of their time and efforts to managerial and supervisory functions. Petitioners functioned as employees of A & R under valid exclusive*59 employment contracts. As employees of A & R, they rendered services to Tahoe City Disposal and Kings Beach Disposal as required by the management services contracts between A & R and the disposal companies. Petitioners' change of employment status from employees of Tahoe City Disposal and Kings Beach Disposal to employees of A & R did not alter the services rendered to Tahoe City Disposal and Kings Beach Disposal.

Effective December 1, 1974, A & R adopted the A & R Enterprises, Inc., Employees' Profit-Sharing Plan and the A & R Enterprises, Inc., Employees' Pension Plan. Petitioners were the only employees covered under A & R's plans. A & R made contributions to its plans in the following amounts:

Effective January 1, 1975, Tahoe City Disposal and Kings Beach Disposal adopted the North Tahoe Solid Waste Profit-Sharing *888 Plan (the North Tahoe P-S Plan) for the employees of these two companies. The disposal companies made contributions to the North Tahoe P-S Plan in the following*60 amounts:

The following chart summarizes selected provisions of A & R's pension and profit-sharing plans and the North Tahoe P-S Plan:

Petitioners' principal purpose in forming A & R and distributing 52 percent of its stock to Renato Achiro was to obtain the benefits of larger contributions to A & R's pension and profit-sharing plans of which they were the sole beneficiaries. It was understood that Renato*61 would not vote his stock or would vote it only in accordance with Achiro's direction.

In his notice of deficiency, respondent adjusted the income of Tahoe City Disposal by disallowing as deductions the management fees paid to A & R totaling $ 65,000 and $ 170,286 for the fiscal years ending March 31, 1975, and 1976, respectively. Respondent determined that these amounts were not expended for the purpose designated or were not ordinary and necessary business expenses. Respondent further adjusted Tahoe City Disposal's income by allowing it to take all the deductions for compensation, interest, depreciation, etc., originally taken by A & R, totaling $ 47,316 and $ 133,754 for the fiscal years ending March 31, 1975, and 1976, respectively. In so doing, respondent stated: "These allocations are made to *889 you [Tahoe City Disposal] from A & R Enterprises, Inc., in order to clearly reflect your income and A & R Enterprises, Inc. income."

At trial, respondent amended his answer and asserted that all of the income and deductions of A & R should be allocated to Tahoe City Disposal and Kings Beach Disposal pursuant to section 482, section 269, or section 61 (the assignment of income*62 doctrine or the sham corporation theory). In the alternative, respondent asserted in his amended answer that the employees of Tahoe City Disposal should be aggregated with the employees of A & R pursuant to section 414(b) for purposes of applying the antidiscrimination provisions of section 401 to A & R's pension and profit-sharing plans.

OPINION

As a preliminary matter it is necessary to decide which party bears the burden of proof with respect to the various issues.

At trial, respondent requested leave to file an amended answer, which this Court granted. In that amended answer, respondent alleged for the first time that section 482, section 269, or section 61 (assignment of income doctrine or the sham corporation theory) also justified the deficiency. The amended answer also contains the alternative argument that section 414(b) requires petitioners to include in their gross incomes their aliquot portions of the contributions made by A & R to its pension and profit-sharing plans.

In response to this amended answer, petitioners filed a motion to shift burden of proof with respect to the matters pleaded therein. Generally, the burden of proof is on the taxpayer. *63 Welch v. Helvering, 290 U.S. 111 (1933); Rule 142(a), Tax Court Rules of Practice and Procedure.Rule 142(a) provides:

The burden of proof shall be upon the petitioner, except as otherwise provided by statute or determined by the Court; and except that, in respect of any new matter, increases in deficiency, and affirmative defenses, pleaded in his answer, it shall be upon the respondent. * * * [Emphasis added.]

At trial, this Court agreed with petitioners that respondent's amended answer presented new matters under Rule 142(a)*890 and, accordingly, we shifted the burden of proof to respondent. On brief, respondent argues that the Court improperly shifted the burden of proof because his amended answer presented new theories, not new matters. He asserts that the statutory notice is sufficiently broad to encompass these theories and that petitioners knew at least as early as 5 weeks prior to trial that these theories would be relied upon by respondent and, thus, petitioners were neither surprised nor disadvantaged thereby. We are still of the view that respondent's amended answer raised new matters and that, therefore, respondent*64 bears the burden of proof.

The assertion of a new theory which merely clarifies or develops the original determination without being inconsistent or increasing the amount of the deficiency is not a new matter requiring the shifting of the burden of proof. Estate of Jayne v. Commissioner, 61 T.C. 744, 748-749 (1974); McSpadden v. Commissioner, 50 T.C. 478, 492-493 (1968); Estate of Sharf v. Commissioner, 38 T.C. 15, 27-28 (1962). However, if the assertion in the amended answer either alters the original deficiency or requires the presentation of different evidence, then respondent has introduced a new matter. Estate of Falese v. Commissioner, 58 T.C. 895, 898-899 (1972); McSpadden v. Commissioner, supra; Papineau v. Commissioner, 28 T.C. 54, 57 (1957); Tauber v. Commissioner, 24 T.C. 179, 185 (1955). The factual bases and rationale required to establish that the amounts paid by Tahoe City Disposal as management fees were expended for that purpose and were ordinary and*65 necessary business expenses are entirely different from the factual bases and rationale necessary to establish that sections 482, 269, 61, and 414(b) do not apply to the present situation. Sanderling, Inc. v. Commissioner, 66 T.C. 743, 757-758 (1976), affd. 571 F.2d 174 (3d Cir. 1978). Respondent's new positions raised in his amended answer require the presentation of new evidence and do not simply clarify or develop his original position.

Although we believe the general rules governing the burden of proof require the transfer of that burden to respondent with regard to his determination under section 482, we feel compelled to further comment on the specific burden of proof problems under section 482. Cases dealing with the burden of proof under section 482 have set up a three-tier approach in *891 determining whether respondent may assert section 482, and, if so, whether respondent or petitioner bears the burden of proof thereunder.

First, if the notice of deficiency is clear that respondent is relying on section 482 in support of his deficiency, then the burden is upon the taxpayer to establish that respondent's allocation*66 was unreasonable, arbitrary, or capricious. Brittingham v. Commissioner, 66 T.C. 373, 395 (1976), affd. 598 F.2d 1375 (5th Cir. 1979) (quoting Ach v. Commissioner, 42 T.C. 114, 125-126 (1964), affd. 358 F.2d 342 (6th Cir. 1966)).

Second, if respondent does not indicate in the notice of deficiency that he is relying on section 482, but alerts the taxpayer of his reliance on section 482 formally in pleadings far enough in advance of trial so as not to prejudice the taxpayer or take him by surprise at trial, then the burden of proof shifts to respondent to establish all the elements necessary to support his allocation under section 482. See Rubin v. Commissioner, 56 T.C. 1155, 1162-1164 (1971), affd. 460 F.2d 1216 (2d Cir. 1972); Rule 142(a), Tax Court Rules of Practice and Procedure. But see Abatti v. Commissioner, 644 F.2d 1385 (9th Cir. 1981), revg. a Memorandum Opinion of this Court.

Third, if respondent raises section 482 at such a late date that the principles of fair play *67 and justice would be abrogated by permitting him to rely on section 482, then he will not be allowed to rely on section 482 at all. United States v. First Security Bank, 334 F.2d 120, 122 n. 4 (9th Cir. 1964); Commissioner v. Chelsea Products, 197 F.2d 620, 624 (3d Cir. 1952), affg. 16 T.C. 840 (1951). See Abatti v. Commissioner, supra.

In the present case, petitioners' counsel admits that petitioners had notice of respondent's reliance on section 482 at least 5 weeks prior to the scheduled