Achiro v. Comm'r of Internal Revenue
| Decision Date | 19 October 1981 |
| Docket Number | Docket Nos. 467-79,468-79. |
| Citation | 77 T.C. 881 |
| Parties | SILVANO ACHIRO and CAROL ACHIRO, PETITIONERS v. COMMISSIONER of INTERNAL REVENUE, RESPONDENTPETER ROSSI and GEMMA ROSSI, PETITIONERS v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Achiro and Rossi each owned 50 percent of the stock of Tahoe City Disposal, and each owned 25 percent of the stock of Kings Beach Disposal. In 1974, Achiro and Rossi incorporated A & R for the purpose of rendering management services to Tahoe City Disposal and Kings Beach Disposal. Achiro and Rossi each owned 24 percent of A & R's stock, and Renato Achiro (Achiro's brother and Rossi's brother-in-law) owned the remaining 52 percent. A & R entered into management service agreements with Tahoe City Disposal and Kings Beach Disposal pursuant to which A & R provided those corporations with management services and, in exchange, received management fees. Achiro and Rossi entered into exclusive employment contracts with A & R, and, acting in their capacities as A & R's employees, rendered management services to Tahoe City Disposal and Kings Beach Disposal. Held:
1. A & R's income and deductions are not allocated pursuant to sec. 482, I.R.C. 1954, to Tahoe City Disposal and Kings Beach Disposal;
2. A & R's income and deductions are not allocated pursuant to sec. 269 to Tahoe City Disposal and Kings Beach Disposal;
3. A & R is not a sham and should not be disregarded for tax purposes;
4. A & R's income and deductions are not assigned pursuant to the assignment of income doctrine to Tahoe City Disposal and Kings Beach Disposal;
5. The management fees paid by Tahoe City Disposal and Kings Beach Disposal were expended for the purpose designated and were ordinary and necessary expenses; and
6. The employees of A & R are aggregated pursuant to sec. 414(b) with the employees of Tahoe City Disposal for purposes of applying the antidiscrimination provisions of sec. 401 to A & R's pension and profit-sharing plans. Alvin R. Wohl and Michael P. Casterton, for the petitioners.
Woodford G. Rowland, for the respondent.
Respondent determined deficiencies 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 ();
(2) In the alternative, whether amounts paid by Tahoe City Disposal and Kings Beach Disposal to A & R and designated as 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 the antidiscrimination provisions of section 401 to A & R's pension and profit-sharing plans.
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 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 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:
+---------------------------------------------------------------+
¦ ¦ ¦Percentage ownership ¦
+---------------------+------------------+----------------------¦
¦Shareholder/officer ¦Corporate office ¦of capital stock ¦
+---------------------+------------------+----------------------¦
¦ ¦ ¦ ¦
+---------------------+------------------+----------------------¦
¦Shaffer ¦President ¦50% ¦
+---------------------+------------------+----------------------¦
¦Achiro ¦Vice president ¦25% ¦
+---------------------+------------------+----------------------¦
¦Rossi ¦Treasurer ¦25% ¦
+---------------------+------------------+----------------------¦
¦Jill Shaffer ¦Secretary ¦0 ¦
+---------------------+------------------+----------------------¦
¦ ¦ ¦100% ¦
+---------------------------------------------------------------+
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:
+----------------------------------------------------------+
¦ ¦Tahoe City Disposal ¦Kings Beach Disposal ¦
+-------------+---------------------+----------------------¦
¦ ¦ ¦ ¦
+-------------+---------------------+----------------------¦
¦Dec. 31, 1975¦9 ¦3 ¦
+-------------+---------------------+----------------------¦
¦Dec. 31, 1976¦10 ¦4 ¦
+-------------+---------------------+----------------------¦
¦Dec. 31, 1977¦11 ¦4 ¦
+----------------------------------------------------------+
On November 14, 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:
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 A & R, but never received any compensation for such advice. Renato has never...
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