Borge v. CIR

• Citation: 405 F.2d 673
• Decision Date: 17 December 1968
• Docket Number: Dockets 31903,31904.,16,No. 15,15
• Parties: Victor BORGE, Sanna Borge, and Danica Enterprises, Inc., Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: United States Courts of Appeals. United States Court of Appeals (2nd Circuit)

405 F.2d 673 (1968)

Victor BORGE, Sanna Borge, and Danica Enterprises, Inc., Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

Nos. 15, 16, Dockets 31903, 31904.

United States Court of Appeals Second Circuit.

Argued September 30, 1968.

Decided December 17, 1968.

Milton Young, New York City (Stephen S. Ziegler and Robert D. Howard, New York City, on the brief), for petitioners.

Louis M. Kauder, Atty., Dept. of Justice (Mitchell Rogovin, Asst. Atty. Gen., and Lee A. Jackson and Harry Baum, Attys., Dept. of Justice, on the brief), for respondent.

Before SMITH, KAUFMAN and HAYS, Circuit Judges.

HAYS, Circuit Judge:

Petitioners seek review of a decision of the Tax Court sustaining the Commissioner's determination of deficiencies in their income tax payments for the years 1958 through 1962, inclusive. The Tax Court upheld both the Commissioner's allocation to Borge¹ 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 Enterprises, Inc., Borge's wholly owned corporation, for services performed by Borge as an entertainer, and the Commissioner'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 excess of $50,000 per year, and of its loss carryovers.² We affirm.

From April 1952 through February 28, 1959, Borge conducted a poultry business on a 400-acre farm in Connecticut under the name of ViBo Farms. The farm business centered on and pioneered in the development and commercial sale of processed, quality chickens called rock cornish hens.

Borge incurred substantial losses in his poultry business.³ 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 conditions were unfavorable. Borge's tax consultant advised him that if the poultry losses for 1958 exceeded $50,000 the Commissioner would probably recompute Borge's taxes for each year that the losses had exceeded $50,000, pursuant to Section 270 of the Internal Revenue Code of 1954, 26 U.S.C. § 270 (1964).⁴ In an effort to avoid the application 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. During the years preceding the organization of Danica he made large sums from television, stage and motion picture engagements.

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 corporation under which Borge agreed to perform entertainment and promotional services for the corporation for a 5-year period for compensation from Danica of $50,000 per year. Danica offset the poultry losses⁵ against the entertainment profits, which far exceeded the $50,000 per year it had contracted to pay Borge.⁶ Borge obviously would not have entered into such a contract with an unrelated party.

Danica did nothing to aid Borge in his entertainment business. Those who contracted with Danica for Borge's entertainment services required Borge personally to guarantee the contracts. Danica's entertainment earnings were attributable solely to the services of Borge, and Danica's only 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 Commissioner, acting under Section 482 of the Internal Revenue Code of 1954, 26 U.S.C. § 482 (1964), properly allocated 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 its net loss carryovers for fiscal years 1960 through 1962.

I.

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 Commissioner 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.⁷ We conclude that the Commissioner could properly have found that for purposes of Section 482 Borge owned or controlled two businesses, an entertainment business and a poultry business, and that the allocation to Borge of part of the entertainment compensation paid to the corporation was not error.⁸

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 corporation, was in the poultry business.

Petitioners, relying primarily on Whipple v. Commissioner, 373 U.S. 193, 83 S.Ct. 1168, 10 L.Ed.2d 288 (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 operation of the corporation\'s business as distinguished from the trade or business of the taxpayer himself. When the only return is that of an investor, the taxpayer has not satisfied his burden of demonstrating that he is engaged in a trade or business since investing is not a trade or business and the return to the taxpayer, though substantially the product of his services, legally arises not from his own trade or business but from that of the corporation." 373 U.S. at 202, 83 S.Ct. at 1174.

Here, however, Borge was in the business of entertaining. He was not devoting his time and energies to the corporation; he was carrying on his career as an entertainer, 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 connection 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.C. 376 (1955); Fontaine Fox, 37 B.T.A. 271 (1938). Instead he recognizes the existence of the corporation, but under 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 provisions of the Code, precluded the Commissioner's action in this case under Section 482. We do not read those provisions, however, as the only available methods for dealing with the situations there involved. As the Third Circuit said in National Sec. Corp. v. Commissioner, 137 F.2d 600, 602 (3d Cir.), cert. denied, 320 U.S. 794, 64 S.Ct. 262, 88 L.Ed. 479 (1943),

"In every case in which Section 482 is applied its application 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 situations 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.

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, 87 S.Ct. 205, 17 L.Ed.2d 131 (1966).

The Commissioner's action in allocating a part of Danica's income to Borge was based upon his conclusion that such allocation was necessary 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, ...