Borge v. Commissioner - 405 F.2d 673 (2d Cir. 1968)

Rule:

When two or more organizations, trades or businesses, whether or not incorporated, are owned or controlled by the same interests I.R.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.

Facts:

From April 1952 through February 28, 1959, Victor Borge conducted a poultry business on a 400-acre farm in Connecticut under the name of ViBo Farms. Borge incurred substantial losses in his poultry business. 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). In an effort to avoid the application of Section 270, Borge organized Danica Enterprises, Inc., 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). The Commissioner, acting under Section 482 of the Internal Revenue Code of 1954, 26 U.S.C. § 482 (1964), allocated to Borge from Danica $75,000 per year from 1958 through 1961 and $25,000 for 1962. Moreover, the Commissioner, acting under Section 269 of the Internal Revenue Code of 1954, 26 U.S.C. § 269 (1964), 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. The Tax Court upheld the Commissioner’s decision, holding that Borge controlled two separate businesses and the principal purpose for which Borge acquired control of his newly formed corporation was evasion of federal income tax within the meaning of I.R.C. § 269 (1964). Borge appealed. 

Issue:

1.  Did the Commissioner, acting under Section 482 of the Internal Revenue Code of 1954, 26 U.S.C. § 482 (1964), properly allocate to Borge from Danica $75,000 per year from 1958 through 1961 and $25,000 for 1962?
2. Did the Commissioner, acting under Section 269 of the Internal Revenue Code of 1954, 26 U.S.C. § 269 (1964), properly disallow 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? 

Answer:

1) Yes. 2) Yes.

Conclusion:

Since Borge’s purpose in organizing the new corporation was avoidance of the loss limitation of I.R.C. § 270 (1964), the Commissioner did not act unreasonably in disallowing, under § 269, deductions for subsequent years in excess of the deductions which Borge would have denied if the new corporation had not been organized. According to the Court, Borge organized the new corporation in order to avoid the recomputation of taxes authorized by § 270. Accordingly, the judgment of the Tax Court was upheld.