## Facts

- Two couples challenged income tax deficiencies for 1975 and 1976 arising from the IRS’s treatment of a closely held management company and two related garbage-collection corporations.
- Silvano Achiro and Peter Rossi each owned 50% of Tahoe City Disposal Co. and each owned 25% of Kings Beach Disposal Co.
- In 1974, Achiro and Rossi formed A & R Enterprises, Inc. (A & R) to provide management services to the two operating corporations.
- A & R’s stock was owned 24% by Achiro, 24% by Rossi, and 52% by Renato Achiro (Achiro’s brother and Rossi’s brother-in-law).
- A & R entered written management-services agreements with Tahoe City and Kings Beach under which A & R provided management services in exchange for fees.
- Achiro and Rossi executed exclusive employment contracts with A & R and performed management services for Tahoe City and Kings Beach as A & R employees.
- Tahoe City and Kings Beach deducted management fees as business expenses; A & R reported the fees as income and deducted salary and related expenses.
- The Commissioner issued deficiency notices reallocating A & R’s income and deductions to the operating corporations under I.R.C. § 482 and disallowed deductions for payments to A & R.
- In an amended answer, the Commissioner materially changed theories, asserting A & R was a sham, the arrangement was an assignment of income, and § 269 applied.
- The case also involved whether A & R’s employees had to be aggregated with Tahoe City’s employees under § 414(b) for § 401 qualified-plan nondiscrimination testing.

## Issues

1. Whether the Commissioner could reallocate all of A & R’s income and deductions to Tahoe City and Kings Beach under § 482 or § 269, or disregard A & R under sham-corporation or assignment-of-income theories.
2. If A & R was respected, whether the management fees paid to A & R were deductible by Tahoe City and Kings Beach as ordinary and necessary business expenses under § 162.
3. Whether A & R’s employees had to be aggregated with Tahoe City’s employees under § 414(b) for applying § 401 nondiscrimination rules to A & R’s pension and profit-sharing plans.

## Decision

- The Tax Court held A & R’s income and deductions were not reallocated to Tahoe City and Kings Beach under § 482.
- The Tax Court held § 269 did not justify reallocating A & R’s income and deductions to the operating corporations.
- The Tax Court held A & R was not a sham and would be respected for federal tax purposes.
- The Tax Court held the management-fee income was not reassigned to the operating corporations under the assignment-of-income doctrine.
- The Tax Court held the management fees paid by Tahoe City and Kings Beach were ordinary and necessary business expenses and were deductible.
- The Tax Court held A & R’s employees were aggregated with Tahoe City’s employees under § 414(b) for § 401 nondiscrimination testing of A & R’s qualified plans.

## Legal Principles

- A corporation formed and operated with real business activity, contractual relationships, and genuine functions will generally be respected for tax purposes and not disregarded as a sham solely because tax benefits result.
- The assignment-of-income doctrine does not apply where the purported earner (here, the management company) actually performs the services under bona fide contracts and therefore earns the related income.
- Section 482 reallocations require a showing that allocations among controlled entities distort income; absent proof that management fees were unreasonable or that income was not clearly reflected, a wholesale reallocation is improper.
- Section 269 applies to acquisitions of control principally motivated by tax avoidance; substantial non-tax business purposes for forming and using an entity weigh against § 269 disallowance.
- Payments for actual management services may qualify as deductible ordinary and necessary business expenses under § 162 when made for the stated purpose and supported by real services.
- Employee aggregation rules for qualified plans may apply even when corporate separateness is respected for income tax; under § 414(b), employees of commonly controlled corporations must be treated as a single group for § 401 nondiscrimination testing.

## Conclusion

The Tax Court upheld the separate tax existence of a management-services corporation and rejected the IRS’s attempts to reallocate its income and deductions under § 482, § 269, sham-entity, and assignment-of-income theories, while allowing the operating corporations’ deductions for bona fide management fees; however, it required controlled-group aggregation of employees for qualified-plan nondiscrimination purposes under § 414(b) and § 401.


Achiro v. Commissioner, 77 T.C. 881 (1981)