## Facts

- Victor Borge was a well-known professional entertainer who earned substantial income from television, stage, and motion picture engagements.
- Separately, Borge operated a poultry business on a Connecticut farm (ViBo Farms) that pioneered processed “rock cornish hens” and sustained heavy losses; for each of 1954–1957, losses exceeded $50,000, and losses continued into early 1958 amid unfavorable market conditions.
- Borge’s tax adviser warned that if 1958 poultry losses exceeded $50,000, the Commissioner might recompute prior years’ taxes under I.R.C. § 270.
- To reduce the risk of § 270 consequences, Borge formed Danica Enterprises, Inc. (Danica), a corporation wholly owned and controlled by him.
- On March 1, 1958, Borge transferred the poultry business assets (excluding the farm real property) to Danica in exchange for all of Danica’s stock and a loan payable.
- Because Danica had no independent source of funds to absorb continued poultry losses, Borge and Danica entered a five-year contract under which Borge agreed to perform entertainment and publicity-related services for Danica for $50,000 per year.
- Danica’s only meaningful income during 1958–1962 came from receipts attributable to Borge’s personal entertainment performances; Danica did not arrange Borge’s entertainment contracts or otherwise provide material services in the entertainment business.
- Over the relevant period, Borge generated average annual income for Danica far exceeding his $50,000 annual compensation (reported in summaries as about $166,465 per year).
- The Commissioner determined deficiencies for 1958–1962 by:
  - allocating to Borge, under I.R.C. § 482, a portion of the income received by Danica for Borge’s entertainment services (reported as $75,000 per year for 1958–1961 and $25,000 for 1962); and
  - disallowing, under I.R.C. § 269, Danica’s poultry-business loss deductions in excess of $50,000 per year and disallowing related loss carryovers.
- The Tax Court sustained the Commissioner’s determinations, and the petitioners sought review in the Second Circuit.

## Issues

1. Whether the Commissioner properly allocated to Borge, under I.R.C. § 482, a portion of income received by his wholly owned corporation for entertainment services personally performed by Borge.
2. Whether the Commissioner properly disallowed, under I.R.C. § 269, Danica’s poultry-business loss deductions in excess of $50,000 per year and related loss carryovers because control and use of the corporation was principally for tax evasion or avoidance.

## Decision

- The Second Circuit affirmed the Tax Court.
- The court upheld the Commissioner’s § 482 allocation attributing to Borge a portion of Danica’s entertainment income derived from Borge’s personal services.
- The court upheld the Commissioner’s § 269 disallowance of Danica’s poultry losses above $50,000 per year and the related loss carryovers.
- Certiorari was denied by the Supreme Court.

## Legal Principles

- Under I.R.C. § 482, the Commissioner may allocate income among commonly owned or commonly controlled organizations, trades, or businesses when necessary to clearly reflect income or to prevent tax evasion.
- When a controlled corporation receives income that is, in substance, earned through an individual’s personal services—and the corporation provides little or no meaningful business function related to generating that income—the Commissioner may attribute a portion of that income to the individual who performed the services.
- Courts generally sustain a § 482 allocation unless the taxpayer shows the Commissioner acted unreasonably, arbitrarily, or capriciously.
- Under I.R.C. § 269, the Commissioner may disallow deductions, credits, or other allowances when control of a corporation is acquired (or a corporation is used) with the principal purpose of evading or avoiding federal income tax.
- A corporate structure formed and used mainly to obtain tax benefits—such as channeling personal-service income into a corporation to absorb and use business losses and avoid unfavorable Code provisions—can support denial of deductions and carryovers under § 269.

## Conclusion

Borge formed and controlled Danica, moved his loss-producing poultry business into it, and routed his entertainment receipts to the corporation while it performed no meaningful entertainment-related functions; the Second Circuit therefore upheld the Commissioner’s reallocation of part of Danica’s entertainment income to Borge under § 482 and the denial of Danica’s excess poultry-loss deductions and carryovers under § 269 because the arrangement was chiefly tax-motivated and distorted taxable income.


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