Filed: Feb. 16, 2000
Latest Update: Mar. 02, 2020
Summary: RECOMMENDED FOR FULL-TEXT PUBLICATION 16 Kenco Restaurants, et al. Nos. 98-2416/ Pursuant to Sixth Circuit Rule 206 v. Commissioner 2417/2418/2420 ELECTRONIC CITATION: 2000 FED App. 0057P (6th Cir.) File Name: 00a0057p.06 failure to make a reasonable attempt to comply with the provisions of this title . . . .” I.R.C. § 6662(c). It has also UNITED STATES COURT OF APPEALS been defined as a “lack of due care or a failure to do what a reasonable and prudent person would do under the FOR THE SIXTH CI
Summary: RECOMMENDED FOR FULL-TEXT PUBLICATION 16 Kenco Restaurants, et al. Nos. 98-2416/ Pursuant to Sixth Circuit Rule 206 v. Commissioner 2417/2418/2420 ELECTRONIC CITATION: 2000 FED App. 0057P (6th Cir.) File Name: 00a0057p.06 failure to make a reasonable attempt to comply with the provisions of this title . . . .” I.R.C. § 6662(c). It has also UNITED STATES COURT OF APPEALS been defined as a “lack of due care or a failure to do what a reasonable and prudent person would do under the FOR THE SIXTH CIR..
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RECOMMENDED FOR FULL-TEXT PUBLICATION
16 Kenco Restaurants, et al. Nos. 98-2416/ Pursuant to Sixth Circuit Rule 206
v. Commissioner 2417/2418/2420 ELECTRONIC CITATION: 2000 FED App. 0057P (6th Cir.)
File Name: 00a0057p.06
failure to make a reasonable attempt to comply with the
provisions of this title . . . .” I.R.C. § 6662(c). It has also UNITED STATES COURT OF APPEALS
been defined as a “lack of due care or a failure to do what a
reasonable and prudent person would do under the FOR THE SIXTH CIRCUIT
circumstances.” Hofstetter v. Commissioner, 98 T.C. 695, _________________
704 (1992). We find and conclude that Petitioners allocated
BKK’s management fees on the ability of each Group
;
member to pay.
KENCO RESTAURANTS, INC.
(98-2416); K-K
RESTAURANTS, INC.
Nos. 98-2416/
(98-2417); TIFFIN AVENUE
2417/2418/2420
REALTY COMPANY, INC. >
(98-2418); BRYAN REALTY,
INC. (98-2420),
Petitioners-Appellants,
v.
COMMISSIONER OF INTERNAL
Respondent-Appellee.
REVENUE,
1
On Appeal from the United States Tax Court.
Nos. 95-15949; 95-15950; 95-15951; 95-15952
Argued: December 10, 1999
Decided and Filed: February 16, 2000
1
2 Kenco Restaurants, et al. Nos. 98-2416/ Nos. 98-2416/ Kenco Restaurants, et al. 15
v. Commissioner 2417/2418/2420 2417/2418/2420 v. Commissioner
Before: BOGGS and SUHRHEINRICH, Circuit Judges; so did its fees.5 GMK’s fees increased more than 900%
POLSTER, District Judge.* between 1990 and 1992, and its share of the total fees
increased by a factor of seven. However, no evidence was
_________________ presented that there was a corresponding increase in Owner
hours. In 1990, Kenco required special attention to rebuild
COUNSEL the restaurant. Yet, in 1991, the fee allocated to it was higher
than 1990. There is no claim that K-K required special
ARGUED: John D. Steffan, STEFFAN & ASSOCIATES, attention in 1992, but its fee was higher in 1992 than in 1991.
Fairfax, Virginia, for Appellants. Charles F. Marshall, U.S. Perrysburg was charged $29,000 in 1990, $60,415 in 1991,
DEPARTMENT OF JUSTICE, APPELLATE SECTION and $42,700 in 1992, but Petitioners provided no explanation,
TAX DIVISION, Washington, D.C., for Appellee. in terms of services, that would account for these differences.
ON BRIEF: John D. Steffan, STEFFAN & ASSOCIATES,
Fairfax, Virginia, for Appellants. Charles F. Marshall, Teresa The third issue we address is whether Petitioners are liable,
E. McLaughlin, U.S. DEPARTMENT OF JUSTICE, under § 6662(a) of the Internal Revenue Code, for accuracy-
APPELLATE SECTION TAX DIVISION, Washington, D.C., related penalties due to their negligence. Petitioners contend
for Appellee. that the facts do not support the imposition of negligence
penalties because Petitioners never made adjustments based
_________________ upon the ability or inability of a Group member to pay.
However, the Commissioner contends that Petitioners
OPINION allocated fees based on each Group member’s ability to pay.
_________________
SUHRHEINRICH, Circuit Judge. The Commissioner of We review an imposition of § 6662(a) “negligence”
the Internal Revenue Service (“Commissioner”) sent penalties for clear error. See Leuhsler v. Commissioner, 963
Petitioners notices of deficiency that reallocated fees F.2d 907, 910 (6th Cir. 1992); see also Sacks v.
Petitioners paid for management and administrative services. Commissioner, 82 F.3d 918, 920 (9th Cir. 1996).
The notices of deficiency also imposed accuracy-related “Commissioner’s assessment of a negligence penalty is
penalties. Petitioners filed separate petitions in the United presumptively correct, and the taxpayer has the burden of
States Tax Court seeking a redetermination of the deficiencies proving that an underpayment was not due to his negligence
and accuracy-related penalties. . . . .”
Leuhsler, 963 F.2d at 910.
The tax court sustained the reallocations and penalties If there is an underpayment of tax on a return, a penalty in
because Petitioners failed to overcome the presumption of the amount of twenty percent of the underpayment is
correctness afforded to the notices of deficiency. Petitioners imposed. See I.R.C. § 6662(a). This applies to the portion of
appeal. We AFFIRM. the underpayment that is attributable to negligence. See
I.R.C. § 6662(b)(1). “Negligence” is defined to include “any
5
* The Tax Court suspected “that Wapak’s insufficient cash-flow was
The Honorable Dan A. Polster, United States District Judge for the the determinant factor in BKK’s management decision not to allocate
Northern District of Ohio, sitting by designation. Wapak a management fee in 1990.” We agree.
14 Kenco Restaurants, et al. Nos. 98-2416/ Nos. 98-2416/ Kenco Restaurants, et al. 3
v. Commissioner 2417/2418/2420 2417/2418/2420 v. Commissioner
Petitioners must show that their own allocations reflect an I.
arm’s-length charge. See DHL Corp. & Subs. v.
Commissioner, 76 T.C.M. 1122, 1145 (1998); see also Petitioners-Appellants, Kenco Restaurants, Inc. (“Kenco”);
Treas. Reg. § 1.482-1(b). This is accomplished by providing K-K Restaurants, Inc. (“K-K”); Tiffin Avenue Realty Co.,
evidence of similar transactions between uncontrolled Inc. (“Tiffin”); and Bryan Realty, Inc. (“Bryan”) (collectively
taxpayers. See Lufkin Foundry & Machine Co., 468 F.2d at “Petitioners”), are members of a commonly owned group of
808; see also Treas. Reg. § 1.482-2(b)(3). fourteen corporations (collectively “Group”). During the
years 1990 through 1992, George Kentris (“G. Kentris”),
For this first burden, the Commissioner is not required to Michael Kentris (“M. Kentris”), and Kenneth Baerwaldt
support the notice of deficiency with proof because courts (“Baerwaldt”), either individually or with their wives
generally do not examine the underlying motives or policy of (collectively “Owners”), owned equal shares of the Group.
the Commissioner’s determination. See Pasternak v.
Commissioner, 990 F.2d 893, 898 (6th Cir. 1993). Also, Of the fourteen Group members, thirteen either own and
when determining whether the Commissioner’s reallocation operate one or more Taco Bell restaurants (“Restaurant
is reasonable, courts focus on the reasonableness of the result Corporations”) or own the real estate (“Realty Corporation”)
and not the details of the methodology employed. See on which another member of the Group operates a Taco Bell
Seagate Tech., Inc. & Consol. Subs. v. Commissioner, 102 restaurant. The following is a chart identifying the thirteen
T.C. 149, 164 (1994); see also Bausch & Lomb, Inc. v. Restaurant and Realty Corporations:
Commissioner,
92 T.C. 525, 582 (1989).
Restaurant Realty
Under the second burden, which only arises after Corporations Location Corporations
Petitioners have satisfied the first burden, Petitioners “still K-K Findlay, OH Tiffin
have the burden of proving that their own allocation satisfies K-K Findlay, OH Trenton Ave. Realty
the arm’s length standard.” Inverworld, Inc. v. Kenco Lima, OH Harding Highway Realty
Commissioner, 71 T.C.M. 3231, 3237-62 (1996); see Kenco Lima, OH Allentown Road Realty
also Achiro v. Commissioner,
77 T.C. 881, 900 (1981). If Bowling Green Bowling Green, OH Bowling Green
GMK Defiance, OH unrelated corporation
Petitioners fail to carry this burden, the tax court must Perrysburg Perrysburg, OH Perrysburg
determine a proper allocation based on the record. See Wapak Wapakoneta, OH Apollo Drive Realty
Inverworld, Inc., 71 T.C.M. at 3237-62 (citing Eli Bryan Rest. Bryan, OH Bryan
Lilly 7
Co, 856 F.2d at 860).
The fourteenth Group member, BKK Management, Inc.
We conclude that Petitioners’ allocations are not an arm’s- (“BKK”), neither owns a Restaurant Corporation nor owns a
length charge because Petitioners provide no evidence of an Realty Corporation. Instead, BKK provides management and
independent transaction between unrelated parties in similar administrative services to the thirteen Group members and
circumstances. Also, the facts support our conclusion that bills each Group member for these services. These services
Petitioners were not dealing at arm’s length but were, instead, are not in dispute and, according to the tax court’s opinion,
allocating their costs based on an ability to pay. Petitioners include “accounting and administrative services, advertising,
charged Wapak, a Restaurant Corporation, no management coordination and installation of Taco Bell menus,
fee in 1990, but when its income increased in 1991 and 1992, renovations, remodeling and repairs, building and equipment
4 Kenco Restaurants, et al. Nos. 98-2416/ Nos. 98-2416/ Kenco Restaurants, et al. 13
v. Commissioner 2417/2418/2420 2417/2418/2420 v. Commissioner
maintenance, insurance coverage, training, inspections, and Treas. Reg. § 1.482-2(b)(7)(ii)(a).
contracting.” Kenco Restaurants, Inc. v. Commissioner, 76
T.C.M. 512, 513 (1998). The services are performed We conclude that BKK’s performance of services for other
by Owners and BKK’s support staff, and BKK pays their Group members is an “integral part” of its business activity
salaries. Baerwaldt and M. Kentris provide the operational and that an arm’s-length charge is equal to “the amount which
management of the restaurants, and G. Kentris, an attorney, was charged or would have been charged” for same or similar
works half as many hours as the former two and is responsible services “in independent transactions with or between
for the Group’s administrative and legal needs, which include unrelated parties under similar circumstances.” Treas. Reg.
payroll, contracts, finances, and legal matters. § 1.482-2(b)(3). We reach this conclusion because BKK is a
member of a controlled group and renders services as its
All costs that BKK incurs for providing these services are principal activity.
allocated to Group members as a “management cost share”
fee. These fees have two categories: payroll related (salaries, The Group members are members of a “controlled group,”
employment taxes, and health benefits) and incidental (office as used in Treasury Regulation § 1.482-2(b)(7)(ii), because
supplies, telephone charges, and rent). Approximately 85 each Group member is a “controlled taxpayer.” “Controlled
percent of BKK’s payroll related costs are attributable to taxpayer” is defined as “any one of two or more
Owners, and approximately 15 percent are attributable to the organizations, trades, or businesses owned or controlled
support staff. directly or indirectly by the same interests.” Treas. Reg.
§ 1.482-1(a)(4). In the instant case, Petitioners are controlled
Petitioners contend that BKK’s payroll related costs were taxpayers because it is undisputed that they are commonly
allocated according to the number of hours each Owner spent owned corporations and are owned equally by Owners. Also,
with each Group member. For an upcoming year, the Owners BKK renders services to Group members as its principal
projected the hours they would spend with each Group activity because the parties have stipulated that the primary
member based on the hours they spent the previous year. purpose of BKK is to provide services to Group members.
Then, they adjusted their projections for upcoming projects Thus, both the “25 percent test” and the “facts and
and reevaluated them at midyear. However, the Owners did circumstances test” of Treasury Regulation § 1.482-2(b)(7)(ii)
not maintain time logs or written documents recording their are satisfied.
actual hours. Petitioners further contend that BKK allocated
its incidental costs to Group members based on their Now that we have defined an arm’s-length charge, we must
consumption. next determine whether Petitioners have overcome two
burdens of proof. Under the first burden, Petitioners must
The fees that Group members paid to BKK are reflected in prove that the Commissioner’s reallocations are wrong,
the following chart. To the right of each fee is the percentage because the notices of deficiency have a presumption of
that the fee represents of BKK’s total annual fees. correctness. See Welch v. Helvering, 290 U.S. 111, 115
(1933). This presumption is overcome if Petitioners prove
that the reallocations contained in the notices of deficiency
are arbitrary, capricious, or unreasonable. See Spicer Theatre
Inc., 346 F.2d at 706; see also Eli Lilly &
Co. 856 F.2d at
860. To prove arbitrary, capricious, or unreasonable,
12 Kenco Restaurants, et al. Nos. 98-2416/ Nos. 98-2416/ Kenco Restaurants, et al. 5
v. Commissioner 2417/2418/2420 2417/2418/2420 v. Commissioner
is “the amount which was charged or would have been Restaurant Corporations
charged for the same or similar services in independent 1990 1991 1992
transactions with or between unrelated parties under similar **
Kenco FEE / % 313,700.00/43.0% 413,000.00/42.3% 389,000.00/33.5%
circumstances considering all relevant facts.” Treas. Reg.
K-K** FEE / % 279,650.00/39% 283,500.00/29% 380,600.00/32.9%
§ 1.482-2(b)(3).
GMK FEE / % 9,100.00/1.0% 21,700.00/2.2% 87,200.00/7.5%
Of the four situations that the regulations consider an Perrysburg FEE / % 29,000.00/4.0% 60,415.00/6.2% 42,700.00/3.7%
“integral part of the business activity,”3 the most applicable Bowling
to the instant facts is Treasury Regulation 1.482-2(b)(7)(ii). Green FEE / % 30,500.00/4.2% 82,000.00/8.4% 112,000.00/9.7%
In this section, “[s]ervices are an integral part of the business Wapak FEE / % 0.00/0.0% 29,600.00/3.0% 52,366.00/4.5%
activity of a member of a controlled group where the renderer
renders services to one or more related parties as one of its Bryan
Rest. FEE / % --------- --------- 6,000.00/0.5%
principal activities.” Treas. Reg. § 1.482-2(b)(7)(ii). Services
are considered “principal activities” if the following two tests4 Realty Corporations
are satisfied. First, the renderer’s cost of services
“attributable to the rendition of services for the taxable year 1990 1991 1992
to related parties” must exceed “25 percent of the total costs Tiffin** FEE / % 28,000.00/3.9% 31,000.00/3.2% 26,000.00/2.2%
or deductions of the renderer for the taxable year [25 percent Trenton FEE / % 12,000.00/1.7% 14,500.00/1.5% 16,100.00/1.4%
test].” Treas. Reg. § 1.482-2(b)(7)(ii)(a). Second, the facts Allentown FEE / % 2,000.00/0.3% 8,700.00/0.9% 11,100.00/1.0%
and circumstances determine whether the rendition of services
to related parties is one of the principal activities of the Harding
Highway FEE / % 18,000.00/2.5% 24,000.00/2.5% 25,000.00/2.2%
renderer (“facts and circumstances test”). See Treas. Reg.
§ 1.482-2(b)(7)(ii)(a). The regulations consider six factors: Apollo FEE / % 3,000.00/0.4% 7,700.00/0.8% 7,200.00/0.6%
Bryan** FEE / % --------- --------- 3,000.00/0.3%
the time devoted to the rendition of the services, the
relative cost of the services, the regularity with which the After an audit, IRS Agent Camper (“Camper”) calculated
services are rendered, the amount of capital investment, the reallocations of BKK’s management fees to reflect each
the risk of loss involved, and whether the services are in Group member’s yearly gross sales.1 These reallocations
the nature of supporting services or independent of the decreased the share of BKK fees claimed by each Petitioner
other activities of the renderer. and thus decreased each Petitioner’s deductions.
Consequently, the lowered deductions increased each
Petitioner’s taxable income and created a disparity between
3
Subdivisions (i) through (iv) describe those situations that are **
considered an “integral part of the business activity.” See Treas. Reg. Petitioners on appeal.
§§ 1.482-2(b)(7)(i) through (iv).
1
4 Camper testified that she used the gross sales method because
Cost of services includes “all costs or deductions directly or Petitioners provided no actual time logs or any other information from
indirectly related to the rendition of such services.” Treas. Reg. § 1.482- which Camper could calculate the actual hours Owners spent with each
2(b)(7)(ii)(b). Group member.
6 Kenco Restaurants, et al. Nos. 98-2416/ Nos. 98-2416/ Kenco Restaurants, et al. 11
v. Commissioner 2417/2418/2420 2417/2418/2420 v. Commissioner
the taxable income as represented by Petitioners and the order to prevent evasion of taxes or clearly to reflect the
taxable income as represented by the Commissioner’s income of any of such organizations, trades, or
reallocations. The notices of deficiency that the businesses . . . .
Commissioner mailed separately to each Petitioner on June
13, 1995, reflect this disparity. The deficiencies and their I.R.C. § 4822.
accuracy-related penalties (20 percent) are illustrated in the
following chart: The “purpose of section 482 is to place a controlled
taxpayer on a tax parity with an uncontrolled taxpayer . . . .”
Petitioners Year Deficiency Penalty Total Commissioner v. First Security Bank of Utah, 405 U.S. 394,
Kenco 1990 $36,664.00 $7,333.00 $43,997.00
400 (1972). If an arrangement between related parties differs
from those reached in an uncontrolled, arm’s-length dealing,
Kenco 1991 23,068.00 4,614.00 27,682.00 the Commissioner may reallocate under section 482. See
Lufkin Foundry and Machine Co. v. Commissioner, 468 F.2d
K-K 1990 35,056.00 7,011.00 42,067.00 805, 807 n.2 (5th Cir. 1972) (citing Spicer Theatre, 346 F.2d
K-K 1991 18,962.00 3,792.00 22,754.00 at 706). This authority includes reallocating charges among
controlled corporations for “marketing, managerial,
K-K 1992 21,304.00 4,261.00 25,566.00 administrative, technical, or other services” that do not
Tiffin 1990 4,772.00 954.00 5,726.00
represent an arm’s-length charge. See Treas. Reg. § 1.482-
2(b)(1).
Tiffin 1992 4,124.00 825.00 4,949.00
Whether the notices of deficiency are arbitrary, capricious,
Bryan 1992 174.00 35.00 209.00 or unreasonable depends, in part, on whether the charges were
TOTAL $184,435.00 $36,887.00 $221,323.00 arm’s length. If the charges were equivalent to charges made
at arm’s length, then Petitioners have satisfied their burden of
On August 18, 1995, Petitioners filed separate petitions in proving that the notices of deficiency are arbitrary, capricious,
the United States Tax Court for a redetermination of the or unreasonable. The regulations of section 482 govern the
deficiencies and accuracy-related penalties. These petitions definition of an arm’s-length charge.
were consolidated at trial.
If BKK’s services are not an “integral part of the business
At trial, the Commissioner retained Sharon Moore activity,” then an arm’s-length charge is generally equal to the
(“Moore”), a business valuation expert with Alpha Consulting costs or deductions incurred in rendering such services. See
Alliance, to decide whether BKK’s fee allocations were Treas. Reg. § 1.482-2(b)(3). However, if BKK’s services are
consistent with an arm’s-length transaction. Moore an “integral part of the business activity,” then the costs or
determined that Petitioners’ allocations were not arm’s length deductions incurred are not an arm’s-length charge. See
and devised her own time-based allocations. To calculate Treas. Reg. § 1.482-2(b)(7). Rather, an arm’s-length charge
these time-based allocations, Moore used the hours that each
Owner and BKK employee spent in performing services for
each Group member, which Moore obtained through 2
Unless otherwise indicated, all section references are to the Internal
interviews with Owners and BKK employees, rather than Revenue Code and its Regulations that are in effect for the taxable years
in issue.
10 Kenco Restaurants, et al. Nos. 98-2416/ Nos. 98-2416/ Kenco Restaurants, et al. 7
v. Commissioner 2417/2418/2420 2417/2418/2420 v. Commissioner
deficiency are arbitrary, capricious, or unreasonable. Because adopting Petitioners’ method of using only Owner hours.
deficiency notices have a presumption of correctness, Moore included the projected hours of a district manager, a
Petitioners have the burden of overcoming this presumption maintenance man, and BKK’s in-house accountant
by proving that their initial allocations were arm’s length. (“Borsani”). In contrast to Petitioners’ allocations, Moore
weighed Owner and employee hours equally because Moore
Petitioners contend that the Commissioner’s reallocation found that both Owners and employees performed similar
method is arbitrary, capricious, or unreasonable for the operational tasks. Moore then converted the total hours
following three reasons. First, the Commissioner’s allocated to each Group member into a corresponding fee
methodology ignores the special situations that justified allocation and concluded that her time-based allocations were
Petitioners’ initial allocations. Second, Petitioners contend more consistent with an arm’s-length charge than were
that their fee allocation is reasonable and arm’s length Petitioners’ allocations.
because it represents the actual time spent on managing and
operating each Group member. Petitioners further argue that However, Moore’s allocations pertained only to the six
these records were in fact created and monitored even though Restaurant Corporations. Moore neither addressed any fees
they were inadvertently destroyed. Third, Moore, the attributable to the Realty Corporations nor allocated any fees
Commissioner’s expert, conceded that Petitioners’ method of to Bryan Restaurant, Inc., which was created in 1992.
allocating time was reasonable because Moore’s method is
identical and differs only as to hours. At trial, Petitioners disputed Moore’s time-based
allocations because Moore never considered special
The Commissioner contends that Petitioners have failed to circumstances that varied the time that Owners dedicated to
show that the reallocations contained in the notice of particular Group members. Specifically, these special events
deficiency are arbitrary, capricious, or unreasonable. In the include a fire that demolished a Kenco restaurant in 1990, a
alternative, the Commissioner contends that assuming we find scrape and rebuild of a K-K restaurant in 1990, a unique
the notices of deficiency arbitrary, capricious, or employment problem in 1990 (i.e., civil rights commission
unreasonable, then Moore’s time-based allocations represent case filed by former employee), a worker’s compensation
an arm’s-length charge. For this alternative contention, claim in 1990, additions and remodeling of a K-K restaurant
Commissioner asserts that Moore’s allocations more properly in 1991, land acquisitions and zoning litigation, dramatic
reflect value added to each Group member. decreases in sales caused by rumors of intentionally tainted
food in 1992, and the development and opening of the new
Section 482 of the Internal Revenue Code and its Bryan restaurant in 1992.
regulations govern the instant case:
Petitioners also dispute Moore’s time-based allocations
In any case of two or more organizations, trades, or because Moore included hours of modestly compensated,
businesses . . . owned or controlled directly or indirectly nonowner employees. Additionally, Petitioners dispute
by the same interests, the Secretary may distribute, Moore’s treatment of Owner’s hours as equal to maintenance
apportion, or allocate gross income, deductions, credits, workers’ hours. Moreover, Petitioners dispute Moore’s
or allowances between or among such organizations, inclusion of 2,000 hours for Borsani in 1992 because Borsani
trades, or businesses, if he determines that such worked at BKK for only one month in 1992.
distribution, apportionment, or allocation is necessary in
8 Kenco Restaurants, et al. Nos. 98-2416/ Nos. 98-2416/ Kenco Restaurants, et al. 9
v. Commissioner 2417/2418/2420 2417/2418/2420 v. Commissioner
The tax court ruled in favor of the Commissioner and found that used in the notice of deficiency. This reliance does not
that Petitioners failed to prove that the reallocations in the necessarily place the burden on the Commissioner or render
notice of deficiency, based upon gross sales, were arbitrary, the notice of deficiency arbitrary, capricious, or unreasonable.
capricious, or unreasonable. The tax court also sustained the See Altama Delta Corp. v. Commissioner, 104 T.C. 424, 458
Commissioner’s imposition of accuracy-related penalties. (1995) (citing Sundstrand Corp. v. Commissioner,
96 T.C.
226, 354-355 (1991)).
II.
However, if the Commissioner abandons the notice of
We review factual findings of the tax court for clear error deficiency, then the notice of deficiency is no longer
and legal questions de novo. See Hoover v. Commissioner, presumed correct, and all that remains is for Petitioners to
102 F.3d 842, 844 (6th Cir. 1996) (citing Conti v. show that the transaction was conducted at arm’s length. See
Commissioner,
39 F.3d 658, 662 (6th Cir. 1994)). We review DHL Corp. v. Commissioner,
76 T.C.M. 1122, 1144
mixed questions of law and fact under the “clearly erroneous” (1998).
standard. See Eli Lilly & Co. v. Commissioner,
856 F.2d 855,
860-61 (7th Cir. 1988) (citing Standard Office Bldg. Corp. v. In the instant case, the tax court found that the
United States,
819 F.2d 1371, 1374 (7th Cir. 1987)). Whether Commissioner had not abandoned the notices of deficiency:
the Commissioner abused or exceeded his discretion in
determining deficiencies against a taxpayer is a question of “Although the Moore allocation differs from the amounts
fact. See Spicer Theatre, Inc. v. Commissioner,
346 F.2d 704, allowed by respondent in the notices of deficiency,
706 (6th Cir. 1965); see also American Terrazzo Strip Co., respondent is explicit in stating that he has not
Inc. v. Commissioner,
56 T.C. 961, 971 (1971). abandoned the notice and, we believe, relies on the
Moore allocation only to prove a reasonable allocation on
The first issue we address is whether the Commissioner the contingency that petitioners succeed in showing the
abandoned the notice of deficiency. Petitioners contend that respondent’s allocation to be arbitrary, capricious, or
the Commissioner abandoned the allocations contained in the unreasonable.”
notice of deficiency at trial and instead relied upon Moore’s
reallocations. Also, Petitioners contend that the Kenco Restaurants, Inc. v. Commissioner, 76 T.C.M. (CCH)
Commissioner has to establish the reasonableness of his 512, 517 (1998).
adjustments because the burden of proof shifted when he
abandoned the original allocations. Upon our review of the record, we agree with the tax court
and find that the Commissioner did not abandon the notices
The Commissioner, however, contends that he never of deficiency. The record does not support that either the
abandoned the notice of deficiency and that the purpose of Commissioner or Moore rejected Camper’s method in favor
Moore’s testimony was merely to provide a reasonable of the time-based method. Also, as shown below in the
allocation in the event Petitioners were successful in proving second issue, the Commissioner had no reason to establish an
that the allocations contained in the notice of deficiency were arm’s-length charge other than as a contingency argument in
arbitrary, capricious, or unreasonable. case Petitioners overcame the initial presumption.
Under current law, the Commissioner may rely on The second issue we address is whether Petitioners have
alternative theories supported by a different methodology than shown that the reallocations contained in the notice of
