DocketNumber： Docket Nos. 299-67 -- 308-67
Judges： Irwin
Filed Date： 9/29/1969
Status： Precedential
Modified Date： 11/14/2024
WBB obtained a restaurant franchise for the State of Wisconsin. It set up and, in one case, acquired from its shareholders, wholly owned subsidiaries each for the purpose of operating restaurants under a subfranchise agreement. WBB also set up two corporations as commissaries to serve the restaurants. Each subsidiary was so completely managed and controlled by WBB that WBB, in effect, earned the income arising from their operation.
52 T.C. 1073">*1074 Respondent determined deficiencies in the following cases which have been consolidated for trial and briefing:
| Docket No. | Petitioner FYE | Deficiency | |
| May 31 -- | |||
| 1963 | $ 5,500.00 | ||
| 299-67 | Marc's Big Boy-Prospect, Inc. (Prospect) | 1964 | 5,500.25 |
| 1965 | 5,293.32 | ||
| 1963 | 2,254.94 | ||
| 300-67 | Marc's Big Boy-Appleton, Inc. (Appleton) | 1964 | 4,858.38 |
| 1965 | 4,235.68 | ||
| 301-67 | Marc's Big Boy-Specialty Products, Inc. | ||
| (Specialty Products) | 1965 | 2,476.96 | |
| 1963 | 5,500.00 | ||
| 302-67 | Marc's Big Boy-Point Loomis, Inc. (Point | ||
| Loomis) | 1964 | 5,610.68 | |
| 1965 | 5,293.15 | ||
| 1963 | 6,087.90 | ||
| 303-67 | Bon Host Service Corp. (Bon Host) | 1964 | 5,720.71 |
| 1965 | 5,293.11 | ||
| 1963 | 5,500.00 | ||
| 304-67 | Marc's Big Boy-5th, Inc. (MBB-5th) | 1964 | 5,667.37 |
| 1965 | 5,293.15 | ||
| 1963 | 85,214.77 | ||
| 305-67 | Wisconsin Big Boy Corp. (WBB) | 1964 | 146,645.30 |
| 1965 | 153,411.42 | ||
| 1964 | 5,128.15 | ||
| 306-67 | Marc's Big Boy-100, Inc. (MBB-100) | 1965 | 5,293.15 |
| 1963 | 5,484.90 | ||
| 307-67 | Marc's Big Boy-Port, Inc. (Port) | 1964 | 5,500.21 |
| 1965 | 5,288.52 | ||
| 1963 | 5,500.00 | ||
| 308-67 | Marc's Big Boy-Capitol, Inc. (Capitol) | 1964 | 5,500.02 |
| 1965 | 5,293.15 |
The Commissioner assessed the deficiencies against WBB under
The Commissioner assessed the portions of the deficiencies in issue for all petitioners except WBB by disallowing their surtax exemptions under section 269.
At trial and on brief the Commissioner also chose to rely on section 1551 for its disallowance of the surtax exemptions for each petitioner except WBB.
Respondent states on brief that his disallowance of the surtax exemptions is an alternative position to the deficiencies assessed against 52 T.C. 1073">*1075 WBB. If we uphold the respondent as to WBB, he concedes the deficiencies assessed against the other petitioners are improper.
FINDINGS OF FACT
The parties stipulated some facts and exhibits which are incorporated herein.
Petitioners are corporations located in Wisconsin which filed their income tax returns for the years in issue with the director of internal revenue in Milwaukee, Wis.
Ben Marcus (hereinafter Marcus) and Gene Kilburg (hereinafter Kilburg) were business associates residing in Milwaukee, Wis. During the summer of 1957 Marcus and Kilburg learned of a 1969 U.S. Tax Ct. LEXIS 52">*55 restaurant franchise operation controlled by two California corporations headed by Robert C. Wian (hereinafter Wian). Those corporations were Big Boy Franchises, Inc. (hereinafter California Big Boy, the reference name used in relevant contracts) and Robert C. Wian Enterprises, Inc. (hereinafter Enterprise). Wian had developed a philosophy of how to produce and market food items as short orders through a system of franchised restaurants using a hamburger sandwich called the "Big Boy" as a principal product.
Marcus and Kilburg became interested in obtaining a franchise agreement and contacted Wian. They also, together and individually, investigated and visited various restaurant operations including several Big Boy franchise operations of varying sizes in several States including Wisconsin, Ohio, Kentucky, Pennsylvania, Tennessee, California, and Arizona. They talked with operators and other personnel connected with the restaurants and with Wian's employees regarding business risks involved and the economics and methods of operation. They tried to obtain a maximum of information. In late 1957 or early 1958, they reached an oral agreement with Wian for a franchise.
One of the major, 1969 U.S. Tax Ct. LEXIS 52">*56 if not the primary, reasons Marcus and Kilburg decided to enter the franchise agreement was to take advantage of the Big Boy goodwill and reputation which they believed was favorable throughout the United States.
The first corporation formed was Bon Host Food Service, Inc. It was incorporated as a restaurant under the laws of the State of Wisconsin on January 28, 1958. Its name was changed to Marc's Big Boy-Capitol, Inc., on October 10, 1961. It will be referred to as Capitol throughout this opinion in order to avoid confusing it with Bon Host Service Corp., a commissary, which is also a petitioner herein. Capitol's original capitalization consisted of 1,000 shares of $ 1 par value common stock issued to its officers at par as follows: 52 T.C. 1073">*1076
| Shares | |
| Ben Marcus, president | 500 |
| Gene Kilburg, vice president | 250 |
| Ceil Marcus, treasurer, secretary | 250 |
All officers were also directors. Ceil Marcus was Ben's wife.
In early 1958 Marcus and Kilburg, with Wian's personal assistance, investigated and chose a location for the restaurant in the area of 72d Street and Capitol Drive in Milwaukee. With the help of a real estate agent Marcus contacted and personally negotiated an agreement with the owner of the 1969 U.S. Tax Ct. LEXIS 52">*57 property. On June 19, 1958, Capitol entered a written agreement for the construction and leasing of a restaurant at this site.
WBB was incorporated under the laws of Wisconsin on July 29, 1958, and it issued 5,000 $ 1 par value common shares for $ 2 per share as follows: Ben Marcus 2,250, Ceil Marcus 1,500, and Gene Kilburg 1,250. The above persons were directors and held the same offices in WBB as they held in Capitol. The franchise contract granted WBB the exclusive right, limited to the State of Wisconsin, to use the Big Boy trademark and all designs incidental thereto in connection with the making and selling 1969 U.S. Tax Ct. LEXIS 52">*58 of double-deck hamburger sandwiches and other food items. WBB also acquired the exclusive right to use menus, recipes, formulas, and products provided or developed by the licensors. The licensors agreed to furnish "to the Licensee, without charge, counseling and advisory services and suggestions in planning, developing and promoting the restaurant business of" WBB and its sublicensees and the sale of Big Boy products -- including specifically, advice, counsel and suggestions relating to the following: Menu planning and printing; recipes; selection of restaurant location; building plans; traffic planning and ground layout; advertising plans; specifications and use of trade symbols and promotional materials; business promotions and operations; pricing; employee training; and the establishment of systems of operation, including accounting and commissary operations. * * * There was no provision for other administrative type services to be furnished by the licensors. The licensors also agreed to furnish certain 52 T.C. 1073">*1077 advertising, promotional and training materials at the licensee's expense. The franchise contract provided that the licensors would maintain a staff of employees or advisers necessary 1969 U.S. Tax Ct. LEXIS 52">*59 to render the services required under the contract. It provided that the licensors would furnish such selected key personnel as they deemed necessary to enable WBB to commence operations of its restaurants. The contract contained several provisions regarding the dimensions, ingredients, and quality of the double-deck hamburger sandwich. It provided also that employees of the licensee must refer to this sandwich as the "Big Boy" and not as a "hamburger." The franchise contract specified certain general operating procedures relating to operation of restaurants in a dignified manner, licensee's use of its "best efforts" in merchandising food products, presentation of food products to the public in a favorable and dignified manner, compliance with the rules or regulations of the licensors attached to the contract document or subsequently established (the record does not reveal any such rules or regulations). WBB agreed to maintain full and accurate books of account disclosing its sales, and to make them available to the licensors. The contract provided that the licensee would obey appropriate governmental laws and regulations, maintain certain financial records, and carry products liability 1969 U.S. Tax Ct. LEXIS 52">*60 insurance in minimum amounts of $ 100,000 and $ 300,000 covering each restaurant it operated. WBB also agreed to join and maintain membership in local and national restaurant associations and to obtain the highest sanitation, health, and quality classification awarded by the appropriate governmental authority. WBB agreed to grant sublicenses under this contract only upon the written approval of California Big Boy. However, the contract provided that if the licensee or "persons in control" of the licensee owned the majority of the voting stock of a corporate sublicensee, California Big Boy's consent was not required. In addition, WBB agreed to grant sublicenses "only to persons, firms or corporations of good reputation who shall assume and shall be subject to all of the terms and obligations of this license contract and the rules and regulations set forth or referred to herein." The contract provided that, generally, the licensee would pay the licensors an annual license or franchise fee of 1 percent of the gross sales, as defined, of the licensee and its sublicensees. The licensors granted WBB an option for 1 year to include within its exclusive franchise area all or part of the States 1969 U.S. Tax Ct. LEXIS 52">*61 of Iowa and Minnesota upon the terms and conditions as provided for in the franchise contract. Within 1 year from August 29, 1958, WBB exercised its 52 T.C. 1073">*1078 option to expand its franchise agreement to include the States of Iowa and Minnesota. On October 1, 1959, Capitol became a wholly owned subsidiary of WBB when its shareholders transferred their stock to WBB. In addition to Capitol, it is stipulated that WBB has the following wholly owned subsidiary corporations which are connected with its Big Boy subfranchise operation: The portion of the name following "Marc's Big Boy" referred to the street, highway, or city where the subsidiary corporation conducted its restaurant operation except in the cases of Bon Host and 52 T.C. 1073">*1079 Specialty Products which were commissaries and did not conduct restaurant operations. The officers and directors of each of the subsidiaries of WBB were the same 1969 U.S. Tax Ct. LEXIS 52">*63 as those of WBB both before and after February 1, 1962. Other restaurants, not here in issue, were operated under the name "Marc's Big Boy" or "Marc's Carryout" or "Marx Snax." WBB entered separate written subfranchise or sublicense contracts with its various subsidiary restaurant corporations involved herein. Each subfranchise contract was 1969 U.S. Tax Ct. LEXIS 52">*64 patterned after and worded substantially the same as WBB's franchise contract regarding the obligations of the parties except for certain significant additions or modifications. 1969 U.S. Tax Ct. LEXIS 52">*65 of its location on the principal shopping street in the central business district of Milwaukee. The contract between Point Loomis and WBB, submitted in evidence as typical, provided that WBB would -- furnish from time to time * * * Under the subfranchise contract WBB agreed to provide promotional, merchandising, advertising, and training materials to the sublicensee at cost without profit to WBB. The Point Loomis subfranchise contract was signed by Marcus as president for WBB and by Kilburg as vice president of the sublicensee, Point Loomis. The annual sublicense or subfranchise fee payable to the sublicensor (WBB) was 1 percent of the sublicensee's gross sales. This is the same fee WBB was to pay California Big Boy as a franchise fee. The term "gross sales" had the same definition in this contract as it had in the franchise contract. The subfranchise contract also provided that the sublicensee would pay the sublicensor an administration fee at the end of each 4-week period. The fee was stated to be 3 percent of gross sales unless gross sales during each 52-week period of operation failed to exceed $ 400,000. In that case the fee was to be 2 percent of gross sales for that period and appropriate credits for the amount over 2 percent actually paid were to be made. However, it was provided that no administration fee would be charged if the sublicensee's "net profit before taxes" was less than $ 1,000 1969 U.S. Tax Ct. LEXIS 52">*67 during the 52-week period. Bon Host was a foodstuffs commissary and purveyor operation which purchased several food items in large quantities at wholesale prices and distributed them to WBB's subsidiary restaurants after having processed or prepared them. The restaurants also purchased food supplies from outside sources. Each restaurant paid Bon Host the cost of the goods plus a markup of 2.4 percent of the restaurant's gross sales, which sales included supplies bought from other sources. Prior to the formation of Bon Host each restaurant obtained and prepared these items itself. Bon Host deducted cost of goods sold and administration expenses on its income tax returns for the years involved as follows: 52 T.C. 1073">*1081 Figures for sales and net profits are reported below. Specialty Products was set up as a broker dealing only in potatoes. Large quantities of potatoes were purchased and sold in its name only to the restaurants owned by WBB. This procedure allowed the restaurants to purchase potatoes at less cost than they could acting separately. On its income tax return for 1965, Specialty 1969 U.S. Tax Ct. LEXIS 52">*68 Products reported gross sales of $ 38,325.26, cost of goods sold of $ 27,192.77, "Administration charge" of $ 1,536.15 which left taxable income of $ 9,116.53 after other deductions for Wisconsin income tax and organizational expense. All of WBB's subsidiary corporations which are in issue actually received $ 1,000 cash for their stock upon formation. They obtained borrowed funds from banks and credit from suppliers partly because of Marcus' business reputation. As set forth in the following schedule, these petitioners borrowed additional funds for the purchase of leasehold improvements, equipment, and for lease deposits but normally not for working capital because current operations were expected to generate sufficient cash to meet such needs: The following schedule shows amounts expended by each corporate restaurant operator formed prior to 1965 for leasehold improvements, equipment, and lease deposits with regard to their respective restaurant locations: 52 T.C. 1073">*1082 The next schedule summarizes the history and certain important provisions of leases acquired for restaurant operations and for Bon Host: WBB acquired leases in its name as lessee when the landlord or the mortgagee desired its liability on the respective lease. Marcus was involved in the negotiations of each lease. As president of the corporate lessor, Diane Building Corp., he executed the leases under which Port, MBB-100, and Manitowoc eventually operated. Also Marcus appears to have been associated with the persons acting for the corporate lessor on the lease under which Appleton eventually operated. Marcus intended that WBB would never operate restaurants under its own name, and the leases were assigned to the particular corporate restaurant operator. The two leases executed in 1963 under which Green Bay and Layton, respectively, operated contained the following language with respect to the lessee's (WBB's) use of the premises: "Said premises shall be used by the lessee for the conduct of a restaurant business similar to the business conducted by lessee in Marc's Big Boys in the Milwaukee, 52 T.C. 1073">*1083 Wisconsin area, * * *." MBB-5th's lease executed 1969 U.S. Tax Ct. LEXIS 52">*72 in 1961, provided: "Said Lessee [MBB-5th] agrees to operate a restaurant of a similar nature to those now being operated by associated companies of Lessee on the Port Washington Road [Port] and Capitol Drive [Capitol], * * *." No other lease in evidence made specific reference to other restaurants in the provision regarding the use of the premises. A proper location is an important factor in the success of a restaurant, and Marcus and Kilburg chose the locations themselves based upon their investigations (except to the extent of Wian's participation in Capitol's location, described above). For each restaurant WBB tried to create the public image of offering similar food products, quality of service, and prices as offered by all Marc's Big Boy restaurants. The franchise contract between California Big Boy, Enterprises, and WBB as well as those between WBB and its sublicensees contained several provisions designed to achieve an image of uniformity. The restaurants also tried to create the image of serving nationally famous food items. In actual operations menu prices in Big Boy operations varied more nationally than locally in various Big Boy restaurants, but the content of and prices 1969 U.S. Tax Ct. LEXIS 52">*73 in menus were similar nationally as well as locally. All Marc's Big Boy restaurants here in issue were listed on the menus of each restaurant. Those in the Metropolitan Milwaukee area were listed in both the commercial and noncommercial portions of the Milwaukee telephone directory under the name "Marc's Big Boy Coffee Shops and Car Service Restaurants." Of the two newspaper advertisements in evidence, both of which prominently display the name "Marc's Big Boy," one sets out only the address of Port while the other, dated February 15, 1966, consisted of a full page setting out a map showing the location of MBB-5th and another restaurant which was probably Marc's Big Boy-Plankinton, Inc., and is not in issue here. At the bottom of the latter advertisement was a line calling attention generally to other Marc's Big Boy family coffee shops in Milwaukee, Appleton, Green Bay, and Manitowoc and one to be opened soon in Juneau Village. Advertisements for employees in the help-wanted section of the newspapers, which are in evidence, were either over the name "Big Boy Corp." or "Marc's Big Boy" and shall be discussed further below. The design and physical appearance of the restaurants and their 1969 U.S. Tax Ct. LEXIS 52">*74 respective storefront signs also bore similarities. The name "Marc's" derived from "Marcus." The name "Marc's" was not registered as a trade name or trademark under the laws of the United States or under any particular State. However, it was usually portrayed in a distinctive and recognizable style in restaurant advertising. 52 T.C. 1073">*1084 Restaurant menus also displayed the name "Marc's" prominently and distinctively, and a customer could easily and reasonably conclude from the menus that all the restaurants listed thereon were under the same management. No attempt was made to inform the public that separate corporations operated each restaurant. The employees of all of WBB's subsidiaries were insured under master insurance policies covering workmen's compensation, group hospitalization, and life insurance. Until March 18, 1964, the group hospitalization policy also covered employees of two other companies with which Marcus was associated. A single pension plan, entitled "Marc's Big Boy Pension Trust," covered employees of Bon Host and all the restaurants involved herein, and another pension plan covered WBB. Specialty Products was not covered in the restaurant plan in evidence for 1965. The restaurant 1969 U.S. Tax Ct. LEXIS 52">*75 pension-plan agreement was executed May 7, 1964. Previously, an insurance agent representing WBB had asked the licensors about its profit-sharing plan. In the February 1963 response, a copy of which was sent to Kilburg, the licensor described the following purposes and advantages of its plan: This plan was established for two purposes: (1) to accumulate funds for employees to use as capital when granted a Big Boy Franchise, and (2) to provide funds for retirement for long term employees, such as executives and management. * * * * In permitting our employees to accumulate funds in this type of plan, when it is time to set them up in a franchise, we pick those in management with the greatest seniority in the company (which means, of course, they have the most funds accumulated in the plan), these funds are used for operating capital and as part of their investment in their own business. Thus, we have recovered from tax money a means of expanding which would not otherwise be possible. With regard to Item No. 2 -- Our profit sharing plan gives to the executive who is a long term career man in the company, a sizable sum of "capital gains" funds to enable him to help plan his own retirement. 1969 U.S. Tax Ct. LEXIS 52">*76 These funds, along with what he should be able to save from his salary, can help him look forward to a comfortable retirement. Another factor that has been helpful in having this type of plan is that it enables us to move out our serving personnel who have been with us for from seven to ten years, in favor of younger employees. * * * Since our employees are not eligible to participate in the plan until they have been with us five years, we do not feel it has too much value in employee recruitment. Its main value is to keep seasoned employees, who are, after all, the backbone of our business. The restaurant's pension plan followed the pattern of that of the licensor. The restaurant corporations deducted their respective contributions to the pension plan in computing their taxable income. 52 T.C. 1073">*1085 The Marc's Big Boy Pension Trust agreement provided "that additional corporations or organizations affiliated with Marc's Big Boy organization" might be permitted to join, and that contributions made to plans of such organizations could be brought into this pension trust. Employees of WBB and other organizations which might join this trust were entitled to have such previous "employment period applied 1969 U.S. Tax Ct. LEXIS 52">*77 for purposes of eligibility hereunder." Signatory on the trust agreement for Bon Host and each of the restaurants here involved was "Ben Marcus, Pres." with attestation by "S. Marcus" as secretary. Ben S. Marcus and Gene Kilburg were listed as trustees to "serve at the pleasure" of "the majority of the respective Boards of Directors." At the time of trial in February 1968 there had not been a sale of a franchise interest to any Marc's Big Boy employee (other than to the officers as described above). Each restaurant was covered by at least the minimum amounts of products liability insurance called for in the franchise agreements. Marcus obtained liability insurance protection for the restaurants under a master policy which also covered theaters which were owned or managed by Marcus or another company he owned. This master policy was obtained with great difficulty and two or three were canceled and replaced each time with another insurance company. Lawrence Kerski, WBB's controller and office manager, maintained the books, records, and checkbooks for WBB and each of its subsidiaries at WBB's offices. WBB and each of its subsidiaries in issue had its own minute book and stockbook, a separate 1969 U.S. Tax Ct. LEXIS 52">*78 bank account or accounts, separate books and records reflecting income and expenses including payments for purchases and payroll, a separate payroll record, including separate State of Wisconsin unemployment compensation accounts, and separate Federal Insurance Contribution Act reporting and separate returns for income taxes withheld from wages. Each subsidiary was separately licensed (for restaurants and commissary purposes where applicable), applied for and received a separate State sales permit, and reported and paid its own State sales tax. Checks were actually written at WBB to pay for inventory supplied by all outside suppliers as well as for inventory supplied by other WBB subsidiaries. Accounts payable by one subsidiary to another for inventory arose only when merchandise was actually transferred. Each restaurant received its own utility bills directly from the utility involved. These bills and the cost of each restaurant's proportionate share of joint advertising in the yellow pages of the telephone directory were paid out of each restaurant's bank account by checks written at WBB's office. 52 T.C. 1073">*1086 During the years in issue bills normally were paid by check by WBB out of each corporation's 1969 U.S. Tax Ct. LEXIS 52">*79 bank account. During the years in issue Marcus caused all bills to be paid out of a clearing account maintained by WBB in order to reduce the check-writing workload and to obtain discounts for quick payment. Each subsidiary corporation reimbursed WBB for these expenditures by a single check drawn by WBB against the subsidiary's bank account after every 28-day accounting period. Also, at the end of every 28-day accounting period, each subfranchisee paid WBB an administration or management fee as set out in the subfranchise contract. The amount of the fee charged by WBB to its subsidiaries was determined by Marcus and Kilburg. As described above, the contract provided for a fee of 3 percent of gross sales unless gross sales failed to exceed $ 400,000 in which case the fee would be 2 percent. No fee was charged if "net profits before taxes" for a 52-week period was less than $ 1,000. Marcus and Kilburg attempted to charge a percentage of gross sales that would allow WBB what they felt would be a small profit for the supervision. California Big Boy, pursuant to its franchise agreement with WBB, assisted in the opening of each new restaurant by sending people to train the personnel 1969 U.S. Tax Ct. LEXIS 52">*80 who would operate the restaurant. After training, the local personnel took over and California Big Boy's staff withdrew. Thereafter, each store became responsible for maintaining required standards. Each restaurant began its business day at 7 a.m. and closed the following morning at 2 a.m. Menus were designed for breakfasts, lunches, and suppers. Restaurant managers supervised the actual operation of a specific restaurant. They supervised and participated in the preparation and serving of food. Each manager interviewed at least some of his prospective staff. A newspaper advertisement in evidence over the name "Marc's Big Boy" directed applicants for positions as busboys and dishwashers to apply to the manager "at one of Marc's Big Boy many locations." Managers were also responsible for training personnel and for coordinating and scheduling their work hours. The managers approved the time records used to compute the payroll for their respective store. They ordered all inventory directly from suppliers, including Bon Host and Specialty Products. They then sent the time records and inventory invoices to WBB for payment. Each restaurant manager deposited his store's daily receipts in 1969 U.S. Tax Ct. LEXIS 52">*81 his restaurant's bank account which was in a bank selected for its proximity of location. Managers made daily reports of receipts. 52 T.C. 1073">*1087 Although a bank account was maintained for each restaurant, the managers did not sign checks. Only Marcus, Steve Marcus or a Mr. Lowe associated with WBB had the authority to sign checks for WBB and its subsidiaries. There were up to three district managers employed by WBB and under the direct supervision of Kilburg and his immediate subordinate, the division manager. Each district manager supervised three to five restaurants so that WBB could maintain the desired standards and uniformity of operations. Kilburg described the district managers as "graduate [managers]." These district managers sometimes took over the functions of the restaurant managers or assisted them when they were not able to perform their jobs. Restaurant managers were recruited by means of help-wanted advertisements in newspapers. The two advertisements in evidence were over the names "Mac's Big Boy" and "Big Boy Corp." Each stated that the "Big Boy restaurant chain" sought applicants for positions as "restaurant cook manager" or "manager cooks." One stated that applicants hired 1969 U.S. Tax Ct. LEXIS 52">*82 would receive accelerated training after which they would "be qualified as a shift manager and later full-fledged restaurant manager with an earnings potential of $ 8,000 to $ 10,000 a year plus many company benefits; you may advance to supervisor and later to franchised partner." The other advertisement was similar. It stated that there was a "policy to promote from within" and offered advancement "to positions of ever increasing responsibility leading to a franchise partner with the chain." Both advertisements directed applicants to apply to specified persons at three to four of the restaurant locations. The respective positions of these persons were not stated. Each restaurant and Bon Host had employees, generated income, and sustained expenses in connection with its particular operation. The following employment summaries show the total employment of each corporation in issue except Specialty Products (which had no employees) for the years 1963, 1964, and 1965, and shows a breakdown of restaurant employment for a typical week by job classification: 52 T.C. 1073">*1088 52 T.C. 1073">*1089 During the typical week of August 8, 1965, set forth in the table above, Bon Host employed 14 persons classified by operations variously as baker, baker's helpers, food production and inventory, food production and shipping, food preparation, and sanitation. During that week WBB employed 9 or 10 persons, respectively classified as a division manager, district managers, training supervisors, clerks, a controller and a vice president. Each petitioner paid income taxes in the amounts shown on its respective income tax return as reflected by the notice of deficiency for each year in issue herein. In years of net profit, the respective petitioners availed themselves of the surtax exemption provided for in The following schedule summarizes the pre-income tax profit or loss shown on income tax returns filed for the indicated period by each petitioner and Layton, Manitowoc, and Green Bay: The next schedule sets forth the amount of gross receipts for each petitioner and restaurant corporation here involved in the reallocation as taken from its respective income tax returns in evidence: 1969 U.S. Tax Ct. LEXIS 52">*85 52 T.C. 1073">*1090 Marcus first entered business in 1935. He became an officer of various corporations operating restaurants, a hotel, motels, about 40 theaters, and a bowling alley and owning real estate. He was president of several corporations, including the Diane Building Corp., some of which elected to be taxed under subchapter S of the Internal Revenue Code, a partner in several active partnerships, and a director of two banks and an insurance company. In his business dealings he generally relied upon his own business judgment and negotiated his own transactions. Marcus and Kilburg, in effect, pooled their respective resources or talents in setting up and operating the corporations here involved. Marcus had the responsibility for the financial structure of the business. This involved obtaining the financing necessary for setting new restaurants in operation and for providing adequate working-capital funds. Marcus set the financial policy for each corporation requiring it to take advantage of quick-payment discounts allowed against current obligations whenever possible. He had the power to determine the amounts, if any, to be allocated to each corporation for officers' salaries. He and Kilburg 1969 U.S. Tax Ct. LEXIS 52">*86 discussed and determined the amount for which Capitol's and WBB's capital stock was issued. Marcus alone made the determination of the amounts of capital stock issued by the other corporations. He preferred to borrow as much necessary capital funds as possible. Marcus and Kilburg discussed each new restaurant location. After they agreed on a desirable location, Marcus had the responsibility of negotiating either a lease or the purchase of real estate. Marcus initiated and handled the incorporation of each restaurant by instructing an attorney to draw up the appropriate documents. Kilburg did not participate in any decision to set up separate corporations. Because of his considerable experience in and knowledge of the restaurant and foodstuffs businesses, Kilburg's main function in the Marc's Big Boy operations was to set up and supervise the day-to-day routine of obtaining and merchandising foods by all the subsidiary corporations. He oversaw the actual operation of the restaurants utilizing the above-mentioned district managers for this purpose. Kilburg rendered advice as to layout of the restaurant premises and supervised the processing and serving of food. Kilburg exercised 1969 U.S. Tax Ct. LEXIS 52">*87 no supervision over the financial books and records of the various corporations, which job appears to have been the responsibility of Marcus and was accomplished through Kerski. Marcus and Kilburg became familiar with and practiced Wian's philosophy of operating Big Boy restaurants. Wian envisioned a high-volume, 52 T.C. 1073">*1091 low-margin commodity, short-order operation in which fast service and amiable relations between Big Boy personnel and customers were consistently maintained. In order to permit expansion and to maintain young management this philosophy included a pension or retirement plan, partially described above, to allow employees with managerial ability and with relatively long-term employment to acquire an equity interest in a sublicensed restaurant operation. ULTIMATE FINDINGS OF FACT The operation of WBB and its subsidiaries comprised a single integrated business enterprise. There would have been no substantial difference in the operations of the various restaurant and commissary functions if the petitioners and Layton, Green Bay, and Manitowoc had not been incorporated separately. WBB failed to prove that the dealings between it and its subsidiaries were equivalent to arm's-length 1969 U.S. Tax Ct. LEXIS 52">*88 dealings between it and uncontrolled taxpayers. WBB failed to show that the Commissioner was arbitrary, capricious, or unreasonable in attributing to WBB the gross income and deductions of its subsidiaries. The allocations of gross income and deductions to WBB were necessary in order to reflect WBB's income clearly. OPINION Respondent assessed deficiencies against WBB under Respondent relies primarily on All the restaurants and the commissaries involved in this case were wholly owned by WBB which, in turn, was owned by Marcus and his family and Kilburg. The restaurants were set up and operated as subfranchisees of WBB. The commissaries were set up and operated as 1969 U.S. Tax Ct. LEXIS 52">*89 adjuncts to the restaurants. WBB, as franchisee or subfranchisor, passed on its right and obligation under the franchise contract to its subfranchisees. In addition, WBB included in the subfranchise contracts certain provisions with 52 T.C. 1073">*1092 respect to management and administration which were not contained in the franchise contract. By virtue of its ownership of the subsidiaries and the subfranchise contracts, WBB had the power and authority to determine all policy including matters with respect to the financial affairs and operations of the restaurants, leasehold obligations, personnel practices and procedures, advertising, and purchases and sales of goods. WBB exercised this power and authority to determine such policies and implemented them by overseeing and supervising all aspects of the restaurant's business including the services provided by the commissaries. At times personnel directly employed by WBB would step in to perform particular restaurant functions. For its services to the restaurants, WBB charged a fee based upon a sliding-scale percentage of gross sales. Marcus and Kilburg determined the formula by which such fee was computed. The Commissioner has considerable discretion in applying In The purpose of said statute is to prevent the evasion of taxes by the The Commissioner may allocate income and deductions between commonly controlled corporations not because the common owner has the Some cases have involved a specific transaction or transactions between commonly controlled corporations in which the courts were concerned with whether 1969 U.S. Tax Ct. LEXIS 52">*93 the transaction or transactions resulted from arm's-length bargaining or were fair. See, e.g., In this case, however, respondent assessed the deficiencies against WBB by allocating to its gross income and deductions all the gross 52 T.C. 1073">*1094 income and deductions of the other petitioners herein plus Layton, Green Bay, and Manitowoc. He stated that this allocation was made to prevent evasion of taxes and to clearly reflect WBB's income. Respondent did not base the allocations on any particular transaction or transactions between WBB and its subsidiaries such as payment of salaries advertising expenses, or transfers 1969 U.S. Tax Ct. LEXIS 52">*95 of inventory. He suggested on brief that certain transactions failed to satisfy the arm's-length standard. His deficiency determination and conduct at trial, however, focused on whether the subsidiaries were formed and operated as separate taxable entities and as separate business enterprises. Petitioner WBB also sees the issues in these terms rather than in terms of specific transactions. Thus, we shall follow the approach of This approach appears to be contemplated by the above-cited regulations and is indicated by comments of the Senate Committee on Finance in recommending the provisions for a corporate surtax exemption of $ 25,000 in the Revenue Act of 1950: 1969 U.S. Tax Ct. LEXIS 52">*97 applicable to the entire normal tax net income of all corporations; the surtax rate applies to the corporation surtax net income in excess of $ 25,000. Under this plan, the so-called notch provisions are eliminated. It is not intended, however, that the exemption of the first $ 25,000 of a corporation's surtax net income from the surtax shall be abused by the splitting up, directly or indirectly of a business enterprise into two or more corporations or the forming of two or more corporations to carry on an integrated business enterprise. It is believed that sections 45 [ 52 T.C. 1073">*1095 Applying the above principles to the record before us, we uphold the Commissioner's determination based upon The framework of the business was the franchise contract between WBB and its licensors, California Big Boy and Enterprises. This contract controlled the principal product to be sold and reserved the right to designate other products, and the trademarks and incidental designs, menus, recipes and formulas to be used in connection with the merchandising of food products. The contract provided for operating procedures including requirements that WBB, as licensee, use its "best efforts" in merchandising Big Boy food products; maintain and make available to the licensors full and accurate records of sales; carry certain minimum amounts of products liability insurance; comply with all rules and regulations attached to the contract and all reasonable rules and regulations established later; join and maintain membership in local and national restaurant associations; and obtain the highest health, sanitation, and quality classification available from the appropriate governmental authority. The franchise contract 1969 U.S. Tax Ct. LEXIS 52">*99 contemplated that WBB might conduct its restaurant operations through subsidiary corporations since it provided that only where WBB or "persons in control" of WBB owned the majority of the voting stock of the corporate subfranchisee was the consent of California Big Boy not required in order to grant a subfranchise. Additionally, WBB obligated itself to see that the terms and conditions imposed on it by the franchise contract were passed onto and observed by all of its subfranchisees. In the subfranchise contracts WBB formally passed on these terms and conditions to its wholly owned restaurant subsidiaries. The subfranchise contracts were patterned after and worded substantially the same as the franchise contract, except for certain important particulars discussed below. The effect of passing on the terms and conditions of the franchise contract was to define for the restaurants: The products to be merchandised; the menus, recipes, formulas, trademarks, and designs to be used in the marketing process; and the services to be provided to each restaurant in order to commence operations, including the selection of a location, traffic planning and ground layout, training personnel, planning 1969 U.S. Tax Ct. LEXIS 52">*100 and developing and promoting the restaurant business and Big Boy products, and "the establishment of systems of operation, including accounting and commissary operations." 52 T.C. 1073">*1096 In short, under the packaged deal provided in these contracts, about all WBB, Marcus, and Kilburg needed in order to open a restaurant was to provide personnel and capital and sources of supplies and foodstuffs to implement the grand design of the licensors. They could call on the licensors for the initial push. As it developed WBB and its subsidiaries sought the help of the licensors in setting up each restaurant and in training personnel. Thus, except for financing, locating restaurants, and arranging leases, the terms and conditions of the franchise contract set the policies and operating procedures of the restaurants owned by WBB. Integration of WBB and its restaurants was also maintained in the procedures for arranging locations, leases, and financing not because of requirements of the franchise and subfranchise contracts but because Marcus and Kilburg were the common denominators in these areas. Kilburg and Marcus personally chose each restaurant location, after initially calling on Wian's assistance in choosing 1969 U.S. Tax Ct. LEXIS 52">*101 the first location. Marcus had the responsibility for obtaining financing and leases. He personally guaranteed the 10 bank loans, 9 of which were with the same bank. He testified that his own reputation was an important factor in obtaining credit for the various corporations. Two restaurants, one of which came into existence before WBB, were required to make security deposits which came from the initial capital obtained by Marcus. WBB was the original lessee for all but three restaurants and Bon Host because, according to Marcus, the lessors and mortgagees wanted WBB to be primarily liable rather than the corporate restaurant operator. This indicates that lessors and mortgagees depended upon WBB's reputation and financial ability rather than that of WBB's subsidiaries. Marcus acted for the lessors as president in three instances, and regarding another lease, was associated with the lessor and the persons acting for the lessor. The leases under which Layton and Green Bay operated required WBB, as lessee, to conduct "restaurant business similar to the business conducted 52 T.C. 1073">*1097 We turn next to the manner in which business was conducted. The framework is set out in the portion of the subfranchise contract dealing with the services to be furnished by WBB. This contract contemplated more than merely opening a restaurant and commencing operation. It also embraced the close administration and supervision of the business on a constant and continuing basis. It provided that WBB would -- furnish from time to time * * * administrative counseling and advisory services and suggestions in planning, developing and promoting the restaurant 1969 U.S. Tax Ct. LEXIS 52">*103 business of the sublicensees and the sale of "BIG BOY" products, including specifically, advice, counsel and suggestions relating to the following: Menu planning and printing; recipes; selection of restaurant location; building plans; traffic planning and ground layout; advertising plans; specifications and use of trade symbols and promotional materials; business promotions and operation; pricing; employee training; and the establishment of systems of operation, including accounting and commissary operations. WISCONSIN BIG BOY shall administer for the sublicensee the recruitment, selection and training of personnel and shall maintain a complete supervisory staff, and shall perform bookkeeping and accounting services for sublicensee. * * * Our conclusion that the apparent intent of this language was to impose comprehensive supervision and management by WBB upon its subsidiaries is borne out by WBB's subsequent conduct. Marcus testified that he intended to use WBB for purposes of managing the restaurants so as to insulate himself from direct ownership. An aspect of this comprehensive management is the bookkeeping and accounting functions performed by WBB at the behest of Marcus. WBB 1969 U.S. Tax Ct. LEXIS 52">*104 kept separate books and records for each corporation which, of course, would be necessary to a significant extent for several purposes, including the establishment of the amount of rentals contingent upon gross sales, whether or not separate corporations were involved. See 52 T.C. 1073">*1098 Thus, it appears 1969 U.S. Tax Ct. LEXIS 52">*105 that both the determination of financial and accounting policies and the implementation of these policies occurred in the personage of Marcus and the corporate form of WBB, and these activities of the subsidiary corporations were completely integrated through WBB. Marcus had the power and responsibility to determine the basis on which salaries of officers for all the corporations were allocated. During the years in issue, however, only WBB reported that it paid any salary to an officer. The other corporations here involved did not report on their returns that any salaries were paid to officers. WBB paid a salary only to Kilburg who was listed as devoting full time to WBB even though he was an officer of each of the other corporations and supervised their activities. The reason for not paying salaries to any of the other officers and for allocating all of Kilburg's salary to WBB was not otherwise explained. These circumstances give rise to a reasonable inference that Kilburg managed his sphere of the business through WBB. And, further, they do not negate the likelihood that the other officers, and particularly Ben Marcus, performed services for all the corporations as representatives 1969 U.S. Tax Ct. LEXIS 52">*106 of WBB. In fact, it seems probable that the officers themselves regarded the corporations as facets of a single enterprise when the circumstances of this case are viewed in toto. Likewise, the manner of recruiting and supervising restaurant personnel and the subordinated functions of the restaurant managers are circumstances indicating that the corporations should be viewed as a single enterprise. It appears that WBB exercised the complete control over the recruitment and selection of restaurant personnel as contemplated by the subfranchise contract. WBB employed persons for training managerial personnel also. Many other aspects of the operations, while again not determinative in themselves, give them a factual context smacking of an integrated business. The help-wanted advertisements were stated in terms of what the Marc's Big Boy restaurant "chain" could offer applicants. For example, manager cooks were offered accelerated training eventually leading to full-fledged restaurant manager positions at $ 8,000 to $ 10,000 per year plus benefits including the possibility of becoming a "franchised partner." Another ad stated that there was a "policy to promote from within." The wording 1969 U.S. Tax Ct. LEXIS 52">*107 and tone of these advertisements were not that of separate enterprises. Insurance benefits were provided by means of master policies, and a single pension plan covered all the subsidiaries in issue except Specialty Products. The pension plan contemplated membership by corporations 52 T.C. 1073">*1099 or organizations "affiliated with the Marc's Big Boy organization." The tone and terms of the pension plan contemplated treatment of Marc's Big Boy employees on a uniform basis the same as they would have been had they all been employed by the same single enterprise. While the restaurant managers performed a large number of functions, some of which may have involved their personal judgment and discretion, they were clearly subordinate to Kilburg, the division manager and WBB's three district managers, whom Kilburg referred to as "graduate managers." The restaurant managers only supervised the daily flow of food products and the conduct of their staffs in their respective stores. They in turn were completely subject to the control and supervision of WBB and the terms and conditions imposed upon them by the franchise contract as passed on by WBB in the subfranchise contract. Although WBB had been in business 1969 U.S. Tax Ct. LEXIS 52">*108 only a short time, it possessed the reputation, goodwill, resources, skills, and experience of Marcus and Kilburg and of its licensors by virtue of its franchise contract. WBB had the essential franchise and, in most cases, leasehold rights; it provided the essential experience and financial resources; and it furnished coordination and cohesion through the essential management, supervisory, and administrative services. These attributes were important and substantial factors in the operation of the restaurant business, and make this case similar to others in which like factors helped induce us to hold for respondent. We cannot see how the business would have been conducted any differently had WBB not insulated itself from them by means of a separate corporation. Consequently there is no reason for holding that the Commissioner's reallocations to WBB were arbitrary unless WBB has shown that it was properly compensated for its services. Several cases have reached similar conclusions on similar facts. In Notwithstanding the foregoing facts and circumstances, petitioners here contend that the net profits of York Road should be fixed by charging against the sales of that store only the net current operating cost of such store, without any 52 T.C. 1073">*1100 consideration being given to the above-mentioned factors of goodwill, trade name, experienced buying and selling organizations, customer lists, and advertising format which Hamburger & Sons furnished for the use of York Road. We are confident that Hamburger & Sons would not have permitted such an arrangement, if it had dealt with York Road at arm's length. For such use of its business organization and assets, Hamburger & Sons would, we believe, have claimed for itself the profits in their 1969 U.S. Tax Ct. LEXIS 52">*110 entirety of the York Road segment of the integrated business. Again, in The flow of revenues from the subsidiaries to WBB and then to the licensors gives WBB's alleged position an unrealistic glow in view of the extensive control and management reposed in and exercised by WBB. According to the subfranchise contract WBB obtained its revenues from three sources: Franchise or license 1969 U.S. Tax Ct. LEXIS 52">*112 fees, payments for materials furnished, and administration or management fees. The franchise contract provided that WBB would receive certain materials 52 T.C. 1073">*1101 from the licensors without profit to them; in turn, the sublicense contract provided that WBB would furnish these materials to its subfranchisees without profit to WBB. WBB was obligated, under the franchise contract, to pay the licensors 1 percent of gross sales as a license fee; using the same definition of gross sales the subfranchise contract provided that the sublicensees would pay WBB 1 percent of gross sales as a subfranchise fee. Thus, on two items that one might expect an independent, arm's-length sublicensor to earn profits there could be none because WBB was obligated to pay out all that it was entitled to receive. WBB's profits of $ 21,479, $ 30,827.38, and $ 22,430.40 in 1963, 1964, and 1965, respectively, must then have come from management and administration fees. Marcus testified that he and Kilburg based WBB's fee for administration and management on gross sales of the restaurant so as to allow WBB "a small profit." 1969 U.S. Tax Ct. LEXIS 52">*113 in footnote 14, The subfranchise contract provided that the sublicensees would pay WBB an administration fee at the end of each 4-week period. The fee was set at 3 percent of gross sales; but if gross sales for each 52-week period failed to exceed $ 400,000, the fee 1969 U.S. Tax Ct. LEXIS 52">*114 would be 2 percent. Furthermore, if the pretax net profit of a sublicensee were less than $ 1,000 during each 52-week period of operation, no administration fee would be charged. This formula does not appear to have enhanced the trend of WBB's gross receipts and profits for the years in issue despite the increase in gross receipts of the restaurants from $ 2,755,292.81 in 1963 to $ 4,918,457.82 in 1965. Such a fee structure between a parent corporation and its subsidiaries must be scrutinized closely whenever it is questioned and there is a presumption that it is inadequate attaching to the Commissioner's reallocation under * * * * In any event, the burden was on Industries to prove the value of the services Hosiery rendered, and it has provided no more convincing evidence of that value than the salaries in question. Petitioners insist that once they have shown application of section 45 and the allocations thereunder to be arbitrary, the burden shifted to respondent to prove a proper allocation. While there may be doubt as to the validity of this contention, we need not consider it, because we do not believe that Industries can establish that the allocation of Hosiery's income made to it 1969 U.S. Tax Ct. LEXIS 52">*116 by respondent was arbitrary Petitioner's contention that respondent did not put the fee structure in issue is not well taken. It is true that there are no specific transactions in issue. Rather it is the entire course of dealing between WBB and its subsidiaries, and the fee structure on which the dealings were based, which are relevant. The deficiency notice cited What we have said regarding the integrated operation of the restaurants seems to be substantially true for Bon Host and Specialty 52 T.C. 1073">*1103 Products also except that they were not specifically governed by the franchise and subfranchise agreements, although such agreements to which WBB was a party contemplated commissary operations. Bon Host and Specialty Products were, however, set up to serve only the restaurants which were subject to the subfranchise agreements and they dealt with no one else insofar as we can determine. The record does not indicate that WBB treated them any differently than it treated the restaurants. They both reported administration expenses on their tax returns. It is interesting and helpful to note that Bon Host's 1963 pretax net income of $ 22,945.02 on sales of $ 115,944.72 did not increase greatly, in relation to the increase in sales, for 1964 and 1965. Even though gross sales in those jumped to $ 494,332.71 and $ 553,436.51, respectively, pretax net income was $ 31,329.74 and $ 34,125.84, respectively. In view of the control relationships here involved, these figures lend 1969 U.S. Tax Ct. LEXIS 52">*118 some support to an inference that WBB artifically shifted income with respect to Bon Host. The same might be said of Specialty Products which reported pretax net income of $ 9,116.53 on sales of only $ 38,325.26 in its first year of operation in 1965. This relatively large return on such relatively small gross sales in 1965, a year in which 7 out of the 10 restaurants here involved had gross sales of over $ 400,000, and the fact that Specialty Products does not seem to have existed except on paper (as discussed below) tends to render incredible Marcus' uncorroborated testimony that a separate entity was necessary in order to obtain broker's discounts on large volume purchases of potatoes. 1969 U.S. Tax Ct. LEXIS 52">*119 Moreover, Specialty Products had no employees and no equipment nor is any place of actual operations revealed in the record. The absence of these factors are particularly unusual since Marcus testified that Specialty Products purchased millions of pounds of potatoes, processed them, and sold them to the restaurants. 52 T.C. 1073">*1104 they were operated as part of the enterprise by WBB in the same dominant manner as the restaurants, with due allowance for the difference in functions. We hold that the record sustains the Commissioner's 1969 U.S. Tax Ct. LEXIS 52">*120 determination that WBB generated the income for the years in issue by conducting an integrated business enterprise through its divisions set up as wholly owned subsidiary corporations. We do not impinge upon the limits of those cases holding in favor of the taxpayers where there is a significantly lesser degree of integration of operations. While there are many factual parallels between Respondent's theory under Likewise, there are important dissimilarities with The facts in Some of the cases involving 1. Cases of the following petitioners are consolidated herewith: Marc's Big Boy-Appleton, Inc., docket No. 300-67; Marc's Big Boy-Specialty Products, Inc., docket No. 301-67; Marc's Big Boy-Point Loomis, Inc., docket No. 302-67; Bon Host Service Corp., docket No. 303-67; Marc's Big Boy-5th, Inc., docket No. 304-67; Wisconsin Big Boy Corp., docket No. 305-67; Marc's Big Boy-100, Inc., docket No. 306-67; Marc's Big Boy-Port, Inc., docket No. 307-67; and Marc's Big Boy-Capitol, Inc., docket No. 308-67.↩ 2. Individual petitioners will be referred to herein by the short name in parentheses.↩ 3. Unless otherwise indicated, statutory references are to the Internal Revenue Code of 1954.↩ 4. The Commissioner stated his reasons for the deficiencies as follows: "It is determined that the corporate entities listed in schedule 7 attached hereto, are to be disregarded for income tax purposes and that the gross income and deductions reported and claimed by such corporations on their separate federal income tax returns are attributable and taxable to you in accordance with "Alternatively, it is further determined that all of the gross income and deductions of each of the corporate entities listed in schedule 7 attached hereto, are allocable to you under the provisions of 5. The three are as follows, the reference subsequently used herein being in parenthesis: Marc's Big Boy-Manitowoc, Inc. (Manitowoc); Marc's Big Boy-Green Bay, Inc. (Green Bay); Marc's Big Boy-Layton, Inc. (Layton). 6. On or about Feb. 1, 1962, Steve Marcus, Ben's son, became the secretary and a director of WBB and of Capitol.↩ 7. WBB's income tax returns for 1963-65 list the following wholly owned subsidiaries and dates acquired: 1. Capitol opened 11/19/58.↩ *. The starred corporations are not petitioners but Layton, Manitowoc and Green Bay relate to WBB's case by virtue of respondent's adjustments.↩ 2. Does not appear in the record.↩ 3. Bon Host and Specialty are commissaries rather than restaurants and date back to 1962 and 1965, respectively.↩ 8. See fn. 6, 9. Significant provisions in the subfranchise contract which do not have counterparts in the franchise contract relate to continuing administrative services to be furnished by WBB for a fee. These portions are set out in the text, 1. Marcus, acting for each of the corporations, negotiated and signed a separate note for the bank loans. The Manitowoc bank loan was from the First National Bank of Manitowoc. It was not guaranteed or endorsed by any other person or entity. All of the other bank loans were from the Marine National Exchange Bank of Milwaukee, Wis., and were personally guaranteed by Marcus. WBB did not guarantee any of said bank loans. 3. The "Other Loans" by Capitol were borrowings from the members of Ben Marcus' family or from entities controlled by them.↩ 4. All of the bank loans, Bordens loans, and other loans were paid by the borrowers.↩ 2. "Bordens" was a dairy company whose products the restaurants used. The Bordens loans were separate equipment loans for each corporation, executed by such corporation, without any guarantee or endorsement.↩ 1. During the first 5 years of the lease periodic payments increased the deposit to $ 30,000.↩ 1. In instances where WBB was the original lessee, WBB assigned the lease to the corporate operator. 2. "Percentage" refers to the percentage of some portion of the restaurant's gross sales which was either in lieu of or in addition to a stated amount of rent.↩ 1. Job classifications for WBB and Bon Host do not appear in the record except as indicated below.↩ 1. After special credits and net operating loss carryovers.↩ 10. In any case of two or more organizations, trades, or businesses (whether or not incorporated, whether or not organized in the United States, and whether or not affiliated) owned or controlled directly or indirectly by the same interests, the Secretary or his delegate may distribute, apportion, or allocate gross income, deductions, credits, or allowances between or among such organizations, trades, or businesses, if he determines that such distribution, apportionment, or allocation is necessary in order to prevent evasion of taxes or clearly to reflect the income of any of such organizations, trades, or businesses.↩ 11. (c) 12. "Common control, however, is not the end of the matter; for, as we stated in 13. S. Rept. No. 2375, 81st Cong., 2d Sess. (1950), 14. The following is taken from the transcript of the respondent's cross examination of Ben Marcus: "Q. Who determined the franchise fee that would be charged? I mean, who determined this management fee that would be charged? "A. I think Mr. Kilburg and I sat down and reviewed our costs of administration and management and figured the -- probably a small profit for the supervision. "Q. Was that fee suggested to you by California? "A. Well, we checked to see as to what the -- generally is being charged in the industry, and there was no set fee. It ranged all the way from two percent to five percent, I think it is. "Q. Of gross sales? "A. Of gross sales." There was no other evidence relating to the basis for the fee nor to the nature of services provided by others in the industry so as to permit comparisons.↩ 15. We need not deal with the question of whether these standards are different, and, if so, which one is applicable herein. See 16. We were not referred to any law or regulation or other source supporting this testimony. Moreover, such a statute or regulation would not be determinative even if in existence. 17. Also, it does not appear that Specialty Products reported figures on its income tax return relating to the processing or distributing of potatoes, nor that it borrowed funds, leased property, or adopted a pension plan. Under all these circumstances it was obviously a sham. We need not discuss the sham theory in regard to the other subsidiaries because of our holding under 18. In 19. See 20. 21. Cf. Commissioner of Internal Revenue v. Chelsea Products, Inc ( 1952 ) Victor Borge, Sanna Borge, and Danica Enterprises, Inc. v. ... ( 1968 ) Charles Town, Incorporated v. Commissioner of Internal ... ( 1967 ) W. Braun Co., Inc. v. Commissioner of Internal Revenue ( 1968 ) Ballentine Motor Co., Inc., Ballentine's, and Ballentine ... ( 1963 ) Eli Lilly and Company v. The United States ( 1967 ) Dillard-Waltermire, Inc. v. Ellis Campbell, Jr., District ... ( 1958 ) Simon J. Murphy Company and Social Research Foundation, Inc.... ( 1956 ) Advance MacHinery Exchange, Inc. v. Commissioner of ... ( 1952 ) Spicer Theatre, Inc. v. Commissioner of Internal Revenue, ... ( 1965 ) pauline-w-ach-v-commissioner-of-internal-revenue-estate-of-ernest-m ( 1966 ) Asiatic Petroleum Co. v. Commissioner of Internal Revenue ( 1935 ) william-e-frank-district-director-of-bureau-of-internal-revenue-for-the ( 1962 ) Grenada Industries, Inc. v. Commissioner of Internal Revenue ( 1953 ) Dorba Homes, Inc. v. Commissioner of Internal Revenue ( 1968 ) Moline Properties, Inc. v. Commissioner ( 1943 ) local-finance-corporation-local-finance-corporation-of-south-marion-local ( 1969 ) Valmore H. Monette and Nannie B. Monette v. Commissioner of ... ( 1967 ) United States v. Manor Care, Inc. ( 1980 ) The Coca-Cola Company and Subsidiaries v. Commissioner ( 2020 )Date of Capital Date Name of corporation incorporation stock restaurant outstanding opened for business Port 10/ 8/59 $ 1,000 2/12/60 Point Loomis 8/ 5/60 1,000 11/29/60 Appleton 9/16/60 1,000 1/19/61 MBB-100 4/ 6/61 1,000 3/15/62 Prospect 4/ 6/61 1,000 5/ 9/61 MBB-5th 10/10/61 1,000 4/19/62 Marc's Carryout -- Appleton, Inc. 10/31/61 (( Marc's Carryout -- North, Inc. 7/ 5/62 ( ( Bon Host 12/ 6/62 1,000 (Manitowoc 3/14/63 1,000 6/11/63 Green Bay 10/ 7/63 1,000 1/21/64 Layton 10/ 7/63 1,000 6/30/64 Marc's Big Boy -- Juneau, Inc. 10/11/64 1,000 ( Specialty Products 12/30/64 1,000 ( Marc's Big Boy -- Mayfair, Inc. 5/17/65 1,000 ( Marc's Big Boy -- Plankinton 5/25/65 1,000 ( Marc's Big Boy -- Racine, Inc. 1/19/66 1,000 ( Marc's Big Boy -- Oklahoma, Inc. 2/ 1/66 1,000 ( Marc's Big Boy -- Oakland, Inc. 7/25/66 1,000 ( Marc's Carryout -- Jarvis, Inc. 6/ 7/67 ( ( 1963 1964 1965 Cost of goods sold $ 72,402.83 $ 359,393.53 $ 410,912.95 Administration expense None 7,182.57 9,583.20 Sources of Borrowed Capital Corporation Bank loans 1969 U.S. Tax Ct. LEXIS 52">*69 Bordens Other loans Total loans Capitol $ 50,000 $ 12,466.35 $ 120,000 $ 182,466.35 Port 50,000 15,000.00 65,000.00 Point Loomis 60,000 18,300.00 78,300.00 Appleton 30,000 14,150.00 44,150.00 Prospect 30,000 15,709.17 45,709.17 MBB-100 60,000 23,838.75 83,838.75 MBB-5th 60,000 17,693.21 77,693.21 Manitowoc 50,000 20,000.00 70,000.00 Green Bay 75,000 21,684.61 96,684.61 Layton 75,000 22,270.82 97,270.82
1969 U.S. Tax Ct. LEXIS 52">*70 Leasehold Improvements, Equipment, and Deposits Leasehold Corporate restaurant operator improvements Equipment Capitol $ 21,000.00 $ 83,000.00 Port 6,526.90 71,807.50 Point Loomis 4,084.88 66,680.80 Appleton 4,761.52 45,593.84 Prospect 2,360.45 53,668.17 MBB-100 7,937.94 108,828.33 MBB-5th 59,000.00 66,000.00 Manitowoc 2,810.50 60,514.94 Green Bay 15,969.88 100,197.59 Layton 7,629.59 113,797.12 Leasehold Improvements, Equipment, and Deposits Security Corporate restaurant operator or lease Total deposit Capitol $ 119,000.00 Port 78,334.40 Point Loomis 15,000 85,765.68 Appleton 50,355.36 Prospect 56,028.62 MBB-100 116,766.27 MBB-5th 125,000.00 Manitowoc 63,325.44 Green Bay 116,167.47 Layton 121,426.71 LEASE SUMMARY Corporate operator Date of Term lease Capitol 6/19/58 10 yrs. from 10/1/58 Point Loomis 10/ 5/59 15 yrs Port 1/30/60 10 yrs Prospect 11/ 1/60 15 yrs. from 4/1/58 Appleton 1/10/61 10 yrs. from 2/1/61 MBB-5th 10/11/61 10 yrs MBB-100 2/ 1/62 10 yrs. from 3/15/62 Green Bay 3/27/63 20 yrs Manitowoc 4/ 1/63 10 yrs Layton 11/12/63 15 yrs Bon Host 11/30/62 7 1/2 yrs LEASE SUMMARY Lessor's Corporate operator Original lessee 1969 U.S. Tax Ct. LEXIS 52">*71 Percentage right to audit books Capitol Capitol 5 Yes Point Loomis WBB 5 Yes Port WBB 5 No Prospect WBB 5 Yes Appleton WBB 5 No MBB-5th MBB-5th 5 Yes MBB-100 MBB-100 5 No Green Bay WBB None No Manitowoc WBB None No Layton WBB 5 Yes Bon Host Bon Host None No EMPLOYMENT SUMMARY Total employees during year Years WBB Capitol Port Point Appleton Prospect Loomis 12/31/65 22 378 284 279 92 210 12/31/64 29 340 278 303 115 168 12/31/63 33 274 246 251 86 78 EMPLOYMENT SUMMARY Total employees during year Years MBB-100 MBB-5th Manitowoc Green Layton Bon Bav Host 12/31/65 327 367 137 135 201 42 12/31/64 272 275 87 213 229 72 12/31/63 289 235 112 37 67 EMPLOYMENT SUMMARY Typical weekly employment 8/8/65 Position Capitol Port Point Appleton Prospect Loomis Manager 1 1 1 1 1 Asst. mgrs 4 1 3 3 2 Busboys 10 8 16 7 7 Cashiers 7 5 6 5 6 Cooks 14 11 14 5 9 Waitresses 28 31 37 19 27 Lot hosts 4 1 Carhops 13
1969 U.S. Tax Ct. LEXIS 52">*83 EMPLOYMENT SUMMARY Typical weekly employment 8/8/65 Position MBB-100 MBB-5th Manitowoc Green Bay Layton Manager 1 1 1 1 1 Asst. mgrs 3 2 2 3 3 Busboys 11 13 6 11 10 Cashiers 6 6 3 4 5 Cooks 12 11 2 8 11 Waitresses 32 41 11 21 30 Lot hosts 1 Carhops 15 6 15 PRETAX PROFIT (LOSS) Corporate FYE FYE FYE FYE Operation 5/31/62 5/31/63 5/31/64 5/31/65 WBB $ (96.39) $ 21,479.00 $ 30,827.38 $ 22,430.40 Capitol 50,677.12 26,543.63 54,941.90 41,601.27 Port 23,985.64 24,931.34 31,879.90 26,093.73 Point Loomis 41,394.70 47,036.07 69,987.61 53,780.36 Appleton 5,645.24 10,249.75 22,082.94 20,005.50 Prospect 18,229.25 25,941.08 42,714.21 45,215.09 MBB-100 (13,117.64) 1,210.72 20,720.57 38,768.12 MBB-5th (4,678.44) 43,822.84 67,616.85 62,223.63 Bon Host 22,945.02 31,329.74 34,125.84 Manitowoc (26,418.04) (7,885.35) Green Bay (19,625.84) (1,140.22) Layton 14,179.09 Specialty Products 9,116.53 GROSS RECEIPTS Fiscal year ending May 31 -- 1963 1964 1965 Restaurants: Capitol $ 564,836.10 $ 590,846.04 $ 608,617.01 Port 465,256.46 494,005.55 504,172.29 Point Loomis 517,867.35 607,775.08 665,181.87 Appleton 262,663.03 213,220.39 344,527.41 Prospect 351,696.14 403,068.39 450,162.33 MBB-100 572,367.75 630,466.13 MBB-5th 592,973.73 639,392.95 651,714.60 Layton 474,753.96 Manitowoc 201,573.16 201,070.80 Green Bay 156,173.32 387,791.42 Total for restaurants 2,755,292.81 3,878,422.63 4,918,457.82 WBB 138,447.12 126,976.47 148,484.76 Bon Host 115,944.72 494,332.71 553,436.51 Specialty products 38,325.26
Likewise, in
It was Spicer's reputation and capital that had made these operations profitable, Spicer's facilities were used, and these facilities were operated with Spicer's personnel except that for purposes of reporting to Governmental agencies the employees were listed as being those of Copley. * * * The anticipated profits generated by Spicer's reputation and effort, when projected over the reasonably short term of the lease, properly can be primarily attributed to the activities of Spicer and not Copley. * * *
To the extent that the arrangement between Hosiery and Industries resulted in a larger concentration of profits in the hands of Hosiery, to the detriment of Industries, this case presents a typical situation for the application of section 45 [now 482].
He [the Commissioner] has not determined that the income and deductions of the new sales companies should be allocated to the old sales companies but rather that the income and deductions of all the sales companies, including the two original ones, should be allocated to Manufacturing. * * * [
principal contention for the application of
There again we were unable to find facts supporting respondent's contention. The basis for the Commissioner's reallocation of the keyman's 52 T.C. 1073">*1105 salary was unjustified.
the Commissioner has not distributed, apportioned or allocated gross income, deductions, credits, or allowances between or among such trades or businesses as contemplated by the statute where section 45 is to be applied. On the contrary respondent has "combined" the "net" income of the sales companies with the "net" income of petitioner. Section 45 does not grant such authority to respondent. * * * [
Four of the five dissenters felt that section 45 was applicable 1969 U.S. Tax Ct. LEXIS 52">*123 and that "Petitioner has failed to prove that it received fair value, or that its subsidiaries performed any valuable function." Footnotes
Date Subsidiary corporation acquired Capitol 7/28/59 Port 10/ 7/59 Point Loomis 8/ 2/60 Appleton 9/13/60 Prospect 3/24/61 MBB-100 3/24/61 MBB-5th 10/10/61 Manitowoc 3/ 1/63 Green Bay 5/14/63 Layton 8/22/63 Marc's Big Boy -- Mayfair, Inc Not given. Specialty Products Do. Marc's Big Boy -- Juneau, Inc Do. Marc's Big Boy -- Plankinton, Inc Do. Bon Host 10/11/62 Marx Snax -- Appleton, Inc 1961 Marx Snax -- Madison, Inc 1962 Authorities (20)
Cited By (2)