Related Companies

It was found by the trial judge that management companies, which two professional engineers ("Parsons" and "Vivian") had incorporated and interposed between themselves and an engineering firm ("Design") of which they had been employees until that time, "(1) had no bona fide business purpose, (2) had, primarily, the purpose of directly reducing their income tax liabilities [and] (3) had, secondarily, an estate planning purpose which ... must be taken to have also been solely motivated by tax and personal, not business, considerations." Nonetheless, it was held that the arrangements were not a sham and were effective for tax purposes because the legal rights and obligations which the parties purported to create, they had succeeded in actually creating.

The purported interposition between the taxpayer and his employer of a management corporation was legally ineffective, and thus, also ineffective for tax purposes, because (1) he failed to have his existing employment contract cancelled (or effectively assigned to the management corporation) and, in fact, he later entered into a similar employment contract with the same employer, which contract made no reference to the management corporation, and (2) the dealings between the taxpayer and his employer were consistent only with their being in an employer/ employee relationship.

A partnership of two dentists determined that the value of administrative services performed by them was $20,000, and "by means of" appropriate journal entries paid that sum to a service company that was equally owned by them. There was no change in the services that they performed after they commenced to make payments to the company, there was no genuine business purpose to the transaction, and the deduction of $20,000 by the partnership accordingly was found to be prohibited. In addition, the bulk of the administrative services were performed by them in their capacities of partners, rather than of employees of the company.

The amounts paid by a wholly-owned Bermudan subsidiary ("Span") for purchases of steel were found to constitute the taxpayer's cost of that steel, rather than the higher price charged by Span to the taxpayer, because Span was a puppet of the taxpayer, and the business of the taxpayer accordingly included the activities or purported activities of Span. A vice-president of the taxpayer "controlled every step of the operations of Span from the purchase price to the selling price of off-shore steel" and in fact was permitted by the Articles of Association of Span to exercise the powers of its board. [CR: Tax Avoidance]

The wives of the partners of a law firm incorporated a company ("Irish") which acquired all the equipment and furniture of the partnership, entered into a lease of the premises to be used by the firm and commenced undertaking all the administrative activities that previously had been performed directly by the firm. A management fee charged by Irish to the firm, equal to 15% of the disbursements made by Irish plus 2.5% per month of the cost of the furniture and equipment acquired by Irish, was deductible given that it was reasonable in amount in relation to the benefits which enured to the firm and the partners, including avoiding personal liability on the lease and greater ease of entry and withdrawal of partners from the firm.