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OPINION
I. Introduction
Petitioners are members of a commonly owned group of
14 corporations (the group), 13 of whom (the purchasing members),
during one or more of the years in issue, purchased management
services from the 14th, BKK Management, Inc. (BKK). Each of the
purchasing members deducted its payments to BKK for management
services (the BKK fees). In order to clearly reflect the incomes
of the purchasing corporations, respondent has reallocated the
BKK fees among the purchasing corporations (generally,
respondent’s reallocation). Respondent has decreased the share
of the BKK fees claimed by each petitioner. Petitioners argue
that respondent’s reallocation is arbitrary, capricious, and
unreasonable. We must determine whether respondent abused his
discretion in making his reallocation. We must further determine
whether any underpayments of tax are due to negligence or
disregard of rules or regulations.
II. Reallocation of Deductions
A. Code and Regulations
In pertinent part, section 482 provides:
In any case of two or more organizations, trades,
or businesses * * * owned or controlled directly or
indirectly by the same interests, the Secretary 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 such
organizations, trades, or businesses. * * *
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Last modified: May 25, 2011