SERVICE WILL NOT FOLLOW SEVENTH CIRCUIT'S FOGLESONG DECISION INTERPRETING SECTION 482'S DUAL TRADE OR BUSINESS REQUIREMENT.

Rev. Rul. 88-38

Foglesong v. Commissioner, 691 F.2d 848 (7th Cir. 1982), rev'g 77 T.C. 1102 (1981), concerns an individual who works exclusively for a corporation that is controlled by that individual. The Seventh Circuit considered whether, for purposes of section 482 of the Internal Revenue Code, the individual is engaged in a trade or business separate from the trade or business of the corporation. The case holds, in part, that if such an individual has no trade or business other than working for the corporation, the individual is not engaged in a trade or business separate from that of the corporation and therefore the "two or more organizations, trades, or businesses" requirement of section 482 is not met.

Section 482 of the Code provides that in any case of two or more organizations, trades, or businesses (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 may distribute, apportion, or allocate gross income, deductions, credits, or allowances between or among such organizations, trades, or businesses, if it is determined 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.

The term "organizations, trades, or businesses" is to be construed broadly. H.R. Rep. No. 704, 73rd Cong., 2d Sess. 24 (1934), 1939-1 C.B. (Part 2) 554, 572. Section 482 of the Code contemplates any kind of entity or enterprise that has independent tax significance. Keller v. Commissioner, 77 T.C. 1014, 1022 (1981), aff'd, 723 F.2d 58 (10th Cir. 1983). The Tax Court in similar cases has consistently taken the position that a shareholder/employee who receives a salary for services rendered is engaged in a trade or business for purposes of section 482. See Keller; Haag v. Commissioner, 88 T.C. 604, 615 (1987); Dolese v. Commissioner, 82 T.C. 830, 839 (1984), aff'd, 811 F.2d 543 (10th Cir. 1987). The dual trade or business requirement of section 482 is satisfied because the corporation is in the business of providing goods or services to customers and the employee is in the business of providing services to the corporation. See Keller; Haag.

The purpose of section 482 of the Code is to place a controlled taxpayer on a tax parity with an uncontrolled taxpayer by determining, according to the standard of an uncontrolled taxpayer, the true taxable income from the property and business of a controlled taxpayer. Section 1.482-1(b)(1) of the Income Tax Regulations. Allocations under section 482 may be necessary to determine the true taxable incomes of a controlled corporation and its shareholder/employee, notwithstanding the fact that the shareholder/employee works exclusively for the controlled corporation.

In cases to which section 482 of the Code would otherwise be applicable, the Internal Revenue Service does not follow the decision in Foglesong to the extent it held that the two trades or businesses requirement of section 482 is not satisfied when the controlling shareholder works exclusively as an employee of the controlled corporation.

DRAFTING INFORMATION

The principal author of this revenue ruling is Christopher Rogers of the Corporation Tax Division. For further information regarding this revenue ruling contact Mr. Rogers on (202) 377-9583 (not a toll-free call).