Elliot Pisem and David E. Kahen
The label assigned to a payment may not be respected in determining U.S. income tax consequences, if, based on the surrounding facts and circumstances, the label is inconsistent with the substance. Aspro v. Commissioner (TC Memo 2021-8) illustrates how application of this principle can result in disallowance of claimed deductions (in that case, for millions of dollars of management fees) and underscores issues that should be considered in designing arrangements to compensate enterprise owners or related parties for their services.
Facts in ‘Aspro’
Aspro, Inc., a closely held corporation with three shareholders, operated an asphalt paving business in Iowa. Two of the shareholders were corporations, and each owned 40% of the stock of Aspro. The third shareholder, an individual, Milton Dakovich, owned 20% of the stock of Aspro and, as Aspro’s chief executive officer, was responsible for day-to-day management of its business. He received salary, annual bonus, and director’s fees for service on the board of directors of Aspro, in addition to a portion of the management fees discussed below.
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