                        T.C. Memo. 1998-342



                      UNITED STATES TAX COURT



        KENCO RESTAURANTS, INC., ET AL.,1 Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos.   15949-95, 15950-95    Filed September 24, 1998.
                   15951-95, 15952-95.



          Pursuant to sec. 482, I.R.C., R reallocated among
     a group of commonly owned corporations certain
     management service fees charged by one member of the
     group to the other members.
          Held: Ps have failed to prove that R abused his
     discretion by making an arbitrary, capricious, or
     unreasonable reallocation. Held, further, Ps were
     negligent in making their initial allocation.



     John D. Steffan, for petitioners.

     Diane D. Helfgott, for respondent.

1
     Cases of the following petitioners are consolidated
herewith: K-K Restaurants, Inc., docket No. 15950-95; Bryan
Realty, Inc., docket No. 15951-95; Tiffin Avenue Realty Co.,
Inc., docket No. 15952-95.
                                   - 2 -

               MEMORANDUM FINDINGS OF FACT AND OPINION


       HALPERN, Judge:   These cases have been consolidated for

trial, briefing, and opinion.      Respondent has determined

deficiencies in income tax and accuracy-related penalties as

follows:

Petitioner                  Year           Deficiency   Penalty

Kenco Restaurants,          1990           $36,664      $7,333
Inc. (Kenco)                1991            40,311       8,062
                            1992            23,068       4,614

K-K Restaurants,            1990            35,056       7,011
Inc. (K-K)                  1991            18,962       3,792
                            1992            21,304       4,261

Tiffin Avenue Realty,       1990             4,772         954
Co., Inc. (Tiffin)          1992             4,124         825

Bryan Realty, Inc.          1992               174          35
(Bryan)

       After concessions, the remaining issues to be determined

are:    (1) Whether respondent's reallocations of deductions among

petitioners and certain other commonly controlled corporations

under section 482 were necessary to clearly reflect the income of

such corporations, and (2) whether petitioners are liable for the

accuracy-related penalties imposed pursuant to section 6662.

       Unless otherwise indicated all section references are to the

Internal Revenue Code as in effect for the years in issue, and

all Rule references are to the Tax Court Rules of Practice and

Procedure.
                                - 3 -

                           FINDINGS OF FACT

Introduction

     Some of the facts have been stipulated and are so found.

The stipulation of facts, with accompanying exhibits, is

incorporated herein by this reference.    At the time of the filing

of the petitions in these cases, the principal places of business

of all petitioners were in Ohio.

The Commonly Owned Group

     Petitioners are members of a commonly owned group of

14 corporations (the group).    Except for one member of the group,

BKK Management, Inc. (BKK), each member of the group either owns

and operates one or more Taco Bell restaurants or owns the real

estate on which another member of the group operates a Taco Bell

restaurant.    BKK provides management and administrative support

services to the other 13 members of the group.   During the years

at issue, each member of the group was owned in equal shares by

George L. Kentris (G. Kentris), Michael N. Kentris (M. Kentris),

and Kenneth J. Baerwaldt (Baerwaldt), either individually or

together with their spouses.    Messrs. G. Kentris, M. Kentris, and

Baerwaldt were also the directors and managing officers of each

member of the group (collectively, the owner-managers).

BKK Management, Inc.

     BKK was established as a “cost company”, to provide

management and administrative support services to the other

members of the group (the purchasing members) at cost.    Among the
                                - 4 -

services BKK provided to the purchasing members were the

following:   accounting and administrative services, advertising,

coordination and installation of Taco Bell menus, renovations,

remodeling and repairs, building and equipment maintenance,

insurance coverage, training, inspections, and contracting.

BKK’s costs, which were passed on to the purchasing members,

included payroll-related costs (including salaries, employment

taxes, and the cost of health benefits) and incidental costs

(including office supplies, telephone charges, and rent).     The

payroll-related costs represented the vast majority of BKK's

costs in providing the management and administrative services to

the purchasing members.   Approximately 85 percent of BKK’s

payroll-related costs was attributable to the owner-managers.

The remaining approximately 15 percent was attributable to

support staff.

     The owner-managers were employed by BKK to provide services

to the purchasing members.   They received salaries and certain

other fees from BKK.   They did not receive any other compensation

for their services as officers or directors of the members of the

group.    Messrs. M. Kentris and Baerwaldt were full-time employees

of BKK.   Mr. G. Kentris, an attorney, who maintained an active

law practice, worked part-time for BKK.   All three owner-

managers, however, received substantially identical salaries.

     The owner-managers did not maintain time logs or written

documents recording the hours that they spent working on behalf

of any individual member of the group.
                                       - 5 -

          During the years at issue, in consideration of the services

   received from BKK, each of the purchasing members paid BKK a fee

   (the BKK fees).    The following table lists the purchasing members

   and sets forth (1) the BKK fees paid during each of the years in

   issue and (2) the corresponding percentage that each such fee is

   of the total BKK fees for each year.

Members                  1990                    1991                  1992
Kenco*            $313,700      43.0%    $413,000       42.3%     $389,000    33.5%
K-K*               279,650      39.0      283,500       29.0       380,600     32.9
Tiffin*              28,000      3.9       31,000        3.2        26,000      2.2
Bryan*                    ---                     ---                3,000      0.3
GMK, Inc.             9,100      1.0       21,700        2.2        87,200      7.5
Perrysburg           29,000      4.0       60,415        6.2        42,700      3.7
Restaurants,
Inc.
Bowling Green        30,500      4.2       82,000        8.4       112,000      9.7
Restaurants,
Inc.
Wapak                     ---              29,600        3.0        52,366      4.5
Restaurants,
Inc.
Trenton Avenue       12,000      1.7       14,500        1.5        16,100      1.4
Realty, Inc.
Allentown Road        2,000      0.3           8,700     0.9        11,100      1.0
Realty, Inc.
Harding Highway      18,000      2.5       24,000        2.5        25,000      2.2
Realty, Inc.
Apollo Drive          3,000      0.4           7,700     0.8         7,200      0.6
Realty, Inc.
Bryan                     ---                     ---                6,000      0.5
Restaurants,
Inc.
Total           $724,950   100%     $976,115            100%    $1,158,266    100%
   * Petitioners in these consolidated cases
                                    - 6 -

                                   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. * * *
                               - 7 -

     In pertinent part, section 1.482-1(b), Income Tax Regs.,

provides:   “The purpose of section 482 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.”

     In pertinent part, section 1.482-1(a)(6), Income Tax Regs.,

provides:

     The term "true taxable income" means, * * * the taxable
     income (or, as the case may be, any item or element
     affecting taxable income) which would have resulted to
     the controlled taxpayer, had it in the conduct of its
     affairs (or, as the case may be, in the particular
     contract, transaction, arrangement, or other act) dealt
     with the other member or members of the group at arm's
     length. * * *


     In pertinent part, section 1.482-2(b)(1), Income Tax Regs.,

provides:

     Where one member of a group of controlled entities
     performs marketing, managerial, administrative,
     technical, or other services for the benefit of * * *
     another member of the group * * * at a charge which is
     not equal to an arm's length charge as defined in
     paragraph (b)(3) of this section, the district director
     may make appropriate allocations to reflect an arm's
     length charge for such services.

Paragraph (b)(3) of section 1.482-2, Income Tax Regs., provides:

          Arm’s length charge. For the purpose of this
     paragraph an arm’s length charge for services rendered
     shall be the amount which was charged or would have
     been charged for the same or similar services in
     independent transactions with or between unrelated
     parties under similar circumstances considering all
     relevant facts. However, except in the case of
     services which are an integral part of the business
     activity of either the member rendering the services or
     the member receiving the benefit of the services * * *
                                   - 8 -

     the arm's length charge shall be deemed equal to the
     costs or deductions incurred with respect to such
     services * * * unless the taxpayer establishes a more
     appropriate charge * * *

     In pertinent part, section 1.482-2(b)(7)(ii)(A), Income Tax

Regs., provides:    "Services are an integral part of the business

activity of a member of a controlled group where the renderer

renders services to one or more related parties as one of its

principal activities."

     Section 1.482-1(a)(4), Income Tax Regs., provides:      "The

term 'controlled taxpayer' means any one of two or more

organizations, trades, or businesses owned or controlled directly

or indirectly by the same interests."

     B.    Burden of Proof

     Respondent’s authority to make allocations under section 482

is broad.    Bausch & Lomb, Inc. v. Commissioner, 92 T.C. 525, 581-

582 (1989), affd. 933 F.2d 1084 (2d Cir. 1991); Edwards v.

Commissioner, 67 T.C. 224, 230 (1976); PPG Indus., Inc. v.

Commissioner, 55 T.C. 928, 990-991 (1970).      Respondent’s section

482 determination must be sustained absent a showing that he has

abused his discretion.       Paccar, Inc. v. Commissioner, 85 T.C.

754, 787 (1985), affd. 849 F.2d 393 (9th Cir. 1988).      The

determination of whether respondent abused his discretion

presents a question of fact, and petitioners bear the burden of

proof.    Rule 142(a).   Indeed, in order for us to redetermine a

deficiency attributable to section 482, petitioners bear the

heavier than normal burden of proving that respondent’s section
                                 - 9 -

482 allocation is arbitrary, capricious, or unreasonable.    Bausch

& Lomb, Inc. v. Commissioner, supra; G.D. Searle & Co. v.

Commissioner, 88 T.C. 252, 359 (1987); see also Altama Delta

Corp. v. Commissioner, 104 T.C. 424, 456-457 (1995); Seagate

Tech. Inc. & Consol. Subs. v. Commissioner, 102 T.C. 149, 163-164

(1994).

     Neither the absence of tax avoidance motives, nor the

existence of a business purpose, precludes respondent from

reallocating costs under section 482 in order to reflect clearly

the respective incomes of members of the controlled group.

Central Cuba Sugar Co. v. Commissioner, 198 F.2d 214, 215-216 (2d

Cir. 1952) (dealing with 26 U.S.C. sec. 45 (I.R.C. 1939), the

precursor to section 482), revg. and remanding on this issue,

16 T.C. 882 (1951); Eli Lilly & Co. v. United States, 178 Ct.Cl.

666, 372 F.2d 990, 998-999 (1967); G.D. Searle & Co. v.

Commissioner, supra at 359.

     C.   Common Control

     Petitioners are commonly owned corporations, owned in equal

shares by the owners either individually or with their respective

spouses, and are, thus, "controlled taxpayers" within the meaning

of section 482.   See sec. 1.482-1(a)(4), Income Tax Regs.

     D.   Arm’s-Length Charges

     The parties have stipulated, and we have found, that the

primary purpose of BKK is to provide management and

administrative support services to the other 13 members of the

group.    BKK provided such services to the purchasing members, and
                                  - 10 -

all of its costs were charged to the purchasing members as fees

for those services.    Thus, we find that BKK rendered services to

related parties as one of its principal activities.      As a

consequence, rendering services was an integral part of BKK’s

business activity within the meaning of section 1.482-

2(b)(7)(ii), Income Tax Regs.      Because of that, the cost or

deductions incurred by BKK with respect to the services rendered

by BKK to the purchasing members (and passed through to the

purchasing members) is not deemed equal to an arm's-length charge

for those services.    See sec. 1.482-2(b)(3), Income Tax Regs.

Instead, an arm's-length charge is the amount that would have

been charged for the same or similar services in independent

transactions with or between unrelated parties under similar

circumstances considering all the relevant facts (the independent

transactions standard).     Id.

     Before concluding this discussion of arm's-length charges,

it is important to note that we are not here concerned with the

arm's-length charge for the totality of services provided by BKK

to the purchasing members for each year (BKK's total yearly

fees), which respondent does not challenge, but rather with the

allocation of BKK's total yearly fees among the purchasing

members.

     E.    Reasonableness of Allocation

            1.   Respondent’s Reallocation

     Respondent’s reallocation is reflected in the statutory

notice of deficiency received by each petitioner.      Each such
                                - 11 -

notice contains one or more negative adjustments (depending on

the number of years in issue) for “management cost share

expenses”.   Those adjustments are explained in substantially

similar language, as follows:

     [I]t is determined the management fee was paid under an
     agreement which is not at arm’s length. Therefore,
     this expense is reallocated among the controlled
     corporations under section 482 of the Internal Revenue
     Code. This action is necessary to clearly reflect the
     true taxable income of each controlled corporation and
     to prevent income manipulation. * * *

Respondent called as a witness Diane Camper, a revenue agent for

the Internal Revenue Service.    Ms. Camper is responsible for

calculating the adjustments respecting management cost share

expenses set forth in the notices of deficiency.   Ms. Camper was

questioned on cross-examination about the methodology she used to

make those adjustments.   She testified that she made those

allocations based on the gross sales of the purchasing

corporations, making some adjustments with respect to time spent

with respect to certain of the purchasing corporations that were

merely real estate holding companies.

     At trial, respondent called as an expert witness Sharon

Moore.   Ms. Moore is a certified public accountant and a senior

appraiser accredited by the American Society of Appraisers.      She

is affiliated with Alpha Consulting Alliance (Alpha) and, along

with others affiliated with Alpha, prepared a report that was

offered as her expert testimony (the report).   The report was

prepared in response to respondent’s request that Alpha opine as

to whether BKK's management cost fee allocation represented an
                              - 12 -

arm's-length price to each of the purchasing corporations.      Ms.

Moore was of the opinion that “the management costs allocated by

BKK Corporation for managerial and administrative services are

not accurately allocated based on value-add [sic] to the

operating restaurant entities.”   Ms. Moore also reached a

conclusion as to a fair allocation of such costs.   Ms. Moore was

accepted by the Court as an expert with respect to business

valuation, and her report was received into evidence as her

expert testimony.

          2.   Petitioners' Allegations

     Petitioners recognize that they must show that respondent

abused his discretion:   They must show that respondent’s

allocations are arbitrary, capricious, or unreasonable.2     See,

e.g., Bausch & Lomb, Inc. v. Commissioner, 92 T.C. at 582.

Ms. Camper testified that she allocated BKK's total yearly fees

among the purchasing members based primarily on gross sales, with

some adjustments with respect to the realty holding corporations,

which did not have any sales (respondent's method).   Although

petitioners allege that their allocation (which is based on the

2
     The case law interpreting sec. 482 illustrates that there is
some ambiguity as to whether the taxpayer has the burden of
proving that (1) the amount of the allocation proposed by the
Commissioner is arbitrary, capricious, or unreasonable, or
(2) the method or theory upon which the allocation was based is
arbitrary, capricious, or unreasonable. Compare Perkin-Elmer
Corp. & Subs. v. Commissioner, T.C. Memo. 1993-414 (theory was
arbitrary, and capricious), with Sundstrand Corp. & Subs. v.
Commissioner, 96 T.C. 226, 354 (1991) (result was arbitrary and
capricious), and Eli Lily & Co. v. United States, 178 Ct. Cl.
666, 676, 372 F.2d 990, 997 (1967) (same). That ambiguity does
not affect resolution of this case.
                              - 13 -

owner-managers' service hours) is reasonable, they have not

directed any of their argument to proving that respondent's

method produces an arbitrary, capricious, or unreasonable result,

to wit, that gross sales is not indicative of management and

administrative services provided.   Petitioners do, however, make

a collateral argument assaulting respondent's method, alleging

that Ms. Camper did not take into account certain unusual events

that occurred during the years at issue, which required BKK to

provide unusual types and amounts of services to the affected

purchasing members.3   Ms. Camper testified that she considered

allocation methodologies based on both hours and gross sales.

Although she admitted that the "top" method would have been based

on hours or time spent, she was limited by the information

available to her.   The owner-manager’s failure to maintain time

logs or other documentation recording the allocation of their

time spent among the purchasing members, along with their failure

to separately account for the time spent by support staff (whose

activities gave rise to 15 percent of payroll-related costs),

made it impossible for her to determine the impact of the unusual

events on the services provided using an hour-based allocation



3
     The unusual events include: (1) A fire at one of Kenco's
restaurants that burned the restaurant to the ground on Dec. 7,
1989, and the subsequent construction of a new, larger
restaurant, (2) the owners razed Tiffin Realty's only restaurant
and rebuilt a new facility in 1990, (3) the owners remodeled
Bowling Green's only restaurant and expanded the dining room of
K-K's restaurant located on Trenton Ave. in 1991, and (4) Bryan
was incorporated on June 3, 1992, and Bryan's restaurant opened
in Oct. 1992.
                               - 14 -

methodology.   Petitioners have, therefore, failed to prove that

respondent's method, based as it was on gross sales, did not

satisfy the independent transactions standard and, thus, reflect

arm's-length charges for purposes of this case.   See supra sec.

II.D.   Further, petitioners did not even address the individual

allocations resulting from respondent's method beyond arguing

that they would be different had Ms. Camper's method weighed the

unusual events more heavily.   Finally, since the practice of the

group was to separate real estate ownership from restaurant

operation, the unusual events in question that involved the

destruction or construction of improvements to real property

(see supra, note 3), affected the real estate holding companies.4

Ms. Camper testified that, in allocating management cost share

expenses to the real estate holding companies, she took into

account not only those members' gross sales (which were very low)

but also some measure of the time spent with respect to those

members.   Undoubtedly, management time was necessary to deal with

the destruction and construction caused by the unusual events

and, to that extent, Ms. Camper did take account of the unusual

events.    Petitioners have not persuaded us that it was arbitrary,

capricious, or unreasonable for Ms. Camper to deal with the real

estate holding companies as she did, nor have petitioners


4
     For instance, it was Harding Highway Realty, Inc. and not
Kenco, that incurred the loss from the fire, filed the claim,
received the proceeds from the insurance company, sold the
property and received the proceeds therefrom, and incurred the
costs of building the new facility.
                                - 15 -

proposed a formula for quantifying the value of any additional

management and administrative services necessitated by such

unusual events.    Therefore, petitioners have failed to prove that

the allocations resulting from respondent's method do not satisfy

the independent transactions standard or reflect arm's-length

charges.

     Petitioners' principal engagement at trial and on brief was

with Ms. Moore's allocation, apparently due to their belief that

respondent had abandoned his method in favor of Ms. Moore's.

Although the Moore allocation differs from the amounts allowed by

respondent in the notices of deficiency, respondent is explicit

in stating that he has not abandoned the notice and, we believe,

relies on the Moore allocation only to prove a reasonable

allocation on the contingency that petitioners succeed in showing

the respondent's allocation to be arbitrary, capricious, or

unreasonable.   Having concluded that petitioners have failed to

carry their initial burden, we need not consider petitioners'

criticism of Ms. Moores's allocation.

           3.   Conclusion

     Petitioners have failed to carry their burden of proving

that respondent abused his discretion; i.e., that the allocations

resulting from respondent’s method were arbitrary, capricious, or

unreasonable.     The management cost fee allocation determined in

petitioners' notices of deficiency is therefore sustained.
                               - 16 -

III.    Accuracy-Related Penalties

       In the case of an underpayment of tax required to be shown

on a return, section 6662(a) and (b)(1) impose a penalty in the

amount of 20 percent of the portion of the underpayment that is

attributable to negligence or intentional disregard of the rules

or regulations (hereafter, simply, negligence).    Negligence has

been defined as lack of due care or failure to do what a

reasonable and prudent person would do under like circumstances.

E.g., Hofstetter v. Commissioner, 98 T.C. 695, 704 (1992).

Negligence includes any failure to make a reasonable attempt to

comply with the provisions of the internal revenue laws or to

exercise ordinary and reasonable care in the preparation of a tax

return; it also includes any failure by the taxpayer to keep

adequate books and records or to substantiate items properly.

Sec. 1.6662-3(b)(1), Income Tax Regs.

       Respondent determined penalties under section 6662(a) and

(b)(1), and petitioners assigned error to those determinations.

On brief, however, petitioners fail to identify those penalties

as an issue in this case.    We assume that petitioners principally

rely on our finding no deficiencies in tax to avoid the

penalties.    In that tactic, petitioners are not successful.

       Respondent’s notices of deficiency do not particularize

petitioners’ negligence.    On brief, respondent explains:

“[P]etitioners were negligent in claiming deductions for

management expenses that were solely based on petitioners’
                               - 17 -

ability to assume the cost of such expenses, and that petitioners

continued to do so even after they were informed by respondent’s

agents that the method of determining such costs was arbitrary.”

That explanation, at least the first clause, is not a model of

clarity.   We deduce that respondent’s principal complaint is that

petitioners were negligent in allocating the BKK fees on a basis

that did not reflect the relative usage of BKK services by the

purchasing members.

     Ms. Moore was of the opinion that petitioners' method of

allocating the management cost share fee did not satisfy a value

added standard.    Ms. Moore opined that each restaurant showed

profitability consistent with industry averages before the

management cost share fee allocation, but not after, concluding

that petitioners' allocation distorted the individual store

performances and did not clearly reflect the economic income of

those locations.

     Petitioners claim:    “The representations of hours spent by

the owner/managers is highly reliable and was neither rebutted

nor impeached at trial.”    We assume that petitioners’ claim is

that the representation of hours spent by the owner-managers is

reliable in the sense that it accurately reflects the hours spent

with respect to each purchasing member.    Petitioners state:

“[T]he time allocation was based on historical experience; was

evaluated on a regular, on-going (almost daily) basis by the

owner/managers; was evaluated and adjusted at midyear based on
                               - 18 -

actual experience; and was recorded in contemporaneous records

kept in computer spreadsheets.”    We, thus, assume that

petitioners' implicit defense to the claim of negligence rests on

the accuracy of their time allocations.    Petitioners bear the

burden of proof.    Rule 142(a).   Petitioners have not carried that

burden.

     Petitioners make much of the unusual events, which occurred

during the years at issue, and which, petitioners claim, required

BKK to dedicate unusual amounts of time to certain of the

purchasing corporations.    Those events, however, do not account

for petitioners' allocations, and the record does not support

petitioners' contentions that the owner-managers spent most of

their time working on behalf of K-K and Kenco.    Although no

special projects required additional managerial attention for

Kenco's restaurants in 1991, unlike in 1990, the management cost

fee allocated to Kenco for 1991 was higher in absolute terms, and

only slightly lower in relative terms, than the fee BKK charged

to Kenco in 1990.   Although petitioners do not claim that K-K

required unusual management attention in 1992 as compared to

1991, its allocated fee was higher in both absolute and relative

terms in 1992 than in 1991. It is telling that, between 1990 and

1992, GMK's management cost fee allocation increased more than

900 percent.   That percentage increase substantially exceeds the

increases in the management cost fee allocated to the other

members of the commonly controlled group.    In relative terms,
                                - 19 -

GMK's share of the total BKK management cost fee allocation

increased by a factor of seven.    During that period, facts

stipulated by the parties show that GMK's gross receipts

increased substantially as well.    During that period, there were

no unusual events or other requirements of GMK that justified a

substantial increase in management services required in 1991 and

1992 as compared to 1990.

     Additionally, Perrysburg, which allegedly required minimal

management services, was charged $29,000 in 1990, $60,415 in

1991, and $42,700 in 1992.   Petitioners did not provide any

explanation, in terms of services required by Perrysburg from

year to year, that would account for those differences.

     Finally, it defies explanation how Wapak was not allocated

any of BKK's management costs in 1990.    Petitioners allege that

BKK's management costs were allocated using an allocation

methodology predicated on the number of hours that the owners

spent at or on behalf of each of the commonly controlled

corporations.   Wapak was incorporated and operating a Taco Bell

restaurant in 1990.   We suspect that Wapak's insufficient cash-

flow was the determinant factor in BKK's management's decision

not to allocate Wapak a management cost fee in 1990.

     Petitioners claim that contemporaneous records of time

allocations “were actually created, maintained and used in making

the Petitioners’ allocations.”    Those records, petitioners claim,

were inadvertently destroyed.    The only evidence of
                              - 20 -

contemporaneous time records was Ms. Borsani’s and Mr. G.

Kentris’ testimony that Mr. G. Kentris’ allocations of the owner-

manager’s hours for the upcoming year were recorded and served as

the basis for allocating the BKK fees.   Such forecasts, even if

recorded, merely frame the problem, the accuracy of petitioners’

estimates; the recording of estimates does not make them any more

or less accurate.

     Petitioners have failed to persuade us that the owner-

managers’ time allocations accurately reflected the hours spent

by them with respect to each purchasing member.   A close

examination of petitioners’ "unusual events” argument, along with

a consideration of the allocations to Perrysburg and Wapak,

convinces us that petitioners' allocations were, at best, what

petitioners’ counsel characterized them as during his examination

of Mr. G. Kentris:   a “guesstimation based on conversations

between [sic] the [owner-managers]”.   Petitioners have failed to

prove that they were not negligent in allocating the BKK fees

according to petitioners' ability to “assume” the cost of such

expenses.   Respondent's determination of a section 6662 penalty

is therefore sustained.


                                    Decisions will be entered

                               for respondent.
