Related-party management charges disallowed.

• Author: Zink, William
• Position: Taxation

Kenco Restaurants, Inc., TC Memo 1998-342, involved members of a commonly owned group of 14 corporations (the group). Except for BKK Management, Inc. (BKK), each group member either owned and operated one or more Taco Bell restaurants, or owned the real estate on which another group member operated a Taco Bell restaurant. BKK provided management and administrative support services to the other 13 group members. During the years at issue, each group member was owned equally.

BKK was established as a "cost company," to provide management and administrative support services to the other members (the purchasing members) at cost. Among the services BKK provided to the purchasing members were accounting and administrative services; advertising; coordination and installation of 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 (e.g., salaries, employment taxes and health benefit costs) and incidental costs (e.g., 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% of BKK's payroll-related costs was attributable to the owner-managers; the remaining 15% was attributable to support staff.

BKK employed three owner-managers to provide services to the purchasing members. They received salaries and certain other fees from BKK, but did not receive any other compensation for their services as officers or directors of the group members. Two of the owner-managers were full-time employees; one was a part-time employee. All three owner-managers, however, received substantially identical salaries.

The owner-managers did not maintain any time logs or written documents recording the hours they spent working on behalf of any group member.

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 were based on each service recipient's respective cash flows.

Regs. Sec. 1.482-2(b)(3) 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...