(dissenting in part):
Since I am disturbed by certain inconsistencies in the Tax Court decision and by the majority’s placing the imprimatur of our Court on those inconsistencies, I respectfully dissent in part.
With respect to the Section 482 allocations, I dissent from the majority opinion to the extent that it affirms the Tax Court in upholding the Commissioner’s allocation of Chef Foods’ income to Your Host and his allocation of the entire income of Your Host Bakery to Sher-Del Foods. As 'to the Chef allocation, I would reverse. As to the Bakery allocation, I would reverse and remand for determination of a proper adjustment and a reallocation of income.
With respect to the Section 269 surtax exemptions, I agree with the majority’s affirmance of the Tax Court in upholding the Commissioner’s disallowance of surtax exemptions for four of appellant’s five affiliated companies. As to the 309 Delaware restaurant, however, I would reverse and hold that the Commissioner’s disallowance of its surtax exemption was clearly erroneous.
I.
Section 482 of the Internal Revenue Code of 1954, 26 U.S.C. § 482 (1970), authorizes the Commissioner to “allocate gross income” among the units of commonly controlled business organizations. Its purpose is to prevent tax evasion or clearly to reflect the income of the various parts of an integrated corporate group. While this statute gives the Commissioner broad discretion to allocate income, it does not permit him to disregard a separate corporate entity if it exists for “a bona fide business purpose”, W. Braun Co. v. C. I. R., 396 F.2d 264, 268 (2 Cir. 1968), and if it conducts substantial business activities and earns its own income. Philipp Brothers Chemicals, Inc. v. C. I. R., 435 F.2d 53 (2 Cir. 1970). Nor does this statute permit the Commissioner to substitute his business judgment for that of management. The fact that a parent corporation might have performed services for itself rather than establishing a subsidiary for that purpose is irrelevant so long as the latter is a viable, going concern. Philipp Brothers Chemicals, Inc. v. C. I. R., supra, 435 F.2d at 58. Income allocation is proper only when the income earned by one corporation is artificially deflected to another.1
Applying these criteria to the instant ease, the Tax Court held that the ten restaurant corporations were “economically viable business entities”. 58 T.C. at 27. It refused to uphold the Commissioner’s allocation of their income to Your Host. The Tax Court based its conclusion on the fact that these corporations earned their own income and paid their own costs of doing business.2
If the Tax Court was correct in holding such operational autonomy to be a bar to income allocation with respect to the ten restaurant corporations, I fail to understand the majority’s conclusion with respect to Chef Foods. Chef was a viable, independently functioning business enterprise. It had cigarette vending machine sales averaging $130,000 per *964year; it had a salaried employe for whom it paid workmen’s compensation and social security contributions; it owned its own vending machines and maintained a substantial inventory; it paid its own utilities, taxes, automobile expenses and, as did the ten restaurant corporations, a proportionate share of group insurance and general administrative costs.3 Chef conducted its business no differently than did its competitors. It serviced its own machines, collected receipts and paid commissions based upon the amount of merchandise sold.
These factors clearly distinguish the instant ease from Philipp Brothers Chemicals, Inc. v. C. I. R., supra. There we affirmed the Tax Court in sustaining the Commissioner’s allocation of the entire income of foreign sales subsidiaries to their parent upon a finding that they had had no employees, no inventory and did nothing whatever to earn the income they reported. That is a far cry from the situation here.
The case against allocating all of Your Host Bakery’s income to Sher-Del Foods is even more compelling. Bakery had sales in excess of $175,000; it had a payroll of approximately $50,000; it purchased more than $80,000 worth of raw materials; and it paid for its own insurance, linen, laundry and operating supplies. These are clear indices of operational autonomy. They demonstrate that Bakery was a viable, income earning enterprise. I see no basis for the Tax Court’s conclusion that Bakery “could hardly be considered to have conducted any business.” 58 T.C. at 28-29.
True, Bakery sold its entire output through Sher-Del which acted without charge as Bakery’s middleman, delivery and billing agent. There was some income distortion. This does not mean, however, that a Section 482 allocation of 100% of the subsidiary’s income is appropriate. While Sher-Del has not established the adjustment necessary to reflect the cost to it of these services, it has demonstrated that Bakery earned a substantial portion of its reported income. In an analogous situation, we held that
“[t]he Commissioner was not justified in arbitrarily allocating all of [the subsidiary’s] taxable income to petitioner.” W. Braun Co. v. C. I. R., supra, 396 F.2d at 268. (emphasis added).
I would remand for a determination of the proper adjustment of Sher-Del’s costs as a basis for reallocating Bakery’s income to Sher-Del according to law.4
II.
Since Your Host did not demonstrate non-tax avoidance reasons for the separate incorporation of Telesnax, Inc., Royal Host, Inc., Main Host, Inc. and Arlo Realty, Inc., the Tax Court correctly upheld the Commissioner’s disallowance of their surtax exemptions pursuant to Section 269 of the Internal Revenue Code of 1954, 26 U.S.C. § 269 (1970).
The specific findings of the Tax Court with respect to 309 Delaware Ave., Inc.,5 however, establish that it was formed for the very reasons said to *965have justified the formation of the eight other “Host” companies as to which the Tax Court found the principal purpose of incorporation to have been other than tax avoidance. These findings by the Tax Court strike me as undermining the majority’s assumption that there were “no unusual risks . . . which might have been persuasive of the necessity for separate incorporation” of 309 Delaware. I would hold that the Commissioner’s disallowance of its surtax exemption was clearly erroneous. See Borge v. C. I. R., 405 F.2d 673 (2 Cir. 1968).
. See 7 Mertens, Law of Federal Income Taxation § 38.63 (Zimet & Barton rev. 1967):
“The identity of businesses is to be preserved and the Secretary or his delegate has no authority under [§ 482] to merge them into one single business unless the businesses are carried on and manipulated in such a way as to constitute one single business, or unless the ‘controlled enterprise’ is a sham.” (citations omitted).
. Each of the ten restaurant corporations paid for its own nonadministrative help, supplies, utilities, state and federal taxes, social security contributions, fire insurance premiums and license fees. Each was solely responsible for payment of its own rent. Each paid a proportionate share of the common administrative and group insurance costs.
. The majority notes that Chef had insubstantial business expenses. As long as Chef was a viable enterprise and received no services from Your Host for which the latter was not adequately compensated — i. e. no income distortion — that fact would appear irrelevant.
. A proper adjustment would involve an increase in Sher-Del’s income sufficient to reflect the cost to it of the billing and delivery services provided for Bakery and a corresponding decrease in Bakery’s income.
. The Tax Court found with respect to the 309 Delaware restaurant:
“The prospects for a restaurant at 309 Delaware Avenue were not as favorable as those enjoyed at the other Your Host locations. The rent was higher there than ■ for other locations ($250 to $300 per month over a seven-year period compared to a $200 maximum per month on a ten-year lease at 3232 Bailey Avenue). There were no adjacent parking facilities, and pedestrian traffic was not as heavy as at other locations.” 58 T.C. at 14.