Volume 10 — Tax Court Reports

1. Petitioner is engaged in the business of manufacturing road machinery, which he started in 1932 in Texas. Held: petitioner is not taxable on the 10 per cent share paid to his brother in 1942. 2. Petitioner and his wife separated in February 1943 and she sued for divorce.

Petitioner's property was partially destroyed by fire. Held: the gain incident to the involuntary conversion is not taxable by virtue of section 112 (f) of the Internal Revenue Code.

1. Interpretation of Statute -- Specific v. General Provision -- Sec. 711 (a) (3) (B) -- Regulations 109, Sec. 30.711 (a)-4 (d). -- The provision of section 711 (a) (3) (B), implemented by Regulations 109, section 30.711 (a)-4 (d), being a special provision of limitation applicable to the particular facts in this case, takes precedence over the general provision of section 322 (b) (3). 2. Regulations -- Validity -- Length of Time for Compliance. -- A regulation promulgated pursuant to a statute expressly requiring the regulation to supply necessary administrative details was not unreasonable in its requirement that an application for the benefits of the statute to result in a refund of taxes already paid be filed within two and one-half months after the regulation was promulgated, which was over seven months after the statute was approved.

Stockholders of a corporation in 1941 adopted a plan of recapitalization whereby stockholders were permitted to exchange one share of existing stock having $ 50 par value for 1 1/4 shares of… Held: recapitalization had a corporate business purpose and constituted a nontaxable reorganization. Elmer W. Hartzell, 40 B. T. A. 492, followed.

Petitioner, fearing the loss of its essential and experienced employees to war industries paying higher wages, established an employees' beneficial trust fund of $ 40,000 in 1941 to provide pensions,… Held: the $ 40,000 payment is not deductible as compensation paid for services rendered nor as an ordinary and necessary expense paid or incurred in 1941 in carrying on petitioner's trade or business.

The petitioner, a man of wealth, set up an irrevocable trust providing income for named beneficiaries, his wife, brothers, and sisters, undistributed income to become corpus. Held: the petitioner is taxable upon the trust income, under section 22 (a) of the Internal Revenue Code.

1. The executor of the estate of petitioner's mother, pursuant to the mother's will, purchased from an insurance company in 1942 for a single premium payment of $ 30,559 an annuity contract calling… Held: the amount of the dividend was income subject to tax. 2. Held, on facts shown, that income received by petitioner upon an investment in an annuity contract was not less than 3 per cent thereon, and tax determined by respondent is not unconstitutional.

1. Renegotiation Act amendment of July 1, 1943, expressly including contracts with Defense Plant Corporation, held to have retroactive force to date of original act rendering renegotiable petitioner's contracts with Defense Plant Corporation paid for after date of original act but prior to amendment. 2.

For several years prior to 1943 petitioner's president served as treasurer and president of the Catholic Press Association, of which petitioner was a member. Held: petitioner is entitled to deduct the payment as an ordinary and necessary business expense under section 23(a) ( 1) (A), Internal Revenue Code.

Petitioner, a corporate resident of the United States, maintained during the taxable years a branch or sales agency in China. Held: the interest thus paid constituted income to the Chinese national from sources within the United States and petitioner should have withheld a tax therefrom.

The stockholders of the petitioner, a corporation engaged in the manufacture and sale of liquid meters, organized a partnership to take over a portion of the petitioner's business. Held: that the respondent erred in refusing to recognize the partnership for tax purposes and in holding the petitioner taxable on the income of the partnership either under section 22(a) or under section 45.

Petitioner is a corporation engaged in the processing and selling of meat products. Held: The loss deduction on the sale of the rejected meat was not abnormal in class to petitioner under subparagraph (J) (i) of section 711 (b) (1), Internal Revenue Code. (2) Petitioner has failed to establish error in the respondent's determination that only $ 1,000 of the $ 4,107.95 constituted a deductible expense.

The petitioners were employed by a company which established a noncontributory pension plan for the exclusive benefit of its employees. Held: the petitioners were bona fide beneficiaries of a trust which qualified under section 165, as applicable to 1941 and 1942, and are taxable under that section only on the amounts actually distributed to them during those years.

1. The petitioner, a manufacturer of brush materials, developed a new product, utilizing to a small degree waste formerly sold as such. Held: on the facts, that for purpose of computation of excess profits tax, an operating loss of the department devoted to the development of the new product was not a deduction within section 711 (b) (1) (J) (ii), Internal Revenue Code; held, further, that such loss was the consequence of change in type, manner of operation, size, and…

Income received by petitioner from its tenant as consideration for agreeing to cancellation of a sublease made by the tenant held not excludible as abnormal income for excess profits tax purposes under Internal Revenue Code, section 721 (a) (2) (E).

The shareholders of a California corporation engaged in the operation of a bus line took over the corporation's business and assets on June 1, 1942, under a contract of purchase and sale, and… Held: taxable to the corporation and not to the partners.

1. Scrip delivered to petitioner's bondholders in reorganization based upon past due interest held to retain character as interest, and as such to be excluded from the computation of petitioner's borrowed invested capital under Internal Revenue Code, section 719 (a) (1). 2.

In 1932 petitioner received the assets of its subsidiary upon the latter's liquidation. Held: going concern value was not a separate intangible asset of petitioner's subsidiary, separately valued as such in the former proceedings, but was a criterion of value used in valuing the depreciable assets of the subsidiary; held, further, petitioner's basis for depreciation as to assets in question is res judicata by reason of…

Petitioner was employed as an attorney by a receiver in a liquidation proceeding from January 12, 1937, to June 25, 1942. Held: the several payments were compensation for professional services, constituting gross income to petitioner when received, and petitioner is not entitled to the benefits of section 107, Internal Revenue Code.

1. A corporation, regularly engaged in the manufacture and sale of wine, sold its entire stock and leased its winery to the purchaser after its… Held: The evidence adduced does not support a finding that any part of the consideration paid for the wine was applicable to the good will of the business. (b) Profit from the sale of the wine was ordinary income and not capital gain, as the intent to discontinue the business did not convert stock in trade into a capital asset. 2.

Held, that the transactions here involved between petitioner and the holder of all its outstanding old bonds did not constitute… Held: that the transactions here involved between petitioner and the holder of all its outstanding old bonds did not constitute purchase and sale transactions, but an exchange or substitution of new bonds for old as evidence of a continuing indebtedness between the same parties; held, further, that the premium paid and unamortized discount…

Taxpayer, on July 1, 1925, changed his method of keeping books of his printing business from the cash to the accrual basis. He continued, however, to compute his net income for income tax purposes on the cash basis.

Petitioner's acquisition of property from two transferor-stockholders in exchange for its obligation to pay for the properties what it received upon sale up to an agreed amount, held to create a basis of its cost, the transaction not constituting a tax-free exchange under Internal Revenue Code, section 112 (b) (4) or (b) (5), nor a capital contribution under Internal Revenue Code, section 113 (a) (8) (B).

The petitioner has since 1936 been employed by a company engaged in geophysical exploration in foreign countries, as well as in the United States. Held: on the facts, that he was during 1943 a bona fide resident of Colombia and therefore not subject to taxation by the United States on his income earned in Colombia, within the purview of section 116 (a), Internal Revenue Code, as amended by section 148 (a), Revenue Act of 1942.

1. Abnormality -- Class -- Section 711 (b) (1) (J) (i), I. R. C. -- Excise taxes on chewing gum imposed during part of base period but not during taxable year, held not an abnormal class of deduction. 2. Id. -- A bad debt which resulted, not from transactions with customers or from advances for goods, but from a transaction not directly connected with the business, held abnormal as to class. 3.

1. Where the operator of a horse-book establishment where bets on horse races were illegally made, paid sums of money for protection from arrests and prosecution, held, such payments are contrary to… Held: such payments are contrary to public policy and are not deductible in determining net income. 2. The expenses of actually earning income in illegal businesses are deductible in computing net income subject to tax. 3. Fraud penalties approved.

Petitioner, a resident alien, owned certain real and personal properties in German-occupied zones of Holland and France on December 11, 1941, when the United States declared war on Germany. Held: petitioner is entitled to a war loss deduction under section 127, Internal Revenue Code.

1. S, an employee of petitioner, had in prior years acquired 100 shares of petitioner's stock, which were subsequently increased to… Held: the stock plan petitioner had with S was an employment arrangement, rather than an outright sale and repurchase of stock, and under section 23 (a) (1) (A), I. R. C., petitioner is entitled to deduct in 1943 the part of the judgment paid which represented additional compensation to the employee rather than a capital expenditure; held,…

1. Two brothers, sole equal shareholders of the taxpayer corporation, contributed to it cash as paid-in surplus in 1931 and orally agreed that either might make withdrawals up to $ 150,000. Held: on the evidence to be distributions of dividends and not loans. 2. Amounts paid by the taxpayer corporation to its two shareholding officers, held, on the evidence to be excessive as salaries and deductible as such only to a lesser amount determined. 3.

The taxpayer, a solvent corporation, purchased its own bonds by direct negotiations with bondholders at a price equal to half of face value. Held: The amount of discount on those acquired from a closely connected seller was a gratuitous forgiveness of debt, not taxable as income. (2) The amount of discount on one bond acquired from a seller not shown to have had personal or business relations with the taxpayer was taxable as income.

1. The deficiency notice for 1941 tax was mailed July 31, 1945. Held: the assessment is not barred by the statute of limitations. 2. In 1928 the Board of Tax Appeals held that the intangibles of this taxpayer at its organization in 1918 had a value of at least $ 412,500, which was 25 per cent of the outstanding capital stock and the allowable limit under the statute therein involved.

Petitioner, a nonresident alien, empowered his brother, who resided in the United States, to deal in commodity futures at his own discretion through resident brokers in the United States for… Held: petitioner was engaged in trade or business in the United States and is taxable as a nonresident alien so engaged; held, further, that the petitioner is entitled to a net short term capital loss carry-over from 1940 to 1941.

1. Petitioner's basis for gain or loss on certain securities purchased in January and October 1937 and sold in 1941, held to be the original cost of such securities and not their fair market value on… Held: that some of the petitioner's expenses in operating the ranch in 1941 and 1942 were for the primary personal benefit of that individual and are not deductible; the amounts of expenses deductible as ordinary and necessary business expenses are determined from the evidence.

1. Excess Profits Tax -- Equity Invested Capital -- Accumulated Earnings and Profits -- Section 718 (a) (4). -- Accumulated earnings and profits within the meaning of section 718 (a) (4) does not include cash and property transferred to a taxpayer by a community group to induce the petitioner to operate a factory in the community, since no profit or income was shown to result from the transfer. 2.

The trust estate, taxable as a corporation, sold its assets and business to a partnership composed of the three beneficiaries and two… Held: the trust estate transferred good will to the partnership which had a fair market value of $ 110,194.80; held, further, long term notes given to the trust estate had a fair market value equal to their discount value; held, further, the stockholder-beneficiaries received in effect a distribution taxable as a dividend to the extent of…

1. Nonresident Alien -- Income From Sources Within the United States -- Allocation -- Acts of Trustees. -- The tax liability of a nonresident alien beneficiary of a trust must be determined by referring to the terms of the trust instrument and to the provisions of the Internal Revenue Code, and it is not affected by the mechanics of the method chosen by the trustees to distribute the income of the trust where their choice was prompted by no more compelling reason than their…

1. Employee Pension Trust -- When Contribution Made -- Section 165 Prior and 165 (c) Subsequent to the 1942 Amendment, I. R. C. -- A nonforfeitable contribution is made by an employer to an employee pension trust within the meaning of section 165 prior and 165 (c) subsequent to the 1942 amendment in the year in which the employer's obligation to pay the contribution becomes fixed. 2.

Decedent, a resident of California, by her will bequeathed the residue of her estate, consisting of more than one-third of her estate, to charitable organizations. Held: charitable bequests were voidable, not void, and decedent's estate is entitled to deduct the entire amount thereof from the gross estate, pursuant to section 812 (d), I. R. C.

1. Charitable bequests of the remainder interest in residuary estate, after life estate in decedent's invalid husband, with power in the trustee to invade the principal for husband's care and maintenance, held deductible. 2. Value of such remainder interest determined with reference to actual physical condition of life beneficiary on the date of decedent's death, rather than by use of established mortality tables exclusively.

1. The petitioners operate a chain retail grocery business. Prior to 1941 they reported their inventory on the basis of cost. Held: that for 1941 they were entitled to report their inventory on the elective or last in, first out basis authorized by section 22 (d) of the Internal Revenue Code. 2. During 1941 the petitioners made three trips.

Held, where the excess profits credit computed by using average base period net income reconstructed under section 722, I. R. C., is… Held: where the excess profits credit computed by using average base period net income reconstructed under section 722, I. R. C., is less than the credit resulting from application of the 75 per cent rule under section 713 (e) (1) to the actual base period net income, the taxpayer is not entitled to relief under section 722 in addition to…

1. The Renegotiation Act of 1942, as amended July 1, 1943, held applicable to Defense Plant Corporation contracts fully performed and paid for after date of original enactment and prior to date of amendment. 2. As so applied, Renegotiation Act of 1942, as amended, held not unconstitutional. Stein Brothers Mfg. Co., 7 T. C. 863; Ring Construction Corporation, 8 T. C. 1070; National Electric Welding Machines Co., 10 T. C. 49. 3.

A national bank, on the cash basis, paid checks drawn or endorsed by its depositors. Some of the checks were lost or returned during the taxable year before they had been charged to the depositors. Held: the amount of such checks is deductible under section 23 (f), as a loss sustained during the taxable year.

During 1925 to 1928 petitioner built a large rayon plant not far from a river in Tennessee. The plant was built under the supervision of competent engineers. Held: petitioner is entitled under section 23 (a) (1) (A) of the Internal Revenue Code to deduct the expenditures for drilling and grouting as ordinary and necessary business expenses. Illinois Merchants Trust Co., Executor, 4 B. T. A. 103, followed.

Taxpayer in 1941 made certain gifts, thereafter filed a gift tax return, and paid the tax as disclosed by the return. Held: that the amount paid to his attorneys by taxpayer is not allowable as a deduction under section 23 (a) (2), Internal Revenue Code.

1. Gift Tax -- Settlement at Divorce -- Transfer in Trust for Minor Child. -- No adequate money consideration or lack of donative intent shown, and transfer held gift to extent value exceeded obligation to support child during minority. 2.

Albert V. Moore made certain cash payments to his wife and created a life insurance trust for her benefit pursuant to a decree of divorce which ratified and confirmed a separation agreement. Held: the transfer of property and cash by Moore in compliance with the decree of the court was for an adequate and full consideration in money or money's worth, and did not constitute taxable gifts, following Commissioner v. Converse, 163 Fed. (2d) 131, affirming 5 T. C. 1014.

Petitioner, a member of a partnership engaged in business in Texas, sold his partnership interest, which he had owned for more than one year, to one of his copartners and two other individuals. Held: the gain realized upon the sale was a long term capital gain.

Refund of excess profits tax payment made on a tentative excess profits tax return more than two years before the mailing of a deficiency notice by the Commissioner held barred by the statute of limitations.

Petitioner was divorced from his wife in 1940 under a decree obligating him to pay her $ 60 a week for her maintenance and support. On January 2, 1942, petitioner and his ex-wife entered into a written agreement, conditioned on her remarriage to another, calling for the payment by petitioner to her of $ 8,500 and $ 1,500 for her attorneys' fees. In consideration therefor she consented to a modification of the divorce decree so as to eliminate the payments for support and maintenance, released petitioner from all future claims in that regard, and agreed to dismiss a court action she had instituted against petitioner for conversion of personal property. She remarried on January 9, 1942, and petitioner made the specified payments. A court order was obtained eliminating the support and maintenance payments from the divorce decree. Petitioner paid his own attorney $ 1,000 for his services in this connection. Held, the petitioner is not entitled to deductions under section 23 (u) of the Internal Revenue Code for any part of the $ 11,000 he paid in 1942.

Payments of alimony under decree which provided that divorced husband was to pay $ 100 monthly until $ 9,500 was paid, unless his former wife remarried, held, to be installment payments within… Held: to be installment payments within section 22 (k) and therefore not deductible from husband's gross income under section 23 (u), Internal Revenue Code.

Corporation exchanged mortgaged real estate for unencumbered properties, plus cash. Held: in computing the amount of the gain which is to be recognized under the provisions of section 112 (c) (1), I. R. C., the amount of the mortgage indebtedness is to be treated as other property or money received in the exchange, and inasmuch as this amount plus cash received exceeds the amount of realized gain, the entire gain is…

Petitioner and one Ferguson, as partners, developed a large dairy business. Held: that the wife, having rendered vital services to the operation of the business and having contributed to it capital which did not originate with petitioner, is recognizable as a partner for tax purposes.

The taxpayer's wife advanced to him funds on three occasions for use in a business of renting automobiles and adjusting insurance claims conducted by him. Held: that no partnership existed in 1943 and that all profits of the business are income of the taxpayer.

Petitioner, a Texas corporation, upon its organization received from its incorporators conveyances of certain real estate located in Houston, Texas, in exchange for all of its capital stock. Held: the real estate in question was property held by petitioner primarily for sale to customers in the ordinary course of its business and the profits are taxable as ordinary income, as the Commissioner has determined.

Petitioner's wholly owned subsidiary incorporated in Canada undertook contracts in Canada in 1937 and 1938 from which a profit resulted. Held: the funds withdrawn by the petitioner in 1938 and 1939 were not dividends in those years for purposes of computing excess profits tax base period net income, credit, and carry-over from 1940 to 1941.

1. The petitioner, prior to April 1, the date of incidence of taxes later paid by it on real estate and personal property, had an executory contract, without possession, as to purchase of the… Held: the petitioner was not owner on April 1, and may not deduct the taxes paid. 2.

1. Stock of Trask-Willamette Co. held to have become worthless during the year 1941. 2. Held: petitioner's distributable share of the profits realized from the sale of the contract by the partnership is his separate income. 4.

Payment made to Office of Price Administration in settlement of a cause of action for price ceiling violations resulting from disclosures voluntarily made by the petitioner, held, not deductible… Held: not deductible either as a business expense, or as a reduction of sales income, or as a contribution to the United States.

1. As assistant manager of a branch office of a life insurance company, the petitioner received a salary, standard commissions on all policies sold by him personally, overwriting commissions on all policies sold by agents under his supervision, and renewal commissions. He received commissions in 1942 on several policies which he had written in 1941, amounting to less than 80 per cent of the total compensation received from the insurance company in 1942.

1. Section 721 (a) (2) (C) -- Class of Income. -- Where a corporation develops patents and processes in prior years and then exploits the article produced thereby during the taxable year by manufacturing and selling it, using management salesmanship, plant, and equipment and other aids, not all of the gross income from the sale of the product can be classified as class (C) income from the development of the patents and processes, since some must be regarded as resulting from…

Petitioner on August 1, 1943, gave his wife a bakers supply business which he had been operating under the name of J. M. Henson Co. in Atlanta, Georgia. Held: the net income of the business for the period August 1 to December 31, 1943, is taxable to petitioner. Robert E. Werner, 7 T. C. 39, followed.

Use of substantial inventory and, intermittently, other capital, by petitioner engaged in part in hosiery manufacturing business, held, to demonstrate that capital is a material… Held: to demonstrate that capital is a material income-producing factor so as to defeat petitioner's exemption as personal service corporation, under section 725, Internal Revenue Code, notwithstanding that most of its gross income was derived from personal service business of selling on commission.

For 25 years prior to 1942 petitioner operated his own business of selling railway parts and supplies. Held: petitioner's adult son was a bona fide partner because he performed vital additional services during 1942 and 1943 and his share of partnership net income is not taxable to petitioner; held, further, that petitioner is not taxable on the share of partnership profits allocated to his wife in proportion to their respective capital…

In 1932 petitioner's decedent, a nonresident alien, created a revocable inter vivos trust, naming a New York bank as trustee. Held: the bank deposits were held for the decedent within the meaning of section 863 (b), I. R. C., and, therefore, were not subject to estate tax.

Capital or Expense -- Equipment Purchased by Lessee. -- The cost of equipment purchased by a lessee for use in the leased premises is not necessarily deductible as an ordinary and necessary expense. It may be an expense or a capital expenditure recoverable through depreciation, depending upon circumstances not shown herein.

1. Respondent determined income tax deficiencies for 1943, based in part on adjustments to 1942 income and computed pursuant to section 6 of the Current Tax Payment Act of 1943. Held: the Commissioner is not barred by the limitation provisions of section 275 (a), Internal Revenue Code, from determining and asserting these deficiencies. Lawrence W. Carpenter, 10 T. C. 64, followed. 2. Petitioners, husband and wife, were majority stockholders of a closely held corporation.

Petitioner and his wife were divorced. Care and custody of their eight minor children were awarded to the wife. Held: under the facts and circumstances, petitioner is not entitled to any credit for dependents.

In 1893, pursuant to a compromise agreement, decedent executed a trust agreement, reserving, inter alia, the income for life. Held: The value of the remainder interests transferred was includible in decedent's gross estate under section 811 (d) (2), I. R. C. (2) The application of that section does not infringe the due process clause of the Fifth Amendment.

Payments made by petitioner in 1943 and 1944 to another corporation held not deductible as contributions by an employer to a profit-sharing trust, as required by 1942 amendments to section 23 (p) (1) (C), covering the years involved, notwithstanding subsequent creation of trust and its approval by respondent and irrespective of the statutory grace provisions of Revenue Act of 1942, section 162 (d), which do not waive trust requirement and are inapplicable to trusts having no…

Compensation received by petitioner in the taxable year 1943 for personal services allocable in part to the year 1942 under section 107, Internal Revenue Code, held to be subject to tax computation at the reduced amount provided by the Current Tax Payment Act of 1943, to the extent of the compensation allocable to the year 1942 under section 107.

1. At decedent's death title to certain corporate stock, a partnership interest, and other miscellaneous properties was held in his sole… Held: that the petitioner has failed to prove that the decedent and his wife, at the time of marriage, agreed to hold all after-acquired property, whether from earnings or other sources, as tenants in common rather than as joint tenants with right of survivorship; and that the full value of all the property involved is includible in the…

1. Held, that by relinquishment of exclusive dominion and control and power of recapture for her own benefit and purposes, a donor, on January 10, 1936, made taxable gifts of the entire… Held: that by relinquishment of exclusive dominion and control and power of recapture for her own benefit and purposes, a donor, on January 10, 1936, made taxable gifts of the entire trust estate, including the shares given to the trust by two beneficiaries, and accumulated trust income. 2.

1. The petitioner, a taxicab driver, received tips with fares collected from passengers. Held, such tips are income. 2. Held: such tips are income. 2. On the facts, held, that the Commissioner is not shown to have erred in adding to petitioner's income 10 per cent of his gross receipts because of such tips, in the absence of any record kept by the petitioner; held, further, that the Commissioner is not shown to have erred in denying deduction for the cost…

Money of decedent held by bank in agency account subject to owner's instructions, held excluded from gross estate as moneys deposited, within the meaning of Internal Revenue Code, section 863 (b).

1. Petitioner, holding a one-third interest in a partnership, assigned to his wife two-thirds of such interest upon her advancing to the partnership at his request… Held: the share of such profits so distributed to the wife is taxable to petitioner. 2. Held, that reimbursement to petitioner for certain expenses incurred and paid by him in his efforts to negotiate the proposed contract between the War Department and the partnership did not constitute taxable income to him.

Life insurance which to the extent of decedent's payments of the premiums prior to 1941 is includible in gross estate only in the event of the retention by decedent of an "incident of ownership" (Revenue Act of 1942, section 404, amending Internal Revenue Code, section 811 (g), held properly includible in view of decedent's reversionary interest in the insurance policies. Sec. 404 (c).

Where a corporation, which regularly computed income from long term contracts on the completed contract method of accounting and filed its income tax returns accordingly, exercised the election under… Held: that its corporation surtax net income, computed under section 15 for the purpose of section 710 (a) (1) (B) is to be computed upon the percentage of completion method of accounting.

An automobile and truck sales business which was owned and controlled by one person was operated for several years under a valid corporate charter issued by the State of Tennessee, although no stock… Held: that the petitioner was a legal corporate entity, taxable as such until its charter was revoked, and that thereafter it was not an association taxable as a corporation, but was a sole proprietorship, the income of which is taxable to the sole owner individually.

The petitioner has moved for judgment on the pleadings, the claim being that the War Contracts Price Adjustment Board did not conclude renegotiation of his business for the calendar year 1943 within… Held: that petitioner's motion is not well taken, in that the facts do not show that the determination of excessive profits was not made within the time prescribed by section 403 (c) of the Renegotiation Act, as amended.

Income -- Estate -- Section 126 (a) (1) (A) -- Income Earned But Never Received by Decedent. -- Bonus for services of decedent awarded after death and received by estate is taxable to estate under section 126 (a) (1) (A) because the right to receive was derived through decedent, even though he never had an enforceable right during his life.

1. Upon the pulling or abandonment of an oil well, petitioner's loss is determined by adjusting its cost basis for depletion allowable, as well as for depreciation allowable. 2.

The petitioner, successor to a partnership, recovered, in 1943 and 1944, upon debts which, prior to January 1, 1940, had been charged off by the partnership and were allowable as deductions from… Held: the petitioner may not, under section 711 (a) (1) (E) of the Internal Revenue Code, exclude the recoveries from excess profits taxable income.

Petitioner separated from his wife in 1926. Held: the obligation in question was incident to divorce as provided in section 22 (k), Internal Revenue Code, and that the payments thereunder in the years involved are deductible by petitioner under section 23 (u), Internal Revenue Code.

1. The Commissioner has determined a deficiency in petitioner's income tax for the year 1943, based on the disallowance of a claimed deduction for 1942 and a similar one for 1943. Held: that although the year 1942 was involved in part, determination of the deficiency was not barred by the statute of limitations. Lawrence W. Carpenter, 10 T. C. 64. 2. Petitioner is a civilian employee of the United States Government and maintains a home for his family in Bozeman, Montana.

1. The Commissioner determined a deficiency in excess profits tax and an overassessment in income tax in a deficiency notice covering 1942. Held, the Tax Court has no jurisdiction to redetermine the income tax liability. 2. Held, on the facts, that expenditures made for certain alterations and changes in a building were not for repairs, but for replacements, and were capital expenditures. 3. Petitioner exchanged certain of its stock for notes. Held, the petitioner is entitled to a net capital addition under section 713 (a), I. R. C., in the computation of its excess profits credit, to the extent of the value of the stock, as the unadjusted cost basis of the notes. Value of stock determined.

Incentive pay measured by a percentage of sales of certain departments of a manufacturing corporation was authorized by its board of directors in 1943, but was withheld because of a ruling of the… Held: amount received by petitioner in 1944 for services rendered in 1943 is back pay as defined in section 107 (d) (2), I. R. C.

Transferee Liability -- State Exemptions From Execution. -- A widow receiving property from her husband's estate exempt from execution in her hands under state law is a transferee and liable as such for Federal taxes due from the decedent.

Held, under the facts, certain transfers of property made by decedent were not in contemplation of death. Held: under the facts, certain transfers of property made by decedent were not in contemplation of death.

The decedent at the age of 78, without legal advice, wrote out in longhand her will, consisting of four paragraphs. Held: the value of the bank stock is deductible from the gross estate of the decedent under section 812 (d), I. R. C., as a bequest to a trustee to be used by such trustee exclusively for religious or educational purposes.

In 1941 petitioner was the owner of a thoroughbred English setter bird dog which had been well trained. Held: petitioner is not entitled to deduct from his gross income under section 23 (e), I. R. C., the cost of the dog, either as a loss incurred in a trade or business, or in a transaction entered into for profit, or as a loss from casualty or theft.

Payments to divorced wife in excess of amount required by then effective decree, held not deductible under Internal Revenue Code, section 23 (u), notwithstanding increased payments were included in subsequent nunc pro tunc order.

Corporation A in the course of liquidation distributed cash and undivided interests in three mills as a liquidating dividend to its shareholders. They immediately exchanged the cash and mills for all shares of the taxpayer, a corporation organized for the sole purpose of selling the mills. The taxpayer sold the mills within a few months to purchasers who had never negotiated with corporation A; thereafter liquidated and dissolved. Held: (1) Although a part of A's assets was transferred to the taxpayer and immediately thereafter A's shareholders were in control of the taxpayer, there was no reorganization within section 112 (g) (1) (D), Internal Revenue Code, because the taxpayer transferee did not carry on any part of A's corporate business, and was not created for such purpose, but only for the purpose of selling assets. (2) The taxpayer's bases for computing gain or loss on sale of the mills are the bases of the transferor shareholders. Sec. 113 (a) (8) (B), Internal Revenue Code.

1. Notes given in taxable year by petitioner corporation to its principal stockholder-officers as payment of portions of salaries due to them for services during that year, accrued on its books as… Held: deductible from its gross income and not subject to the provisions of section 24 (c). 2.

Alimony payments were allowed to the former wife of the petitioner for a fixed period by a divorce decree, but the amount of each payment was not fixed and the total amount to be paid was not fixed. Held: that the alimony payments were not installment payments, but were periodic payments under section 22 (k), Internal Revenue Code, and, therefore, were deductible by petitioner under section 23 (u).

Petitioner was divorced by his wife in 1936. She did not ask for alimony payments after divorce in her complaint, and was not awarded alimony in the decree of divorce. Held: the payments in 1943 do not come within section 22 (k) of the Internal Revenue Code because they were not made in discharge of a legal obligation which was incurred by petitioner under a written instrument incident to the divorce.

Petitioner is a Texas corporation which was dissolved October 31, 1945, and under the applicable statutes has a taxable year of less than 12 months, to wit, August 1 to October 31, 1945. Held: the Treasury regulation which the Commissioner has applied is valid.

1. Gift Tax -- Nonresident Alien -- Bank Deposits. -- Money on deposit in American banks is not exempt or excluded from gift tax as property without the United States on the theory that section 863 (b) of the estate tax chapter is to be read into the gift tax chapter. 2.

Compensation allocable to 1942 under Internal Revenue Code, section 107, held taxable upon receipt in 1943 only to the reduced extent provided by the Current Tax Payment Act. William F. Knox, 10 T. C. 550.

In computing 90 per cent victory tax limitation on taxes imposed by chapter 1 under Internal Revenue Code, section 456, held addition to 1943 tax liability of 25 per cent of 1942 tax is not affected as being imposed by section 6 of Current Tax Payment Act and not by chapter 1.

Income -- Compensation for Extended Services -- Section 107 (a). -- Period includes that during which efforts were unsuccessful.

1. Petitioners are brothers and partners. For many years prior to 1940 they were diamond merchants in Belgium. On April 1, 1939, they opened a branch in New York City. Held: the cost of all the diamonds sold in the fiscal year 1941 is the amount of $ 325,218.16. 2. The New York partnership kept its books on a fiscal year basis and its first taxable year was the fiscal year ended March 31, 1940.

1. Deductions -- Depreciation -- Section 23 (l) -- Improvements by Temporary Occupant of Land. -- A licensee may not spread the cost of assets over the term of the license where it had a right either to receive a new license or to be paid for the assets at the end of the term of the license and the assets had a useful life longer than the term of the license. 2.

Respondent's action in allowing a deduction of only $ 1,200 under the provisions of section 23 (u), I. R. C., out of $ 3,600 paid by petitioner to his former wife because only $ 1,200 is includible in the gross income of the wife under the provisions of section 22 (k), I. R. C., is approved.

Decedent-grantor established a trust on December 3, 1936, under the terms of which the income of seven-ninths of the trust estate was payable to his wife for life. Held: that the value of the trust estate is includible in the gross estate of decedent under section 811 (d) (1) of the Internal Revenue Code.

1. Petitioners are copartners, carrying on a manufacturing business under the name of Union Manufacturing Co. They have two children. Held: that petitioners did not create a new and bona fide partnership in 1943, and that their two children were not copartners with them in the conduct of the partnership business known as Union Manufacturing Co. Commissioner v. Tower, 327 U.S. 280, followed. 2.

The decedent, a resident of California, was assisted by his wife in starting a fertilizer business. They started with no capital. Held: on the facts, the gift was not to the extent of one-half made by the wife, one-half of the stock not being received by her as compensation for personal services actually rendered by her, within section 1000 (d) of the Internal Revenue Code.

Income -- Alimony Payments -- Periodic v. Installment -- Principal Sum -- §§ 22 (k), 23 (u). -- Payments consisting of a percentage of the husband's annual net income for five years were periodic and not taxable to the husband. There is in such case no principal sum.

1. Borrowed Invested Capital -- Indebtedness -- Sec. 719 (a) (1). -- Money advanced by a chamber of commerce to induce a new business to locate in its city, which money was to be repaid only in case the pay roll of the taxpayer did not reach a certain total within a stated time, should not be represented in borrowed invested capital, even though a note and deed of trust were executed, to mature only after the stated time. 2.

1. In 1942 the sole stockholder of J. T. S. Brown's Son Co., a Kentucky corporation engaged in the distillery business, decided to liquidate the corporation, and a plan for the complete liquidation… Held: a corporation does not realize gain from the distribution of its assets in kind to stockholders in liquidation and the Commissioner's determination is reversed. 2.

In 1926 and succeeding years petitioner acquired certain public utility properties in Florida at a cost which was approximately $ 1,700,000 in excess of the cost to the companies which first devoted… Held: the accounting rules of the Federal Power Commission and its orders with respect thereto for purposes of that body's functions are not controlling of tax questions, and petitioner is not entitled to deduct in 1943 the amounts which the Commission ordered it to charge off.

1. Held, returns in question were joint returns of husband and wife. 2. Where joint returns are filed by husband and wife the liability for taxes and penalty is both joint and several. Held: returns in question were joint returns of husband and wife. 2. Where joint returns are filed by husband and wife the liability for taxes and penalty is both joint and several.

1. Composite rates of depreciation claimed on machinery and motor vehicles used in construction work, held, on the evidence to be… Held: on the evidence to be proper. 2. A contracting firm in 1941 rented machinery and equipment to the United States Government at a stipulated monthly rental under a contract providing that the Government could elect to purchase any or all items on completion of certain work by paying the difference between the agreed value of the items…

1. The Renegotiation Act is not unconstitutional as applied to petitioners. 2. Petitioners' excessive profits for the calendar year 1943 were in the amount determined by the respondent. 3. In determining the amount of excessive profits realized on renegotiable sales by a partnership engaged in the business of representing manufacturers on a commission basis, the respondent did not err in failing to make any allowances as items of cost for reasonable salaries for partners. 4.

1. Held, that under the facts in this case, the Coast Carton Co. was not an association taxable as a corporation in 1940 and 1941, but was wholly owned and operated by James L. Norie. 2. Held: that under the facts in this case, the Coast Carton Co. was not an association taxable as a corporation in 1940 and 1941, but was wholly owned and operated by James L. Norie. 2. Held, that our decision in Coast Carton Co., 3 T. C. 676; affd., 149 Fed.

1. Deductions -- Percentage Depletion -- Gross Income From the Property -- Operation by an Agent. -- The owner's gross income from property operated for it by another is the gross before deduction of operating expenses and other charges. 2. Deductions -- Loss -- Abandonment or Surrender of Worthless Lease. -- A deductible loss occurs when a lessee cancels a lease which has lost all value and become a liability.

The taxpayer's daughter transferred to the taxpayer without consideration valuable real estate and other property prior to her marriage to a man to whom the taxpayer objected. Held: under the circumstances, not a gift, but made for a full and adequate consideration in money or money's worth.

The petitioner, mortgagee-trustee for bondholders, after default and pursuant to a remedy provided in the mortgage, giving it a right to demand and receive a conveyance of the property and lease the… Held: that the petitioner, in receiving rentals upon the property which in the taxable years were used to pay taxes, largely for prior years, and expenses, did not receive taxable income.

Shares of stock of a wholly owned subsidiary corporation which the petitioner purchased for the purpose of increasing its wartime production capacity, held, not emergency facilities subject to… Held: not emergency facilities subject to amortization deductions under section 124, Internal Revenue Code.

Petitioner procured a divorce by default in Florida while stationed there in military service, and shortly thereafter, in 1943, remarried. Held: the agreement in 1944 was not incident to the divorce, within the intendment of section 22 (k), and the deductions were properly disallowed.

1. Held, on the facts, that division of the joint estate of decedent and wife into tenancy in common and transfer to their son were in contemplation of death. 2. Held: on the facts, that division of the joint estate of decedent and wife into tenancy in common and transfer to their son were in contemplation of death. 2.

1. Taxpayer entered into an agreement with two underwriters covering the purchase by them of its 30,000 shares of newly authorized preferred stock at $ 100 per share, the underwriters to be paid $ 3.50 per share for their services.

Deductions -- Divorce -- Periodic Payments -- Section 23 (u). -- Periodic payments are not deductible by a husband, under section 23 (u), where the only written instrument mentioning them does not impose them in discharge of a legal obligation arising out of the marital relationship, but requires them as purchase price for real property being transferred by the wife to the husband.

Petitioner exercised an option to purchase 1,500 shares of stock on May 1, 1944. He sold 900 of the 1,500 shares at a profit on November 1, 1944. Held: that the holding period of the 900 shares begins with and includes the day following the date of acquisition of such stock, and, hence, petitioner realized a short term capital gain.

Premium paid for bonds callable for redemption on 30 days' notice held amortizable in full in year of acquisition under Internal Revenue Code, sections 23 (v) and 125, notwithstanding premium may have been due entirely to accompanying privilege of converting into obligor's stock at price below current market.

The taxpayer indicated on its tax return an election to include tax-free interest in excess profits tax net income and by section 720 (b), Internal Revenue Code, thereby gained the right to include… Held: valid and binding, notwithstanding the unanticipated tax consequences, and the determined adjustment within its framework is sustained.

Excess profits carry-over from 1940 to 1941 denied a taxpayer which operated on a nonprofit basis in 1940, selling its production to its stockholders at cost, but which in 1941 changed its policy and began selling to its stockholders at market for the purpose of making available to its stockholders the relief afforded by the excess profits tax provisions of the statute allowing a credit for invested capital.

Petitioner entered into an agreement with a factor under the terms of which it agreed to assign to the factor contracts calling for the… Held: Contingent liability of petitioner to pay factor face amount of the contracts assigned is indebtedness evidenced by a * * * mortgage and is borrowed capital, as defined in section 719, I. R. C. (2) Discount or finance charges deducted from the face amount of contracts assigned to factor in connection with advances made to petitioner…

1. Held, that a certain sum paid by petitioner corporation in compromise and settlement of a lawsuit for damages for termination of a sales contract was an ordinary and necessary expense of… Held: that a certain sum paid by petitioner corporation in compromise and settlement of a lawsuit for damages for termination of a sales contract was an ordinary and necessary expense of petitioner's business. 2.

1. The taxpayer purchased all the shares of a corporation which acquired two farms and he thereafter made loans and advances to the corporation. Held: not deductible in 1932 because shares and loans became worthless in prior years. 2. The taxpayer, a lawyer, was appointed special counsel for a state railroad commission at an annual salary. He continued his private law practice and, in handling cases assigned him by the state, exercised independent judgment.

The decedent discovered a gypsum deposit during a period covered by an oral agreement that he could mine the property so long as gypsum was produced, as well as during a two-year written lease, which… Held: the decedent had such economic interest in the gypsum deposits as to give right to depletion on a discovery basis.

Petitioner made outright gifts of stock to his wife and children prior to 1941. Held: petitioner is not taxable on the income attributable to pre-1941 gifts; held, further, he is taxable on balance of income received under purported trusts during 1941; held, further, he is taxable on balance of income received under written irrevocable trusts for daughter, but not for son, subject to a qualification which is left for…

In 1943 decedent, who then owned and held title to three tracts of real property, transferred one tract to each of three of his children… Held: These were transfers for an inadequate consideration in money or money's worth and to the extent the value of the property exceeded the value of the consideration received by the decedent they were taxable as completed gifts under section 1002, I. R. C. (2) No reduction in value of the decedent's gifts is to be made by reason of the…

Operating assets of Corporation A were transferred to newly organized Corporation B in exchange for all of B's stock and the assumption… Held: that there was business purpose in the transfer of operating assets from Corporation A to Corporation B, that the transaction was a statutory reorganization under section 112 (g) (1) (D) of the code, and that the distribution to the A stockholders pursuant thereto had the effect of the distribution of a taxable dividend under section…

In 1936 decedent was a stockholder in Corporation A, a family personal holding company having a portfolio of about $ 35,000,000 of investments. Held: the transaction in 1936 effected a statutory reorganization under section 112 (g) (1) (C) of the Revenue Act of 1936; the distribution to A stockholders was made pursuant thereto; and the distribution received by the decedent, to the extent of her pro rata share of the accumulated earnings and profits of A, had the effect of a…

In 1942, petitioner sustained a loss from the sale of part of the unimproved land on which he regularly carried on the business of farming. Held: that such loss is not attributable to the operation of that business. The loss which can be carried over is limited to the extent provided in section 122 (d) (5) of the Internal Revenue Code.

1. Income -- Patent Infringement Award. -- An award for patent infringement was income, not compensation for a loss of capital. 2. Involuntary Conversion -- Section 117 (j). -- The award was not made for an involuntary conversion within the meaning of section 117 (j) and is not taxable thereunder. 3.

A notice of deficiency mailed to the executrix at the address given in the estate tax return, although she had changed her address and had filed documents or written communications to the… Held: not defective so as to deprive this Court of jurisdiction.

In 1923 petitioner's then husband created an irrevocable trust for her benefit and for the benefit of his two daughters by a prior… Held: in view of the recent decision of Commissioner v. Sunnen, 333 U.S. 591, the earlier Maud H. Bush case is not res judicata of the petitioner's liability for tax on the trust income for 1938, 1939, and 1940; held, further, following the views of the Second Circuit in the Irving T. Bush case, petitioner is taxable on the trust income…

In determining the excess profits credit of petitioner for the fiscal year ended August 31, 1941, the Commissioner, acting under the provisions of section 713 (f) (7) (B), reduced the excess profits… Held: that section 713 (f) (7) (B) does not authorize such a reduction and the action of the Commissioner was error.

On the record, held, the value of the corpus of an inter vivos trust executed by decedent is not includible in her gross estate under section 811 (c) of the Internal… Held: the value of the corpus of an inter vivos trust executed by decedent is not includible in her gross estate under section 811 (c) of the Internal Revenue Code, as a transfer by trust intended to take effect in possession or enjoyment at or after decedent's death, or as a transfer in contemplation of death.

1. One of the legatees under the will of the decedent filed, in the court having jurisdiction over the administration of decedent's… Held: that after the decree of the state court confirming partition the income of the two trusts hereby established was not to be included in the taxable income of petitioner. 2. Held, under the facts, that respondent did not err in disallowing deductions taken by petitioner in 1943 on account of certain attorneys' fees and audit expenses.

Income -- Alimony Payments -- 10-Year Period -- Sec. 22 (k). -- The 10-year period described in 22 (k) begins on the date that the legal obligation to pay the principal sum is first imposed upon the husband by the instrument, the decree, or a combination of the two.

Family Partnership. -- A wife is not recognized as a partner for tax purposes where a husband conveyed one-half of his established business to her and neither rendered services to the business during the taxable years.

1. Payments to foreign religious seminary by producer of religious dietary articles held deductible as ordinary and necessary business expense within the meaning of Internal Revenue Code, section 23 (a). 2. Deduction in taxable year on abandonment of experimental electric oven and equipment held proper.

1. Transfer of interest in established business to minor children contributing no new capital nor any services, held not sufficient to create valid partnership therein for income tax purposes, so as… Held: on facts, to be subject to valuation for gift tax purposes at amounts insufficient to create gift tax liability.

1. Held, on the facts, that amounts of deductions for compensation paid officers pursuant to contingent contract entered into in prior years were reasonable compensation for… Held: on the facts, that amounts of deductions for compensation paid officers pursuant to contingent contract entered into in prior years were reasonable compensation for personal services actually rendered, and were properly deducted under section 23 (a) (1) (A) of the Internal Revenue Code. 2.

Net Operating Loss Deduction -- Carry-Back -- Law Applicable to Deductions for Loss Year. -- Deductions in computing a net operating loss are determined under the law applicable to the loss year rather than the law applicable to the year for which a net operating loss deduction is allowed.

Renegotiation -- Jurisdiction -- Section 403 (e) (2). -- Section 403 (e) (2) expressly confers jurisdiction upon the Court to increase the amount of excessive profits in a proceeding before it. This jurisdiction does not depend in any way upon the application of section 403 (e) (1) and is not taken away by the exception contained in the last sentence of section 403 (e) (2).

Community Property Deductions -- Antenuptial Obligations -- Alimony -- Section 23 (u). -- Alimony payments to first wife deductible under section 23 (u) may be divided by husband and second wife filing separate returns on community property basis where they are collectible from community property.

Abnormality -- Class -- Section 711 (b) (1) (J) (i) and (K), I. R. C. -- In base period year 1937 petitioner, for the first time,… Held: that the stock bonus was a class of deduction separate from current basic salaries, that such deduction was abnormal in petitioner's business within subparagraph (J) (i), and that the abnormality was not a consequence of any of the factors enumerated in subparagraph (K) (ii); held, further, the limitation of subparagraph (K) (iii) is…

Held, the obligation under a certain agreement was incident to divorce as provided in section 22 (k), I. R. C., and the payments made thereunder during 1942 and 1943 are deductible by petitioner… Held: the obligation under a certain agreement was incident to divorce as provided in section 22 (k), I. R. C., and the payments made thereunder during 1942 and 1943 are deductible by petitioner under the provisions of section 23 (u), I. R. C.

On the record, held: (1) The contested payments were distributions of profits to shareholders and therefore were not deductible as… Held: The contested payments were distributions of profits to shareholders and therefore were not deductible as royalties or otherwise under section 23 (a) (1) (A) of the Internal Revenue Code. (2) Petitioner is not entitled to add the amount of $ 12,500 to its equity invested capital under section 718 (a) (6) of the Internal Revenue Code.

Decedent gave check to the State of New York for taxes. It was presented to his bank after his death and was, because of his death, refused payment, though sufficient funds were in the account. Held: the check was not paid by the decedent and the amount was not deductible from his income.

The trust instrument executed by decedent on December 8, 1941, was not made in contemplation of death.

Corporation A owned all outstanding stock of corporation B, which it had organized in October 1941 to engage in the manufacture for profit… Held: since section 124 (d) (4), I. R. C., to determine benefit, if any, to which taxpayer making an election under subsection (d) (1) is entitled, requires computation of taxes for all years within which the elected amortization period falls, i. e., 1942 to 1945, inclusive, and since corporation B is unable, under the circumstances, to…

1. Decedent, an alien, died in New York on December 23, 1939. From 1927 until his death he maintained a home in this country. Held: under all the facts and circumstances, decedent was a resident of this country within the meaning of section 810, Internal Revenue Code. 2. The value of blocked Dutch guilders in New York on December 23, 1940, the optional valuation date, determined for estate tax purposes.

1. Wallace H. Petit, manager of a wholesale grocery establishment, was convicted by a Federal district court of counterfeiting war ration sugar stamps and falsifying certain OPA forms in connection… Held: the moneys paid to him in connection with these transactions are includible in his gross income under section 22 (a), I. R. C. 2.

Timely disclaimer of intervening trust estate held to be effective for purposes of Internal Revenue Code, section 812 (d), notwithstanding that disclaiming beneficiary was named and served as trustee of what was charitable trust.

1. Petitioner is engaged in the business of installing an incentive wage system in manufacturing plants. Due to the antagonism and hostility of labor toward the plan during the base period, petitioner's average base period net income did not reflect adequately its normal earnings and resulted in an excessive and discriminatory excess profits tax based upon a comparison of its normal earnings with its earnings during the excess profits tax period.

A deduction claimed by and allowed to the petitioner in its 1937 return as a casualty loss from flood, held, properly disallowed by the respondent under section 711 (b) (1) (E) in determining… Held: properly disallowed by the respondent under section 711 (b) (1) (E) in determining petitioner's average base period net income for the purpose of computing excess profits tax for 1943 and 1944.

Jean Eissengarthen, a nonresident of the United States at the time of his death November 6, 1941, had certain sums of money on deposit with a New York bank. He owed no New York debts. Held: under the facts which have been stipulated, the money on deposit in the New York bank is excludible under section 863 (b), I. R. C.

The petitioner made a sale of real estate in 1941. Under the authority of section 44 (b), I. R. C., it elected to report the gain thereon on the installment basis for the years 1941, 1942, and 1943. In computing its excess profits tax for the years 1942 and 1943 it invoked the relief provision of section 721, claiming that the gain was abnormal and was attributable to the year 1941. Held, that petitioner is not entitled to the relief afforded by section 721, after having taken advantage of the benefit of election in spreading the gain over the three years.

Marriage of petitioner in 1939 having been void and ultimately annulled in 1945, by reason of existing valid marriage of his supposed wife, held, petitioner is not entitled to return any part of his… Held: petitioner is not entitled to return any part of his 1943 income as California community property.

Petitioner, at all times pertinent a nonresident alien, had in years prior to the taxable year been represented in the United States by his brother, who in 1942 placed for the petitioner orders with… Held: that the petitioner was not in 1943 engaged in trade or business in the United States, within the intendment of section 211 (b) of the Internal Revenue Code.