Volume 12 — Tax Court Memorandum

Held, that payments received by a corporation pursuant to Section 16 (b) of the Securities Exchange Act of 1934 because of directors' profits constituted ordinary income under Section… Held: that payments received by a corporation pursuant to Section 16 (b) of the Securities Exchange Act of 1934 because of directors' profits constituted ordinary income under Section 22 (a), I.R.C.General American Investors Company, Inc., 19 T.C. 581, promulgated December 30, 1952, followed.

Held: Petitioner, his wife and his three sons, acting with a business purpose, in good faith, intended, at the time of the formation of a partnership, to join together with others in the present… Held: Petitioner, his wife and his three sons, acting with a business purpose, in good faith, intended, at the time of the formation of a partnership, to join together with others in the present conduct of a business enterprise.

Deficiencies for the years 1945 and 1946 were determined against petitioner's deceased husband and were assessed against his estate. Held: the respondent established a prima facie case of transferee liability; and, since petitioner failed to rebut it, she is liable as a transferee.

On the basis of the facts presented, held that (1) the respondent did not err in determining fraud penalties against petitioner Bove, (2) since petitioner Bove failed to put in an appearance or introduce any evidence, the deficiencies determined against him are sustained subject to adjustments admitted by respondent, (3) respondent erred in determining fraud penalties against petitioner Fay, and (4) petitioner Fay did not receive unreported net taxable income in any of the…

During the taxable year, petitioner received about $67,650 from black-market dealings, which he failed to include in his income tax return for such year. Held: the return was false and fraudulent, with intent to evade tax, so that the 50 per cent penalty on the deficiency was correctly applied.

On the evidence, held, petitioner failed to prove that he contributed over half the support of his two minor children during the taxable year, and consequently is not entitled to the exemption provided by Section 25 (b) (1) (C), Internal Revenue Code.

Held, under all the facts, decedent's wife was a valid partner for income tax purposes during 1942 and 1943. Held: under all the facts, decedent's wife was a valid partner for income tax purposes during 1942 and 1943. Held, further, the amounts claimed in the partnership returns for 1942 and 1943, under the heading of Sales Promotion, are deductible for those years as travel and entertainment expenses.

Petitioner sustained a loss by reason of hurricane damage to his property occurring in 1944. Held that respondent is correct in disallowing the loss claimed as a deduction for the year 1945, this being neither the year in which the identifiable event causing the damage occurred nor the year 1947 in which a litigated claim against the petitioner's insurer was settled. The basis determined for allowance for the year 1945 of depreciation upon certain real and personal property used by petitioner in trade or business.

On April 30, 1943, petitioner sold his one-half interest in a partnership to his wife. Held: respondent erred in treating one-half of the partnership income for the period May 1, 1943 through December 31, 1943 as petitioner's income for 1943.

On the basis of the facts presented, held, that 1. The cost of erecting a substantial wire mesh fence completely enclosing a manufacturing plant was a capital expenditure. 2. Held: that 1. The cost of erecting a substantial wire mesh fence completely enclosing a manufacturing plant was a capital expenditure. 2.

In 1947, petitioner received a 10-year lease of a townsite with an option to buy during the seventh and eighth years of the lease. Held: the agreement was a lease, and the deduction as rent is allowed. Held, further, the useful life of a power plant purchased by petitioner determined.

Petitioner's decedent was a businessman who retired in 1934 and after his retirement purchased a farm in North Carolina containing something over 200 acres only a… Held: the dominant motive of decedent in making the transfer to this friend who was no relative of his, was associated with life and not with death. The transfer was not made in contemplation of death and the value of the property is not includible in decedent's gross estate under Section 811 (c) of the Code.

Held, reasonable salaries for petitioner's officers determined. Selling expenses incurred by the petitioner in the taxable years allowed.

1. Partnership. - Petitioner purchased a bar business for $10,000 taking title as sole proprietor. Held: No partnership existed between petitioner and his wife. 2. Capital gains. - Petitioner, on the cash basis, sought to offset against capital gain an expense of sale which was unpaid in taxable year. Held: Unpaid expenses may not be offset against capital gains where taxpayer is on cash basis of accounting. 3.

Income: Separate entities: Sole proprietorship and corporation: Section 22 (a): Section 45. - Net income reported by a substantial stockholder of a corporation from a sole proprietorship organized by him to take over the truck sales end of the corporation's business held not properly includible under Section 22 (a) or 45 in the income of the corporation when the two businesses were conducted separately and books accurately reflected income of each.

Respondent is sustained as to his disallowance of the inclusion in petitioner's equity invested capital for excess profits tax purposes of an item of $27,000 taken as representing good will acquired from a predecessor partnership, as the record establishes that the acquisition was in a transaction nontaxable under Section 112 (b) (5), Internal Revenue Code, and no cost basis to the predecessor is shown.

The petitioner was a substantial stockholder in a corporation engaged in the sale and servicing of new and used trucks. Held: the book value was not the equivalent of fair market value. 2. Held, further, the petitioner paid not less than fair market value for the building and realized no taxable income on the transaction.

Held, under all the facts, petitioner and his wife intended to join together in good faith and with a business purpose in the conduct of a partnership to buy and sell used automobiles. Held: under all the facts, petitioner and his wife intended to join together in good faith and with a business purpose in the conduct of a partnership to buy and sell used automobiles.

Held, under all the facts, petitioner, her daughter, and her sister-in-law entered into a valid partnership for the taxable years 1944 and 1945.

Held, adjusted basis of stock owned by taxpayer determined. Held: adjusted basis of stock owned by taxpayer determined.

Held, on the facts, petitioners are entitled to deduct from their gross income for the taxable year 1943, either under Section 23 (e) (1) or… Held: on the facts, petitioners are entitled to deduct from their gross income for the taxable year 1943, either under Section 23 (e) (1) or (2), Internal Revenue Code, a loss incurred upon the sale of real property acquired and at all times held for sale at a profit in connection with their real estate development and construction…

Petitioner's claim for traveling expenses incurred as a football player allowed in part.

Held, in respondent's determination of the taxpayers' net worth he erroneously included as an asset a receivable which was due to a corporation and was not owing to the taxpayers personally. Held: in respondent's determination of the taxpayers' net worth he erroneously included as an asset a receivable which was due to a corporation and was not owing to the taxpayers personally.

The Commissioner in his determination of a deficiency against petitioner's decedent stated: Information on file in this office discloses that the following items of taxable income were not reported:… Held: the determination of the Commissioner is presumed to be correct and petitioner has not sustained its burden of proof to show respondent's determination is in error. Respondent's determination is sustained for lack of evidence to overcome it. 2.

Prior to August 1, 1941, petitioners Sam Shainberg, Nathan Shainberg, Herbert Shainberg, and Ben Goldstein were equal partners in the… Held: the partnership agreement was entered into by the parties with a bona fide intent in good faith and acting with a business purpose to join together in conducting as a general partnership the Shainberg Dry Goods Company, and the respective partners should be taxed with their share of partnership profits as fixed in the partnership…

Capital gain or ordinary income. - Petitioner constructed ten houses in 1944, selling two of them in 1945 and renting the balance to defense workers in accordance with Government regulations. Held: the houses sold in 1946 were property held primarily for sale to customers in the ordinary course of business, and the gain realized is taxable as ordinary income.

Deductions: Business expense: Loss. - Petitioner, in the jewelry and antique business, occupied premises under a five-year lease. Lessor was obligated to make major repairs. Held: petitioner was not entitled to a deduction of the amount paid as casualty loss or business expense in 1946.

Deduction: Compensation: Section 23 (a) (1) (A). - Petitioner's board of directors voted its principal officer a fixed salary plus a bonus based on a percentage of corporate earnings. Held: the compensation paid to the officer was a reasonable allowance for personal services rendered.

1. Statute of limitations. - Held, that the notices of transferee liability were timely. 2. Trust: Association taxable as a corporation. - Held, that the trust involved herein was a liquidating trust and not an association taxable as a corporation. 3. Income of trust: Distribution. - Held, income of the trust was distributable within the discretion of the trustees and not currently.

Held, on the facts, the assessment and collection of the concededly correct deficiency asserted herein are not barred by limitation under Section 275 (c) of the Interal Revenue Code. Held: on the facts, the assessment and collection of the concededly correct deficiency asserted herein are not barred by limitation under Section 275 (c) of the Interal Revenue Code.

The gains derived by petitioners during the taxable year from the sale of certain properties are properly taxable as capital gains. Section 117 (a) and (j), I.R.C.

Petitioner sought a deduction for depletion on discovery value basis under Sections 23 (m) and 114 (b) (2), Internal Revenue Code. Held: petitioner failed to establish (1) the definite date of discovery, (2) the fair market value on date of discovery or within thirty days thereafter, and (3) facts required for computation of depletion.

Expenditures for subsistence at petitioner's place of business disallowed.

Validity of partnership established. Amount of casualty loss determined.

1. Part of the deficiency in petitioner's income tax for each year 1942 through 1945, respectively, found to be due to fraud with intent to evade tax. 2. Petitioner held liable for additions to tax for the years 1944 and 1945, respectively, because of the substantial underestimation of her estimated tax in those years.

Where the petitioner sold 19 of an undisclosed number of miners' houses and 13.89 acres of a tract of land containing from 100 to 575 acres for a consideration of $23,000, claiming a loss from the… Held: on the record as a whole, the petitioner has failed to sustain its burden of proof.

Held, under the facts petitioner was not a limited partner in a partnership organized under the laws of the State of New York on July 1, 1943, under the firm name of "Tegumat", succeeding a general partnership of the same name of which her then husband and two others were the general partners. Not being a bona fide partner in said partnership she was not taxable on her alleged distributable share of the profits of the partnership for 1945. The Commissioner is not sustained in his determination of the deficiency and a five per cent negligence penalty.

1. Petitioner, keeping no books and records, computed his sales and expenses as reported on his tax returns for the taxable years from his bank account transactions. Held: the amount of sales not deposited by petitioner and, therefore, not included in his income determined from the evidence for each year. 2. Held, petitioner liable for fraud penalties for each of the three taxable years.

Where Industries, an alleged transferee, was shown to have received $138,083.79 from Electric above and beyond any charges due from Electric to Industries and the transfer was shown to have caused… Held: on the record as a whole, the respondent has sustained his burden of proving Industries to be the transferee of Electric within the meaning of section 311 of the Internal Revenue Code.

Petitioner is a department store in Phoenix, Arizona. Its business expanded rapidly between 1941 and 1950. Held: upon all the facts, the amounts which petitioner added to its earned surplus in each of the taxable years were not unreasonable in amount in view of the needs of the business, and petitioner was not availed of in any of the taxable years for the purpose of preventing the imposition of surtax upon its stockholders.

Capital gain or ordinary income. - Petitioner constructed 20 defense houses and rented them to war workers in accordance with National Housing Agency orders. Petitioner sold the houses in 1946. Held: the houses were held primarily for sale to customers in the ordinary course of business; the gain on the sale is taxable as ordinary income.

Held, in computing the present value of a life interest in a residuary trust, the actual life expectancy and not the present value tables of Regulations 105 should be used where the evidence… Held: in computing the present value of a life interest in a residuary trust, the actual life expectancy and not the present value tables of Regulations 105 should be used where the evidence establishes that the life expectancy is less than that used in the tables.

1. Held, petitioner furnished over one half of the support of her nephew and is entitled to credit for one dependent. 2. Held: petitioner furnished over one half of the support of her nephew and is entitled to credit for one dependent. 2. Held, further, petitioner has not shown that she furnished over one half of the support of her brother Henry, for the year 1947.

Petitioner, a sawmill owner and operator, kept practically no books or records. Respondent increased sales, decreased purchases, and made other adjustments to which petitioner agrees. 1. Held, petitioner has failed to prove his labor expenses were greater than those claimed in his returns and allowed by respondent; 2. Held, further, petitioner understated his taxable net income for 1942 and 1943 with intent to evade tax so that the 50 per cent fraud penalty applies to each year; and 3. Held, further, a 10 per cent penalty for failure to file a declaration of estimated tax for 1943 and a 6 per cent penalty for substantial underestimation of tax for 1943 are applicable.

A corporation having total earnings or profits available for dividends of $5,674,586.32 distributed to its shareholders cash in the amount of $2,113,722.03 with stock having a cost basis of… Held: the distributions were taxable as dividends only to the extent of earnings and profits available for dividends, Section 115 (a) of the Code, and the appreciation in value of the property distributed does not serve to increase the corporation's earnings or profits.

Deductions: Business expense. - A $25,000 payment made to settle a suit brought by O.P.A. for violation of price ceilings, held, nondeductible. Held: nondeductible. The petitioner's overcharges resulted from an unreasonable lack of care.

Petitioner failed to file returns for 1946 and 1948 and failed to keep adequate books and records. Her net income determined from bank deposits, cancelled checks, and other evidence. 1. Held: negligence penalty properly determined. 2. Held, further, petitioner's failure to file returns for 1946 and 1948 was without reasonable cause.

The taxpayer has proved that in the taxable year Willi Gunzburger was indebted to it in the sum of $18,161.16; that in the taxable year 1943, it compromised such indebtedness for $797.78 because that was all that it could get, and agreed to cancel the balance, and that this sum represented all that it could collect on the indebtedness because the debtor was unemployed and had no other assets. Petitioner charged off the balance of its indebtedness against Gunzburger, $17,363.38, and took a deduction for it as a bad debt which became worthless in the taxable year. The Commissioner disallowed the deduction and determined a deficiency. Held, the Commissioner erred and the petitioner is entitled to the deduction under Section 23 (k) (1) of the Code.

Deduction: Net operating losses. - Held, that a restaurant and bar business was conducted and the losses therof were sustained by the petitioner, individually, and not by a corporation which… Held: that a restaurant and bar business was conducted and the losses therof were sustained by the petitioner, individually, and not by a corporation which passively held the lease to the premises and a liquor license.

1. Where a shareholder having a basis for his shares in a corporation of zero received upon complete liquidation of the corporation in 1945 property consisting of assets, cash and accounts receivable… Held: the provisions of Section 115 (c) of the Internal Revenue Code are applicable.

1. Amount of additional unreported income realized by petitioner in 1948 and 1949 from his employment as "pickup man" for operators of numbers games determined. 2. Petitioner's failure to report such additional income held to have been due to negligence, and respondent sustained in his imposition of a 5 per cent addition to tax therefor.

The petitioner established four trusts for the benefit of his four minor children, the terms of which provided that the income from the trusts should be paid to Jean K. Tyler, wife of the petitioner,… Held: the gifts of the corpus were future interests for which no exclusion under Section 1003(b)(3) of the Internal Revenue Code is permissible.

Community property. - Petitioner was manager of the Omaha, Nebraska, branch of the National Cash Register Co. He was employed under a contract which provided he receive a fixed salary plus 50 per… Held: petitioner's share of the profits earned before the date of the Nebraska community property law is his separate property even though he did not receive payment for his share until after the effective date.

Held, the duplex dwelling units here involved were held by the taxpayer during the taxable year primarily for sale to customers in the ordinary course of his trade or business. Held: the duplex dwelling units here involved were held by the taxpayer during the taxable year primarily for sale to customers in the ordinary course of his trade or business.

1. Held, the sales records of Swartz Grill, Inc., were not accurately kept and the corporate books did not correctly reflect its income. 2. Held, the petitioner is liable as a transferee in equity under Section 311, I.R.C., of the assets of Swartz Grill, Inc., for the deficiencies determined against that corporation. 3. Held, the respondent is not estopped to assert transferee liability against the petitioner.

Held, under all the facts, petitioner is not entitled to deduct the cost of meals and lodging while working on various construction jobs throughout the country during the taxable years. Held: under all the facts, petitioner is not entitled to deduct the cost of meals and lodging while working on various construction jobs throughout the country during the taxable years.

Petitioner's ordinary and necessary business expenses for 1948 determined. Petitioner's election to itemize deductions in his 1948 return rather than take the standard deduction held irrevocable.

Petitioner's interest in a partnership determined.

Dependency credit: Section 25 (b) (3), I.R.C. - Upon the facts, held, for the calendar year 1948, petitioner provided his mother with over half the support received by her, and, therefore, she… Held: for the calendar year 1948, petitioner provided his mother with over half the support received by her, and, therefore, she qualifies as a dependent.

Held, the petitioner understated his income for 1943 and 1944 with intent to evade tax. Held: the petitioner understated his income for 1943 and 1944 with intent to evade tax.

Respondent, alleging that petitioners' books and records of accounts were so inadequately kept that it was impossible to ascertain therefrom petitioners' gross income for the taxable year in question, used the bank deposit and cash expenditures method of determining such income and a deficiency in income tax. Held, that petitioners have met the burden of proof imposed on them by such determination and, in large part, have sustained the correctness of their income tax liability as reported in the income tax return.

Held, petitioner was not a bona fide resident of the Philippine Islands during the taxable years. Held: petitioner was not a bona fide resident of the Philippine Islands during the taxable years.

Applying the rationale of Harris v. Commissioner, 340 U.S. 106 and Catherine S. Beveridge, 10 T.C. 915, the compromise agreement between petitioner Reinicke and other interested parties by which was settled in 1941 certain litigation appertaining to a trust created by Reinicke in 1928 held not to have effected a taxable gift of property consisting of the corpus of such trust upon the approval March 7, 1941, of such compromise by decree of the Newyork Supreme Court.

Held, living quarters were furnished the petitioner for the convenience of his employer and their value was not a part of his compensation. Held: living quarters were furnished the petitioner for the convenience of his employer and their value was not a part of his compensation.

Petitioner gave certain shares of stock to members of his family which he valued in his gift tax return at $116.95 per share. Respondent increased the valuation of the stock and determined a gift tax deficiency. Held, the value of such stock at the date of gift was $140 per share.

Held that petitioner is not liable for any deficiency in her income tax return for the calendar year 1950, respondent having consented to the entry of an order of no deficiency.

The petitioners were stockholders in a corporation owning a hotel. The corporation transferred the hotel to Lester Holding Co. owned by most of the same stockholders. Held: Gaines is not a transferee of assets of Lester. Petitioner Steinhardt contends that he was not a stockholder and received no assets of Lester. Held, Steinhardt was a transferee of assets of Lester.

Petitioners erroneously reported their income tax for the calendar year 1947 and prior years on the cash basis. Held: having accrued in prior years, the income from the accounts receivable outstanding on January 1, 1947 should not be included as income for 1947. Caldwell v. Commissioner, - Fed. (2d) -. February 18, 1953, affirming T. C. Memorandum Opinion, followed.

Petitioner, a school teacher, loaned money to a corporation engaged in developing a portable washing machine. Held: petitioner's unpaid loans constituted a nonbusiness debt within the meaning of Sec. 23 (k) (4), and respondent properly disallowed the deduction thereof as a loss or as a bad debt incurred in the petitioner's trade or business. 2. Held, further, respondent's treatment of the $556 expense item approved for failure of proof.

Held, under all the facts, petitioner and his mother entered into a valid partnership for the taxable year 1944.

Petitioner Arthur C. Cope, a professor of chemistry, reduced to practice an invention in the field of barbituric acids in August 1932 and later sold the invention on September… Held: the contract of sale entered into on September 17, 1936, was not a contract for the personal services of Arthur C. Cope. 2. Held, on the facts, the invention sold by Arthur C. Cope was not property held by that petitioner primarily for sale to customers in the ordinary course of his business. 3.

1. Held, business expenses paid by a corporation out of a fund representing unreported gross income must be deducted in determining the correct net income of the corporation. 2. Held, estimates of amounts paid over ceilings of prices and wages may not be included in cost of goods sold in the absence of evidence establishing the amounts so paid. 3. Held, an individual taxpayer may not be charged with a percentage of corporate income because of ownership of that percentage of corporate stock in the absence of evidence that he received such income. 4. Held, deficiencies determined more than three years after the filing of tax returns are barred by the statute of limitations in the absence of fraud, waivers or other statutory bases for extension of the period. 5. Held, corporate funds taken by an officer of the corporation for his own purposes by means of fraud and his dominant position are not exempt from tax as income. 6. Held, the respondent is sustained in his determination that all or part of the deficiencies determined against the president of a corporation and the corporation itself were due to the fraud of the president, individually, and as agent, with intent to evade tax.

A partnership composed of the wives of petitioners held to be a bona fide one organized for a valid business purpose.

Petitioner was guilty of fraud in failing to file returns for 1944 and 1945 and filed a false and fraudulent return for 1946.

On the facts, held, the petitioner is not entitled to deduct as traveling expenses amounts expended for living expenses in Washington, D.C., while employed there by the United States Government for… Held: the petitioner is not entitled to deduct as traveling expenses amounts expended for living expenses in Washington, D.C., while employed there by the United States Government for an indefinite term.

As to each petitioner, respondent has determined that your distributive share of the net income of the partnership of Excello Hosiery Mills includible in gross income for the taxable year 1944 is… Held: on the facts, petitioners are sustained and the Commissioner is reversed as to the amount of his adjustment which exceeds the correctness of the amount admitted by each petitioner.

In 1946, petitioner, a dealer in real estate, sold a war-housing project of 25 single-dwelling units and an unimproved adjacent lot. Held: the houses and the lot were held primarily for sale to customers in the ordinary course of petitioner's trade or business and were not entitled to capital gains treatment under Sec. 117 of the Internal Revenue Code.

Held, certain stock became worthless in the year claimed by the petitioner. Held: certain stock became worthless in the year claimed by the petitioner.

Held, on the facts contained in the record, that certain cash advances which petitioner made to a mining corporation of which she was one… Held: on the facts contained in the record, that certain cash advances which petitioner made to a mining corporation of which she was one of the organizers, in 1942-1943, constituted capital contributions subject to the loss limitations provided in Sec. 117(d)(2), Internal Revenue Code, and not loans the losses from which are deductible…

Held, that the petitioner did not accumulate its earnings or profits beyond the reasonable needs of its business and accordingly is not subject to the surtax imposed by Sec. 102, Internal Revenue… Held: that the petitioner did not accumulate its earnings or profits beyond the reasonable needs of its business and accordingly is not subject to the surtax imposed by Sec. 102, Internal Revenue Code.

Held: The value of an equitable interest in property transferred to the decedent upon liquidation of the debtor corporation offsets, to some extent, the balance of the nonbusiness bad debt owed to… Held: The value of an equitable interest in property transferred to the decedent upon liquidation of the debtor corporation offsets, to some extent, the balance of the nonbusiness bad debt owed to the decedent by the wholly owned corporation.

1. Petitioner was an annuitant beneficiary of her deceased husband's estate in the amount of $15,000 per annum, the residue of the income of the estate being distributable to the deceased's daughter. Held: that the annuity payments to petitioner were income taxable to her. Rationale of Estate of J. T. Sneed, Jr., 17 T.C. 1344, followed. 2. Part of the income of the estate during each of the taxable years 1942 and 1943 was from depletable property belonging to the estate.

Held, payments received by wife under provisions of voluntary separation agreement with husband were not made under a written instrument incident to a divorce decree later obtained by husband. Held: payments received by wife under provisions of voluntary separation agreement with husband were not made under a written instrument incident to a divorce decree later obtained by husband.

Held: The business organization known as Yardley Industries and/or Hill industries was, during the taxable year, a partnership between petitioner and other parties involved. Held: The business organization known as Yardley Industries and/or Hill industries was, during the taxable year, a partnership between petitioner and other parties involved.

Corporation engaged in portrait photography, held, exempt as a personal service corporation as denied in Sec. 725, I.R.C.Trout-Ware, Inc., 11 T.C. 505, followed.

Petitioner and his copartner sold their respective equal interests in a partnership to a corporation. Among partnership holdings transferred were installment obligations on properties sold to customers in the ordinary course of partnership business, which had an unrealized profit value. 1. Held, under Sec. 44 (d) of the Internal Revenue Code, the partnership received additional ordinary income in the amount of the unrealized profit value of the installment obligations transferred. 2. Held, further, petitioner's remaining gain on the sale, represented by his equal share of the difference in the unrealized profit value of the installment obligations and the total sales price received by the partners, is a long-term capital gain under Sec. 117 of the Internal Revenue Code.

Held: That the petitioner did not accumulate its earnings or profits beyond the reasonable needs of its business and accordingly is not subject to the surtax imposed by Sec. 102, Internal Revenue… Held: That the petitioner did not accumulate its earnings or profits beyond the reasonable needs of its business and accordingly is not subject to the surtax imposed by Sec. 102, Internal Revenue Code.

Petitioner's president, who owned or controlled all of its capital stock, leased a mortuary establishment at a minimum rental of $200 a month plus a percentage of gross receipts… Held: the amounts that petitioner was required to pay as rent during the taxable years were the amounts allowed by respondent. In 1945 petitioner paid $1,000 to a nonprofit organization in which its president was a founder and life-member, which it deducted as an ordinary and necessary expense. 2.

Petitioner purchased from certain stockholders of a liquidated bank, who had already been paid 100 per cent of their deposit claims, certain claims asserted for interest upon such deposits subsequent… Held: upon the record, to have become worthless prior to December 31, 1941, and his loss thereon not subject to be carried forward to the taxable year 1946 under Sec. 117 (e), Internal Revenue Code.

1. Held, deficiencies determined by the respondent are barred by statute of limitations in the absence of proof of fraud or the execution of… Held: deficiencies determined by the respondent are barred by statute of limitations in the absence of proof of fraud or the execution of consent agreements extending the period prescribed by the statute of limitations. 2. Held, deficiency and negligence penalty approved for year upon which the statute of limitations was not pleaded.

For all but two of the fiscal years ending February 28, 1942, to February 28, 1950, decedent's returns disclosed income of less than 50 per cent of the amount determined by respondent by use of the… Held: respondent was justified in resorting to the net worth method in reconstructing decedent's taxable income for the years in question, and, with minor adjustments, correctly determined the deficiencies for all years in question. 2.

Petitioner was sole proprietor of a chenille bedspread factory during 1944 and 1945. Held: petitioner's returns were not false or fraudulent with intent to evade tax. 2. Held, further, petitioner is not entitled to a deduction for accrued and unpaid Georgia state income taxes for the years in question.

The amounts expended by two taxpayers for business travel and customer entertainment over and above the amount claimed by and allowed to the partnership, of which they were members, for such purposes, determined.

Held: Deductions and rental property expenses determined. Held: Deductions and rental property expenses determined.

Respondent determined deficiencies and penalties for the years 1946 to 1949, inclusive, for unreported business income allegedly received by petitioner from the truck leasing business. Held, in those years petitioner was not in the truck leasing business and had no taxable income, the sources of the funds in question being the sale of assets and repayments of loans.

1. Real or immovable property is exclusively subject to the law of the state in which it is situated, and no interference with it by law or any other sovereignty is permitted. 2. Rents from realty situated in Alabama, separately owned by the wife, are taxable to her individually and not to the marital community domiciled in Louisiana, even though such rents constitute community income under the laws of Louisiana.

Respondent determined income for the taxable years 1944 through 1947 from the apparent increase in net worth of the taxpayer partners' assets plus living expenses… Held: there was an increase in net worth although not so large as determined. Increase in net worth and annual income redetermined. 2. Held, further, the evidence is insufficient to sustain fraud. A previous determination of deficiencies as to 1944 was the subject of deficiency notices to these taxpayers in 1947.

Shares of stock found to be worthless in 1947.

1. Petitioner Lawrence Fred Zacker operated a used car business in 1946 in Los Angeles, California. Petitioner had no books or records available to substantiate his return of income or deductions for the year 1946. The Commissioner by the use of the bank-deposit method has arrived at net income considerably higher than petitioners reported on their returns. Held, the Commissioner's use of the bank-deposit method is sustained though his determination as to amount of goods sold and cost of goods sold is changed to accord with the facts in evidence at the hearing. 2. Petitioner Lawrence Fred Zacker contributed $625 for his three children by his divorced wife, the children residing with their maternal grandparents in Iowa. Held, that Lawrence Fred Zacker has not sustained the burden of proving that he is entitled to exemptions for his three children by contributing more than one-half of their support in 1946. 3. Respondent in his determination of the deficiencies did not determine that petitioners fraudulently filed their returns with intent to evade tax. He did not impose fraud penalties. However, in an amended answer he made certain affirmative allegations of fraud and asked for the imposition of 50 per cent fraud penalties. He now concedes that he has not proved fraud as to petitioner Geraldine M. Zacker but contends he has sustained his burden of proof as to petitioner Lawrence Fred Zacker. Held, respondent has not sustained his burden of proof of showing that part of the deficiency in the case of Lawrence Fred Zacker is due to fraud with intent to evade the tax. No fraud penalties will be imposed. 4. Respondent in his determination of the deficiencies has determined that each petitioner was negligent in filing his return and has imposed a penalty of five per cent for negligence under section 293 (a) of the Code. Held, respondent's determination of negligence penalties is sustained in the case of each petitioner. They have not offered sufficient evidence to overcome the presumptive correctness of respondent's determination.

The exchange of shares of stock in a corporation that was essentially a holding company for shares in a new company that was essentially an operating company was a transfer that gave rise to gain or loss under the Revenue Act of 1917.

Upon the facts held, that: (1) Amounts of gross income for years 1946 and 1947 determined. Held: that: (1) Amounts of gross income for years 1946 and 1947 determined. (2) For the year 1945, amounts of business expense deductions under section 23 (a) (1) (A), determined; amount of casualty loss under section 23(e) (3), determined; and two dependency exemptions under section 25 (b), denied.

The evidence discloses, contrary to petitioners' contentions, that the Moore Equipment Company, a community property proprietorship, had not uniformly and consistently applied an annual composite… Held: The fact that respondent had not questioned the rates used in prior years is not material and petitioners have not sustained the burden of showing that respondent erred in reducing the claimed deductions for depreciation for 1944 and 1945.

Transferee liability determined.

Petitioner's father gave money to petitioner's mother over a period of years. Held: petitioner is not liable as a transferee of funds with which he purchased the retail liquor store in 1947, since the funds were, in fact, transferred to him in 1945 or earlier, and there is no showing of the transferor's insolvency at that time; nor that the transfer was made with intent to hinder, delay, or defraud creditors. 2.

Certain deductions for contributions, medical, business, and other expenses determined.

1. Transaction whereby wife transferred her interest in property to her husband constituted a sale upon which gain or loss is recognized, rather than a mere division or partition of community property. 2. The sale was not a closed transaction until 1944 and the gain accrued in that year rather than in 1943 when the contract was signed. Lucas v. North Texas Lumber Co., 281 U.S. 11.

On the evidence, held, petitioner failed to prove that he contributed over one-half the support of his four minor children during the taxable year, and consequently is not entitled to the exemption… Held: petitioner failed to prove that he contributed over one-half the support of his four minor children during the taxable year, and consequently is not entitled to the exemption provided by Sec. 25 (b) (1) (D).

1. Held, it was improper for Columbus Wood Preserving Company, a partnership of which petitioner is a member, to reduce the value of its closing inventory on December 31, 1945, so as… Held: it was improper for Columbus Wood Preserving Company, a partnership of which petitioner is a member, to reduce the value of its closing inventory on December 31, 1945, so as to reflect the accrual of a loss thereon by reason of the termination of its war contract with the Government. 2.

Held, the taxpayers received taxable income upon the purchase of stock in the petitioner's employer-corporation in the amount of the differential between the price paid for the stock and its fair market value on the date of delivery.

1. Determination of fraud disapproved. 2. Determination of deficiencies on the increase in net worth method disapproved. 3. Taxable years 1942 to 1946, inclusive, barred by statute of limitations. 4. Recomputation directed as to years 1947, 1948 and 1949.

Held, the petitioners' failure to file income tax returns for the years 1939 and 1940 and their failure to report their correct income for the years 1941 through 1947 were proven to be due to fraud… Held: the petitioners' failure to file income tax returns for the years 1939 and 1940 and their failure to report their correct income for the years 1941 through 1947 were proven to be due to fraud with intent to evade tax.

Held, the petitioner has not shown that she furnished over one half of the support of two of her minor children for the year 1947. Held: the petitioner has not shown that she furnished over one half of the support of two of her minor children for the year 1947.

Held, petitioner, failed to establish that he had paid more than one-half of the total amount expended for the support and maintenance of his two minor children during the year involved, and accordingly is not entitled to the dependency credits claimed under Sec. 25 (b), I.R.C.

1. A joint venture bought real property for the purpose of building a hotel and apartments. Held: the property was not held for sale to customers in the ordinary course of trade or business and the profits represented capital gain to the participants. 2. One of the joint ventures withdrew making a settlement with the others. Held, the settlement was a closed transaction in which the continuing participants realized gain.

1. In 1942, petitioner was a partner in the partnership of Kershaw and Blount which was engaged in the construction of a short line railroad. Held: the two individuals who petitioner claims were joint venturers with him in his one-half partnership interest were not joint venturers and petitioner is taxable on his entire interest in the profits which he received from the partnership of Kershaw and Blount. On this issue the Commissioner is sustained. 2.

Held, the petitioner is not entitled to exemption for son whose gross income for the taxable year was over $500. Held: the petitioner is not entitled to exemption for son whose gross income for the taxable year was over $500.

Petitioners, L. C. Hall and C. J. Hall, sometimes in partnership and sometimes individually, operated a so-called numbers business from 1939 to 1951. Each day they collected from their pick-up men players' tickets and the net amounts bet after the deduction of commissions for the services of such pick-up men and writers. Individual players' tickets were retained for one week. L. C. Hall sent to his accountant a weekly summary of his net intake, amounts paid out in wins, and expenses from which a permanent record was made. Individual tickets were then destroyed. Petitioners' income tax returns were prepared from the permanent records. Respondent accepted as correct all figures in petitioners' returns except the amount paid out in wins. For this item he substituted an amount equal to one-half of the total bets placed on the assumption that the ratio of wins to total bets of a numbers operator should be 50 per cent. Held, respondent's use of a percentage ratio to determine the amount paid out in wins, in the absence of other evidence, was arbitrary and unjustified; and the deficiencies so determined, and the penalties dependent thereupon, cannot be sustained.

The petitioners are held to have carried on the business of the Enoch Packing Company during the taxable years 1943 to 1946, inclusive, as a joint partnership with their son, and the one-half of net earnings of the business paid or credited to the son in each of those years represented partnership earnings to which the son was entitled and not income taxable to petitioners.

During 1947, 1948, and 1949, Benjamin H. Minchew's bank deposits were more than twice the amount of his principal source of income. He was unable to identify certain deposits. Held: respondent was justified in adding unexplained bank deposits to petitioners' income. 2. Held, further, the basis for determining the amount of long-term capital gain on the sale of the building is its cost plus proven capital improvements, less depreciation.

Petitioner owned 146 shares of common stock of a corporation whose only income-producing property consisted of its lessee interest in a lease on which the net average earnings were $1,714.97 per year. Ground rent due the lessor was $2,100 per year. Preferred shareholders were entitled to 6 per cent cumulative dividends. In 1932, the corporation defaulted on ground rental payments and never again paid preferred dividends. By 1940, it owed more than $7,000 in delinquent ground rent, together with some accrued interest. Petitioner sold his shares in 1943 for the sum of $1 and took a capital loss under Sec. 23 (g) of the Code. Held, petitioner's shares became worthless before 1943 and the Commissioner properly disallowed any deduction in that year.

1. The decedent, who died in March 1947, owned one-eighth of the stock of a family corporation which owned one-sixth of the stock of a logging company. Held: the value of decedent's stock was $357,443.27. 2. Value of other stocks determined. 3. The decedent furnished most of the funds for building a new residence in 1936. Her husband, to equalize their contributions, gave her a ten-year non-interest bearing note and made book entries indicating that he owned her $28,000.

Held, the original petitioner's share of net income derived from the performance at Oak Ridge, Tennessee, of a certain construction subcontract, known as subcontract No. 63, was properly taxable to… Held: the original petitioner's share of net income derived from the performance at Oak Ridge, Tennessee, of a certain construction subcontract, known as subcontract No. 63, was properly taxable to him in 1946.

Although the apartment house which was the principal asset of a corporation was lost through foreclosure sale in 1945, the corporate stock did not become worthless in that year since other assets exceeded liabilities at the close of the year notwithstanding certain unsettled claims against the corporation.

It being shown affirmatively that the determination of a deficiency as made by respondent is in error, and there being no evidence indicating that income of the petitioners was understated, the determination by the respondent is reversed.

The Commissioner has determined that petitioner is liable as transferee for the income taxes and penalties of Anniston Better Built Homes, Inc., to the extent of $9,063.63. Held: the Commissioner has not borne his burden of proof to show that petitioner is liable in equity as a transferee for the taxes and penalties due by Anniston.

United States citizen employed abroad, held, on facts, not a "bona fide resident of a foreign country" so as to be exempt from United States income tax under Sec. 116 (a) (1), Internal Revenue Code.

Petitioner failed to prove the basis and the sale price of his converted home. Held: he is not entitled to the nonrecognition provisions of Sec. 112 (f), I.R.C. Held, further, respondent's determination of a penalty under Sec. 291 is sustained.

1. Upon dissolution of a partnership, petitioners, having been fully reimbursed by the retiring partner for proceeds of coal sold by him, suffered no deductible loss. 2. Attorney's fees and court costs incurred in procuring an injunction against the retiring partner, requiring him to account for the proceeds of sales of partnership property, held deductible as ordinary and necessary business expenses of petitioners. Kornhauser v. United States, 276 U.S. 145.

Held, taxpayer not being proven guilty of fraud, all deficiencies and additions to the tax determined by respondent are barred by the statute of limitations.

Payments made petitioner by her former husband under a contract entered into by them subsequent to the entry of a decree of divorce awarding alimony, in which it was agreed that payment should be made of a maximum fixed sum, payable over a term of less than ten years, and to constitute full satisfaction of all claims for alimony on the part of the petitioner, held not to be taxable to petitioner under Sec. 22 (k), I.R.C.

Petitioners failed to prove that they contributed over one-half the support of his two minor children during the taxable years involved, and consequently are not entitled to the exemption provided by Sec. 25 (b) (1) (D), I.R.C.

Petitioners, under the facts disclosed, held to be entitled to deduct in 1948 the depreciated cost, less one dollar, of a frame building owned and rented by them for several years to tenants, where in the taxable year they decided to raze the building and effected their purpose by conveying it to a purchaser for one dollar and the latter's obligation to remove it from the premises in 30 days.

From 1912 through the taxable years 1946, 1947, and 1948, petitioner followed a plan of keeping its fixed overhead for executive salaries low by the payment of nominal salaries plus a bonus based on… Held: the compensation paid to the three executive officers was a reasonable allowance for personal services rendered.

Payments totaling $15,000 made by a partnership to a corporation, found to be in consideration of the acquisition of the good will of the corporation whose stock of goods was also being acquired. Held that such payment was a capital expenditure not deductible as a business expense, and represented long-term gain to the corporation, no cost basis having been shown of the good will transferred.

Respondent reconstructed petitioner's income by the increase in net worth method and determined deficiences and negligence penalties for 1946, 1947, and 1948. Held: 1. Held: Respondent's use of the net worth method was proper and not arbitrary. 2. On the record, a cash sum in excess of $20,000 was earned during 1946, 1947, and 1948 and did not, as petitioner contended, constitute fire insurance proceeds collected by him in 1931 and held in his daughter's safe deposit box. 3.

Petitioner was a bookmaker's "commission man" between 1937 and 1947. He failed to file Federal income tax returns for 1940 through 1946, and understated his income in his 1947 return. Respondent computed petitioner's income for 1940 through 1947 by the net worth method, determined deficiencies and fraud penalties for those years, and delinquency penalties for 1940 through 1946. Petitioner only contests the fraud penalties, the deficiencies for 1946 and 1947, and the amount of the delinquency penalty for 1946. Held, the Commissioner's determination of petitioner's net income for 1946 and 1947 was excessive and should be recomputed in accordance with the amounts in our Findings of Fact. Held, further, the Commissioner has sustained his burden of proving fraud and has established that part of the deficiencies in each year was due to fraud with intent to evade the tax.

Payments totaling a year's salary made by his former employer to the petitioner during the year following his resignation, held, taxable income, not a gift.

On October 4, 1949, petitioner sold and exchanged a building which it owned in the City of Birmingham, Alabama, to the Southern Natural Gas Company for a cash consideration, the assumption by the… Held: the fair market value of the Old Court House lot at the time it was conveyed to petitioner was $525,000, as the Commissioner has determined.

Respondent's determination, taxing petitioner for the calendar year 1946 under the provisions of Sec. 211 (b), Internal Revenue Code, as a nonresident alien engaged in trade or business within the United States, sustained.

In 1947, petitioner signed a contract agreeing to "sell and convey" her going business, together with all of its assets including realty used therein, to three employees. The employees assumed all liabilities, including accounts payable of $3,880.69 and employees' deductions of $1,217.66. They paid $5,000 in cash at the signing of the contract and, pursuant to its terms, have since made timely monthly payments of $750 on the remaining balance due. No deed conveying title to the realty covered by the contract has ever been executed by petitioner, who reported a gain of $982.94 from the sale of the assets of her business on her return for 1947. 1. Held, the contract by which petitioner agreed to sell and convey her going business, and the corresponding action by her and the purchasers thereunder, constituted a closed transaction for Federal tax purposes on which she received taxable gain in 1947. 2. Held, further, the amount of the accounts payable and employees' deductions assumed by the purchasers are includible in determining the total gain realized by petitioner on the sale of the business.

On November 24, 1947, the Louisiana State Highway Commission accepted the completed work which Roy Moody Bell had contracted to perform in repairing a state highway. Held: the respondent properly determined that the right to receive the final payment and all profits on the contract accrued to petitioners in 1947 and was taxable to them in that year.

Respondent's disallowance of $11,000 of a $26,872.68 deduction, taken by petitioner for travel expenses, etc. on his 1946 income tax return, is upheld because of petitioner's failure to introduce evidence to overcome this determination.

Held, the petitioners have failed to show that they incurred a loss in 1944 on the sale of residential property within the meaning of Sec. 23 (e) (2) of the Internal Revenue Code. Held: the petitioners have failed to show that they incurred a loss in 1944 on the sale of residential property within the meaning of Sec. 23 (e) (2) of the Internal Revenue Code.

Petitioner is a social club whose members are interested in horseback riding and related sports. Each year the club sponsors a rodeo for the benefit of the entire community. In order to meet the expenses of the rodeo, the club charges admission to the rodeo and dances and sells beer, soft drinks, and advertising space. The rodeo results in no net profit to the club. Held, the petitioner is an exempt corporation under Sec. 101 (9), I.R.C.

Held that the redemption of the 125 shares of preferred stock of Treff, Inc. held by petitioner was not made at such time and in such manner as to be essentially equivalent to a taxable dividend.

1. Petitioner during the taxable years 1948 and 1949 was sales representative in the State of Alabama of Brown-Forman Distillers Corporation of Louisville, Kentucky. Held: he is entitled to deduct as ordinary and necessary business expenses the amounts which he paid his brother for legal services and as farm manager in the taxable years. 2. Petitioner on his income tax return for 1948 claimed deductions of $3,881.32 as entertainment expenses.

Advances made to a controlled corporation resulting in loss to principal stockholder held deductible by stockholder only as a nonbusiness bad debt.

During their respective fiscal years, petitioners, pursuant to contracts with the lessee of certain coal properties, strip mined such coal and hauled it to the lessee's tipple. Held: on the facts, petitioners acquired no depletable interest in the coal in place by assignment or otherwise.

Miriam G. Sauer was divorced from David E. Sauer and has custody of their three children. She took dependency credits for the three children on her income tax return for 1949. Held: David E. Sauer contributed more than one-half of the support of each of the three children during 1949 and is entitled to dependency credits for each.

Estate tax. - Fair market value of shares of stock in closely held corporation determined.

1. Income. - Correct taxable income determined. 2. Fraud. - Additions to tax for fraud disapproved.

Held: Bad debt loss sustained by petitioner in 1946 is properly deductible under section 23 (k) (4), I.R.C., as determined by respondent.

Held: Evidence insufficient to establish that petitioner became a creditor as a result of his advances through the agency of his brother to two new corporations over a three-year period and that such advances constituted loans.

Income. - Correct income for taxable year determined.

Held, during 1950, petitioner contributed more than 50 per cent of the support of his three minor children and is entitled to dependency credits therefor. Held: during 1950, petitioner contributed more than 50 per cent of the support of his three minor children and is entitled to dependency credits therefor.

1. Income. - Correct income for 1942 and 1943 determined. 2. Fraud. - Additions to tax for fraud sustained. Section 293 (b), Internal Revenue Code.

Petitioner was the sole stockholder, president, and manager of a mining corporation known as the General Ore Company. Held: $8,500 represented worthless capital contributions which were deductible only as capital loss under Sec. 23(g), and $4,730 constituted a nonbusiness bad debt under the provisions of Sec. 23(k)(4).

Gift taxes. - Value of shares of corporate stock on date of gifts determined.

Where petitioner, a noresident alien individual, furnished $100,000 to Higgins, Inc., a New Orleans shipbuilding corporation, to be used to pay the balance of the purchase price on two war surplus… Held: petitioner's participation in this single, isolated transaction did not constitute engaging in a trade or business in the United States as contemplated by Sec. 211 (b) of the Internal Revenue Code.

Upon the evidence, held that part of the deficiency for each taxable year was due to fraud with intent to evade tax.

Held: A dissolution agreement executed December 8, 1943, by petitioner, Durwood O. Jones, and his partner, Andy Jones, effectuated a purchase by the former of the latter's interest in a certain bus… Held: A dissolution agreement executed December 8, 1943, by petitioner, Durwood O. Jones, and his partner, Andy Jones, effectuated a purchase by the former of the latter's interest in a certain bus transportation franchise and in the lease to which such franchise was subject.

Deductions: Sec. 23 (a) (1) (A) and Sec. 23 (a) (2). - The petitioner, an officer and stockholder of a corporation, brought suit, individually and as Committee for her mother, to rescind a contract pursuant to which the petitioner's mother had transferred stock in the corporation. Held, legal fees expended by the petitioner were not deductible.

1. On July 1, 1943, Charles H. Edwards and Bruce W. Hulbert each gave one-half of his partnership interest in the Century Biscuit Company to his respective wife. Held: the wives were bona fide partners of Century for Federal tax purposes. 2.

Reasonable compensation determined. Loss on sale of stock was determined to be long-term capital loss.

From its organization in 1937 and during the years here in question, Travis T. Wallace and C. O. Hambleton were president and vice-president, respectively, of the Great American Reserve Insurance… Held: such payments were additional compensation and not gifts as petitioners reported on their returns.

1. Respondent determined deficiencies in petitioners' taxes for 1945 through 1948 based upon calculation of income pursuant to the net worth increase method. Held: use of the net worth increase method was unjustified and improper since the books of petitioners' cafe adequately and correctly reflected income and there was no dispute as to the correctness of petitioners' income from other sources.

Petitioner's two principal stockholders had a legitimate business purpose in taking title to property which later was used by petitioner in the conduct of its business, and in leasing it to the… Held: that the amounts of rent paid by petitioner under the lease in 1947, 1948, and 1949 were required to be paid by the petitioner as a condition to the continued use of the premises, were ordinary and necessary business expense, and are deductible in full under Sec. 23(a)(1)(A).

1. Held: Since the books and records maintained by Brasington for the taxable years 1942, 1943, 1944, and 1945 were incomplete and did not properly and accurately reflect his… Held: Since the books and records maintained by Brasington for the taxable years 1942, 1943, 1944, and 1945 were incomplete and did not properly and accurately reflect his taxable income, respondent was justified in adopting a method of computing such income which, in his opinion, did so reflect it. 2.

1. Held, petitioner was engaged in the trade or business of farming for profit during the taxable year 1947. Sections 23 (a) (1) (A) and 23 (1) (1) of the Internal Revenue Code. 2. Held: petitioner was engaged in the trade or business of farming for profit during the taxable year 1947. Sections 23 (a) (1) (A) and 23 (1) (1) of the Internal Revenue Code. 2.