Volume 15 — Tax Court Memorandum

Valuation of inventories: Cost v. market: Year of loss of value. - Taxpayer, a parent corporation and its subsidiaries, alleged that the closing inventory of one subsidiary was inadvertently overstated and overvalued on its consolidated return, resulting in overstatement of income. The taxpayer claimed that the subsidiary always valued its inventory at the lower of cost or market and that cost figures, rather than the lower market figures, were inadvertently used.

Estate tax: Gross estate: Value of stock. - Fair market value of a block of stock of Fulton Trust Company of New York on the optional valuation date held to be not in excess of the value at which it was reported in the estate tax return.

On the facts, held, (1) Under section 25(b)(1)(D) and (b)(3) of the 1939 Code, petitioner is entitled to dependency credits in the year 1950 for a nephew and for a niece. Held: Under section 25(b)(1)(D) and (b)(3) of the 1939 Code, petitioner is entitled to dependency credits in the year 1950 for a nephew and for a niece. (2) Petitioner has failed to prove that he is entitled to a dependency credit in 1950 for a brother.

During the taxable years 1948, 1949 and 1950, James Ross and Neil Sullivan were equal partners operating an illegal bookmaking business… Held: Respondent's disallowance of a portion of claimed pay outs disapproved where calculated upon a ratio determined on the basis of data unrelated to petitioners' business or similar businesses. (b) Respondent sustained in disallowing deductions for wages and rent paid in violation of Illinois law in the conduct of a bookmaking business.

Increase in net worth. - Decedent had an estate of some $166,000 at time of his death in 1949. He had not filed returns since 1937. Opening net worth determined and the increase in net worth in the intervening years held to be income for such years and properly to be allocated ratably over such years. Penalties. - Delinquency penalties sustained.

Held, the petitioner, a lessee, is not entitled to deduct the unamortized cost of the lease in the year in which it was canceled and a new lease entered into, but may deduct only a pro rata portion… Held: the petitioner, a lessee, is not entitled to deduct the unamortized cost of the lease in the year in which it was canceled and a new lease entered into, but may deduct only a pro rata portion for that year; the unamortized cost is to be treated as cost of the new lease.

Petitioners' joint return for 1950 disclosed a tax liability of $13,370.28, of which amount $7,591.56 was paid by withholding tax deductions. Held: respondent's determination of penalties sustained. G. E. Fuller, 20 T.C. 308 (1953), affd. 213 Fed. (2d) 102 (C.A. 10, 1954); and Harry Hartley, 23 T.C. 353 (1954).

Held: 1. Respondent failed to establish fraud by clear and convincing evidence. Held: Respondent failed to establish fraud by clear and convincing evidence. Accordingly petitioner is not liable for the additions to tax because of fraud asserted for the years 1945 through 1949, 1951 and 1952. 2.

During each of the taxable years in question, petitioner W. L. Gladish sold cotton to cotton merchants with on call arrangements as part of the transactions. Held: that the cotton so sold was not a capital asset (section 117(a)(1)(A), Internal Revenue Code of 1939) and the profit derived from the disposition thereof was taxable as ordinary income.

Income: Sales: Unrecorded transactions. - Income from sales of real property was not recorded on accrual-basis taxpayer's books and not reported on his returns. Since contradictory evidence was absent, the Commissioner was held to have properly determined additional income from these sales for the taxable years.

1. The net income of Paul J. High for the taxable years 1945 and 1946 and of Paul J. and Fay High for the years 1947 through 1949, determined. 2. Held: The returns filed for all of the years involved were false and fraudulent with intent to evade tax, and a part of the deficiency for each of the years 1945 through 1949 was due to fraud with intent to evade tax.

Profit on the sale in 1947 of a herd of ewes held to give rise to long-term capital gain.

1. Petitioner R. M. Clayton has been a real estate broker since 1923. Held: the lots in issue were held primarily for sale to customers in the ordinary course of petitioner's business, and profits derived from sales of such land are not entitled to capital gains treatment within section 117, I.R.C., 1939.

Net-worth method. - Respondent's use of the net-worth method, and the deficiencies thereby determined, upheld. Fraud. - Part of deficiencies for 1942 to 1944, inclusive, was due to fraud with intent to evade tax, and returns for those years were fraudulent. Husband-wife partnership. - Petitioner's evidence insufficient to prove that he and his wife were partners in 1946.

Held: The shares of preferred debenture stock on which $5,000 was paid by each of the petitioners in the years 1948, 1949, and 1950 were representative of a proprietary interest and not evidence… Held: The shares of preferred debenture stock on which $5,000 was paid by each of the petitioners in the years 1948, 1949, and 1950 were representative of a proprietary interest and not evidence of indebtedness and the amounts so paid were distributions in the nature of dividends.

Petitioner corporation was organized in 1883 for the purpose of selling some 361,000 acres of land, together with timber and mineral rights appurtenant thereto, which it acquired from the bondholders of a defunct railroad. From the date of its incorporation to and throughout the years in issue, it continually sold its land, timber, and mineral properties. On its income tax returns for 1943 and 1944, petitioner reported the gain from the sale of such properties as capital gain. Respondent determined that such gain was ordinary income. On its returns for 1943 and 1944, petitioner claimed a depletion deduction on timber sold during such years based on the unrecovered March 1, 1913 value of such timber, which depletion deduction the respondent disallowed in large part. On its return for 1943, petitioner claimed a loss of $28,475.66 on a land sale, which loss is computed on the basis of the difference in the March 1, 1913 fair market value of such land and the selling price. Respondent disallowed such claimed loss. Held, petitioner was regularly engaged in the business of selling land, timber, and mineral properties from the date of its incorporation to and throughout the years in issue, and the gain derived from the sale of such properties during the years 1943 and 1944 was ordinary income. Held, further, the unrecovered March 1, 1913 value of timber which petitioner sold during the years in issue determined. Held, further, petitioner's basis for claiming a loss on the sale of land owned by it on March 1, 1913, is the cost of such land and since no evidence of such cost was introduced, the respondent's disallowance of the claimed loss is sustained.

Respondent's determinations of deficiencies sustained on petitioner's failure to show that amounts determined by the respondent as having been received from clients in adoption proceedings were not income, or that any additional expense deductions were allowable.

1. Petitioner Albert A. Loden is by occupation an electrician. Held: petitioners, who filed a joint return for 1952, are entitled to a deduction for the amount expended by Albert Loden for meals and lodging while away from home under section 22(n)(2) and section 23(a)(1)(A) of the Internal Revenue Code of 1939. Commissioner v. Flowers, 326 U.S. 465, distinguished. 2.

Where a partnership has consistently capitalized breeding stock, $ held, immature ewes on hand at the end of the year which were intended to be used as a part of the breeding… Held: immature ewes on hand at the end of the year which were intended to be used as a part of the breeding herd are not to be included in inventory as of the end of the year; and, held, further, no change is required on the basis of certain breeding ewes held by the partnership on January 1, 1951.

On the facts, held: (1) That petitioner and his wife were not partners in commodity futures trading done by petitioner, Arthur Murray, in 1946. Held: That petitioner and his wife were not partners in commodity futures trading done by petitioner, Arthur Murray, in 1946. (2) That alleged traveling expenses deducted in the returns for 1946, 1947, and 1948, are not deductible, and that they are personal expenses.

1. Upon the evidence, held, that Michael Collino, in each taxable year, received salary from a business owned by his mother. Held: that Michael Collino, in each taxable year, received salary from a business owned by his mother. The amounts of income from this compensation for services are determined. 2.

Petitioner in 1949 sold some of his shares of stock in a corporation controlled by him to another corporation also controlled by him. Held: the sale did not lack economic reality and all the proceeds did not constitute a dividend to petitioner. John Wanamaker (Phila.) Trustees Common Stock, 11 T.C. 365, affd. 178 Fed. (2d) 10; and Emma Cramer, 20 T.C. 679, followed.

Income or gift. - Amounts paid by corporations to widow of a deceased officer in the two years after death, held to be gifts to the widow and not includible in her income.

Petitioner, Benjamin F. Haas, organized Oxford Looms, Inc., a woolen mill, in 1933. All of the outstanding common stock was given to his daughter. Petitioners owned the nonvoting preferred stock. From the time of its incorporation to and throughout 1948, 1949, and 1950, the years here in issue, petitioners advanced various sums of money to Oxford. The sums advanced during 1948 were pursuant to an agreement whereby in consideration for such advances, petitioner and Oxford agreed to share the profits and losses of the corporation on a 50 per cent basis. In 1949 and 1950, petitioners advanced funds under a similar agreement, except that they were to assume all losses. All advances made during the three years were to be repaid prior to any division of profits. Oxford sustained net operating losses in each of the three years. Petitioners deducted one-half of the loss in 1948 and the entire losses in 1949 and 1950 on their tax returns for such years. The record does not show that they reimbursed Oxford for the net operating losses and, at the end of 1950, the books of the corporation showed as a debt owed to petitioners the outstanding balance of the amounts which they had advanced. Held, petitioners sustained no actual losses in connection with the operation of Oxford Looms, Inc., during the years in issue which are deductible under any provision of the 1939 Code.

Petitioner David Fixler operated a tobacco shop and a handbook in 1947 and 1948. Held: respondent's determination of deficiencies for all years in issue for both petitioners was not arbitrary and, since not rebutted by credible evidence, is sustained. Held, further, additions determined under sections 291(a), 294(d)(1)(A), and 294(d)(2), and the additions under section 293(a) for negligence, sustained.

1. Respondent disallowed portions of the amounts claimed by Utility as traveling and entertainment expenses because of lack of substantiation. Held: on the record herein, respondent's determination is sustained. 2. Utility credited the drawing account of its president, B. F. Crabbe, for various deposits of cash and checks which he made in its bank account and also for various expenditures purportedly made by him on the corporation's behalf.

During 1944, 1945 and most of 1946, petitioner Wilson owned and operated a transfer company. Held: Respondent was justified in resorting to the net worth plus nondeductible expenditures method in reconstructing income for the years in issue. Adjustments and understatements determined for the years in question. 2. Some part of the respective deficiencies for the years 1945 and 1946 was due to fraud with intent to evade tax. 3.

Held: Amounts received by individual petitioner from corporation in which he was a principal shareholder were payments on the purchase price of patent rights, not royalties for the use of such rights… Held: Amounts received by individual petitioner from corporation in which he was a principal shareholder were payments on the purchase price of patent rights, not royalties for the use of such rights or disguised dividends.

Petitioner Albert Axler owned and operated a meat and grocery market and owned bonds and various rental properties during the years here involved. Held: 1. Held: Respondent was justified in resorting to the net worth-plus-nondeductible expenditures method to show understatements of income for the years in issue. 2. Various disputed items in the net worth computation are adjusted and determined. 3.

Petitioner paid certain auditing and legal expenses incurred in connection with the investigation and litigation of income tax liabilities of its two controlling stockholders. Such income tax liabilities arose from transactions entered into by the two stockholders while partners in petitioner's predecessor partnership. Respondent determined that such expenditures were not deductible as ordinary and necessary business expenses and further determined that no part of the auditing expenses incurred by petitioner in 1952 was deductible since no allocation had been made showing what portion of such auditing expenses was attributable to the investigation and litigation of the stockholders' tax liabilities. 1. Held, petitioner has failed to prove that it assumed its stockholders' personal income tax liabilities as part of the purchase price of the assets transferred to it by the partnership and, accordingly, legal and auditing expenses paid by it in connection with the settlement of such liabilities are not deductible as ordinary and necessary business expenses. 2. Held, further, of the total auditing fees incurred by petitioner in 1952, the amount of $1,000 was incurred in connection with routine corporate auditing services and is deductible as an ordinary and necessary business expense.

Income from invention: Capital gain or ordinary income. - Grant by inventor of the right to make, use, and sell his invention (which was later patented) held to constitute a sale of the invention and the amounts received thereunder are taxable as capital gains. Edward C. Myers, 6 T.C. 258, followed.

In 1943, 1944, and 1945, petitioners operated a dress manufacturing business as a partnership. Held: the unreported sales, as determined by respondent, constituted additional partnership income to petitioners. Held, further, a part of each deficiency was due to fraud with intent to evade tax.

The issues involved in this proceeding have to do with petitioner's claims for relief and refunds under sections 722(b)(4), 721(a)(2)(C), and 711(b)(1)(J) and (K), Internal Revenue Code of 1939. The taxable years involved are 1943, 1944, and 1945. The issues will be stated in detail in the opinion.

Family partnership. - Held, petitioners failed to sustain their burden of showing that father and son in good faith and acting with a business purpose intended to join together in the present conduct… Held: petitioners failed to sustain their burden of showing that father and son in good faith and acting with a business purpose intended to join together in the present conduct of an enterprise.

Held, that loss deductions claimed by the petitioners in their individual tax returns for the years 1950 and 1951 on account of losses allegedly incurred by a trust of which one of the petitioners… Held: that loss deductions claimed by the petitioners in their individual tax returns for the years 1950 and 1951 on account of losses allegedly incurred by a trust of which one of the petitioners was a life income beneficiary are disallowed.

1. Held: The returns filed for the years 1942 to 1947, inclusive, were false or fraudulent with intent to evade tax which bars the running of the statute of limitations as to those years. Held: The returns filed for the years 1942 to 1947, inclusive, were false or fraudulent with intent to evade tax which bars the running of the statute of limitations as to those years.

Petitioner is one of three liquor licensees who were authorized to operate a retail liquor store in Clinton, Tennessee, in 1949. Held: that petitioner failed to prove that payments made by him under the lease in excess of $3,600 per year were required to be made as a condition to continued use of the premises within the meaning of section 23(a)(1)(A) of the I.R.C. of 1939.

1. Petitioner was the majority stockholder and an officer in Bristol Fabrics, Inc. He dominated its affairs. Held: such payments constituted taxable income to him. 2. Petitioner was in fact a partner in an enterprise known as Plastoplex Company, and an effort to substitute his wife as a partner in his stead was a sham. Held, the distributive income of Plastoplex allocated to his wife was correctly charged to petitioner by the Commissioner. 3.

1. Petitioner's gross receipts determined by the bank deposit method. 2. Petitioner purchased three buildings in Chattanooga, Tennessee, to be used in his practice. Held: that all of the work done on the Vine Street properties was part of an over-all plan of permanent betterment increasing the usefulness and the life of such buildings, and no part of the expense thereof is deductible as repair expense.

Held, that petitioner's salary as a corporate officer was income from the operation of a trade or business within the meaning of section… Held: that petitioner's salary as a corporate officer was income from the operation of a trade or business within the meaning of section 122(d)(5) of the 1939 Internal Revenue Code, and for carry-forward purposes, this salary income must be applied against a partnership operating loss sustained by the petitioner without first offsetting…

Gain on sale of real estate: Capital gain or ordinary income. - Upon the evidence, held that tracts and lots of real estate sold by petitioner in 1947 were held primarily for sale to customers in the ordinary course of business, and the gain realized constituted ordinary income rather than capital gain.

Respondent affirmed for failure of proof of error.

1. Held: Silver's transaction of January 22, 1947, with Joy Manufacturing Company, wherein the former transferred all of his right, title… Held: Silver's transaction of January 22, 1947, with Joy Manufacturing Company, wherein the former transferred all of his right, title and interest in and to a continuous coal miner invention conceived by him and reduced to practice in excess of six months prior to the date of such transaction, constituted the outright sale of a capital…

Where a separation agreement provided for periodic payments for the support of the former wife and minor children, with a provision for… Held: viewing the instrument as a whole, that a portion of the periodic payments was payable for the support of minor children and therefore not deductible by the husband under section 23(u) of the 1939 Internal Revenue Code; held, further, dental expenses for the former wife paid by the husband are not periodic payments and therefore not…

In 1949, petitioner corporation purchased merchandise in India and borrowed pounds sterling from a bank to make payment. Held: the gain realized by petitioner is a gain arising directly out of its trade or business from the settlement of a debt incurred therein for less than its face amount and, hence, is taxable as ordinary income. America-Southeast Asia Co., 26 T.C. -, decided this day, followed.

Held: The advances by Ben P. Gale during the year 1946 to the Universal Plating Company as evidenced by three promissory notes of that company were contributions to capital rather than bona fide… Held: The advances by Ben P. Gale during the year 1946 to the Universal Plating Company as evidenced by three promissory notes of that company were contributions to capital rather than bona fide loans.

Where, over a period of years, the petitioner, an experienced businessman, omitted substantial amounts of income from his returns and offered… Held: the respondent has established by clear and convincing evidence that a part of the deficiency for each of the years involved was due to fraud with intent to evade tax within the meaning of section 293(b) of the 1939 Internal Revenue Code; held, further, that the 50 per cent addition for fraud is to be computed for 1946 without…

1. Income. - Petitioner, Max Hixon, received gambling winnings which he failed to report in income on his return. Held: that having elected to take the standard deduction in lieu of itemized deductions, petitioner may not revoke the election and claim specific deductions, including gambling losses. Robert V. and Jennie J. Johnston, 25 T.C. 106 (October 26, 1955) followed.

1. Louis Groh, who had for many years operated a country store, dealt in grain, and engaged in trucking in a small community, decided to take his son into the business as a "share-basis joint venture." The written agreement, which a local lawyer prepared to evidence this arrangement, did not employ the term "partnership" and referred to the parties by the descriptive terms "employer" and "employee." Thereafter, the business was carried on jointly by the father and son under the name of Louis Groh & Son, and the bank account on which both issued business checks was maintained in the same name. The son considered that he and his father had entered into a joint venture, and that he was a partner therein; he assumed a major portion of the responsibility and management; and he received 25 per cent of the net profits, plus a $50 per week drawing account. The father made no decision without consulting the son, and considered him to be just as much a part of the business as he was. Held, that a true joint venture or partnership existed between the father and son; and that the net profit of the business is taxable on a partnership basis. 2. Further held, that in each of the cases, an addition to the tax should be imposed under section 294(d)(2) of the Internal Revenue Code (1939), for substantial underestimate of estimated tax resulting from the failure to file a declaration of estimated tax; but that a further addition to the tax should not be imposed under section 294(d)(1)(A) for failure to file the declaration, because such failure was due to reasonable cause and not a willful neglect.

Income: Taxable to individuals or to a corporation. - Petitioners, Robert Azevedo and Paul Kershaw, Jr., entered into an executory contract of sale with Robert's father, John, on… Held: that the corporation did not own an inventory of wine prior to the sale thereof; that the proceeds from sales of the wine was not the corporation's income; and that the net earnings of the winery were compensation to petitioners under the agreement. Respondent's determinations sustained.

A painting contractor expanded his business to include the retail sale of furniture, slip covers, and draperies; and he thereupon changed from the cash to the accrual method of keeping his books and reporting his income, without obtaining the prior consent of the Commissioner. Held, that there should be included in his income for the year of the change, the uncollected accounts receivable of prior years, which would otherwise entirely escape taxation.

1. Held, that attorney's fees and court costs incurred and paid by petitioner in connection with a proceeding for divorce and property settlement were personal expenditures and not deductible in… Held: that attorney's fees and court costs incurred and paid by petitioner in connection with a proceeding for divorce and property settlement were personal expenditures and not deductible in determining net income. 2.

Held: Respondent erred in failing to include as a factor in making his computation of [petitioners]' net worth during the taxable years a large amount of cash kept by petitioner in his home. Held, further: Petitioner was not guilty of fraud.

1. On December 31, 1949, 200 shares of petitioner Sam Rosania's stock in a corporation of which he was the majority stockholder were redeemed at par value, which was its cost to… Held: the redemption was a partial liquidation within the meaning of section 115(i), Internal Revenue Code of 1939, as petitioners contend and was not essentially equivalent to the distribution of a taxable dividend under section 115(g) of the 1939 Code, as the Commissioner has determined. 2.

Fraud. - Respondent's evidence clearly showed that petitioner's returns for 1942, 1943 and 1944 were fraudulent with intent to evade tax. Fraud for 1941 not shown. Petitioners failed to show that respondent's determination of deficiencies in their income tax liability for 1942, 1943, 1944 and 1947 was incorrect. Deficiencies were determined by the net worth plus nondeductible expenditures method of determining income.

While employed for an indefinite period in Ankara, Turkey, as a construction designer taxpayer maintained a separate home for his family in St. Paul, Minnesota. Held: expenditures made by taxpayer for meals and lodging in Ankara are not deductible traveling expenses.

Petitioner Jay L. Ambrose, manager and virtually sole stockholder of Ambrose and Company, a Colorado corporation, negotiated an agreement… Held: that the assets received from the Colorado corporation and contributed to the partnership included a legally enforceable contract to purchase 108,694 gallons of bulk wine from Italian. Held further, the fair market value of the uncompleted contract was $1.30 per gallon or a total of $141,302.20 as of the applicable valuation date.

Held, there was no valid and bona fide partnership in the years 1944 and 1945; held, further, certain sales were improperly omitted from the… Held: there was no valid and bona fide partnership in the years 1944 and 1945; held, further, certain sales were improperly omitted from the petitioner's income in the years 1943, 1944 and 1945; and held, further, a portion of the deficiency for each of the years 1943, 1944 and 1945 was due to fraud with intent to evade tax.

Net casualty losses deductible under section 23(e)(3), IRC of 1939, resulting from fire damage to petitioners' residence and its contents in the year 1949 determined. The amount of a casualty loss deductible under section 23(e)(3), IRC of 1939, resulting from storm damage to petitioners' residence and shrubbery in 1950 determined.

Held: Petitioners' election to report gain from the sale of real estate by a method other than the installment basis is binding and they are not now entitled to a recomputation of tax on the… Held: Petitioners' election to report gain from the sale of real estate by a method other than the installment basis is binding and they are not now entitled to a recomputation of tax on the installment method.

Held, that 35 improved subdivision lots sold by one of the petitioners, during the taxable periods involved, were at the time of their sale held primarily for sale to customers in the… Held: that 35 improved subdivision lots sold by one of the petitioners, during the taxable periods involved, were at the time of their sale held primarily for sale to customers in the ordinary course of a real estate business; and that the gains therefrom are taxable as ordinary income.

Income tax: Deduction of cost of improvements to leased premises. - Petitioner made improvements upon premises which it occupied under a lease for five years with provisions for renewal for three… Held: that for the taxable year the petitioner is entitled to deduct one-fifth of the cost of such improvements.

Held, amounts which petitioner received in 1949 and 1950 from a motion picture company or its sole stockholder were compensation for services rendered or to be rendered and were properly reported by… Held: amounts which petitioner received in 1949 and 1950 from a motion picture company or its sole stockholder were compensation for services rendered or to be rendered and were properly reported by him as ordinary income.

Held, upon the facts, that a net sum received by petitioner upon the purchase of coal mining rights by the holder of an option constituted payment for petitioner's services in negotiating an option… Held: upon the facts, that a net sum received by petitioner upon the purchase of coal mining rights by the holder of an option constituted payment for petitioner's services in negotiating an option and sale for the owner of the property. 2.

Petitioner was incorporated under New York law on January 29, 1948, as a wholly owned subsidiary of a Switzerland (patent) corporation. Held: in determining petitioner's tax liability for the fiscal year ended January 31, 1949, the credit of $12,000 represented a contribution of capital by the parent as paid-in surplus, rather than a reduction of the purchase price of bracelets as determined by the respondent.

Held: 1. A part of the deficiency for each of the years 1941 to 1947, inclusive, was due to fraud with intent to evade taxes. 2. Held: A part of the deficiency for each of the years 1941 to 1947, inclusive, was due to fraud with intent to evade taxes. 2. Respondent failed to sustain the burden of proof that some part of the deficiency for the year 1948 was due to fraud with intent to evade taxes. 3.

Decedent, Don H. Finkle, was the owner of seven patents which he had held for more than six months and which were capital assets in his hands. Held: such assignment was a sale of the patents, and payments received by decedent in 1951 under the assignment were taxable as capital gains and not as ordinary income. Edward C. Myers, 6 T.C. 258 (1946), followed.

In 1949 petitioners sold 7 lots of real estate which they had acquired for investment purposes in past years. Held: The lots were not held primarily for sale to customers in the ordinary course of business within the meaning of section 117, Internal Revenue Code of 1939, and respondent erred in taxing the gain realized as ordinary income.

Held, that the deficiency determined for each of the years 1944 and 1945 is, in part, due to fraud with intent to evade tax, within the meaning of section 293(b) of the Internal Revenue Code (1939). Held: that the deficiency determined for each of the years 1944 and 1945 is, in part, due to fraud with intent to evade tax, within the meaning of section 293(b) of the Internal Revenue Code (1939).

Deductions: Salesmen's expenses: Transportation: Entertainment: Contributions: Medical expenses: Evidence. - The court on the facts disallowed portions of taxpayer's deductions for contributions and medical expenses. The deductible amount of business expenses of the taxpayer, including transportation and entertainment expenses, was determined by the court by application of the Cohan rule.

From 1943 to 1949, inclusive, petitioner operated a farm, a general store, an oil and gas distributorship, and a fertilizer business in a small Georgia community. Held: deficiencies found for the years 1945, 1947, and 1948; no deficiency found for 1949.

Petitioners did not file a declaration of estimated tax for the taxable year 1951, for which year respondent determined a deficiency in income tax, and additions to income tax under sections… Held: no error was committed by respondent.

1. Depreciation. - Petitioner's stock and the stock of Globe, another corporation whose premises were occupied by petitioner, is owned by two individuals, husband and wife, who were the sole partners… Held: that in the taxable year petitioner's tenancy was for an indefinite period rather than under an alleged lease and that all of the depreciation in dispute should be computed on the basis of the useful life of the tower and other facilities. 2.

Officers' salaries: Sec. 23(a)(1)(A), 1939 Code. - All of petitioner's stock was owned in equal amounts by its two principal officers. Held: that the compensation paid was excessive in part; a reasonable allowance for compensation, in a larger amount than respondent allowed, is determined.

Petitioner filed joint income tax returns with his wife, Bertha A. Germon, for the years 1947, 1948, and 1949. Held: for failure of proof, the deficiencies determined by respondent are sustained. 2. Held, further, for failure of proof, the additions to tax for fraud are not sustained. 3. Held, further, having filed income tax returns jointly with his wife, petitioner is liable for any deficiencies in tax on their joint incomes.

During 1949 and 1950 petitioner made distributions under its by-law providing therefor to the extent of a certain percentage of annual profits over a specified base. The distributions were made to certain of its employees and to several employees of its wholly-owned subsidiary entitled to participate on the basis of and in proportion to their respective holdings of petitioner's A stock. Respondent disallowed deduction therefor on the ground that such distributions were in reality preferential dividends. Held, that the distributions to petitioner's own employees were made in accordance with an incentive-compensation plan, and to the extent found to be reasonable in amount, in accordance with a formula determined by the Court, such payments constituted additional compensation and were deductible. Held further, that no portion of the distributions in excess of amounts found to be reasonable additional compensation are deductible as either ordinary and necessary business expenses or as a part of petitioner's cost of goods sold. And held further, that the amounts distributed under the by-law to employees of petitioner's wholly-owned subsidiary are not deductible by petitioner.

The decedent, during his lifetime, pledged stock with a bank to secure a loan from the bank to H, a corporation, of which decedent was president. The corporation gave its notes to the bank. Held: upon the facts, that the respondent erred in determining that the basis of the new notes was zero; held, further, that the basis of the notes was the sum paid by the executors to obtain the notes and the collateral which had been pledged to secure the notes.

1. The decedent, a lawyer, agreed to undertake work for clients on a contingent basis. The question involves four of such arrangements. Held: that at the time of decedent's death, the value of the decedent's services, in each instance, could not have been determined and there could not have been a quantum meruit recovery. The subsequently recovered fees are not includible in decedent's gross estate. 2.

1. Held, that overpayment is the excess of the amount of tax shown by the taxpayer on its return and paid, plus any deficiency determined and thereafter paid,… Held: that overpayment is the excess of the amount of tax shown by the taxpayer on its return and paid, plus any deficiency determined and thereafter paid, over the amount of the taxpayer's correct tax liability, without reduction in either amount for the postwar refund credit. Sections 780 and 781, I.R.C., 1939. 2.

Petitioner, Benjamin F. Haas, organized Oxford Looms Inc., a woolen mill, in 1933, and at all times thereafter had complete control over the operation… Held: the profit and loss arrangements between petitioner and Oxford were not bona fide and the losses claimed by petitioners on their joint returns are not deductible under any provision of the 1939 Code. Note: This Memorandum Findings of Fact and Opinion supersedes T.C. Memo. 1956-50, filed February 29, 1956 [15 TCM 211,].

Held, petitioners failed to prove that stock which they owned became worthless in 1950 so as to entitle them to a capital loss deduction in that year and a carry-over of the balance of such loss to the year 1951.

Held: 1. That respondent's use of the bank deposit method in determining petitioner's income was justified and was not arbitary. 2. Held: That respondent's use of the bank deposit method in determining petitioner's income was justified and was not arbitary. 2. That because of the application of the provisions of section 275(c) of the Internal Revenue Code of 1939, the defense of limitations (raised only in respect of the year 1949) does not bar assessment. 3.

1. Petitioners claimed a credit of $600 against net income for each of the years 1948, 1949, and 1950 as an exemption for their son under section 25(b), I.R.C. of 1939, which respondent disallowed. Held: petitioners are entitled to the credit for 1948 but not for the years 1949 and 1950. 2.

Held, $3,000 of a $12,500 payment received by decedent upon her divorce was a periodic alimony payment within the meaning of section 22(k) of the 1939 Code. Held: $3,000 of a $12,500 payment received by decedent upon her divorce was a periodic alimony payment within the meaning of section 22(k) of the 1939 Code. F. Ewing Glasgow, 21 T.C. 211 (1953), followed.

Held, petitioner is not entitled to deduct amounts which it accrued as interest on advances made to it by its stockholders since such advances constituted contributions to capital rather than loans. Held: petitioner is not entitled to deduct amounts which it accrued as interest on advances made to it by its stockholders since such advances constituted contributions to capital rather than loans.

Respondent sustained for failure of proof of error.

Determination of income upon basis of net worth increase held justified. Amounts determined by respondent modified in certain respects. Additions to tax determined by respondent for fraud, failure to file return, failure to file declarations of estimated tax and for underestimation of tax, approved as to some years and disapproved for others. Statute of limitations held to bar assessment and collection of tax for some years.

1. Held, petitioner failed to prove that the Commissioner erred in disallowing a loss from a transfer of assets for stock of the petitioner. 2. Held: petitioner failed to prove that the Commissioner erred in disallowing a loss from a transfer of assets for stock of the petitioner. 2. Held, petitioner failed to prove that the Commissioner erred in disallowing certain deductions for travel expenses. 3.

Issues relating to O. K. Loan Company of Troy, Inc.: 1. Held: certain alleged interest added by the Commissioner to the income reported by petitioner on its returns for the fiscal years 1948 through 1952 was erroneously added. As to these adjustments the Commissioner is reversed. 2.

Held, advances by petitioner's sole stockholders and their daughter denominated as loans were in fact investments of risk capital and petitioner was therefore not entitled to deduct $8,400 paid to them in 1948 as an interest expense allowable under section 23(b) of the 1939 Code.

Held, the losses sustained by petitioner in 1948 as the result of the uncollectibility of amounts which he had advanced to two corporations constituted nonbusiness bad debts. Held: the losses sustained by petitioner in 1948 as the result of the uncollectibility of amounts which he had advanced to two corporations constituted nonbusiness bad debts.

Held, that petitioner has failed to sustain the burden of proving that over half of the support of either of his two children was received from him for the taxable year in question. Held: that petitioner has failed to sustain the burden of proving that over half of the support of either of his two children was received from him for the taxable year in question.

Buckeye Stamping Company distributed common stock as dividends to its holders of common stock in 1916 and 1922, capitalizing $180,000 in earnings and profits accumulated after February 28, 1913. In 1943 petitioners as members of a purchasing group, in effect, borrowed money from Buckeye in order to purchase its stock from the original holders and gave their notes in return. In 1945 the notes were cancelled upon surrender of 75 per cent of the stock by petitioners and other members of the purchasing group or their successors. Held, that cancellation of the notes was essentially equivalent to the distribution of a taxable dividend within the meaning of section 115(g) of the Internal Revenue Code of 1939. Woodworth v. Commissioner. 218 Fed. (2d) 719 (C.A. 6, 1955) followed.

Depreciation deductions. - Average useful life of tractors and trailers used in petitioner's business of common carrier in motor freight transportation determined to be four years and five years, respectively. Issues: Pleadings. - Question raised on brief by respondent as to the correctness of salvage values, not framed as an issue by the pleadings, is not properly presented and will not be considered.

Held: 1. Petitioners have failed to upset the presumption of correctness adhering to respondent's determination of deficiencies for the taxable years involved. 2. Held: Petitioners have failed to upset the presumption of correctness adhering to respondent's determination of deficiencies for the taxable years involved. 2.

Held: The shares of preferred stock on which five per cent return was paid by the petitioner in the years 1949 and 1950 constituted capital stock rather than indebtedness and the amounts so paid were… Held: The shares of preferred stock on which five per cent return was paid by the petitioner in the years 1949 and 1950 constituted capital stock rather than indebtedness and the amounts so paid were dividends.

Net worth. - Inadequacy of petitioners' records justified use of net worth method of determining income. Income as determined by respondent modified in some respects in accordance with facts established by the evidence. Fraud: Statute of limitations. - Held, the respondent has established that some part of the deficiency for each of the years 1944, 1945, 1947 and 1950 was due to fraud with intent to evade tax, justifying imposition of 50 per cent additions to the tax under section 293(b) of the Internal Revenue Code of 1939. Held, further, that the returns for the years 1944, 1945 and 1947 were false or fraudulent with intent to evade tax and that assessment of deficiencies and additions thereto for those years is not barred by the statute of limitations, but that the return for 1946 was not shown to be false or fraudulent with intent to evade tax and assessment of tax and addition thereto is barred by the statute of limitations.

In 1950, petitioner, L. H. Burnett, recovered on a claim which he had received upon the dissolution of a corporation in 1945. The claim had no ascertainable fair market value when received. Held: the amount recovered by petitioner in 1950 was a long-term capital gain, and not ordinary income as determined by the respondent. Westover v. Smith, 173 Fed. (2d) 90 (C.A. 9, 1949); and Susan J. Carter, 9 T.C. 364 (1947), affd. 170 Fed. (2d) 911 (C.A. 2, 1948).

In 1945, Victor Hugo Smith bought a house and lot situated in Carlton, Georgia, into which his son, Victor, and his family moved. Victor died in 1945. Held: Jonnie Lou Smith is liable as trustee-transferee for Hugo's deficiencies and penalties to the extent of $5,500, together with interest thereon as provided by law.

1. (a) Petitioner was engaged in the check cashing business, and also in illegal bookmaking activities during the relevant years. Held: the use of the net worth method to reconstruct petitioner's income for the years in question was justified; certain inaccuracies in respondent's net worth analysis are sulting from the net worth analysis, as so corrected, are sustained.

Petitioner operated a trucking business in 1949 and 1950 and with others formed a corporation which operated this business during part of 1950. Held: Income is recomputed in accordance with proof. 2. Unidentified deposits, in the absence of proof to the contrary, represent taxable income. 3. Additions to tax for failure to file returns or estimates and for substantial underestimates are sustained. 4. Deficiencies were not due to fraud with intent to evade tax.

Respondent partially disallowed deductions for automobile expense and charitable contributions and disallowed entire deductions claimed as entertainment and travel expense. Held: Petitioners entitled to deductions for entertainment and travel expense in amounts determined under application of the rule of Cohan v. Commissioner, 39 Fed. (2d) 540.

1. In 1944, petitioner, Ray Howard, an attorney, began prosecuting claims in behalf of an incompetent under an agreement whereby he was to receive one-half of any amount recovered. Held: no part of the amount received by petitioner in 1950 was taxable under the provisions of section 107 (a) of the 1939 Code. 2.

Petitioner was organized in March 1937 to acquire and operate certain warehouse property which had been purchased at foreclosure for $350,000 by a bondholders committee of petitioner's predecessor. Held: petitioner's unadjusted basis for the property is that of its transferor, namely, the fair market value at the time of acquisition. On the facts herein, such value is determined to be $450,000, of which $300,000 is allocable to the building and $150,000 to the land. 2.

1. Certain income received by petitioners in the taxable years 1948, 1949, and 1950, held to be proceeds from the sale of stock rather than compensation for services and taxable as long-term capital gain rather than as ordinary income. 2. The amount of legal fees taxable to petitioner in 1949 determined. 3.

Petitioner's transfer of stock to her children in return for the settlement of their lawsuits and claims against her held under the circumstances, made without donative intent and for an adequate consideration in money or money's worth within the meaning of section 1002, Internal Revenue Code of 1939.

Petitioner was engaged in the artificial flower business through a partnership comprised of himself, his wife, and his son-in-law during the years 1945, 1946, and 1947. Held: petitioner's son was not a partner, and the respondent correctly determined that the portion of net partnership profits paid to him during 1945, 1946, and 1947 was taxable income to the petitioner.

The petitioner, a corporation, owned a patent which dealt with making silver articles tarnish resistant by coating them with rhodium and/or palladium. It had no employees. Held: The petitioner has not shown that the payments it received from Baker were not royalties as determined by the Commissioner and thus personal holding company income. 2. The petitioner's failure to file personal holding company returns was not due to reasonable cause and was due to willful neglect.

1. For the years 1939 to 1944, inclusive, the respondent determined deficiencies in income taxes and additions thereto for fraud against the husband and wife jointly and severally. Held: that the wife is not liable since joint returns were not intended or filed, notwithstanding the fact that some of the income returned might have been that of the wife. 2.

Petitioner operated a branch office of a construction firm. His contract with the firm, as evidenced by its terms and the action of the parties in its execution, entitled him to one-third of the net income from operations of that branch office, subject to a reduction in future years of one-third of the amount of net losses of any year as yet unrecovered by later net income. He was also required to leave in his account an amount equal to one-third the net investment in certain assets. This relationship terminated in 1949, and in 1952 petitioner paid the firm $55,000 in settlement of claims aggregating approximately $90,000. The claims made by the firm included a share of the loss suffered upon the disposition of assets used in the trade or business at the end of the relationship, as well as amounts allegedly withdrawn in excess of petitioner's share of the income, and a onethird part of the original operating capital. Held: 1. Petitioners' taxable income includes one-third of the net income of the branch office for each year during the existence of this relationship with the construction firm, less one-third of any net losses of prior years. 2. Petitioner has not shown that any part of the foregoing payment of $55,000 was attributable to items includible in determining a net operating loss. Respondent is sustained in his refusal to permit the carry-back to 1951 of any net operating loss on account of that payment. 3. The evidence shows that in 1949 the business enjoyed a small net profit. Respondent erred in allowing a deduction for 1947 in his notice of deficiency of a net operating loss as a carry-back from 1949.

(1) Held: The partnership created by the taxpayer and his uncle in 1943 and which lasted until the uncle's death in 1946 is recognizable for federal income tax purposes. Held: The partnership created by the taxpayer and his uncle in 1943 and which lasted until the uncle's death in 1946 is recognizable for federal income tax purposes.

Held, real property owned by decedent at the date of his death had a fair market value of $100,000 at that time for Federal estate tax purposes. Held: real property owned by decedent at the date of his death had a fair market value of $100,000 at that time for Federal estate tax purposes.

Prior to 1948 petitioners, Huey F. and Horace S. Baker, were engaged in the electrical appliance business as partners, with a 2/3 and 1/3 interest therein, respectively. Held: Huey and Horace were engaged in the business of selling war surplus electrical equipment in 1949, 1950, and 1951, and the equipment sold during such years was stock in trade of a business operation and gain realized thereon was taxable as ordinary income.

During 1950 and 1951, petitioner, John L. Wheeler, operated a drug store in Atlanta, Georgia. Held: with minor adjustments, the respondent's determination of petitioner's net business income for 1950 and 1951 by an analysis of bank deposits and expenditures is sustained and the additions to tax for negligence, for failure to file declarations of estimated tax, and for substantial underestimate of estimated tax are approved.

Losses: Capital loss v. ordinary loss: Sale of corporate stock. - Although the corporate taxpayer was authorized to deal in securities, at no time did it appear that it was a dealer in stocks and securities. Thus, a loss on the sale of corporate stock was held to be a capital loss.

1. Petitioner purchased a motion picture film in 1943 and continued to spend sums to adapt it for commercial exhibition until approximately August of 1945. Thereafter, he made continuous efforts to sell or distribute the film, culminating in a sale in 1951. Held, despite the fact that the picture dealt with an imaginary Nazi occupation of the United States, and the fact that Nazi Germany was defeated in 1945, the evidence does not establish the film to have become worthless in 1945. 2. In 1943 petitioner purchased a film from one representing himself as having authority to execute the sale. In late 1945 petitioner was informed of claims adverse to his purported interest. He did not concede the correctness of such claims and in fact sent the film to his English agent for marketing. In 1946 the film was seized pursuant to legal proceedings commenced by the adverse claimants. Thereafter, petitioner made no more than a casual inquiry with respect to the potential liability and financial standing of the person from whom he had purchased the film. The evidence does not establish such person to have ever been insolvent. Held, petitioner has failed to prove that his claimed interest in the film became worthless in 1945; furthermore, he has not established the absence of a valuable claim against his seller. 3. In 1942 petitioner and two others formed a corporation for the purpose of producing motion pictures. Petitioner became a 20 per cent stockholder and also a creditor of the corporation in the amount of $20,000. Various contracts between the stockholders and the corporation provided petitioner with valuable rights not normally held merely on the basis of stock ownership or a debtor-creditor relationship. Disagreements arose between petitioner and the majority stockholder, which were finally resolved in an agreement whereby petitioner sold his stock to the corporation and also executed a general release and permitted the pledge of his share of profits from a picture already produced to help finance a subsequent production. In return he was to receive, inter alia, a share of the profits from the next three pictures to be produced. Held, petitioner did not merely sell shares of stock; he surrendered various other rights and gave valuable rights to the corporation which it would not otherwise have been able to exercise. Amounts received from a film subsequently produced were not amounts received as part of the purchase price of petitioner's stock; they are taxable as ordinary income.

The taxpayer corporation was engaged in building projects under long-term construction contracts. It maintained no inventories and did not own any heavy equipment. Held: The cash receipts and disbursements method of accounting clearly reflected the income of the taxpayer for the taxable period. 2. The taxpayer has not carried its burden of proving error in the Commissioner's determination disallowing the items of travel and entertainment.

Petitioner received assets in an exchange incident to a 77-B reorganization pursuant to which petitioner was revived to take over and continue the business of The Bessemer Limestone and Cement… Held: This Court is without jurisdiction to consider petitioner's income tax liability for 1942 as respondent determined no deficiency in such tax for that year.

Held: (1) The Commissioner was justified in computing taxpayer's net income by the net worth method. (2) Amount of undeposited cash at beginning of net worth period determined. Held: The Commissioner was justified in computing taxpayer's net income by the net worth method. (2) Amount of undeposited cash at beginning of net worth period determined. (3) Additions to deficiencies because of fraud with intent to evade tax sustained.

1. Held, amounts of business expenses determined. 2. Held: amounts of business expenses determined. 2. Held, that payments for wages and rent violated clearly defined public policy of the State of Illinois, and are accordingly not deductible as ordinary and necessary business expenses under section 23(a)(1)(A) of the 1939 Code.

1. Held, L. R. Bentson was not a bona fide participant in the transactions leading up to the acquisition by petitioners of the stock of Oregon Motor Stages and was not a bona fide stockholder in such… Held: L. R. Bentson was not a bona fide participant in the transactions leading up to the acquisition by petitioners of the stock of Oregon Motor Stages and was not a bona fide stockholder in such company.

1. In 1949, petitioner Henry W. Rice became a clerk in the Post Office Department in Greenville, South Carolina. Held: that petitioner's place of employment during the year 1952 was at Greenville and that under section 23(a)(1)(A) of the 1939 Code he is entitled to deduct as traveling expenses the above amount of $306.25. 2.

The net worth method was relied upon by respondent for the years 1943 to 1951, inclusive, to determine deficiencies in the income tax (and additions to tax under sections 293(b) and 294(d), 1939… Held: That there were no understatements of taxable income for any of the years involved except 1949, 1950 and 1951. Amounts of these understatements determined. 2. That respondent has failed to establish fraud by clear and convincing evidence for any of the years involved. 3.

In 1944 the petitioner transferred to a newly formed corporation certain property for use in manufacturing plastic toys as well as orders for toys. Held: The petitioner failed to prove that the 1944 transaction in which he received corporation stock was a nontaxable exchange within the scope of sections 112(b)(5) and 112(h), I.R.C. 1939. 2. The petitioner failed to prove that he filed an income tax return for 1946. 3.

1. From 1943 to 1949, inclusive, petitioners, Hyman R. and Abraham R. Minkoff, Isadore J. Weniker, Leon Figoff, and at times, another individual, were partners in the Huntington Rubber Company. The partnership agreements provided that partnership income each year would be allocated by mutual agreement rather than on the basis of any fixed percentage interests owned by the partners. The income each year was so allocated by mutual agreement. Held, respondent erred in reallocating partnership income among petitioners solely on the basis of percentage interests set forth in the partnership agreements. Held, further, respondent erred in determining that petitioners, Hyman R. and Lucia Minkoff and Abraham R. and Beatrice Minkoff, received additional income by virtue of the erroneous charging of their tax payments to the partnership capital account of Isadore J. Weniker, which charges were subsequently corrected. Held, further, respondent erred in determining that Hyman R. Minkoff received $25,000 of additional income by virtue of a loan made to him by Abraham R. Minkoff in 1947. 2. Huntington normally depreciated its machinery and equipment on a composite, straight-line method at 10 per cent per year. During 1946, 1947, and 1948, it claimed accelerated depreciation of 20 per cent because of excess use of such machinery and equipment. Held, petitioner failed to prove that the life of the machinery and equipment was materially lessened by such excess usage, and respondent properly disallowed the accelerated depreciation deductions claimed. 3. Hyman R. Minkoff, on behalf of Huntington, entered into the business of buying and selling the entire 1946 crop of chili peppers grown by an association of Mexican farmers. Huntington sustained losses on such venture which it claimed on its returns as net operating losses for the fiscal years ended April 30, 1947 and 1948. Held, respondent erred in disallowing losses sustained by Huntington from its chili pepper business during such years. 4. Huntington retained Norman Obrand as counsel during its fiscal year ended April 30, 1947, and paid him $1,000 for legal fees. Held, respondent erred in disallowing a deduction for such amount paid as legal fees. 5. In 1944, Hyman R. and Lucia Minkoff made contributions to charity in the total amount of $3,807.65. Held, the respondent erred in disallowing the deduction of a part of such sum as charitable contributions. 6. From 1944 to 1949, Hyman R. Minkoff was in the business of lending money for profit. Held, the respondent erred in determining that bad debts, deducted by Hyman R. and Lucia Minkoff on their returns in 1946 and 1947, were nonbusiness bad debts rather than business bad debts. Held, further, Hyman R. Minkoff sustained a deductible loss in the amount of $44,712.50 in 1948 for business debts which became worthless in that year. 7. Held, no part of any of the deficiencies here in issue was due to fraud with intent to evade tax. 8. Held, no part of any of the deficiencies here in issue was due to negligence or intentional disregard of rules and regulations. 9. Held, petitioners failed to show that the respondent erred in determining additions to tax for their substantial underestimate of estimated tax.

Gain realized from the sale of a vessel by a partnership held to be taxable as ordinary income and not as long-term capital gain. Held: further, petitioners' claim that petitioners are taxable, as equal partners, on the husband's share of the profits of a partnership, disallowed.

1. Respondent determined that certain parts of compensation payments to two officer-stockholders were unreasonable in amount and, to the extent which he determined them to be unreasonable, disallowed… Held: the entire payments made to these two officers as compensation were reasonable in amount and deductible. 2.

Held, that the petitioner is entitled in 1951 to a casualty loss deduction of $4,000 under section 23(e)(3) of the Internal Revenue Code of 1939 because of damage to his property… Held: that the petitioner is entitled in 1951 to a casualty loss deduction of $4,000 under section 23(e)(3) of the Internal Revenue Code of 1939 because of damage to his property caused by a storm. Held, further, that petitioner is not entitled to the deduction of a casualty loss in the year 1952.

Held: That petitioner Hedberg-Freidheim and Company did not accumulate its earnings or profits beyond the reasonable needs of its business during the years 1945-1948 and accordingly for those… Held: That petitioner Hedberg-Freidheim and Company did not accumulate its earnings or profits beyond the reasonable needs of its business during the years 1945-1948 and accordingly for those years is not liable for additional surtax under section 102, Internal Revenue Code of 1939.

Held, upon the facts, that petitioner, Frank Ronkowski, did not own any interest in the taxable years in a tavern business which was operated and owned by his nephew and another person, and that he… Held: upon the facts, that petitioner, Frank Ronkowski, did not own any interest in the taxable years in a tavern business which was operated and owned by his nephew and another person, and that he did not realize any income during the taxable years from the business.

Petitioner received cash and negotiable checks on December 31, 1946, which he deposited in his checking account on the next business day thereafter, January 2, 1947. Held: that such cash and checks should have been included in opening net worth by the respondent. The inclusion thereof eliminates the determined increased in net worth and the deficiency based thereon.

1. Deficiencies in income tax determined by use of net worth method approved subject to adjustments for cash on hand and for minor specific items. 2. Held: some part of the deficiency for each year was due to fraud with intent to evade tax. 3. Addition for substantial underestimation of tax for each year sustained.

Alimony: Section 22(k), I.R.C. 1939. - Petitioner and her husband entered into a separation agreement in 1932 calling for the establishment by the husband of an… Held: the separation agreement was incident to divorce, and payments thereunder subsequent to divorce were taxable to the wife. Limitations: Section 275(c), I.R.C. 1939. - The payments above referred to totalling $15,000 per annum were omitted from gross income by the wife in her returns for 1946 and 1947.