Volume 16 — Tax Court Memorandum

The operation by which petitioner sold defense housing units was in all important respects substantially equivalent to a business. Held: The gains from such sales are taxable as ordinary income. Held: The gains from such sales are taxable as ordinary income.

Petitioner, by stipulation, waived assignment of error in his petition relating to disallowance of feed expense. Held: Respondent's determinations are sustained.

Issue 1. Upon the facts, held that: (1) Loans were made by a partnership, in which petitioners were equal partners, to a corporation in the total… Held: that there were no fixed and definite liabilities in this amount and that the partnership is not entitled to a reserve for future contingent claims. Held, further, that such reserve represents a change in the partnership's method of accounting without obtaining the Commissioner's permission to make such change. Issue 4.

1. The greatgrandfather of petitioners Sudie F. Robinson and Ruth F. Robinson died testate July 1, 1883. Held: under section 113(a)(5) and (14) of the Internal Revenue Code of 1939, the basis for determining gain from the property sold is the fair market value of such property as of March 1, 1913. 2. The March 1, 1913, fair market value of the timber sold on November 16, 1951, determined. 3.

1. Petitioner and others formed a corporation in 1935. Held: on the facts, a bad debt rather than a contribution to capital resulted. Held further, despite testimony as to various enterprises and activities on the part of petitioner, the bad debt is deductible only as a non-business bad debt. 2. Petitioner also guaranteed the payment of certain debts of the corporation.

Petitioner by an instrument incident to a divorce agreed to pay to his wife $87,000 alimony in gross payable in periodic payments during a period ending more than ten (10) years but with the time of… Held: such payments not installment payments of alimony deductible by petitioner under sections 22(k) and 23(u) of I.R.C. 1939. Held, also, amount of certain entertainment expenses determined under rule of Cohan v. Commissioner, 39 Fed. (2d) 540.

Held: Petitioner has not proven that contributions to a profit-sharing plan are deductible under section 23(p)(1)(A), I.R.C. 1939. Held: Contributions to a profit-sharing plan were not deductible under section 23(p)(1)(D) because the rights of an employee therein were not "nonforfeitable". William M. Bailey Co., 15 T.C. 468, affd. (C.A. 3) 192 Fed. (2d) 574, followed.

1. In 1947, a loan which petitioner had made to a corporation, of which he was a stockholder, became worthless; in 1948, petitioner made good on his guaranty of another… Held: respondent properly allowed the deduction of such worthless debts as nonbusiness bad debts. 2. In 1947, 1948, and 1949, petitioner paid certain real property taxes owed by a corporation of which he was the sole stockholder. Held, such tax payments were not deductible by him under section 23(c). 3.

Held, that portions of club dues paid personally by an executive officer of a trust company are deductible by him as ordinary and necessary business expenses. Held: that portions of club dues paid personally by an executive officer of a trust company are deductible by him as ordinary and necessary business expenses. The amounts of such deductions are determined.

1. The Commissioner determined the petitioner's net income by the net worth method for the years 1940 to 1949, inclusive, and by making specific adjustments to the reported income for the years 1950 and 1951. The petitioner contends that the net worth method should be used for all of the years because his books and records were inadequate and the change in method causes a distortion of income between years. Held, the Commissioner's method of determining income is reasonable and is upheld. 2. The petitioner contends that certain items in the net worth computation are incorrect. Held, that the Commissioner's determination as to cash on hand, liabilities, inventories, and living expenses is erroneous and subject to adjustment and adjustments are made herein, but no credit should be given to petitioner for income belonging to him and derived from his assets although reported by his wife on a separate return. 3. The Commissioner increased the petitioner's professional income for 1950 and 1951, and determined that certain other amounts received in 1950 were compensation for services rendered. Held, that increases in professional income are approved subject to certain adjustments but that other amounts received in 1950 were loans subject to an indemnification agreement and not income. 4. The Commissioner disallowed petitioner's son as a dependency exemption for several of the years here involved on the ground that the petitioner did not furnish over one-half of his support and also disallowed (son's) wife as a dependent during 1946 on the ground that she filed a joint return with the son. Held, that the Commissioner's action in disallowing these exemptions was proper under the facts and he is sustained. 5. Held, that petitioner fraudulently failed to report part of his professional income for the years 1947, 1948, 1949, 1950, and 1951, and that a part of the deficiencies for each of those years was due to fraud with intent to evade the tax. Held, further, that the Commissioner has not sustained his burden of proof as to fraud for the taxable years 1940 to 1946 and his additions to the tax for those years under section 293(b), Internal Revenue Code of 1939, are not sustained. 6. Statute of limitations. - The petitioner has pleaded the statute of limitations as a bar to the assessment and collection of the deficiencies for all of the years 1940 to 1948, inclusive. He concedes that the statute of limitations does not bar the years 1949, 1950, and 1951. Held, the Commissioner has not sustained his burden of proof that petitioner's returns for 1940 to 1946, inclusive, were false and fraudulent with intent to evade taxes, and the deficiencies for those years are barred by the statute of limitations. Held, further, petitioner's returns for 1947 and 1948 were false and fraudulent with intent to evade taxes and the assessment and collection of the deficiencies for those years are not barred by the statute of limitations. 7. Estimated tax. - Held, additions provided for in section 294(d)(1)(A) and section 294(d)(2), Internal Revenue Code of 1939, are sustained. 8. Self-employment tax. - Held, that petitioner had self-employment income and is liable for self-employment tax provided in section 480, Internal Revenue Code of 1939.

The respondent determined deficiencies in petitioner's income tax for the years 1948, 1949, and 1950, and additions to tax under section 293(b), section 291(a), and section 294(d), Internal Revenue… Held: petitioner is liable for the deficiencies in income tax as determined in the deficiency notice, and he is also liable for the additions to the tax under sections 291(a) and 294(d) of the 1939 Code.

1. During the taxable years 1951 and 1952 and for many years prior thereto, petitioner Edmund Thomas Gulledge, Sr., was engaged in the business of farming. Held: the advances were loans to the corporation rather than capital contributions. Held, further, a part of the loans became entirely worthless in 1951 and the remainder was entirely worthless in 1952 when made pursuant to the agreement of November 29, 1951.

Held, bonuses paid by petitioners to a corporate official were reasonable compensation for past services rendered by him, and deductible in full as ordinary and necessary trade or business expenses. Held: bonuses paid by petitioners to a corporate official were reasonable compensation for past services rendered by him, and deductible in full as ordinary and necessary trade or business expenses.

Held, that respondent has not established that the returns for the years involved were false or fraudulent with intent to evade tax, within the meaning of section 276(a) of the 1939 Code; and that, therefore, assessment and collection of the determined, assessed and claimed liabilities were and are barred by the limitation provisions of section 275(a).

Petitioners filed no returns from 1945 through 1949, inclusive. Petitioner, Margaret W. Brizendine, was employed for a part of 1950 and throughout 1951, and petitioners filed returns for those years. In determining deficiencies, respondent added estimated living expenses of $2,000 a year to known expenditures made by petitioners from 1945 to 1951, inclusive. Held, petitioners received adjusted gross income in the amount of known personal expenditures made by them, plus estimated living expenses of $1,200 per year. Held, further, respondent properly imposed additions to tax under sections 291(a), 293(a), 294(d)(1)(A), and 294(d)(2).

Petitioners filed their tax return on March 16, 1949. The notice of deficiency was mailed to them on March 15, 1952. Held: the notice of deficiency was mailed within three years after the return was filed. Held further: respondent's disallowance of deductions claimed by petitioners sustained.

Held, wages paid by petitioner in the business of a painting and paper-hanging contractor, which were in violation of Defense Production Act, were properly disallowed under the authority of… Held: wages paid by petitioner in the business of a painting and paper-hanging contractor, which were in violation of Defense Production Act, were properly disallowed under the authority of Sidney Zehman, et al., 27 T.C. - (Feb. 28, 1957) and Weather-Seal Manufacturing Co., 16 T.C. 1312.

Petitioner, a pipeline construction company, loaned one who aided in procuring construction contracts the sum of $40,000, taking the latter's note for that sum. Held: petitioner was not entitled to take a bad debt loss after it learned the application for the certificate would be denied, and after the close of the fiscal year in which the deduction was taken.

Held, petitioner Gerald L. Walker was a bona fide resident of Japan for the entire year 1950, and the insurance commissions which he… Held: petitioner Gerald L. Walker was a bona fide resident of Japan for the entire year 1950, and the insurance commissions which he earned in 1950 under his contract for writing life insurance policies on the lives of American military personnel stationed in Japan, having been earned in Japan, were excludible from his gross income under…

Held: The Commissioner failed to prove that the petitioner's tax returns for the years 1941 through 1948 were false and fraudulent with intent to evade tax. Held: The Commissioner failed to prove that the petitioner's tax returns for the years 1941 through 1948 were false and fraudulent with intent to evade tax.

Petitioner, Fletcher A. Burton, derived income from a variety of sources during the years 1944 to 1950, inclusive. He owned a great many pieces of depreciable income-producing property. His books and records were inadequate to correctly determine the amount of his taxable income during such years. Held, respondent was justified in using the net worth method to determine petitioner's taxable income for such years. Held, further, no part of the deficiencies was due to fraud with intent to evade tax. Held, further, respondent properly imposed an addition to tax for substantial underestimate of estimated tax for the year 1950. Held, further, since the returns were not false or fraudulent, the years 1944 to 1948, inclusive, are barred by the statute of limitation.

Held: Amounts credited by a finance company to the dealer's reserve account of petitioner, an accrual basis automobile dealer, were income to petitioner in the year credited. Held: Amounts credited by a finance company to the dealer's reserve account of petitioner, an accrual basis automobile dealer, were income to petitioner in the year credited.

The United States Court of Appeals for the Fifth Circuit, on review, affirmed this Court as to the deficiencies found for the years in issue but reversed and remanded the case with directions to eliminate section 291(a), Internal Revenue Code of 1939, additions to tax, and to allow petitioner to amend his petition touching the plea of the statute of limitations for the year 1943.

Held, the cancellation by an officer-stockholder of a corporation of an indebtedness for salary constituted a contribution to capital and is not deductible as an expense under section 23(a) or as a… Held: the cancellation by an officer-stockholder of a corporation of an indebtedness for salary constituted a contribution to capital and is not deductible as an expense under section 23(a) or as a loss under section 23(e), I.R.C. of 1939.

Held, voluntary payments by a corporation to the widows of deceased officers, which payments were intended as gifts and were subject to termination, modification or reduction at any time by the… Held: voluntary payments by a corporation to the widows of deceased officers, which payments were intended as gifts and were subject to termination, modification or reduction at any time by the corporation, are not includible in the gross income of the widows.

Fees paid by a partnership to an accountant and attorneys in an unsuccessful endeavor to prevent an indictment for and in the defense of a criminal charge against the individual partners for income tax evasion, held, not deductible as business expenses.

Held, that petitioner is entitled to a deduction of $5,224.10 in the year 1950 for a partially worthless debt. Held: that petitioner is entitled to a deduction of $5,224.10 in the year 1950 for a partially worthless debt. Held, further, that petitioner is not entitled to a deduction of $988.70 in the year 1951, on the ground that the remaining indebtedness of the same debtor had then become worthless.

Held, registered cattle sold by petitioners from the herd they called their breeding herd, to cattle breeders who called at their farm,… Held: registered cattle sold by petitioners from the herd they called their breeding herd, to cattle breeders who called at their farm, and to purchasers at auction sales following displays of the cattle at exhibitions, were sales of cattle held by petitioners primarily for sale to customers in the ordinary course of their business and not…

Respondent determined deficiencies in petitioner's income tax for the years 1942 through 1949 by a net worth computation in the total sum of approximately $18,000 (with additions thereto under… Held: petitioner had $42,500 undeposited cash on hand at the beginning of the period involved, which was not considered in the net worth computation, and therefore the net worth computation was unreliable as evidence of unreported income.

Petitioner, the owner of a one-third interest in Tract I, obtained partly by inheritance, formed a plan of disposing of the tract by platting the area into lots. Held: the profit from the sales was ordinary income.

Petitioners, who are schoolteachers, elected to take the standard deduction in lieu of itemizing their expenses for 1952. In arriving at their adjusted gross income, they took deductions for certain summer school expenses, and for dues paid to various teachers' associations. Held, none of the expenses claimed by petitioners qualify under section 22(n) as proper deductions from gross income.

Held, the sum of $9,200 received by petitioner in 1950 in consideration of the release of his employment contract is taxable as ordinary income, and not as capital gain.

Held: (1) The sale of 19 head of cattle for $3,146.29, although recorded on the books of the purchasers as a sale from the petitioner, was not a sale by the… Held: The sale of 19 head of cattle for $3,146.29, although recorded on the books of the purchasers as a sale from the petitioner, was not a sale by the petitioner but was a sale by petitioner's brother of cattle owned by him and respondent erred in increasing the petitioner's income from cattle sales by that amount.

Items of alleged expenses disallowed for lack of substantiation.

Held: The net increase in amounts credited during 1952 and 1953 by finance companies to the loss reserve accounts of petitioner, an accrual basis automobile dealer, was taxable income to petitioners… Held: The net increase in amounts credited during 1952 and 1953 by finance companies to the loss reserve accounts of petitioner, an accrual basis automobile dealer, was taxable income to petitioners in the years that the increases occurred.

Held: on the facts, respondent's determination of deficiencies in petitioners' income tax computed on the basis of net worth increase plus expenditures is sustained. Held further: at least part of the deficiency for each of the taxable years 1943 to 1951, inclusive, was due to fraud and the return filed for each year was false and fraudulent with intent to evade tax.

Petitioner, Cornelia Hekman, was paid $1,500 per month for 1 year, or $18,000, following her husband's death by the corporation which had employed him, of which he was an officer. Held: such payment was a gift and is, therefore, excludable from gross income under section 22(b)(3), 1939 Code.

Held, the petitioner was not a charitable organization exempt from tax during the taxable years. Held: the petitioner was not a charitable organization exempt from tax during the taxable years. An earlier ruling of the Commissioner that petitioner was tax-exempt did not operate to exempt petitioner from tax for the taxable years, and the Commissioner had authority to determine tax deficiencies for the taxable years.

Held: petitioner is liable as a transferee of the property of Society of Good Neighbors, a corporation, transfeeror, both at law and in equity, for its unpaid taxes, i.e., income tax, declared value excess profits tax, and excess profits tax, for the years 1943-1947, inclusive, plus statutory interest.

During the years 1944 through 1947, inclusive, petitioner Alice V. Prokop, while employed by a local labor union in Milwaukee as bookkeeper and personal secretary to Edward J. Brown,… Held: That with respect to the deficiencies determined for the years 1944, 1945 and 1946, petitioner has failed to meet the burden of establishing error on the part of respondent except to the extent set forth in our Opinion. Commissioner v. Wilcox, 327 U.S. 404 (1946) distinguished. 2.

1. Respondent disallowed certain alleged compensation deductions in part and others in their entirety. Held: that compensation claimed for Theodore allowed in full and compensation claimed for Carl and Edward allowed in part. 2. Theodore incurred out-of-pocket expenses on behalf of corporate petitioners. He estimated the amounts expended and corporate petitioners reimbursed him.

Commissioner's disallowance of alleged travel expense sustained. Cost of carpenter overalls and laundry of same disallowed as a business expense.

Held: The method of evaluating inventory employed by the petitioner was arbitrary and the adjustments thereto by the respondent are sustained. Held, further: The petitioner, as a guarantor, did not sustain a bad debt loss in 1949 upon the default of the principal debtors and the repossession of the property securing the debt.

1. From 1938 to 1948, inclusive, petitioner Milton A. Gilmore practiced medicine in Parkersburg, West Virginia, as an eye, ear, nose, and throat specialist. Held: a part of the deficiencies for each of the years in issue was due to fraud with intent to evade tax, and the returns for each of such years were false or fraudulent with intent to evade tax. 2.

Petitioners had both a business and nonbusiness loss and, in addition, had salary income. Held: respondent's determination upheld. Anders I. Lagreide, (1954) 23 T.C. 508, followed.

The Commissioner has determined a deficiency of $11,895.95 against petitioners, representing their liability as transferees of the assets of the Cortland County LP Gas Corporation of McGraw, New York. Held: on the facts which have been stipulated, petitioners are liable as transferees for the full amount of the deficiency which has been determined by the Commissioner, plus interest as provided by law. Section 311, Internal Revenue Code of 1939.

Held, the proof not establishing that the trust corpus would not be invaded to pay expenses for medical, nurses' or doctors' fees, the respondent did not err in… Held: the proof not establishing that the trust corpus would not be invaded to pay expenses for medical, nurses' or doctors' fees, the respondent did not err in holding that a deduction of the value of the trust remainder which was left to a charitable purpose should be disallowed in computing the estate tax.

Held, in the absence of any books and records by the petitioner, the respondent was correct in determining petitioner's income on the cash… Held: in the absence of any books and records by the petitioner, the respondent was correct in determining petitioner's income on the cash receipts and disbursements method; held, further, the petitioner did not show reasonable cause for failure to file proper corporate income tax returns for the years here involved and consequently is…

Upon the facts, held, that a piece of heavy equipment was purchased by petitioner, Donald R. Peterson, in November 1946; it was sold in March 1947; and it was, therefore, an asset of Donald R. Peterson at the end of 1946.

1. Fraud. - Respondent failed to submit clear and convincing evidence that false and fraudulent returns for 1943 were filed. Held, the deficiencies for 1943 are barred. 2. Held: the deficiencies for 1943 are barred. 2. Fraud. - Respondent established by cancelled checks cashed at check cashing concerns, paid invoices of customers, and records of check cashing concerns that gross receipts of petitioners' partnership were far in excess of gross receipts reported.

Dependent: Portion of support furnished: Section 25(b)(3), Internal Revenue Code of 1939. - Upon the evidence that the amounts contributed by the petitioner for the support of his two minor sons was less than one-half of the total support received by the sons in the taxable year, held that the respondent properly disallowed dependency credits claimed for the sons.

Exemptions allowed petitioner under section 25(b), I.R.C. 1939, for support of two minor daughters. The amounts of deductions, if any, for interest, sales tax, gasoline tax, and automobile depreciation have been determined from the evidence.

Net worth method. - Deficiencies in income tax determined by use of net w3rth method approved upon failure of the petitioners to show error in the respondent's determinations. Additions to tax for failure to file one return, for failure to file declarations of estimated tax for certain years, and for substantial underestimate of tax, approved.

Sections 42 and 111(b), 1939 Code: Equivalent of cash-amount realized: Cash basis. - Petitioner conveyed her undivided interest in a tract of unimproved real estate to her son and another in 1949 in… Held: that the note was not the equivalent of cash, and petitioner did not realize income in 1949 upon her exchange of a deed for the note.

Held, petitioners failed to prove that the method used in computing depreciation for hotel property and vending machines (a declining… Held: petitioners failed to prove that the method used in computing depreciation for hotel property and vending machines (a declining balance with a variable rate) produced reasonable allowances; held, further, petitioners failed to prove that certain vending machines, which petitioners originally estimated as having a life of five years,…

Held, that the term home, as used in sections 62(2)(B) and 162(a)(2) of the 1954 Code which provide deductions for away from home expenses, means the taxpayer's principal place of business or… Held: that the term home, as used in sections 62(2)(B) and 162(a)(2) of the 1954 Code which provide deductions for away from home expenses, means the taxpayer's principal place of business or employment.

Petitioner, a used car dealer, engaged in gambling activities throughout the taxable years involved, but did not report any income from such source during said years. Held: Respondent properly resorted to the net worth method to compute unreported income for the years 1946 to 1948, inclusive, and to the specific adjustment method for the years 1949 and 1950. Held further: Petitioner had unreported income for the years 1946, 1947, 1949 and 1950 in the amounts determined, but none for the year 1948. Held further: No part of the deficiencies for the years 1946 and 1947 was due to fraud but that at least a part of the deficiencies for each of the years 1949 and 1950 was due to fraud with intent to evade tax.

The income reported by petitioner on his returns for 1952 and 1953 was from his earnings as a painter and interior decorator. Held: the Commissioner is sustained. Petitioner has not proved that he contributed these amounts to Grace Gospel Mission; also he has not proved that Grace Gospel Mission was an organization which qualifies for the deductibility of contributions under section 23(o)(2), Internal Revenue Code of 1939.

Held, the patents here involved were held primarily for sale in the ordinary course of business and consequently the payments received by the taxpayers from the transfer of such patents are taxable… Held: the patents here involved were held primarily for sale in the ordinary course of business and consequently the payments received by the taxpayers from the transfer of such patents are taxable as ordinary income.

Petitioner made separate cash gifts in trust for his two children. On the same date he joined together with the trusts in partnership. Held: The parties to the partnership intended in good faith to join together with a business purpose in the present conduct of a business:

Petitioners' home during the taxable year ended December 31, 1952, is held to be in Atlanta, Georgia, rather than in Nashville, Georgia. Held: petitioners are not entitled to deduct any part of the unreimbursed expenses, under section 22(n)(2) of the Internal Revenue Code of 1939.

Held: On the evidence presented, petitioners did not furnish more than one-half the support of James R. Friedeman entitling them to dependency credits in the years before the Court. Held: On the evidence presented, petitioners did not furnish more than one-half the support of James R. Friedeman entitling them to dependency credits in the years before the Court.

Held, that returns filed by the petitioners for the years 1946 through 1949 were not false or fraudulent with intent to evade tax, within the… Held: that returns filed by the petitioners for the years 1946 through 1949 were not false or fraudulent with intent to evade tax, within the meaning of section 276(a) of the 1939 Code; and that assessment and collection of any deficiency or addition to tax for said years are barred by limitation, under section 275(a) of said Code.

Held: 1. Reasonable rental deductions determined. 2. Rental payments made by Ross Paper Mill Supplies, Inc., to Herman and Sadie Ross in 1951 and 1953 are not includible in the gross income of Ross Auto Parts, Inc.

1. Held, that false and fraudulent returns were filed for each of the years 1942-1945, inclusive, and for 1947, by the petitioners, Checker Taxi Company and Robert L. Bender, and that, therefore, deficiencies for those years are not barred by the statute of limitations. 2. Held, that each of the petitioners, Robert L. Bender and Esther C. Bender, received taxable income for each of the years 1942-1948, inclusive, from Checker Taxi Company but the amounts thereof were less than the Commissioner determined. 3. Held, that the deficiencies for each of the years 1942-1947, inclusive, of Checker Taxi Company and of Robert L. Bender were due to fraud with intent to evade tax.

1. Fraudulent return: Respondent's burden of proof. - Held, that respondent introduced sufficient proof to establish that petitioner filed a return for one of the years involved which was, on its face, a false and fraudulent return in the light of all of the other evidence introduced by the respondent which proved clearly and convincingly that petitioner filed a false and fraudulent return for the year in question with intent to evade tax. 2. Pleadings: Admissions by petitioner. - Held, that since petitioner, in his reply, did not specifically admit or deny respondent's affirmative allegation of fact in his answer that petitioner filed a return for the year involved in which he reported net income of a stated amount, respondent's allegation of fact is deemed to be admitted by petitioner. Rule 18(b), Rules of Practice.

During each of five years, petitioner received payments from three corporations which made the payments for the purpose of obtaining assistance in their efforts to obtain reduction and relief from… Held: that the respondent has established by clear and convincing evidence that petitioner filed a false and fraudulent return for each of the five years involved, and that, therefore, the deficiencies are not barred, section 276(a), 1939 Code.

Official amendment. - The following official order of the Tax Court amends the case of Jack Douglas et al., 27 TC 306, filed November 21, 1956.

Petitioner sold all of the outstanding stock of a corporation to Smith. The corporation was indebted to petitioner in the amount of $65,000. Later petitioner assigned the $65,000 note to Smith for $500. Petitioner, on the same day as the assignment, charged off $64,500 as a bad debt loss. Held, petitioner was only entitled to a capital loss deduction under section 117(a)(1), Internal Revenue Code of 1939.

Petitioner Gene O. Clark, president and majority stockholder of Gene Clark, Inc., from April 23, 1946, through March 1, 1949, inclusive, was the dominating factor in conducting and… Held: Petitioners realized unreported income from informal or constructive dividends from Gene Clark, Inc., for the calendar years 1946 and 1947, reportable for income tax purposes on the community property basis. Farm losses determined for 1946 and 1947. Long-term capital gain for 1947 adjusted.

1. Respondent concedes that the separate returns of Fawn Koyl for the years 1946 and 1947 were not false and fraudulent. Held: that assessment and collection are barred by the statute of limitations as to Fawn Koyl for 1946 but not for 1947. Section 275(c). Respondent concedes that no additions to tax are to be determined as to Fawn Koyl under section 293(b) for either of the years 1946 or 1947. 2.

The Commissioner has determined a deficiency in income tax against petitioners for the year 1950 of $140,357.52, and additions to the tax under section 293(b) and section 294(d)(2), Internal Revenue… Held: part of the deficiency is due to fraud with intent to evade tax and the Commissioner is sustained in his imposition of addition to tax under section 293(b), 1939 Code.

Held: ( 1) Expenses which were in the taxable years a contingent liability to the petitioner could not be deducted as business expenses; (2) petitioner failed to substantiate that medical expenses… Held: ( 1) Expenses which were in the taxable years a contingent liability to the petitioner could not be deducted as business expenses; (2) petitioner failed to substantiate that medical expenses were paid or accrued during the taxable years.

Held: On the facts, that the $16,200 paid to Idabelle Shaucet in 1952 was prepaid rent and includible in her gross income for the taxable year. Held: On the facts, that the $16,200 paid to Idabelle Shaucet in 1952 was prepaid rent and includible in her gross income for the taxable year.

Petitioner acquired patents from a stockholder, who obtained the patents, under a tax-free exchange of its stock for the patents. Its cost basis for the patents was the same as the transferor's cost. For lack of substantiation of the alleged cost basis, respondent determined that petitioner's basis was zero. Upon the entire record, petitioner's cost basis of each patent is determined and deductions are allowed in the taxable years for depreciation.

Petitioner was engaged in the business of leasing automobiles. During the taxable years he leased all of his automobiles to U-Drive. Held: useful life and salvage value of the automobiles determined, for the purposes of depreciation.

Held: (1) That there are no deficiencies in tax or additions to tax with respect to Zora Mills. Held: That there are no deficiencies in tax or additions to tax with respect to Zora Mills. (2) That there are no deficiencies in tax or additions to tax arising out of the proceeding in Docket No. 44282.

The principal petitioner operated a store and pawn shop; and he also purchased diamonds, bought and sold securities through a brokerage account, and held rental properties. Held: that reconstruction of petitioner's income by use of the bank deposit method was justified; and that, after allowance for certain additional adjustments, there was an understatement of net income for each of the years involved. Determination is made of the amounts of such understatements.

Respondent's determination of deficiencies resulting from use of increase in net worth plus expenditures method approved, subject to adjustment for cash on hand and certain other items. Amount advanced to Steel Producers, Inc., held to be an equity investment and amount of deductible loss is limited by capital loss provisions of 1939 Code. Additions to tax for fraud sustained for years 1944, 1945, 1947 and 1949, but not for the year 1950. Assessment held not barred for years 1944, 1945 and 1949 because returns were false or fraudulent with intent to evade tax and not barred for 1947 because of failure to file a return for that year. Additions to tax for failure to file declarations of estimated tax held improper because of showing that declarations were filed. Additions for underestimate of estimated tax approved.

Held, respondent's determination of deficiencies in petitioner's income tax under the net worth plus expenditures method, with certain… Held: respondent's determination of deficiencies in petitioner's income tax under the net worth plus expenditures method, with certain adjustments, upheld for the years 1944, 1945, 1946 and 1947; Held, further, a part of the deficiencies for each of the years 1944, 1945, 1946 and 1947 was due to fraud with intent to evade tax; Held,…

The principal petitioner was sole proprietor of a wholesale seafood business at Oyster, Virginia; and he also was a member of several joint ventures in the vicinity, some of which engaged in planting… Held: that none of petitioner's returns for the years 1942 through 1946 was false or fraudulent with intent to evade tax, within the meaning of section 276(a) of the 1939 Code; and that assessment for each of the years 1942 through 1944 is barred by the statute of limitations.

Held: 1. That, where petitioner received almost all of his income from the illegal operation of a "betting commissioner" enterprise, and kept no permanent records of his transactions in that capacity, respondent's use of the bank deposit method in determining petitioner's income was not arbitrary or invalid. 2. That certain losses from gambling are to be allowed to the extent of gambling gains. 3. That petitioner understated taxable income on his returns for each of the years 1948, 1949 and 1950. Amounts of understatements determined. 4. That a part of the deficiency in each of the years 1948 through 1950, inclusive, was due to fraud with intent to evade taxes.

Petitioner's husband died March 4, 1952. Approximately 11 months before his death he took out $100,000 of life insurance with the petitioner as beneficiary. Petitioner possessed all the incidents of ownership in $50,000 of the term insurance included in the insurance taken out by decedent. Respondent increased decedent's gross estate by this latter $50,000 on the ground that "Estate has not furnished proof that premiums were paid by widow with her own funds" and also determined petitioner was liable as transferee for the deficiency in estate tax. On the evidence, held, petitioner paid the premiums on the $50,000 of insurance in question. Held, further, since there is no deficiency, petitioner is not liable as transferee.

Petitioner and his wife were members of a partnership acting as a sales agency for a manufacturing organization. Held: the parties to the partnership intended in good faith to join together with a business purpose in the present conduct of a business, as partners.

Deduction of business bad debt not approved where the proof in the case fails to establish the worthlessness of the debt in the taxable year.

An amount of $220,000 withdrawn from a corporation by the sole stockholder, held on the facts to be a loan and not a dividend. An unauthorized and erroneous credit of $25,740 to the account of the sole stockholder on the books of another corporation held not to be a dividend.

The principal petitioner was a professional gambler who, since about 1928 to 1930, had derived income from gambling in card and dice games, and from betting on and handling wagers on horse races and sporting events such as basketball and baseball games. He at no time prior to 1952 filed any income tax return or declaration of estimated tax, in order to conceal the amounts of his income and his derelictions in failing to file returns for prior years. He kept no record of the amounts of his winnings, income, or assets. In 1948 he made an investment of $92,750 in stock and notes of Arizona Harness Racing Association, Inc.; and in 1949, 1950 and 1951 he made further substantial investments in such Association. The respondent reconstructed his income by the net worth method, and determined deficiencies in income tax and additions to tax for 1944 through 1946 and 1948 through 1951. Held, that the amount of petitioner's adjusted gross income for each of the years 1944 and 1946, as reflected in the net worth statement and notice of deficiency, is increased on the basis of petitioner's admissions and testimony; that the amount of the adjusted gross income for 1948, as determined by respondent, is redetermined by application of the rule of Cohan v. Commissioner, 39 Fed. (2d) 540; and that the amounts of the adjusted gross incomes for the years 1945 and 1949 through 1951, as determined by respondent, are approved because of the failure of petitioner to prove error therein. Held, further, that additions to tax for all years involved should be imposed under sections 291(a), 293(b), 294(d)(1)(A) and 294(d)(2) of the 1939 Code.

Held: That the Rajeh patent was not property held primarily for sale to customers in the ordinary course of business, and the gain from the sale of said patent is to be considered as gain from the… Held: That the Rajeh patent was not property held primarily for sale to customers in the ordinary course of business, and the gain from the sale of said patent is to be considered as gain from the sale of a capital asset held for more than six months.

Held, the petitioner and his wife did not, in good faith and with a business purpose, intend to join together in the operation of the business of the A. L. Powell Company as partners. Held: the petitioner and his wife did not, in good faith and with a business purpose, intend to join together in the operation of the business of the A. L. Powell Company as partners.

Held, certain advances were loans which, when they became worthless in the taxable year, constituted nonbusiness bad debts. Section 23(k)(4), Internal Revenue Code of 1939. Held: certain advances were loans which, when they became worthless in the taxable year, constituted nonbusiness bad debts. Section 23(k)(4), Internal Revenue Code of 1939. Salvage value of certain equipment determined for purposes of loss deduction on account of loss in useful value of assets.

Issue 1. A partnership acquired an inventory of whiskeys, represented by warehouse receipts, during the time that O.P.A. controls over whiskey prices were in effect. Held: the substance of the transaction constituted a sale of the inventory of the partnership rather than sales of common stock of W corporation, and the partnership realized ordinary income from the sale of its inventory. Issue 2.

Petitioner Loran F. Twohig made payments to his former wife of $8.50 per week for 9 months during 1952 and 1953 for the support of their son. Held: petitioner did not show that the amounts which he spent in support of his son were over half of the total amount spent for the child's support, and petitioner is therefore not entitled to claim a dependency credit for him.

Joint returns: Presumption: Signature not that of wife. - Where a husband files a joint return without objection of the wife, who fails to file a separate return, there is a presumption that the joint return was filed with the tacit consent of the wife.

1. Held, that additional net income is chargeable to the petitioner for each of the years involved. The amounts are determined. 2. Held: that additional net income is chargeable to the petitioner for each of the years involved. The amounts are determined. 2. Held, further, that an addition to tax for fraud, under section 293(b) of the 1939 Code, should be imposed for the year 1945, but not for the year 1944. 3.

Held: Petitioners failed to establish that they furnished more than one-half the support of the claimed dependent so as to entitle them to a deduction therefor under the provisions of sections 151… Held: Petitioners failed to establish that they furnished more than one-half the support of the claimed dependent so as to entitle them to a deduction therefor under the provisions of sections 151 and 152, I.R.C., 1954.

For the taxable years 1945, 1946, 1947 and 1949, petitioner, a certified public accountant, filed skeleton income tax Forms 1040 which… Held: The Forms 1040 filed by petitioner for the years 1945 and 1946, and the Form 1040 first filed by petitioner for the year 1947, were not returns within the meaning of section 51, I.R.C., 1939, and petitioner has not shown that the failure to file timely returns for those years was due to reasonable cause and not to willful neglect. 2.

Petitioner was a partner in a stock brokerage firm during 1951 and 1952. He was a cash basis taxpayer and, despite business difficulties, reported substantial net income during both years. Held: petitioner did not show reasonable cause excusing his failure to make timely installment payments, and the respondent properly determined additions to tax as provided by section 294(d)(1)(B).

Petitioners acquired a tract of land by inheritance and used it for many years for hay pasture. Held: petitioners were engaged in the business of subdividing and selling real estate, and the profits realized from such business during the years in issue were properly determined by respondent to be ordinary income.

Held: 1. Adjustments to Commissioner's net worth computation discloses no deficiency in Thomas's income tax. 2. Amounts of Joseph's unreported income determined by the Commissioner upon the basis of increases in net worth modified in certain respects. Additions to tax for fraud disapproved. Statute of limitations bars collection of tax for some years. Additions to tax for substantial underestimate of estimated tax to be computed under Rule 50. 3. Amounts of Frances's unreported income determined by the Commissioner upon the basis of increases in net worth modified in certain respects. Additions to tax for fraud disapproved. Statute of limitations bars collection of tax for some years. Additions to tax for substantial underestimate of estimated tax to be computed under Rule 50. 4. Thomas did not fraudulently understate his net income by knowingly overstating his sales promotion expenses. Amounts of such expenses determined. Statute of limitations bars collection of tax for some years. 5. Westerhaus did not fraudulently deduct certain entertainment, picnic, and Christmas expenses. Amount of entertainment and picnic expenses determined. Westerhaus failed to show that the Commissioner erred in disallowing certain Christmas and travel expenses. Statute of limitations bars collection of tax for some years. 6. Amount of entertainment and picnic expenses incurred by Joseph on behalf of Westerhaus determined. Joseph failed to show that he incurred certain Christmas expenses on behalf of Westerhaus. 7. Westerhaus failed to show that it sustained a loss as a result of the seizure, by local law enforcement officers, of certain of its coin-operated machines and starter money therein. 8. Joseph's sales of stock of one wholly owned corporation to another wholly owned corporation at the current book values of the stock did not result in dividends to Joseph under sections 115(a) or 115(g), I.R.C. 1939. Book value is reliable as an approximation of the fair market value of the stock in the absence of any different showing by the Commissioner.

Petitioner was in the restaurant business in Waverly, New York, and filed income tax returns for the calendar years 1947 to 1951, inclusive. Held: petitioner has established by credible testimony that he had on hand at least $5,500 in cash on December 31, 1946. That amount should be used as petitioner's amount of cash on hand December 31, 1946, instead of the $300 which the Commissioner used in his net worth computation.

1. Held, upon failure of petitioner to prove that various expenditures are deductible, respondent's disallowance of deductions is sustained. 2. Held: upon failure of petitioner to prove that various expenditures are deductible, respondent's disallowance of deductions is sustained. 2. Petitioner was employed during part of the taxable year for which he received wages. He was unemployed during part of the year.

In 1944, 1946, and 1947, petitioners Elmer D. and Charles Wesley Willis operated a partnership in North Carolina which was primarily engaged in buying for and shipping seafood to dealers outside of… Held: respondent's determination of the distributive shares of partnership income was by a method which did not clearly reflect such income and cannot be sustained. Held, further, certain expenses claimed by Charles for 1946 and 1947 disallowed for lack of proof.

Held: 1. Bankers did not accumulate its earnings and profits beyond the reasonable needs of its business during the years ended April 30, 1948 and April 30, 1949, and… Held: Bankers did not accumulate its earnings and profits beyond the reasonable needs of its business during the years ended April 30, 1948 and April 30, 1949, and that Bankers was not availed of for the purposes of avoiding the surtax upon its shareholders within the meaning of section 102, I.R.C. 1939. 2.

Petitioner made a gift in trust of which petitioner's spouse was a life beneficiary, the trustees having the power to invade principal… Held: the interests of third parties under the trust instrument were not ascertainable at the time of the gift, and hence severable from the interest transferred to his spouse, as provided by Regulations 108, sec. 86.3a (a)(4), and petitioner is not entitled to the giftsplitting benefits of section 1000(f) of the Internal Revenue Code of…

1. The charter of Sanders-Fountain Furniture Co., Inc., expired on December 14, 1942. Held: the fair market value of such accounts did not exceed the tax basis of such accounts in the amount of $27,528.51. 2. No deficiencies or additions to the tax are due from the dissolved corporation for the period January 1 to January 2, 1943, and, therefore, petitioners are not liable as transferees.

In 1949, petitioner sold its entire issue of 5 per cent cumulative preferred stock to an insurance company for $500,000. Held: the amounts received by petitioner from the sale of its 5 per cent cumulative preferred stock represented an investment of equity capital by the purchaser, and dividend payments made by petitioner in 1951, 1952, and 1953 were, in fact, dividends and not interest paid for the use of borrowed money.

1. Petitioner D. L. Jolly, Sr., the principal officer and controlling stockholder of the corporate petitioners, directed his employees to divert checks and other receipts from the corporate… Held: the diverted funds are taxable as ordinary income to the corporate petitioners. Held further: the diverted funds are taxable as informal dividends to the individual petitioners. 2.

Loss on the sale of a house was not deductible under section 23(e)(2), Internal Revenue Code of 1939, when the loss was not proved to have been sustained in a transaction entered into for profit.

Petitioner, which operated a department store in Boston, sold properties used in its business at their fair market value and leased them from the buyer for 30 years with the option to renew for… Held: the loss from the sale is not deductible, following Century Electric Co. v. Commissioner, 192 Fed. (2d) 155 (C.A. 8, 1951), affirming 15 T.C. 581.

Held: The election to include in inventory livestock purchased for breeding purposes is binding on the taxpayers for subsequent years and may not be changed without approval of the Commissioner of Internal Revenue. Held: Regulations 111, sec. 29.23(1)-10, which disallows depreciation of livestock purchased for breeding purposes if included in the inventory, is valid.

Petitioners claimed a dependency credit for each of their three children for the years 1952 and 1953. Each of the children had a one-third interest in a partnership, and the share of each child in the gross income of the partnership exceeded $600 in each of the years involved. Held, on the authority of Doris V. Clark, 29 T.C. - (filed November 13, 1957), that petitioners are not entitled to the dependency credit claimed under section 25(b)(1)(D) of the Internal Revenue Code of 1939.

Held, following the principle of Koppers Coal Co., 6 T.C. 1209, Kimbell-Diamond Milling Co., 14 T.C. 74 (C.A. 5, 1951), affd. per curiam 187 Fed. Held: following the principle of Koppers Coal Co., 6 T.C. 1209, Kimbell-Diamond Milling Co., 14 T.C. 74 (C.A. 5, 1951), affd.

Petitioner is an automobile dealer and sells automobiles with down payment of cash or trade-in payment with balance of purchase price being payable in monthly installments provided for in conditional… Held: the Commissioner is sustained.

During the years in issue the petitioner sold milk to some of its customers at prices below the minimum price set by the Milk Commission of Virginia pursuant to an agreement with such customers that… Held: the amount of the rebates did not constitute income to petitioner when originally received, and should not have been reported by it as income. Pittsburgh Milk Co., 26 T.C. 707 (1956), followed.

Held: Deficiencies determined by net worth method, and additions to tax for fraud not sustained. Held: Deficiencies determined by net worth method, and additions to tax for fraud not sustained.

Held: No part of the value of the Iowa real property involved is includible in the gross estate of the decedent, Nettie M. Adams, under the provisions of Section 811(c)(1), I.R.C. of 1939.

In 1947 petitioner held property subject to the debts of its president, who was adjudged bankrupt. Petitioner paid to the trustee in bankruptcy $7,929.02. Held: Such payment was for the purpose of protecting petitioner's title to the property and as such was in the nature of a nondeductible capital expenditure. Held further: 1. Useful life and basis of petitioner's brick veneer building, furniture and fixtures determined. 2. Rental income for 1947, gain from sale of land in 1948, and charitable deduction for 1949 determined. 3. Petitioner did not realize gain from sale of land in 1947. 4. Petitioner did not sustain an allowable bad debt or business loss in 1947 in the amount of $750. 5. Petitioner in 1947 did not sustain additional allowable expenses for roof repairs and painting in the amounts of $265 and $318.50, respectively. 6. Respondent did not err in disallowing petitioner's claimed deduction in 1950 for repairs in the amount of $764. 7. Respondent correctly determined that $1,863.70 of petitioner's claimed deduction for "repairs" in 1951 was for capital expenditures.

Held, upon the facts, that during the taxable years 1952 and 1953, petitioner did not carry on farming operations with the intent of making profit, that he was not engaged in a trade or business of… Held: upon the facts, that during the taxable years 1952 and 1953, petitioner did not carry on farming operations with the intent of making profit, that he was not engaged in a trade or business of farming, and that, therefore, loss sustained in each year is not deductible.