Volume 18 — Tax Court Reports

1. The petitioner and her husband at all times pertinent hereto were citizens of the Commonwealth of the Philippines, under the laws of… Held: that under Philippine law the agreement was ineffective and that both the individual earnings of the spouses and the income from their separate properties were community income. 2. Throughout the calendar year 1940 the petitioner was the sole stockholder of a foreign personal holding company whose taxable year was the calendar year.

1. Excess Profits Tax -- Relief -- Section 722 (b) (4) -- Commence Business. -- Petitioner, a plywood manufacturing corporation, came into existence in 1939 when its articles of incorporation were filed, but did not commence business so as to qualify for relief under section 722 (b) (4) until after the end of the base period when its officers and directors were elected and its nature and character were fully determined. 2.

Petitioner, on a calendar year cash basis, received a commission check on December 31, 1946, after banking hours, for services rendered in 1946. Held: petitioner realized income upon receipt of the check in 1946.

Compromise settlements whereby senior partners released junior partners from liability for losses sustained in prior years, and juniors relinquished rights to profits in a liquidating account arising out of a former partnership and operated as a joint venture, held to be readjustments of interests in the venture and did not give rise to allowable deductions to the senior partners for income tax purposes.

Petitioner is a corporation engaged in the manufacture of foundry and dehydration equipment. Foundry equipment is sold for cash. Held: under all the facts, for the year 1945, petitioner is entitled to report income from the credit sale of dehydration equipment on the installment basis under section 44 (a) of the Internal Revenue Code.

Petitioner seeks general relief under the provisions of section 722 of the Code from excess profits taxes for the years 1942, 1943, 1944, and 1945. Held: During the years 1936 and 1937, petitioner established additional theatres which constituted a change in the character of its business, section 722 (b) (4), and relief therefor has been determined. 2. During 1938, petitioner remodeled and increased the seating capacity of a theatre.

Deductions -- Alimony -- Sections 22 (k), 23 (u). Held: the $ 10,000 payments made in 1946 and 1947 were installment and not periodic payments and hence not allowable as deductions.

1. The two trusts created by petitioner for the sole benefit of its employees with five or more years of service, pursuant to a plan for sharing its profits, meet all the requirements to qualify them as exempt under section 165 (a), and the contributions thereto in the respective taxable years involved are deductible as provided in section 23 (p), Internal Revenue Code. 2.

Petitioners purchased a dry cleaning business paying $ 10,000 for the tangible assets and $ 15,000 for the intangible assets. Held: the covenant not to compete was a nonseverable item of the contract, its purpose being to protect petitioners' purchase of the business, and no portion of it is depreciable.

1. Where a parcel of real property was not purchased by the petitioner, Charles S. Guggenheimer, and his two associates in their joint… Held: that the expenses incurred by the petitioner, Charles S. Guggenheimer, in the years 1942, 1943, and 1944, in entertaining law clients at a certain club of which the petitioner was a member, were ordinary and necessary business expenses deductible under section 23 (a) of the Code, and a reasonable estimate of the amount of these…

Petitioner purchased all the assets of a newspaper in 1940, including an Associated Press membership. Held: petitioner has no realized loss which is deductible.

Payments received by petitioner, a physician, for the sale of his first book, held to be long term capital gain, as the proceeds of the sale of a capital asset of which, under the evidence, the holding period commenced on completion and extended more than 6 months until delivery of the manuscript.

Excess Profits Tax -- Equity Invested Capital -- Property Paid in for Stock -- Basis -- Sections 718 (a) (2) and 113 (a) (8). -- The petitioner was incorporated in 1921 and issued its stock in that year for a lease. The basis of the lease to be included in equity invested capital is the transferors' basis since sections 113 (a) (8) and 112 (b) (5) apply, as does section 202 (c) (3) of the Revenue Act of 1921.

Prior to 1938 petitioner claimed and was allowed depreciation on certain properties on the basis of assessed valuations, which were less than cost. The properties were sold during the taxable years. Held, that respondent properly adjusted the original costs for depreciation allowed or allowable on the basis of original cost, even though the maximum amount of depreciation was not claimed or allowed for all years prior to sale. Held, further, that a deduction for depreciation in a taxable year may not exceed the adjusted basis of the property at the beginning of the year.

In 1941, the State of Arkansas redeemed some of its refunding bonds which were received by petitioner in 1934 in substitution for some defaulted… Held: that a refunding of outstanding defaulted bonds of the State of Arkansas pursuant to a refunding state statute with provisions for the same face value of bonds and the same interest rate did not create a new debt but resulted in a continuation of the existing indebtedness. Motor Products Corporation, 47 B. T. A. 983, affirmed

1. During the taxable year 1944 Theodore Gutman and George Goldberg were the members of a partnership which, since its formation… Held: that Gutman's and Goldberg's interests in the mortgages were not capital assets within the meaning of section 117 (a) (1) of the Internal Revenue Code, (2) that the portion of the Harrison Avenue mortgage indebtedness which became worthless during the taxable year constituted business bad debts under the provisions of section 23 (k)…

1. Income -- Gain From Sale -- Corporation's or Sole Stockholder's? -- When a corporation in the ordinary course of its business delivered apricots from its orchards to a marketing cooperative which then mixed them in pools with the apricots of other growers, sold the pools, and paid the proceeds from the apricots grown by the corporation to a creditor of the corporation, the corporation in the meantime having commenced dissolution, the amount so paid is taxable to the…

Deduction for partially worthless debts disallowed for failure to charge off specific debts.

Petitioner contends she is not liable as a transferee for 1945 income taxes of her deceased husband, because the respondent failed to exhaust his remedies against the estate. Held: that petitioner is liable as transferee.

Petitioner filed no declaration of estimated tax for the year 1947. Held: No reasonable cause existed for petitioner's failure to file the requisite declaration and respondent is sustained in his determination.

Capital Gain -- Sale of Exclusive License to Grantor. -- A contract entered into in 1903 granting an exclusive license to the petitioner to sell the products of a drug company in a specified city was a capital asset, and the sum received by the petitioner in 1943 from the drug company for the termination of that license was payment for the sale of a capital asset.

Stock in the corporation employing petitioner and issued to him under an agreement restricting its use and sale held to have had no fair market value when acquired capable of being ascertained with reasonable certainty so as to justify charging petitioner with income at the time of issuance.

Income -- Stock Dividend. -- The petitioners received a pro rata dividend paid in shares of preferred of the distributing corporation on… Held: that the purposes of the issuance of the preferred was concurrently to place that issue in the hands of others not then stockholders, thereby altering the preexisting proportionate interests of the common stockholders and setting up an entirely new relationship amongst all the stockholders and the corporation and at the same time to…

Deduction -- Business Expense -- Attorneys' Fees. -- Petitioner, a movie script writer, was summoned to appear as a witness before a Committee of Congress to give testimony in a hearing wherein his… Held: such payments to his attorneys were ordinary and necessary business expenses and deductible under section 23 (a), I. R. C.

Petitioner contributed the amounts of $ 20,000, $ 15,000, and $ 10,000 in the respective taxable years 1944, 1945, and 1946 to an irrevocable Employees' Benefit Trust created for the purpose of extending financial assistance to certain of its needy employees and their beneficiaries in cases of sickness, injury or other disability, etc. Held, the trust was organized and operated exclusively for charitable purposes, and the contributions petitioner made thereto are proper deductions from gross income to the extent such contributions, together with the other charitable contributions made by petitioner in the taxable years involved, do not exceed the 5 per cent limitation prescribed by section 23 (q) of the Internal Revenue Code.

In 1929 the petitioner made a secured loan to a corporation that became insolvent later in that year and went out of existence in 1933. Held: the debt became worthless prior to 1943 and the deduction is not allowable for that year. Section 23 (k) (1), Internal Revenue Code.

Petitioners' decedent was the insured under a 20-year endowment life insurance policy. Held: of the $ 11,648.19 received by decedent in 1945, the face amount of the policy, $ 10,000, is excludible under section 22 (b) (2) and (5) and the amount of $ 1,648.19 paid by the company as accumulated mutual insurance dividends and interest is taxable income.

Under the facts, held, that petitioner George M. Hancock, and not the corporation, purchased certain stock of the corporation belonging to another, and that dividends and bonus declared on the stock… Held: that petitioner George M. Hancock, and not the corporation, purchased certain stock of the corporation belonging to another, and that dividends and bonus declared on the stock so purchased constitute taxable income to petitioners.

Petitioner, although entitled to use the excess profits credit based on income, computed its excess profits taxes on the invested capital method. Held: petitioner was not entitled to such relief where it has failed to show that, even if the new plant had been available 2 years earlier, it would have had sufficient earnings to produce credits based upon constructive average base period net income that would be greater than the credits actually employed by it.

Denial of relief under section 722 sustained where petitioner failed to prove a change in the character of its business within section 722 (b) (4), and where it failed to establish that it would have realized substantially increased earnings if the events on which it relied had occurred 2 years earlier or that it was entitled to constructive earnings resulting in a larger excess profits tax credit than the credits it used under the invested capital method.

Held: Amounts expended in defending and settling suits brought to set aside a trust of which petitioner was trustee and remainderman, were not deductible by petitioner… Held: Amounts expended in defending and settling suits brought to set aside a trust of which petitioner was trustee and remainderman, were not deductible by petitioner as expenses and losses incurred in trade or business or as nonbusiness expenses or losses incurred in a transaction entered into for profit.

During the base period years, freight and purchase discounts were improperly excluded from inventories in reporting income for taxation purposes. Held: respondent did not err in making an adjustment by including freight and purchase discounts in opening and closing inventories in computing the excess profits credit applicable to the taxable years 1943, 1944, and 1945 and adjusting petitioner's excess profits tax under the provisions of section 734 of the Code.

1. Held, petitioner was not committed prior to January 1, 1940, to a course of action which resulted in the erection by a landlord of a new warehouse to be leased to… Held: petitioner was not committed prior to January 1, 1940, to a course of action which resulted in the erection by a landlord of a new warehouse to be leased to petitioner and which when occupied in February 1941 by petitioner resulted in more efficient operation of its business and in increased earnings.

In 1937 petitioner commenced the business of producing and selling carbonated beverages. Held: petitioner qualifies for relief under section 722 (b) (4), but not (b) (5); that it did not reach, by the end of its base period, the earning level it would have reached if it had commenced business two years earlier; and reconstructed average base period net income determined.

1. During the year 1942, petitioner Jon Gregg had pending an application for letters patent to cover the manufacture of certain outsoles known as… Held: In view of the attached conditions, the agreement amounted to no more than the granting of a license and royalties received by the Greggs under such agreement constituted ordinary income, not capital gain. 2. Petitioner paid $ 2,300 during 1943 to his father on behalf of petitioner's brother Charles for services rendered.

1. In connection with the settlement of an indebtedness in January 1934, petitioner received 24,000 shares of its own stock which, in the settlement made, were subject to a 10-year option. Held: the evidence shows that the stock, encumbered as it was by a 10-year option which compelled petitioner to hold the stock during the term of the option, had no fair market value at the time it was received in 1934.

Section 23 (a) (2) -- Nonbusiness Expense Deduction -- Proximate Relation. -- Held, a payment of $ 1,000 made by the petitioner to the… Held: a payment of $ 1,000 made by the petitioner to the Investors League, Inc., in 1946, is not a deductible nonbusiness expense under section 23 (a) (2), where there is no proximate relation of the expenditure to the production or collection of petitioner's income or the management, conservation, or maintenance of income producing…

Held: 1. Petitioner realized taxable income in the amounts determined by respondent. 2. Held: Petitioner realized taxable income in the amounts determined by respondent. 2. Petitioner's failure to file income tax returns was not due to reasonable cause and was due to willful neglect. 3. The deficiencies determined are due to fraud with intent to evade tax.

Held: Petitioner is entitled to relief from excess profits tax under section 721 (a) (2) (C), I. R. C., because of income received from the sale of machine tools developed through research and… Held: Petitioner is entitled to relief from excess profits tax under section 721 (a) (2) (C), I. R. C., because of income received from the sale of machine tools developed through research and experiment in prior years extending over a period of more than 12 months.

1. Section 23(a)(2) -- Section 23(e)(3) -- Costs of Litigation -- Recovery of Stock -- Collection of Income -- Allocation. -- Petitioner expended $… Held: The portion of the litigation expense attributable to the collection of income is deductible under section 23 (a) (2), but the portion allocable to the recovery of stock forms part of the cost of the stock; (2) The litigation expense incurred and paid to recover the stock is not a loss under section 23 (e) (3). 2.

1. The petitioner became obligated in 1946 to pay additional compensation for the services of its former president, deceased, and in 1946 the estate of the former president became… Held: that a payment of $ 61,000 by the petitioner in 1946 was in discharge of its obligation to pay compensation which became fixed in 1946; that said payment was not a payment of dividends; and that said payment is deductible as a business expense in 1946 under section 23 (a) (1) (A). 2.

Depreciation or amortization deductions may not be taken by partnership with respect to alleged basis of certain war contracts performed by it.

A certain note held by petitioners' decedent constituted a capital asset and was sold to, rather than discounted at, a bank with the result that the loss sustained in the sale is deductible only as a capital loss.

Loss incurred in annuity venture entered into for profit held deductible under section 23 (e) (2) of the Internal Revenue Code.

Petitioner and his wife owned a farm in Michigan as tenants by the entireties upon which general farming operations were conducted. Held: the net operating loss resulting from the farming operations was deductible one-half by petitioner and one-half by his wife in their individual Federal income tax returns.

Section 107 (a) -- Computation of Taxes Attributable to Prior Years. -- Long term compensation for legal services of husband received in… Held: that the computation, under the facts presented, under section 107 (a), of taxes attributable to 1943 and 1944 was correctly computed by the respondent on the basis of comparison of what the tax would have been for each year if the allocated part of the compensation had been included in the taxable unit of the petitioners for the…

Amounts paid to petitioner in 1946 by its subsidiary corporations with which it filed a consolidated return for 1945 held to constitute taxable dividends to petitioner in 1946 to the extent that such payments exceeded the tax allocable to the subsidiaries in the consolidated return.

Gain or Loss -- Sale -- Year. -- A loss is deductible in the year when right-of-way lands leased to an electric railway operator were the subject of a bona fide sale which definitely fixed the loss of the seller and the amount of it.

1. By contract of sale on April 18, 1945, petitioner purchased real property for $ 40,000 and the seller retained possession and rents until August 15, 1947. Held: since the seller retained legal ownership as well as control, benefits, and unfettered command of the rents, petitioner is not taxed on the rental income which was paid to the sellers by the tenant in 1945 and up to February 7, 1946. 2.

Estate Tax -- Gross Estate -- Interest on Series G Savings Bonds. -- Interest on United States savings bonds, Series G, is payable only at the end of 6 months' periods after issue, and no interest is… Held: that upon the death of a holder of bonds between interest payment dates no amount is to be included in the gross estate as accrued interest on such bonds.

Petitioners, key employees of the Chichester Chemical Company owned by D. D. Chidester, agreed after Chidester's death in 1927 to remain… Held: the fair market value of the shares of stock was not back pay within the definition provided in section 107 (d), I. R. C.Held, further, since petitioner Bell failed to prove he was an employee of petitioner Giangiulio, administrator of the estate of D. D. Chidester, the $ 2,671.17 received by him from Giangiulio was not back pay…

Capital Gain -- Sale of Leasehold Benefit -- Income to Lessee. -- A relinquishment by lessee for a valuable consideration of a benefit granted him in a lease relating to the use and enjoyment of the leased premises is a sale of property and gain therefrom is capital gain and taxable as such.

1. Held, the surrender by petitioner of stock in a corporation undergoing a reorganization and claims against that corporation, for new… Held: the surrender by petitioner of stock in a corporation undergoing a reorganization and claims against that corporation, for new stock in the corporation was an exchange upon which no gain or loss is to be recognized under the provisions of section 112 (b) (3), I. R. C., and the basis for determining gain or loss upon the subsequent…

1. Exemption -- Section 101 (6) -- Trust Operating Regular Business. -- Congress, in section 101 (6), did not intend to include in the exempt class, as a fund or foundation organized and operated exclusively for charitable purposes, a trust not engaged in charitable work but earning the larger part of its income by the operation of regular substantial businesses, unrelated to the operation of any charity, even though its property must eventually go to corporations of the…

Petitioner, a corporation engaged in the business of owning and renting defense housing, at some time early in the year 1946, decided to sell 82 of its 212 housing units. Held: the houses sold by petitioner during the fiscal year 1946 were property held primarily for sale to customers in the ordinary course of business, and the gain realized by petitioner was taxable as ordinary income and not as capital gain.

Credit for Dependents -- Over Half Support -- Arrearages under Court Order -- Employee Wages -- Section 25(b)(3). -- Arrearages of prior year paid by a divorced husband to his former wife under Court order for support of minor children are not part of support for current year for purposes of section 25(b)(3), but amount paid by mother for assistance in caring for the children is a part of the cost of their support.

1. Petitioner and his three associates over a period of years organized corporations to hold and manage tenement properties. Held: under the facts, that petitioner's advances to E corporation were capital contributions and his loss upon E's liquidation is not deductible in full as a bad debt, but is deductible as a capital loss subject to the limitations of section 117 of the Internal Revenue Code. Isidor Dobkin, 15 T. C. 31, affd.

Held: 1. At the time of decedent's death all of the capital stock of Crown Body & Coach Corporation was jointly owned by the decedent and his son Murillo, with the right of… Held: At the time of decedent's death all of the capital stock of Crown Body & Coach Corporation was jointly owned by the decedent and his son Murillo, with the right of survivorship, and one-half of its fair market value at decedent's death is includible in his gross estate for estate tax purposes. 2.

Survivorship annuities held properly valued for estate tax purposes under optional valuation date provisions of section 811 (j), Internal Revenue Code, by excluding from gross estate loss of value due to surviving annuitant's death prior to optional date. Estate of Judson C. Welliver, 8 T. C. 165.

Pursuant to readjustment of corporate structure, preferred stock owned by petitioners was exchanged for newly issued debentures. Held: in the circumstances of this case, the exchange was tax free under section 112 (b) (3) and (g), I. R. C.Bazley v. Commissioner, 331 U.S. 737, distinguished.

Respondent disallowed under section 24 (c) of the Internal Revenue Code additional salaries for petitioners' sons. Held: that constructive payment does not constitute payment under section 24 (c) (1). Held, further, that under the facts there was no constructive receipt during the taxable years as required by section 24 (c) (2). Therefore, all conditions of section 24 (c) are present and the deduction is not allowed.

Petitioner's action in reporting compensation received in 1945 under section 107 (a), Internal Revenue Code, held on the facts to constitute inclusion of the entire amount in gross income rendering erroneous respondent's reliance on the 5-year limitation of section 275 (c), Internal Revenue Code, on the ground that more than 25 per cent of gross income was omitted.

1. In 1940, the decedent created a trust for a 10-year term under which his three nephews were the trustees, income beneficiaries, and remaindermen. Held: that decedent had a power to terminate under section 811(d)(1) of the Internal Revenue Code and the trust is includible in his gross estate. Held, further, that decedent's legal incompetency prior to his death did not mitigate his power to terminate in so far as section 811(d)(1) is concerned. 2.

Expenses incurred in attending the Fifth Annual Institute on Federal Taxation by a practicing lawyer, held, to be personal and educational expenses and hence nondeductible under section 23 (a) (1)… Held: to be personal and educational expenses and hence nondeductible under section 23 (a) (1) (A) of the Internal Revenue Code.

1. Petitioner purchased real property which was used as a family residence and later converted to rental property. Held: that since petitioner has failed to prove the market value of the property on the date of conversion she has failed to show error in the determination of the Commissioner as to basis. 2.

1. Petitioners, husband and wife, filed a joint income tax return for the year 1946. During the year 1946, the mother of petitioner Lola Harrison lived with petitioners during the entire year. Held: she was a dependent within the meaning of the applicable section of the Code and petitioners are entitled to a deduction on her account, as a dependent. 2. Petitioners had living with them during the year 1946, four children whose ages ranged from 9 to 15 years.

1. Held, that under the provisions of section 861 (c), I. R. C., United States bonds issued after March 1, 1941, are not includible in gross estate… Held: that under the provisions of section 861 (c), I. R. C., United States bonds issued after March 1, 1941, are not includible in gross estate of petitioner's decedent who died before October 20, 1951, and who was at the time of his death a nonresident of the United States, not engaged in business within the United States. 2.

Held, increase in seating capacity of petitioner's theatre consummated in 1942 was a change in capacity within the meaning of section 722 (b) (4), I. R. C., as a result of… Held: increase in seating capacity of petitioner's theatre consummated in 1942 was a change in capacity within the meaning of section 722 (b) (4), I. R. C., as a result of a course of action to which petitioner was committed prior to January 1, 1940. Constructive average base period net income determined.

Petitioners were for a good many years general agents of Northwestern Mutual Life Insurance Company. Held: petitioners being on the cash basis are taxable only on the amounts which they actually received in each of the taxable years and are not taxable on the commissions credited to their accounts which they did not receive and are not entitled to receive under their contract until some future year.

1. Petitioner during the taxable periods involved was a personal holding company. 2. Petitioner has failed to establish that its failure to file personal holding company returns, Form 1120-H, was due to reasonable cause and the imposition of the 25 per cent penalty for each of the taxable years involved is sustained. 3.

1. Section 117 (a) (1) (B) -- Depreciable Property Used in Trade or Business. -- Apartment building held to be depreciable property which the petitioner used in his trade or business where the petitioner constructed the building with the intention of renting apartments and in fact did rent apartments until the building was sold. 2.

Petitioner is not entitled to any relief from excess profits tax for its fiscal year ended September 30, 1941, because it has not established within the scope of section 722 (b) of the Internal Revenue Code, as required and claimed, that its average base period net income is an inadequate standard of normal earnings.

1. Petitioner, since its organization in 1914 and as the successor of a partnership organized in 1876, has engaged in the business of making fine wines. Held: that the making of the arrangement with the nearby winery and the operations thereunder, beginning in 1937, constituted a change in the character of petitioner's business within the meaning of section 722 (b) (4) of the Internal Revenue Code.

Sec. 23 (a) (1) (A) -- Travel Away From Home on Business, Expense of Meals. -- The petitioner, an employee of Railway Express Agency, performed all of his duties on trains running between Parsons,… Held: that the petitioner's work required traveling away from home and that the expense of meals purchased during the travel status is deductible under section 23 (a) (1) (A), I. R. C.

Petitioner owned land which was farmed by sharecroppers; he also owned and operated a cotton gin, a cotton warehouse, two cotton seed warehouses, and a mercantile store which sold fertilizer and… Held: such cotton did not constitute capital assets, section 117 (a), I. R. C., and the profit derived from disposition thereof was taxable as ordinary income.

Profit-Sharing Plan -- Exempt Trust -- Deduction for Contribution -- Reduction of Percentage Shared -- Section 23 (p) (1) (C) -- Section 165 (a). -- Exemption of trust and employer's right to deduction for annual contributions continued despite reduction in percentage of profits to be shared through contributions.

For several years prior to his death, decedent was an equal partner with his wife in a business in Nashville, Tennessee, known as Grace's which was a ladies ready-to-wear shop handling high class… Held: the value of decedent's one-half interest in the partnership business at the time of his death, including good will, was $ 45,000.

The petitioner owned land which it leased for the production of oil and gas. Held: that under the lease the petitioner retained no royalty interest in the oil used for fuel and that it is not entitled to a depletion allowance computed on one-sixth of the fair market value of the oil so used.

Income -- Compensation for Services -- Section 22 (a). -- Money paid to the petitioner by his employer to assist in the purchase of a house at a new work location was compensation for services taxable under section 22 (a).

In order to induce Standard to furnish merchandise on credit, petitioner had to agree on July 1, 1936, to pay premiums and interest on a $ 60,000 life insurance policy assigned to Standard by Hale. Held: that because of the applicability of section 24 (a) (4) of the Internal Revenue Code, premiums paid are not deductible expenses.

Income -- Trust -- Fiduciary -- Beneficiaries -- Delayed Receipt -- Sections 142, 161, 162. -- A fiduciary held stock in his own name which he failed to disclose and have distributed to the beneficiaries as an asset of the estate of a decedent to which it belonged and which he was administering. The heirs were unaware that he held the stock.

Income -- Deduction -- Theft -- Section 23 (e) (3). -- A deduction for a loss from theft is not allowed for 1948 where the petitioner's wife removed property of his from his safe deposit box and disappeared at some time between July 1943 and April 1946 not disclosed by the record and their marriage was annulled in 1948.

Section 124 (d) (1), (4) -- Amortization of Emergency Facility. -- Petitioner owned an emergency facility. Held: that since the petitioner owned the property during 1945, in which year the emergency period ended, he is entitled to have tax for 1943 recomputed under section 124 (d) (4) to give effect to retroactive allowance of amortization deductions for 1943 computed on the basis of an amortization period of 32 months; and that the loss of the…

1. Decedent, who died in 1946, transferred securities to his second wife in 1934 pursuant to an agreement entered into in 1930. Held: the transfer of the securities was not made in contemplation of death within the meaning of section 811 (c), Internal Revenue Code. 2.

Sums received by petitioner from a third person as petitioner's participation in the proceeds of a fraudulent scheme practiced on petitioner's employer held not exempt from tax under the doctrine of Commissioner v. Wilcox, 327 U.S. 404; Rutkin v. United States, 343 U.S. 130, followed.

The husband-petitioner created a trust for the benefit of his minor son and conveyed to it a 42 per cent interest in his business. The settlor was not a trustee. Held: that the trust was a bona fide partner and that its distributive share of partnership profits was not income of the petitioners. 2. Held, further, that the settlor did not have any rights in the trust corpus or income sufficient to make the income of the trust taxable to him and his wife.

A trust created by the husband-petitioner for minor children, only one of whom was then in being, became a special partner in a partnership in which the petitioner was the general partner. The next year, when the petitioners had two children, the wife-petitioner created a trust for minor children, which trust purchased the interest of the first trust in the partnership and became a special partner. The trusts' contributions to the partnership originated with the husband. The trusts were long term trusts, irrevocable, and the trustees were independent of the settlors. 1. Held, that the trusts were bona fide partners in the partnership and their distributive shares of partnership income were not income of the settlors. 2. Held, further, that the settlors did not retain sufficient control over, or interest in, the trusts to make the trust income taxable to them.

Petitioner, engaged in the business of selling household furnishings on the installment basis, kept its books on the accrual method of accounting and filed its tax returns on the installment basis. Held: petitioner has not shown that its method of accounting resulted in an inadequate standard of normal earnings during the base period.

Section 107 (d) (2) (A) (iv) -- Back Pay -- Similar Event. -- A payment made pursuant to a settlement reached by the employee and employer themselves is not taxable under section 107 (d) (1), since the failure to pay it in prior years was not due to the intervention of any event similar in nature to bankruptcy, receivership, or a dispute determined after the commencement of court proceedings.

1. The holder of a note liquidated certain of the endorser's collateral and applied the proceeds in part payment of the principal sum due on the note. The maker of the note was insolvent. Held: the endorser is entitled to a nonbusiness bad debt deduction under section 23 (k) (4) of the Internal Revenue Code. 2. The holder of a note liquidated certain of the endorser's collateral and applied the proceeds to the payment of interest due on the note.

On December 11, 1941, when war was declared between the United States and Germany, Austria was then under the control of Germany and the petitioners were the owners of a residence and furnishings therein in Vienna. The building and all furnishings, if any remained, were destroyed by fire in 1945, the taxable year herein. Held, under section 127 (a) (2), Internal Revenue Code, that a deductible loss of the property was sustained by petitioners on December 11, 1941, when war was declared and, unless prior to its destruction by fire in 1945 the said property had been recovered by petitioners, it had no basis to them at that time for gain or loss purposes, and held, further, that the evidence of record fails to establish such recovery.

Held: Income derived from the sale and rental of construction equipment is taxable as community income to husband and wife who purported to give the equipment to husband's parents… Held: Income derived from the sale and rental of construction equipment is taxable as community income to husband and wife who purported to give the equipment to husband's parents under an implicit agreement that the parents would give the income and property back to the husband and his family.

Petitioner was incorporated in 1929 to own and operate certain real property. At the time of incorporation petitioner issued its stock and debentures to the owners of the real property in exchange for the property. The real property which was received by petitioner had a fair market value of at least the face value of the stock and debentures which petitioner issued for it.

Advance of funds by petitioner to his wife did not give rise to a debt where repayment was subject to a contingency that never occurred.

Excess Profits Tax -- Carry-Back of Unused Excess Profits Credit. -- The provisions of Code section 710 (b) (3) providing for the deduction of unused excess profits credits in the determination of adjusted excess profits net income are mandatory and do not give an election as to the application of an available carry-back of an unused credit.

Held, income received from dividends on stock held by an estate is properly taxed to the beneficiaries of the estate if the period of administration of the estate has terminated and the income is… Held: income received from dividends on stock held by an estate is properly taxed to the beneficiaries of the estate if the period of administration of the estate has terminated and the income is currently distributable.

In determining the value of the decedent's interest in the estate of her grandfather for estate tax purposes, the respondent included in the gross estate evaluation certain cash on deposit and… Held: the funds on deposit were cash on deposit by or for a nonresident alien not doing business in the United States at the time of her death and are therefore not includible in the gross estate.

Petitioner owned a one-half interest in a partnership known as "Allen's." His brother owned the other one-half. Petitioner's wife performed valuable services for the partnership in a managerial, buying, and selling capacity but she was not a partner and did not receive a salary. Petitioner agreed with his wife that in consideration for her valuable contribution of services she would receive 25 per cent of his 50 per cent share in the profits of Allen's. Held, that petitioner and his wife were joint venturers and petitioner's interest in the joint venture was 75 per cent of his 50 per cent share in the net profits of Allen's and the interest of his wife was 25 per cent of such profits. Held, further, that petitioner is taxable on 75 per cent of 50 per cent of the partnership profits of Allen's and is not taxable on the 25 per cent of the profits which under the joint venture agreement was the property of his wife. Rupple v. Kuhl, 177 F. 2d 823, followed.

Petitioner is the life beneficiary of a trust created under the will of her deceased husband, the corpus of which consists of one-fifth of the outstanding shares of stock of a family-owned… Held: that the payments to petitioner, as set forth above, during the taxable years represented income to her and are not to be excluded under the provisions of section 22 (b) (3) of the Internal Revenue Code.

1. During the taxable years petitioner's income was derived primarily from rentals on its property leased to a partnership composed principally of petitioner's five shareholders. Held, petitioner is a personal holding company as defined in sections 500- 502 of the Internal Revenue Code. 2. Petitioner failed to file personal holding company returns for each of the taxable years relying upon its tax advisers. Held, petitioner's failure to file the required returns was due to reasonable cause and was not due to neglect, and petitioner is not subject to a penalty therefor.

Petitioner deferred payment of a portion of its excess profits taxes for 1944 and 1945 in accordance with section 710 (a) (5), I. R. C., pending consideration of applications for relief under section 722. It subsequently executed an agreement in which it conceded that its constructive average base period net income for those years was "none." On November 2, 1948, the Executive Committee of the Excess Profits Tax Council took action approving a determination of a panel of the Excess Profits Tax Council which had approved a proposed constructive average base period net income of certain amounts for two other years as well as "none" for the years 1944 and 1945. A letter notifying petitioner of the action of the Executive Committee was sent to petitioner by ordinary mail by the Chairman of the Excess Profits Tax Council on November 23, 1948. The Commissioner by letter dated August 21, 1950, sent by registered mail, notified petitioner of denial of relief under section 722, and asserted deficiencies in excess profits tax for 1944 and 1945 based on the portions of its payments for those years which petitioner had deferred under section 710 (a) (5). Held, the Commissioner's action was not untimely; the 1-year period of limitations in section 710 (a) (5) did not begin to run either from the date of the action of the Executive Committee (November 2, 1948) or from the date of the letter sent to it by the Chairman of the Excess Profits Tax Council (November 23, 1948).

Petitioner, on the record, held not entitled to deduct for 1945 a payment accrued in that year representing its contribution to an employees' pension trust, it having failed to establish that the amount in question was actually paid into the trust within 60 days after the close of the year of accrual, as required by section 23 (p) (1) (E), Internal Revenue Code.

1. A contingent remainder of a trust and the residue of a will went to charity, and a charitable deduction was claimed on the estate tax return. Held: the contingent remainders to charitable organizations can and have been valued by competent actuarial methods and the Commissioner erred in refusing to allow a deduction under section 812 (d) of the Code for the value of these contingent remainders to charity. 2.

1. Where a creditor joins with the other creditors of his debtor in an agreement to accept preferred stock of the debtor in lieu of the claim held by the creditor against the debtor for the purpose… Held: the transaction is not a sale or exchange under section 117 of the Internal Revenue Code. 2. Bad debt deduction disallowed for failure of proof of worthlessness. 3. The respondent's determination of reasonable compensation upheld. 4.

Where the petitioner was the victim of the so called Spanish prisoner swindle and the facts were such that under the law of Mexico, the place where the swindle took place, the swindlers had committed… Held: the petitioner is entitled to deduct the amount of his loss under the provisions of section 23 (e) (3) of the Internal Revenue Code in the taxable year 1947, the year in which the theft occurred.

1. Held, the petitioners' partnership and a corporation, which was owned and operated by two of the partners, were under common control and since… Held: the petitioners' partnership and a corporation, which was owned and operated by two of the partners, were under common control and since both enterprises were subcontractors during the fiscal year here involved and since their combined renegotiable sales exceeded $ 500,000, petitioners' partnership profits are subject to…

1. Where a lump sum of money is received in settlement of various claims, an allocation of specific amounts to each of the several claims is necessary and proper. 2. Sums received in settlement of punitive damages do not constitute taxable income. 3. Sums received in settlement of claims for anticipated profits are taxable as ordinary income.

Held, petitioner failed to prove that he contributed in the taxable year 1947 over half the support of his four minor children who were living with his former wife. Held: petitioner failed to prove that he contributed in the taxable year 1947 over half the support of his four minor children who were living with his former wife.

1. The transferor was held to have filed fraudulent tax returns, Louis Halle, 7 T. C. 245. This decision became final after certiorari was denied by the Supreme Court on February 6, 1950. Held: notice of transferee liability mailed to petitioner on September 14, 1950, was timely, section 311 (b) and (d) of the Code. 2. Louis Halle died insolvent in 1949 owing income taxes in substantial amounts. Proceeds from decedent's life insurance were received by petitioners.

Petitioners were the sole stockholders, the principal officers, and two of the three directors of a corporation which, on January 2, 1947, authorized the payment to them of an incentive bonus based on a percentage of profits for the year. On December 2, 1947, before the exact amount of profits had been determined, the directors adopted a resolution authorizing the payment to petitioners of $ 10,000 each of their bonuses for that year. The corporation had ample funds available for such payments. In January 1948 it was determined that each petitioner was entitled to a bonus for 1947 of $ 12,067.74, based on the corporation's net profits for that year. Held that petitioners each constructively received $ 10,000 of their 1947 bonus in that year.

Estate Tax -- Deduction -- Value of Charitable Remainder Bequest. -- The testator left the residue of her estate in trust providing for annual payments to a life tenant in an amount requiring annual… Held: that since respondent's method is the proper approach and since petitioners fail to establish a better acceptable method, the result obtained by respondent's method is approved.

Income -- Exemption -- Nonresident -- Earned Income -- Sources without the United States -- Section 116 (a) (3). -- An amount received by a nonresident citizen of the United States from the Reader's Digest for foreign rights to an article written while the taxpayer was abroad, which rights were sold in this country after the article had been written, does not constitute earned income within the meaning of section 116 (a) (3) and is not exempt. E. Phillips Oppenheim, 31 B. T. A. 563, followed.

An acquiring corporation, a general automobile dealership, under the facts, held, entitled to include in its base period net income the income from the handling of installment notes which were… Held: entitled to include in its base period net income the income from the handling of installment notes which were received in payment for cars sold during the base period.

Respondent made a final determination within the purview of section 3801, Internal Revenue Code, by allowance of petitioner's claim for refund for 1943 which asked deduction for that year of an item… Held: that in the adjustment for 1942 petitioner is not entitled to have reflected in the computation of net income a similar item of deduction allowed for 1941 which was not involved in the final determination made for 1943.

Petitioner seeks excess profits tax relief under section 722, Internal Revenue Code, subparagraphs (2) and (5) of subsection (b). It is engaged in mining and selling bituminous coal. Held: petitioner is not entitled to relief as it has not established that its average base period net income is an inadequate standard of normal earnings.

1. Where the decedent's widow was suffering from cancer in an inoperable and incurable form at the date of the decedent's death and facts known at that time indicated that her actual life expectancy… Held: the facts in existence at the time of decedent's death will be taken into account in valuing the widow's life estate rather than actuarial tables. 2.

Excess Profits Tax -- Relief Under Section 722 -- Section 722 (b) (1), (2) and (5) -- Bank Control During During Base Period. -- The petitioner has not shown it is entitled to relief under section 722 (b) (1), (2) or (5) based upon bank control of its business during the base period.

Held, pursuant to the pleadings and respondent's 90-day letters, the Court has jurisdiction of deficiencies determined by respondent as well as relief sought by petitioner under… Held: pursuant to the pleadings and respondent's 90-day letters, the Court has jurisdiction of deficiencies determined by respondent as well as relief sought by petitioner under section 722, and orders will be entered finding deficiencies thus determined where they were not otherwise contested.

Excess Profits Tax -- Section 722 (b) (4) Relief -- Constructive Earnings. -- Petitioner was organized and commenced business in 1938 and its business did not reach, by the end of 1939, the earning level it would have reached had it commenced business two years earlier. Held, relief should be granted. Amount of constructive average base period net income determined.

1. Petitioners were two manufacturing corporations which, together with a partnership to which they sold their products, were owned or controlled… Held: respondent's allocations of part of the income of the partnership to petitioners under sections 22 (a) and 45, disapproved, where petitioners were prohibited by maximum price regulations from receiving the very income sought to be allocated to them. 2. Period for the amortization of certain leasehold improvements determined.

1. Petitioner was granted the drilling and development rights in certain submerged oil property by the State of California. Under the terms of such grant petitioner was required to drill certain offset wells. Upon completion thereof, petitioner was to continue uninterrupted drilling operations until a total of 83 wells were thus drilled. Held: The drilling of wells during 1939 to 1943, inclusive, subsequent to the required number of offset wells was a part of the consideration for acquisition of the drilling rights from the State of California and as such the intangible drilling costs incident thereto are not deductible in accordance with the option contained in Regulations 111, section 29.23 (m)-16. 2. Pursuant to the State Lands Act of 1938 all oil wells bottomed in the submerged oil deposits were required to be drilled from filled lands or slant-drilled from littoral drill sites. The necessary drill sites and easements appertaining thereto were acquired from certain upland owners by petitioner for which it agreed to pay an amount equal to 24 1/2 per cent of its net profits. Held: Petitioner was the sole recipient of an economic interest in the submerged oil deposits; no third parties thereafter acquired any such interest; the amounts paid by petitioner equal to 24 1/2 per cent of its net profits were not so paid as rent or royalty on an economic interest in the oil and gas in place; and, therefore, petitioner is entitled to include such amounts in its gross income subject to the statutory allowance for depletion.

Held, the exchange by stockholders of half their stock in a corporation for the pro rata distribution of stock in a newly created corporation which transferred all its stock to the distributing corporation in exchange for property of the distributing corporation was an exchange upon which no gain or loss will be recognized under the provisions of section 112 (b) (3), I. R. C.

Petitioner Foster G. Beamsley and one R. H. Johnson were officers in a corporation engaged in the insurance brokerage business, the stock of… Held: these payments did not constitute part consideration for the surrender of the stock by petitioner's wife; they were made for Mr. Beamsley's influence or assistance, real or supposed, in assuring the continuance of National City Lines, Inc., as a client of the corporation, and are therefore taxable to him rather than to his wife.

1. Petitioner, accounting on the accrual basis, executed and delivered to an exempt pension trust its demand negotiable promissory note on… Held: delivery of such notes was not payment within 60 days after the close of the taxable year of the amount accrued in that year, as required by section 23 (p) (1) (E) of the Internal Revenue Code, and therefore deduction may not be taken except to the extent of the actual payment made within the 60-day period already allowed by the…

Excess Profits Tax -- Abnormal Deduction -- Consequence of a Decrease in Some Other Deduction -- Section 711 (b) (1) (J) (ii) and (K) (ii). -- Where depreciation deductions for new taxi cabs, having a life corresponding to the four base years, are taken on a declining scale, 45 per cent of cost in the first year, 25 per cent the second, 20 per cent the third, and the remaining 10 per cent the fourth, no disallowance of a part of the 45 per cent deduction for the first year…

Held, that $ 10,720 which Harold W. Ross paid his divorced wife, Jane C. Grant, in 1946 was an amount which represented arrearages in alimony payments which Ross had agreed to make to his wife under… Held: that $ 10,720 which Harold W. Ross paid his divorced wife, Jane C. Grant, in 1946 was an amount which represented arrearages in alimony payments which Ross had agreed to make to his wife under a separation agreement entered into by the parties April 1, 1929.

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

Petitioner claiming credit for agreed constructive average base period net income under section 722held entitled to compute credit thereon applicable to all excess profits tax years notwithstanding actual losses in the base period also permit it to take deduction for net loss carry-over. E. P. C. 29 held erroneous.

Intercompany profits restored to petitioner's opening inventory for 1943, first taxable year after it discontinued filing consolidated returns with affiliated corporate group held properly restricted under Treasury Regulations 110, section 39.33 (c), as amended, to intercompany profits eliminated from petitioner's inventory at beginning of consolidated period.

1. Funds improperly obtained from a corporation of which petitioners were in complete control and in connection with which there was no embezzlement prosecution and no adequate proof that petitioners' acts had not been condoned, held to be taxable income. Commissioner v. Wilcox, 327 U.S. 404, distinguished; Rutkin v. United States, 343 U.S. 130, followed. 2.

1. Mrs. Malone was an experienced and able executive of petitioner and rendered valuable services during busy war years. Held: that her annual salary of $ 18,200 was reasonable and, therefore, deductible in 1942 and 1943. Held, further, that $ 18,200 paid to Mrs. Malone in 1941 was also reasonable and is deductible as affecting the unused excess profits credit, if any, to be carried forward in 1942. 2.

1. Deduction -- Salary of Employee. -- Amount allowed by respondent sustained, upon failure to show extent or value of services rendered. 2. Held: that three wives became bona fide partners in a general partnership with their respective husbands and several other persons. 3. Trusts -- Share of Partnership Net Income. -- Certain members of a general partnership made transfers in trust by gifts of percentage interests in the partnership.

Held, from the evidence, that petitioner, which commenced business during the base period, failed to establish assumed earnings under… Held: from the evidence, that petitioner, which commenced business during the base period, failed to establish assumed earnings under the push-back rule of an amount sufficient, under reconstruction, to result in an excess profits credit in excess of the amount allowed by the invested capital method without relief under section 722 of the…

Claims for refund under section 721, I. R. C., based upon the realization of abnormal income from the development of a formula or process for the manufacture of spaghetti sauce denied for lack of proof as to what portion, if any, of petitioner's income for the taxable years involved is attributable to the development of the formula.

Relief under section 722 (b) (4), I. R. C., denied where petitioner commenced business, a retail grocery business, and also enlarged its business during its base period, but where the evidence fails to establish a basis for a reconstructive average base period net income which would result in a greater excess profits credit than that allowed by the Commissioner under the invested capital method.

Taxpayer, a wholesale liquor dealer, found it difficult to procure liquor in 1943 because of Government restrictions on production. Held: the loss was a part of the cost of the whisky and not a short term capital loss. Held, further, the shares of stock were not capital assets and were not inadmissible assets as defined in section 720, I. R. C.

1. Held: Expenses attributable to abandoned plans of liquidation and partial liquidation of a corporation are deductible in the year of abandonment by the corporation.… Held: Expenses attributable to abandoned plans of liquidation and partial liquidation of a corporation are deductible in the year of abandonment by the corporation. 2. Held: That portion of expenses of a partial liquidation attributable to the distribution of corporate assets is deductible by the corporation.

Prior to March 1, 1913, petitioner paid certain dividends of its common stock on common stock. Held: that the dividends are not includible in equity invested capital as distributions of stock under section 718 (a) (3) (A), I. R. C.

1. Respondent's determination as to reasonableness of officers' salaries approved. Section 23(a), I. R. C. 2. Where taxpayer receives a refund by reason of a carry-back pursuant to section 3780, I. R. C., the period of limitations for assessment of deficiencies with respect to the earlier year is not enlarged by section 3780(c) or section 276(d), I. R. C., except to the extent that the deficiency is based upon an error attributable to the carry-back.

1. Excess Profits -- Abnormal Deductions in Base Period -- Section 711 (b) (1) (J) -- Interest on Late Tax Payments. -- Statutory interest on late tax payments deducted by a public utility in its base period is of a different class of deductions for purposes of section 711 (b) (1) (J) from interest paid and deducted by the utility on its borrowed capital but is not different in class from interest deducted on account of other past due state and Federal tax payments with the…

1. On the date of his death, Richard C. du Pont owned five single premium life insurance policies which he had taken out on his father's life. Held: For estate tax purposes, the proper measure of value of such policies, to the extent of decedent's interest therein at the date of his death, is the replacement cost thereof or, in the absence of such replacement cost, the respective interpolated terminal reserve values thereof. 2.

1. Deductions -- Depreciation. -- Held, that, in the taxable year 1945, petitioner may not properly claim allowances for depreciation on certain… Held: that, in the taxable year 1945, petitioner may not properly claim allowances for depreciation on certain properties where the presently asserted basis is inconsistent with the position taken in earlier years resulting in substantial tax benefits and allowance of the present claim would result in double tax benefits. 2.

Petitioner claims a net operating loss deduction carry-back for the year 1946. Held: petitioner sustained a net operating loss as defined by section 122 (a) of the Code in the amount of $ 3,667.19 for the year 1948. The loss realized by petitioner upon the sale of assets used in his business may not be included in the statutory net operating loss.

1. Jelwan, the taxpayer, transferred all or substantially all of his property to petitioner in fraud of creditors and in partial consideration for petitioner's promise of future support. Held: that respondent made a prima facie case of transferee liability against petitioner by showing the transfer of money and property to her in fraud of creditors, and that the burden of going forward with the proof shifted to petitioner.

1. Items includible in petitioner's borrowed invested capital, determined. 2. Status of certain securities held and sold by petitioner during taxable years, determined. 3. Held: properly recognizable as individual assets on a gross basis in computing the percentage of inadmissible to total assets under section 720, I. R. C.

Petitioner's failure to give a clear indication in its 1944 return of an election to expense its development costs, all of which were incurred in drilling a dry hole, held not such an election to capitalize under Regulations 111, section 29.23 (m)-16 (b), as to preclude it from electing in 1945 to expense such costs incurred for the first time in drilling productive wells.

Cost of acquiring fractional interests in oil and gas leases from the owner and driller held on facts not expenses of drilling so as to be deductible under option to expense for intangible drilling and development costs incurred after 1942. Regulations 111, section 29.23(m)-16.

1. Where the managing member of a joint venture wrongfully withheld profits earned in 1933, which were recovered by the entitled decedent's estate… Held: the defrauded party's estate received gross income in 1944, the year of recovery. 2. Wrongfully withheld profits earned in 1933 and recovered in 1944 by the entitled decedent's estate, held, distributable to the beneficiary under the decedent's will pursuant to the provisions of section 162 of the Internal Revenue Code. 3.

Pension payments received in 1944 and 1945 attributable to compensation of United States citizen for services rendered during more than 2 years' previous residence abroad but received after taxable year of change of residence to the United Statesheld not exempt under Internal Revenue Code, section 116 (a) (2). Wood v. United States, 104 F. Supp. 1020, followed.

Held, the phrase paid or accrued as used in section 122 (d) (6) of the Internal Revenue Code has reference to the system of accounting used by the… Held: the phrase paid or accrued as used in section 122 (d) (6) of the Internal Revenue Code has reference to the system of accounting used by the taxpayer; held, further, amounts tendered to the collector in 1947 by taxpayer as payment of additional excess profits taxes for 1943, 1944, and 1945 were not deductible in 1947.

1. Held: The amount to be included in equity invested capital for excess profits tax purposes is the cost of the property for which common stock was issued. Held: The amount to be included in equity invested capital for excess profits tax purposes is the cost of the property for which common stock was issued.

1. Petitioner transferred a dairy farm, real and personal property, in 1943 executing a bill of sale, deed and lease. Held, that the 1943 transfer constituted a sale, not a lease. 2. Held: that the 1943 transfer constituted a sale, not a lease. 2. Held, further, petitioner did not make an election in a timely filed income tax return to report the capital gain on the installment method under section 44(b), I. R. C., and the entire capital gain is taxable in 1943. 3.