Volume 19 — Tax Court Reports

1. The amounts paid by petitioner to its four officers in the taxable years 1942, 1943, 1944, and 1946, pursuant to its bona fide contingent compensation plan adopted in 1931, and consistently followed, constituted reasonable compensation for the services rendered to it by such officers in those respective taxable years. 2.

Two months after death of petitioner's husband in 1944, the company he had long served in an executive capacity departed from its usual policy and paid to petitioner the approximate amount of bonus… Held: on the facts, payment was not compensation for services but was a a gift to the widow, excludible from gross income under section 22 (b) (3) of the Code.

1. In June 1943, petitioner and his associates acquired all the outstanding shares of stock of The Read House Company, petitioner acquiring one-half the corporate stock. During the taxable years 1944 and 1945, the corporation made to its former stockholders substantial payments of principal and interest on its second mortgage which arose out of the cancelation of the shares of corporate stock not purchased by petitioner and his associates. Respondent determined that the payments to the extent of $ 37,808.85 in 1944 and $ 41,481.98 in 1945, were income to petitioner based on the theory that the payments made by the corporation were in effect a part of the purchase price to be paid for the corporation's stock by petitioner and the other acquiring stockholders. Held, these payments are not taxable to petitioner as dividends under the provisions of section 115 (a) and (g) of the Internal Revenue Code. No part of the indebtedness which the corporation owed on its second mortgage was petitioner's indebtedness or was incurred in his behalf. Consequently, the payments made were not made in his behalf or for his account. 2. Held, that petitioner omitted from his 1944 return more than 25 per centum of his gross income for that year. Consequently, the 5-year statute of limitations provided in section 275 (c) of the Code is applicable and the statute of limitations does not bar the deficiency determined for 1944.

Petitioner's board of directors on December 28, 1944, adopted a resolution to establish a pension trust for its employees and authorized a contribution of not to exceed $ 25,000 to such trust. Held: such payment did not accrue in 1944, and therefore could not be deducted in 1944 under section 23 (p) (1) (E) of the Internal Revenue Code.

Gifts of trust income required to be paid to their guardians for the education, maintenance and support of minor beneficiaries held not gifts of future interests so as to eliminate permitted exclusions under section 1003, Internal Revenue Code. Madeleine N. Sharp, 3 T.C. 1062, affd. (C. A. 9) 153 F.2d 163, followed.

Dividend declared and made payable in 1946 by a corporation of which petitioner and another were stockholders but, at petitioner's request, discriminatorily withheld from his possession until the following year, held constructively received by him in the prior year. Avery v. Commissioner, 292 U.S. 210, distinguished.

1. On March 2, 1946, petitioner acquired an old warehouse building with the intent and purpose of completely renovating and remodeling it into a plant suitable to its business needs. Held: the work of replacing and restoring the foundation piling was incidental to and involved in a greater plan of over-all rehabilitation, remodeling, and permanent improvement of the entire property, and the expense thereof is properly to be capitalized. 2.

Estate Tax -- Nonresident Alien -- Gross Estate -- Property Subject to Mortgage -- Full Value or Only Equity of Redemption -- Sections 861 (a) (1), 812 (b) (4) -- Regulations 105, Section 81.38. -- Only the equity of redemption in United States real property need be included in the gross estate of a nonresident alien under Regulations 105, section 81.38 which is in accordance with Congressional intention as indicated by section 812 (b) (4) of the Internal Revenue Code.

The decedent received gifts in each year, 1946 and 1947, from his wife. Held: that the property given the decedent in 1946 was not property previously taxed within sec. 812 (c) of the Code, and that the decedent's estate is not entitled to a deduction with respect to the value of the gifts received in 1946, but is entitled only to deduction under sec. 812 (c) for the gift received in 1947, which constituted…

-- The Tax Court will not consider as a possible basis for relief under section 722 a contention and supporting facts presented to it which were not a part of the Form 991 applications shown to the Court and which the petitioner fails to show were ever properly advanced for the Commissioner's consideration prior to his denial of the applications. Blum Folding Paper Box Co., 4 T. C. 795, followed.

1. The decedent had a one-third interest in the estate of his deceased wife, which had not yet been distributed at the date of his death. Held: the decedent's interest in his wife's estate must be measured by one-third of the value of her estate as it was composed on the date of his death, rather than by the specific assets that were subsequently distributed to his estate. Section 811 (a), I. R. C. 2.

X corporation, a wholly owned subsidiary of Y corporation, filed applications for relief under section 722, I. R. C. Later X was dissolved and transferred all of its assets to Y in cancellation of… Held: respondent's motion to dismiss for lack of jurisdiction granted. Section 732 (a), I. R. C.

Petitioner, the owner of 1034 3/8 shares of the common stock of the Jennison-Wright Corporation of Toledo, Ohio, entered into agreements in 1946 with her son and daughter whereby she purportedly sold… Held: the Commissioner did not err in determining that the dividends from such stock were includible in petitioner's gross income for the years 1946 and 1947.

1. Held: Legal fees and expenses incurred in settlement of a claim affecting the title to certain property were capital expenditures and not… Held: Legal fees and expenses incurred in settlement of a claim affecting the title to certain property were capital expenditures and not deductible under the provisions of section 23 (a) (2), I. R. C. 2. Held: The period of administration of an estate had terminated in the year the ordinary administrative duties were completed.

1. Petitioners in 1940 abandoned their residence (Plot A) and offered the same for sale or rent. Held: petitioners sustained no deductible loss within the purview of section 23 (e), I. R. C., on the sale of such former residence in the taxable year 1945. 2. Petitioner, E. R. Fenimore Johnson, individually owned unimproved real estate (Plot B) adjoining Plot A and which he sold as a unit with Plot A in 1945.

Recognition of Gain -- Involuntary Conversion -- Money Expended for Similar Property -- Mortgages -- Section 112 (f). The gain of a taxpayer whose property is taken by eminent domain is not recognized to extent of an amount paid by government to a mortgagee to discharge a mortgage on property for which the taxpayer was not liable.

1. Held, rental expenses, taken as a deduction by a corporation should be reduced in the amount of an allowance granted by the lessor to the corporation for replacement… Held: rental expenses, taken as a deduction by a corporation should be reduced in the amount of an allowance granted by the lessor to the corporation for replacement and repair of rented items. 2. Held, deduction for contributions should be increased to 5 per cent statutory limit on the increased net income.

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

In the taxable year 1948 petitioners, fee owners of the surface lands, entered into a written agreement with a construction company whereby petitioners granted and conveyed to the construction company the exclusive use and privilege of entering upon the surface lands for a period not to exceed three years, for the purpose of extracting coal by the stripping method, for a stated consideration. Held: 1.

The petitioner, a dealer in new and used cars, claimed depreciation on certain cars and capital gains with respect to certain company cars which it had sold. Held: on the facts the cars in controversy were used in the petitioner's trade or business and as such are entitled to depreciation under section 23 (1) and to treatment under section 117 (j) of the Internal Revenue Code.

The petitioners, by trust agreement, provided for payment of the income derived from the trust corpus to the beneficiaries for life or until 1967, and provided for the distribution of the corpus to… Held: the gifts of corpus were future interests for which no exclusion under section 1003 (b) (3) of the Internal Revenue Code is permissible. 2.

Family Partnership -- Husband and Wife -- Wife not Recognized. -- The evidence does not establish that the wife of the petitioner, the petitioner, and others intended to enter into a… Held: That the wife of the petitioner was not a partner in a partnership, in which he was a member, during the taxable years 1943 and 1944, and that the petitioner is taxable on a four-ninths share of the partnership income for 1943 and 1944, none of which is taxable to petitioner's wife.

1. Petitioner, a member of the cotton textile industry, Southern division, has not shown that the effect of the large cotton crop of 1937 on the cotton textile industry resulted in an abnormally depressed base period net income entitling it to relief under section 722 (b) (2), Internal Revenue Code. 2. The base period is not to be divided into separate segments; it is a unitary period.

1. Petitioner undertook large construction jobs in new and unfamiliar areas during the period 1932 to 1935. Held: Petitioner's undertaking of contracts outside its normal field of operations does not constitute an event, during or immediately prior to the base period, of the sort contemplated by section 722 (b) (1), and petitioner is denied relief thereunder. 2.

Held, the excess profits tax computed without the benefit of section 722, I. R. C., has not been shown to result in an excessive and discriminatory tax because of the qualifying factors found in… Held: the excess profits tax computed without the benefit of section 722, I. R. C., has not been shown to result in an excessive and discriminatory tax because of the qualifying factors found in section 722 (b), I. R. C.

In 1934 petitioner inherited a one-sixth interest in a farm in Hungary. He sustained a war loss with respect to that interest in 1942 when war was declared between the United States and Hungary. Held: petitioner sustained a deductible loss in 1945 under section 23 (e), I. R. C., measured by his adjusted basis in the property as of the time war was declared against Hungary in 1942, in accordance with section 127 (c) (3) (A) and section 127 (d)(2).

Deductions on Accrual Method of Accounting -- Strip-Mining of Coal -- Estimates of Costs of Backfilling. -- A partnership engaged in strip-mining of coal was required by provisions of leases and… Held: the respondent's action was proper. In the taxable years in which the reserves were created, not all events had occurred which fixed the cost to the partnership of backfilling and determined its liability to pay.

Petitioners Clarence B. Ford, Wade E. Moore, and Vern Forcum each originally had a 25 per cent interest in the Forcum-James Construction Company, a partnership, prior to 1940. Held: these partnership agreements were entered into by the parties with a bona fide intent in good faith and acting with a business purpose to join together in conducting a contracting business as a partnership, and are valid for tax purposes.

1. During the taxable years, petitioner had independent contractors strip-mine fringe coal on lands under lease to petitioner. Held: under all the facts, the independent contractors did not acquire an economic interest under their contracts; and respondent erred in computing percentage depletion by reducing petitioner's gross income by an amount equal to that paid the independent strip-mining contractors. 2.

1. Excess Profits Tax -- Abnormal Deduction -- Surety Loss -- Class -- Section 711 (b) (1) (J) (i) and (ii). -- A deduction taken in 1939 for an anticipated loss on a surety bond was not a separate class and abnormal within section 711 (b) (1) (J) (i) and the surety code number under which it was classified did not represent a class of deductions for the purpose of section 711 (b) (1) (J) (ii). 2.

Exemption -- Section 101 (3) -- Fraternal Beneficiary Order -- Operating Under the Lodge System -- Benefit Payments to Members or Their Dependents. -- An organization having a membership which lacks a common bond, carrying on no activities which further its written purposes or promote a common object, associating with no other similar organization or parent organization and providing death benefits to any named beneficiary of only one class of members is not a fraternal…

Held: The correct income and excess profits tax liability of petitioner for 1943 shall be taken into account as accrued liability as of… Held: The correct income and excess profits tax liability of petitioner for 1943 shall be taken into account as accrued liability as of December 31, 1943, and the correct post-war refund of excess profits taxes for 1943 shall be taken into account as an accrued receivable as of December 31, 1943. Stern Brothers & Co., 16 T.C. 295, followed.

Held, seat on New York Produce Exchange is a capital asset, and loss on sale is subject to limitations of section 117 (d) (2), I. R. C. Held: seat on New York Produce Exchange is a capital asset, and loss on sale is subject to limitations of section 117 (d) (2), I. R. C.

1. Petitioner, a corporation organized under the laws of New York, entered into an agreement with the stockholders of Corporation A on August 31, 1943, to transfer their stock in A for stock of… Held: the transaction achieved a substantial business purpose, and the principal purpose of the merger was not to avoid or evade taxes within the purview of section 129 of the Code. 2.

1. The controlling stockholder of petitioner which was engaged in the rock and sand business, formed a partnership which furnished technical and management services to petitioner and other… Held: respondent erred in allocating to petitioner part of the gross income and deductions of the partnership under section 45, Internal Revenue Code. 2. Held, further, petitioner was entitled to a loss for abandonment of an asphalt plant.

On the date of a decedent's death, petitioner-insurer held insurance proceeds which were includible in the decedent's gross estate under section 811 (g) of the Internal Revenue Code. Held: that petitioner-insurer is not a transferee or trustee within the meaning of section 827 (b) of the Internal Revenue Code.

Respondent has determined that the estate of a citizen of Puerto Rico who was also a citizen of the United States and who at the time of his death… Held: that the Federal estate tax is not applicable to a citizen of Puerto Rico who is also a citizen of the United States and who at the time of his death was domiciled in Puerto Rico, Estate of Albert DeCaen Smallwood, 11 T. C. 740, followed, and the decedent was an American citizen who cannot be taxed as a nonresident alien.

Basis for Determining Gain or Loss. -- Petitioner purchased stock from A; petitioner borrowed money to pay for this stock from B and deposited the stock as collateral to secure the indebtedness. Held: the basis of the stock for the computation of gain or loss was the cost of the stock.

Unused Excess Profits Credit. -- Carry-back from 1946 to 1944, allowed corporation which, on January 1, 1944, sold its principal assets to a partnership but took no steps to dissolve and continued to operate a portion of its business through 1944, 1945, and 1946.

1. The holder of mining rights acquired by lease entered into a contract with a coal strip-mining contractor whereby the latter agreed to… Held: that by contract the holder of the mining rights transferred to the coal stripper a depletable interest in the coal in place and accordingly the receipt by the coal stripper of 83 per cent of the net selling price of the coal is income subject to percentage depletion allowed by virtue of sections 23 (m) and 114 (b) of the Internal…

1. Employer contributions to an exempt pension and profit-sharing trust in excess of the agreement's terms held voluntary and not deductible under section 23 (p) (1) (C) or (D), Internal Revenue Code. Held: on facts, properly disallowed by respondent.

1. Petitioner owns and operates a department store. Held: that the good will so acquired is includible in petitioner's equity invested capital, under section 718 (a) (2) of the Code, as its basis for determining loss upon sale or exchange; that such basis to petitioner was its loss basis to Hens & Kelly Company, which basis was its cost; and, on the facts, that the cost of the good will to…

Amounts voluntarily paid by petitioners to meet deficits in the general fund of a local mutual aid association organized by petitioners and others under the statutes of Texas to issue life insurance policies for the primary purpose of advertising the funeral home of petitioners constitute, under the prevailing facts, ordinary and necessary expenses of their business.

Petitioner corporation on November 26, 1940, entered into a written agreement wherein petitioner agreed to erect a bus terminal with all necessary terminal facilities, and the… Held: Respondent properly computed petitioner's income for the respective taxable years involved in accordance with the terms of the original agreement until the execution of the amendatory agreement on June 14, 1945, and thereafter in accordance with the terms of the original agreement as amended. 2.

1. Petitioner and his partner each had a 50 per cent interest in a partnership engaged in the furniture business which reported sales on the installment basis. Petitioner sold his interest in the partnership, including his interest in outstanding installment obligations, to his partner.

Petitioner in the taxable year 1944 reported in a single return the income and deductions pertaining to the operations of its business as a security… Held: the Exchange and the Gratuity Fund are separate entities for purposes of Federal taxation, and the filing of a single return was improper. Held, further, respondent's disallowance of the amount of $ 900 paid by petitioner in 1944 to the widow of a former employee as an ordinary and necessary business expense is sustained.

1. Rentals paid to lessor after he had agreed to sell the leased property to petitioner and apply the rentals to the purchase price did not constitute rental income to petitioner. 2. Transfer of the assets of the old partnership in which the petitioner was a member to a new partnership was not accomplished by means of a sale by the old partnership, and the old partnership did not realize taxable gain as a result of the transfer.

In 1941, petitioner, who was president, director and holder of 50 per cent of the voting stock of X and Y Corporations, executed 9 separate trust instruments purporting to convey to the trustees,… Held: petitioner in substance transferred to the trustees nothing more than the right to receive income from the stock, retaining for himself full legal title and the substantial economic benefits to be derived therefrom.

The agreement by which the partnership du Pont took over a stock brokerage branch office in Elmira, New York, constituted a sale of a going business, Held, therefore, that the payments pursuant to… Held: therefore, that the payments pursuant to the sale were a capital expenditure and not deductible expenses under section 23 (a) (1) (A), I. R. C.

In 1943 petitioners, sole stockholders of a corporation, received liquidating dividends on its dissolution and properly paid capital gains tax thereon. Held: that the 1947 payments must be treated as capital losses and not ordinary losses. Arrowsmith v. Commissioner, 344 U.S. 6.

Capital Gain or Ordinary Income -- Sale of Accrued Interest on Indebtedness. -- The excess of the amount received by a creditor from a third party for notes and accrued interest of a debtor over the principal loaned on the notes is ordinary income under section 22(a) and not capital gain under section 117.

Held, petitioner is not entitled to deductions on account of amounts paid to acquire defeasible remainder interests of her son in certain trusts which interests were divested by reason of her son's… Held: petitioner is not entitled to deductions on account of amounts paid to acquire defeasible remainder interests of her son in certain trusts which interests were divested by reason of her son's death during the taxable year.

1. Held: The respondent's determination of a deficiency within 3 years of the filing of a return is not barred by the granting of a… Held: The respondent's determination of a deficiency within 3 years of the filing of a return is not barred by the granting of a refund more than 2 years prior to the determination. 2. Held: An annuity to be paid monthly under the terms of a testamentary trust is taxable to the taxpayer-recipient to the extent that it is paid out of income.

1. Petitioner during the taxable year received alimony from her husband pursuant to a written agreement entered into 19 years subsequent to their divorce. Held: the written agreement here was incident to the divorce within the meaning of section 22(k) of the Code, therefore, the alimony is taxable income to the petitioner. 2. Petitioner acquired stock in a cooperative apartment corporation in 1929 incident to the leasing of an apartment for her personal residence.

The father of the petitioners died in March 1930 leaving a will in which he named the petitioners and a cousin, Carleton Macy, as… Held: that the duration and scope of the activities of the petitioners as executors and trustees in the conduct and continued operation of the various business enterprises was sufficient to constitute these activities the conduct of business and that the amounts paid by the petitioners in settlement of the objections to their accountings…

Petitioner is a partner in an old and well established accounting firm. Held: These payments were distributions of income to the retired partners and estate and are deductible by the continuing partners in determining the distributable income taxable to them.

Where an employee received the total distributions payable to him by reason of his participation in an employees' pension trust in the taxable year 1947 and reported the sum received as capital gain,… Held: that the employee was not separated from the service of his employer within the meaning of section 165 (b) of the Internal Revenue Code and the amount of the settlement is taxable as ordinary income, the employee having made no contributions to the trust.

1. During the taxable year petitioners as stockholder-transferees paid the taxes owed by a corporation completely liquidated in a prior year. Held: these payments constitute capital losses to petitioners, Arrowsmith v. Commissioner, 344 U.S. 6. 2. In addition to paying the tax deficiencies of the liquidated corporation, petitioners paid the interest accrued on the deficiencies.

Held: That net operating loss carry-back deduction of the petitioner for the year 1945 is unaffected by the fact that a fee received in 1947 is subject to the provisions of section 107 (a), I. R. C. Held: That net operating loss carry-back deduction of the petitioner for the year 1945 is unaffected by the fact that a fee received in 1947 is subject to the provisions of section 107 (a), I. R. C.

Respondent's burden of proof as to increased deficiency held adequately supported by facts alleged in answer and deemed admitted as a result of Tax Court's order under Rule 18 entered after notice and default by petitioner.

Petitioner, under section 29.22(c)-6 of Regulations 111, elected to change the basis of his return for the year 1947 from that of cash receipts and disbursements used in prior years to an inventory… Held: petitioner did not comply with the applicable regulations and the Commissioner is sustained in refusing to recognize his right to use an accrual basis. Kenneth S. Battelle, 9 T. C. 299, distinguished.

1. Deduction -- Accrual -- Ordinary and Necessary Expense -- Vacation Pay -- Section 23 (a) (1) (A). -- Liability for 1946 vacation pay did not accrue in 1945 where there was no contract in existence covering it and where the contract for 1945, if allowed to remain in effect, would require employment on May 1, 1946, as a condition precedent for 1946 vacation pay. 2. Capital Expenditure or Advertising Expense -- Catalogs -- Section 23 (l). -- The 1944, 1945, and 1946 costs of catalogs published in September 1946 were not deductible as ordinary and necessary expenses of those years and the Commissioner did not err in allowing only deductions under section (l) on the basis of a useful life of 5 years for the catalogs.

Original deficiency in income tax liability held proper base for computing 50 per cent fraud penalty, despite later reduction in tax deficiency due to loss carry-back from subsequent year. Nick v. Dunlap (C. A. 5), 185 F.2d 674, followed.

During the taxable years, petitioner assigned one-half interests in manuscripts to his wife. The assignments were made in France where petitioner and his wife, British subjects, were residing. Held: the assignments constituted transfers within the meaning of the gift tax statute and are not taxable under such statute, because they were transfers by a nonresident alien of property situated outside the United States.

The residue of decedent's estate was placed in trust. Held: the trust providing for the education of decedent's grandnieces and grandnephews is a private trust and the value of the residue of the estate transferred to the trustees is not deductible under section 812(d).

1. Accrual Accounting -- Reserves for Backfilling. -- Estimated amounts for backfilling strip-mined coal lands are not deductible as accrued expenses where no backfilling has… Held: not to result in an economic interest in the strippers and amounts paid to them are not to be excluded from operators' gross income from the property in the computation of depletion deductions. Morrisdale Coal Mining Co., 19 T. C. 208, followed; James Ruston, 19 T. C. 284, distinguished. 4.

In 1947, Rogers Utilities, Inc., sold its business to a competitor including approximately 2,700 accounts receivable. These accounts receivable were sold for $ 32,672.34 less than their face value. Held: following Graham Mill & Elevator Co. v. Thomas, 152 F. 2d 564, the Commissioner is sustained.

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, a manufacturer of raincoats, snow suits, reversible topcoats, and similar garments, filed claims for relief under section 722 (a) and 722… Held: the strike did not cause petitioner's average base period net income to become an inadequate standard of normal earnings within the meaning of section 722 (b) (1), I. R. C. 2. In 1935, petitioner began using wool in the manufacture of its products. Petitioner used waterproofed fabrics in its manufacturing processes.

Petitioners were organized after December 31, 1939. During the taxable year they were engaged exclusively in the production of coveralls under Government contract for the armed forces. Held: petitioners are not entitled to any relief under section 722 (c) because they have failed to establish a constructive average base period net income within the framework of section 722 (a).

Distribution of cash by corporation to petitioners constituted payment of a taxable dividend and not repayment of a loan.

Held, that payments received by a corporation because of insiders' profits pursuant to section 16 (b) of the Securities Exchange Act of 1934… Held: that payments received by a corporation because of insiders' profits pursuant to section 16 (b) of the Securities Exchange Act of 1934 and section 30 (f) of the Investment Company Act of 1940 constituted ordinary income to the corporation under section 22 (a), I. R. C.Park & Tilford Distillers Corporation v. United States (Ct.

1. Taxable Year -- Beginning of Year for Fiscal Year Taxpayer. -- A fiscal year beginning December 1, 1943, and ending November 30, 1944, held not a taxable year beginning after December 31, 1943, within meaning of section 510 of Revenue Act of 1943, which excluded capital gains from income for purposes of declared value excess-profits tax for taxable years beginning after December 31, 1943. 2.

Petitioner, inventor of an electrical device known as a voltmeter and owner of all of the patent rights thereto, manufactured and sold voltmeters over a period of years receiving more than 80 per… Held: section 107 (b), I. R. C., is inapplicable.

1. Excess Profits Tax -- Section 722 (b) (4) -- Change in Character of Business. -- Petitioner installed a photo-mechanical method for producing lithograph press plates and thereby eliminated the… Held: petitioner changed the character of its business and a constructive average base period net income has been determined. 2.

Petitioner, operator of a chain of motion picture theatres in Texas, seeks relief under section 722 of the Code. Held: petitioner qualifies for relief under section 722 (b) (4) of the Code; held, further, the facts fail to show that petitioner had abnormal income during the base period years which is excludible in determining petitioner's constructive average base period net income as respondent contends; held, further, a constructive average base…

1. Held, respondent's determination that deficiencies in the petitioners' income tax were due to fraud with intent to evade tax not sustained where the evidence shows only ignorance and negligence on… Held: respondent's determination that deficiencies in the petitioners' income tax were due to fraud with intent to evade tax not sustained where the evidence shows only ignorance and negligence on the part of the taxpayers. 2.

Income -- Punitive Damages. -- Petitioner, as an injured party, received a damage judgment in an antitrust suit. Held: one-third of the award was compensatory damages for loss of profits and taxable as income. Held, further, that two-thirds of the award was punitive damages and not taxable.

1. In the taxable year 1947 the Shanis partnership of which the petitioners were equal partners exchanged old bonds of the St. Louis-San Francisco Railway Company for new… Held: the claim for interest is an integral part of the bonds and together with the principal debt constitutes a security for purposes of section 112 (b) (3), I. R. C., and respondent erred in allocating any part of the new securities to interest accrued subsequent to the acquisition of the old bonds.

1. Upon the record the petitioner is held to have realized income upon the exercise of an option to purchase stock, issued to him by his employer, as compensation for services rendered, in the difference between the option price and the market price of the stock on the date the option was exercised. 2. Further held that petitioner is taxable upon the fair market value at the time of receipt of certain stock issued him by his employer corporation as compensation for services.

Under a partnership agreement petitioners on a calendar year basis became entitled as of the end of the partnership fiscal year, March 31, 1948, to credits totaling $ 10,000 on the partnership books,… Held: the $ 10,000 was income to petitioners in 1948.

Held, section 107 (b), I. R. C., is inapplicable where the author of a book receives in one year less than 80 per cent of the royalties from sale of the book over the statutory period up to and… Held: section 107 (b), I. R. C., is inapplicable where the author of a book receives in one year less than 80 per cent of the royalties from sale of the book over the statutory period up to and including the subsequent 12 months.

During the taxable year petitioner occupied business premises under a lease which expired January 31, 1946, and continued in possession as a statutory tenant under the New York emergency rent control… Held: petitioner sold a property right, which was a capital asset, and the amount realized therefrom constituted a capital gain.

Decedent created a trust for the purpose of first providing support and maintenance for his children during their minority. Held: decedent made a transfer to the trust within the meaning of section 811 (d) (2), Internal Revenue Code, part of which was for an adequate and full consideration in money's worth, and pursuant to section 811 (i) there should be included in decedent's gross estate only the excess of the fair market value at the time of death of the…

1. Depreciation. -- Cost of covenant not to compete held depreciable over the term of the covenant. 2. Held: further, petitioner's earnings were not permitted to accumulate beyond the reasonable needs of the business in years subject to review.

1. Held, neither the oral trust nor the written trust here involved was expressly made irrevocable by the instrument creating the trust * * * as provided in… Held: neither the oral trust nor the written trust here involved was expressly made irrevocable by the instrument creating the trust * * * as provided in section 2280, Civil Code of California. 2. Held, transfer of trust assets on May 2, 1946, to guardianship estate of minor beneficiary constituted a taxable gift.

Ordinary Income -- Amounts Received for Covenant not to Compete. -- The owners of the entire capital stock in a newspaper publishing business sold their stock pursuant to a written contract which… Held: the covenant was a separate item of the transaction and the selling stockholders received ordinary income therefor.

Held, the transfer of certain rental property to Spencer Land Company by petitioner was a bona fide transaction consummated for business purposes and respondent erred in including income thereafter… Held: the transfer of certain rental property to Spencer Land Company by petitioner was a bona fide transaction consummated for business purposes and respondent erred in including income thereafter derived from such property within the community income of petitioner and his wife.

Petitioner, a stockholder, director, officer, and employee of a corporation, seeks to deduct as trade or business expenses under section 23 (a) (1) (A) of the Code certain sums he paid to settle a… Held: the automobile, although owned by petitioner, was engaged in the business of the corporation at the time of the accident, not that of the petitioner, and the deduction is disallowed.

Petitioner having had losses in all of the base period years except one, in filing excess profits tax returns for its fiscal years ending April 30, 1943, 1944, and 1945, used excess profits credits… Held: petitioner has not established its grounds for relief under either 722 (b) (1) or (2) or (4) and the Commissioner's determination is sustained.

An income tax return for 1947 in joint form, unsigned by the wife, where she had no income in the taxable year and took no part in the preparation of the return, held, not to be a joint return. Held: not to be a joint return. Held, further, an income tax return in joint form for 1948 signed by both the husband and wife was in fact a joint return.

Petitioner challenged as inadequate the relief accorded to it by the Commissioner by reason of certain changes in its business which qualified it for relief under section 722 (b) (4), I. R. C. Constructive average base period net income determined.

1. Petitioner is a bakery seeking relief from excess profits taxes under section 722 for the years 1942, 1943, and 1944. Held: that petitioner qualifies for relief under section 722 (b) (4), and a constructive average base period net income is determined. 2. In 1936, petitioner had a strike of its bakers which lasted for three months.

Petitioner held entitled to relief under section 722 (b) (4) by reason of changes in its business made during the base period years. Constructive average base period net earnings determined on the evidence.

Held, petitioner has not reconstructed a fair and just amount representing normal earnings because it took into consideration events and conditions occuring after December 31, 1939,… Held: petitioner has not reconstructed a fair and just amount representing normal earnings because it took into consideration events and conditions occuring after December 31, 1939, consideration of which for such purpose being prohibited under section 722 (a) of the Internal Revenue Code.

The petitioner, a handkerchief manufacturer, filed claims for relief under section 722 (b) (1) and ( 2) of the Internal Revenue Code and for the refund of excess profits taxes paid for its taxable years ended June 30, 1942, and June 30, 1943. The petitioner, in making its returns for the years mentioned, and the respondent, in making his determination with respect thereto, computed the petitioner's excess profits credit on the basis of invested capital.

The petitioners executed formal instruments of assignment to trust of portions of their capital interests in a partnership which was engaged in the mercantile business. Held: that the respondent did not err in determining that the trustee was not a partner and that the income credited to the capital accounts standing in his name was taxable to the petitioners.

Petitioner, a manufacturer of cosmetics, paid a manufacturers' excise tax which was assessed on a distributor's selling price. Held: on the facts, that excise taxes paid in the fiscal years 1937 and 1938 were not abnormal deductions, or deductions abnormal in class, under section 711(b)(1)(H) or (b)( 1)(J)(i) of the Internal Revenue Code.

During the taxable year, assets of a partnership were conveyed to a corporation in return for stock. The conveyance was at the book value of the assets. Subsequent to the date of conveyance, the respondent made adjustments resulting in a higher book value as of the date of conveyance to the corporation.

1. Held, a deceased husband's estate is taxable upon one-half of the income derived during the administration of Texas community property, following Estate of J. T. Sneed, Jr., 17 T. C. 1344. 2. Held: a deceased husband's estate is taxable upon one-half of the income derived during the administration of Texas community property, following Estate of J. T. Sneed, Jr., 17 T. C. 1344. 2.

On July 15, 1943, the petitioner purchased all the stock of a corporation whose primary asset was a citrus grove. The stock was purchased for the purpose of acquiring the grove. Held: the proceeds of the fruit constituted taxable income of the corporation. 2. Held, further, the petitioner realized no taxable gain on liquidation of the corporation. Commissioner v. Ashland Oil & R. Co., 99 F. 2d 588, followed.

Adjusted Gross Income -- Deduction Attributable to Rents -- Interest. -- The petitioner, prior to the taxable years, borrowed money on unsecured notes to… Held: that the interest paid on the notes in the taxable years shall be deducted from gross income in arriving at adjusted gross income as a deduction allowed by section 23 which is attributable to property held for the production of rents within the meaning and intent of subsection (4) of section 22 (n) of the Code.

Divorce -- Periodic Payments -- Section 22 (k). -- A divorced wife received periodic payments from her former husband under a decree of divorce based upon a written instrument executed by the parties as an incident to such divorce and separation.

Petitioners' decedent in the taxable year 1948 sold certain stock purchase warrants acquired in 1947 from the Follansbee Steel Corporation of which he was… Held: The warrants were capital assets as defined by section 117 (a) (1), I. R. C. 2. The decedent's base for determining gain or loss on the sale of such stock warrants in the taxable year 1948 is the amount paid therefor, increased by the amount included as additional compensation in the year he purchased the warrants.

1. Credit for Foreign Tax -- Mexican Mining Tax Laws -- Production Tax -- Section 131 (a) (1) and (h). -- The production taxes imposed by the Mexican Mining Tax Laws do not constitute income taxes or taxes in lieu of income taxes within the meaning of section 131 (a) (1) or (h) of the Internal Revenue Code. 2.

Respondent sustained in his determination that a portion of the amounts respectively received by petitioners upon the sale of their interests in Mainline Construction Company constituted payment to them of salaries accrued on the books of that corporation as due them and Edward H. Green.

1. Rental income of property owned by petitioner and leased by him for 20 years partially on a percentage arrangement, held taxable to petitioner notwithstanding that part of the percentage income was given to his sons for the full lease period as evidenced by a letter and lease terms covering payment to the sons. 2. Pursuant to concessions of the parties, gift tax liability of petitioner for 1946 determined. 3. Deduction of lawyer's fee for various services determined.

Estate Income Properly Credited to Beneficiaries -- Sec. 162 (c), I. R. C. -- Under the facts, held that proportionate amounts of income of an estate for 1941 were properly credited in 1941 to each of the petitioners within the meaning of section 162 (c) of the Code so that the respective amounts of income so credited are taxable to each of the petitioners in 1941.

Excess Profits Tax -- Relief Under Section 721. -- A corporation prospected for iron ore throughout 1938 and for several months in 1939 when it located a large body of ore from the sales of which it… Held: that the corporation realized income of the class defined by section 721 (a) (2) (C) and is entitled to relief. Amount of net abnormal income attributable to prior years determined.

1. In connection with the construction of Boulder Dam petitioner in 1930 contracted to purchase certain minimum specified amounts of electric power to be generated for a period of about 50 years. Held: petitioner has qualified for relief under section 722(b)(2). However, correction of the abnormality is subject to certain limitations which must be observed. 2. By reason of its own commitment to take Boulder power, petitioner claimed relief under section 722(b)(4).

In 1945, corporation gave one of its officers an option to purchase 12,500 shares of its stock at stated intervals over a two-year period at less than market value. Officer exercised option in 1946 and 1947 when the fair market value of the stock exceeded the option price. Held: 1. Gain derived from the option was intended as compensation. 2. The intended compensation was the difference between the option price and the fair market value of the stock on the dates the option was exercised and the stock acquired. Connolly's Estate v. Commissioner, 135 F. 2d 64 (C. A. 6), affirming 45 B. T. A. 374, and Commissioner v. Smith, 324 U.S. 177, rehearing denied, 324 U.S. 695, 889, followed. 3. Fair market value of stock on dates the option was exercised determined.

Decedent and his wife executed a trust instrument in 1915 whereby property owned by him was transferred in trust for the benefit of his wife's sister. Held: the value of the corpus was includible in the decedent's gross estate under section 811 (d) (2), I. R. C.

In 1929 petitioner and 8 corporations were members of an affiliated group which elected under the provisions of Regulations 75 to file a consolidated income tax return. Petitioner must in 1943 use as a basis for computing profit on the sale of natural gas wells acquired from the corporations during the consolidated return period the basis of the wells in the hands of the 8 corporations.

1. In May 1942, petitioner became the chairman of a party county central committee, and in November 1942, was elected mayor. Held: on the facts, that the compensation paid as salary during the taxable years in the name of the daughter of petitioner, except as to a small amount, was income to petitioner. 2. At the instigation of petitioner, contributions were solicited in 1944 and 1946 from tavern keepers and bookies.

Petitioner paid into escrow a portion of the revenues which it earned from the operation of buses under certain franchises which it had purchased; that portion of the revenues, according to the… Held: such revenues were not excludible from petitioner's gross income. Held further, that the payment of such revenues into escrow on behalf of the seller was not deductible, since such payment represented merely part of the cost of acquiring the franchises.

Income -- Deduction -- Loss -- Theft -- Section 23 (e) (3). -- Amount of loss determined and allowed under section 23 (e) (3) where owners paid a contractor and he feloniously absconded with the money after doing only a small part of the work of constructing their residence.

Where the petitioner was divorced under an interlocutory decree on August 2, 1949, which did not provide for the separate maintenance of either party, the decree of divorce becoming final 6 months… Held: under the laws of the State of Utah, domicile of the parties, the petitioner and Maysie Y. Eccles were husband and wife on December 31, 1949, and were entitled to file a joint return.

Section 102 -- Improper Accumulation of Corporate Surplus. -- The taxpayer, engaged in the operation of theatres owned by another corporation in a family-owned group of businesses, has not shown reasonable need for its accumulated earnings of the taxable year.

Estate Tax -- Gross Estate -- Insurance -- Section 811 (g) (2). -- Where an employer paid all premiums and held all incidents of ownership of a policy of life insurance on the life of an employee payable only to the employer as sole beneficiary, no part of the proceeds of the policy is includible in the gross estate of the employee even though the employer had notified the employee that its purpose was to pay $ 5,000 from the proceeds to a member of the immediate family of…

During the fiscal year ended July 31, 1945, two of petitioner's officers and stockholders withheld from petitioner the proceeds of certain cash… Held: In the circumstances of this case, petitioner has failed to show that income thus improperly omitted from its returns was offset by a deductible embezzlement loss. 2. The subsequent filing of an amended return and payment of tax shown therein did not deprive the Commissioner of the right to assert the so-called fraud penalty.

A deficiency was determined for 1945 after the normal 3-year statute of limitations based on adjustments from a net operating loss carry-back… Held: where taxpayers receive 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 276 (d), I. R. C., except to the extent that the deficiency is based upon an error attributable to the…

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

The decedent was a citizen and resident of France. He died on September 21, 1943. Held: the entire value of the community property situated in the United States is includible in the decedent's gross estate under section 811 (e) (2) of the Code, as it applied to estates of decedents dying between October 22, 1942, and December 31, 1947, except that part thereof constituting less than one-half which was identified and…

Petitioner was granted an interlocutory decree of divorce in Colorado in December 1947. Under the laws of Colorado, the decree became a final decree of divorce 6 months later, in June 1948. Held: petitioner and her husband were still man and wife under Colorado law until the decree became final so that payments received by petitioner, prior to June 1948, were not income to her under section 22 (k) of the Code. Marriner S. Eccles, 19 T. C. 1049, followed.

Petitioners were the sales representatives of Crucible Steel Company of America under an employment contract entered into in 1935. Held: section 403 (a) (5) (B) of the Renegotiation Act of 1943 authorizes adjustment of profits of petitioners even though such profits form a part of the consideration for cancellation of the employment agreement.

1. Statute of Limitations. -- Petitioner filed his final income tax return for 1947 on January 23, 1948, after obtaining an extension of time for filing from January 15, 1948, to… Held: statute of limitations began to run on March 15, 1948. 2. Community Property. -- Petitioner received a bonus in December 1947 subsequent to the enactment of the community property law in the State of Nebraska on September 7, 1947. Petitioner apportioned the bonus on when received basis.

In 1927, Corporation A, an Alabama corporation, was dissolved to get rid of Alabama taxes. Held: under all the facts, the dissolution of Corporation A and the subsequent formation of Corporation B did not constitute a tax-free reorganization and the earned surplus of Corporation A became paid-in or donated surplus of Corporation B, and did not constitute net earnings and profits of Corporation B available for the distribution of…

1. The sum petitioner was obligated to pay because of its statutory liability as a stockholder in a New York state bank held deductible as an ordinary loss under section 23 (f) where petitioner's obligation accrued at a time when the bank stock was worthless. 2.

Petitioner is a national association composed of individual motorists, automobile clubs, state associations comprised of five or more automobile clubs, and commercial vehicle organizations. Held: under the facts, that petitioner is not an exempt business league under section 101 (7) of the Internal Revenue Code.

Estate -- Period of Administration. -- Petitioner and his deceased father carried on a business in partnership in which their respective interests were 40 per cent and 60 per cent. Held: that for Federal income tax, the period required for administration of the estate ended on May 19, 1944. Held, further, that petitioner is not taxable on income of $ 1,800 each year, the annuity of Ella LeFiell.

Petitioner is held not to be entitled to a dividend received credit under section 26 (b) (1), Internal Revenue Code, with respect to a dividend received from the Illinois Farm Supply Company, a cooperative, as (1) the record does not establish that at the time such dividend was received the payor corporation had ceased to be a tax exempt corporation, and (2) it is definitely established that (a) for the year in which such dividend was declared and became a fixed liability…

Petitioner filed applications for relief under section 722 of the Internal Revenue Code based on section 722 (b) (4) and (b) (5). Held: fair and just amount representing average base period net income determined.

1. Business Deduction. -- Rotary Club dues of petitioner's president and majority stockholder held not deductible. 2. Held: partnership was not entered into in good faith for a business purpose and was a sham created to siphon off profits of petitioner for sole purpose of avoiding income tax. Respondent's determination of deficiency upheld.

Petitioner's claim for relief under section 722 on the ground of a change in the character of its business due to increased capacity actually installed or committed for prior to 1940, held properly disallowed in view of petitioner's failure to show that its reconstruction of a fair and just amount representing normal earnings was more than the excess profits credit to which it is entitled in any event under section 713.

Carl Reimers had owned 51 per cent of the stock of a corporation which conducted an advertising agency and which had gone into bankruptcy in 1933. Held: payments were not deductible as ordinary and necessary business expenses under section 23 (a) (1), I. R. C.Welch v. Helvering, 290 U.S. 111, followed.