Volume 2 — Tax Court Memorandum

Held, the personal account of petitioner with a corporation of which he owned all the stock was a creditor-debtor relationship and the difference between credits and debits to such account for the… Held: the personal account of petitioner with a corporation of which he owned all the stock was a creditor-debtor relationship and the difference between credits and debits to such account for the taxable year did not constitute dividends or income to petitione.

1. On the facts it is held that petitioners' wives, and several trusts created for the benefit of their children, acquired bona fide interests, as limited partners, in a limited partnership of which… Held: the wives are persons having substantial adverse interests within the intendment of sections 166 and 167 of the Revenue Act of 1936. Held, further, trust income is not taxable to the petitioners under section 22(a).

(1) Basis for gain or loss: Repurchased property: Evidence. - Taxpayer transferred in 1933 and 1935, respectively, various shares of stock to a wholly-owned corporation at his cost, in part payment of advances made to him which were outstanding on the corporate books. In 1936, taxpayer repurchased some of the securities formerly turned over at cost and gave his interest-bearing personal note as security for the balance of his account.

1. Respondent's determination of the amount of gain realized on the liquidation of Douglas-Rogers, Inc., approved for failure of proof. 2. An account entitled Marion I. Davis et al. Loan Account was established in 1930 by petitioner's father on the books of the corporation. The amonts placed by the father in such account to petitioners' credit were gifts to them when so placed.

Upon the facts, held that the amount of the purchase price paid by petitioner for real estate transferred at its direction to its wholly-owned subsidiary constituted a loan to the subsidiary, not a contribution to capital, and therefore petitioner was not prohibited by section 112 (b) (6) of the Internal Revenue Code from taking a bad debt deduction for the loss which it sustained on the loan when its subsidiary dissolved.

A lessor entered into a lease agreement whereby the lessee was to borrow money, erect an apartment building, and make amortization payments on the mortgage entered into by both parties to secure the… Held: lessor is not entitled to a depreciation allowance on the building as it does not suffer the loss by depreciation, having made no capital outlay.

1. Held, petitioner is a trust operating an office building until ultimate liquidation and is taxable as provided by sections 161 and 162,… Held: petitioner is a trust operating an office building until ultimate liquidation and is taxable as provided by sections 161 and 162, Revenue Act of 1938, and the same sections of the Internal Revenue Code, and is not a mere agency for former bondholders for whose benefit it purchased certain property at foreclosure sale in 1936, as…

Liability in fixed amount assumed by lessee for cancellation of a lease held deductible in year incurred, lessee being on the accrual basis; held, further, lessee realized no gain upon subsequent… Held: further, lessee realized no gain upon subsequent discharge of a portion of said liability for less than face value. United States v. Kirby Lumber Co., 284 U.S. 1, distinguished.

Where, by the terms of a 99-year lease, renewable forever, the lessee agrees that it will, at its own expense, keep the buildings and improvements on the premises in good order and repair and will, at its own expense, replace all or any part thereof whenever necessary, the lessor is not entitled to depreciation on such buildings and improvements.

Held, that a certain trust created as part of a settlement between petitioner and his divorced wife was based on adequate and full consideration in money or money's worth, and resulted in no gift tax… Held: that a certain trust created as part of a settlement between petitioner and his divorced wife was based on adequate and full consideration in money or money's worth, and resulted in no gift tax liability.

Held, certain distributions did not constitute liquidating dividends under section 115 of the Revenue Act of 1938. Held: certain distributions did not constitute liquidating dividends under section 115 of the Revenue Act of 1938.

Gifts of income to certain trusts held to be gifts of present interests in property. Gifts of interests in the corpus of the trusts held to be gifts of future interests in property. Fisher v. Commissioner, 132 Fed. (2d) 383; F. J. Sensenbrenner, 46 B.T.A. 713.

Respondent's determination of petitioner's unjust enrichment tax liability approved for failure of proof.

1. The amount of income derived by petitioner from forfeiture of a lease by its lessee and recovery of possession of a building erected on the premises by the lessee determined upon the record. 2. An amount recovered from a lessee to reimburse petitioner-lessor for the payment in the lessee's behalf, upon the latter's default in payment, of special assessments, held not to constitute taxable income to petitioner. 3.

On the facts, held: that certain gifts in trust were gifts of future interests; and that the beneficiaries in the trust are liable, as transferees, for the gift tax due and unpaid by the donors, as… Held: that certain gifts in trust were gifts of future interests; and that the beneficiaries in the trust are liable, as transferees, for the gift tax due and unpaid by the donors, as are likewise the trustees in the trust.

Prior to the taxable years here involved portions of certain properties owned by petitioner were condemned and taken for street widening. Held: under section 112 (f) of the Revenue Acts of 1932, 1934 and 1936, petitioner did not expend any of the award money in the establishment of a replacement fund but did expend part of the award money forthwith in good faith in the acquisition of other property similar or related in service or use to the property taken.

Trust to which gifts were made provided that the income thereof was to be expended for the proper care, maintenance and education of the beneficiaries until they became twenty-five years of age when they were to receive the income currently. The oldest beneficiary was nineteen years of age. The corpus of the trust was payable to the beneficiaries in installments as they became 30, 36, 42, and 48 years of age respectively except in certain eventualities.

1. Deduction for officer's salary denied where the alleged compensation was neither paid nor accrued as a liability by petitioner in the tax year. 2. Liability of an accrual-basis taxpayer upon a note delivered in partial settlement of a judgment rendered against it in a damage suit held deductible in the year the liability becomes fixed rather than in the subsequent year when the note becomes due.

Held, transfers to two certain trusts were not made in contemplation of death or to take effect in possession or enjoyment at or after death. Held: transfers to two certain trusts were not made in contemplation of death or to take effect in possession or enjoyment at or after death. The fair market value of Class A common stock of The Hobart Manufacturing Company on January 21, 1938, was $36 per share.

Held, petitioner corporation did not realize taxable income from the cancellation by a stockholder of a debt due from the petitioner to the deceased… Held: petitioner corporation did not realize taxable income from the cancellation by a stockholder of a debt due from the petitioner to the deceased husband of the stockholder, as to which debt petitioner had received tax benefit of salary deductions in prior years. Helvering v. American Dental Co., 318 U.S. 322, 63 S. Ct. 577.

Shares of stock in two corporations held upon the record to have become worthless prior to the tax year 1940.

On February 26, 1927 petitioner entered into an agreement to operate a coal mine. It has operated it continuously from that date through the years 1938 and 1939. Held: for the taxable years 1938 and 1939 petitioner is not entitled to percentage depletion since it failed to indicate such election in its return for the year 1934.

1. Prior to the taxable years here involved portions of certain properties owned by petitioner were condemned and taken for street widening. Held: under section 112(f) of the Revenue Acts of 1932, 1934 and 1936, petitioner did not expend any of the award money in the establishment of a replacement fund but did expend part of the award money forthwith in good faith in the acquisition of other property similar or related in service or use to the property taken.

Held, the petitioner realized taxable income as a result of satisfying a mortgage indebtedness by the transfer of stock having a cost basis to him of less than the amount of the indebtedness discharged, where the mortgage was not shown to have been a purchase-money mortgage and where the value of the stock at the time of its transfer to the mortgagee was not shown.

1. Held, the petitioner is taxable on the income of a certain trust, under the provisions of section 22(a) of the Revenue Act of 1938. Andrew Jergens v. Commissioner, 136 Fed. Held: the petitioner is taxable on the income of a certain trust, under the provisions of section 22(a) of the Revenue Act of 1938. Andrew Jergens v. Commissioner, 136 Fed. (2d) 497 (C.C.A. 5th Cir., June 15, 1943), affirming B.T.A. memorandum opinion entered August 28, 1942, followed. 2.

1. Held, that under the provisions of her husband's will decedent acquired a life interest and not a fee in his residuary estate, and hence the value of the residuary property is not includable in her estate. 2. At the time of decedent's death 400 shares of H. Childs & Co., Inc. stock were held by her subject to an option at $10.00 per share. The fair market value of the stock at her death was $100 per share. Held, the proper value of such stock for Federal estate tax purposes is $10.00 per share.

Petitioner, after certain negotiations, entered into a contract dated May 1, 1936, with a partnership whereby, under Article 1 petitioner was to acquire from the partnership for a certain consideration stated in Article 1 the latter's "hard metal composition" business, including the inventory, good will, customers' list and contracts pertaining thereto, and under Article 3 petitioner was to make certain payments semi-annually for seven years to the partnership providing "that on each semi-annual date * * * during the period * * * from May 1, 1936, to and including April 30, 1943, neither said Thomas Prosser & Son, nor said Richard Prosser, nor said Roger D. Prosser shall for any part of any six months preceding said November 1 or May 1, as the case may be, have been in competition * * * with the second party in respect of 'hard metal composition'." Held, the payments made by petitioner during the taxable years in question under Article 3 were made in consideration for the partnership refraining from competing with petitioner during the period for which the payments were made and are, therefore, deductible by petitioner under section 23 (1), Revenue Act of 1936 as amounts representing the exhaustion of a contract used in petitioner's trade or business, ratably by the lapse of time; and if not deductible under section 23 (1), such payments are deductible as ordinary and necessary business expenses under section 23 (a) of the same Revenue Act. Eitingon-Schild Co., Inc., and Subsidiaries, 21 B.T.A. 1163, followed.

The income of a trust created by petitioner consisted of taxable and tax-exempt income. Held: the trust income during the tax years that was (1) received by petitioner, (2) used to pay premiums upon insurance policies covering his life, and (3) used for the support of his minor children, is taxable to petitioner in the same ratio that the taxable income of the trust bears to the total net income of the trust.

Under the facts, held, that petitioner is not shown to be entitled to depletion for the taxable years under section 114 (b) (1) of the Revenue Act of 1938; but is entitled to depletion under section 114 (b) (3) of that Act as determined by respondent. Held, further, that oil royalties received by the petitioner in the taxable years are to be included in petitioner's gross income for those years with proper deductions therefrom of depletion by way of return of capital rather than by applying the full amounts so received as a return of capital.

Petitioner's promise in a trust indenture to set aside, on or before a date after the close of the taxable year, a stated amount of its earnings for such taxable year, held not to constitute an irrevocable setting aside of funds to retire indebtedness, within the purview of section 27(a)(4) of the Internal Revenue Code and Regulations 103, section 19.27(a)-3(b).

Under the facts: held, that petitioner, as the grantor in a certain trust created for the benefit of his sons, is taxable with the income therefrom. Held: that petitioner, as the grantor in a certain trust created for the benefit of his sons, is taxable with the income therefrom. Held, further, that petitioner, as the grantor of another trust created for the benefit of his daughters, is not taxable with the income from that trust.

On December 23, 1939, petitioner made gifts to three trusted employees whom he regarded as keymen of a corporation of which he was president and the dominant stockholder. At the time of the gifts and as a condition thereto, petitioner required the donees to enter into agreements with him which, among other things, prevented the donees from selling or disposing of any of the shares of stock without first offering to sell said shares to petitioner, if living, or otherwise to his wife, at a price equal to the book value of the stock as shown on the balance sheet of the corporation at the end of the month preceding the date of offer. Petitioner, in returning the gifts for gift taxation, valued the stock at what he conceived to be its book value on the date in question. The Commissioner, in his determination of the deficiency, has greatly increased this valuation and contends that no consideration should be given to the restrictive agreements. Held, the restrictive agreements do not conclusively fix the value of the stock as contended by petitioner but such restrictive agreements as are in evidence in the instant case must be taken into consideration along with other elements of value to fix the fair market value of the stock on the basic date. Held, further, on consideration of all the evidence in the record, including the restrictive agreements, the Court fixes the fair market value of the stock on the date of the gifts.

An amount advanced by petitioner to a corporation under the latter's promise to repay in cash, or upon a certain contingency, in shares of its stock, which… Held: to constitute a debt due petitioner by the corporation; held, further, petitioner has failed to prove error in respondent's determination that an amount subsequently advanced to the corporation, with the notation that it was in payment of shares of the latter's stock, was a subscription to capital and not a loan.

The net income of an estate for the final year of administration, held not taxable to the residuary legatees under section 162(c) of the Internal Revenue Code where neither the will nor the local law directed or authorized the distribution of net income as such.

An arrangement effected pursuant to the provisions of a written contract whereby the parties thereto, who owned an interest in or rights under a certain patent or patents, severally appointed a common agent, with specifically limited powers, to grant licenses to hosiery manufacturers, to conduct patent litigation, and to collect and distribute royalties, did not constitute an association taxable as a corporation.

Petitioner as the owner of an interest in mortgaged real estate had executed a bond to secure the payment of the mortgage indebtedness. Held: that the loss was a capital loss. Petitioner was the owner of stock in a corporation. In the taxable year distributions were made to petitioner and the other stockholders, whereupon no assets were left in the hands of the corporation.

Earnings accumulated to avoid surtax on shareholders. - Petitioner, a Texas corporation organized in 1935 to drill oil wells, issued all its stock to its president with the exception of two… Held: petitioner was availed of in such fiscal year for the purpose of preventing the imposition of a surtax upon its shareholders, within the meaning of section 102 of the Internal Revenue Code.

Petitioner corporation had a corporate existence separate from the shareholders and was used for business purposes during the taxable years.

Administrators of decedent's estate, who paid debts and distributed the assets of the estate without knowledge of a tax due the United States and without information that would charge them with such… Held: not personally liable for such tax under section 3467 of the Revised Statutes, as amended. Irving Trust Company, 36 B.T.A. 146, followed.

Under the facts existing in the current tax year, held income of a trust is taxable to petitioner, the grantor-trustee.

Petitioners, as lessees, agreed in an oil and gas lease to sink certain wells each year. Held, the drilling of the wells was part of the consideration for execution of the lease, and, consequently, the intangible costs thereof are capital expenditures and may not be deducted as business expenses under Regulations 94, article 23 (m)-16.

1. Petitioner is a personal service corporation all of the stock of which is owned by two brothers. Held: petitioner's earnings were permitted to accumulate beyond the reasonable needs of its business in 1938, 1939 and 1940, and petitioner was availed of to prevent the imposition of surtaxes upon its shareholders. Section 102 of the Revenue Act of 1938 and the Internal Revenue Code. 2.

Under the facts, held that debenture preferred stock issued by a corporation in exchange for its common shares does not represent an indebtedness of the corporation, and payments thereon held not to be deductible as interest.

Petitioner sold to a corporation some of the latter's stock under a court order requiring the corporation to hold the stock for resale for thirty days. Held: in so far as petitioner was concerned the disposition by it of the stock was a sale and not a partial liquidation.

Respondent's action in disallowing claim for refund of taxes paid for the processing of peanuts approved for failure of proof of error.

Petitioner, operating motor buses and trucks, held not a common carrier by railroad and therefore not entitled to report its income on a consolidated return under section 141 of the Internal Revenue Code although it was a wholly-owned subsidiary of a common carrier by railroad.

On the facts, held that under section 505 (b) of the Internal Revenue Code, petitioner, a personal holding company, is not entitled to claimed deductions for expenses and depreciation on certain real property owned by it.

Petitioner claimed and respondent allowed as deductions during the years 1929 to 1938 various amounts for amortization of patents, depreciation of machinery and equipment, and other expenses claimed… Held: the proof does not establish that petitioner's method of computation more accurately reflects income.

Respondent's action in disallowing claim for refund of processing taxes paid on the first domestic processing of cotton approved.

Taxpayer, being indebted to a bank in the sum of $400,000, repaid this amount by delivering its check to the bank, but on the same day it borrowed $500,000 from the same bank. Held: the transaction was in effect a renewal and increase of the debt rather than a payment of indebtedness within the meaning of section 27(a)(4) of the Internal Revenue Code.

A partnership on an accrual basis held not entitled to deduct the portion of an excise tax that was not assessed in the tax year, for which the partnership denied liability, and which by reason of subsequent settlement was never paid.

1. Grantor held not taxable under section 22(a) of the Revenue Act of 1938 and the Internal Revenue Code upon income of an irrevocable trust where he had reserved no rights in himself to corpus or… Held: the income of the trust is not taxable to petitioner under section 167(a)(3), notwithstanding the beneficiary voluntarily paid a portion of her distributions toward such premiums.

In 1934 petitioner created a trust directing that $30,000 per annum of the net income be paid to her during her life and the balance be distributed annually to four trusts created for the benefit of her daughters. The trustees included, in the fiduciary returns filed by them, the aggregate net income of the trust and deducted the aggregate amount paid to petitioner and the four trusts for her daughters. Held, that, inasmuch as the amount to be paid to petitioner was payable only out of the net income of the trust, the amounts received by her during the taxable years were not "received as an annuity" and hence, were not to be taxed as provided in section 22 (b) of the Revenue Act of 1936 and corresponding sections. Held further, it is immaterial that the Commissioner, in computing the value of the property transferred by petitioner to the trust for the purpose of computing her gift tax liability, deducted therefrom an amount assumed to be the value of her right to receive $30,000 per annum for and during her life.

1. Basis for computation of depreciation allowance determined from the evidence. 2. In 1930 and during the first three months of 1931, petitioner sold axes to its jobber customers with a guarantee against subsequent reduction in price. On April 1, 1931, petitioner reduced its price on axes and thereby became liable to make rebates under its guaranty. It promptly requested its customers to report the number of axes in their respective invetories at the date of the price reduction. All of such reports were not received and the exact amount of petitioner's total liability was not ascertained until July 1931. Held, since the liability was definitely incurred and all facts had transpired to fix the amount of such liability within petitioner's fiscal year ended April 30, 1931, petitioner is entitled to accrue and deduct from gross income for that year the amount of rebates paid pursuant to its guaranty. 3. On the facts, held that certain shares of corporate stock owned by petitioner became worthless within the taxable year 1931, and petitioner is, therefore, entitled to deduct from gross income for that year the amount of its investment in such stock. 4. Held, petitioner is not entitled to a credit against its United States income tax on account of foreign income taxes paid by the foreign subsidiaries of petitioner's wholly owned Canadian subsidiary. 5. On July 31, 1930, petitioner purchased all of the assets of another corporation, and as a part of the purchase price assumed all liabilities of the vendor, including a deficiency in Federal income tax then in controversy. Petitioner finally settled its liability by the payment of tax in the amount of $81,721.06 and interest in the amount of $40,483.75, all within its fiscal year ended April 30, 1934. Of the interest so paid, $21,723.25 was for the period prior to July 31, 1930, and the balance for the period subsequent to that date. Held, the interest for the period prior to July 31, 1930, was a part of the consideration paid by petitioner for the assets acquired on that date, and is not deductible from gross income by petitioner as interest paid. Held, further, the tax liability became petitioner's own obligation on the date last mentioned, and petitioner is entitled to deduct the interest paid for the period subsequent thereto. 6. Held, petitioner is entitled, under section 116(a)(12)(D), of the Revenue Act of 1942, to exclude from gross income for the taxable year 1934 recoveries in that year of bad debts previously charged off and deducted, but which deduction resulted in no tax benefit to petitioner. 7. Held, petitioner did not sustain a deductible loss by reason of the payment within its fiscal year ended April 30, 1935, of the balance of the principal of its previously issued first mortgage bonds, payment of which had been assumed in 1923 by a sublessee of petitioner. William Phillips, 46 B.T.A. 784, followed.

1. Held, that a check of the Paden City Pottery Co. for $233.25 was constructively received by petitioner in December 1935 when delivered to his duly… Held: that a check of the Paden City Pottery Co. for $233.25 was constructively received by petitioner in December 1935 when delivered to his duly authorized agent and endorsed by him for use by the company but not used by the holder until February 1936, the Pottery Co. having had sufficient funds to pay the check. 2.

1. Petitioner's taxable net income for the years 1933 to 1937, inclusive, determined from the evidence. 2. Held: no part of any deficiency for the years involved is due to fraud with intent to evade tax. 3. Petitioner had taxable net income for each of the years involved but failed to file a return for any of the taxable years.

Petitioner, by stockholders' suit, compelled an accounting for profits made by the president of the company by means of stock manipulation. Held, the recovery by petitioner is taxable income. Held: the recovery by petitioner is taxable income.

After granting income to his wife for life and then to his two sons if he survived his wife, decedent gave the remainder of a trust upon… Held: the very remote possibility that decedent might have survived his two sons and their issue and thereby reacquired the trust property upon a resulting trust does not make the transfer one intended to take effect in possession or enjoyment at or after decedent's death within the meaning of section 811(c) of the Internal Revenue Code.

Earnings and profits of petitioner were not permitted to accumulate during the years 1938 and 1939 beyond the reasonable needs of its business nor was petitioner availed of to prevent the imposition of surtaxes upon its shareholders.

Certain persons in 1934 came into ownership as tenants in common of an undivided one-third interest in and to a seven-eighths oil, gas and… Held: that notwithstanding the actual operation of the lease was in the hands of persons selected by all the owners of the lease, including petitioner as the owner of a one-third fractional interest, and notwithstanding the actual activities of the trustee in the taxable years consisted in collecting the trust's portion of the oil runs…

Petitioner's stock in The Hartman Corporation became worthless prior to 1937 and, therefore, deduction therefor is not allowed in that year.

1. Excessive depreciation taken in prior net loss years may not be restored to unrecovered cost basis in computing depreciation for the current tax year. Virginian Hotel Corp. of Lynchburg v. Helvering, 319 U.S. 523. 2. An absolute right to receive interest gives rise to an accrual of income notwithstanding the fact that payment of the interest is not to be made until another obligation is satisfied by the debtor.

Payments by petitioner to an officer's widow, pursuant to a contract between petitioner and its officers authorizing such payments in the sum of $5,000… Held: deductible under the provisions of section 19.23 (a)-9, Regulations 103, notwithstanding a provision in the contract that the amount of the payments in any year was to be reduced by the amount of dividends paid in that year upon stock of petitioner owned by the deceased officer on the date the contract was executed.

The sale by petitioner to a company in which he was chief stockholder of part of his stock, held, to have been made at such times and in such manner as to make the transaction essentially equivalent… Held: to have been made at such times and in such manner as to make the transaction essentially equivalent to the distribution of a taxable dividend.

March 1, 1913 fair market value of decedent's stock in Long Island Star Publishing Company determined.

(1) Estate tax: Transfer in contemplation of death. - Decedent made gifts in cash and bonds, totalling $40,000, in 1932, to M, a friend, to whom he had made a number of gifts over a period of years.

A mortgage indenture dated October 1, 1932 provided that petitioner should declare or pay no dividends on its capital stock unless, at the time of declaration, its bonds should have been redeemed or… Held: that petitioner was actuated by sound business motives and is entitled to credit provided by section 26 (c) (1), Revenue Act of 1936.

1. Petitioners' taxpayer was a processor of hogs. Held: the tax period referred to in section 907 of the Revenue Act of 1936 includes only the months and portions of months with respect to which the taxpayer actually paid the processing tax and excludes the months and portions of months in which no tax was paid. 2.

Pursuant to a plan to reward faithful and capable key employees for their services to the company, petitioner issued its certificates for class A stock to such employees in amounts determined by it… Held: that payments to employees and on repurchase settlements during the taxable year constituted additional compensation to the respective employees and were deductible from petitioner's gross income.

Petitioner's investment of $185,313.75 in stock of Stambaugh Iron Company and the amount due to it by reason of advanced royalties and idle mine expenses, aggregating $270,059.56, determined to have become worthless in 1935 and deductions therefor allowed.

In 1930 petitioner, E. B. Coolidge, was the owner of certain shares of stock of The Montana Corporation of which he was the president and directing head. Held: following Helvering v. Clifford, 309 U.S. 331 that on account of the dominion and control which the settlor of the trust continued to exercise over the corpus and income, the income from the property is taxable to the settlor.