Volume 20 — Tax Court Reports

Income -- Deposits on Containers -- Method of Accounting Failing to Reflect Income -- Section 41. -- The experience of the petitioner indicates that many of its containers will never be returned and the balance at the beginning of the taxable years in its reserve for returnable containers is ample to meet its liability for refunds which might reasonably be expected.

Held, the petitioner Abraham Rosenberg did not realize taxable income upon exercise of a stock option received from his employer prior to… Held: the petitioner Abraham Rosenberg did not realize taxable income upon exercise of a stock option received from his employer prior to February 26, 1945, where it was found that the option was given to enable him to acquire a proprietary interest in the employer corporation and not with the intent to compensate him for services.

The petitioner received an amount in partial retirement of a corporate obligation. The obligation referred to itself as being registered and was transferable only on the corporation's books. Held: the note was in registered form within the meaning of section 117 (f), Internal Revenue Code, and the gain realized upon partial retirement thereof was therefore entitled to capital gain treatment.

1. Where the payment of royalties which were due to petitioner was prohibited by an order of the Secretary of the Navy, pursuant to the Royalty Adjustment Act of 1942, it was unnecessary to accrue the amount due and report it as income until the dispute was finally settled. 2.

1. Mokan Corporation acquired Panhandle Eastern stock at a cost of $ 47.86 per share. Held: the petitioners correctly used $ 1 as the cost basis for each right sold and did not err in returning the gain from the sale of such rights as capital gain, therefore, the Commissioner erred in determining that the entire proceeds from the sale of rights were taxable income to petitioners.

1. Petitioner is the owner of a hotel property in New York City which it acquired February 14, 1947, and at the end of its first fiscal year ended January 31, 1948, it had received rents in the… Held: that prepaid rent which, as here, was received under a present claim of full ownership and subject to petitioner's unfettered control was taxable income in the year of receipt. Palm Beach Aero Corporation, 17 T. C. 1169, followed. 2.

1. Were the petitioners computed their net income upon the basis of the hybrid method of accounting regularly employed in keeping their books, held, the method employed does not clearly reflect… Held: the method employed does not clearly reflect income and the determination of the respondent is sustained. 2.

1. P corporation owned improved realty which it leased to F corporation for a period of 10 years, extending from October 9, 1939, to October 9, 1949. Held: petitioners were personal holding companies during the taxable year 1945, within the meaning of section 501 of the Internal Revenue Code. 2.

Deduction -- Net Operating Loss -- Income not Derived from Business -- Joint Return -- Wife's Salary -- Sections 23 (s) and 122 (d) (5). -- A wife's salary from her husband's business reported on a joint return is not gross income not derived from such trade or business in computing the net operating loss of the business under section 122 and the applicable sections of Regulations 111, and can not be offset by nonbusiness deductions.

1. Capital Asset. -- A partnership sold coal lands, held for less than 6 months, rather than an interest in a lease and option held for more than 6 months. 2. Partnership Interest -- Capital Asset -- Capital Loss. -- The sale of an interest in a West Virginia partnership, held for more than 6 months, is the sale of a capital asset and the resulting loss is a long-term capital loss.

Deduction -- Loss -- Owner -- Estate or Beneficiaries -- Conversion of Real Property. -- Held, no conversion of real property was effected by will and residuary legatees may deduct loss on real… Held: no conversion of real property was effected by will and residuary legatees may deduct loss on real property which they, joined by executor, sold.

Petitioners filed original returns for the calendar year 1945 which omitted more than 25 per cent of their gross income. Held: respondent did not err in asserting the deficiency under section 275 (c).

Change in Character of Business -- Section 722 (b) (4). -- Held, the petitioner changed the character of its business during the base period by developing a line of official type athletic balls… Held: the petitioner changed the character of its business during the base period by developing a line of official type athletic balls different in type, function, and market from the line of rubber balls previously marketed. Constructive average base period net income determined.

Petitioner, a corporation required to compute excess profits on the invested capital basis without the benefit of section 722, produced and sold, under an exclusive license, a product marketed under the name of Dex-O-Tex and had exclusive rights for the sale of chain ladders in limited territory. Licenses for production and sale of Dex-O-Tex were held by two other corporations from 1938 until 1942 when petitioner acquired the right.

1. Petitioner, which operates a department store, had abnormally low net income during the base period and seeks relief from excess profits tax under section 722 (b) (2) of the Internal Revenue Code, or in the alternative, under section 722 (b) (5). The principal cause of its low base period earnings was steady, permanent decline of a local industry, the employees of which constituted petitioner's largest group of customers. 2.

Gain or Loss -- Basis -- Prior Owner -- Section 112 (b) (4), (5). -- Where one corporation permanently lost all of its properties through a sale to the state for delinquent taxes and another corporation acquired those properties by purchase from the state owners, the basis of the first corporate owner does not carry over to the other corporation.

1. Where stockholder loaned money to the corporation in which he owned shares, creating a bona fide debtor-creditor relationship, later… Held: the loss incurred by the shareholder-creditor is deductible, if at all, as a nonbusiness bad debt and the subordinated agreement entered into by all of the shareholder-creditors is not sufficient to convert the loss from the debt into a loss from a transaction entered into for profit within the meaning of section 23 (e) (2) of the…

Petitioner owned approximately 94 per cent of the preferred stock of Lake Eloise Groves, Inc., which operated citrus groves in and near Winter Haven, Florida. Held: the sale of the assets of the dissolved corporation was made to a valid existing trust and the loss sustained does not fall within the provisions of section 24 (b). 2. Held, further, net operating loss carry-backs allowed to the extent of offsetting the corporation's income for 1942 and 1943. 3.

Petitioner, a citizen and resident of Sweden during the taxable year 1946, realized capital gain from the sale in 1946 of real property located in the United States. Held: that the treatment for tax purposes of gains derived from the sale of real property located in the United States is governed by article V of the tax convention between the United States and Sweden and that the provisions of article IX of the tax convention do not apply.

1. Real property held as tenants by the entirety, in the purchase of which the wife made no contribution, was conveyed to a trust under the terms of which the settlors reserved power to manage and… Held: that the value of the property is includible in gross estate under the provisions of section 811 (e), Internal Revenue Code. 2. Respondent's determination of a penalty for failure to file a timely return sustained because of lack of proof of error.

1. Section 811 (c) (1) (B), 811 (d), I. R. C. -- Payment of Insurance Premiums by Trustee. -- Decedent, on June 9, 1931, created a trust,… Held: under the provisions of the trust relating to the use of trust principal as well as trust income for the payment of premiums, and relating to the reservation of the rights to receive dividends and all payments made under insurance policies of the trust, and to withdraw insurance policies from the trust, the decedent reserved the…

1. Held, a trust is not an individual within the meaning of section 24 (b) and the deduction of interest accrued by petitioner corporation on sums owing to a trust that owned all the stock of the… Held: a trust is not an individual within the meaning of section 24 (b) and the deduction of interest accrued by petitioner corporation on sums owing to a trust that owned all the stock of the petitioner is not disallowed by section 24 (c), and is allowed by section 23 (b). 2.

Exchanges of Like Kind -- Land for Standing Timber. -- Petitioner exchanged land for the right to cut and remove standing timber. Held: the exchange was not an exchange of property for property of a like kind within section 112 (b) (1), Internal Revenue Code.

Income -- Deduction -- Purchase of Stock to Settle Dispute. -- The stockholders of a Delaware corporation transferred all of its assets, except one contract with the petitioner, to another… Held: that the amount which the petitioner paid for the stock was deductible from its income at the time paid and was not in the nature of an investment in the stock.

Honorarium received by petitioner from Louisiana State Law Institute constitutes taxable income within the meaning of section 22 (a) of the Internal Revenue Code.

In 1947, petitioner transferred to her two children real property in the city of Amarillo, Texas, having a fair market value of $ 245,000. Held: the fair market value of the note at the time it was received was $ 134,538.30.

Property of insolvent predecessor acquired at foreclosure sale by petitioner, the stockholders of which were majority of predecessor's bondholders, held, on facts, transferred to effectuate a plan of… Held: on facts, transferred to effectuate a plan of reorganization approved by the court within the meaning of section 112 (b) (10), Internal Revenue Code, so as to permit use of predecessor's basis for depreciation under section 113 (a) (22), Internal Revenue Code.

1. The petitioner was not engaged with her controlled corporation, The Ballet Theatre, Inc., in a joint venture for the production of ballet, and her primary motive or intent in advancing funds to… Held: petitioner's losses on these advances are not deductible under section 23 (e) (2), Internal Revenue Code, as losses incurred in a transaction entered into for profit. 2.

Petitioner lost his textile plant and the realty in Vienna in 1938 when it was confiscated under Nazi decree during the Anschluss. Held: petitioner has failed to prove that under Austrian law the effect of the decree of the Austrian Restitution Court in May 1949 restored petitioner's title to the realty, plant, fixtures, and properties ab initio to March 1938; that petitioner has failed to prove that he owned the realty and plant in question in 1945, as well as the…

1. For the taxable years 1944 and 1945, petitioner paid premiums on life insurance policies held as security for certain debts previously charged off to profit and loss in prior years. Held: deductible as ordinary and necessary business expenses. Dominion National Bank, 26 B. T. A. 421, followed. 2. In 1945 petitioner made recoveries of portions of bad debts charged off and allowed as deductions in prior years.

Webb Company, with both common and preferred stock outstanding, redeemed some of its preferred shares for cash and other assets for the purpose of distributing them as a dividend on the remaining… Held: the dividend constituted income under section 115 (f) (1), Internal Revenue Code.

1. Petitioner's equity invested capital held properly computed by respondent on failure of proof as to value of property paid in for stock. 2. Petitioner's deductions for compensation of officers, held reasonable, on facts. 3. Cost of welding machine held a capital expenditure and not deductible as an ordinary business expense. 4. (a) Insurance proceeds from partial destruction of a building by fire held taxable to extent not expended for replacement.

Section 3806 (a) (3). -- Petitioner received income of $ 77,313.83 in 1944 which was subject to renegotiation. Held: section 3806 (a) (3) is limited to excessive profits and does not permit the deduction of amounts paid in a subsequent year relating to the renegotiation to be related back to the year the renegotiation income was earned.

Where husband and wife are each separately employed in different cities for an indefinite time, the expenses incurred by each spouse for food and lodging at his respective place of employment are personal and living expenses and are not deductible as traveling expenses under section 23 (a) (1) (A) of the Internal Revenue Code.

1. Excess Profits -- Accumulations Beyond Business Needs -- Section 102. -- A paper jobbing corporation which accumulated earnings beyond the reasonable needs of its business and invested large amounts in securities unrelated to its business is subject to tax under section 102. 2.

Petitioner, on the accrual basis, contested excess profits taxes for 1943 and 1944. The contest terminated in 1949 and the taxes were paid in that year. Held: the petitioner was entitled to a deduction in 1949 under section 122 (d) (6), Internal Revenue Code, for excess profits taxes paid or accrued in determining the amount of a loss carry-back.

In 1945 petitioner performed certain packaging and preservation work under four Government contracts, the prices subject to negotiation between the parties later on a fair and reasonable or equitable… Held: these amounts were properly accrued in 1946 when the amounts were negotiated and fixed by written agreement. All events fixing the amounts had not occurred until negotiations were completed and the agreements were made.

Deduction -- Loss -- Transaction Entered into for Profit -- Residence -- Temporary Occupancy -- Section 23 (e) (2). -- Loss on the sale of a residence, obtained in a transaction entered into for profit but temporarily occupied by the owners who had a permanent home elsewhere, is deductible under section 23 (e) (2) since the investment character of the property never changed.

Petitioner during the years 1948, 1949, and 1950 was engaged in the sale at wholesale and retail of whiskey in violation of the laws of Oklahoma. Some of his stocks were confiscated in 1948 and 1950. Held: that petitioners realized gross profit of $ 85,088.41 in 1949 from sales of whiskey; that the fraud penalty was improperly imposed; that respondent did not err in imposing penalties under section 294; that the cost of confiscated whiskey is not deductible.

1. Petitioners received distributions in the amount of $ 3,802.50 in 1946, representing accumulated dividends on preferred stock pursuant to a Plan of Recapitalization. Held: the $ 3,802.50 is taxable as ordinary income under section 115 (a), Internal Revenue Code, since the distributing corporation had sufficient earnings or profits. 2. The $ 3,802.50 was reported on an enclosure to petitioners' 1946 tax return as a return of capital and was not included as income.

1. Petitioner is a motion picture actress unskilled in financial matters. Held: the amounts paid Fontaine in 1945 and 1946 were reasonable considering that they were paid under a contract made prior to the rendition of the services and that the contract was made in an arm's length transaction and that Fontaine's compensation was fixed on a contingent basis. Regulations 111, section 29.23 (a)-6 (2) and (3). 2.

1. During the taxable year petitioners sold their interest in a partnership through a receiver for cash. Held: even though receipt of a portion of sale proceeds is deferred to a subsequent taxable year by reason of an attachment by a creditor of the seller, the gain is realized in the taxable year within the meaning of section 111 of the Code. 2.

A partnership sold its assets in return for cash and notes under circumstances whereby it could have elected to treat the transaction as an installment sale under section 44, Internal Revenue Code. Held: petitioner, a partner, was chargeable with his distributive share of the gain thus reported by the partnership on the completed transaction basis and could not elect to report his distributive share of the gain under the installment method. Sections 182, 183.

In the taxable year 1947 petitioners, stockholders of Wolverine Supply & Manufacturing Company, received a proportionate distribution of 1,486 shares of its capital stock acquired by purchase out of… Held: that such distribution constituted a taxable dividend to the extent of the fair market value of the shares received by each petitioner.

Inventories -- Revaluation -- Section 22 (c). -- The addition of a portion of overhead expenses to the closing inventory cost of merchandise made only on special order was proper in order to clearly reflect income, and it is not necessary to make the same adjustment to opening inventory where the adjustment is made in the petitioner's first taxable period in business and the opening inventory had been acquired in a tax-free exchange and was carried on petitioner's books at…

Petitioners made cash advances to the Dallas Symphony Orchestra, Inc., during the 3 years D. Gordon Rupe, Jr., one of the petitioners, served as its president. Held: the advances were made with the intent and expectation that they would be repaid, and therefore, were loans.

The amount by which petitioner's indebtedness for royalties was reduced, pursuant to prolonged negotiations conducted under a contractual provision therefor, was not a gift to the debtor of the amount agreed upon as excessive, and having been deducted in prior years as business expenses, resulted in realization of taxable income to petitioner.

Deduction -- Nonbusiness Bad Debt or Ordinary Loss -- Section 23 (k) (4) -- Section 23 (e) (2). -- The endorser of a corporation's notes who was required to pay the notes when the corporation became insolvent sustained a loss from the worthlessness of a nonbusiness debt rather than from a transaction entered into for profit where the corporation was solvent at the time the notes were endorsed but was insolvent though still in existence at the time payment was made under the…

From January 12, 1939, to and including June 14, 1947, petitioner W. Harold Warren was a substituted trustee for trusts created under the… Held: the total compensation for personal services as those words are used in the Code include both the commissions for collecting income and also commissions paid as compensation for looking after the corpus. The Commissioner is sustained in thus applying the statute. Paul H. Smart, 4 T. C. 846, affd. (C. A. 2) 152 F. 2d 33, followed.

Petitioner was employed by the War Department as a civilian to act as banking and taxation consultant for the Government of South Korea. Held: petitioner's home within the meaning of section 23 (a) (1) (A) was in Korea, and, therefore, petitioner's expenses in Korea were not away from home and are not deductible under section 23 (a) (1) (A). Held, further, these expenses were not deductible under section 23 (a) (2) of the Code.

Estate Tax -- Deduction -- Claim Against Estate -- Settlement Agreement and Decree of Divorce -- Section 812 (b) (3). -- The claim of a divorced wife founded upon the decree of divorce which approved and adopted the terms of a prior separation agreement is deductible under section 812 (b) (3). Estate of Pompeo M. Maresi, 6 T. C. 582, affd. 156 F. 2d 929, approved in Harris v. Commissioner, 340 U.S. 106, followed.

1 and 2. In the year 1944 petitioner made expenditures for an air shaft, fan, and compressor. Held: these expenditures were incurred to maintain normal output because of the recession of the working faces of the mine and are allowable as ordinary and necessary business expenses. 3. In 1945 and 1946 petitioner constructed a rock slope. Held, this expenditure had no relation to maintaining normal output and should be capitalized. 4.

In the taxable year 1948 petitioner mined coal from three mines under leases acquired at various times. All of the lands were contiguous and contained in a single boundary. Held: respondent properly computed petitioner's depletion allowance on the basis it was carrying on coal mining operations on three separate properties within the purview of section 114 (b) (4), Internal Revenue Code.

Application of Canadian currency, which had appreciated in value since original acquisition, to consummate purchase of stock in Canada at fixed price in Canadian dollars held, on facts, not to result… Held: on facts, not to result in independently realized gain on foreign exchange.

Where wife has gross income, husband filing separate return cannot claim exemption of $ 600 for wife and his optional standard deduction cannot exceed $ 500.

Petitioner agreed to transfer to her husband certain properties he had given her during their married life upon the assurance of the husband that a property settlement agreement satisfactory to… Held: the transfers were for an adequate consideration in money or money's worth and were not gifts.

1. Where the income from contracts accrued, under both the accrual and completed contract method of accounting, during a fiscal year ending prior to July 1, 1943, the Secretary of War has authority to determine whether any part of the profits from such contracts is excessive. 2.

Petitioner, a Florida, citrus fruit producer, realized income, abnormal in amount, in the taxable year from the sale of its citrus crop. Held: assuming that petitioner had a class of income, which was abnormal in amount, the abnormality resulted from a general improvement in business conditions, so that all of the net abnormal income is attributable to the taxable year and no part thereof is attributable to the previous years.

Credit for Dependents -- Nonresident Alien Minor Children -- Section 25 (b) (3). -- The taxpayer, a naturalized citizen, is not entitled to credit for his alien minor children who resided throughout the taxable year in the Philippine Islands, a country not contiguous to the United States.

1. Excess Profits Tax -- Equity Invested Capital -- Property Contributed -- Basis -- Section 718 (a) (2). -- The cancellation in a 77B reorganization of a part of the debts owed claimants, which part, at least, was worthless, can not increase equity invested capital under section 718 (a) (2). 2. Id. The issuance of preferred stock in a 77B reorganization for a percentage of the debts due claimants, held not to increase equity invested capital under section 718 (a) (2).

Capital Expenditures or Repairs. -- Petitioner replaced an old floor 46 years old in the building used in its business with a stronger floor. Held: that the aggregate cost of installing the new floor and moving and reinstalling partitions and fixtures was capital expenditure.

Where, during the year 1942, the petitioners were subcontractors under certain prime contracts with the War Department involving the construction of various buildings and various military… Held: the petitioners' subcontracts are not exempt from renegotiation for the year 1942.

1. Where in certain investment trusts the depositor had the right to vary the existing investment of participating certificate holders at will, held, the trusts are associations taxable as… Held: the trusts are associations taxable as corporations under the provisions of section 3797 (a) (3) of the Internal Revenue Code. 2.

1. Held, on the record that six conveyances of property to six trusts for the benefit of settlor's five minor children and wife were not made in contemplation of death within section 811 (c),… Held: on the record that six conveyances of property to six trusts for the benefit of settlor's five minor children and wife were not made in contemplation of death within section 811 (c), Internal Revenue Code. 2.

Joint Return -- Fiscal Year in 1947 and 1948 -- Tax Computation -- Sections 108 (d) (1) and 51 (b) (1). -- The tax at the 1947 rate, like the tax at the 1948 rate, must be computed on the basis of a joint return rather than separate returns, where the taxpayers chose to file a joint return for their fiscal year ended June 30, 1948.

1. Estate Tax -- Reciprocal or Crossed Trusts. -- Where the facts and circumstances surrounding the creation of trusts by the decedent and her husband on the same date show that they were not… Held: that the reciprocal or crossed trust doctrine is not applicable. 2. Id. -- Deduction. -- Allowed in amount of reasonable estimate of fee for services of special guardian which will be paid prior to the executor's final accounting.

Statute of Limitations -- Section 3801 (b) (2) -- (b) (5). -- The petitioner purchased bonds in 1944 and sold them in 1945. Held: section 3801 is not available to lift the bar of section 275 (a).

Computation of amount of abnormality under section 711 (b) (1) (J) (ii) on account of petitioner's corn futures transactions, in which it had net gains in some previous years and net losses in others, held to require consideration only of annual net losses on such transactions.

In connection with a sale of assets to Wil-Tex Oil Corporation on January 1, 1947, Wilson agreed to reimburse the corporation for $ 42,104.87, the difference between the value of a note which the… Held: that upon the cancellation of the indebtedness in 1948, petitioners thereby realized income of $ 33,950. Petitioners sold all their stock in Wil-Tex Oil Corporation on April 8, 1948.

Held, the petitioners, who had no business and no permanent home, are not entitled to deduct traveling expenses and legal fees incurred during the taxable year on a trip to… Held: the petitioners, who had no business and no permanent home, are not entitled to deduct traveling expenses and legal fees incurred during the taxable year on a trip to investigate numerous business properties with the purpose in mind of finding a suitable enterprise to purchase and operate.

1. Carry-back of unused excess profits tax credits for 1945 and 1946 denied where petitioner distributed its operating assets and was de facto dissolved in 1944. 2.

1. Petitioner and the respondent, when renegotiation of petitioner's renegotiable contracts for the year 1942 was under consideration, entered into an agreement which determined the amount of… Held: income from the three contracts realized by petitioner in 1943 was properly included in its renegotiable business for 1943 in accordance with paragraph III, and no reopening under paragraph VI was required. 2.

Amounts accrued for the cost of survey and legal work to ascertain whether land descriptions in insured titles are accurate, held, under the circumstances not to be deductible as losses or as… Held: under the circumstances not to be deductible as losses or as ordinary and necessary business expenses.

1. Interest for prior years on cumulative debentures previously unpaid but eventually payable held not deductible by accrual basis taxpayer in subsequent years when payment made. 2. Failure to file excess profits tax return held not due to reasonable cause.

Capital Gain -- Cancellation of a Contract -- Section 117 (a) (4). -- The cancellation of a contract under which the petitioner had the exclusive right for a period of years to hosiery produced by machines owned by another was a sale or exchange within section 117 (a) (4) since there was thereby transferred to the owner valuable property rights in the machines.

Held, the organization, of which petitioner was a member, was a joint venture or partnership engaged in an oil drilling operation, which joint venture was entitled to an election either to deduct as… Held: the organization, of which petitioner was a member, was a joint venture or partnership engaged in an oil drilling operation, which joint venture was entitled to an election either to deduct as necessary expenses or to capitalize intangible drilling costs.

Capital Gains and Losses -- Timber Cutting -- Section 117 (k) (1) Internal Revenue Code. -- A partnership in which the taxpayers had an interest entered into contracts for logging timber on lands… Held: the taxpayers were not entitled to capital-gains treatment on the timber cut under section 117 (k) (1).

1. Petitioner, asking redetermination of gift tax, seeks to exclude the sum of $ 3,000 from gifts to each of seven trusts made to her… Held: petitioner may not exclude any portion of said gifts under section 1003 (b) (3), Internal Revenue Code. 2. Commissioner may disregard exclusions erroneously allowed in prior years, now barred by the statute of limitations, for the purpose of determining petitioner's total net gifts and applicable tax rate for 1947, the year at issue.

Deduction -- Expense or Capital Expenditure -- Defense of Title -- Attorney's Fees. -- Attorney's fees and related expenditures paid to defend against an action attacking the petitioner's title to stock and claiming dividends and interest while stock was held by petitioner are capital expenditures and no part is deductible as an ordinary and necessary expense. Safety Tube Corporation, 8 T. C. 757, affd. 168 F. 2d 787, followed.

Where the petitioner, a retired minister, fails to produce evidence sufficient to prove that certain payments received by him from the church and congregation formerly served by him were intended as… Held: the determination of the respondent that the payments were compensation for past services is sustained.

The decedent created during his lifetime a trust to which he conveyed improved real estate. Held: the decree of the Massachusetts probate court determining that part of the trust corpus was irrevocably appropriated to the extent of the face amount of the certificates and that the certificates constituted a first charge upon the corpus is determinative with regard to the ultimate question of value of trust corpus includible in…

1. Income -- Cooperative -- Revolving Fund Certificates. -- Amounts retained at sole discretion of board of directors for capital purposes evidenced by revolving fund certificates issued to members… Held: not to be income of members in year issued. 2.

Increased deficiency claimed in amended answer more than 5 years after return filed held not barred by 5-year statute of limitations effective when more than 25 per cent of gross income is omitted from return, timely deficiency notice having been mailed within 5 years and petition for redetermination thereof duly filed.

1. Petitioners made lump-sum sales of citrus groves having growing crops on the trees. Held: that the gain realized, which was attributable to the fruit on the trees, is taxable as ordinary income. Watson v. Commissioner, 345 U.S. 544. 2. Held, further, that two of the petitioners may return such ordinary income on the installment basis, under section 44 (b) of the Internal Revenue Code.

The petitioner purchased certain citrus groves having growing crops thereon. Held: that such portions of the lump-sum purchase prices as were properly allocable to the fruit on the trees at the time of purchase constituted cost of such fruit in computing the gain realized in the subsequent sale thereof.

1. Petitioners applied for and obtained endowment life insurance policies. Petitioners were the insured and held all of the incidents of ownership throughout the life of the policies. Held: words aggregate premiums or consideration paid in section 22 (b) (2) (A) mean paid by petitioners only.

1. Loss -- Capital or Ordinary. -- Each of the petitioners sold an abstract plant. Held: the loss sustained on the sale of the surplus plant was a capital loss; held, further, the loss sustained on the sale of the other plant was an ordinary loss. 2. Obsolescence. -- Held, abstract plants are subject to obsolescence. 3.

1. In 1932 the petitioner acquired certain properties from its predecessor in a nontaxable exchange under section 112 (b) (4) of the Revenue Act of 1932 pursuant to a reorganization as defined in… Held: the basis of the properties to the petitioner for equity invested capital purposes is the predecessor's basis. Section 718 (a) (2), Internal Revenue Code, section 113 (a) (7) and (8) of the Revenue Act of 1932. 2.

Involuntary Conversion of Property -- Gain Recognized in Full. -- Upon the facts, held, that there is no basis in fact for petitioner's… Held: that there is no basis in fact for petitioner's theory that property disposed of in 1946 under threat of condemnation proceedings was sold in two parcels; that the petitioner is not entitled to apportion the proceeds received in a lump sum upon the sale of one parcel of land between two alleged component portions thereof; that since…

Petitioner operated a newspaper establishment under the terms of written leases. Held: expenditures were made for capital assets and must, therefore, be recovered on a depreciation basis over the useful life of the assets acquired or the remaining term of the leases, whichever is the lesser.

1. Section 294 (d) (2) of the Internal Revenue Code construed and held to contain no express or implied provision for avoiding the penalty provided for therein, upon a showing by the taxpayer of… Held: further, under the facts, that no showing of reasonable cause was made by petitioners to avoid imposition of additions to the tax.

The petitioner purchased certain improved real estate with the intention of demolishing the existing building and erecting an addition to its bank. Held: functionally the bank addition differed from the existing building which had been used for rental purposes; therefore, the insurance proceeds were not expended to acquire property similar or related in service or use to the property destroyed by fire within the meaning of section 112 (f) of the Internal Revenue Code.

At the time of his death, August 21, 1946, petitioner's decedent was a member of a Utah partnership. Held: the tax year of the partnership did not end with the death of decedent, but continued pursuant to the partnership agreement, and no part of the partnership income for the period March 1, 1946, to August 21, 1946, should be included in decedent's final return for the period January 1, 1946, to August 21, 1946.

Amounts equivalent to fair value received by stockholders from wholly owned corporation for stock of three other wholly owned corporations, held, on facts, to… Held: on facts, to result in capital gain and not in a distribution substantially equivalent to a taxable dividend under applicable sections of Internal Revenue Code, including section 115 prior to 1950 amendments, and section 112 (c) (2). Rodman Wanamaker Trust, 11 T. C. 365, affd. (C. A. 2) 178 F. 2d 10, followed.

Amount paid 3 years and 1 day before execution by both the Commissioner and the taxpayer of an agreement pursuant to section 276 (b), waiving the statute of limitations, held, not refundable under… Held: not refundable under section 322 (d) notwithstanding that last day of 3-year interval fell on a Sunday.

1. Amounts includible in the unadjusted bases to be employed in computing the adjusted bases of 191 houses constructed by Brazoria for determining gain and depreciation thereon, determined. 2. Held: in computing the amount of gain realized by Ivan H. Greer and his wife from the liquidating dividend received from Brazoria in 1946, the cost basis of the stock held therein by Greer is the amount actually paid by him for the stock.

Excess Profits Tax -- Abnormal Income -- Allocation to Prior Years -- Direct Costs and Expenses -- Section 721 (a). -- Abnormal income, representing a credit against unemployment insurance taxes fixed by a law passed in 1945, resulting from a surplus created by payments to the insurance fund in 1945 and prior years, and based upon extended required participation in the state plan of unemployment insurance, is allocable in part to prior years and one method of allocation…

The petitioner filed a timely application for relief under section 722 of the Internal Revenue Code for the fiscal year ended July 31, 1943, and for refund of the overpayment of excess profits tax for that year which would result from an allowance of the constructive average base period net income claimed and from a carryover from the fiscal years 1941 and 1942 of unused excess profits credits. Subsequently it filed a timely claim for relief under section 722 for the fiscal year ended July 31, 1944, and for the refund of the overpayment of excess profits tax which would result from the allowance of the section 722 relief requested for the taxable year 1944 and from the carry-back of unused excess profits credits from the fiscal years 1945 and 1946. After the statutory period for the filing of a claim for refund for the fiscal year ended July 31, 1943, had expired, it filed a claim for refund of excess profits tax paid for that year which would result from a carry-back of unused 1945 excess profits credit to 1943. Prior to the filing of such untimely claim, the petitioner had made no claim for a carry-back to 1943 of any unused excess profits credit from 1945. Held, that petitioner, under the Code and the regulations, is not entitled to a refund of excess profits tax paid for the taxable year 1943, based on a carry-back to that year of any unused excess profits credit from the taxable year 1945. Lockhart Creamery, 17 T. C. 1123, followed.

1. Where the method of accounting employed by the petitioners accurately reflects income, the Commissioner may not resort to the increase in net worth method to determine income. 2. Fraud penalties disallowed.

1. Gross Income -- Compensation for Services Other Than Cash -- Year Taxable. -- A client conveyed an interest in real property in 1937 to an attorney for services rendered and for services to be… Held: the reasonable value of the property not includible in gross income in 1944. 2.

Ordinary Income or Capital Gain -- Accounts Receivable Collected -- Section 117 (a) (4). -- A business, in which the cash method of accounting was used, was sold but the accounts receivable were… Held: the income from the collection of the accounts was ordinary income and not capital gains.

Capital Gain -- Ordinary Income -- Section 117 (a) (4). -- Petitioners purchased a judgment from the residuary legatees of an estate; later, petitioners settled the judgment with the judgment debtor. Held: the gain realized by petitioners was not gain realized from the sale or exchange of a capital asset.

Held, motion addressed to Special Division of Court constituted under section 732 (d), Internal Revenue Code, for leave to have oral argument on Motions for Rehearing and to Vacate Decision denied. Held: motion addressed to Special Division of Court constituted under section 732 (d), Internal Revenue Code, for leave to have oral argument on Motions for Rehearing and to Vacate Decision denied.

Realization of Income -- Foreign Funds. -- The petitioner borrowed pounds sterling in England in an amount sufficient to pay for lambskins to be used in its business, the cost of which in dollars at the $ 4.04 exchange rate then in effect would have been $ 276,108.20. Later, when the exchange rate had gone down to $ 2.81, it repaid the loans by using only $ 192,060.84. The difference of $ 84,047.36 was taxable income from dealing in foreign exchange.

Net Operating Loss Carry-Back -- Section 122 (b) (1) (B) Under Amendment of Section 215 (a), Revenue Act 1950 -- Retroactive Application. -- Section 215 (a) amending section 122 (b) (1) to limit carry-back of net operating loss for years beginning after December 31, 1949, to one preceding year is not unconstitutional because of retroactive application.

Exclusion of Income -- Workmen's Compensation -- Retirement Pay -- Section 22 (b) (5). -- Retirement pay after serving as a state official for 10 years, not based upon incapacity incurred in line of duty and not under the workmen's compensation law, is not excluded from income under section 22(b)(5).

1. Upon the facts established, it is held that certain transfers of property by decedent in 1935, 10 years prior to her death, in trust… Held: that the life insurance policies having been reduced to cash and being no longer in existence at the time of decedent's death, their value may not be included in decedent's estate, as no interest of any kind was possessed by decedent at her death or passed by reason of her death within the purview of section 811(c), Internal Revenue…

Petitioners L. Glenn Switzer and Howard A. Switzer were partners in the Transit Mixed Concrete Company during 1944 and 1945. Held: no part of any of the deficiencies for either of the taxable years determined with respect to the two husbands was due to fraud with intent to evade tax. 2. Held, further, no part of any of the deficiencies for either of the taxable years determined against the wives was due to negligence. 3.

1. Petitioner purchased more than 80 per cent of the outstanding stock of X corporation and caused it to sell its operating assets to Y corporation in return for debentures of Y, the assumption of… Held: no gain was recognized on the liquidation of X under the provisions of section 112(b)(6), Internal Revenue Code. International Investment Corporation, 11 T. C. 678, affirmed 175 F. 2d 772 (C. A. 3); Tri-Lakes Steamship Co. v. Commissioner, 146 F. 2d 970 (C. A. 6).

Held, the gross income stated in petitioner's individual income tax return, though described as 1/2 community income, is limited to the… Held: the gross income stated in petitioner's individual income tax return, though described as 1/2 community income, is limited to the amount stated therein and does not include any amounts stated in her husband's return, and, having concededly omitted gross income in excess of 25 per cent of the amount so stated in her return, the 5-year…

1. Held, the profits of a partnership which took over operation of the business previously conducted by the petitioner corporation cannot be attributed to the petitioner inasmuch as the partnership… Held: the profits of a partnership which took over operation of the business previously conducted by the petitioner corporation cannot be attributed to the petitioner inasmuch as the partnership was a separate business entity organized for a valid reason. 2.

The petitioner, a director, depositor, and shareholder in a trust company, loaned money to the trust company along with other contracting… Held: the transaction from which the worthless debt was derived created a debtor-creditor relationship between the petitioner and the trust company and the loss is deductible only under section 23 (k) (4) as a nonbusiness bad debt, for the petitioner was not engaged in a trade or business of his own to which the debt was proximately…

Excess Profits Credit -- Borrowed Invested Capital. -- Held, that a land purchase contract and so-called note executed pursuant thereto were conditional and that the obligation under such… Held: that a land purchase contract and so-called note executed pursuant thereto were conditional and that the obligation under such instruments was not an outstanding indebtedness evidenced by either a note or a mortgage, within the meaning of section 719 (a) (1), Internal Revenue Code.

Petitioner Bennett H. Darmer supported his son for 27 weeks in 1949. On July 7, 1949, the son enlisted in the United States Navy and thereafter received no support from petitioner. Held: the statutory test for determining half of the support is in terms of money, not time, and petitioner did not furnish over half of the support for his son so as to be entitled to a dependency credit.

Held, the returns filed by petitioner and her husband constituted a joint return for the year 1949. Held: the returns filed by petitioner and her husband constituted a joint return for the year 1949.

1. Respondent determined that petitioner is liable as transferee for her husband's taxes for 1944 and 1945. Held: that the statute of limitations for determining transferee liability is 1 year after the expiration of the period against the transferor as properly extended by agreements. A jeopardy assessment was made against petitioner on June 22, 1951. The deficiency notice was mailed July 19, 1951.

Petitioners were members of a partnership which realized $ 90,610.35 from a sale of property to a corporation which they owned completely. Held: that the sale by the partnership was a bona fide sale of a going business and the fair market value of the good will was $ 61,278.85, and the profit realized on the sale was capital gain as treated by petitioners on their returns.

In 1947, 1948, 1949, and the fiscal year ending March 31, 1950, petitioners realized gains from the sale of certain units of a defense-housing project and unimproved lots. 1. Held: that all of the houses and one of the unimproved lots were held primarily for investment and were entitled to capital-gains treatment under section 117 of the Internal Revenue Code. 2.

Two brothers, the Murchisons, purchased all the stock of Austin Transit Company and liquidated the corporation. Held: that the acquisition of the assets by petitioner corporations was not a tax-free reorganization within the meaning of section 112 (g) (1) (D), since the Murchisons owned less than 80 per cent of their stock and the petitioners are entitled to their own cost basis of the assets.

1. Held, petitioner, in 1940, acquired substantially all of the properties of a partnership bearing the same name in an exchange to… Held: petitioner, in 1940, acquired substantially all of the properties of a partnership bearing the same name in an exchange to which section 112 (b) (5), Internal Revenue Code, applies and petitioner is, therefore, an acquiring corporation within the meaning of section 740 (a) (1) (D), Internal Revenue Code, and is entitled to an excess…

1. Estate Tax -- Gross Estate -- Retention of Income -- Section 811 (c) (1) (B). -- Where a trust reserved such income to the grantor as the Trustees deem necessary for her comfort, support and/or happiness, all of the income was paid to the grantor during her life, and, although the trust was amendable by sons of the grantor, it was not in fact amended during her life, the grantor has retained the right to income from the property for a period which did not in fact end…

Capital Gain -- Time of Receipt. -- The petitioner owned 50 shares of stock. Held: the petitioner received the equivalent of $ 65,000 in 1947 and was taxable in that year on the capital gain instead of at the times the trust company actually transferred the stock and paid cash in hand to the petitioner. 2.

Robert B. Gardner transferred certain stock in trust to petitioner for benefit of his wife on December 29, 1921. Held: the transfer in trust was part of a property settlement between husband and wife in which the wife agreed that if the husband would make the transfer of property in trust she would release him from everything, dower rights and other marital rights. The transfer of property to the trust was not a gift as respondent has determined.

Time of Accrual of Income. -- The petitioner, on the accrual basis, contracted with the United States Government in 1942 to manufacture and deliver housing units. Held: the petitioner should have accrued in 1942, 86.7 per cent of the contract price less the 10 per cent the Government was entitled to retain.

1. Petitioners for several years incorrectly reported income in full from real estate installment sales in the year the last installment was paid. Held: that this income, properly attributable to prior years and received in those prior years either in cash or its equivalent, is not taxable in 1948, and in spite of consistent use petitioners' method is improper. 2.

1. Upon the record it is held that a trust created by the decedent is not includible in his gross estate as (a) a transfer in contemplation of death within section 811 (c) (1) (A), Internal Revenue Code, or (b) as a transfer in trust in respect of which the grantor retained the right to income for life within the purview of section 811 (c) (1) (B), Internal Revenue Code, or (c) as a conveyance of insurance policies in trust in which the decedent at the time of his death…

Money transferred by decedent to one of his sons as trustee for himself and 9 brothers and sisters with the understanding that it was to be… Held: not completed gifts. Consequently the loans represented by 19 of the 20 notes so given and not paid off prior to decedent's death, held not to be indebtedness contracted bona fide and for an adequate and full consideration in money or money's worth so as to be deductible from decedent's gross estate under section 812 (b) (3),…

The United States Educational Foundation in China was an instrumentality of the United States and was under the general control of the Secretary of State. The salary and allowances of petitioner as an officer of the Foundation were fixed with the approval of the State Department in accordance with its regulations governing the pay and allowances of Foreign Service officers and employees.

Decedent's employer, under the terms of its established bonus plan, awarded him substantial bonuses in 1946, 1947, and 1948. Held: the undelivered portions of the bonus awards were includible in decedent's gross estate, under section 811 (a) of the Internal Revenue Code, as property in which decedent had an interest at the time of his death.

Petitioner, who owned farms for the production of income which had been under cultivation for many years, sought to check and reduce water erosion and loss of top soil by terracing his farms in… Held: the expenditures for farm terracing were essentially for maintenance and conservation and as such are deductible as ordinary and necessary expense under section 23 (a) of the Internal Revenue Code, and they were not for permanent improvements within section 24 (a) (2).

Litigation expenses incurred by the petitioners in a suit attacking the validity of patents issued to them held to be capital in nature and not deductible as ordinary and necessary business expenses or as losses incurred in trade or business.

Petitioner, a wholesale liquor dealer, commenced business on April 10, 1935, approximately 1 year prior to the beginning of its base period. Held: petitioner has qualified for relief under section 722 (b) (4), Internal Revenue Code. Constructive average base period net income determined.

1. Petitioner, a manufacturer of dental and surgical equipment, filed claims for relief under section 722 (a), (b) (1) and ( 4), Internal… Held: the strikes and slowdowns did not cause petitioner's average base period net income to be an inadequate standard of normal earnings within the meaning of section 722 (b) (1). 2. Petitioner placed the E & O light on the market in 1939. Held, the E & O light was not a different product within the meaning of section 722 (b) (4).

Amounts received by former shareholder for transfer of stock pursuant to agreement requiring surrender of all stock holdings upon retirement from active employment held, on facts, proceeds of sale of… Held: on facts, proceeds of sale of capital assets so as to permit full recovery of basis prior to taxation of any further receipts as capital gains, even though sale price was measured by contingent future dividends. Burnet v. Logan, 283 U.S. 404, followed.

Petitioner, engaged in the manufacture and sale of paper mill machinery, contracted with the Government of Finland for the manufacture and… Held: that petitioner made no investment as such in Government bonds, and that the transaction was merely incident and necessary to the performance of its contract of manufacture and sale of machinery, and the bonds having been sold below the original cost, the loss incurred constituted a reasonable and necessary expense in its business…

Petitioner having commenced business during the last base period year held entitled under section 722 (b) (4) to use a constructive average base period net income determined from the evidence.

In 1936 Ford Motor Company began the production and sale of Ford transit buses. Ford manufactured the chassis, had the body built thereon by Union City Body Company, and sold the completed buses through its transit bus dealer organization. Early in 1941 the petitioner was organized. It contracted with Ford to buy transit bus chassis and with Union City Body Company to build the bodies thereon.

Where three partners paid a fourth partner $ 22,500 for his interest in the firm and the purchase price was $ 6,500 in excess of the fourth partner's capital account as computed by the partners,… Held: the entire purchase price of $ 22,500, including the $ 6,500 in excess of his capital account, is a capital expenditure and not an ordinary and necessary business expense.

A partnership of which petitioner was a member owned a compress and warehouse in West Memphis, Arkansas, and in 1946 listed the property with… Held: the $ 5,000 compromise payment was an ordinary and necessary expense paid during the taxable year for the management, conservation, or maintenance of property held for the production of income under section 23 (a) (2) of the Code, and petitioner is entitled to deduct his one-half of the payment thus made. Carl W. Braznell, 16 T.

Held, the vendee of property in Florida subject to tax liens at time of purchase is not entitled to deduct amounts paid to discharge tax liability as taxes paid under section 23 (c) (1) of the… Held: the vendee of property in Florida subject to tax liens at time of purchase is not entitled to deduct amounts paid to discharge tax liability as taxes paid under section 23 (c) (1) of the Internal Revenue Code.

Constitution, a newspaper publisher, purchased land, together with the building thereon, in 1899 to house its business operations. The purchase price was $ 125,000. Held: in computing the amount of capital gain realized on the sale of the property, petitioner may use the fair market value as of March 1, 1913, in determining the basis for the land and the adjusted cost value in determining the basis for the building.

1. In 1945 the respondent held that the petitioner was not an exempt organization under the Internal Revenue Code or under prior revenue acts,… Held: that the portion of Regulations 103, section 19.101-1, and the corresponding portions of earlier regulations, providing that where an organization established its right to exemption it need not thereafter make a return of income unless it changed its character, did not operate to exempt petitioner from tax for 1943 and 1944. 2.

1. In an earlier proceeding between the parties hereto involving the same partnership agreement and an income tax deficiency determined against petitioner for the… Held: such change of concept by the Supreme Court decisions cited operated as a change of the law or concept of the law upon which the decision in the prior proceeding between the parties hereto was based and therefore such prior decision does not operate as collateral estoppel against the instant proceeding.

The alleged indebtedness in the sum of $ 26,389.65 advanced by petitioner to a corporation of which he was a stockholder and officer was not wholly worthless as of the close of the taxable year 1943, and was consequently not the subject of a bad debt deduction under section 23(k)(1), Internal Revenue Code. Nor did $ 1,509.05 of such sum constitute an ordinary and necessary expense of petitioner.

Petitioner acquired two tracts of land, one of which he held for more than 6 months, the other of which he held less than 6 months. Held: petitioner is entitled to a short-term capital loss with respect to the parcel held for less than 6 months.

1. An agreement entered into by petitioner (a radio commentator) and his wife on February 4, 1944, provided that he should pay her $ 500 per month… Held: both the $ 500 and $ 300 components of each $ 800 payment made by petitioner during the taxable years and subsequent to divorce decree constituted installment payments within the meaning of section 22 (k), Internal Revenue Code, and were therefore not deductible by petitioner under section 23 (u), Internal Revenue Code. 2.

Dividends on petitioner's federal savings and loan association shares were declared and payable on December 31, 1949. Held: the dividends were not constructively received during the taxable year 1949, but were income in 1950.

Rental expense accrued and set off by petitioner corporation against amounts previously advanced to landlord-stockholder so as to reduce the latter's liability thereon held not barred as a deductible expense by section 24 (c), Internal Revenue Code. Michael Flynn Mfg. Co., 3 T. C. 932, followed.

Lump sum received in settlement of claims for damages arising under the antitrust laws held, on facts, allocable one-third as taxable ordinary income and two-thirds as nontaxable amounts received in… Held: on facts, allocable one-third as taxable ordinary income and two-thirds as nontaxable amounts received in lieu of punitive damages. Glenshaw Glass Co., 18 T. C. 860, followed.