Volume 21 — Tax Court Reports

1. Accounting -- Accrual -- Year. -- The petitioner used an accrual method of accounting, as determined by the Commissioner, and deductions for interest and taxes and income from sales must be taken into account in the years accrued. 2. Ordinary Income v. Capital Gain -- Breeding Herd. -- Unbred heifers and ewe lambs were not part of breeding herds and gain on their sale was ordinary income. 3.

1. Husband and wife owned a ranch business as community property. Held: section 130, Internal Revenue Code, is inapplicable. 2. Petitioners MacMurray, Fenton, and a third person purchased a story in 1944 and sold it in 1945 to two corporations, in one of which these petitioners owned all the stock.

An amount received by the taxpayers upon assignment of a portion of their interest in oil and gas leases held includible in gross income and subject to an allowance for depletion.

Depletion -- Discovery Value, Sections 23 (m) and 114 (b) (2), I. R. C. -- The petitioner is engaged in the business of exploring for, mining, and selling gypsum. Held: petitioner is entitled to the allowance of depletion deductions based upon discovery value.

Held, interest payments received by petitioners in 1948 on overassessments of income taxes are properly includible within their respective gross incomes as determined by respondent. Held: interest payments received by petitioners in 1948 on overassessments of income taxes are properly includible within their respective gross incomes as determined by respondent.

In 1944, petitioner deducted as a loss a $ 2,000 payment in compromise and settlement of his $ 5,000 note given as additional security in 1937 for the debt of a corporation of which he was managing… Held: the amount paid by petitioner in settlement of the note was a nonbusiness bad debt within the meaning of section 23 (k) (4) of the Internal Revenue Code.

1. Estate Tax -- Gross Estate -- Dividend -- Section 811. -- A dividend declared prior to the death of the decedent but payable to stockholders of record on a date after his death is not includible in the gross estate. 2.

Petitioner was president and one of four equal stockholders in a corporation formed in September 1946 to build and sell houses on a tract of land. Held: the dividend distribution did not render the corporation insolvent and petitioner, therefore, cannot be held liable as a transferee on that account.

1. Petitioner held engaged in regularly carrying on a trade or business, and a net loss of $ 14,032.34 realized by him in the calendar year 1947 was attributable to the operation of such business and subject to be carried back to the calendar year 1945 under sections 23 (s) and 122, Internal Revenue Code. 2. Amounts received by petitioner in 1947 as payments under a lease of iron ore lands represented royalties payable upon production and not amounts received for the sale of ore in place. Such amounts held to represent ordinary income and not capital gain.

Security Construction Company, a partnership organized in May 1942, built houses for sale before wartime controls of private housing went… Held: that the partnership was engaged in the business of building houses for sale and selling houses in 1943, 1944, and 1945; that it did not enter into a new business in 1944 of renting houses for investment; that the 69 houses sold in 1945 were not capital assets but were houses built and held for sale, were rented only pending sale,…

The petitioner received monthly payments on insurance policies left by her deceased husband. Held: having permitted the full amount of the principal to be retained by the insurers, interest paid to the petitioner as primary beneficiary constitutes taxable interest income.

1. The petitioner, who was engaged in the trade or business of selling construction equipment, entered into 26 equipment rental agreements, together with purchase options which gave the purported… Held: the equipment rental agreements were sales and the installment obligations resulting were distributed, transmitted, sold, or otherwise disposed of by the petitioner within the meaning of section 44 (d) of the Internal Revenue Code. 2.

1. Income -- Dividends. -- A corporation's reported profits in excess of taxes which were received and retained by the corporation's three stockholders were taxable dividends to the stockholders. 2. Deduction -- Loss -- Demolition of Building. -- There was no intention at the time of acquisition to demolish a building, and a corporation is entitled to a deductible loss resulting from the later demolition of the building. 3.

In 1949, Charles H. Hyslope received a salary of $ 2,475 as a State Police Trooper for the State of Indiana. Held: the sum of $ 842 was properly included by petitioner in gross income in his return for 1949; 2. Held, further, the sum of $ 545 of such amount was a personal expenditure under section 24 (a) (1) and is, therefore, not deductible.

1. Petitioner contended that 186 issues of securities purchased in his name were so purchased in error, and should have been bought for his wholly owned corporation. Held: on the facts, the 186 securities were petitioner's individual property and the transfer of 172 issues to the corporation was a sale. 2. Losses on the sale by petitioner of certain substantially identical stocks within 30 days of the purchase of 186 issues disallowed as wash sales under section 118 (a). 3.

Petitioner is a corporation created to take over the assets and business of three proprietorships. Held: petitioner, having failed to file the necessary request, may be required to abandon the last-in, first-out method and to recompute its income for 1947, according to the method prescribed by section 22 (c). 2.

Full ownership interest received as tenant by entirety by petitioner's daughter as cograntee of petitioner held to require disallowance under section 24 (b), Internal Revenue Code, of any loss to petitioner on transfer of property.

Held, the gain realized by petitioners in 1948 was ordinary income derived from the sale of real estate held for sale to customers in the ordinary course of petitioners' real estate business. Held: the gain realized by petitioners in 1948 was ordinary income derived from the sale of real estate held for sale to customers in the ordinary course of petitioners' real estate business.

Cost of meals and entertainment of petitioner or his family not shown to be greater or different than other personal expenses held denied deductibility as business expense by section 24 (a) (1), Internal Revenue Code, notwithstanding some connection with business occasions or entertainment.

Petitioner, lessee of a building, subleased a part of that building to another corporation. Held: the payments made to the trust by the sublessee were taxable to the petitioner as its income. United States v. Joliet & Chicago R. Co., 315 U.S. 44. Held, further, petitioner is not liable for additions to tax under sections 291 (a) and 293 (a), Internal Revenue Code, since it acted in good faith and with reasonable cause.

1. The petitioner's president and sole stockholder sold certain goods from the petitioner's stock in 1944 and 1945 and retained the proceeds. Held: the returns were false and fraudulent with intent to evade tax. 2. Deficiencies for 1944 and 1945 were eliminated by excess profits credit and net loss carry-backs from 1947. Held, the 50 per cent additions to the tax for fraud are properly based upon deficiencies computed without application of carry-backs.

1. Gain or Loss -- Basis -- Carrying Charges -- Taxes and Mortgage Interest -- Secs. 24 (a) (7) and 113 (b) (1) (A), I. R. C. -- Real estate taxes and mortgage interest paid on property while it was being used and occupied regularly as a residence are deductible as paid and are not carrying charges to be capitalized as a part of the cost of the property. 2.

Petitioner was engaged in the production of 20 mm. cartridge cases and armor piercing shot under a total of 17 contracts with the War Department during the years 1942 and 1943. Held: upon the record that the petitioner realized excessive profits from renegotiable contracts during the years 1942 and 1943, in the amounts of $ 355,400, and $ 1,000,000, respectively.

1. In 1948, the taxable year, and immediately after the granting of a decree of divorce to his wife, petitioner, pursuant to a settlement agreement, paid to her an initial payment of $ 12,500. Held: that, except for $ 3,000, the initial payment of $ 12,500 was not a periodic payment within the meaning of section 22 (k) of the Internal Revenue Code, and was not, therefore, deductible by petitioner, under section 23 (u) of the Code, in computing his net income. 2.

Estate Tax -- Gross Estate -- Redemption Value or Par Value of Series G United States Savings Bonds. -- At time of death decedent was the owner of certain Series G bonds and the coowner of others. Held: the Commissioner's valuation sustained.

Petitioner, which commenced business during the base period, held to qualify for relief (I. R. C., sec. 722 (b) (4)). Constructive average base period net income determined.

Excess Profits Tax -- Sec. 722 (b) (2), I. R. C. -- Low Selling Prices Due to Temporary Overexpansion of Industry. -- The petitioner, a manufacturer of paper board shipping containers, has failed to show that it is entitled to relief under section 722 (b) (2) based upon abnormally low selling prices from late 1937 to late 1939 of the base period forced upon it and the industry of which it was a part by a temporary overexpansion of the competing kraft paper board industry.

1. Sec. 711 (b) (1) (J) and (K), I. R. C. -- Petitioner deducted a payment of 50 per cent of its yearly profits as an expense attributable to the profits earned during each base period year. Held: petitioner did not sustain the burden of proving that such payment was abnormal or that the increased payment was not in consequence of an increase in gross income in petitioner's base period. 2.

The petitioner claims relief from excess profits tax under the provisions of Code sections 722 (a) and 722 (b) (3) (A). Held: petitioner has established the qualifying factors requisite to such relief and has established the amount that would be fair and just as the average of normal income for the base period years.

1. Dependency credits claimed by petitioner for the taxable years denied for failure of proof to show that she contributed more than… Held: that $ 50 of the $ 100 so received by petitioner from her former husband in September 1948 and in each month thereafter through 1949 must be regarded as having been paid for the support and maintenance of the son, and only $ 50 constituted alimony includible in the income of petitioner within the meaning of section 22 (k) of the…

The petitioner, a religious and charitable foundation, accepted the gift of two United States Government bonds totaling $ 15,000 upon the proviso that… Held: a part of petitioner's income inured during the taxable year to the benefit of a private individual, and petitioner is not entitled to exemption from Federal income taxation under section 101 (6). 2. Held, further, petitioner's failure to file a timely return was due to willful neglect, and not due to reasonable cause.

1. Taxpayer owned a 40 per cent interest in a partnership and agreed to pool his personal earnings from outside sources with partnership income. Held: taxpayer is chargeable with income in an amount not less than his personal earnings ( Lucas v. Earl, 281 U.S. 111) and not more than his distributive share of partnership net income, computed by including therein his personal earnings. 2.

Estate Tax -- Deduction -- Charitable Bequest -- Exclusively -- Sec. 812 (d), I. R. C. -- A residuary bequest, after a life estate of measurable value, gives rise to a deduction under section 812 (d) where left to trustees as a Retirement and/or Welfare Fund for employees of a corporation.

1. Transferee Liability -- Sec. 311, I. R. C. -- In Equity. -- Petitioners were officers and stockholders in a corporation formed in 1941. Held: the petitioners were not liable as transferees in equity for the amounts received in 1943 and 1944 because the corporation was not insolvent nor rendered insolvent by the payments made.

Pursuant to the provisions of section 403 (e) (1) of the Renegotiation Act of 1943, the petitioner filed petitions with this Court contesting certain unilateral orders of the War Contracts Price… Held: since the provisions of section 201 (h) of the Renegotiation Act of 1951 were not complied with by the petitioner, this Court is without jurisdiction to further consider the matters raised by the petitions.

1. Excess Profits Tax -- Sec. 722 (b) (4) Relief -- Constructive Average Base Period Net Income. -- Petitioner filed timely applications and related claims for refund for the taxable years 1943 and… Held: that petitioner's business commenced in 1938 did not reach, by the end of 1939, the earning level it would have reached had it commenced business 2 years earlier. The amount of petitioner's constructive average base period net income determined and relief granted. 2.

Petitioner, sole owner of the stock of a corporation, withdrew amounts out of earnings of the corporation under the guise of salaries of designated officers of the… Held: that the distributions to petitioner constitute dividends taxable to him in the year of receipt, notwithstanding transferee liability for unpaid income taxes subsequently determined against the corporation, and that the returns of petitioner and the corporation were false with intent to evade tax.

A document entitled decree was entered and filed in the divorce proceedings between petitioner and her husband. Held: amounts paid petitioner, being solely for support of the minor child, are not includible in her income.

Petitioner and her husband executed a separation agreement in 1937, providing, inter alia, for monthly support payments to petitioner, and requiring her husband to pay the premiums on a policy of… Held: the obligation to make support payments was imposed upon or incurred by the husband by a decree of divorce and the support payments are includible in the petitioner's gross income, as alimony, under section 22 (k), Internal Revenue Code.

Petitioner held not to have established that its invested capital was abnormally low. (I. R. C., sec. 722 (c) (3).)

Petitioner and her former husband entered into a separation agreement providing for monthly payments to petitioner, but the agreement was not prompted by plans for an eventual divorce of the parties. Therefore, although the petitioner's husband, 2 years later, secured a divorce and remarried, the separation agreement was not incident to the divorce.

Held, value of living quarters furnished to the petitioner by his employer was compensation for services rendered and therefore includible in the petitioner's gross income. Held: value of living quarters furnished to the petitioner by his employer was compensation for services rendered and therefore includible in the petitioner's gross income.

Estate Tax -- Contemplation of Death -- Funded Life Insurance Trust -- Sec. 811 (c) (1) (A), I. R. C. -- The value of bonds and life insurance policies transferred to trusts is includible in the decedent's gross estate as transfers made in contemplation of death where the trusts would not provide any economic or other benefit to the beneficiaries until the death of the decedent and the transfers were not made for motives associated with life.

1. Prior to March 1, 1913, petitioner made four separate distributions to stockholders. Held: That the distribution of its common on common stock was a dividend which is not includible in equity invested capital as a distribution in stock which comes within section 718 (a) (3) (A), Internal Revenue Code. Owensboro Wagon Co., 18 T. C. 1107, followed.

Held, respondent's action in adjusting petitioner's income tax liability and determining a deficiency therein, such adjustment and determination being based upon a prior… Held: respondent's action in adjusting petitioner's income tax liability and determining a deficiency therein, such adjustment and determination being based upon a prior decision of this Court wherein petitioner was granted a refund of excess profits tax under section 721, Internal Revenue Code, sustained.

Petitioner filed her income tax return for the year 1945 on or before March 15, 1946. Held: that the burden of proof is on respondent to sustain his affirmative allegations and he has not met that burden of proof. Held, further, that the 3-year statute of limitations provided in section 275 (a), Internal Revenue Code, has run and assessment of the deficiency is barred.

Upon the facts, held that section 3801 is not applicable to lift the bar of section 275 (a), Internal Revenue Code. James Brennen, 20 T. C. 495, followed.

Petitioner made a series of loans to two corporations. The first corporation was a distributor of frozen foods and the second was a retailer of frozen foods. Held: the worthless loans represented nonbusiness bad debts deductible only under section 23 (k) (4), Internal Revenue Code.

Upon the facts held that section 3801 is not applicable to lift the bar of section 275 (a), Internal Revenue Code. James Brennen, 20 T. C. 495; Max Schulman, 21 T. C. 403, followed.

Where taxpayers realized capital gains in 1947 on the sale by warranty deed of income-producing realty, deductions for amounts paid to the purchasers in 1949 in discharge of liabilities for breach of covenants of title to the property are subject to the capital loss provisions of section 117 of the Internal Revenue Code. Arrowsmith v. Commissioner, 344 U.S. 6.

In 1946, petitioner acquired the remaining 24 per cent minority interest in the capital stock of its foreign subsidiary and immediately liquidated the latter. Held: petitioner did not become affiliated with its subsidiary within the intent of section 23 (g) (4) of the Internal Revenue Code. The loss sustained in 1946 by reason of the worthlessness of the capital stock of the subsidiary is a capital loss and not an ordinary loss.

In computing the petitioner's unused excess profits credit for the fiscal year 1946 the respondent reduced a net operating loss sustained in the taxable year 1948 by 50 per cent of the interest on… Held: the determination of the respondent is incorrect.

A dividend resolution by petitioner's board of directors provided for the distribution of certain securities and did not create to that extent a monetary obligation which was satisfied by the distribution of such securities; accordingly, petitioner realized no recognizable loss on the transaction.

1. Limitations -- Sec. 275 (c), I. R. C. -- The taxpayer improperly included items in cost of goods sold with result that an amount in excess of 25 per cent of gross income stated on the return was… Held: the 5-year statute of limitations provided for in section 275 (c) is applicable. 2. Deductions. -- The respondent disallowed claimed deductions and made other adjustments for the years 1945, 1946, 1947, and 1948 for lack of substantiation.

Fair market value of certain war contracts determined.

Held, on the facts, that payments received by petitioner Antoinette during the taxable year 1949 were in discharge of a legal obligation… Held: on the facts, that payments received by petitioner Antoinette during the taxable year 1949 were in discharge of a legal obligation which was incurred by her former husband, petitioner James, under a written instrument incident to their decree of divorce; that such payments were periodic payments taxable to Antoinette in the year in…

Estate Tax -- Property Subject to Claims -- Section 812 (b), I. R. C. -- Held, property subject to a power of appointment exercised by decedent's will not property subject to claims under South… Held: property subject to a power of appointment exercised by decedent's will not property subject to claims under South Carolina law.

1. On December 15, 1950, there was sent to petitioner by registered mail a joint notice of deficiency and disallowance in respect of the taxable years 1941 to 1944, inclusive. Held: no appeal having been taken from the determination of deficiencies in petitioner's income tax, there is no proceeding to dismiss of the kind respondent has mentioned in his motion. Motion denied. 2.

Petitioner claimed a dependency credit for his mother who had rent and other income substantially in excess of the $ 500 gross income… Held: that under section 23 of the Internal Revenue Code such items as taxes, maintenance, and the allowance for depreciation are deductions from gross income in determining statutory net income and not from total or gross receipts in determining statutory gross income, and the gross income of petitioner's mother being more than $ 500,…

Petitioner seeks relief under section 722 of the Code based on section 722 (b) (4). Held: petitioner has not established the grounds for relief under section 722 (b) (4), and the Commissioner's determination is sustained; held, further, that a motion of the respondent to amend his answer is untimely, and even though the motion were to be granted, the proposed amended answer raises a standard issue which this Court has no…

Fraud. -- Proof woefully inadequate.

1. National Dairy, in a lump-sum purchase, acquired the assets and business of Kraft-Phenix Cheese Corporation, an Illinois corporation paying therefor $ 78,338,412.84 in common stock, bonds, and… Held: that the cost of the patents and applications for patents to National Dairy was $ 8,000,000. 2.

Petitioner in the taxable year had outstanding an issue of debenture bonds of a stated face value of $ 50 each. Held: that petitioner realized no taxable gain upon the purchase and retirement of the debenture bonds in question. Rail Joint Co., 22 B. T. A. 1277, affd. 61 F. 2d 751, followed.

Transfers of real property in 2 successive years to corporation whose stock was owned 10 per cent by each of four petitioners and 30 per cent by the children of each petitioner-couple held taxable as gifts. Each transferor, held further, entitled to one exclusion for each taxable year. Frank B. Thompson, 42 B.T.A. 121, followed.

Petitioner, the publisher of a daily newspaper, for many years prior to 1947, entered in its books, kept on an accrual basis, and reported as income, amounts received for prepaid subscriptions. In 1947, without applying for or receiving the consent of the Commissioner, it deferred as taxable income the unexpired portions of the subscriptions. Held, that the full amount of the prepaid subscriptions constitutes taxable income in the year of receipt.

The proper method of computing petitioner's personal holding company surtax liability, with due regard to the availability of section 117 (c) (1), Internal Revenue Code, and all of the appropriate provisions, determined.

Cost of installing sprinkler system in petitioner's hotel held to constitute a capital outlay and not an ordinary and necessary business expense. Held: further, amount by which it exceeded cost of installing similar system in comparable new building is merely part of capital outlay and not a currently deductible expense.

On December 31, 1948 and 1949, Wallace A. Moritz, a photographer, held customers' deposits for portraits which were not completed and accepted until the following year. Held: the right to such deposits became a claim of right when received, without restriction as to their disposition, and the amounts thereof were includible in computing income for the years in question.

Held, the taxpayer, a corporate stockholder, is entitled to a dividends received credit on the proceeds from the sale of stock subscription rights which were conceded to be taxable as ordinary income. Held: the taxpayer, a corporate stockholder, is entitled to a dividends received credit on the proceeds from the sale of stock subscription rights which were conceded to be taxable as ordinary income.

Held, allowance for meals received by petitioner, a New Jersey State Trooper, is includible in gross income under section 22 (a). Held: allowance for meals received by petitioner, a New Jersey State Trooper, is includible in gross income under section 22 (a). Held, further, the amounts actually spent on meals while on duty are not deductible either under section 22 (n) or 23 (a) (1) (A) but, rather, are nondeductible personal expenditures under section 24 (a) (1).

1. The petitioner was formed in 1939 under the laws of Ohio by a consolidation of The Vermilion Banking Company and The Farmers and Citizens… Held: that the consolidation was a reorganization under section 112 (g) (1) (A) of the Internal Revenue Code and that under section 113 (a) (7) (B) of the Code the debts had the same basis to the petitioner that they had to the predecessor banks. Held, further, that petitioner did not realize taxable income on the recoveries. 2.

1. Public Law No. 88 was enacted on June 23, 1945. Held: that the subsidies constituted taxable income to the petitioner when received in 1945. Held, further, that at the end of 1945 there was no obligation on the part of the petitioner which had become final to repay the subsidies and that the amount thereof does not constitute an allowable deduction for that year. 2.

Payments required by corporate bylaw and made by petitioner to indemnify its vice president for costs incurred in his defense against a criminal charge resulting from an act in his official capacity held deductible by petitioner as an ordinary and necessary business expense.

Previous to their marriage, petitioner's late husband conveyed certain business property to the University of Tennessee, reserving to himself a life interest, together with the right to * * * make *… Held: the amounts received by petitioner from the university were taxable income, not gifts. Held, further, petitioner is subject to penalty under section 291 for failure to file 1945 return on time.

Petitioner, Vern W. Bailey, owned undivided interests in a lease in Callahan County, Texas, and in another in Eastland County, Texas. Held: the Callahan and Eastland County leases were held primarily for investment, and not for sale to customers in the ordinary course of trade or business.

Amount received in settlement of a lawsuit held to consist of nontaxable punitive damages to the extent of one-sixth thereof, and of compensatory damages for loss of profits and destruction of a… Held: further, that one-half of such compensatory damages was for loss of profits, taxable as income, and that as to the remaining one-half, the excess over basis constitutes taxable income, but that in the circumstances of this case, there is no unrecovered basis.

1. The petitioner was organized to engage in buying shell eggs and the selling of frozen eggs. It decided to explore the possibilities of entering the business of producing and selling dried eggs. Held: that the expenditures constituted capital costs, but which have not been shown to represent the cost of wasting assets which would give rise to amortization or depreciation deductions for the years claimed. 2.

Deduction -- Loss -- Mortgage Pool -- Partnership, Corporation, or Trust. -- The petitioner has not shown that the mortgage pool was a trust rather than a partnership, as determined by the Commissioner, or rather than an association taxable as a corporation, or that it sustained a loss on the investment in the mortgage pool which was deductible in 1948 in an amount greater than that allowed by the Commissioner.

Petitioner's 50 per cent share of partnership earnings held taxable to him until date of sale of such partnership interest to remaining partner notwithstanding that by the agreement of sale he relinquished his right to part of such share.

Held, 1. Oklahoma ad valorem taxes on real and personal property for the year 1946 are deductible under section 23 (c), Internal Revenue Code, where the petitioner acquired the property on July 19,… Held: Oklahoma ad valorem taxes on real and personal property for the year 1946 are deductible under section 23 (c), Internal Revenue Code, where the petitioner acquired the property on July 19, 1946, and subsequently in that year paid the taxes in question.

1. Income or Gifts -- Solicited Contributions of Listeners to Religious Radio Programs -- Sec. 22 (a), I. R. C. -- The petitioners, in putting on religious radio programs, were conducting a business for profit, and amounts designated for them by name received from listeners following solicitations for funds were income to the petitioners from their business rather than nontaxable gifts. 2.

Oil treatment applied by petitioner at the mine to portion of its bituminous coal held not shown to be an ordinary treatment process normally applied in order to obtain the commercially marketable mineral product or products within the meaning of section 114 (b) (4), Internal Revenue Code, so as to permit inclusion of proceeds thereof in gross income from the property for purposes of computing percentage depletion.

Petitioner's claims for relief from excess profits taxes for the years here involved under the provisions of subsections 722 (b) (2) and (4) of the Code denied.

In 1947 the petitioner sold to its president 14,754 shares of its capital stock which it held as treasury stock. Held: that in the sale to its president the petitioner was not dealing in its shares as it would in the shares of another corporation and that it did not realize taxable gain on the transaction.

Income -- Deduction -- O. P. A. Overcharge -- Public Policy -- Ordinary and Necessary Expense -- Sec. 23 (a) (1) (A), I. R. C. -- A partnership which deliberately, knowingly, and wilfully violated an O. P. A. regulation and continued until stopped by the O. P. A., may not deduct under section 23 (a) (1) (A) the amount of the resulting overcharges which it was forced by suit to pay into the Treasury of the United States.

1. Income -- Gross Income -- Cost of Goods Sold. -- The 1947 and 1948 costs of constructing new burial crypts, none of which were sold in 1947 and 1948, cannot be deducted as the cost of crypts sold in 1947 and 1948, all of which were constructed prior to 1947 and the cost of which had been recovered tax free in prior years. 2.

Certain amounts withdrawn from corporation by sole stockholder and his wife held on the facts to be loans and not dividends.

1. In determining deficiencies against petitioners for the taxable period July 26, 1945, to February 28, 1946, respondent refused to recognize Ernest Felix and his wife, Mary Felix, as bona fide… Held: Ernest Felix and Mary Felix were bona fide partners during the taxable period involved, and the partnership income is taxable to the four partners in accordance with their agreement. 2.

Held, petitioner, during the fiscal years involved, was an organization exempt from income tax under section 101 (9), Internal Revenue Code. Held: petitioner, during the fiscal years involved, was an organization exempt from income tax under section 101 (9), Internal Revenue Code.

1. Petitioner purchased land which it had under lease for a period of 21 years for a consideration of $ 2,100,000. Held: the $ 1,440,000 is not deductible in the year paid as an ordinary and necessary business expense. Cleveland Allerton Hotel, Inc. v. Commissioner, 166 F. 2d 805, reversing Memorandum Opinion of this Court, not followed. 2.

Payment of $ 1,100 to petitioner in 1948 by a corporation of which her former husband had been an officer, in discharge of his obligation for alimony payments, is held taxable to her as alimony income under section 22 (k) of the Code; and her failure to file a return for that year subjects her to the 25 per cent negligence penalty imposed under section 291 (a) of the Code.

Each of the four petitioners contributed equal amounts in payment of medical expenses incurred by their mother. They deducted such amounts on their respective returns as medical expenses incurred on behalf of a dependent. No additional amounts were contributed by any of them toward her support. Held, no one of the petitioners contributed more than one-half of their mother's support.

Estate Tax -- Prior Taxed Property. -- Sec. 812 (c), I. R. C. -- The deduction for property previously taxed provided for in section 812 (c) is not allowable to the estate of the grantor of a trust with right to income retained where the estate of the grantee of a general testamentary power of appointment under the trust paid an estate tax on substantially the same assets within 5 years prior to the death of the grantor, since the grantor did not receive the property from…

1. Petition for review of disallowance of claim for refund amplifying claim for accelerated depreciation of emergency facilities under… Held: on facts, not untimely. 3. Petitioner's abnormal base period expenses for interest on notes issued as dividends held, on facts, not to be a consequence of an increase in gross income or a change at any time in the type, manner of operation, size, or condition of petitioner's business, within the meaning of section 711 (b) (1) (K)…

1. Deductions -- Losses -- Secs. 23 (e) and 117 (j) (2), I. R. C. -- Petitioner since 1934 owned shares in a Czechoslovakian corporation. Held: if petitioner suffered any loss it was a capital loss and was incurred in 1945 and not 1946. 2. Deductions -- Interest. -- Petitioner entered a partnership in 1945.

Dividend -- Earnings and Profits of Taxable Year -- Accumulated Deficit -- Sec. 115 (a ) (2), I. R. C. -- A dividend as defined in section 115 (a) of the Code includes a distribution made by a corporation to its stockholders out of earnings and profits of the taxable year even though those earnings and profits were not sufficient to wipe out an accumulated deficit existing at the beginning of the taxable year.

Accounting -- Accrual -- Interest -- Payment Doubtful. -- A taxpayer regularly using an accrual method of accounting may deduct accrued interest even though not in good financial condition.

1. In 1944 petitioner sold, at a loss, 40 acres of unimproved land located near Lake Wales, Florida. Held: that the loss was an ordinary loss, and not a capital loss. 2. In 1945 petitioner sold, at a loss, a residence he had built in 1926 for his personal use. On the evidence, held that the residence was converted from personal use to business use in 1940. 3.

Upon the facts, held that the executors properly credited net income for the taxable year to the beneficiaries and are, therefore, entitled to deduct such credits under section 162 (c), Internal Revenue Code, Estate of Andrew J. Igoe, 6 T. C. 639.

Deduction From Income -- Bad Debts -- Business v. Nonbusiness -- Sec. 23 (k) (1) and (4), I. R. C. -- A bad debt resulting from advances by an advertising agent to a client in the course of business of assisting in the publication of a magazine was proximately related to the advertising agency business and was deductible as a business bad debt.

Sec. 102, I. R. C. -- Accumulations Beyond Business Needs. -- An advertising and promotion agent for a Canadian whiskey bottler reimbursed monthly by the client for all expenditures made for the client, accumulated the earnings of its first year of operation beyond the reasonable needs of its business and was subject to tax under section 102 of the Internal Revenue Code.

Petitioner seeks relief under section 722 of the Code based on section 722 (b) (4) and (b) (5). Held: petitioner is not entitled to relief under section 722 (b) (4) or (b) (5) since it has failed to establish that a fair and just amount representing normal earnings to be used as a constructive base period net income would exceed its average base period income as determined under the growth formula.

The petitioner challenged as inadequate the relief accorded to it by the Commissioner by reason of certain changes in the character of its business which qualified it for relief under section 722 (b) (4) of the Internal Revenue Code. Constructive average base period net income determined.

The petitioner received $ 7,000 in 1948 from a trust. Under the terms of the indenture the payment was a lump-sum gift, payable in any event out of the income or principal of the trust and, therefore, under the provisions of section 22 (b) (3) of the Internal Revenue Code, was not properly included in petitioner's gross income.

Held: 1. Respondent's right to compute income by use of the increase in net worth method upheld. 2. Held: Respondent's right to compute income by use of the increase in net worth method upheld. 2.

1. Standard Issue. -- Under mandate of United States Court of Appeals, standard issue under section 713, Internal Revenue Code, is determined upon the authority of City Machine & Tool Co. v.… Held: that petitioner had income during base period years so as to be entitled to compute excess profits credit for years 1941 through 1944 based upon income under section 713 (f). 3. Estoppel. -- Petitioner is a wholly owned subsidiary of another corporation.

1. Held, Frutal Export Company, a partnership, and its successor, Frutal Export Company, Inc., were, during the taxable years involved herein, bona fide business enterprises, recognizable for… Held: Frutal Export Company, a partnership, and its successor, Frutal Export Company, Inc., were, during the taxable years involved herein, bona fide business enterprises, recognizable for tax purposes, separate and distinct from the business conducted by Polak's Frutal Works, Inc. 2.

Decedent had general testamentary power of appointment over assets of inter vivos trust which he exercised. Held: the appointive property was not property subject to claims under New York law so as to authorize deduction of the excess of expenses and debts under section 812 (b), Internal Revenue Code.

Petitioner Frank N. Smith was in 1949 employed by the Corning Building Company, Inc., on a salary basis. Held: that the city of Corning where petitioner was employed was his home for the purpose of determining whether he was traveling away from home and any expenses incurred in the operation of his automobile within the boundaries of the city of Corning are not deductible under section 22 (n) (2) of the Code.

The partnership of which petitioners were members executed a contract in December 1946 for advertising which required services for that and subsequent years. Held: only that portion representing services rendered in 1946 was accruable as an expense incurred in that period.

1. Excess Profits Tax Relief Under Sec. 722 (b) (2), I. R. C. -- Held, a contract under which most of petitioner's production was reserved… Held: a contract under which most of petitioner's production was reserved for one customer did not bring about a restriction in petitioner's sales promotional activities which was either temporary or unusual; the contract was the result of an internal management decision and could not form the basis for relief; and petitioner's earnings…

Held, amounts credited to petitioner on books of limited partnership of which he was a limited partner constituted ordinary income. No sale or exchange of capital asset took place. Held: amounts credited to petitioner on books of limited partnership of which he was a limited partner constituted ordinary income. No sale or exchange of capital asset took place.

1. Taxability of Income -- Settlement Did Not Include Settlement of Taxes. -- The settlement of the petitioner's claims for additional compensation arising from a contract to perform work for the United States Government did not include the settlement of the petitioner's income tax liability. 2.

Family Partnership -- Trusts as Partners. -- Held, on the facts that petitioner and his wife were partners in the operation of a department store; held, further, that trusts for their children were… Held: on the facts that petitioner and his wife were partners in the operation of a department store; held, further, that trusts for their children were not partners for Federal tax purposes.

1. Houses built in 1943 and 1944 under governmental regulations which required their rental to defense workers for a prescribed period before being offered for sale were built primarily for sale to customers in the ordinary course of petitioners' business and gains were properly treated by the respondent as ordinary income. 2.

Renegotiation -- Statute of Limitations -- Notice. -- Held, that a telegram, sent by respondent and received by petitioners within 1 year after the close of petitioners' fiscal year, was sufficient… Held: that a telegram, sent by respondent and received by petitioners within 1 year after the close of petitioners' fiscal year, was sufficient notice of a commencement of renegotiation proceedings.

1. Petitioner mortgaged a piece of business property in 1932 as security for a loan of $ 64,000. Held: the petitioner received ordinary income in the amount of $ 57,512.64 in the year 1947. 2. Held, further, the petitioner is entitled to deduct, in the year 1947, (a) income taxes paid to the State of Oregon, and (b) one-half the attorneys' fees and court costs incurred in obtaining possession of his property. 3.

1. When the deficiency notice for 1944 was mailed, the tax involved had already been paid. Held: the deficiency notice for that year was not valid and the Tax Court has no jurisdiction. Stanley A. Anderson, 11 T. C. 841, followed. 2. In 1945, petitioner made certain payments to and for his former wife pursuant to a 1941 written agreement which replaced earlier 1927 and 1934 agreements.

1. Partnership agreement provided that, upon the death of a partner, surviving partners had the right to liquidate the partnership or, in the… Held: In determining value of decedent's interest in partnership, respondent was not bound by price fixed in supplement to partnership agreement; and (b) Decedent's share of profits of partnership from date upon which option price was fixed to date of decedent's death is to be included in determining value of decedent's interest in…

1. Where petitioner received $ 15,000,000 in settlement of two derivative stockholders' suits against The Pennsylvania Railroad Company charging breach of a fiduciary relationship in causing improper investment of petitioner's funds, the entire amount received resulted in no income taxable to petitioner. 2.

1. Petitioner, a nonresident alien author, sold the serial rights to a novel to an American publisher for $ 33,750. Held: in the absence of proof that such services were rendered as consideration for the assignment, the entire value of the interest transferred constitutes a taxable gift. 2. Five per cent of the purchase price of the serial rights was paid for their use in Canada.

Decedent, domiciled in Pennsylvania, executed a will in 1945 containing a charitable bequest. Held: by operation of a Pennsylvania statute, Act of 1939, P. L. 141 the charitable bequest was void under the 1946 will and, since the 1945 will was expressly revoked, the gift was made by the codicil and was, therefore, void and not deductible from decedent's gross estate under section 812 (d), Internal Revenue Code.