Volume 23 — Tax Court Reports

The petitioner owned stock in a corporation of, and located in, Yugoslavia which was deemed to have been seized, upon declaration of war between the United States and Germany in 1941, under section… Held: that petitioner recovered his interest in the stock in 1945, Andrew P. Solt, 19 T. C. 183, but he has failed to prove that the stock was seized or confiscated in 1945, and, therefore, loss deduction under section 23 (e) of the Internal Revenue Code of 1939 is denied.

Petitioner's husband filed income tax returns without petitioner's name on the caption or without her signature on the returns. Held: on the facts, that petitioner did not file joint returns with her husband, nor did she intend to file joint returns with him in the years before us.

The respondent determined that petitioner, as transferee of the assets of a transferee of the assets of a certain individual, was liable for the unpaid income tax of that individual for 1944 and 1945. Held: that since the same issues presented in the instant proceeding were presented and adjudicated by the bankruptcy court, said issues have become res judicata.

Petitioner, in its excess profits tax returns, and respondent, in his determinations, computed petitioner's excess profits credits for the taxable years herein on the basis of invested capital. Held: that petitioner is not entitled to relief as claimed, since it has failed to establish or show a constructive average base period net income which would result in a greater excess profits credit than that allowed by the respondent on the basis of invested capital.

1. Claims for excess profits tax relief under section 722 (b) (2), (4), and (5) of the Internal Revenue Code of 1939, based upon an alleged depression of base period income due to intense competition among petitioner and two other Atlanta, Georgia, daily newspapers denied where the evidence fails to show that there were depressed base period earnings because of a temporary or unusual circumstance in petitioner's experience. 2.

Stock distributed to two stockholders substantially in proportion to their prior stock ownership, purportedly in payment of salary, held, not to constitute taxable income. Held: not to constitute taxable income.

Petitioner was granted a 10-year franchise to operate a motor coach transportation system in the city of Pasadena, California. Held: on the facts, petitioner's franchise was granted for a determinable period; and its cost may be depreciated, during the years in issue, on the basis of its 10-year term. 2.

Decedent made a will leaving the bulk of his estate in trust. Under the terms of the trust decedent's surviving spouse was entitled to two-thirds of the income for life. Held: the interest of the surviving spouse did not qualify for the marital deduction as it was terminable within the purview of section 812 (e) (1) (B), and did not come within the exception contained in section 812 (e) (1) (F) of the Internal Revenue Code of 1939.

1. Petitioner's claim for relief under section 722 (b) (2)held properly disallowed for failure to establish that any decline in its earnings or those of any industry of which it was a part during the… Held: further, properly included in reconstruction; but (c) relief held, further, unavailable for the year 1940 where claim based on change in capital ratio for that year was not timely filed. 6.

Petitioner in 1949 paid commissions to a trustee upon the revocation of a trust previously created by her. Held: that petitioner has failed to establish that the commissions paid out of principal were paid solely for the management, conservation, or maintenance of the trust property (or that a portion of such commissions in excess of the amount thereof deducted on her income tax return was so paid out), and it is therefore unnecessary to…

1. In 1948 and 1949, petitioner, Leon Mandel, made payments to his divorced wife exclusively for the support of his son and daughter. Held: payments by petitioner to his divorced wife for his children, after they became 21 years of age, are not deductible by him as alimony payments under section 23 (u) of the Internal Revenue Code of 1939. 2. Also in 1948 and 1949, petitioner, Leon Mandel, paid premiums on two insurance policies pursuant to the separation agreement.

A ballistics laboratory, owned by petitioner, and operated consistently at a loss held, on facts, not a business carried on for profit and the excess of expenditures over income not deductible as… Held: on facts, not a business carried on for profit and the excess of expenditures over income not deductible as either a loss or business expense under section 23, Internal Revenue Code of 1939.

An accrual basis corporation claimed certain charitable contributions as a deduction in 1949. These contributions, as authorized by the board of directors in 1949, were made in 1950. Held: under section 23 (q), Internal Revenue Code of 1939, that the deduction was not proper in 1950.

Spouse's bequest of legal life estate coupled with unlimited lifetime power of invasion but with remainders over, held not to qualify for the marital deduction from gross estate permitted by section 812 (e), Internal Revenue Code of 1939.

Income -- Husband's or Wife's -- Business Operated for Years by Husband -- Assigned to Wife. -- The income of a business, in which the husband was expert and to which he had devoted all of his time for many years, was taxable entirely to him and none was taxable to wife who had no knowledge of the business and devoted little or no time to its management and operation.

A United States District Court determined that petitioner and a co-venturer willfully violated the Emergency Price Control Act of 1942, as amended. Its decision was affirmed on appeal. Held: the determination of the District Court that petitioner's violation of the Price Control Act was willful is res judicata as to the issue of willfulness in this proceeding. 2.

Held, that payments by a corporation of 20 per cent of its profits to a former stockholder as part of the consideration for the sale and… Held: that payments by a corporation of 20 per cent of its profits to a former stockholder as part of the consideration for the sale and transfer by him of all of his stock to an existing stockholder who, through the acquisition of said stock and the purchase of additional shares from another source, became the owner of a controlling…

1. Petitioner was divorced from his wife Charlotte Joslyn in 1940. Held: that payments made in 1942 and 1943 under the amended decree are deductible only to the extent of the provisions of the original decree. 2. Further amendments to the original decree were made on March 16, 1944, and December 29, 1947.

1. Individual petitioners received in liquidation upon the dissolution of a corporation in which they were equal stockholders a quantity of industrial pipe that had been the stock in trade, or… Held: the operation of the partnership for the sale of the pipe was a business, and the pipe was held for sale to customers in the regular course of business. Profits from the sale of the pipe are the ordinary income of the business and not capital gains from the sale of assets. 2.

Petitioner's business property was completely destroyed by fire December 11, 1946. His loss was not completely covered by insurance. Held: no reasonable grounds existed for doubt on the part of petitioner which would excuse his failure to take his loss in 1946, the year of the fire, and permit the taking of such loss in 1947, the year in which the insurance coverage was paid.

Where allegations of fact in a petition were that payments to a divorced wife sought to be deducted by the husband were made pursuant to a decree of divorce ordering payments of $ 50 per week for 5… Held: that respondent's motion to dismiss the petition for failure to state a cause of action should be granted.

1. Excess Profits Tax Income -- Exclusion -- Profit on Purchase of Own Bonds -- Sec. 711 (a) (2) (E). -- Profits made by the petitioner on the purchase of its own bonds during the taxable year were excluded from excess profits net income under the provisions of section 711 (a) (2) (E). 2.

Deduction -- Interest -- Indebtedness -- Lack of Substance -- Sec. 23 (b). -- A parent operating company transferred the operating assets of its foreign business to a foreign operating company through the petitioner, the foreign company issuing its preferred stock to the petitioner and the petitioner issuing its Income Notes to the parent.

Petitioners sued the owner and operator of a recycling plant for damages to oil in place underneath two oil leases of which petitioners were part owners. Held: the amount petitioners received was compensatory damages for the compulsory or involuntary conversion (as a result of destruction in whole or in part) of property used in petitioners' trade or business and the gain is taxable as capital gain under the provisions of section 117 (j), Internal Revenue Code of 1939.

On June 21, 1938, petitioner created a trust of which she was the sole life beneficiary. Held: under Massachusetts law, petitioner's creditors had recourse to the full amount of the trust income for settlement of their claims. Ware v. Gulda, 331 Mass. 68, 117 N. E. 2d 137 (1954).

Employees' Trust -- Distribution of Annuity Contract in Year Trust Not Exempt Under Sec. 165 (a) -- Regs. 111, Sec. 29.165-6. -- The fair market value of an annuity contract, distributed by the trustee of an employees' trust to a former employee during a year in which the trust was not exempt under section 165 (a), which annuity contract was retained by the employee, was taxable income under section 22 (a).

Vinson Act -- Subcontracts -- Sec. 401, Second Revenue Act of 1940. -- Subcontracts were made in 1946 with respect to a prime contract entered into in 1945 for the manufacture of engines for naval… Held: the subcontracts are also exempt from the Vinson Act, even though they were entered into after the expiration of the excess profits tax, since section 3 of the Vinson Act does not apply to subcontracts unless they are under prime contracts to which that section applies.

The notice of deficiency was sent by registered mail addressed to petitioners in care of their attorney and petitioners timely filed a petition requesting a redetermination of the deficiency set… Held: the notice was sufficient and this Court has jurisdiction within the purview of section 272 (a) of the Internal Revenue Code of 1939.

During the course of a liquidation which commenced in 1948, petitioner sold all of its noninventory assets to a corporation wholly owned by its controlling stockholders. Held: the purchase of petitioner's noninventory assets by a corporation wholly owned by petitioner's controlling stockholders was pursuant to a plan of reorganization within the meaning of section 112 (g) (1) (D) of the 1939 Code; hence, no loss is allowed on such sale.

On November 15, 1945, petitioner entered into a lease for 10 years beginning July 1, 1946. There was no provision for extension or renewal of the term. Held: petitioner is entitled to amortize its cost over the period of the lease despite the identity of corporate officers in the participating corporations.

The corporate petitioner paid $ 19,500 in 1948 to one of the individual petitioners, a former president, in settlement of his claims against the corporation. Held: 1. The individual petitioner had no proprietary interest in the corporation and made no sale of a capital asset to the latter and the amount received in settlement of his claims constituted ordinary income. 2.

Petitioner, a native of Milwaukee, Wisconsin, was a professional musician, who performed as a soloist in hotel dining rooms and cocktail lounges in various cities in Wisconsin and Minnesota. Held: that petitioner, while away from Milwaukee in the course of his employment, was not away from home in the pursuit of his trade or business within the meaning of section 23 (a) (1) (A) of the Internal Revenue Code of 1939, and his traveling expenses are not deductible thereunder.

Held, sale by petitioner of certain whiskey certificates resulted in long-term capital gain and not in ordinary income. Held: sale by petitioner of certain whiskey certificates resulted in long-term capital gain and not in ordinary income.

Petitioner Harold E. MacDonald terminated his employment as vice president of one corporation and accepted a similar position with another corporation although this resulted in the forfeiture of… Held: the bargain nature of this stock option was intended to induce petitioner to accept employment and as compensation for services to be rendered. 2.

Petitioner's husband filed Federal income tax returns for the years 1941 through 1944 which included petitioner's share of rental income and deductions attributable to various parcels of real… Held: petitioner did not file returns jointly with her husband for the years here in issue.

Claims for relief under section 722 (b) (4) allowed where there was a change in the character of petitioner's business during or immediately prior to the base period, and to the extent that the manufacturing costs would have been reduced with 2 years' additional experience.

Petitioner, a professor of English literature, was granted a fellowship by the John Simon Guggenheim Foundation to enable him to devote his full time for a year to a research project on which he had… Held: the grant constitutes a gift and not taxable income.

On the record it is held that petitioner has failed to establish that it is entitled to constructive average base period net income which is large enough to produce a credit greater than any of the invested capital credits used by the petitioner for the taxable years herein, or that the excess profits taxes paid by it for the years in issue are excessive and discriminatory.

1. Petitioners Al and Ethel Goodman were officers and, in effect, the sole shareholders of Al Goodman, Inc., a corporation engaged in the sale of high-style ladies' shoes at retail. Held: the $ 145,000 advance and the $ 6,913.45 balance of withdrawals on open account were regarded by all the parties as loans and Al and Ethel intended to repay them and did repay them from time to time. They were, therefore, loans to those petitioners and not taxable dividends. 2.

Dahar Cury was the proprietor of a number of department stores. He and his wife filed joint income tax returns for the years 1941-1944. She died early in 1945. Held: Deficiencies in income tax with respect to the liability of Dahar and his wife for 1941-1944 (when they filed joint returns) and of Dahar alone from 1945 until the date of his death may properly be determined by using the net worth method. 2.

1. Use of net worth method approved where husband and wife commingled assets and filed joint returns for some of the years involved. Held: that the total net income for both spouses for each year as shown by the net worth method may be allocated between them where a reasonable basis for such allocation exists. 2. Various items in net worth statement determined. 3. The Commissioner's determination of fraud approved.

Petitioners, during 1949 and 1950, were engaged in the business of buying old motor blocks, rebuilding, and then selling them. Held: The accounting method was a hybrid method which did not clearly reflect income but which most closely resembled an accrual method. Therefore, an accrual method, taking into account inventories of the old and rebuilt motor blocks, must be used. Elsie SoRelle, 22 T. C. 459.

Petitioners, each a resident foreign corporation which owned one ship documented under the laws of the Philippines, derived earnings from sources within and without the United States from shipping… Held: with respect to earnings derived from international (as distinguished from coastwise) shipping operations, the Philippine law granted an equivalent exemption within the meaning of section 231 (d) (1), Internal Revenue Code of 1939. 2.

In 1934, the decedent created an inter vivos trust, the entire corpus of which consisted of life insurance policies on his life. Held: the gifts of the insurance premiums did not qualify for the marital deduction within the purview of section 1004 (a) (3) (E), Internal Revenue Code of 1939, and the applicable Treasury regulations interpreting said section, which are determined to be valid.

Excess Profits Tax -- Relief Under Sec. 722 (b) (2) -- Depressed Business -- Temporary Economic Circumstance. -- The petitioner is entitled to relief under section 722 (b) (2) because its business was temporarily depressed as a result of the sudden discontinuance in 1937 and 1938 of the use of adjustable windshields by Ford and Chrysler and brakeshafts by Ford, the manufacture and sale of which represented the larger part of the business of the petitioner at that time.

Petitioner, a Government employee living in Washington, D. C., from 1944 to 1954, maintained his law office in Grand Forks, North Dakota, during the years of his absence. Held: the expenses of maintaining the office during 1947 are not attributable to a trade or business carried on by petitioner.

Petitioner's constructive average base period net income determined.

Petitioners sold, 10 days prior to maturity, certain non-interest-bearing notes which had been issued originally on a discount basis for substantially less than face value. Held: that the increment or profit so realized was in fact interest and was taxable as ordinary income notwithstanding the fact that the transactions resulting in the realization of such increment or profit constituted sales.

In 1931, petitioner discovered that one of its officers had embezzled a total of $ 488,010.60 during the years 1926 to 1931. Held: the insurance proceeds do not constitute a recovery of petitioner's embezzlement loss and the tax benefit rule is therefore inapplicable.

1. Accruals and payments on short-term notes issued by corporation to its three controlling stockholders, consisting of husband, wife, and infant daughter, held, not… Held: not interest on indebtedness under section 23 (b), Internal Revenue Code, and, hence not deductible from the corporation's gross income. 2. Payments on the principal of the above mentioned notes, held, to constitute the distribution of taxable dividends under section 115 (a), Internal Revenue Code. 3.

Petitioners' statutory deductions and credits exceeded their ordinary income (as distinguished from taxable capital gain) for the year 1948. Held: in computing the alternative tax pursuant to section 117 (c) (2), Internal Revenue Code of 1939, then in effect, the 50 per cent capital gain rate is to be applied to the taxable capital gain unreduced by the amount of the excess deductions and credits.

A social club lost a number of its members and the remaining members decided to sell the clubhouse, pay off existing debts, and distribute the assets. Held: the sale of the club property and the distribution of the pro rata share of assets among the members did not destroy the club's exemption from income taxes for the final year of its operation.

The taxpayer, a motion picture director, purchased a literary property, expecting to sell it to an independent motion picture producer and to direct… Held: petitioner did not hold the literary property primarily for sale to customers in the ordinary course of his trade or business within the meaning of section 117 (a) (1) (A) of the Internal Revenue Code of 1939, and the gain derived by him upon sale of the story must be treated as capital gain. Fred MacMurray, 21 T. C. 15.

In the circumstances of this case the Commissioner was not justified in reconstructing gross income from bookmaking operations at an amount equal to 15 per cent of the gross receipts from bettors.

Petitioners bought bulls and rented them for nominal amounts to neighboring dairy farmers for breeding purposes. The farmers using the bulls fed and cared for them at no expense to petitioners. Held: petitioners held the bulls for sale to customers in the ordinary course of their business and the income from the sales is taxable as ordinary income and not as a capital gain under section 117 (j) (1) of the Internal Revenue Code of 1939.

Alfred B. Thoreson received $ 4,800 from the A. O. Jostad Company in 1946 which he designated as back pay for the years 1932 through… Held: where there is no proof that there was an agreement or legal obligation existing during the prior period to pay the sum received and there is no proof that the sum would have been paid except for the intervention of an event similar in nature to bankruptcy or receivership, the amount in question is not accorded the benefits of those…

Husband's agreement for wife's support held, on facts, not incident to a divorce subsequently obtained by the husband within the meaning of sections 22 (k) and 23 (u), Internal Revenue Code of 1939. Held: on facts, not incident to a divorce subsequently obtained by the husband within the meaning of sections 22 (k) and 23 (u), Internal Revenue Code of 1939.

1. Excess Profits Tax -- Credit Based upon Invested Capital -- Borrowed Capital -- Deposits by State Treasurer -- Sec. 719 (a) (1). -- Deposits by the State of Illinois did not constitute borrowed capital within the meaning of section 719 (a) (1). Commissioner v. Ames Trust & Savings Bank, 185 F. 2d 47, reversing 12 T. C. 770; National Bank of Commerce, 16 T. C. 769; and Capital National Bank of Sacramento, 16 T. C. 1202, followed. 2. Excess Profits Tax -- Credit Based upon Invested Capital -- Borrowed Capital -- Cashier's Checks -- Sec. 719 (a) (1). -- Outstanding cashier's checks and bank money orders do not represent indebtedness of the kind which Congress intended to include in borrowed capital under section 719 (a) (1). 3. Excess Profits Tax -- Credit Based upon Invested Capital -- Borrowed Capital -- Amounts Due Securities Broker -- Sec. 719 (a) (1). -- Amounts due a broker on the purchase of Government securities were not evidenced by instruments of the kind required under section 719 (a) (1) and did not constitute borrowed capital.

Petitioner is a stockbroker. On September 18, 1946, its customer was obligated to purchase new stock of certain railroads when, as, and if issued at a price which exceeded the then selling price of… Held: petitioner did not prove that within the taxable year ended November 30, 1946, it sustained a bad debt loss within the purview of section 23 (k) (1) or an ordinary loss within the purview of section 23 (f) of the Internal Revenue Code of 1939.

During the taxable year the petitioner engaged in the business of booking bets on baseball, football, and basketball games. Held: an additional deduction of $ 3,000 for wagering losses is allowed.

Excess Profits Tax -- Credit Carry-Back -- Discontinuance by Sale -- Sec. 710 (c) (3). -- A corporation, on January 1, 1946, sold all of its assets to a related corporation which assumed all of the… Held: the selling corporation was not entitled to an unused excess profits credit carry-back from 1946 to 1944.

In 1949, petitioners, husband and wife, filed a joint return disclosing a net operating loss, one-half of which was carried back by each to… Held: that the income from rents and salary received by the wife constituted income from the operation of a trade or business regularly carried on which, for carry-back purposes, should have been applied to reduce the loss sustained by the husband in operating his business without first being offset by certain nonbusiness deductions.

Credit for Dependent -- Uncle by Marriage -- Sec. 25 (b) (3). -- An uncle by marriage of a petitioner does not qualify as a dependent of that petitioner under section 25 (b) (3).

Petitioner was the owner of an oil payment which had an original face value of $ 1,000,000 but a face value of $ 854,993.25 at the time of transfer herein. Held: the oil payment which petitioner transferred to the contractor was a capital asset which had been held for more than 6 months and the gain is taxable as long-term capital gain.

Gross Income -- Exclusions -- Compromise of Claim Against Estate -- Sec. 22 (b) (3), I. R. C. 1939. -- An amount received in compromise of a claim against an intestate decedent's estate based upon an oral contract whereby the decedent promised to take care of the taxpayer in his will in exchange for the taxpayer's personal services is includible in gross income and is not excluded as a gift, bequest, devise, or inheritance under section 22 (b) (3).

The taxpayer was organized as a national bank in Pennsylvania in 1934. It took over certain assets and assumed certain liabilities of a financially embarrassed bank bearing a similar name. Held: the amount so transferred represented taxable income to the taxpayer in 1948.

Charles M. Moore died leaving two-thirds of the residue of his estate to his two sons and one-third to his wife for life with remainder to the two sons. Held: petitioners are taxable on the income of the trust to the extent of their respective interests therein under section 167 (a) (1) and (2), or section 22 (a), Internal Revenue Code of 1939.

The A. B. Lewis Co. reported its income as a partnership, which included petitioners' two minor children, and filed its returns on a fiscal year basis. Held: not only were petitioners' two minor children not partners in the business as conducted by respondent, but as contended by petitioners in their alternative assignment of error, neither was Mary a partner in the business.

1. On facts, issuance of petitioner's debentures held to have been supported by consideration rendering them valid corporate obligations. 2. Held: further, deductible as interest on indebtedness.

Petitioners owned 37 out of 345 shares of common stock of a corporation. At the beginning of 1948 the stock had some value. Held: the $ 10,000 advanced to the corporation was a loan, rather than an expense or capital contribution, and the debt so created did not become worthless within the taxable year 1948.

1. By reason of a net operating loss deduction from a loss incurred in 1948, the respective petitioners received tentative abatements of their income taxes assessed for… Held: the method used by the respondent in his determination of the respective deficiencies is approved. Morris Kurtzon, 17 T. C. 1542, followed. 2. The respondent filed tax liens for the unpaid income taxes assessed for 1946. On the abatement of such taxes certificates of discharge of tax liens were issued.

Petitioners were engaged in the manufacture and repair of machinery used in the processing of quartz. Held: on the facts herein, that the partnership and the corporation were under common control within the meaning of section 403 (c) (6) of the Renegotiation Act; and, therefore, petitioners' profits for the years here in issue are subject to renegotiation.

Petitioner was divorced from his former wife in 1946 pursuant to a decree which incorporated a prior separation agreement providing support and maintenance payments for her and their minor child. Held: respondent correctly determined that 60 per cent of the amounts paid by petitioner to his former wife in both years was for the support of his minor child and was not deductible by him.

Petitioner commenced a derivative stockholder's suit against Tennessee Gas and Transmission Company in a United States District Court on April 23, 1945. Held: the stock received by petitioner was not for personal services rendered and, hence, does not qualify as compensation reportable under section 107 (a).

Held, losses sustained by petitioner in 1947, 1948, and 1949 from abandonment of certain components of its mining plant and from… Held: losses sustained by petitioner in 1947, 1948, and 1949 from abandonment of certain components of its mining plant and from scrapping of certain mining equipment must be deducted from gross income in computing net income for purposes of determining its percentage depletion allowance under sections 23 (m) and 114 (b) (4) (A) and (B) of…

1. Estate Tax -- Transfer in Contemplation of Death -- Motive -- Sec. 811 (c) (1) (A). -- The evidence does not show that the primary motive for transfers was one connected with life (relief from management of property) rather than one connected with death (avoidance of estate taxes). 2.

In 1949, petitioner sustained a loss on the sale of an animal and certain farm machinery used in her farm business. Held: that the loss on the sale of assets arose in the regular course of conducting a continuing business in which the assets were utilized, that there was no consequent termination of the business or any part thereof, that the loss was attributable to the operation of that trade or business, and that it is includible in determining the…

Held, petitioner was a bona fide resident of Saudi Arabia throughout the year 1949 within the meaning of section 116 (a), Internal Revenue Code of 1939. Held: petitioner was a bona fide resident of Saudi Arabia throughout the year 1949 within the meaning of section 116 (a), Internal Revenue Code of 1939.

Held, because of the drought and, to a lesser extent, insect infestation and their effect on farm income and business generally in the State of Nebraska, petitioner's… Held: because of the drought and, to a lesser extent, insect infestation and their effect on farm income and business generally in the State of Nebraska, petitioner's earnings were depressed during the base period years so that its average base period net income was an inadequate standard of normal earnings.

1. Petitioner has not shown that its excess profits taxes computed without the benefit of section 722, Internal Revenue Code of 1939, were excessive and discriminatory because of qualifying factors found in section 722 (b) (2) and (4), Internal Revenue Code of 1939. 2.

Issue 2. In an agreement between Charles and Beulah Weil which was incident to their divorce, Charles agreed to make periodic payments for the… Held: that $ 6,000 of the $ 10,500 paid by Charles in 1947 is the portion payable for the children's support, and the remaining portion, $ 4,500, is for Beulah's support, and, therefore, only $ 4,500 is includible in Beulah's taxable income under section 22 (k) of the 1939 Code, and is deductible by Charles under section 23 (u).

Petitioner, a Canadian, manufactured postal cards in Canada which were sold in the United States through an agreement with a news company. Held: under the agreement, the news company was the petitioner's agent for distributing the cards in the United States. Thus, petitioner was engaged in business within the United States and income from sales in this country is subject to income taxes.

Decedent was the sole legatee and executor of the estate of his brother who died less than 5 years prior to decedent. Held: the deduction for previously taxed property to which decedent's estate is entitled is limited to the net value of his brother's estate after deductions for debts, Federal estate, and State inheritance taxes. Central Hanover B. & T. Co. v. Commissioner, 159 F. 2d 167 (C. A. 2, 1947), certiorari denied 331 U.S. 836 (1947), followed.

Sec. 162 (b), I. R. C. 1939 -- Income Currently Distributable -- Year of Taxability -- Estoppel. -- Decedent was the life income beneficiary of a trust, part of the corpus of which consisted of… Held: the portion of the proceeds allocated to decedent from the sale in 1945 of one of the properties was taxable to him in the return filed for his last taxable period, January 1, 1945, to November 15, 1945. 2.

Deductions -- Travel Expenses -- Sec. 22 (n) (2), I. R. C., 1939. -- Petitioner was employed as high school principal by the City of Attleboro, Massachusetts, where he lived. Held: the automobile expenses were not deductible because not incurred in connection with the performance of services by petitioner as an employee.

1. Held, where individual kept no books or records and where those kept for his wholly owned corporation were inadequate, respondent was justified in using the net worth and sources and… Held: where individual kept no books or records and where those kept for his wholly owned corporation were inadequate, respondent was justified in using the net worth and sources and expenditures methods for determining petitioners' income and his determination thereof is upheld. 2.

Taxpayer, owner of an old theatre building which could no longer be profitably operated, entered into an agreement on October 6, 1949, for a 25-year lease to begin May 1, 1950, it being contemplated… Held: taxpayer did not sustain a deductible loss by reason of the demolition of the building.

1. In April 1947, petitioner Phil Kalech exercised an option to purchase 60 shares of stock of The Toni Company for $ 333.33 per share. Held: because respondent claims no lesser amount, they are deemed to have had a value of $ 557.12 on that date; and such value will be the basis for computing the amount of long-term gain which petitioner realized from their sale in 1948, and for determining the amount of compensation which he realized upon exercise of the option in 1947.…

1. Petitioner brought suit against his sister in 1947 to perfect title to an undivided one-half interest in certain rental properties and to recover money advanced to pay the mortgage indebtedness on… Held: those portions of the expenditures attributable to the perfection of title to the properties and the recovery of loan principal are capital expenditures and are not deductible under section 23 (a) (2), Internal Revenue Code of 1939.

1. Petitioners operated a farm during the years in issue and bred high quality Herefords for sale to other breeders for use as breeding stock. Held: animals held for breeding purposes are property used in a trade or business and gains from their disposition are capital gains under section 117 (j) (1), 1939 Code. 2. Petitioners elected to determine their income from farming operations according to the accrual method of accounting.

Petitioner and his partner transferred the partnership business and assets to a corporation which they controlled and then liquidated the partnership. Held: deduction of any loss sustained by petitioner upon the transaction is prohibited by section 24 (b) (1) (B) of the Internal Revenue Code of 1939.

Where freeze kills trees in citrus orchards used in trade or business and decreases value of land due to presence of dead trees, held: 1. Held: Land and trees are not to be considered as an integral unit in determining deductible loss under Internal Revenue Code (1939), section 23 (e). 2.

Decedent's great-grandfather created a testamentary trust. Held: that decedent's mother effectively exercised her power; that she intended that upon decedent's death without issue before the end of the trust, his share of trust income should pass to her other surviving children in being at the end of the trust; and, therefore, that there should not be included in decedent's gross estate under…

Gift or Compensation for Services. -- A payment for past services made by a corporation voluntarily and without legal obligation to an employee in connection with his resignation was not a gift but compensation taxable as ordinary income.

1. Petitioner, a corporation, was simultaneously engaged in the businesses of building houses for sale and building and holding houses for rent. Held: the manner in which the rental units were sold was such that they must be considered as having been held and sold by petitioner in the ordinary course of its business of holding houses for sale. Gains derived from their sale are to be treated as ordinary income rather than as capital gains. 2.

1. Petitioners are stockholders in several corporations, some organized to hold land and some to build and operate apartment developments thereon. Held: the distributions to the officer-stockholders were not in any part salaries for their services.

George Santayana, author of the literary work Persons and Places, caused the manuscript of that work to be delivered to petitioner, and… Held: that (1) Santayana had made a gift of his entire interest in Persons and Places to petitioner prior to November 10, 1942; (2) the agreement by petitioner and Scribner's was not a sale by petitioner of a property interest in Persons and Places to Scribner's, or of his rights with respect thereto; and (3) the amount of income realized…

Petitioner formed a wholly owned corporation to operate a sawmill and act as a source of lumber supply for his sole proprietorship retail lumber business. Held: the $ 49,153.75 balance of petitioner's advances represented capital contributions, not loans, and the loss deduction for worthlessness of that balance is limited by the provisions of sections 23 (g) and 117 of the 1939 Code.

In 1945 decedent sold business property held jointly with his wife. The sale was pursuant to a contract in which the purchasers agreed to make a downpayment and monthly payments thereafter. Held: the contractual promise of the purchasers to make future monthly payments had no ascertainable fair market value in 1945. The contract was not the equivalent of cash and, thus, not a part of the amount realized by decedent from the sale in 1945. Nina J. Ennis, 17 T. C. 465 (1951).

1. Business Expense -- Hearing Aid -- Sec. 23 (a), I. R. C., 1939. -- A lawyer deducted the cost of maintaining his hearing aid as a business expense; held, that the expense was personal and not… Held: that the expense was personal and not deductible under section 23 (a) of the 1939 Code. 2.

Decedent's wife applied for and received an insurance policy on decedent's life which she transferred in 1928 to a trust, together with certain securities. Held: Decedent had no incident of ownership in the policy at his death requiring inclusion of the insurance proceeds in his gross estate. 2. The insurance proceeds are includible only insofar as the trust income used to pay the premiums was attributable to trust assets contributed by decedent. 3.

1. Interest received on mortgage constituted personal holding company income because the property covered by mortgage was held by petitioner for investment purposes and not for sale in the ordinary course of its trade or business. 2. For the failure to file personal holding company income tax returns the 25 per cent penalty under section 291 (a) of the Internal Revenue Code of 1939 is approved.

On January 31, 1951, Transamerica Corporation made a distribution to its stockholders, of Bank of America stock. Held: the fair market value of the property distributed is to be applied in reduction of the basis at which petitioners held their stock in Transamerica pursuant to section 115 (d) of the Internal Revenue Code of 1939.

Excess profits tax relief under section 722 (c) of the Internal Revenue Code of 1939 disallowed where the petitioner in 1941 began the manufacture of uniform shirts and slacks, principally for military use, and where the evidence fails to establish a basis for reconstruction of normal base period earnings productive of greater excess profits credits than those allowed by the respondent on the invested capital basis.

1. Building constructed on leased ground should have been depreciated over the life of the lease where there was no right to renew the lease and the building could not be moved except by demolition. 2. Amount received by lessee for salvage value did not constitute income.

Petitioner owned a tract of land with valuable mineral rights. The mineral rights had a zero basis. Held: in the circumstances of this case, that petitioner intended from the outset to reacquire the mineral rights from the subsidiary for purposes of sale, that the transfer of the mineral rights to the subsidiary was without business purpose and was lacking in bona fides, and that the reacquisition of the mineral rights by petitioner from…

1. Petitioner, in 1936, as part of his contract of employment as president of a corporation, received an option to purchase 30,000 shares of the company's common stock at $ 2 per share during the… Held: petitioner realized compensation upon his exercise of the option in 1947 in an amount equal to the excess of the fair market value of the stock acquired over the option price. 2. Petitioner purchased a farm in 1940 and hired a farmer to operate it.

The petitioners, as owners in fee simple of unimproved land situated in Maryland, subdivided it into lots upon each of which they built a dwelling house. Held: that the ground rental arrangements in controversy were leases and that there was no sale or exchange of the lots either at the time the leases were created or at the time the houses thereon were sold.

A corporation engaged in slaughtering cattle and hogs and selling meat invoiced its products to customers at the ceiling prices fixed by the Government. The two owners of all the stock collected cash overceiling payments from customers, measured by the quantity of meat delivered. No record of these collections was maintained. Returns of the corporation prepared by accountants did not include these receipts. The stockholders reported on their tax returns certain amounts as "commissions" or "miscellaneous income from other sources," but less than the amount of the overcollections determined by the respondent. The wives of the stockholders signed returns prepared by accountants reporting their income from their hsubands' earnings pursuant to the community property laws. Held: 1. The amount of overceiling collections determined by respondent is not shown to be erroneous. 2. The overceiling collections were income to the corporation. 3. The stockholders' returns were fraudulent with intent to evade tax. 4. Returns of the stockholders' wives were not fraudulent. 5. Returns of the corporation were not fraudulent.

Estate Tax -- Apportionment -- Marital Deduction -- Pennsylvania Inheritance Tax -- Sec. 812 (e) (1) (E) (i) (1939 Code). -- The Pennsylvania inheritance tax, a charge on the property received and not on the estate of the decedent, has the effect of reducing the net value of the interest of the surviving spouse and must be subtracted in determining the marital deduction.

On May 1, 1944, H and W formed partnership #1 with A, the brother of H. H and W together owned 95 per cent of the partnership. Held: The respondent was correct in renegotiating the profits of partnership #1 and #2 as two separate and distinct business entities. They were not one continuous partnership as maintained by the petitioners. 2.

On October 31, 1944, H. L. McBride conveyed a 1,050.69-acre tract of land to McBride Refining Company, Inc., in which he owned a bare majority of stock, taking a note for the sales price. Held: The conveyance of the 1,050.69-acre tract by McBride to the Refining Company was bona fide and for a business purpose and McBride was not the beneficial owner of any part of that tract between October 31, 1944, and September 30, 1945.

Pursuant to the provisions of a property settlement agreement, decedent maintained two policies of life insurance on his life with his former wife as the beneficiary. Held: decedent possessed no incidents of ownership in the policies within the purview of section 811(g)(2)(B) of the 1939 Code.

A newly organized corporation issued to two persons a total of 16,500 shares of $ 1 per share par value non-voting preferred stock and 210 shares of $ 1 per share par value voting common stock in… Held: the transaction constituted a nontaxable exchange, and, for the purpose of computing gain on sale, the basis of the real property in the hands of the corporation is the same as in the hands of the transferors. Secs. 112 (b) (5) and 113 (a) (8) (A), I. R. C., 1939.

In determining their community income for 1948, in separate returns filed by them, H. L. McBride and his wife, Janet, claimed a… Held: Of the claimed debt of $ 24,064.10, (a) $ 2,535.50 was not advanced by McBride to the Oil Company until 1949, and (b) $ 12,847, which McBride Refining Company loaned to the Oil Company and on which McBride was a guarantor, did not represent a debt due McBride in 1948 because he made no payment on his guaranty prior to the end of that…

In a consolidation of two corporations under section 112 (g) (1) (A), Internal Revenue Code of 1939, petitioner received a lesser number of shares in the new corporation than she otherwise would have… Held: petitioner realized recognizable gain to the extent of the cancellation of indebtedness as a taxable dividend under section 112 (c) (2), Internal Revenue Code of 1939.

Deductions -- Compensation -- Stock Sale and Repurchase Plan. -- The excess of the book value of stock paid by a corporation during the taxable years to repurchase the stock over the book value at the time the corporation transferred the stock to key employees pursuant to a contract which provided, inter alia, that the key employees purchase stock at book value and give in exchange non-interest-bearing demand notes with the stock as security, that the corporation apply all…

Under the evidence, held, expenses incurred for a trip to the Shrine of Our Lady of Lourdes to seek spiritual aid did not constitute cost of medical care within the meaning of section 23 (x),… Held: expenses incurred for a trip to the Shrine of Our Lady of Lourdes to seek spiritual aid did not constitute cost of medical care within the meaning of section 23 (x), Internal Revenue Code of 1939.

Respondent determined liability against petitioner as transferee for income taxes and penalties determined against Lila G. Husted for the years 1944 to 1946, inclusive. Held: Petitioner has failed to show the amount of consideration paid for the assets transferred to him by decedent. 2. The assets transferred by decedent to petitioner rendered her insolvent. 3.

Father of petitioner created a trust on July 1, 1920, and conveyed to his wife, as trustee, his automobile business together with the property appurtenant thereto. Held: the basis for gain or loss to petitioner of the shares distributed to him by the trustee is the value of the claim which he surrendered in connection with their acquisition.

Petitioner, engaged in the operation of a bakery and the distribution of bakery goods by means of house-to-house delivery, seeks relief under section 722 (b) (2) and (b) (4) of the Internal Revenue… Held: petitioner is not entitled to relief under section 722 (b) (4) as it has not shown a change in the character of its business within the meaning of that section.

1. Deduction -- Percentage Depletion -- Metal Mine -- Sec. 114 (b) (4). -- The petitioner's mine producing ilmenite concentrate was a metal mine within the meaning of section 114 (b) (4) although none of the titanium contained in the ilmenite concentrate was reduced to metal on a commercial basis. 2.

Payment of royalties during base period because of patent injunction obtained against petitioner just prior to its base period, the fraudulent nature of which became manifest by close of base period, held to qualify petitioner for relief under section 722 (b) (5) of the Internal Revenue Code of 1939. Constructive average base period net income determined.

Exempt Corporations -- Social Club -- Sec. 101 (9). -- A social club which provides death benefits for its members is not exempt under section 101 (9). Cf. sec. 101 (3).

Decedent and his wife executed a joint and mutual will in which the estate of the first to die was left to the other and the survivor's estate was left to their children. Held: all property interests passing to the surviving spouse were terminable interests and no marital deduction is allowable under section 812 (e) (1) (B), Internal Revenue Code 1939.

1. Petitioner Curtis R. Andrews and another individual formed a partnership in 1938, which thereafter conducted several dancing schools. The partnership kept its books on the accrual system. Held: the prepaid tuition fees were received under a claim of right, without restriction as to their use or disposition and, therefore, constituted income in the year of receipt.

Deductions. -- Petitioner invested $ 5,000 in a joint venture or partnership engaged in dealing in automobiles. The business failed in 1949. Held: petitioner sustained a business loss in 1949 properly deductible in full in that year.

The fair rental value of lodging furnished a dependent parent during 1951 in a house owned by petitioners should be taken into account in determining whether over half of the support of such dependent was contributed by petitioners.

Petitioner, a nonresident alien whose securities were managed primarily for investment purposes by a resident commission agent, held, on facts, not subject to tax on capital gains as not being… Held: on facts, not subject to tax on capital gains as not being engaged in a trade or business within the United States under section 211 (b), Internal Revenue Code of 1939.

Dependent -- Support -- Lodging -- Sec. 25 (b) (3). -- Support of a dependent includes lodging and where dependents are furnished with a house owned by the taxpayers, its fair rental value is a reasonable measure of a part of the support furnished.

A corporation filed a petition in voluntary bankruptcy. Held: the transaction whereby petitioner acquired the assets was not a reorganization within the meaning of section 112 (b) (10), Internal Revenue Code of 1939, and the petitioner may not use the basis of the assets in the hands of the bankrupt in computing its excess profits credit under the invested capital method.

Petitioner, owner of a dairy and breeding herd, sustained a loss on its operation during each of the years 1942 to 1946, inclusive. Held: 100 per cent of capital gains is includible in gross income for the purpose of a section 130 recomputation; and, consequently, petitioner's net income is not subject to recomputation under such section for the year 1946.

The notice of deficiency was issued to petitioner more than 3 but less than 5 years after the returns for 1947 and 1948 were filed. Held: that reported gross income from business is the gross profit stated in the return without adjustment for any items incorrectly reported therein as part of cost of goods sold; 2. Held, further, upon the facts, that petitioner omitted from his return in each year an amount in excess of 25 per centum of the gross income reported therein.

1. Held, petitioner failed to prove that amounts in excess of $ 500 paid to its vice president were reasonable compensation for personal services actually rendered within the purview of section 23… Held: petitioner failed to prove that amounts in excess of $ 500 paid to its vice president were reasonable compensation for personal services actually rendered within the purview of section 23 (a) of the 1939 Code. 2.

Petitioner, under an exclusive contract to direct motion picture films for one producer, nevertheless contracted to produce a film for a second producer. Held: the entire sum received by petitioner under his contract with the second producer constituted gross income to him upon receipt.

1. Income -- Accrual -- Fees -- Prior Commitment as to Use. -- Fees, which a wholly owned subsidiary agreed to pay to its parent for services, did not cease to be income to the parent on an accrual basis after the parent, in order to strengthen the credit of the subsidiary and to give it more capital, agreed to invest the fees, up to a stated amount, in capital stock of the subsidiary. 2.

Held, on the basis of the facts of record, cattle raised by petitioner and sold when they were between the ages of 6 and 24 months were held * * * for * * *… Held: on the basis of the facts of record, cattle raised by petitioner and sold when they were between the ages of 6 and 24 months were held * * * for * * * breeding, or dairy purposes within the meaning of section 117 (j) (1) of the 1939 Code and the gains arising from those sales were, therefore, capital gains.

1. The two principal officers of a corporation, who owned or controlled all of the outstanding capital stock, removed checks from the corporation's incoming… Held: the diverted funds are taxable as ordinary income to the corporation which is not entitled to an offsetting embezzlement loss under section 23 (f) of the 1939 Code. Held, further, accrued but unpaid Federal taxes are not deductible in determining the amount of the earnings and profits of a cash basis corporation.