Volume 23 — Tax Court Memorandum

Miscellaneous issues relating to income and deductions, decided.

Petitioner was engaged in the business of packing and marketing carrots. Held: The Commissioner properly allocated to petitioner pursuant to sec. 482, I.R.C. 1954, the income reported by the controlled corporation but actually earned by petitioner. Petitioner claimed a business bad debt deduction pursuant to sec. 166, I.R.C. 1954, on account of the alleged loss of certain dealer's reserves.

Held, that capital losses sustained by the trust in the sale of a portion of its asset are chargeable against corpus and are not deductible from the income which was distributed to the income… Held: that capital losses sustained by the trust in the sale of a portion of its asset are chargeable against corpus and are not deductible from the income which was distributed to the income beneficiary.

The stock of X corporation was held 37 1/2 percent by a trust, 37 1/2 percent by M, the vice-president and manager, and 25 percent by… Held: That R acted for a syndicate consisting of the trust, individuals, himself, and the corporation who were the actual purchasers of the 375 shares of M; that the corporation acquired it from M, not R (the petitioner), and redeemed 128 shares, under section 317(b), 1954 Code, for $192,000; that the corporation did not pay a pre-existing…

Value of real estate for gift tax purposes determined.

Held: (1) That all petitioners understated their taxable income for the years 1949, 1950 and 1951 by overstating expenses. Held: That all petitioners understated their taxable income for the years 1949, 1950 and 1951 by overstating expenses.

During the years 1953 through 1955 petitioner was a party to defalcations by the state auditor of Illinois and retained, but fraudulently failed to report as income, proceeds of checks issued to him in payment of fictitious invoices. Petitioner also received payments from a subcontractor which he fraudulently failed to report as income. Respondent's determination of the amount of petitioner's capital gain on the redemption of his corporate stock is sustained, although certain deductions are allowable to petitioner. Petitioner is entitled to deduct only part of expenses incurred in 1955. Petitioner is liable for the statutory additions to tax for fraud in all years involved and for the failure to file an estimated tax return in 1953 and 1954, upon the underpayments in question.

The petitioner, a real estate broker for many years, occasionally bought and sold real property. In 1953 he sold certain properties which he claimed he held as investments and not "primarily for sale to customers in the ordinary course of his trade or business." Section 117(a)(1) of the 1939 Code. He also claimed that the sale that year by him of all the stock of a corporation whose sole asset was one of the properties should be treated as a sale of realty. Held: The petitioner held the properties in question for investment purposes and therefore was entitled to capital gain treatment on their disposition. This was also the case with respect to the property held by his solely owned corporation and therefore the question of whether he sold realty or capital stock is rendered moot.

1. Petitioners sold all of the stock of Radio KITE, Inc., in 1958 under two separate contracts. Held: the payments received during the taxable years under the second contract were not a part of the selling price of the stock and are taxable to petitioners as ordinary income. 2.

In 1951, respondent made a ruling that because of the nature of petitioner's business, petitioner could not use any long-term contract method… Held: The accrual method used by petitioner is an authorized method which clearly reflects petitioner's income; the use thereof in 1959 did not result in any distortion of income; petitioner was entitled to use its accrual method in computing income for 1959, and was entitled under that method to deduct all of its expenses actually…

Each of three corporations issued notes in the face amount of $150,000 to nonstockholders for $50,000 cash. Held: That under the circumstances of this case, the notes constituted equity capital and not loans. Interest and amortization deductions were properly disallowed.

Held, pre-merger 1950 net operating loss sustained by petitioner corporation in business of manufacturing and selling motor trucks can not be carried over and offset against post-merger 1953 and 1955 income generated by business of manufacturing and selling industrial clutches and brakes which had been merged into the petitioner in 1952. Libson Shops, Inc. v. Koehler, 353 U.S. 382.

Petitioner sold his insurance agency, including goodwill, records, expirations, and furniture and fixtures, for a lump-sum consideration of $24,000. Held: no part of the purchase price was allocable to the covenant not to compete. Held, further: A part of the purchase price was allocable to the services to be rendered by petitioner. Amount determined. Petitioner's basis in the agency determined.

Held, expenses incurred and paid by an insurance claims adjuster in attending night law school are deductible as ordinary and necessary business expenses under section 162(a) of the Internal Revenue… Held: expenses incurred and paid by an insurance claims adjuster in attending night law school are deductible as ordinary and necessary business expenses under section 162(a) of the Internal Revenue Code of 1954, and Income Tax Regs., section 1.162-5(a).

1. Held, that the daughters of the petitioners Jeremiah O'Donnell, Sr. and Margaret O'Donnell and the sister of Margaret O'Donnell were,… Held: that the daughters of the petitioners Jeremiah O'Donnell, Sr. and Margaret O'Donnell and the sister of Margaret O'Donnell were, together with the senior O'Donnells, bona fide members of a partnership, and that therefore the respondent erred in allocating to the senior O'Donnells the shares of partnership income reported as belonging…

Petitioner performed numerous legal services for the testatrix over a 25-year period from 1930 until her death in 1955. However, the great bulk of these services were performed between 1930 and 1946. He submitted no bills to his client, and she, having paid him small amounts from time to time, did not consider that any debt existed. In appreciation for these services and because of their long and close association she left petitioner $10,000 by a codicil to her will made in 1952, but she did not intend this to be actual payment for services rendered: Held: since the $10,000 was not intended to be compensation, it is a bequest within the meaning of section 102 of the 1954 Code, and is therefore excluded from gross income.

Petitioners granted the Phillips Petroleum Company and its assigns the right to use water underlying certain portions of their property. Held: the water rights grant did not effect a sale of the water in place, and the annual amounts received by petitioners were taxable as ordinary income and not as long-term capital gain.

Net worth increase: Burden of proof: Beginning and ending computations. - Errors in the Commissioner's beginning and ending computations of the networth of taxpayers who failed to maintain adequate records of their gambling activities did not destroy the presumption that the Commissioner's determinations were correct and impose the burden of proof on him. The burden remained upon the taxpayers to demonstrate that the Commissioner was wrong as to each item involved.

Petitioner, in charge of developing good customer relations for his employer, expended certain amounts during the year in question for transportation, meals, lodging, and entertainment. Held: petitioner was not required to include in his taxable income for the year 1959 any amount of the reimbursement for expenditures he received from his employer. Held, further, petitioner is not liable for the addition to tax under section 6653(a), I.R.C. 1954.

Held, that a portion of amounts expended by two elementary and high school music and band instructors on an organized music and cultural tour in Europe… Held: that a portion of amounts expended by two elementary and high school music and band instructors on an organized music and cultural tour in Europe are deductible under section 162(a) of the 1954 Code as ordinary and necessary expenses incurred in maintaining and improving their skills in their respective employments.

Amount of taxicab tips determined.

Petitioner made various expenditures in renovating and improving a building for a new tenant under the terms of the lease. Held: all of the expenditures made by petitioner were part of an overall plan for renovating and improving the building, and must be capitalized.

Held, that the cost basis of certain depreciable property did not exceed $28,000 and that since, prior to the taxable year 1958, the… Held: that the cost basis of certain depreciable property did not exceed $28,000 and that since, prior to the taxable year 1958, the petitioners had already been allowed depreciation deductions with respect to such property in excess thereof, they are not entitled to any depreciation deduction with respect thereto for the taxable year 1958.

Pollack sold used cars under a trade name. Held: The corporations were engaged in business and the omitted income is taxable to them; (2) Such income is taxable to Pollack as dividends or capital distributions from the corporations; (3) The deficiencies in tax of Pollack and the corporations are due to fraud with intent to evade tax; (4) The statute of limitations does not bar the…

Petitioner and X each owned 50 percent of the stock in A, B, C and D corporations. Held: Petitioner realized long-term capital gain on the sale to C and D corporations of his stock in those corporations and the proceeds of the sale received by B corporation represent a capital contribution by petitioner to that corporation.

Petitioner is a real estate holding company and rented certain properties which it owned to three of its subsidiary corporations for the fiscal year 1958 for a total of $43,200. Held: the forgiveness in 1959 of 50 percent of the prior year's rentals amounted either to a gift or a contribution to capital by the petitioner to the subsidiaries and in either event is not deductible.

The return of petitioners for 1954 was filed more than three but less than six years before the mailing of the statutory notice of deficiency to the petitioners. Held: Respondent has not sustained his burden of proving that petitioners omitted from their gross income for 1954 an amount properly includable therein in excess of 25 percent of the gross income reported by petitioners in their return for that year.

Petitioners and others, believing they had an opportunity to obtain a license to operate a television station, formed Wespen Television, Inc., to handle the transactions required in filing and… Held: The loss incurred by petitioner from the liquidation and dissolution of Wespen Television, Inc., is to be treated as a capital loss.

Petitioner, a nurse, was employed principally by four persons on regular night duty during successive periods of the taxable years involved. Held: Petitioner's automobile expenses incurred in getting to the places at which her services for her patients were performed are nondeductible personal expenses. Sec. 262, I.R.C. 1954. Held further: No part of petitioners' residence was property used in a trade or business depreciable under section 167, I.R.C. 1954.

For the calendar years 1955, 1956, and 1957 petitioners reported certain conceded gains from three tracts of timber (Travers, Section 33, and Wilson) as long-term capital gain. The respondent determined that the gains were ordinary income.

1. Deductible farm expenses determined. 2. Amount of casualty loss from frost damage to lime trees determined. 3. Petitioner failed to prove that he incurred deductible travel expenses while away from home in his employment as a commercial airline pilot in excess of the amounts reimbursed by his employer. 4. Addition to tax for negligence applied.

Consideration received by taxpayer under a contract for sale of his accounting business was consideration for the sale of a capital asset, taxable as capital gain.

1. Petitioner purchased, under a written Agreement of Sale, dated January 23, 1956, certain assets, including all machinery and equipment, and… Held: Of the total amount of $472,232.46 paid by petitioner for the purchase of the assets, both tangible and intangible, of the Philadelphia Steel and Iron Company, the sum of $294,967.76 represented the cost to petitioner of machinery and equipment for depreciation purposes and $177,264.70 represented the cost of intangible assets…

Petitioner, a sixth grade science teacher and part-time electronics engineer, purchased with his own funds certain items of electronic equipment which he used at times for demonstration purposes in… Held: petitioner's expenditures for the electronic equipment and books were not deductible either as educational expenses or as ordinary and necessary expenses of petitioner's trade or business.

Held: Petitioner, a waiter, has failed to show error in respondent's computation of his tip income or in the imposition of additions to tax under section 6653(a) for failure to keep adequate records. Held: Petitioner, a waiter, has failed to show error in respondent's computation of his tip income or in the imposition of additions to tax under section 6653(a) for failure to keep adequate records.

Held, that petitioner who was a Graduate Electrical Engineer employed as a Patent Searcher is not entitled to deduct for income tax purposes certain expenses which he… Held: that petitioner who was a Graduate Electrical Engineer employed as a Patent Searcher is not entitled to deduct for income tax purposes certain expenses which he incurred during the taxable year in attending a University Law School and pursuing a course of law studies leading to a Bachelor of Law degree.

Gift tax - Annual exclusion - Gifts in trust to minors - Only trust income expendable for benefit of minors. - Gifts to minors of trust income interests qualified for the $3,000 annual gift tax exclusion, even though the trustees did not have authority to expend trust corpus for the benefit of the beneficiaries during their minority. A.I. Herr, 35 TC 732, CCH Dec. 24,652 (nonacq.), affirmed, CA-3, 303 F. 2d 780, 62-2 USTC [*] 12,079, controlling.

Petitioner was a family-owned corporation engaged in the business of baking and distributing bread and related products in the southwestern part of the… Held: The amounts advanced to petitioner's affiliate represent unreasonable accumulations of earings. The earnings retained by petitioner in excess of the amounts advanced to its affiliate were retained to meet the reasonable needs of its business, and petitioner is entitled to an accumulated earnings credit based thereon.

1. Held, that the $10 per diem living allowance which was paid to petitioner Jack L. Luckett by McDonnell Aircraft Corporation of St.… Held: that the $10 per diem living allowance which was paid to petitioner Jack L. Luckett by McDonnell Aircraft Corporation of St. Louis, Missouri, while petitioner, an employee of the corporation, was assigned by the corporation by different assignments which totaled a period of almost three years to perform duties at Holloman Air Force…

Held, no bona fide indebtedness existed in connection with a transaction involving the purported purchase of United States Treasury Notes, and… Held: no bona fide indebtedness existed in connection with a transaction involving the purported purchase of United States Treasury Notes, and consequently the payment made by petitioner to a bank purportedly as interest is not deductible as interest on an indebtedness within the meaning of section 163(a) of the I.R.C. of 1954.

Upon its organization, petitioners and other stockholders paid $1,000 for all the capital stock of a corporation organized to acquire, subdivide, develop, and sell real estate, and also paid to the… Held: the $25,000 paid to the corporation represented equity capital rather than loans to the corporation and respondent's determination, that amounts paid to petitioners by the corporation as repayments of loans, and interest thereon, were taxable as dividends, is sustained.

1. On July 30, 1959, petitioners and petitioner-husband's mother, as lessors, leased certain property for a term of 49 years for a total rental of $686,000 ($14,000 per year) $28,000 payable on execution of this lease. At about the same time the lessors entered into an Agreement for Division of Rent whereby it was agreed that as long as petitioner-husband's mother shall live, she was to receive $4,500 of the yearly rental and petitioners were to receive $9,500.

Money contingently paid to Charles F. McNamee periodically during the year 1953 as salary, the payment being contingent on the payor corporation having sufficient earnings to pay a 6 percent dividend on preferred stock, held not income to the payee where within the year the corporation determined it did not have sufficient earnings to pay both the dividend and salary, and upon such determination reversed the salary entry on its books.

Held, the cancellation by petitioner of an obligation by his divorced wife to pay him $2,500 upon the sale of a residence which had been… Held: the cancellation by petitioner of an obligation by his divorced wife to pay him $2,500 upon the sale of a residence which had been conveyed to her in a property settlement incident to the divorce and for which obligation she was in possession of funds with which to pay at the time petitioner canceled it, was not a periodic payment…

Held: Petitioner was not away from home in 1958 while at Edwards Air Force Base. Held: Petitioner was not away from home in 1958 while at Edwards Air Force Base.

The petitioner was able to raise only part of the necessary funds to buy the stock of a certain corporation. Therefore, as part of the stock-purchase agreement, he had the corporation give its note to the former shareholders in part payment for the stock. The corporation also borrowed $18,000 from a bank to provide the necessary cash to close the stock sale. Held: The obligations to both the former stockholders and the bank were those of the corporation, and their discharge was not a dividend to the petitioner.

1. Held, that the corporate petitioner failed to report in its returns substantial amounts of income from its contracting business. The amount of its gross receipts, costs of operations, and net profits determined. 2. Held, that some part of the deficiency due from the corporate petitioner for each of the years 1946 through 1950 is due to fraud with intent to evade tax and that such petitioner is liable for additions to tax under section 293(b) of the Internal Revenue Code of 1939. 3. Held, that such petitioner's return for each of the taxable years 1946, 1947, and 1948 was false and fraudulent with intent to evade tax and that, under section 276(a) of the Code, assessment and collection of the deficiencies due for those years are not barred by the statute of limitations. 4. Held, that the individual petitioners failed to report in their returns substantial amounts of income, including amounts of corporate receipts diverted by the petitioner Patsy F. DiZenzo to his own use from the corporate petitioner and another corporation which he owned and controlled. 5. Held, that some part of the deficiency due from the individual petitioners for each of the taxable years 1946 through 1951 is due to fraud with intent to evade tax and that such petitioners are liable for additions to tax under section 293(b) of the Code. 6. Held, that the joint return of the individual petitioners for each of the taxable years 1946 through 1950 was false and fraudulent with intent to evade tax and that assessment and collection of the deficiencies due for those years are not barred by the statute of limitations. 7. Held, that the petitioner Patsy F. DiZenzo is liable, as a transferee, to the extent of his diversions of receipts of the corporate petitioner, for any taxes due from the corporate petitioner. 8. Held, that the respondent has not met the burden of proving that the petitioner Anna DiZenzo is liable, as a transferee, for the transferee liability of the petitioner Patsy F. DiZenzo, since he has failed to show that, under the law of the State of Connecticut, transfers of property and money to her were void for actual fraud or constructive fraud.

Petitioner received stock in the amount of $525,000 and five debenture bonds in the total face amount of $500,000 in 1954 when he incorporated his sole proprietorship and transferred all his operating assets to the corporation. The debenture bonds in form were evidences of indebtedness. In 1956 petitioner sold the debenture bonds to an investment brokerage firm for face value plus accrued interest of $7,916.67. Six months later the corporation redeemed said bonds for face amount plus $26,000 of accrued interest. Held: That the debenture bonds are bona fide evidences of indebtedness, and, held further, that no part of the interest in the amount of $26,000, received by the brokerage firm is income to petitioner.

Held: Respondent failed to prove by clear and convincing evidence that each petitioner filed a false or fraudulent return with intent to evade tax. Held: Respondent failed to prove by clear and convincing evidence that each petitioner filed a false or fraudulent return with intent to evade tax. Therefore, assessments of deficiencies are barred by the statute of limitations. Secs. 276(a), 1112, 1939 Code.

Petitioner, a cattle raiser, valued its inventories at cost or market, whichever is lower. To identify the animals in its closing inventories petitioner used a modified FIFO method. Held, petitioner's inventory method is acceptable. Held, further, petitioner is entitled to value its 1952 and 1955 closing cattle inventories at market value, having shown that market value was lower than cost for both years. Market value of inventories determined. Value of property transferred, in redemption of stock in minority shareholder, determined.

Held, redemption of wife's preferred stock (where she and her husband retained the balance of the stock interest) was essentially equivalent to a dividend within the meaning of section 302(b)(1),… Held: redemption of wife's preferred stock (where she and her husband retained the balance of the stock interest) was essentially equivalent to a dividend within the meaning of section 302(b)(1), I.R.C. of 1954.

Transferee liability: Exhaustion of remedies against primary obligor: Burden of proof. - The Commissioner carried his burden of proving that he had exhausted his remedies against the primary obligor, that there were transfers of assets by the primary obligor to the petitioner without consideration during or after the time the primary obligor's tax liabilities accrued and that at the time of the transfers the primary obligor was insolvent or that the transfers rendered it insolvent. Therefore, the taxpayer was liable as transferee.

The Goldenbergs transferred the stock of a corporation, the assets of a related partnership, and certain business real estate to the… Held: Under the doctrine of collateral estoppel, a decision of the Court of Claims in a prior proceeding involving installment payments received by the Goldenbergs in 1954 pursuant to their agreement with the Foundation conclusively establishes that they are entitled to capital gain treatment on the payments received by them in 1955 and…

Held, that petitioner is not entitled to charge off to its bad debt reserve for 1958 an account of $28,090.58 which it allegedly held against a former debtor and is not entitled to increase its bad debt reserve for 1958 by an addition of such an amount so as to permit a chargeoff of that amount.

A parent corporation's intercompany profit from contracts with subsidiaries, eliminated from consolidated returns for years prior to 1958, held not to constitute income to the parent in 1958 when all stock of the subsidiaries was sold to an unrelated party, following Henry C. Beck Builders, Inc. 41 T.C. 616.

The petitioner, a manufacturer and wholesaler of hats, acquired on March 29, 1954, the capital stock of Young's a corporation engaged in… Held: that the petitioner's principal purpose for the acquisition of control of Young's was to preserve such corporation as a market and retail distributor of petitioner's hats and was not the evasion or avoidance of Federal income tax by securing the benefit of the deduction of Young's net operating losses, and that accordingly the…

Held, respondent's determination of petitioners' business income by the cash expenditures and source of funds method sustained, except for one item. Held: respondent's determination of petitioners' business income by the cash expenditures and source of funds method sustained, except for one item. Held, further: At least a part of the deficiency was due to negligence or intentional disregard of the rules and regulations, and was not due to reasonable cause.

Payments on promissory demand notes issued by petitioner corporation to its shareholder-incorporators, held, not interest on indebtedness under sec. 163(a), Code of 1954, and, held further, not… Held: not interest on indebtedness under sec. 163(a), Code of 1954, and, held further, not deductible from petitioner corporation's gross income.

During the taxable years 1955, 1956, and 1957, petitioner deposited in his checking account approximately $246,300. Held: petitioner has failed to show that the respondent erred in including in taxable income the bond interest of $2,028.82 but has shown that $6,115.70 of the $20,736.24 was not taxable income.

Petitioner, by trade a professional ice skater, is an employee of the Ice Follies. Held: that the expenses were incurred by the petitioner while she was away from home, and that the entire amount of the expenses is deductible under sections 162(a)(2), and 62(2)(A) and (B), 1954 Code.

Petitioner, a professional ice skater, was employed by and required to travel with the Ice Follies show to various cities except during a lay-off period, without pay, when her employer paid for her… Held: that the entire amount of the expenses is deductible as expenses incurred while away from home under sections 62(2) and 162(a)(2), 1954 Code.

Taxpayers held real estate for sale to customers in the ordinary course of their trade or business in 1958 and 1959, but not in 1957. Gains on 1958 and 1959 sales are ordinary income; 1957 sales result in capital gains.

Petitioners distributed bakery products made by the student bakery of Berea College. Held: Under the cash method of accounting the loss created by the exchange of fresh bread for stale is not allowable until it is actually paid. Petitioners have failed to carry their burden of proof that these losses were allowable in the years here involved.

Petitioners furnished more than one-half the support of husband-petitioner's sister, and petitioners are entitled to a deduction for the $600 dependency exemption.

1. Arlington Corp. (now Interestate Steel Co., the corporate petitioner herein) during its fiscal period February 1, to December 31, 1955, suffered a net… Held: That the principal purpose of the stockholders of Illinois and Minnesota for acquiring control of Arlington was to evade or avoid Federal income tax by securing to themselves the benefit of Arlington's (now Interstate Steel Co.) net operating loss deductions, which said stockholders would not have otherwise enjoyed.

Held, claim against decedent's estate was bona fide, for an adequate and full consideration, and is thus deductible under sec. 2053(a)(3), I.R.C. 1954.

Real property and mortgages on real property were held for sale by the petitioners or their joint ventures in the ordinary course of their trades or businesses.

Respondent properly disallowed deductions for alleged rental payments since, under the facts, such payments were not intended as rent, but constituted nondeductible items.

Petitioner-corporations, all controlled by Alfred L. Kaskel, made bona fide mortgage loans and in connection with these loans made interest payments, mortgage bonus payments and certain other related… Held: petitioners are entitled to deduct the interest payments and mortgage bonus payments incurred in connection with these mortgage loans.

Petitioner, Western New York Water Company, sold all of its properties and assets to the Erie County (New York) Water Authority in a settlement in lieu of condemnation in 1953. Held: that petitioner Western has established that its easements, franchises, rights of way, etc., acquired prior to March 1, 1913, had a fair market value on that date; that value determined.

The $41,250 voted for petitioner by Berlin & Jones on October 30, 1956, was not a voluntary act proceeding from detached and disinterested generosity, and hence was not a gift within the meaning of section 102 of the Internal Revenue Code of 1954.

Held: Weekly payments made to petitioner Epstein by petitioner Philip M. Schlussel, pursuant to a formal agreement as consideration for Epstein's covemant not to compete, in fact represented part… Held: Weekly payments made to petitioner Epstein by petitioner Philip M. Schlussel, pursuant to a formal agreement as consideration for Epstein's covemant not to compete, in fact represented part payments for the purchase of Epstein's going insurance brokerage business.

Held, that the operation of a farm during the taxable years 1956, 1957, and 1958 did not constitute the carrying on of a trade or… Held: that the operation of a farm during the taxable years 1956, 1957, and 1958 did not constitute the carrying on of a trade or business and that the petitioner is not entitled to deduct ordinary and necessary expenses incurred in connection therewith, losses sustained in the operation thereof, or depreciation on account of property used…

Petitioner resided on a farm from 1946 to the time of trial, including the taxable years 1956 through 1959, inclusive, involved herein. Virtually all of her time was devoted to varied and arduous activities on said farm, such as raising agricultural products, horses, cattle, and boarding dogs. Petitioner sustained substantial loses during the entire period in which she operated the farm, including the years in issue. Held: That the losses which petitioner incurred during the taxable years in question are deductible as losses incurred in the operation of a trade or business within the intendment of sec. 162, I.R.C. 1954.

1. Held, collateral estoppel does not apply in this proceeding against petitioners due to our decision in J. Raymond Dyer, 36 T.C. 456 (1961). The parties in this proceeding are the same as in 36 T.C. 456, supra, but the facts are not the same. 2. Held, certain expenditures made by the petitioners in 1958 were deductible under section 162, I.R.C. 1954, as conceded by respondent at the hearing and in his brief; held, further, certain other expenditures made by the petitioners in 1958 and 1959 were not deductible under either section 162 or section 212 of the 1954 Code.

Held, petitioner's opening inventory for computing cost of goods sold is zero since its basis in the inventories resulting from a tax-free exchange is zero. Held: petitioner's opening inventory for computing cost of goods sold is zero since its basis in the inventories resulting from a tax-free exchange is zero.

Held: That petitioner was not engaged in carrying on a business of promoting corporations for the purpose of sales of the stock thereof, and that legal fees and expenses incurred by him in connection with the collection of loans made by him to certain corporations are not deductible as ordinary and necessary business expenses under section 162 of the Internal Revenue Code of 1954. Held, further, that the portion of the legal fees and disbursements paid in connection with suits which is attributable to claims for recovery of the principal of alleged loans is not deductible under section 212 of the Internal Revenue Code of 1954, but that the portion thereof attributable to claims for collection of interest on the alleged loans is deductible under section 212. The deductible amounts determined. Held, further, that the portion of legal fees and disbursements paid in a suit which is attributable to an attempted revision of the selling price of stock is not deductible as expense under section 212, but is properly to be treated as a capital expenditure to be taken into account in computing gain or loss upon the sale. Held, further, that no part of the legal fees and disbursements paid to an attorney in connection with a condemnation proceeding resulting in the receipt of an award, including interest, is deductible as expense under section 212(1) of the Code. Held, further, that interest paid by the petitioner on the tax liability of a corporation of which he was a transferee is deductible by him to the extent it represented interest accrued subsequent to the receipt of corporate assets by him.

Held: 1. Petitioner cannot deduct as worthless a debt which has been voluntarily forgiven. 2. A second alleged debt has not been proved worthless in the year in issue so as to support deduction. 3. Held: Petitioner cannot deduct as worthless a debt which has been voluntarily forgiven. 2. A second alleged debt has not been proved worthless in the year in issue so as to support deduction. 3.

Certain items claimed as interest deductions for 1956, 1957, and 1958 disallowed on the ground that as payments of interest, the transactions were shams. Joseph H. Bridges, 39 T.C. 1064, affd. 325 F. 2d 180, Eli D. Goodstein, 30 T.C. 1178, affd. 267 F. 2d 127, and like cases, followed. Additional travel and entertainment expenses allowed for 1958.

Held, Farmers Investment Company did not incur any loss within the meaning of section 23(f), I.R.C. of 1939, as a result of the flooding of its property in 1952. Held: Farmers Investment Company did not incur any loss within the meaning of section 23(f), I.R.C. of 1939, as a result of the flooding of its property in 1952.

1. Held, respondent failed to carry his burden of proof as to fraud for the years 1942 through 1946 because no returns for those years were introduced in evidence and there was no other proof offered as to what petitioners' returns for those years had contained. Assessment of deficiencies for those years is barred by the statute of limitations. 2. Held, petitioners fraudulently omitted substantial amounts of income from their income tax returns for each of the years 1947 through 1956 with intent to evade tax. Therefore, assessment for those years may be made at any time and the 50 percent penalty for fraud is also applicable. 3. Held, the penalty for substantial understimation of estimated tax is also applicable to each of the years 1947 through 1954.

Petitioners entered into an agreement dated June 6, 1958, with Blackwelder Textile Co., Inc., a corporation, and Joseph J. Immerman, a… Held: The fair market value of certain property received by petitioners was determined; (2) The aggregate amount received by petitioners was allocable proportionately between the capital and ordinary income items included in the obligations owed to petitioners by Blackwelder; (3) Petitioners did not sustain a nonbusiness bad debt loss upon…

Held: Since the petitioner did not provide over one-half of his father's support, he is not entitled to a dependency exemption for his father under section 151(e)(1)(A) of the 1954 Code.

The petitioner on behalf of himself and other holders of stock and securities of Penndale entered into an agreement to sell such securities to… Held: That no portion of the recited consideration constituted ordinary income received by the petitioner for cancellation of his employment contract. Held, further, that the petitioner has not shown that certain payments made to a chemist constituted research or experimental expenditures deductible under section 174 of the Code.

Nash Miami Motors, Inc., and its predecessor partnership, Nash Miami Motors, were engaged in the business of selling new and used automobiles. Held: That Sydney's distributive share of the income from the partnership was understated by reason of the failure of the partnership to report all income from the sale of used cars. 2. That the unreported proceeds from the sale of used cars on behalf of the corporation constituted additional income to the corporation. 3.

Held, petitioner, together with his wife, Marie A. Deatherage, as sole members of the partnership known as George E. Deatherage & Son,… Held: petitioner, together with his wife, Marie A. Deatherage, as sole members of the partnership known as George E. Deatherage & Son, realized a taxable gain on the sale and reacquisition of the partnership's business in the taxable year 1959 in the amount of $12,450, which gain was not reported either on the partnership's final return…

Petitioner's 8-year-old daughter as severely afflicted with cerebral palsy from the date of her birth. Held: the Commissioner is sustained in his disallowance of depreciation on the Ford automobile - depreciation is not an amount paid but represents a decrease in value of the automobile. Maurice S. Gordon, 37 T.C. 986 (1962), followed.

Held, on these facts, that petitioner, a retired corporate executive, is not entitled to deduct amounts paid for safaris, traveling… Held: on these facts, that petitioner, a retired corporate executive, is not entitled to deduct amounts paid for safaris, traveling expenses, cameras and film processing, and losses resulting therefrom, because he was not engaged in the trade or business of lecturing on big game hunting adventure films during the years 1957 through 1959.

Petitioner is the daughter of the transferor, David J. Pleason. Held: Respondent has established that petitioner is liable as a transferee to the extent of transferor's beneficial interest in the vessel conveyed to her in the amount of $16,905.92, together with interest thereon as prescribed by Texas law, from the date of transfer, February 15, 1959. 2.

Deduction: Nonbusiness debts. - Held, that petitioner's loans to a corporation were not proximately related to any trade or business of petitioner and… Held: that petitioner's loans to a corporation were not proximately related to any trade or business of petitioner and therefore constituted a nonbusiness debt. Further, held, that since such nonbusiness debt did not become wholly worthless in the taxable year 1958, no amount is allowable as a deduction for that year.

In 1958 petitioner Sarah H. Leaf Whitney paid $20,964.27 in attorney fees in a will contest respecting a will in which she had been appointed executrix and under which will… Held: that so much of the attorney fees as is properly allocable to the property which petitioner received in the settlement is not deductible. Held, further, that so much of the attorney fees as in allocable to the commissions paid petitioner as executrix is deductible under section 212(1), I.R.C. 1954.

Held, respondent erred in disallowing to petitioner Martell, as an ordinary and necessary business expense, a substantial portion of loan fees paid to American Savings & Loan… Held: respondent erred in disallowing to petitioner Martell, as an ordinary and necessary business expense, a substantial portion of loan fees paid to American Savings & Loan Association in connection with a subdivision development. Held, further, American is not liable as transferee of Martell.

Held, that payments aggregating $22,916.63 received by Frances C. Cross in the taxable year from a corporation of which her deceased… Held: that payments aggregating $22,916.63 received by Frances C. Cross in the taxable year from a corporation of which her deceased husband had been president and a director at the time of his death, are includable in her gross income under section 61(a), I.R.C. 1954, except to the extent of the exclusion provided by section 101(b) of…

1. Held, that a purported sale in 1958 by the principal petitioner for $100 of all of his stock in Bradley, Inc., to a close friend who… Held: that a purported sale in 1958 by the principal petitioner for $100 of all of his stock in Bradley, Inc., to a close friend who managed a dress shop operated by said corporation, was not a bona fide arm's length transaction; and that petitioner is not entitled to a deduction for a long-term capital loss on said purported sale of…

1. Held, the sale of the Harlem Avenue property occurred in 1957 as stipulated by the parties, and not in some other year as contended by petitioners and petitioners therefore realized taxable income from the sale of capital assets of $65,476.93 in lieu of $17,641.35 as reported by them in their 1957 return. 2. Held, petitioners are entitled to a casualty loss deduction under section 165(a) and (c)(3), I.R.C. 1954, of $7,500 due to the freezing of asparagus plumosus ferns during the winter of 1957. Cohan v. Commissioner, 39 F. 2d 540, applied. 3. Held, petitioners are not entitled to any loss from worthless Polish bonds during the year 1957.

Petitioner accumulated its earnings and profits beyond the reasonable needs of its business during the year here involved and was availed of for the purpose of avoiding the income tax with respect to its shareholders. Secs. 531 through 537, I.R.C. 1954.

Held, petitioner has failed to show that respondent erred in determining that certain freight revenues accrued during 1952 and 1953 and should have been reported in those years. Held: petitioner has failed to show that respondent erred in determining that certain freight revenues accrued during 1952 and 1953 and should have been reported in those years.

Petition was received and filed in the Tax Court on the 92nd day after the notice of deficiency was mailed. Held: petitioners failed to prove that the covering envelope was postmarked on or before the 90th day; therefore, the actual filing date controls. Motion to dismiss for lack of jurisdiction granted.

Petitioner corporation acquired certain assets from its principal officer and controlling stockholder, George P. Thomas, Sr., in 1942 pursuant to a conditional sales contract under the terms… Held: Amount paid as interest to Thomas by petitioner in 1957 was not interest paid on indebtedness within the purview of sec. 163, I.R.C. 1954. 2. Held: Compensation paid by petitioner to each of three executives during 1957 was reasonable within the meaning of sec. 162, I.R.C. 1954.

Held, reasonable compensation for the year 1956 for petitioner's officers, determined. Held: reasonable compensation for the year 1956 for petitioner's officers, determined.

Petitioner during taxable year 1960 was employed from January 1, 1960, through June 30, 1960, and from October 10, 1960, through December 31, 1960, by… Held: Petitioner was engaged in the carrying on of the trade or business of being a real estate broker during the taxable year 1960. 2. Petitioner is entitled to business expense deductions for the taxable year 1960 in the amount of $353.49. 3. Petitioner is not entitled to a deduction in the amount of $325 for contributions.

Held, that amounts paid by petitioner as prepaid interest on funds borrowed to purchase Treasury notes are not deductible, where the Treasury note transactions would result in economic losses and where the actual motivating purpose of borrowing the funds was to reduce taxes through deductions of such prepaid interest.

1. Petitioners' taxable income from lottery operations during the years 1956, 1957, and 1958 redetermined. 2. At least a part of the deficiency in petitioners' income tax for each of the years 1956, 1957, and 1958 was due to fraud with intent to evade tax. Fifty percent addition to tax for fraud imposed.

Held: (1) Petitioner's books and records were inadequate to determine petitioner's taxable income for the taxable years in issue; (2)… Held: Petitioner's books and records were inadequate to determine petitioner's taxable income for the taxable years in issue; (2) Respondent properly determined petitioner's income under the bank deposits and withdrawals method for the taxable years involved; (3) Part of the deficiencies in petitioner's income taxes for the taxable years…

Petitioner formed Smith, Inc., in order to market grocery store supermarket check out counters. Its paid-in capital was $10,000. Held: The advances made by petitioner to Smith, Inc., were placed at the risk of the business of the corporation and constituted equity capital. Held, further, petitioner was not in the business of organizing, promoting, managing, or financing businesses.

Held, that at the time of his death the decedent had no power to alter, amend, revoke, or terminate an annuity payable to his wife for… Held: that at the time of his death the decedent had no power to alter, amend, revoke, or terminate an annuity payable to his wife for life after decedent's death; held, further, that the commuted value of the wife's annuity at the time of decedent's death is not includable in his estate under the provisions of section 2038(a)(1), I.R.C.…

Held, taxpayers were engaged in the business of breeding, raising, racing, showing, and selling horses during the years 1957, 1958, and 1959 and may deduct their losses incurred in that business.

In 1935 petitioner Arthur F. Brook was granted an exclusive franchise, unlimited in duration, to assemble and sell a newly developed type of binding for books. On April 11, 1955, Brook entered into an agreement with the grantor whereby the duration of the franchise was limited to 15 years and the range of products covered thereby was enlarged. On April 27, 1955, Brook sold the new franchise to a newly formed corporation for $600,000, payable ratably over 15 years. The negotiations for the sale of the franchise were at arm's length. The corporation, which took over the business of the proprietorship, entered into an agreement with a partnership composed of Brook and two others, under which the partnership was to provide the corporation with machinery and the corporation was to pay one-half of its net profits as rent. Held: Brook's transfer of the franchise to the new corporation constituted the sale of a capital asset. The franchise sold by Brook (1) was a different asset from the franchise originally granted to him, (2) did not receive a carryover basis, and (3) had not been held by Brook in excess of 6 months. The payments received in exchange therefor represent short-term capital gain. Held further: The new corporation is entitled to amortize the franchise at its cost over the 15-year life of the franchise. Held further: The new corporation's rental payment in the amount of $43,737.90 for 1957 was not unreasonable.

Petitioners were engaged in the operation of Wherry Housing Projects located on Larson Air Force Base. Held: Petitioners are entitled to deduct depreciation on leasehold improvements for a portion of the years in which condemnation occurred. Wyoming Builders, Inc. v. United States, 227 F. Supp. 534 (D. Wyo. 1964), on appeal (C.A. 10, May 28, 1964), and Macabe Company, Inc., 42 T.C. 1105, followed. 2.

Petitioner, a family-owned corporation engaged in the business of representing a group for insurance purposes and acting as an insurance agent for insurance companies, retained a substantial portion of its earnings and profits for the years 1956 through 1959. It had previously accumulated a large earned surplus over a period of years. During this period petitioner paid substantial dividends and large salaries and bonuses to its stockholder-officers. It also made substantial loans to an unaffiliated, inactive corporation, owned by the same family, of which it later acquired control. Held: The amounts of retained earnings in the years before us represented unreasonable accumulations of earnings and profits beyond the reasonable needs of petitioner's business. Held, further, petitioner was availed of for the purpose of avoiding the income tax with respect to its shareholders.

Held, that petitioners have failed to establish that they furnished during the taxable years 1959 and 1960, over half of the support of three… Held: that petitioners have failed to establish that they furnished during the taxable years 1959 and 1960, over half of the support of three minor children of petitioner Ted R. Pape by a prior marriage; and accordingly, they are not entitled to deductions for dependency exemptions under sections 151(e) and 152(a), I.R.C. 1954, with…

1. Held, on the facts, that no part of the consideration paid by petitioner as the purchase price for the going business of a retail liquor store, is properly allocable to the leasehold occupied by such business; and that petitioner is not entitled to an amortization deduction in respect of a claimed cost for said leasehold. 2. Held, that petitioner did not realize any taxable income as a result of a transaction whereby it relinquished its rights under a covenant not to compete executed by the seller of the liquor store, and said seller cancelled certain notes payable issued by petitioner in connection with the purchase of the store.

Petitioner John H. Maxwell owned the controlling stock of two corporations - one engaged in the warehousing and fabrication of steel and the other in the erecting of steel and in transportation. He divered to his own use checks received for goods sold or services rendered by the corporations without accounting for the proceeds on his returns or those of either corporation. He had the corporations pay some of his personal expenses. He received other unreported income and claimed excessive depreciation on his returns. He was indicted on four counts for tax evasion and pleaded guilty on two counts, upon which he was convicted. Held: (1) Petitioner's returns were false and fraudulent with intent to evade tax; (2) At least a part of each deficiency in tax was due to fraud with intent to evade tax; (3) Petitioner has not proved error in the deficiencies determined; and (4) The additions to tax are sustained.

Petitioner used his personally owned automobile in connection with his employment by a corporation in which he owned all of the stock. He was not reimbursed by his employer either for these automobile expenses or for entertainment expenses he sought to deduct. Held: Some travel expenses should be allowed for 1961 and the amount determined.

Petitioner held taxable on distributive share of partnership income attributable to a partnership interest he purportedly sold to a trust for his minor son.

Extent of petitioner's interest in a trust fund determined

Held, that expenses incurred by the principal petitioner in attending night law school are not deductible as ordinary and necessary business expenses under section 162(a) of the Internal Revenue… Held: that expenses incurred by the principal petitioner in attending night law school are not deductible as ordinary and necessary business expenses under section 162(a) of the Internal Revenue Code of 1954, and the regulations promulgted thereunder, Income Tax Regs., sec. 1.162-5.

The individual petitioner, (Docket No. 91655), who was president and sole stockholder of the corporate petitioner (Docket No. 91656) during each of the taxable calendar years 1955, 1956, and 1957,… Held: At least a part of the underpayment of tax of the individual petitioners and corporate petitioner for each of the taxable years involved was due to fraud with the intent to evade tax; and the additions to tax provided in sec. 6653(b) of the 1954 Code are to be applied. 2.

Issue 1. Held, (1) certain amounts paid by Systems for club dues and a trip by June to South America were made for the personal benefit of June, the principal stockholder of Systems, and, as such, constituted constructive dividends to June, Challenge Manufacturing Co., 37 T.C. 650, followed; (2) no part of the cost of an automobile owned by Systems and used by Elliott almost entirely in the operation of Systems' business was a constructive dividend to June; and (3) certain withdrawals by Elliott from Osceola and Systems were in fact bona fide loans to Elliott and not constructive dividends to June. Issue 2. Held, (1) Briarcliff, a small business corporation, subject to sections 1371-1377, I.R.C. 1954, was not entitled to report a 1958 sale of a hotel on the installment basis; (2) the fair market value on September 25, 1958, of a third mortgage note of $42,593.58 received as part consideration for the sale did not exceed the sum of $22,212.97; (3) the profit from the sale was $71,743.07 instead of $91,245.57 as determined by the respondent; and (4) such profit must under section 1375(d)(1), I.R.C. 1954, and section 1.1375-1(a), Income Tax Regs. , be reduced by the operating loss of Briarcliff for 1958 of $3,724.61. Issue 3 has become moot. Issue 4. Held, the transfer by June on or about April 30, 1959, of her stock in Daytona, No. 6 and No. 26, for the same number of shares of stock in Osceola was such an exchange of stock as is mentioned in section 354(a)(1), I.R.C. 1954, upon which no gain or loss shall be recognized. Issues 5 and 9 will be settled under Rule 50. Issue 6. Held, the assessment of any tax for the year 1958 against Elliott and June is barred by the statute of limitations. Issue 7. Held, Osceola realized rental income for the year 1958 in the amount of $3,250. Issue 8. Held, Osceola has failed to show error on the part of the respondent in disallowing $654.85 as legal expense for the year 1959.

Held: On the facts presented, that a check delivered to petitioner on December 30, 1960, dated December 31, 1960, but not cashed until… Held: On the facts presented, that a check delivered to petitioner on December 30, 1960, dated December 31, 1960, but not cashed until January 5, 1961, because of the drawee's statement at the time of delivery that he did not have money in the bank to cash it and his request that petitioner not cash it for four or five days, is not to be…

During the taxable years 1957 and 1959 petitioners sold or exchanged seven parcels of real estate upon which petitioners had built houses. Held: petitioners are entitled to capital gain treatment as to six of the parcels but are not so entitled as to one.

Held, where petitioner, in a settlement agreement executed December 2, 1959, with his employer, received from his employer, among other things, an agreement that his employer would pay him $6,500 within 90 days from the date of the signing of the agreement, and where, on the same day, December 2, 1959, petitioner in a separation agreement with his wife, for a full and adequate consideration received from her, assigned to his wife the aforesaid $6,500 agreement, the income which petitioner received from the $6,500 agreement was received in 1959 and not in 1960 as the Commissioner has determined.

Held, that $6,495.69 advanced to petitioner Curtis Blinsinger in 1959, and debited by the corporation to petitioner on the books of the corporation and designated as "Curtis Blinsinger - Loan Account", was a distribution of earnings and profits of the corporation within the meaning of section 316, I.R.C. 1954, and constituted dividends taxable to petitioner in 1959.

Held, that petitioner was not engaged in a trade or business of organizing and promoting corporations and that gains and losses resulting from the sale by him of stock of corporations received by him, upon the organization of such corporations, in exchange for mining claims, constituted capital gains and losses, and not ordinary gains and losses. Held, further, that various expenditures made by petitioner on behalf of corporations in which he held interests are not deductible by him as ordinary and necessary expenses under section 212 of the Internal Revenue Code of 1954. Held, further, that certain expenditures made by the petitioner, including office expense and costs of assistance in preparing his income tax returns, are deductible as ordinary and necessary expenses under section 212; that the cost of an engineering report with respect to property which the petitioner considered buying, but did not buy, is deductible as either a loss in a transaction entered into for profit under section 165(c)(2) of the Code, or as an ordinary and necessary expense under section 212 of the Code; but that petitioner has failed to show that other amounts which he paid on his own behalf constitute deductible items. Held, further, that certain sales of stock in 1954 resulted in long-term capital gain. Held, further, that the petitioner failed to show that a debt owing to him by one of the corporations in which he owned an interest became worthless in 1958, that he failed to show that certain other advances made by him to or on behalf of such corporation created debts, and that consequently he did not establish that he is entitled to any bad debt deduction for 1958.

During 1960, petitioner's wife was employed and she had gross income. She filed a separate return for the calendar year 1960. Petitioner filed a separate return for the calendar year 1960. Held: The question must be determined under the provisions of sections 151(b) and (e), and 152(a)(9) of the 1954 Internal Revenue Code. (2) Section 151(b) specifically precludes allowing petitioner an exemption deduction of $600 for his wife because she had gross income in 1960.

The Pub, Saratoga, and Waldorf leased slot machines to Challenger. All four were corporations owned by Graves. 1. Held: most of the slot machine lease payments are not deductible by Challenger as rent. Deductible amount determined. Sections 482, 162(a)(3), I.R.C. 1954. 2. Receipts by the Pub, Saratoga, and Waldorf of the disallowed rent payments do not, on the facts of this case, constitute taxable income to those corporations. 3.