Volume 26 — Tax Court Reports

1. Held, the revision effected by petitioner in 1949 to reflect contract sales accounts under which 95 per cent payments had been made in 1949… Held: the revision effected by petitioner in 1949 to reflect contract sales accounts under which 95 per cent payments had been made in 1949 and for which contingent adjustments might be made in 1950 upon the determination in 1950 of certain facts constituted a change in its accrual method of accounting for which prior consent of the…

Individual Income Tax Returns -- Joint or Separate. -- Return forms captioned in the names of both spouses and signed by both, in which it was stated that no separate returns were being filed, and in which the tax was computed on aggregate income, held to be joint returns on which the wife is jointly and severally liable for the deficiencies and additions for fraud, even though the fraudulent acts were solely those of the husband.

1. The petitioner is a corporation organized to acquire, subdivide, and sell real estate. It was organized with a total capital of $ 1,000. Held: the $ 57,800 paid over to petitioner by its stockholders constituted contributions to capital, rather than bona fide loans, and amounts paid by petitioner to the stockholders in 1948, 1949, and 1950 constituted nondeductible distributions in the nature of dividends rather than interest on indebtedness which is deductible under…

1. Petitioner, one of three licensed retail liquor dealers in Clinton, Tennessee, all of whom were restricted to operating within a 3-block area located approximately in the center of… Held: that petitioner failed to sustain his burden of proving that payments made by him under the lease in excess of $ 3,600 per year were required to be made as a condition to continued use of the premises within the meaning of section 23 (a) (1) (A) of the Internal Revenue Code of 1939. 2.

1. In 1939 an individual obtained from a patentee of a freezing and dispensing machine the exclusive right and license to the use, manufacture, sale and distribution of all machines built under the… Held: the 36 agreements were licensing agreements rather than sales of property and the payments received thereunder (both lump-sum and gallonage) were royalties taxable as ordinary income. 2.

Petitioner, officer-stockholder of corporations without current resources, having paid corporate expenses to forestall enforced corporate liquidations and so avoid secondary personal liabilities,… Held: further, additions to tax under section 291 (a), Internal Revenue Code of 1939, properly imposed.

1. Petitioner, with her husband, Leo, and their children, was domiciled in St. Paul, Minnesota, prior to 1939. Held: on the facts, that Leo's domicile during 1944 and 1945 was in Texas, that petitioner and Leo properly reported their income for those years on a community property basis, and that respondent did not err in not determining otherwise. 2.

1. Petitioner, upon withdrawing from an accounting partnership, received $ 25,000 for his interest in the cash capital account (then overdrawn), the… Held: petitioner received in substance an amount representing earnings of the partnership which is taxable as ordinary income. Helvering v. Smith, 90 F. 2d 590 (C. A. 2), followed. 2. Petitioner had overdrawn his capital account by $ 1,101.33, which he was permitted to retain upon severing his connection with the firm.

Petitioner's employer's business was liquidated by transfer of its assets to its sole stockholder. Concurrently with the transfer, petitioner became an employee of the transferee corporation. Held: following Mary Miller, 22 T. C. 293, affd. 226 F. 2d 618, that the lump-sum payment is taxable as long-term capital gain under section 165 (b), I. R. C. 1939.

Held, that each of the deficiencies here involved is due to fraud with intent to evade tax, and that the addition to the tax provided by… Held: that each of the deficiencies here involved is due to fraud with intent to evade tax, and that the addition to the tax provided by section 293 (b) of the Internal Revenue Code (1939) has been properly applied; held, further, that the additions to the tax provided by section 291 (a) for failure to file returns, by section 294 (d) (1)…

Dividends -- Reduction of Authorized Capital Represented by No-Par Common Stock -- Surplus Credited to Stockholders. -- A corporation reduced its authorized capital represented by no-par common stock in 1936 from $ 50,000 to $ 2,500, credited the difference to capital surplus, and over 21 months later transferred the amount from capital surplus to stockholders' accounts pro rata.

1. Held, the amount of executor's commissions approved by the Orphan's Court of Philadelphia County is to be allowed as a deduction for Federal estate tax purposes… Held: the amount of executor's commissions approved by the Orphan's Court of Philadelphia County is to be allowed as a deduction for Federal estate tax purposes and the Commissioner cannot limit the deduction to the amount allowed by the Commonwealth of Pennsylvania as a deduction for State inheritance tax. 2.

Held, petitioner timely filed, under section 322 (d) (1) (A) of the 1939 Code, a Form 991 claiming refund of its entire 1942 excess profits tax on section 722 grounds only. Held: petitioner timely filed, under section 322 (d) (1) (A) of the 1939 Code, a Form 991 claiming refund of its entire 1942 excess profits tax on section 722 grounds only. This was a claim for excess profits tax refund which satisfied the statute of limitations provision of section 322 (d) (1) (A).

Held, amounts received in 1951 and 1952 by petitioner Arthur C. Ruge, who in 1944 had transferred all right, title, and interest in certain… Held: amounts received in 1951 and 1952 by petitioner Arthur C. Ruge, who in 1944 had transferred all right, title, and interest in certain patents, were received partly as proceeds from the sale of patents taxable as long-term capital gain under the provisions of section 117 and partly as compensation for personal services taxable as…

Decedent died July 25, 1950, while domiciled in Louisiana. He was survived by his wife, a son, and three daughters, all of maturity. Held: the respondent erred in not allowing as such deduction the full amount of $ 616,146.90.

1. Dividend Income Taxable to Buyer or Seller of Stock. -- Agreement for the sale of stock provided that a dividend was to be declared which was to be applied on or reduce the purchase price of the… Held: dividend taxable as ordinary income to seller, since he owned and controlled the shares at the time the dividend was declared, and the dividend was made payable to and paid to him. 2.

1. Gain on Sale of Real Estate -- Capital Gain or Ordinary Income. -- Held, that land in a tract subdivided into 5-acre parcels, sold by petitioner in 1950 and 1951, was held in the taxable years primarily for sale to customers in the ordinary course of a business, and the gains realized are taxable as ordinary income rather than long-term capital gain. 2. Year in Which Gain is Taxable -- Cash Basis -- Cash Sales. -- Petitioner's agent executed contracts for two sales of real estate at the end of 1949 under which the buyer was to pay cash and the deed was to be given when the entire purchase price was paid. One buyer made a small cash deposit in 1949 when he executed the sales contract; the other, did not make a deposit. Both buyers received their deeds in 1950 when the full purchase price was paid. Upon the facts, held, that the gains from the two sales were realized in 1950 when the purchase price was paid and deeds were delivered, petitioner reporting income on a cash basis, rather than in 1949 when the sales contracts were executed.

1. Stipulations -- Settlement -- Motion to Withdraw -- Good Grounds. -- The Court will not exercise its discretion by granting the Commissioner's motion to withdraw a settlement stipulation where it appears that the stipulation was entered into freely and fairly after long negotiations and independent investigation by the Internal Revenue Service; where all acts by representatives of the Commissioner of Internal Revenue were properly authorized and their authorization was…

1. Stipulated value of trust reserving income for life established by decedent on January 26, 1932, and to which she transferred all her rights in prior trust in which she owned everything except a… Held: on the facts, deductible from gross estate.

On July 28 and August 24, 1949, petitioner Frank C. LaGrange entered into two short sales of English pounds sterling for delivery on February 28 and March 31, 1950. Held: the purchase of petitioner's contracts by his brokerage firm was not a bona fide transaction, and the gain therefrom is, therefore, a short-term capital gain since the holding period of the pounds sterling with which the short sales were consummated was less than 6 months. Regs. 111, sec. 29.117-6.

In June and July 1949, petitioner corporation purchased burlap in India and borrowed pounds sterling from a bank to make payment. Held: the gain realized by petitioner is a gain arising directly out of its trade or business from the settlement of a debt incurred therein for less than its face amount and, hence, is taxable as ordinary income.

Petitioner's expenditures for counsel fees to prosecute a libel action solely for the protection of his income as a public entertainer, held, deductible as ordinary and necessary business expense. Held: deductible as ordinary and necessary business expense.

Excess profits tax relief under section 722 (c) denied where petitioner's organization and all of its production were related to war industry and where the evidence does not show a reasonable method for a reconstruction of base period income under normal, peacetime conditions which would result in excess profits credits greater than those available to petitioner under the invested capital method.

Respondent recognized petitioner's qualifications for excess profits tax relief under section 722 of the Internal Revenue Code of 1939 by reason of base period changes in the character of its… Held: that petitioner had not reached its normal level of earnings under the changed conditions by the end of its base period and its constructive average base period net income is redetermined under the push-back rule.

1. Flotill Products, Incorporated, Docket No. 31942. -- Constructive average base period net income determined under section 722 (b) (4), I. R. C. 1939. 2. Flotill Sales Corporation, Docket No. 32302. -- Petitioner held not qualified for relief under section 722 (c) where it was in existence prior to January 1, 1940.

Petitioner's income tax return was prepared for him by an attorney and accountant. Only petitioner's name appeared thereon as taxpayer and only he signed it. Held: petitioner's return was a separate return and petitioner is not entitled to a dependency exemption on account of his wife's nephew.

1. Petitioner, successor corporation to a sole proprietorship, paid one-half of its profits as rent to Realty Company, its lessor, under an agreement wherein Realty Company had promised to finance… Held: such amounts as were paid to petitioner's sole stockholder by Realty Company from its share of the profits of petitioner (received as rent) are not deductible by petitioner under section 23 (a) (1) (A), I. R. C. 1939, in accordance with respondent's determination. 2.

Petitioner created a trust under which the income was to be paid to his wife during her life with the power in the corporate trustee to pay her so much of the principal as it should deem necessary… Held: wife's interest in trust could be valued and respondent erred in his determination.

1. Estate Tax -- Gross Estate -- Powers of Appointment. -- Decedents did not exercise general power of appointment by their wills requiring inclusion in their estates of property in question. 2. Estate Tax -- Gross Estate -- Inclusion of Excessive Prepayment of Income Tax. -- The decedent's widow and his executor filed a joint return for 1950, the year in which the decedent died, on which an overpayment was shown.

Both petitioners are trustees of assets transferred to them by a decedent who died a resident of Great Britain. Held: this Court has jurisdiction to determine the overpayment.

In 1948 petitioners borrowed money from a corporation to purchase the stock of the majority stockholder and at that time they executed their non-interest-bearing notes to the corporation in the… Held: this redemption and cancellation of stock was at such time and in such manner as to be essentially equivalent to a taxable dividend within the meaning of section 115 (g), 1939 Code.

Sec. 117 (b) and (e), 1939 Code -- 1951 Amendments -- Capital Gains -- Net Capital Loss Carryover. -- Held: (1) Under the 1951 amendments to section 117 (b), 1939 Code, 100 per cent of petitioner's… Held: Under the 1951 amendments to section 117 (b), 1939 Code, 100 per cent of petitioner's net long-term capital gain for 1952 is includible in gross income at 100 per cent.

Held, taxpayer's personal expenditure for entertainment of customers of a corporation in which he was a substantial stockholder, was not… Held: taxpayer's personal expenditure for entertainment of customers of a corporation in which he was a substantial stockholder, was not allowable as a business deduction under section 23 (a) (1) (A), I. R. C. 1939, or as a nontrade or nonbusiness deduction under section 23 (a) (2), I. R. C. 1939, and this was true even though he was also…

1. The E. C. Brown Company which had manufactured both agricultural sprayers and velocipedes prior to World War II confined its production to the sprayers after the war and leased its velocipede… Held: in the absence of proof that the increased usage shortened the useful life of the sprayer machinery, the deduction for depreciation at the increased rate was properly disallowed. 2.

Petitioner having changed to a direct costing method of reporting its income and having consistently filed reports on that basis and respondent having accepted such reporting as correct for the year… Held: petitioner's use of such method of reporting for the tax year 1950 was proper, notwithstanding that it continued to keep its books on an absorption method of accounting.

Held, the various transactions, viewed as a whole, by which the real property of the old corporation was transferred to two new… Held: the various transactions, viewed as a whole, by which the real property of the old corporation was transferred to two new corporations controlled by the same stockholder constituted a reorganization under section 112 (g) (1) (D) of the 1939 Internal Revenue Code, and held, further, the distributions of cash and other property to the…

Petitioners acquired real property in Connecticut in November of 1948, agreeing to assume and pay all taxes levied or assessed upon the property after… Held: petitioners may not deduct, as taxes paid or accrued, for the taxable year 1949, an amount paid by them in respect of such taxes, notwithstanding that pursuant to Connecticut law a vendee agreeing to pay such taxes becomes personally liable to the taxing authorities for the amount thereof. Sec. 23 (c), I. R. C. 1939.

1. Income -- Insurance Renewal Commissions -- Ordinary Income on Receipt by Widow. -- Insurance renewal commissions received by petitioner on policies sold by husband prior to his death and similar commissions from assignments acquired by husband are taxable to petitioner, his wife and sole beneficiary, as ordinary income. Sec. 126, I. R. C. 1939. 2.

J. Ungar, Inc., was a sales agent for foreign exporters. Its regular practice was to accrue commissions on sales arranged by it only after the merchandise had been shipped. Held: the brokerage commissions distributed by the Corporation to its sole stockholder, as a liquidating dividend, matured into realized income prior to the end of the fiscal year here in issue and are, therefore, taxable to it as an anticipatory assignment of income.

Petitioner Dixie Shops, Inc., held entitled to elect to compute income from installment sales made during 1942 on an accrual basis under section 736 (a), I. R. C. 1939, for purposes of reporting its excess profits tax liability for the taxable year ended December 31, 1942.

1. Taxpayer corporation, having a fiscal year beginning March 1, filed its final return for the taxable period beginning March 1, 1949, and… Held: that the return was filed for the proper period, notwithstanding some evidence that there was a meeting of the board of directors several weeks later and that an unexplained check was made out to the corporation and cashed at that time; accordingly, the Commissioner had authority to determine a deficiency for the taxable period…

1. Deficiencies determined by means of net worth method held approved except with respect to a portion of petitioners' claim respecting cash on hand. Michael Potson, 22 T. C. 912, affirmed sub nom. Held: on facts, due to fraud. 3. Petitioners' conviction after trial for fraudulent tax evasion for identical years held admissible as some evidence of the facts. Lillian Kilpatrick, 22 T. C. 446, affd. (C. A. 5) 227 F. 2d 240, distinguished.

Petitioner filed a claim for relief under section 722 for the year 1944. In that claim no reference was made to any carryback of unused excess profits credit from 1945. Held: petitioner had filed no timely claim for a carryback to 1944 of unused excess profits credit from 1945 computed on the constructive average base period net income for that year.

Excess Profits Tax Relief -- Changes Under Sec. 722 (b) (4). -- Excess profits tax relief denied where evidence does not show that changes from manufacturing and selling weaving yarns to knitting yarns, if made 2 years earlier than they were, would have resulted in an increase in base period earnings sufficient to produce excess profits credits greater than those available to petitioner under the invested capital method.

Excess Profits Tax Relief Under Sec. 722 (b) (2) and (b) (5) -- Competition in the Newspaper Business. -- Petitioners, the publishers of daily newspapers at Davenport, Iowa, are not entitled to relief even if their base period earnings were less than they might have been but for the competition from a third daily paper which was published at Davenport during a portion of the base period, since such competition does not bring the case within section 722 (b) (2).

Excess Profits Tax Relief, Sec. 722 (b) (2) -- Depressed Business -- Temporary Economic Circumstances. -- Claim for relief, based on alleged depressed business in the base period resulting from loss of services of principal selling agents, denied, where average base period earnings were not depressed below the previous 7-year average and where the evidence does not show that the base period losses were attributable to the selling agents, or that with satisfactory selling…

Petitioner was incorporated in 1905. For many years prior to its base period (fiscal years ended October 31, 1937, to October 31, 1940,… Held: in determining petitioner's constructive average base period net income under section 722 (a), 1939 Code, from its entire business, the $ 179,136 should be added to the arithmetic average base period net income of its old business, without the benefit of section 713 (f), 1939 Code, and since the sum thereof is less than petitioner's…

Petitioner (William Holton George) owned all the stock of W. H. George, Inc., a Louisiana corporation, which corporation in turn owned 50 per cent of the stock of a Mississippi corporation. Held: there was a reorganization under section 112 (g) (1) (C), I. R. C. 1939. Held, further, under section 112 (b) (3) and (g) (2), I. R. C. 1939, no gain or loss should be recognized on the exchange made by petitioner.

Petitioner and Edward Francis Boozer executed a property settlement agreement in November 1950 which provided, in part, that he would receive $ 12,500 in lieu of all… Held: petitioner and Boozer were entitled to file a joint Federal income tax return for the year 1950. Marriner S. Eccles, 19 T. C. 1049 (1953), affd. 208 F. 2d 796 (C. A. 4, 1953). Held, further, the return which petitioner filed was, in fact, intended to be and was a joint return for herself and her husband.

Helene (petitioner's decedent) and Frank Simmons were husband and wife whose legal residence was in Texas. Helene owned, as her separate property, all of the stock in the Crosby Companies. Held: The aforementioned sums constitute community income to Helene and Frank, one-half of which is taxable to Helene. The doctrine of Commissioner v. Wilcox, 327 U.S. 404, does not apply to this factual situation so as to cause those sums to be nontaxable as embezzlement income. 2.

1. Fines paid by petitioner, engaged in the business of transporting bulk liquids by motor vehicles, for violation of State laws prescribing maximum weight limitations, are not deductible from its gross income as ordinary and necessary business expenses. 2.

Sec. 722. -- Held: Relief denied. Petitioner has established neither that it qualifies for relief because of one or more of the factors specified in section 722 (b) nor that its average base period… Held: Relief denied. Petitioner has established neither that it qualifies for relief because of one or more of the factors specified in section 722 (b) nor that its average base period net income, as computed under section 713 (f), is an inadequate standard of normal earnings.

Petitioner leased real property for a 35-year term commencing January 1, 1947, expiring January 1, 1982. Held: the petitioner was immediately obligated to repay the deposit in 1950 when the lease was mutually terminated and it realized income of $ 185,000 in that year when it was released from its obligation to repay the $ 185,000 balance of the security deposit.

1. Decedent Raymond Parks Wheeler created an inter vivos trust in 1940 to which he transferred certain securities and made the… Held: that so much of the marital deduction claimed by the estate as is based upon the net value of the trust assets at the date of decedent's death is disallowed because the rights and benefits granted Evelyn under the terms of the trust do not meet the conditions imposed by section 812 (e) (1) (F) and Treasury regulations relating…

Held, that under the contract pursuant to which the Valley Lumber Company, a partnership, acquired a tract of timber known as the Vaughan… Held: that under the contract pursuant to which the Valley Lumber Company, a partnership, acquired a tract of timber known as the Vaughan timber, such partnership would, under Oregon law, be deemed the equitable owner thereof; that its subsequent cutting arrangement with its controlled corporation constituted a disposal of the timber…

1. Contributions received by the Bail Fund of the Civil Rights Congressheld not includible in gross income. 2. Loss on forfeitures with respect to bail bonds held not sustained in 1949 where there were claims on outstanding agreements of indemnity which did not become worthless in 1949.

Payment made by petitioner to his partner to acquire her interest in their partnership held a capital expenditure rather than a deductible expense, and held, further, on the facts, amortizable over… Held: further, on the facts, amortizable over the remaining life of their partnership agreement, petitioner's partner having no interest beyond that.

1. Estate Tax -- Notice of Deficiency -- Jurisdiction. -- A notice of deficiency sent to the decedent's executor more than 1 year after the date of the executor's request, pursuant to section… Held: that the value of such property at date of death, less the value of the wife's life estate, is includible in decedent's gross estate, since he retained for his life the right to the income from the property. Sec. 811 (c) (1) (B). The fair market value of such property found. 4.

Under the terms of a trust created in 1949 by petitioner and her deceased husband for the benefit of their children, stock in a family corporation was transferred to the trustees with… Held: the gifts of stock in 1950 and 1951 were gifts of future interests within the meaning of section 1003 (b) (3) of the Internal Revenue Code of 1939. Held, further, the amount of specific exemption to which petitioner is entitled on her 1950 gift tax return is as determined by respondent.

Property Held Primarily for Sale to Customers -- Property Properly to be Included in Inventory. -- Petitioners and others joined in a joint… Held: The wire was stock in trade of the syndicate and stock on hand at the close of each taxable year, 1950 and 1951, was properly included in the syndicate's inventory. (2) The wire was held primarily for sale to customers in the ordinary course of its business. Accordingly, ordinary income rather than capital gain was realized.

Pursuant to an adjustment authorized by section 3801, Internal Revenue Code of 1939, the respondent mailed a notice of deficiency in petitioner's income tax for the year 1943 within the 1-year… Held: the notice was valid and timely, and the assessment and collection of the tax was suspended by section 277 of the Code until the expiration of the period prescribed therein.

Interest accrued and paid on deficiencies in personal income tax is not deductible as a business deduction from gross income for the purpose of computing a net operating loss of the taxpayer's business under section 122, I. R. C. 1939.

1. Held, petitioner, a citizen of the United States, who claims to have been a bona fide resident of China, became a resident of the United States sometime between November 1941 and February 1946,… Held: petitioner, a citizen of the United States, who claims to have been a bona fide resident of China, became a resident of the United States sometime between November 1941 and February 1946, during all of which period he was in the United States. 2.

Petitioner is a national banking corporation which has been in existence for more than 20 years. Held: on the facts, that petitioner has failed to show that the respondent's determination was either an arbitrary or an unreasonable exercise of his discretion.

In 1948 the City of New York condemned real estate which petitioner owned. While title vested in the City in that year, it did not pay petitioner an award for the property until 1950. Held: such amount of interest constituted personal holding company income within the meaning of section 502 (a) of the 1939 Code.

Decedent bequeathed the residue of his estate to a bank in trust with directions to use the income and the principal, if necessary, to make payments of specific amounts to the student nurses enrolled… Held: the bequest is deductible under section 812 (d) of the Internal Revenue Code of 1939.

1. Held, that certain rock which petitioner quarried and sold during the taxable year was dolomite, within the commonly understood commercial meaning of that term. 2. Held: that certain rock which petitioner quarried and sold during the taxable year was dolomite, within the commonly understood commercial meaning of that term. 2.

1. Deductions -- Legal Expenses. -- Petitioner, an attorney at law, was convicted of the crime of subornation of perjury. Held: claimed deduction of legal expenses incurred in defense of criminal prosecution and disbarment disallowed. Commissioner v. Heininger, 320 U.S. 467, distinguished. 2. Casualty Loss. -- Held, in absence of evidence showing Commissioner's determination of amount of fire loss to be in error, Commissioner's determination sustained.

Pursuant to the provisions of a decree of divorce, petitioner established a trust, under the terms of which the net income is payable to his divorced wife for life,… Held: the value of the remainder interest transferred to petitioner's adult daughter is taxable as a gift. Secs. 1000, 1002, I. R. C. 1939. Held, further, the value of the remainder interest is not affected by the remote possibility that the trust principal may be invaded for the support of the divorced wife.

Respondent determined liability against petitioner, as transferee, for the income tax liability of her husband, Lawrence Santos, for the years 1943 to 1946, inclusive. Held: 1. Held: Petitioner is liable as transferee to the extent of $ 68,287.90 representing the value of part of the assets received by her from Lawrence Santos, transferor. 2. Petitioner has failed to show any basis for the application of the doctrine of estoppel.

The Republic of Colombia imposed a tax in 1947 upon a United States corporation doing business in that country, which tax was deemed under… Held: under the criteria of the internal revenue laws of the United States, which are controlling on the classification of the foreign levy, the patrimony tax was neither an income tax nor a tax in lieu of a tax on income within the meaning of section 131 of the Internal Revenue Code of 1939 so as to qualify as a foreign tax credit.

Excess Profits Tax Under Subchapter D of the 1939 Code -- Sec. 456 (b), 1939 Code, Abnormal Income Attributable to Other Years. -- Petitioner's business is the manufacture of wood furniture. Held: petitioner has failed to establish that it realized any income from the insurance proceeds in 1951 which could be allocated to a future year under section 456 (b) and therefore it is not entitled to any exclusion from excess profits net income for 1951 under section 456.

During the taxable years petitioners were partners in the small loan business. Held: petitioners, being on the cash basis, correctly accounted for their income as it was received and the method used by the Commissioner in his determination of the deficiencies was unauthorized.

Certain attorneys rendered services for decedent prior to 1941, and in 1948 they obtained a judgment against decedent for the value of their services plus expenses. Held: at least $ 33,000 of the judgment represented that portion of the cost of the attorneys' services and expenses which was a capital expenditure allocable to the stock for which the $ 225,000 was paid. Held, further, decedent realized capital gain in 1949 in the amount of $ 192,000.

1. Certain security transactions arising out of stocks borrowed by petitioner from Anne W. Collins held not to have resulted in short sales made for petitioner's account but were sales made per… Held: the interest which had accrued after the bonds were purchased was includible in gross income as interest under section 22 (a) of the 1939 Code and was not taxable as long-term capital gain under section 117 (f), I. R. C. 1939. Warner A. Shattuck, 25 T. C. 416, followed.

Petitioners, in the taxable year 1950, included in medical expenses an advance payment of $ 4,000 made on December 29, 1950, for the medical care of Jennie Banks, a dependent, for the ensuing year… Held: a prepaid item for medical services to be rendered in the following year does not constitute a payment in the taxable year for medical expenses within the meaning of section 23 (x), Internal Revenue Code of 1939.

In 1946, petitioner and one Kessler formed a corporation to manufacture and sell swimsuits, orally agreeing that petitioner would transfer to it her trade name and… Held: On the facts, the 1 per cent of net sales was consideration for petitioner's name and inventions, and not compensation for personal services. (2) The transaction respecting petitioner's name and patents constituted a sale, not a mere license. (3) The payments in question are taxable as capital gains.

1. Held, upon the facts, that two exclusive license agreements covering two separate patents executed by Roy J. Champayne, granting rights under each patent to a corporation, were bona… Held: upon the facts, that two exclusive license agreements covering two separate patents executed by Roy J. Champayne, granting rights under each patent to a corporation, were bona fide, arm's-length agreements and were not a fiction to disguise the distribution of dividends to Champayne. 2.

Petitioner was organized and operated in the years 1942 through 1950 to propagate the teachings of the I AM doctrine. Religious literature was sold in connection with petitioner's activities. Held: petitioner exempt from taxation under section 101 (6) of the 1939 Internal Revenue Code as a corporation organized and operated exclusively for religious purposes with none of its net earnings inuring to the benefit of any private shareholder or individual.

Deductions -- Charitable Contributions. -- Deduction denied of contributions to Foundation with charter of a charitable corporation, primarily engaged in holding, maintaining, and managing quarters and equipment for medical center and renting them to partnership of private physicians who controlled Foundation, although from the resulting meager net profits and/or moneys donated to Foundation by joint venture donations were made to charities.

1. Gross Income -- Commissions. -- Gross income includes entire amounts received by the petitioner as commissions on sales of securities, rather than only the difference between such amounts and the amounts of the expense accounts submitted by the petitioner to his employer. 2.

Business -- Regularly Carried On -- Net Operating Loss Carryover -- Sec. 122 (d) (5). -- Held, upon the facts, that a loss in 1951 from the sale… Held: upon the facts, that a loss in 1951 from the sale of interests in royalties and mineral leases was not attributable to a business regularly carried on by petitioners, and, therefore, petitioners are not entitled to deductions for net operating loss carryback to 1950 and carryover to 1952, under section 122 (d) (5), 1939 Code.

Petitioner, as the owner of 50 per cent of the stock and a substantial creditor of a corporation engaged in a similar line of business, decided such corporation could no longer be operated at a… Held: In computing its income tax liability for the fiscal year ended June 30, 1950, petitioner is not entitled to carry over the net operating losses of the liquidated corporation. Sec. 23 (s) and sec. 122 (b) (2) (C), I. R. C. 1939.

Estate Tax -- Marital Deduction -- Trust With Income for Life to Surviving Spouse and Unlimited Power in Spouse to Invade Corpus. -- Decedent's will left the residue of the estate in trust, all… Held: the bequest qualifies for the marital deduction, section 812 (e) (1) (F), I. R. C. 1939. 2.

Petitioner is a citizen of the United States who was a resident of Canada during 1952. All of her 1952 income was derived from sources within the United States. Held: under the 1942 Tax Convention with Canada, as amended, the United States reserved the right, in article XVII, to tax the income of its citizens residing in Canada under provisions of the Internal Revenue Code, and therefore the rates of tax are the rates set forth in sections 11 and 12, 1939 Code.

A corporation sold milk for net prices, fixed pursuant to agreements with certain of its customers, which were less than the minimum… Held: that notwithstanding the illegal nature of the sales, the gains or profits which the corporation realized therefrom must be computed, for income tax purposes, with respect to the agreed net prices for which the milk actually was sold, and not with respect to the fictitious prices entered in the accounts; and that the amounts of the…

Held: The legal obligation imposed upon petitioner's husband to make alimony payments of a principal sum annually for 10 years arose from… Held: The legal obligation imposed upon petitioner's husband to make alimony payments of a principal sum annually for 10 years arose from the date of the divorce decree and not from a written separation agreement effective 3 days prior thereto. Such payments are not includible in petitioner's gross income for the taxable years involved.

Petitioner, a public utility in Ohio, appealed to the State Public Utilities Commission from a 1949 ordinance of the City of Columbus fixing lower rates. Held: the liability for refunds accrued in 1950.

Income Tax -- Sale of Patent -- Long-Term Capital Gain. -- The petitioner and another individual, as co-owners of a patent, entered into a contract which by its terms transferred all their right,… Held: that the transaction was at arm's length and effective as an assignment of the patent, and that the amounts received by the petitioner under the contract constituted long-term capital gain under section 117 of the Internal Revenue Code of 1939, rather than ordinary income.

Petitioner's husband provided in his will that, in lieu of her taking her approximate $ 584,000 share in their community property under… Held: a gift was made to the remainderman to the extent of petitioner's community one-half of the principal less the life estate reserved by her therein, reduced by the value of the life estate received by her in the husband's part of the community property conveyed to the testamentary trust, plus the $ 35,000 bequest in cash which she…

Alimony -- Incident to Divorce -- Sec. 22 (k). -- A property settlement agreement, under which periodic payments to the wife continued after divorce, was incident to the divorce although not mentioned in the decree obtained 6 years after the agreement and separation and although the wife did not appear in the divorce action in the State to which the husband moved after the separation.

Petitioner was divorced from his former wife in 1949 pursuant to a decree which incorporated a separation agreement, which provided, among other things, that petitioner pay $ 250 per month or $ 3,000… Held: the entire $ 3,000 paid by the petitioner to his former wife in 1950 was solely for the support of his minor children and was not deductible by him.

1. Claim for relief under section 722 (b) (4) and (b) (5) denied, where petitioner failed to establish that its base period net income was an inadequate standard of normal earnings because of allegedly unfavorable terms of a contract under which it operated until near the end of the base period. 2. Petitioner's claim for relief under section 722 (b) (5), based upon disparity between depreciation deductions in base period years and taxable year, denied.

Petitioner's father retired in 1949 under the New York State Employees' Retirement System, electing to take his retirement benefits under an option which provided that if he died before receiving… Held: this amount was ordinary income to petitioner under section 165 (b), Internal Revenue Code of 1939, since the payment was not made as the result of a separation from service but as a result of death occurring after such separation. Cf. sec. 402, I. R. C. 1954.

Held, on the facts, that a contract under which petitioner received payments during the calendar year 1943 was a subcontract within the meaning of section 403 (a) (5) (B) of the Renegotiation Act of… Held: on the facts, that a contract under which petitioner received payments during the calendar year 1943 was a subcontract within the meaning of section 403 (a) (5) (B) of the Renegotiation Act of 1943.

1. The proof made fails to establish earnings during the last base period year sufficient in amount to result, under reconstruction, in credits greater than the amounts allowed by the respondent under section 713, Internal Revenue Code of 1939. 2. The amount of excess profits tax deferred under section 710 (a) (5) is a part of the deficiency for imposition of an addition for fraud under section 293 (b). 3.

Petitioner, an accrual basis taxpayer, performed work on a long-term electrical construction contract for the National Tube Company during the years 1947, 1948, 1949, and 1950 on a basis of cost… Held: that portion of the base fee in the amount of $ 79,288.85 invoiced during the years 1947, 1948, and 1949 and noted as being retained by National Tube Company until completion was accruable by petitioner in a period prior to the calendar year 1950.

Held, on the basis of the facts presented, that petitioner is neither an acquiring corporation nor a purchasing corporation, within the… Held: on the basis of the facts presented, that petitioner is neither an acquiring corporation nor a purchasing corporation, within the meaning of sections 461 (a) and 474 (a), respectively, of the Internal Revenue Code (1939); and, hence, that it is not entitled to use the base period experience of a certain proprietorship, in computing…

Petitioners, who were engaged in the sand and gravel business, sold mined-out land for building sites. Held: the sales of lots in the platted area were sales of property held by petitioners primarily for sales to customers in the ordinary course of their trade or business and the sales of other parcels outside the platted area were not. Sec. 117 (a) (1) and sec. 117 (j) (1), I. R. C. 1939.

Petitioner was the assignee of a contract to purchase a hotel executed on May 13, 1949. Held: the net income of the property from May 1, 1949, through June 14, 1949, was earned by the vendor and was not earned by nor taxable to the petitioner.

Petitioner and Idy Hollander were divorced in June 1946. Held: that the payments made to Idy subsequent to her remarriage were not made under a written agreement incident to the divorce of petitioner and Idy, within the meaning of section 22 (k) of the Internal Revenue Code of 1939, but under an agreement incident to Idy's remarriage, and that the said payments are not, therefore, deductible by…

Gross receipts, for purposes of the excess profits tax growth formula (sec. 435 (e) (1), I. R. C. 1939) held to include all amounts received or accrued from sales, not excluding those added to the sales price as reimbursement for beer excise taxes.

Held, with respect to two individuals whose status is that of husband and wife as of the last day of the taxable year, the husband, whose former wife died… Held: with respect to two individuals whose status is that of husband and wife as of the last day of the taxable year, the husband, whose former wife died during the taxable year, will not be allowed an exemption for his deceased wife where the second wife files a separate return and claims an exemption for herself.

Distributions in redemption of stock owned by a trust as a first step in an integrated plan to eliminate the trust as a stockholder held not to have been made at such time and in such manner as to be essentially equivalent to distributions of taxable dividends under section 115 (g), I. R. C. 1939. Cf. Carter Tiffany, 16 T. C. 1443.

1. Held, petitioner did not make a sale of 10 notes for $ 1,000 each in 1950, in which he alleged he incurred a capital loss of $ 9,500. Held: petitioner did not make a sale of 10 notes for $ 1,000 each in 1950, in which he alleged he incurred a capital loss of $ 9,500. He is not entitled to deduct $ 1,000 as a capital loss in 1950, and is not entitled to deduct in 1951 and 1952 a carryover capital loss of $ 1,000 in each of those years.

1. The principle of collateral estoppel held not applicable in the present proceeding where the question of whether certain alimony payments received by petitioner were taxable income to petitioner under the Sixteenth and Fifth Amendments to the Constitution was specifically pleaded but was not pleaded by petitioner or considered by this Court in our decision in Muriel Dodge Neeman, 13 T. C. 397, affirmed per curiam 200 F. 2d 560, certiorari denied 345 U.S. 956, involving…

An individual acquired, by purchase from a corporation, a contract right to receive an interest in such royalty payments as might thereafter accrue and be paid, under an intercorporate patent license… Held: that such payments, in the absence of any contention or evidence that they represented a return of capital, were taxable to the wife as ordinary income.

A Nevada public utility company had most of its facilities condemned by the United States Government; another such company found its operations to be unprofitable. Held: the facilities received by petitioner were not contributions to its capital and its only basis for depreciation of such properties was the $ 2 cost thereof. Detroit Edison Co. v. Commissioner, 319 U.S. 98 (1943).

Deduction -- Interest. -- Holders of all the stock of the petitioner sold their stock to another for a consideration based upon the net worth of the petitioner as reflected by its books and records,… Held: that the petitioner is not entitled to a deduction for interest so paid.

A personal holding company is not entitled to include as part of its net operating loss the Federal income tax paid during the year in which the loss occurred and to incorporate the amount of the net operating loss so computed into its dividends paid credit, carrying the unused portion of that credit forward to a subsequent year.

Held, petitioner is not a purchasing corporation within the meaning of section 474(a) of the Internal Revenue Code of 1939, since it did not… Held: petitioner is not a purchasing corporation within the meaning of section 474(a) of the Internal Revenue Code of 1939, since it did not purchase substantially all of the properties (other than cash) of another corporation, and therefore is not entitled to use the base period experience of that corporation in computing its excess…

Held, on the facts, that the redemption of 446 shares of the stock of Florex Gardens was at such time and in such manner as to make the distribution therefor essentially equivalent to a taxable… Held: on the facts, that the redemption of 446 shares of the stock of Florex Gardens was at such time and in such manner as to make the distribution therefor essentially equivalent to a taxable dividend, under section 115 (g) of the Internal Revenue Code of 1939.

Petitioner filed income tax returns with respect to an unincorporated business and paid taxes out of the funds of the business. Held: petitioner is a taxpayer and is entitled to an order of overpayment in this Court, notwithstanding that the husband has not yet paid the deficiencies determined against him.

1. Estimated Tax -- Additions to Tax -- Concurrent Imposition of Additions for Substantial Underestimate and Failure to File. -- Imposition of addition to tax for substantial underestimate of estimated tax (sec. 294 (d) (2), I. R. C. 1939) and addition to tax for failure to file (sec. 294 (d) (1) (A)) may be concurrently imposed. G. E. Fuller, 20 T. C. 308, followed. 2.

Held, petitioner has failed to justify a constructive average base period net income under section 722 (b) (4), I. R. C. 1939, in excess of that allowed it by respondent. Held: petitioner has failed to justify a constructive average base period net income under section 722 (b) (4), I. R. C. 1939, in excess of that allowed it by respondent.

Taxpayer, a corporation, had four stockholders in 1940, and two stockholders, in each of the years 1946 and 1950, that owned more than 50… Held: taxpayer is a personal holding company within the meaning of section 501 of the Internal Revenue Code of 1939 and is liable for personal holding company surtaxes; and held, further, that taxpayer did not show reasonable cause for failure to file personal holding company returns for the above years and therefore was liable for the…

1. During the taxable year petitioner was engaged in the produce business. He was a major shareholder in a corporation formed to bring bananas to this country. Held: that the bad debt loss was incidental to and proximately related to the petitioner's produce business. It was, therefore, incurred in trade or business and deductible under section 23 (k) (1). 2. Petitioner, in 1946, formed a corporation with $ 40,000 paid-in capital to engage in the wholesale grocery business.

The United States, under section 231 of Title 31 of the United States Code, recovered judgment against a taxpayer for submitting false and fraudulent claims against the Government and was awarded… Held: under the facts, the payment of the judgment, attorneys' fees, and other expenses incurred by taxpayer incident to the litigation are not deductible by him as ordinary and necessary business expenses under section 23 (a), Internal Revenue Code of 1939.

Installation of mechanical equipment in petitioner's plant during a base period year held, on the facts, not shown to have interrupted or diminished normal production, output, or operation so as to… Held: on the facts, not shown to have interrupted or diminished normal production, output, or operation so as to entitle petitioner to relief under section 442 (a) (1), I. R. C. 1939.

Losses on sales of butter futures entered into to protect taxpayers against decline in the price of cheese purchased under forward contracts at a fixed price, held, on the facts, to be allowable in… Held: on the facts, to be allowable in full as hedging transactions.

Held, that in 1947, petitioner received less than 30 per cent of the selling price of certain stock which she sold in that year and she is therefore entitled to report the gain on such sale on the… Held: that in 1947, petitioner received less than 30 per cent of the selling price of certain stock which she sold in that year and she is therefore entitled to report the gain on such sale on the installment basis pursuant to section 44 (b) of the 1939 Code.

Held, a contract giving the taxpayer the exclusive right for a period of years to buy all the coal mined in certain leased property was… Held: a contract giving the taxpayer the exclusive right for a period of years to buy all the coal mined in certain leased property was a capital asset, and the disposition of the rights under that contract to the other contracting party for a sum of money represented a sale or exchange resulting in capital gain rather than ordinary income.

1. During the taxable years 1947 and 1948, the petitioner realized income from houses sold from 1945 to 1948. Held: that petitioner was both a dealer and investor in real estate. The houses sold in 1945 and 1946 were property held primarily for sale to customers in the ordinary course of trade or business and the gain realized from installment payments received in 1947 and 1948 was ordinary income.

Held, the subsistence allowance received by petitioner, a member of the Georgia State Patrol, was additional compensation within the meaning of section 22 (a) of the 1939 Code. Held: the subsistence allowance received by petitioner, a member of the Georgia State Patrol, was additional compensation within the meaning of section 22 (a) of the 1939 Code.

Petitioner, a merchant seaman and British subject, who resided in Belgium before the outbreak of World War II and sailed on British ships out of Antwerp, continued to sail on British ships after the… Held: petitioner was a nonresident alien until 1949 when he became a resident alien.

Petitioners operated, through a corporation, a taxicab business during 1950 and 1951. Held: petitioners failed to show reasonable cause excusing their failure to file declarations of estimated tax and the respondent properly determined additions to tax as provided in section 294 (d) (1) (A), 1939 Code, for failure to do so and for substantial underestimate of estimated tax as provided in section 294 (d) (2).

Excess Profits Tax (Korean War) -- Adjustment for Abnormality -- Abandonment -- Consequence of Change in Manner of Operation of Business. -- Abandonment deduction in base period year 1946 denied disallowance for computation of excess profits credit for taxable years because abandonment was a consequence of change in the manner of operation of the business. I. R. C. 1939, sec. 433 (b) (10).

Taxpayer now seeks excess profits tax relief under section 722 (b) of the 1939 Code for the taxable years ended September 30, 1942, 1943, 1944, 1945, and 1946. Held: the prior decision was a decision on the merits and the doctrine of collateral estoppel prevents the taxpayer from seeking relief in these proceedings.

Petitioner opened a men's haberdashery store in the last part of September 1946 and sold it for cash and stock in the purchasing corporations on April 7, 1947. Held: proceeds received by petitioner for goodwill not long-term capital gains since record does not prove existence of goodwill for 6 months prior to sale.

To fund a deferred compensation agreement executed with its president and majority stockholder, a corporation purchased a combined life and annuity contract insuring his life. Held: the annual premium paid on the policy in 1950 was a distribution to its majority stockholder equivalent to a taxable dividend under section 115 (a) of the 1939 Code.

Petitioners did not elect in their 1950 Federal income tax return to report a gain from the sale of real property on the installment basis. Held, they cannot thereafter so elect for the first time. Held: they cannot thereafter so elect for the first time.

The petitioner from the time of its organization has been engaged in the manufacture of woodworking machinery, and though its plant and tools were old and its machinery designs were generally… Held: that petitioner, by permitting its earnings and profits to accumulate, was not availed of for the purpose of preventing the imposition of the surtax upon its shareholders, within the meaning of section 102 of the Internal Revenue Code of 1939.

Petitioners' preferred stock was redeemed pro rata by their closely held corporation under circumstances in which (1) there was no diminution of their proportionate interest in the corporation; (2)… Held: the redemptions were made at such time and in such manner as to be essentially equivalent to the distribution of a taxable dividend under section 115 (g) (1), I. R. C. 1939.

In 1928, the grantor transferred rental income property to a trust reserving for himself the life income therefrom. Held: the transfer in 1928 was an irrevocable gift in trust at that time and the petitioner correctly determined the basis of the property under the provisions of section 113 (a) (2).

Petitioner held not entitled to deduct contributions made to a profit-sharing trust during 1949 and 1950.

Petitioner was incorporated in 1913. During the taxable years 1947 through 1951 stock was outstanding, bylaws were in effect, directors held office, meetings were held and minutes kept, corporate… Held: Petitioner is a corporation and is liable for corporation taxes. (2) Petitioner is a personal holding company. (3) Petitioner's distributions to Jordan constituted dividends and it is entitled to a dividends paid credit for such distributions.

Jurisdiction -- Petition -- Signing and Verification by Taxpayer. -- The original petition timely filed was not signed by the taxpayers or counsel and was not verified by the taxpayers, but was signed and verified by one who described himself as agent, and the requirements of Rule 7 (h) in regard to verification by someone other than the taxpayers were not complied with in any particular.

1. Held, deductibility of certain claimed business deductions determined. 2. Held: deductibility of certain claimed business deductions determined. 2.

Although taxpayer commenced business in 1938, the 2-year push-back rule provided by section 722 (b) (4), I. R. C. 1939, is of no aid to it since it has failed to show by persuasive evidence that its business did not reach, by the end of the base period, the earning level which it would otherwise have attained with 2 additional years of experience.

Excess profits tax relief under section 722 of the Internal Revenue Code of 1939 allowed where petitioner changed the character of its business during and immediately prior to the base period, and its business did not reach the earning level which it would have reached if the changes had been made 2 years earlier.

Petitioner duly filed applications for relief under section 722 (b) (4) of the Internal Revenue Code of 1939 for the fiscal years ending May 31, 1941 through 1945. The claims were allowed in part and disallowed in part, the disallowance being based on the determination by the respondent of a lesser amount than had been claimed by the petitioner as the amount to be used as petitioner's constructive average base period net income.

1. Petitioner, a manufacturer of twist drills, held qualified for excess profits tax relief under section 722 (c) (1), Internal Revenue Code of 1939, because intangibles not includible in invested… Held: further, that the excess profits credit based on invested capital was an inadequate standard for determining excess profits for the fiscal year ending June 30, 1942, but was not an inadequate standard for the fiscal years ending June 30, 1943, 1944, and 1946. 3.

Petitioner seeks relief under section 722 (a) and (b) (4), Internal Revenue Code of 1939, upon the ground that it changed the character of its business during the base period years because of (1) a… Held: petitioner has failed to establish its right to relief under such section.

1. Held, lots sold by the petitioners in 1951 and 1952 were held by them primarily for sale to customers in the ordinary course of their trade or business and the gains derived therefrom are taxable… Held: lots sold by the petitioners in 1951 and 1952 were held by them primarily for sale to customers in the ordinary course of their trade or business and the gains derived therefrom are taxable as ordinary income. 2.

Excess Profits Tax -- Relief Under Sec. 722 (b) (4) -- Change in Character of Business. -- The petitioner's base period installation of a new filtration plant and its commitment to install new cone-type cookers for use in business of manufacturing paper resulted in a difference in its capacity for production and, with a new product, were the cause of the petitioner's average base period net income being an inadequate standard of normal earning, thus entitling the petitioner…

Sec. 113 (a) (5), 1939 Code -- Basis of Property Sold After Death of Grantor by Trustees of Revocable Trust. -- Trustees of Beckman trust, petitioner, sold stock after death of grantor. Held: that the trust comes within section 113 (a) (5) so that the basis of the stock is value at the time of the grantor's death.

Held, cancellations of indebtedness by three of the taxpayer's creditors in the fiscal years ended May 31, 1942 and 1943, resulted in… Held: cancellations of indebtedness by three of the taxpayer's creditors in the fiscal years ended May 31, 1942 and 1943, resulted in ordinary income in those years to the extent of the taxpayer's solvency after the cancellation, and the cancellation of indebtedness by a fourth creditor in the fiscal year 1942 was intended by such creditor…

1. Held, the amounts received by petitioner in 1948 and 1949 from Coast Redwood Co. for timber cut by the latter in those years from the property of petitioner are properly taxable as ordinary… Held: the amounts received by petitioner in 1948 and 1949 from Coast Redwood Co. for timber cut by the latter in those years from the property of petitioner are properly taxable as ordinary income. 2.

Petitioner entered into an agreement with a corporation, by the terms of which he was given control of its operations and was to receive all of its profits and reimburse it for losses sustained… Held: that the petitioner sustained an operating loss incurred in a business conducted by him of performing the services under the contract.

From 1942 to 1945, inclusive, decedent, the president and sole stockholder of a corporation, received a part of his salary in notes of the corporation. Held: the corporation's redemption of the preferred shares was not at such a time and in such a manner as to make it essentially equivalent to the distribution of a taxable dividend within the meaning of section 115 (g) of the 1939 Code.

In 1945 and 1946, the Henry L. Stern Trust realized losses upon the sale of certain improved rental properties. Held: that the losses were not capital losses, and did not result in a capital loss carry-forward to the years 1950 and 1951.

Lawrence E. Bevers, a dealer in a gambling casino in Las Vegas, Nevada, received certain sums throughout 1953 which represented his share of the proceeds of winning wagers which had been made on… Held: these sums represent taxable income in the form of compensation for personal services.

Petitioner was retired from the United States Navy for age and length of service June 30, 1931, and placed upon a retired list under Act of March 3, 1931, 46 Stat. 1483, for reasons other than… Held: petitioner's pay allowance, being based upon his retirement for age and length of service, was not paid as a pension, annuity, or other allowance for personal injuries or sickness resulting from active service in the Armed Forces.

1. The services rendered by petitioner in the sale of 240 tanks for use of the Chinese Government were only part of his services under his employment contract, and the compensation therefor not being… Held: that a bona fide and valid partnership was formed by petitioner and his wife for the conduct of business which had formerly been that of petitioner alone, and that the business was thereafter conducted by the partnership. 3.