Volume 27 — Tax Court Reports

1. Held, that petitioners are here collaterally estopped from again litigating the issue of the validity of a family partnership previously found not to be bona fide in Stanback v. Robertson, (C. A.… Held: that petitioners are here collaterally estopped from again litigating the issue of the validity of a family partnership previously found not to be bona fide in Stanback v. Robertson, (C. A. 4, 1950) 183 F. 2d 889. 2.

Citizen Resident of Foreign Country -- Exclusion of Income from Sources Without the United States -- Returned to United States on Termination of Foreign Assignment and Termination of Employment -- Sec. 116 (a) (1). -- A citizen residing in foreign countries for several years as an employee of U. N. R. R. A. had her foreign assignment terminated in December 1947 and obtained an assignment to the United States to which she desired to return for necessary medical treatment. She returned, had the treatment, and her employment by U. N. R. R. A. was permanently terminated on January 31, 1948. She later in that year, after a period of convalescence, applied for a position with a new employer, obtained such employment, and left the United States for a new foreign post on October 15, 1948. She was not "a bona fide resident of a foreign country or countries during the entire taxable year" and her income from sources without the United States was not excluded from tax under section 116 (a) (1), 1939 Code.

1. Petitioner corporation acquired assets from a partnership pursuant to an installment sales contract under the terms of which the consideration… Held: the sales contract was not stock or securities within the meaning of section 112 (b) (5), I. R. C. 1939, and the gain realized by the transferors on the transaction was recognized. 2. Held, further, the basis to the transferee corporation of the assets acquired by it is the cost of the assets. Sec. 113 (a), I. R. C. 1939. 3.

Three individuals who owned all the stock of corporation C, which had accumulated earnings and profits of approximately $ 598,000, entered into an agreement with tax-exempt organization S, whereby: A… Held: that the $ 4,000,000 notes of K did not, in reality, represent corporate indebtedness, but rather equity capital investments of the individuals. 2.

As a result of a controversy in which title to shares of stock standing in the name of Lee McRitchie was contested by another, the corporation withheld dividends declared in 1948. Held: the dividends were income to petitioners in 1951, and were not chargeable to the corporation in 1948 and the court in 1949 and 1950 as fiduciaries pursuant to section 161 (a) (1), I. R. C. 1939.

Petitioner, a tool steel manufacturer, which, during 1941, increased its capacity for production pursuant to a course of action to which it was committed prior to January 1, 1940, has failed to prove a constructive average base period net income on the basis of operations under the changed conditions in excess of its average base period net income determined under section 713 (e), and is, therefore, not entitled to relief under section 722, 1939 Code.

Petitioner, a corporation, leased an improved parcel of land to lessee in 1929 for a 21-year term expiring January 31, 1951, with successive options of renewal. Held: the sale of the improved parcel was made by the stockholders and not by the corporation and consequently the corporation is not taxable for any gain in connection with the sale.

In 1951, petitioner, a widow 74 years old, transferred her entire fee interest in the surface and iron ore rights of certain properties and received as payment therefor the sum of $ 202,500. Held: such transfer constituted a sale and that the sum of $ 202,500 received by petitioner in 1951 was in payment for the surface rights and iron ore in the amount of 800,000 tons or less, and was not an advance royalty.

1. Petitioner and her brother and sister owned as partners certain inherited real property. Petitioner also owned real property individually. Held: the sale in 1945 was not attributable to the operation of a trade or business regularly carried on by petitioner, and therefore the loss may not be taken against business income in determining a net operating loss carryover to 1946 by reason of section 122 (d) (5), I. R. C. 1939. 2.

Held, widow's allowance granted by order of Michigan Probate Court not an interest in property passing from decedent as defined in section 812 (e) (3), 1939 Code, and therefore not deductible from… Held: widow's allowance granted by order of Michigan Probate Court not an interest in property passing from decedent as defined in section 812 (e) (3), 1939 Code, and therefore not deductible from value of gross estate under section 812 (e) (1).

Petitioner filed a joint income tax return with his wife for the year 1953. Held: under Colorado State law and the express terms of the interlocutory decree of divorce, petitioner was married to his wife and not legally separated from her as of the close of the taxable year and therefore was entitled to file a joint return with her.

Petitioner Albert McGrath operated an illegal bookmaking business during the years 1948, 1949, and 1950. Held: that payments for wages and rent violated clearly defined public policy of the State of Illinois, and are accordingly not deductible as ordinary and necessary business expenses under section 23 (a) (1) (A) of the Internal Revenue Code of 1939.

During 1952, petitioners Walter Bernard McCall, Sam G. McCall, and a third partner deep mined coal under a contract with the lessee of certain coal lands. Held: petitioners had an economic interest in the coal which they mined and are entitled to a percentage depletion allowance in computing their income, as provided in sections 23 (m) and 114 (b) of the 1939 Code.

The petitioners began publishing a daily newspaper in 1949 and took certain steps to incorporate it. Held: a valid corporation, recognizable as a separate taxable entity, was created by the petitioners in 1949; held, further, a debtor-creditor relationship was established between the petitioners and the corporation by virtue of loans made by the petitioners to the corporation; held, further, petitioners are not entitled to business bad…

Deductions -- Traveling Expenses. -- Held, that the evidence establishes that the employment of the petitioners away from the places of their established… Held: that the evidence establishes that the employment of the petitioners away from the places of their established residences was temporary in character and that the costs of meals, lodging, and transportation constituted deductible traveling expenses while away from home. Secs. 22 (n) and 23 (a) (1) (A), I. R. C. 1939.

Petitioner paid fees of psychiatrists, special guardian, and attorneys in defending suits instituted by his wife to have him declared insane and an incompetent; fees for his attorneys' services in… Held: such expenses are not deductible by petitioner under section 23 (a) (2), I. R. C. 1939.

1. Petitioner is an accrual basis taxpayer whose motor carrier transportation system was taken possession of, controlled, and operated by the United States during… Held: the full amount of the award received by petitioner was accruable in the calendar year 1952. Held, further, payment of the award was not an involuntary conversion within the meaning of section 117 (j), Internal Revenue Code of 1939, and accordingly is taxable as ordinary income rather than capital gain. 2.

Proceeds of life insurance policies placed in trust by decedent, premiums on which were paid by decedent prior to January 10, 1941, and… Held: on the facts, not includible in his gross estate as (a) a transfer in contemplation of death, (b) life insurance purchased with premiums paid by decedent, or (c) life insurance with respect to which decedent possessed at his death any of the incidents of ownership, notwithstanding that decedent reserved some power to direct the trust…

Gifts made while decedent was unaware of any illness and on advice that she would thus save income taxes, held, on the facts, not to be in comtemplation of death. Held: on the facts, not to be in comtemplation of death.

1. Petitioner by one instrument created irrevocable trusts for his wife and two minor children. Held: the income from the trusts for the years 1944, 1945, and 1946 was not taxable to petitioner under section 22 (a), Internal Revenue Code of 1939, and petitioner was entitled, under section 23 (a) (1) (A), 1939 Code, to deduct from his sole proprietorship business income the royalties he had agreed to pay under the license agreement…

Held, amounts withheld as dealer's reserve by bank purchasing notes from petitioners, automobile dealers using an accrual method of accounting, which amounts are reflected on the bank's books to… Held: amounts withheld as dealer's reserve by bank purchasing notes from petitioners, automobile dealers using an accrual method of accounting, which amounts are reflected on the bank's books to credit of petitioners, are income of petitioners in the year the notes are purchased.

During the first part of the taxable year and during several prior years a partnership made many sales under fictitious names and failed to record them on its books. Held: All petitioners were partners during taxable year. 2. Amount of sales omitted from return determined to be in excess of that conceded by petitioners upon failure of petitioners to prove the contrary. 3. Cost of merchandise bought for sale overstated on partnership return. 4.

Prior to 1937 petitioner operated a used bag business. In or about May 1937, petitioner expanded the business to include the manufacture and sale of new bags. Held: petitioner changed the character of its business, but failed to establish a fair and just amount representing normal earnings to be used as its constructive average base period net income.

Section 722 (I. R. C. 1939) claim for relief denied where excess profits tax credits, based on the most favorable constructive average base period net income allowable under the evidence to remove the effect of the drought, would not exceed the credits allowed petitioner by the respondent based on invested capital.

Petitioner's business as a canner of fruit juices, mainly orange juice, including some allied products, commenced on April 15, 1933, and was conducted first by an unincorporated group and then by a corporation which was succeeded on July 1, 1937, by petitioner, as the result of a statutory consolidation.

In 1945, petitioner assigned his full right, title, and interest in an invention, subsequently patented, to his employer in consideration of a percentage of the sales price of the item when… Held: such shop rights as petitioner's employer had in the invention did not dilute petitioner's substantial rights in his patent within the meaning of section 117 (q) of the 1939 Code, and the amounts received in 1951 and 1952 were properly reported by him as long-term capital gains.

1. Joint Return -- Signing -- Tacit Consent -- Accepting Benefits. -- The petitioner acquiesced in and gave her tacit consent to the filing of a joint return on which her name was signed by another. 2.

1. Petitioner held qualified for relief under section 722 (b) (4), Internal Revenue Code of 1939, because of a change in capacity for operation for which it was committed prior to January 1, 1940;… Held: that questions raised in the supplemental memoranda and amended claims, including petitioner's claim for carryover or carryback of unused excess profits credit based on a constructive average base period net income, are properly before this Court.

Amount of estate tax charitable deduction computed from value of residue left to charities, held, subject to reduction by amount of Pennsylvania inheritance tax ultimately to be due therefrom on… Held: subject to reduction by amount of Pennsylvania inheritance tax ultimately to be due therefrom on account of possible remainders under prior testamentary trust after death of life tenant with powers of appointment and invasion.

1. In 1949, petitioner transferred an incompleted building, which the contractor agreed would have a total cost value of $ 175,000, to one of its two principal stockholders in exchange for shares of… Held: petitioner's exchange of its incompleted building for shares of its stock and cash was a sale of property used in its trade or business on which it sustained a fully deductible loss in the amount of $ 7,663.50. 2.

1. Petitioner Dorothy Sullivan (formerly Dorothy Douglas) was married to Jack Douglas during the years 1946 to December 5, 1949, inclusive. Held: the returns for 1946 and 1948 were not joint returns and Dorothy is not liable for the deficiencies and additions to tax under section 293 (b), Internal Revenue Code of 1939, which the Commissioner has determined for those years against Jack and Dorothy jointly.

Income Tax -- Deductions. -- Held, that petitioner's membership in the Associated Press did not become worthless in 1945 as a result of… Held: that petitioner's membership in the Associated Press did not become worthless in 1945 as a result of either the decision of the Supreme Court of the United States invalidating the monopolistic provisions of the Associated Press bylaws or the subsequent amendments to such bylaws, and that petitioner is not entitled to deduct in that…

1. In 1923 the petitioner's grandfather created trusts in which petitioner's father had a remainder interest. The father died in 1925 and by will gave the petitioner a half interest in the remainder. Held: The petitioner sustained no deductible loss when the trustees distributed the properties to her. (2) The petitioner's basis in the one-half interest received from her mother was the fair market value at the time of her mother's death. Sec. 113 (a) (5), I. R. C. 1939.

Petitioner created a trust, of which she was the sole life beneficiary, consisting of stocks, securities, and a contingent remainder interest in a trust created by the will of her… Held: petitioner retained the dominion, control, and beneficial use and enjoyment of the trust income and corpus and therefore did not make a gift, taxable under section 1000, I. R. C. 1939. Alice Spaulding Paolozzi, 23 T. C. 182, and Estate of Christianna K. Gramm, 17 T. C. 1063, followed.

One of the petitioners, an inventor, granted an exclusive license to a corporation to make, use, and sell, throughout the world, machines… Held: that the transfer of patent rights effected by such license agreement must, under the provisions of section 117 (q) of the 1939 Code, be considered the sale or exchange of capital assets held for more than 6 months; and that gains derived by the petitioner from the payments received pursuant to such license agreement are taxable as…

During each of the taxable years in controversy decedent paid certain sums on account of estimated tax. He also paid amounts in respect of deficiencies in income tax of prior taxable years. Held: The duty to pay deficiencies due from prior tax years and that of making current payments on estimated tax are distinct. Payments on account of such deficiencies cannot be treated as part of the amount paid as estimated tax.

1. Petitioner established commodity trading accounts in the names of three relatives. Held: the nominal owners of the accounts neither contributed nor acquired any part of the capital advanced for their operation, and the profits earned thereon are taxable to petitioner. 2. Two of petitioner's relatives included the profits from the commodity accounts maintained in their names on their returns for 1947.

Profit-Sharing Trust -- Validity of Trust. -- The petitioner, an accrual basis taxpayer, executed a profit-sharing plan and trust, and delivered its $ 20,000 demand promissory note to the trust on September 30, 1952, the last day of its fiscal year. $ 22,520 cash was paid within the following 60-day period allowed by the statute for actual payment, being payment of the note and an additional amount to fulfill the petitioner's obligation under the plan.

Notice of Deficiency -- Registered Mailing -- Last Known Address -- Receipt by Petitioner -- Timely Filing of Petition. -- The Commissioner mailed the notice of deficiency by registered mail on August 9, 1955, to the petitioners at their correct and last known address. The post office, upon delivery of that letter to that address, found neither petitioner there to sign the registry receipt.

Decedent was qualified to receive upon retirement an annuity under a group annuity contract purchased by his employer. Held: election of option by decedent in 1946 constituted a transfer under section 811, I. R. C. 1939. Estate of William J. Higgs, 12 T. C. 280, and Estate of Frederick John Twogood, 15 T. C. 989, followed.

The taxpayers were partners in a beverage distribution business which purchased stock ownership of a brewery in 1946 in order to provide itself with beer which was in short supply that year due to a… Held: the advances to the brewery by the partnership were nonbusiness debts.

Held, that the deposits in issue quarried and sold by petitioner were quartzite within the meaning of section 114 (b) (4) (A) (iii) of the Internal Revenue Code of… Held: that the deposits in issue quarried and sold by petitioner were quartzite within the meaning of section 114 (b) (4) (A) (iii) of the Internal Revenue Code of 1939, as amended, and that the applicable rate of percentage depletion allowable is 15 per cent and not 5 per cent under section 114 (b) (4) (A) (i).

1. The petitioner's stallion performed breeding services in the spring of the year and the foal was born to the mare in the following year. Held: the petitioner's method of reporting these fees did not clearly reflect his income; the contingent liability does not justify the postponing of reporting the fees as income to periods subsequent to the periods in which they were both earned and received. The respondent is sustained. 2.

Income Tax -- Deductions. -- Held, that amounts paid by the petitioners, as transferees, in satisfaction of the transferor corporation's tax liability are deductible as capital losses, and not as… Held: that amounts paid by the petitioners, as transferees, in satisfaction of the transferor corporation's tax liability are deductible as capital losses, and not as ordinary losses. Arrowsmith v. Commissioner, 344 U.S. 60.

Petitioner and J. Floyd Frazier were controlling stockholders of the Midwest Materials Company, a corporation engaged in general construction work and in the supplying of materials used in construction work. On August 25, 1941, petitioner and J. Floyd Frazier transferred their stock in the corporation to their wives. On August 31, 1941, the corporation was dissolved and its assets distributed to the two wives. On September 1, 1941, petitioner and J. Floyd Frazier formed a partnership, Midwest Materials and Construction Company, to engage in general construction work. Also on September 1, 1941, the two wives formed a purported partnership, the Finley-Frazier Company, whose function was to rent the construction equipment and operate certain gravel quarries. Midwest Materials and Construction Company, in its operations over the years here involved, had unrestricted use over the construction equipment and other assets of Finley-Frazer. No lease arrangement, or any other arrangements, were ever negotiated for the use of such assets, nor were any records kept by Construction or by Finley-Frazier covering the daily use of such assets. In 1942 and 1943 the two wives transferred the titles of 19 trucks to their children. At no time during the years 1942 through 1945 did the petitioner ever intend to relinquish his unrestricted control over the use and maintenance of these assets. Held, the several steps culminating in the ownership by the wives of the construction equipment assets and the gravel quarries were integrated steps in a plan to divert income from petitioner and J. Floyd Frazier to their wives and are not to be recognized for Federal income tax purposes; held, further, no gift was intended in 1942 and 1943 of the 19 trucks to the children of petitioner and J. Floyd Frazier where it appears that petitioner and J. Floyd Frazier did not intend to relinquish unrestricted control over the use of such equipment; held, further, certain deductions for expenditures for the purchase of liquor are disallowed on the ground that such expenditures violate the statutes of Oklahoma, Boyle, Flagg & Seaman, Inc., 25 T. C. 43, followed; held, further, deductions for payments to county officials disallowed as ordinary and necessary business expenditures; held, further, deductions by Jerline Dick Finley for certain farm expenditures were personal expenditures and therefore disallowed.

Undistributable capital gains earned by an irrevocable trust in 1950 are not taxable under facts of case to the grantor-life beneficiary of the trust who retained (1) limited power to invade the corpus, (2) a right to alter the shares of a designated class of remaindermen, (3) a contingent right to dispose of the trust corpus by will if she survived her mother, her issue, and their children, and (4) the right to become co-trustee with broad managerial powers to act as a…

1. Petitioner, whose business was that of selling surgical and hospital supplies and equipment, purchased a round-trip airplane ticket to England for a newspaperman who was to make a study of… Held: that the expenditure for the ticket was not an ordinary and necessary expense within the meaning of section 23 (a) (1) (A) of the Internal Revenue Code of 1939. Textile Mills Securities Corporation v. Commissioner, 314 U.S. 326. 2.

In computing the percentage of gross income required by section 251, Internal Revenue Code of 1939, relating to income from United States possessions, held, a partner's gross income includes his… Held: a partner's gross income includes his distributive share of the gross income of the partnership.

Petitioner, a majority stockholder in a corporation located in Budapest, Hungary, made advancements to the corporation in 1939 to be used in the… Held: the advances made by the petitioner to the corporation in 1939 were contributions to capital and therefore additions to the basis of his stock in the corporation; held, further, petitioner is not entitled to a deduction under section 23 (g), I. R. C. 1939, for worthlessness of stock on account of the nationalization of the…

Petitioner's firm, in the normal course of business, dealt in shares of stock of a corporation in which petitioner was a shareholder and director. Held: the payment to the corporation of the insider's profits is, in the circumstances of this case, deductible pursuant to section 23 (a) of the Internal Revenue Code of 1939.

The evidence does not justify a constructive average base period net income in excess of the determination of the respondent under the provisions of section 713 (f), I. R. C., 1939.

An individual, who had large unpaid deficiencies in income tax, paid certain sums to his wife, pursuant to an agreement between them that 50 per cent of… Held: that, under the provisions of section 311, I. R. C. 1939, the trustee of each of said trusts is liable as a transferee of the property of the husband in respect of his delinquent income taxes, to the extent of the value of the property transferred to such trustee, together with interest thereon as provided by law.

Excess Profits Tax -- Sec. 722 Relief -- Commencement of Business During Base Period. -- The petitioner, a dealer in scrap metals commenced business with adequate management and capacity 1 1/2 years after the beginning of its base period. Its sales had a direct relationship to the market price for scrap and the evidence does not establish that had it commenced business 2 years before it did so it would have had a higher level of earnings at the end of its base period.

Where original timely claim for refund claimed carryback of unused excess profits credit from fiscal 1946 to fiscal 1944 based upon invested… Held: that respondent waived any objection to the insufficiency of the original claim, that the amended claim was fused with the original claim and as such was timely filed, and that the carryback of the unused credit based upon constructive average base period net income under section 722 from fiscal 1946 to fiscal 1944 is allowable.

Changes in the types of oil well drilling and servicing equipment manufactured by petitioner held a change in the character of the business under section 722 (b) (4), I. R. C. 1939, and a constructive average base period net income determined.

Separation agreement and divorce decree provided for various payments to the wife depending upon whether she remained single or… Held: paragraph 3 (c) would not earmark any one of the payments as being for child support, but the other paragraphs providing the wife would get $ 50 less for any month the wife did not have custody of the child sufficiently earmarked that sum out of each monthly payment as being for child support; and petitioner could deduct the balance…

Respondent determined a constructive average base period net income (CABPNI) under section 722, I. R. C. 1939, for petitioner's taxable year ended October 31, 1941. Held: respondent is not precluded, nor is he estopped, from determining that petitioner is not entitled to relief under section 722 for the taxable years ended October 31, 1942, 1943, 1944, and 1945.

Claims for excess profits tax relief under section 722 (b) (4), I. R. C. 1939, disallowed where evidence fails to show any substantial qualifying changes in the character of the business or any sound basis for a reconstruction of base period earnings.

Held, petitioner, a mutual life insurance company, is not entitled to deduct as investment expenses the portions of the real estate and other expenses on its home office property allocated by… Held: petitioner, a mutual life insurance company, is not entitled to deduct as investment expenses the portions of the real estate and other expenses on its home office property allocated by petitioner to its investment operations.

Pursuant to an agreement between Consolidated Vultee Aircraft Corporation, sometimes referred to as Convair, the Nashville Corporation, sometimes referred to as Nashville, and Avco Manufacturing… Held: at a price of $ 18 cash and 1 share of Convair's stock. In the agreement Avco, which controlled Convair, agreed to purchase its proportionate share of Nashville's stock, plus all other shares not purchased by other Convair shareholders.

Held, a divorced husband is not entitled to deduct the total payments made for the support of his former wife and child if the divorce decree provides for a… Held: a divorced husband is not entitled to deduct the total payments made for the support of his former wife and child if the divorce decree provides for a reduction of such payments upon the wife's remarriage, and thereby earmarks the amount to be presently used to maintain the child. Sec. 23 (u), I. R. C. 1939.

Respondent determined deficiencies in income tax and additions to tax for fraud for the years 1941 to 1947, inclusive, and 1949. 1. Held: respondent has failed to prove fraud for the years 1941 to 1944, inclusive, and the assessment and collection of the deficiencies and additions to tax for such years are barred by the statute of limitations. 2.

Petitioner (hereinafter referred to as Dealer), an accrual basis taxpayer, made installment sales of trailers. Held: that the full selling price of the trailers is accruable as income at time of sale; that the portion of finance charge credited to the Dealer is income when it is credited; and that amount credited to Dealer in dealers' reserve account by Finance Co. is not deductible since it is an absolute credit and will be either paid to Dealer…

Petitioner Elizabeth W. Stavroudis is the widow of John C. Distler who died testate in December 1944. Two children were born of their marriage. Held: that petitioner is not taxable on the remainder of the excess income.

1. Petitioners are members of a partnership which kept its books and filed its returns for 1946 and 1947 on the cash basis. Held: pursuant to section 41 of the 1939 Code, the partnership is required to report its income according to such system as it used in maintaining its books, and respondent's determination that petitioners were required to compute and report their distributable shares of the partnership's income pursuant to an accrual system for the years…

Gift Tax -- Sec. 1003 (b) (3), Annual Exclusions -- Present vs. Future Interests. -- Petitioners made gifts to trusts created for the benefit of minor grandchildren. Held: the gifts were not of future interests, and petitioners are entitled to the exclusions claimed.

Charles A. Trafton and his wife, Ethel, conducted various businesses during the 45 years of their marriage. Held: Charles did not make gifts to Ethel in 1946 and 1947 when he transferred securities to and purchased securities in their joint names. 2. Ethel failed to show that she did not make a gift to Charles in 1946 when she transferred securities to and purchased securities in their joint names. 3.

Excess Profits Tax Act of 1950, Sec. 459 (c) -- Consolidation of Newspaper Operations. -- Petitioner was organized in 1948 upon a consolidation of two corporations publishing newspapers in the same… Held: the petitioner did not consolidate its mechanical, circulation, advertising, and accounting operations with those of another corporation and is not entitled to compute its average base period net income under section 459 (c), Internal Revenue Code of 1939.

Expenses of Education -- College Tutor Required to Obtain Ph. D. as Condition of Employment and Advancement in Grade. -- The petitioner was employed by a college as a tutor on a temporary or probational basis for 1 year. The college requirements as a condition of reemployment were that such an employee would have to make substantial progress toward the attainment of a doctoral degree to the end that he would qualify for a higher teaching rank.

An individual who was domiciled in the State of Virginia (a noncommunity property State), and who for several years had been employed in Washington, D. C., married a resident of Texas (a community… Held: that the husband did not change his domicile from Virginia to Texas; that no marital community was established in the latter State; and that he and his former wife are not entitled to divide their incomes, pursuant to the community property law of said State.

Petitioner, in the computation of its personal holding company tax liability for the year 1949, took a deduction under section 505 (a) (1), I. R. C. 1939, of $ 49,823.24 paid in that year, which sum… Held: respondent was correct in disallowing the deduction under Wm. J. Lemp Brewing Co., 18 T. C. 586, 600, adopting the rule of Commissioner v. Clarion Oil Co., 148 F. 2d 671.

An Indiana corporation engaged in the manufacture and distribution of sport fishing equipment leased a factory in Iowa and organized a subsidiary Iowa corporation for purposes of manufacturing a… Held: payments by the parent corporation to its subsidiary to reimburse the subsidiary for net operating losses sustained in supplying the parent are deductible by the parent as a business expense.

1. Petitioners E and W each owned 50 of the 100 shares of the stock of C corporation and in 1948 they caused it to convey part of its assets to two… Held: the transaction failed to qualify as a tax-free reorganization under section 112 (g) (1) (D) and (h), I. R. C. 1939, because at the completion thereof neither transferee corporation was controlled by the transferor corporation, C, or its stockholder, E, or both, and hence there was a lack of continuity of interest. 2.

1. During the period 1946 through 1952, petitioner Dominick J. Salomone carried on a sole proprietorship business as a broker and wholesaler of food products. Held: since a debtor-creditor relationship was established between petitioner and the Florida company by virtue of the advances made by petitioner to the company, any deduction for the worthlessness of such advances can be had only under section 23 (k) and not under section 23 (e) of the Internal Revenue Code of 1939.

1. Held, respondent's determination of the fair market value of closely held corporate stock sustained. 2. Held: respondent's determination of the fair market value of closely held corporate stock sustained. 2. For many years prior to his death, decedent had often expressed his intention of bequeathing the majority of his stock in a closely held corporation to his two sons.

Held, in a case where the preferred stock claim in liquidation took all of the assets of a subsidiary the parent corporation owning all of the preferred and… Held: in a case where the preferred stock claim in liquidation took all of the assets of a subsidiary the parent corporation owning all of the preferred and common stock of the subsidiary had a recognizable loss for its worthless common stock and section 112 (b) (6), Internal Revenue Code of 1939, would not govern.

The petitioner commenced planning and prepublication activity on a trade magazine in 1935 dealing with electronics but, due to the… Held: relief under section 721, I. R. C. 1939, denied for 1943 because, even assuming arguendo that it in all other respects qualified therefor, the petitioner failed to establish the cost of research or development of the magazine in each of the prior years, making it impossible to compute the amount of any net abnormal income for 1943…

Petitioner purchased his partner's interest in their partnership and thereafter continued the operation of the business as a sole proprietorship. Held: although these contracts had a zero basis in the hands of the partnership, petitioner is entitled to allocate the purchase price of his partner's interest to such contracts and to amortize the basis thereby established in computing the profits realized on their performance by him as a sole proprietor.

Estate Tax -- Gross Estate -- Principal of Inter Vivos Trust Includible in Gross Estate -- Enjoyment Subject at Date of Death to Any Change Through Exercise of a Power Alone or in Conjunction… Held: the transfer was subject to a power by the decedent alone or in conjunction with any person, to alter, amend, or revoke within the meaning of section 811 (d) (2), I. R. C. 1939; (2) the amount includible in the gross estate may not be diminished by the value of the life estates.

Decedent devised her real property to her husband for life, upon his death to her children absolutely and in fee simple. Held: the interest of the surviving spouse did not qualify for the marital deduction as it was a life estate or other terminable interest within the purview of section 812 (e) (1) (B), I. R. C. 1939.

1. Statute of Limitations -- Sec. 275 (c) -- 25 Per Cent Omission From Gross Income -- Omission Explained in Return. -- The 5-year period of limitations provided by section 275 (c) applies where a taxpayer omitted from gross income shown on the return a capital gain, which omission represented more than 25 per cent of the gross income shown on the return. It is immaterial that the omission was explained on a separate sheet of paper attached to the return. 2.

During 1952, petitioner Nan M. Palmieri owned a house which she permitted her aged mother and father to occupy. Her mother rented one room in the house and collected and spent the rent therefrom. Held: the income received from renting the room was taxable to petitioners. Lucas v. Earl, 281 U.S. 111, 74 L. Ed. 731, 50 S. Ct. 241 (1930).

The taxpayer corporation promoted, constructed, and now operates a community television antenna system in Wilkes-Barre and Kingston, Pennsylvania. Held: the contributions were not gifts to petitioner or contributions to its capital, but were part payment for services rendered or to be rendered and therefore includible in gross income under section 22 (a), I. R. C. 1939.

1. Petitioner, an accrual basis taxpayer which operated a department store, sustained losses from water and business interruption which resulted from a fire that occurred 6 days prior to the close of… Held: the income derived from portions of the insurance proceeds accrued and became subject to tax in the later fiscal year, rather than in the fiscal year of the fire. 2.

Excess Profits Tax -- Sec. 722 Relief -- Constructive Average Base Period Net Income. -- The record does not justify a finding of an amount of constructive average base period net income in excess of that allowed by the Commissioner.

1. Excess profits tax relief under section 722 (b) (4), I. R. C. 1939, disallowed where petitioner, a Mississippi title-abstracting company, failed to establish by competent evidence a basis for… Held: petitioner not entitled to relief under section 722 (b) (2) or (5), or section 722 (c), I. R. C. 1939.

Renegotiation -- $ 500,000 Limitation. -- A determination of excessive profits need not be limited to the excess over $ 500,000 of the renegotiable income.

Held, the amount representing the increase in an accrual basis automobile dealer's reserve account with a finance company from March 10, 1950, to… Held: the amount representing the increase in an accrual basis automobile dealer's reserve account with a finance company from March 10, 1950, to December 31, 1950, pursuant to an agreement whereby the dealer discounted its deferred payment automobile contracts to the finance company, is taxable income to the dealer in 1950.

Petitioner was an officer and a substantial stockholder of an insurance company. The company's financial condition was precarious. Held: the cancellation constituted a contribution to capital and was not deductible under section 23 (a) or (e), I. R. C. 1939.

Petitioner, a single man, claimed as a dependent a married and undivorced woman with whom he lived as man and wife during the entire taxable year 1954, in violation of the criminal laws of the State… Held: that an individual living in unlawful intimacy with a taxpayer is not a dependent within the meaning of section 152 (a) (9), I. R. C. 1954.

Excess Profits Credit -- Purchasing Corporation. -- The petitioner, in 1948 and early 1950, purchased substantially all the properties of 4… Held: that the petitioner, for purposes of computing its excess profits credit based on income for the year 1950, is entitled, under section 474, I. R. C. 1939, to compute its average base period net income by taking into account the excess profits net income (or deficit therein) of the 4 State banks to the extent attributable to the…

A storm damaged property in which petitioner had a legal life estate. The cost of removing the debris was $ 1,341.56, and the remaining damage to the property was $ 30,000. Held: the Commissioner erred in failing to allow petitioner to deduct any portion of the $ 30,000. Held, further, petitioner is not entitled to deduct the full amount thereof; she is entitled to deduct a portion thereof allocable to her life estate.

1. Held, that petitioner may not use the net capital loss carryover of its liquidated subsidiary. 2. Held: that petitioner may not use the net capital loss carryover of its liquidated subsidiary. 2. Held, that petitioner may not reduce the amount of its net long-term capital gains in 1949 by the amount of the net long-term capital losses sustained by its liquidated subsidiary in the taxable period January 1, 1949, to December 1, 1949. 3.

The donor established trusts for the benefit of 5 minor grandchildren. Held: the gifts of securities to the trusts resulted in the creation of future interests, and the donor was therefore not entitled to the exclusions under section 1003 (b) (3), I. R. C. 1939. Held, further, no issue having been raised as to whether the income interest alone was a present interest, that question is not decided.

Respondent determined deficiencies against petitioners for 1947, 1948, and 1949. Held: on the facts, each petitioner omitted from his return in each of the years 1947 and 1948 an amount of gross income in excess of 25 per centum of the gross income stated in his return and the 5-year period of limitations provided by section 275 (c) of the Internal Revenue Code of 1939 is applicable.

Excess Profits -- Sec. 722 (b) (4) -- CABPNI. -- The petitioner has failed to prove CABPNI sufficient to give a larger excess profits credit than that allowed by the Commissioner under section 713 (e).

The petitioner, since its incorporation in 1907, has attempted to lease its land for mineral extraction. Held: petitioner did not change the character of its business during or immediately prior to the base period nor was it committed to a course of action consummated subsequent thereto which resulted in any change in its capacity for production or operation, so as to qualify for relief from excess profits tax under section 722 (b) (4), I. R.…

Petitioner has failed to show that it is entitled to any relief under section 722 (a) and (b) (1), I. R. C. 1939, for the year 1944 over and above the benefit it has received under section 713 (e), or that it is entitled to any benefit of unused excess profits carryovers from 1942 and 1943 based upon a constructive average base period net income for those years.

During the years 1950 and 1951 the petitioner was in the business of transportation of goods as a common carrier, the actual… Held: that the trailers to which the petitioner held title for more than 6 months were not held primarily for sale to customers in the ordinary course of business, and were not inventoriable property, and that gains realized are to be treated as long-term capital gains under section 117 (j), I. R. C. 1939, and excluded from excess profits…

At his death decedent was a member of a law partnership to which he had made no capital contribution. The firm owned no material tangible property. Held: the value of the estate's right to post-death partnership earnings attributable to work done after decedent's death was includible in his gross estate for Federal estate tax purposes. Bull v. United States, 295 U.S. 247 (1935); and McClennen v. Commissioner, 131 F. 2d 165 (C. A. 1, 1942), distinguished.

Where petitioner, a New York State unincorporated association, had apparently ceased to exist prior to the time its petition herein was filed by its former treasurer, held, the proceeding must be… Held: the proceeding must be dismissed for lack of jurisdiction.

In January 1942, petitioner corporation entered into an oral agreement with Beattie Manufacturing Company for the manufacture and sale of flame throwers, a war… Held: The parties intended to and did form a joint venture within the meaning of section 3797, I. R. C. 1939. (2) Petitioner is taxable as a partner under section 182 on its distributive share of the joint venture's net profits during the years 1944 and 1945 in the respective amounts of $ 78,789.78 and $ 91,019.45.

During 1951, petitioner was one of four trustees of a Massachusetts real estate trust and received compensation in the amount of $ 3,000 for her services as trustee. Held: petitioner was in the trade or business of being a trustee and such sum constituted earnings from self-employment within the meaning of section 481 of the 1939 Code, and was therefore subject to the self-employment tax.

Effect of Federal Estate Tax on Value of Marital Deduction. -- A surviving husband took one-half of his deceased wife's estate under the Ohio Statute of Descent and Distribution. Held: in valuing the interest passing to the surviving spouse under section 812 (e) (1) (E) (i), I. R. C. 1939, the Commissioner properly reduced the claimed marital deduction by the surviving spouse's pro rata share of the Federal estate tax.

Petitioners, the owners of a commercial lot with a 2-story building thereon located in Tyler, Texas, conveyed, without consideration, to the Foundation, a charitable corporation, the perpetual right… Held: that the rights and interests contributed were property with a fair market value of not less than $ 70,000, and such gift was deductible to the extent provided in section 23 (o).

Held, wages paid by partnership engaged in building contracting business, which were in violation of Defense Production Act, were properly… Held: wages paid by partnership engaged in building contracting business, which were in violation of Defense Production Act, were properly disallowed in the partnership return and the amount thereof was properly charged against the petitioners, who were the partners, within the rule of Weather-Seal Manufacturing Co., 16 T. C. 1312.

In 1951 the Bank of America acquired all the stock of Enterprise Productions, Inc., an unsuccessful motion picture corporation, in foreclosing defaulted loans. Held: the Commissioner erred.

Payments, on account of bonds purchased flat in 1942, made by the debtor in the tax years as interest applicable to periods before 1942 and resulting in recoveries in excess of petitioner's basis but less than the face of the bonds, held taxable as capital gains under section 117 (f), I. R. C. 1939.

In 1948 a partnership entered into a contract which gave it the right to purchase from a corporation 2,250,000 gallons of gasoline per month. Held: the respondent correctly determined that the gain resulting from this transaction was taxable as ordinary income and not as capital gain.

1. Deduction of loss realized by the owner of property upon seizure and sale for nonpayment of realty taxes to a corporation wholly owned by petitioner and his immediate family, held, precluded by… Held: precluded by section 24 (b) (1) (B), I. R. C. 1939, as a sale between related taxpayers. 2.

In 1952, petitioner, living separate and apart from her husband without her fault, received certain periodic payments from her husband pursuant to a final judicial decree of separate maintenance… Held: that such payments are includible in the gross income of petitioner under section 22 (k), I. R. C. 1939.

The petitioner deducted as an expense on its Federal income tax returns certain amounts for salary, rent, and interest expense. Held: such amounts were includible in the gross income of the payees by application of the doctrine of constructive receipt and the claimed deductions are not barred by section 24 (c), I. R. C. 1939, as amended by the Technical Changes Act of 1953. Held, further, the amounts claimed as deductions for officers' salaries were reasonable.

1. Engineering and designing expenses in the amount of $ 82,702.47 held deductible. Sec. 23 (a)(1), I. R. C. 1939. 2. Petitioner had only a skeleton staff. Held: the amount was reasonable, and petitioner, being on the accrual basis, may deduct it during the taxable period when the bill was rendered. 3. Petitioner had an agreement with S Company whereby the latter was to distribute petitioner's products.

Held, amount received by petitioners in settlement of threatened litigation for recovery of anticipated loss of profits and increased rental expense is taxable as ordinary income under section 22(a),… Held: amount received by petitioners in settlement of threatened litigation for recovery of anticipated loss of profits and increased rental expense is taxable as ordinary income under section 22(a), I. R. C. 1939.

The petitioner held entitled to excess profits tax relief under section 722 (b) (4), I. R. C. 1939 because of base period changes in management and operation which resulted in a higher level of earnings. Constructive average base period net income determined.

Petitioner bank was closed by the State Superintendent of Banks on October 30, 1931, and it reopened in 1932 after most of the depositors waived one-third of their deposits, under a plan whereby the… Held: if petitioner realized forgiveness of debt income by reason of the deposits waived in 1932, it was not realized in any year later than 1942 when it bought out the junior interest of the certificate holders.

A payment received in connection with the relinquishment of rights under a distributorship contract held, in the circumstances, to be ordinary income and not capital gain realized on a sale or… Held: in the circumstances, to be ordinary income and not capital gain realized on a sale or exchange. Sec. 117 (a) (4), I. R. C. 1939.

During the year 1947 and through February 10, 1948, petitioner, the owner of all but a nominal number of shares of stock of Wil-Tex, owed Wil-Tex $ 33,950. On February 10, 1948, petitioner entered into a contract with Panhandle to sell all of the shares of Wil-Tex for $ 4,000,000, less net liabilities of Wil-Tex, net liabilities being defined as liabilities less current assets as shown by balance sheet of February 28, 1948. The closing date was to be March 10, 1948.

During its fiscal year ended June 30, 1953, petitioner, a poultry grower, was advised by a marketing cooperative of which it was a member, that a patronage refund credit had been allocated to its… Held: the patronage refund credit was a properly accruable item of income to petitioner during its fiscal year ended June 30, 1953.

Facts found in an earlier proceeding involving the same partnership, including a finding of a business purpose, stipulated in this proceeding as being correct, held, to justify present finding that… Held: to justify present finding that the general partners are not taxable on partnership income credited to their wives as limited partners, notwithstanding a contrary result in the earlier proceeding prior to Commissioner v. Culbertson, 337 U.S. 733.

Transferee Liability -- Burden of Proof. -- Ethel, admittedly liable as transferee of assets, deposited transferred funds in joint bank accounts from which Robert withdrew funds leaving Ethel with… Held: facts show a prima facie case of transferee liability against Robert who has not rebutted it.

Neither a deductible loss in a profit transaction, nor a bad debt, held, on the facts, sustained by petitioner wife upon the subsequent settlement, pursuant to their separation agreement, of payments… Held: on the facts, sustained by petitioner wife upon the subsequent settlement, pursuant to their separation agreement, of payments made to her former husband during their marriage for use in providing for their personal residence.

Held, petitioners failed to show that respondent erred in determining that substantial quantities of cattle, less than 26 months old, never used in… Held: petitioners failed to show that respondent erred in determining that substantial quantities of cattle, less than 26 months old, never used in the breeding herd, and sold in part as the result of extensive advertising, were cattle held for sale to customers in the ordinary course of petitioners' business of selling cattle.

Abraham Stoumen died a suicide in 1946. In 1953 this Court held that Abraham owed income taxes and additions to tax for the years 1943, 1944, and 1945, in an amount exceeding $ 270,000. Held: Transfer of the insurance proceeds to the petitioners rendered Abraham's estate insolvent. (2) Petitioners are liable as transferees for Abraham's unpaid tax liability to the extent of the insurance proceeds received by them.

1. Petitioner, a wholesale liquor dealer, allowed discounts from the list price to its customers in order to meet competition during the base period years 1936-1939. Held: the discounts are adjustments of the sales price and are made to arrive at gross income; they are not deductions from gross income and not deductions under section 711 (b) (1) (J). 2.

In 1922 an individual, pursuant to an agreement with underwriters, borrowed money, acquired assets from a receivers' sale, and transferred them to a new corporation, Auto-Lite, for stock and bonds. Held: The 1922 transaction was a taxable exchange as the transferor at no time had 80 per cent control of Auto-Lite. 2. The basis of the real property to petitioner is the sum of the indebtedness assumed plus the fair market value in 1925 of the stock exchanged. 3.

Prior to February 1, 1950, petitioner and 5 other oil companies owned separate producing rights to an oil pool in Kern County, California,… Held: petitioner did not exchange its interests in its two separate properties for a new depletable interest by participating in the unitization agreement, and it is entitled to claim percentage depletion on that part of unitized oil production attributable to its Main Property, and cost depletion on that part attributable to its Result…

Each of the petitioner corporations was engaged in the purchase and sale of commodities under contracts providing for forward delivery, that were not made through or subject to the… Held: that each of the petitioners was a personal holding company within the meaning of sections 500 and 501, I. R. C. 1939. 2. Held, further, that a question not raised by the pleadings, concerning the amounts of the gross profits from sales of one of the petitioners, will not be considered. 3.