Volume 27 — Tax Court Memorandum

Held: The payment of $59,760 to W. P. Bunton, Sr., by the Bunton Seed Company, reimbursing him for the amount he had previously paid to Ross and Butler for all their stock in the corporation, was not essentially equivalent to a dividend but was a distribution by the corporation in full payment in exchange for the stock of Ross and Butler within the meaning of sections 302(a) and (b)(1), I.R.C. 1954.

Respondent disallowed a large portion of the salary paid by petitioner to its president and deducted in its return for the fiscal year ended February 29, 1964. The president had not received any salary for many years because of petitioner's financial situation but performed valuable executive services for petitioner throughout the years and in the year at issue in particular. Held: The services rendered petitioner by its president were unique, vital to petitioner's financial success and valuable. Respondent's disallowance of three quarters of his salary is unreasonable. The salary deduction of $12,521.91 claimed is found to be a reasonable allowance for actual services rendered to petitioner by its president in its fiscal year ended February 29, 1964.

Petitioner Ruby Marks is a practicing gypsy palmist. Held: Respondent's deficiency determination based on an addition to income of $5,000 is upheld.

1. The board of directors of S Corp., petitioner's wholly owned corporation, resolved "to pay a cash dividend in the amount of $137,000" to P Corp. On the same day, shortly thereafter, petitioner exchanged all his stock in S Corp. for all the stock of P Corp., which had been created the day before, so that S Corp. became a wholly owned subsidiary of P Corp. P Corp. subsequently received the $137,000 cash dividend from S Corp., and another $4,000 dividend paid two and one-half months later. Held, P Corp. was a bona fide corporate entity, and the dividends it received from S Corp. are taxable to it alone and cannot be attributed to petitioner. 90 2. Petitioner gave a remainder interest in a painting to a university in 1962. Held, petitioner failed to prove that the painting had a fair market value in excess of that determined by the Commissioner.

Held, the fair market value as of July 2, 1953, the date of death of petitioner's wife, of certain business property located at 100 E.… Held: the fair market value as of July 2, 1953, the date of death of petitioner's wife, of certain business property located at 100 E. Alameda Street in downtown Tucson, Arizona, which was owned by petitioner and his wife on the date of her death, was $100,000, allocable $55,000 to the land and $45,000 to the improvements, instead of…

Held: Bad debt deductions denied due to petitioner's failure to establish the amount of the alleged losses and the taxable year in which the alleged debts became worthless. Held: Bad debt deductions denied due to petitioner's failure to establish the amount of the alleged losses and the taxable year in which the alleged debts became worthless.

Petitioner, an apprentice-machinist at the California refinery of the Standard Oil Company, moved to a position at a Mississippi refinery of his employer at a time… Held: petitioner made the move from California in the interest of his employer and under the provisions of sec. 162, I.R.C. 1954, may deduct his moving expenses from his gross income for the calendar year 1963 as an ordinary and necessary business expense. Edward N. Wilson, 49 T.C. 406 (Jan. 24, 1968) followed.

Held: (1) A loss of pine trees on petitioners' residential property due to mass attack by southern pine beetles was a loss by casualty within the meaning of section 165(c)(3), I.R.C. 1954. Held: A loss of pine trees on petitioners' residential property due to mass attack by southern pine beetles was a loss by casualty within the meaning of section 165(c)(3), I.R.C. 1954.

Held: (1) In the case of oil and gas producing properties, "lifting costs," which are a portion of the cost of producing oil and gas, are to be subtracted from gross sales in computing gross income for the purpose of determining whether personal holding company income, as defined in section 543 of the Internal Revenue Code of 1954, is at least 80 percent of the corporation's total gross income; (2) On the facts presented herein, respondent correctly determined that Lydia Oil Company, of which petitioner is the successor by merger, was a personal holding company during the years 1962 and 1963.

1. Held, that cash amounts which the petitioner paid to or applied for the benefit of the widow of its former president who died after… Held: that cash amounts which the petitioner paid to or applied for the benefit of the widow of its former president who died after 27 years of active service for which he was inadequately paid are deductible as death benefits in the nature of deferred compensation, under the provisions of section 404(a)(5) and (b) of the Internal Revenue…

In 1958, Soter sold a 25 percent interest in a partnership to Vopat for $75,000, to be paid in installments. Soter retained a 25 percent interest in the partnership. Held: The fair market value of the 5 percent interest reacquired in 1960 by Soter was $15,000. (2) Soter did not realize any taxable income in 1960 under the supplemental agreement of April 7, 1960.

Held, petitioners are not entitled to deduct any amount as away from home expenses in the years 1962 and 1963. Held: petitioners are not entitled to deduct any amount as away from home expenses in the years 1962 and 1963.

Held, under the facts, that petitioner, Mary Kawas Sanford, a citizen of the Republic of Honduras and an airline stewardess employed by TACA International Airlines, S.A., who maintained living quarters in New Orleans, Louisiana, which was the "home base" of her employer, was not a resident of the United States during the years 1961 and 1962 under the Internal Revenue Code, although physically present in the United States during a part of said years.

The Commissioner determined deficiencies in income tax and additions to tax for fraud based on petitioner's failure to report income gained through defrauding his employer. The petitioner conceded the deficiency, leaving for determination only the issue of civil fraud. Held: The respondent has failed to show by clear and convincing evidence a specific intent on the part of petitioner to evade tax. Fraud not established.

Petitioner, Ralph R. Lewis, entered into agreements with the Jenkins family to purchase all of the stock of West Virginia Northern Railroad Co. for $500,000, payable over a period of… Held: the additional 5 cents per ton paid by Railroad to the Jenkins family was payment on the purchase price of Railroad's stock by Ralph Lewis and is neither deductible by Railroad nor excludable from Railroad's income for the years 1954-1957 under any of the theories advanced by petitioners.

Respondent's determination that the entire $33,020 of cash discovered in decedent's safety deposit box at the time of his death was taxable income to decedent in the year before his death, when decedent last entered the box, was arbitrary and unreasonable. Respondent's determination disapproved.

Upon the facts, held: (1) That petitioner failed to establish that certain amounts of expenditures for alleged business entertainment, travel, and contributions, that were disallowed by respondent,… Held: That petitioner failed to establish that certain amounts of expenditures for alleged business entertainment, travel, and contributions, that were disallowed by respondent, are deductible as ordinary and necessary business expenses, and contributions.

Where a husband, while separated from his wife, agrees in writing to make periodic payments to her subsequent to the obtaining of an absolute divorce, and where such payments were made in recognition… Held: they were made because of the marital or family relationship as required by sec. 71(a)(1) and (a)(2), I.R.C. 1954, and the payments are includable in the wife's gross income.

Petitioner, a resident of Biloxi, accepted wagers on sporting events such as baseball and football games. He rented an apartment in New Orleans and accepted wagers there. Held: Amount of payments to winning bettors determined under the Cohan rule; (2) Deductions for apartment rental and robbery loss determined; (3) Disallowance of other expenses claimed sustained; and (4) Addition to tax for negligence, sustained.

Held, petitioner has established (1) that he operated his farm in the taxable year 1963 as a trade or business with a genuine intention of making a profit, and (2) that he sustained a deductible loss… Held: petitioner has established (1) that he operated his farm in the taxable year 1963 as a trade or business with a genuine intention of making a profit, and (2) that he sustained a deductible loss from such operation in the amount of $4,626.08.

Held: The petitioner has failed to prove that he provided more than one-half of the support for his three minor children in 1962 and 1963. Held: The petitioner has failed to prove that he provided more than one-half of the support for his three minor children in 1962 and 1963.

Held: The petitioner has shown that she provided more than half the support for each of her three grandchildren in 1962 and 1963. Held: The petitioner has shown that she provided more than half the support for each of her three grandchildren in 1962 and 1963.

Upon the record, held: That the realities and substance of several steps taken by the petitioner, Glen Harris, and his brother, Darrol… Held: That the realities and substance of several steps taken by the petitioner, Glen Harris, and his brother, Darrol Harris, rather than the form, are such as to require treating the steps taken as constituting one transaction for tax purposes; that the realities and substance of the formal steps taken, when viewed as constituting one…

Held: Petitioners have not established entitlement to a casualty loss deduction under section 165(c)(3), I.R.C. 1954.

The allocation of $160,000 of the total purchase price of $200,000 for a tool and die business to a covenant not to compete was made at arm's length and intended by both parties to the contract, and such allocation shall be upheld and recognized for tax purposes.

Held: Petitioners have failed to prove that they provided more than one-half of the support for a minor child in 1963, and therefore are not entitled to a deduction for a personal exemption. Secs. 151(a), 151(ee, and 152(a). I.R.C. 1954.

Held: 1. Petitioners are not entitled to deduct expenses incurred in a venture to sell advertising and promotional aids. 2. Petitioners are not entitled to deduct expenses incurred on a trip made to settle an ad valorem tax liability on certain land; they were neither ordinary nor necessary, and there was no expectation of profit present. 3. Petitioners are not entitled to deduct a loss claimed on account of a bad debt because the debt was not substantiated sufficiently to meet petitioners' burden of proof. 4. Petitioners are not entitled to deduct a casualty loss for a damaged driveway because they failed to bear their burden of proof by demonstrating the loss in value to the real estate resulting from the damaged driveway. k. Petitioners are not entitled to deduct as a casualty loss the value of a watch allegedly stolen from petitioners' car because neither the event nor the amount of loss was substantiated satisfactorily to overcome their burden of proof. 6. Petitioners are not entitled to deduct medical expenses because of a failure on their part to show that such expenses were not reimbursed, and thus have not met their burden of proof. 7. Petitioners incorrectly reported income purportedly received by assignment from petitioner Elizabeth Lemmon's elderly mother intended to be used primarily to support her, and are therefore entitled to a reduction in their gross income equal to the amounts incorrectly reported. 8. Petitioners are not entitled to a deduction for a personal exemption for petitioner Elizabeth Lemmon's elderly mother because she had well over $600 income per year. 504 9. Petitioners are not entitled to deduct as a charitable contribution any of the expenses incurred by their daughters in a world tour of five weeks during which they devoted a portion of five days to being messengers from their church to the Baptist World Alliance Youth Congress at Beirut, Lebanon.

Held, that petitioner, a police officer who for convenience used his automobile in driving to and from his home and different duty stations and for transporting and… Held: that petitioner, a police officer who for convenience used his automobile in driving to and from his home and different duty stations and for transporting and storing his uniform and equipment, is not entitled to deduct the cost of operating the automobile as an ordinary and necessary business expense.

Held: Petitioners have failed to prove that they provided more than one-half of the support for any of three minor children during any of the years in issue, and, therefore, are not entitled to… Held: Petitioners have failed to prove that they provided more than one-half of the support for any of three minor children during any of the years in issue, and, therefore, are not entitled to deductions for personal exemptions. Secs. 151(a), 151(e), and 152(a), I.R.C. 1954.

Bad debt deduction disallowed for failure to prove worthlessness in the taxable year.

Petitioners resided in a St. Louis, Missouri suburb some 160 miles removed from the Hayward family home in Shelbina, Missouri, which was vacant for some three years prior to 1961. Held: Petitioners have failed to prove that they are entitled to the deductions claimed. They have not proved that a casualty loss occurred or what their interest in the property was when it was allegedly damaged. The evidence is also insufficient to establish the amount of any such loss sustained.

Held, that the income derived from and expenses incurred in a potato-growing-and-selling business were attributable to and reportable by Bob… Held: that the income derived from and expenses incurred in a potato-growing-and-selling business were attributable to and reportable by Bob Inness Co. of Montana, Inc., rather than by petitioner Bob Inness Co., a proprietorship electing to be taxed as a corporation under sec. 1361, I.R.C. 1954. [Net operating loss deduction was…

Petitioner rented some 66 city carriage licenses held by its controlling stock-holders, paying them rent for each said license in the amounts of $1,200, $1,550, and $1,500 in the fiscal years 1961, 1962, and 1963, respectively, and petitioner took deductions for said rental payments. Respondent determined petitioner was not entitled to deduct more than $600 rental for each license and it is held petitioner failed to prove it was entitled to greater rental deductions.

Held, that during the taxable years 1960 and 1961 a race track was operated by a partnership, rather than by a corporation which had theretofore operated the track but which had subleased the premises to the partnership during the years in question, and that therefore each partner is entitled to deduct his proportionate share of the losses sustained by the partnership in the operation of the track.

Held: Respondent failed to prove fraud or that petitioner omitted from gross income an amount properly includable therein in excess of 25 percent of the amount… Held: Respondent failed to prove fraud or that petitioner omitted from gross income an amount properly includable therein in excess of 25 percent of the amount of gross income stated in petitioners' return. Secs. 6501(c) and 6501(e) not applicable. Assessment and collection of tax is barred by statute of limitations.

Petitioner was an elementary school teacher in a Los

Held, petitioners are not entitled to any deduction for the taxable year 1963 under the provisions of sec. 170 of I.R.C. 1954 as the result of the publication on June 1, 1963, in The Journal of Chemical Physics of a paper entitled "Comments on 'Hydrostatics in Various Gravitational Fields.'"

Held, that the petitioner realized long-term capital gain upon the foreclosure sale of stock which he had pledged to secure indebtedness of a… Held: that the petitioner realized long-term capital gain upon the foreclosure sale of stock which he had pledged to secure indebtedness of a corporation owned by him, and that such gain is not offset by any short-term capital loss, since petitioner failed to prove that the debt which he acquired by subrogation was worthless.

Respondent obtained consents from petitioners to extend the three-year statutory limitation period for assessment of deficiencies for the taxable years 1960, 802 within the extended period. Held: petitioners having failed in showing error in respondent's determination of deficiencies, they are sustained; the deficiency notices were timely issued. 1961, and 1962. The deficiency notice was issued

Held, a husband, whose wife was appointed his legal guardian, did not prove that he suffered theft losses when his wife, acting as legal guardian pursuant… Held: a husband, whose wife was appointed his legal guardian, did not prove that he suffered theft losses when his wife, acting as legal guardian pursuant to judicially granted authority, cashed bonds held in their joint names in order to pay the mortgage on their home and withdrew money from a bank account in his name.

Petitioner, an attorney, agreed to pay any deficit as a result of a benefit showing of a movie sponsored by his fraternal order as a money-raising project for its home for the elderly. Held: The loss was not deductible as a loss incurred in any transaction entered into for profit since petitioner has failed to show that he personally had any expectation of profit from the showing of the movie.

Held, that the petitioner, in rendering stenographic and secretarial services to various law firms and corporations for short periods during the years in question, was acting as an employee, and not as an independent contractor, and that the remuneration which she received for such services did not constitute self-employment income subject to the tax imposed by section 1401 of the Internal Revenue Code of 1954.

Petitioners, husband and wife, were employed as an aeronautical engineer and medical records librarian respectively during 1965. Each attended law school in that year. Held: that the study of law was undertaken by both petitioners primarily for personal purposes and that the expenses incurred are not deductible as ordinary and necessary business expenses under sec. 162(a), I.R.C. 1954, and sec. 1.162-5, Income Tax Regs.

Held, that the petitioner, an accrual method taxpayer, may not, in computing gain upon sales of houses, exclude from the amounts realized upon such sales any portion of the sales price represented by portions of loans placed to its credit in restricted savings accounts. Held, further, that the petitioner is not entitled to deduct, as additions to a reserve for bad debts, any portion of amounts placed in such restricted savings accounts.

Petitioner adopted a profit-sharing plan limited to its salaried employees. Its other regular employees are paid wages at hourly rates underunion agreements, and some are covered by the pension plans of two labor unions. Petitioner has only three salaried employees, two of whom are highly paid and are officers and shareholders, and the other one is a bookkeeper-secretary. Held, upon the facts, that the Commissioner did not err in holding that the plan covering salaried employees is not a qualified plan under section 401(a), 1954 Code, because in operation the plan discriminates in favor of officers, shareholders, and highly paid individuals, and, consequently, petitioner's contributions to the plan are not allowable deductions. Ed & Jim Fleitz, Inc. [Dec. 28,974], 50 T.C. 384, followed.

The petitioner, an unmarried individual, lived in California until July 1961. At that time, he began work on a job in Rochester, New York, that lasted until October 1962. Held: The petitioner's expenses for food and lodging inRochester and Utica during 1962 and 1963 were not deductible traveling expenses since the petitioner was not away from home.

Held: The horse racing and horse breeding activities carried on by petitioner fell short of being a business in 1960 and 1961 and claimed losses resulting therefrom were properly disallowed. Held: The horse racing and horse breeding activities carried on by petitioner fell short of being a business in 1960 and 1961 and claimed losses resulting therefrom were properly disallowed.

Facts: Petitioner, a candidate for a Ph.D. degree, performed services under a teaching assistantship for which he received monthly payments from Iowa State University. Held: The amounts received by petitioner do not represent payments under a scholarship or fellowship grant since these payments were primarily for the purpose of compensating petitioner for services rendered rather than for the primary purpose of furthering his own education and training.

Facts: Petitioner, a candidate for a Ph.D. degree, performed services under a teaching assistantship for which he received monthly payments from Iowa State University. He excluded these payments from his gross income as a scholarship or fellowship grant pursuant to section 117, I.R.C. 1954. Held: The amounts received by petitioner do not represent payments under a scholarship or fellowship grant since these payments were primarily for the purpose of compensating petitioner for services rendered rather than for the primary purpose of furthering his own education and training.

Fellowship or scholarship grant: Degree candidate: Benefit of grantor: Primary purpose. - Held: Stipends paid to petitioner, a degree… Held: Stipends paid to petitioner, a degree candidate, while he was a full-time student, directing his own courses of study, and not obligated to work for his grantor after receiving his degree were excludable under sec. 117, I.R.C. 1954, even though petitioner was required to work for grantor when not a full-time student and was nominally…

Commercial Finance Company, a Colorado corporation, was dissolved in 1962, and all of its assets were distributed to its shareholders. Held: Commercial Finance Company was an accrual basis taxpayer with respect to its income and it properly accrued and reported the annual interest due on the Gertrude Cullen notes held by it. Held, further: Commercial Finance Company is subject to tax as a personal holding company.

Loss deduction: Reconveyance of residence: Requirement of profit-inspired use. - The petitioner claimed that his residence was converted into an investment after he moved to another residence. After remaining vacant for three years, the residence was reconveyed to the original owner, whereby the petitioner claimed a long-term capital loss of $3,934. However, the right to a loss deduction must be supported by more than a taxpayer's subjective attitude toward his property.

Petitioner purportedly transferred his entire interest in property in 1960 to a charitable organization. At that time, he intended only to transfer one-fifth of his interest. Held, under Minnesota law, petitioner's unilateral mistake gave rise to an unqualified immediate right to revest in himself title to four-fifths of the interest purportedly transferred. Held further, petitioner's power to revest made the 1960 transfer incomplete as to said four-fifths. Held further, petitioner made a transfer of one-fifth of his interest in 1961 but not in 1962 or 1963.

Facts: Pursuant to a county court order petitioner received the sum of thirty dollars ($30.00) each week for temporary alimony and allowance for child support. Held: No part of the amounts received pursuant to this order constitute child support within the meaning of section 71(b), 1954 Internal Revenue Code, since the order failed to specify the amount of percentage of the payment which was for child support.

In 1959 petitioners rented a 25-acre farm with a residence and barn located on it and moved there to live. They continued regular, full-time employment at places away from their residence. In 1962, 1963, and 1964, petitioners sold livestock for gross sales proceeds of $214.95, $274 and $258.60, respectively, against which they claimed operating business expense deductions of $2,869.51, $6,837.45 and $6,667.21, respectively, with resulting farm losses. A substantial portion of the alleged farm business expense was the estimated cost of commuting from the farm residence to petitioners' respective places of employment and alleged salaries to petitioners' children. The petitioners' gross income from wages for the years 1962, 1963, and 1964, was $12,499.88, $13,897.27, and $13,505.26, respectively. Held: Petitioners' livestock raising endeavors did not constitute a trade or business or a venture for the production of income; the respondent's disallowance of the losses claimed for the years in question is sustained. Held, further: Assets purchased were not used in a trade or business or for the production of income, and therefore petitioners are not entitled to investment credits for the taxable years 1963 and 1964. Held, further: Petitioners failed to prove the total amount of support or the amount they contributed toward a claimed dependent's support; petitioners are not entitled to a dependency deduction for this alleged dependent for the taxable year 1962.

Petitioner accepted orders for furniture to be made to order for its customers and required deposits of a part of the price. It carried the deposits on its books as liabilities and deferred expensing of the cost until delivery. Held: (1) The deposits are taxable when received; (2) Petitioner is not entitled to a deduction for costs of the furniture on order.

During the fall of 1960 petitioner conducted negotiations with John Z. Fletcher & Associates, Inc., an insurance agency for the sale of his own agency. Held: The allocation of $30,000 to the covenant not to compete was made freely and knowingly between two parties dealing at arm's length. Petitioner has failed to provide sufficient evidence that the substance of the transaction is not reflected in the written agreement.

Petitioners were legally divorced, the mother having custody of their four children. The father made payments for the support of the four children. Held: the mother proved that she furnished over one-half of the children's support and the father did not prove that he did so.

1. Held, petitioner realized gain in August 1961, measured by reference to the fair market value of Pictorial Productions, Inc., stock,… Held: petitioner realized gain in August 1961, measured by reference to the fair market value of Pictorial Productions, Inc., stock, found to be $4.50 per share, constructively received in exchange for machinery and equipment; held, further, that computation of the gain should be adjusted for payments, totaling $17,348.04, petitioner was…

Deductibility by corporate petitioner of various expenses of its principal officer and stockholder, a well-known amateur tennis player, paid by the corporation, determined. Payments by corporation of personal expenses of its principal officer and stockholder are taxable to officer-stockholder as dividends. Value of a painting donated by individual petitioners to a church determined; value is deductible as a charitable contribution.

Where a written agreement made incident to a divorce decree provided, in part, that the husband was to purchase a new residence for his wife of her selection under $40,000 and… Held: on the facts, the payments made by the husband in respect to his indebtedness to purchase this residence were not periodic payments of alimony includable in the gross income of the wife under section 71 of the I.R.C. of 1954 and deductible by the husband under section 215(a) of such Code.

Deductions: Business expenses: Away from home: Tax home. - Despite petitioner's contention that his continuous working relationship with Lockheed headquarters in Burbank, California was sufficient to constitute Burbank as his tax home even if he maintained no residence there, the Tax Court held that the petitioner did not have a tax home in Burbank, or in any place other than Honolulu, Hawaii.

Gross income: Termination pay: Discharge of indebtedness: Club membership: Automobile: Taxable year of inclusion: Right to automobile. - The court found that a former corporate officer was indebted to the corporation and that he realized severance payments on the forgiveness of the indebtedness. also, the taxpayer realized income to the extent of a club membership when it was agreed that he could retain it as his own property after the termination of his employment.

Held: Petitioners did not contribute more than one-half of support for four minor children during the year in issue, and therefore are not entitled to claimed deductions for personal dependency exemptions. Secs. 151(a), 151(e), and 152(a), I.R.C. 1954.

Decedent provided for a testamentary trust out of the residue of her estate with assets of about $239,900, to pay the trust income for life to her surviving sister, Ann, and, upon… Held: the trust instrument provided measurable standards limiting the power of invasion, and the possibility of invasion of the corpus was so remote as to be negligible. Therefore the charitable bequest is deductible under section 2055, 1954 Code. Estate of Mary Cotton Wood, 39 T.C. 919, followed.