Volume 28 — Tax Court Memorandum

Facts: Petitioner, a physician, resided on a ten-acre farm on which he raised dogs and ponies, and grew an apple orchard. Held: Petitioner has not met his burden of proving that he was in the trade or business of raising the dogs or ponies. Hence, his expenses are not deductible under section 162, I.R.C. 1954, nor are his losses deductible under section 165, I.R.C. 1954.

1. In February 1961 Seagrave Corp. and L. E. Roberts, deceased, entered into an employment contract. Held: The fair market value of the payments on the valuation date was $121,576.78. 2. Held: The value of several items of personal property and household effects was $4,775 on the valuation date.

Held: The petitioners have failed to show that they provided more than one-half the total support of the claimed dependents in 1963 and 1964. Held: The petitioners have failed to show that they provided more than one-half the total support of the claimed dependents in 1963 and 1964.

Petitioner Alcuin Willenbring was convicted of wilful tax fraud for the years 1954 and 1955. The conviction was affirmed. Held: The deficiencies are presumed to be correctly determined by respondent, and petitioners failed in their burden of proving error therein. 2. Additions to tax, other than fraud, for failure to file a declaration of estimated tax in 1953, and filing a substantial underestimation of estimated tax in 1954 are sustained.

Stephens Brothers, Incorporated, built three coastal minesweepers for the United States Navy. Held: that the Commissioner did not err in including the $59,987.70 retained by the Government until final settlement, as income of Stephens Brothers, Incorporated, for the taxable year ending October 4, 1960; (2) that the $57,539.33 paid to Stephens Brothers, Incorporated, for adjustments for labor costs was properly includable in the…

Held, that the return filed by the petitioner for the taxable year ended September 30, 1955, was false or fraudulent with intent to evade tax and that assessment and collection of any deficiency for… Held: that the return filed by the petitioner for the taxable year ended September 30, 1955, was false or fraudulent with intent to evade tax and that assessment and collection of any deficiency for such year are not barred by the statute of limitation.

G operated the soft goods departments in several discount department stores and formed a separate corporation for the operation in each store. He and his wife held all the outstanding stock in such corporations. The evidence indicates that the separate corporations were formed for business reasons and that tax consequences were not considered. G made loans to one of the petitioners with no obligation to pay interest and no due date, but after several years, the debtor made payments to G which were deducted as interest. Held: (1) The evidence as to the reasons for the formation of the separate corporations is credible, and it is found that the corporations were not acquired for the purpose of evading or avoiding Federal income tax. (2) The amounts paid by one of the petitioners to G are not deductible as interest since no obligation to pay such interest has been established.

Petitioner transportation for migratory laborers to nearby orchards and farms. On her income tax returns for 1961 to 1964 she reported net losses or small net income. She deposited over $30,000 in savings accounts and accrued more than $8,000 in interest thereon in these years. Held: (1) The amounts deposited in savings accounts and the interest accrued thereon are taxable as income to petitioner. (2) The underpayments of tax were due to fraud. (3) The statute of limitations does not bar the deficiency for 1961.

1. Held, petitioner has failed to prove that some of the unexplained bank deposits, not already eliminated by the two written stipulations, should be further eliminated from petitioner's taxable income. 2. During the taxable years 1960, 1961 and 1962, petitioner owned and operated three rental properties in the City of New York. Held, petitioner has proven that she is entitled to deduct certain rental expenses in addition to the expenses allowed by respondent. 3 and 4. Respondent, by an amended answer, affirmatively alleged petitioner was subject to additions to tax under section 6653(a), I.R.C. 1954, for negligence and under section 6651(a), I.R.C. 1954, for failure to file returns on the date prescribed. Held, respondent has failed to prove that such additions to tax should be made. 5. Held, petitioner is not entitled to deduct depreciation on the Surf Avenue property since that was not business property. 6. Held, the burden of proof as to Issue 1, unexplained bank deposits, was upon petitioner and not upon respondent.

Held, respondent correctly disallowed $600 (personal exemption) of a net operating loss of $688.38 for the calendar year 1963 claimed by petitioner on his "Application For Tentative Carryback Adjustment" to the calendar year 1961 under the provisions of section 172, I.R.C. 1954, after the respondent had previously tentatively allowed a net operating loss carryback of $688.38 from 1963 to 1961 under the provisions of sections 6411, I.R.C. 1954.

Petitioners owned certain property upon which they constructed office buildings in 1961 and 1962, which were held for the production of income. Held: Respondent's determinations of useful lives of the respective buildings sustained. Petitioners have not met their burden of proof to show error therein.

Assessment and collection of deficiencies barred by statute of limitations. Neither fraud nor 25-percent omission of gross income proved.

The evidence reviewed and it is, held, respondent failed to sustain his burden of proving fraud as to petitioner Arnold Levy for 1960 and 1961 but sustained his burden of proving fraud as to said… Held: respondent failed to sustain his burden of proving fraud as to petitioner Arnold Levy for 1960 and 1961 but sustained his burden of proving fraud as to said petitioner in 1962.

C.N., while employed as a policeman, undertook a general college education majoring in philosophy. Held: Amounts expended for such education are personal expenses, not deductible expenses of carrying on a trade or business.

Held: (1) Petitioner accumulated its earnings and profits for the taxable years 1960 and 1961 beyond the reasonable needs of its business in… Held: Petitioner accumulated its earnings and profits for the taxable years 1960 and 1961 beyond the reasonable needs of its business in those years, and beyond the reasonably anticipated needs of its business; and (2) petitioner was availed of during the taxable years for the purpose of avoiding the income tax with respect to its…

Held, petitioners have not sustained their burden of proving that the respondent erred in disallowing a portion of the entertainment and automobile expenses claimed as business… Held: petitioners have not sustained their burden of proving that the respondent erred in disallowing a portion of the entertainment and automobile expenses claimed as business deductions in each of the years involved, except 1962 in which year the respondent did not disallow any automobile expenses.

Held: Theft loss deduction limited to property which petitioners established had been stolen and for which basis for determining loss has been shown.

Petitioner operated an undertaking business. It kept a stock of caskets on hand. Held: The stock of caskets was a significant income-producing factor, and the caskets were purchased and sold as merchandise within the contemplation of sections 1.446-1 and 1.471-1, Income Tax Regs. As such the Commissioner did not violate sections 446 or 471 by recomputing petitioner's taxable income on the accrual basis.

Held: The petitioner has failed to show that he provided more than one-half to the total support of the claimed dependents in 1963. Held further: The petitioner may not compute his 1963 income tax at the rates provided for a head of household since he has not shown that he furnished more than onehalf of the cost of maintaining the household with respect to which he is claiming such rates.

Held, cost of acquiring and upkeep of uniforms required to be worn by California automobile driver's license examiner was personal expense and not deductible as ordinary and necessary business expense.

Issues (a) - (d), inclusive. Held, petitioners have failed to establish that any portion of the amounts of $3,536.03, $2,429.52, $328.67 and $100 allegedly expended for travel, entertainment, auto… Held: petitioners have failed to establish that any portion of the amounts of $3,536.03, $2,429.52, $328.67 and $100 allegedly expended for travel, entertainment, auto expense, and dues and periodical expenses, respectively, is an allowable deduction. Issues (e) and (f).

Held, the court order involved herein fails to designate specifically an amount for child support as required by Commissioner v. Lester… Held: the court order involved herein fails to designate specifically an amount for child support as required by Commissioner v. Lester [61-1 USTC 9463], 366 U.S. 299 (1961); consequently, the payments received by petitioner from her husband pursuant to such order do not qualify as child support, but instead are includable in her gross…

Held: Petitioner failed to prove that his Doric Company stock and debentures became worthless in 1964. Held: Petitioner failed to prove that his Doric Company stock and debentures became worthless in 1964.

Held: An estimate for future contingent liabilities was improperly accrued and deducted as an expense in the year it was added to a reserve account. Simplified Tax Records, Inc. [Dec. 26,361], 41 T.C. 75 (1963), followed. Held, further: Expenses actually incurred in 1964 are deductible even though petitioners erroneously accrued and deducted said amounts prior to 1964. Kenosha Auto Transport Corporation, 28 T.C. 421 (1957), acq. 1957-2 C.B. 5, followed.

The petitioner, an internal revenue agent, attended the University of Chicago Graduate School of Business as a candidate for the degree of Master in Business Administration. Held: petitioner's primary purpose in taking courses at the Graduate School was not merely to maintain or improve his job skills and, in fact, said courses did more than that by qualifying him for a more responsible position.

A high school teacher, and his wife, who was the administrative assistant to the high school principal and head of the guidance department, were granted sabbatical leaves at half… Held: the travel expenses were not deductible as a form of educational expenses. Petitioners failed to sustain their burden of establishing that the trip was undertaken primarily to maintain or improve the skills required in their employment within the provisions of sec. 1.162-5, Income Tax Regs.

Held, payments received by petitioner from St. Luke's Hospital Center during the taxable year 1965 represented taxable compensation for services rendered and do not fall within the exclusionary… Held: payments received by petitioner from St. Luke's Hospital Center during the taxable year 1965 represented taxable compensation for services rendered and do not fall within the exclusionary provisions of section 117(a) dealing with scholarship and fellowship grants.

Petitioner was in the business of quarrying and selling stone and stone products. Its first full year of operations was the taxable year ended March 31, 1959. Held: petitioner failed to establish that the additions to the reserve for bad debts for the taxable years ending March 31, 1963, 1964 and 1965 were reasonable within the meaning of section 166(c) of the 1954 Code.

During World War II petitioner had been a pilot in the Army Air Force. He is now a major in the Air Force Reserve in a non-flying status. Held: the balance of the $379 is deductible in 1961 as an ordinary and necessary business expense under section 162(a), I.R.C. 1954, and section 1.162-5 (a)(1), Income Tax Regs., because it was paid for maintaining or improving skills required by the taxpayer in his employment.

Petitioner, who was divorced and lived alone, suffered a heart attack. Pursuant to the advice of his doctor that he obtain non-skilled live-in help, he hired one Mrs. Holtzman whose duties were twofold: (1) to seek medical assistance for petitioner in the event of a heart attack; (2) to relieve petitioner of some of the housekeeping chores. Held, the services rendered by Mrs. Holtzman do not qualify as "medical care" within the contemplation of section 213(e)(1), and consequently, the amounts paid by petitioner during 1964 for Mrs. Holtzman's salary, room and board are nondeductible personal or living expenses under section 262.

S, a wholly owned subsidiary of W and a manufacturer of highly styled expensive wrought aluminum furniture, had incurred net operating losses of about $600,000 prior to its acquisition by K.K paid $235,000 for all of the stock of S, equal to the net book value of S's assets. At the time of its acquisition, S had recently begun to operate at a modest profit. Its profits, however, were not sufficient to absorb any substantial portion of its net operating loss carryovers. Shortly after the acquisition, K caused its wholly owned subsidiary C to be merged into S for the principal purpose of using S's net operating loss carryover to offset the income from C's profitable business. On S's return for its first fiscal year ending after its acquisition by K, S deducted its net operating loss carryover of approximately $600,000 from the combined income of C's business ($976,000) and S's business (35,000), resulting in a reduction of Federal income taxes of approximately $300,000. K acquired control of S for the principal purpose of avoidance of Federal income tax by securing the benefit of S's net operating loss as an offset against the income of its wholly owned subsidiary, C. Held: The Commissioner correctly disallowed S's deduction of its net operating loss carryover under the provisions of section 269(a), I.R.C. 1964. We have carefully considered all the evidence in this record, consisting of both oral testimony and documentary evidence. We have particularly noted that the petitioner, himself, at no time testified that the transfer to him of the insurance policy was specifically agreed to be as a part of the redemption price of his stock. His testimony falls far short of a specific statement that it was understood between the parties at the time the oral agreement for the redemption of his stock was made that the insurance policy was to be transferred to him as part of the consideration of the transfer by him to the corporation of his common stock. Petitioner's testimony with respect to the oral agreement is as follows: Q. Mr. Wilkin, give the Court the nature of the discussions that you had with the other stockholders with reference to the purchase of your shares? A. Well, I was getting on toward sixtyfive (65) years and I wanted to retire and the other stockholders asked what kind of proposition I would have to them to buy my stock in this policy and so forth. Well, I gave them just one proposition, two hundred fifty thousand dollars ($250,000.00) for my stock plus this insurance policy on which my wife was the beneficiary. Q. And what was the response of the stockholders at the time you made that offer? A. They verbally agreed to it. Petitioner further testified as follows: Q. What did the corporation, to your knowledge, what did the corporation owe you in 1963 prior to November, 1963? How much did you have coming from the corporation for the redemption of your shares, for the purchase price of your shares? A. Were there eighteen (18) shares left at that time? Q. Twenty-seven (27). A. Twenty-seven (27) - well, they owed a hundred fifty thousand dollars ($150,000.00) plus interest. This testimony in our opinion establishes only that at the time of petitioner's retirement, the corporation agreed to purchase his 45 shares of common stock for $250,000 and also agreed to transfer all rights in the insurance policy to him. This testimony does not support the conclusion that the transfer of the insurance policy was agreed to be a part of the purchase price of the stock. All of the documentary evidence clearly leads to the conclusion that the purchase price of the stock was $250,000 and that the transfer of the insurance policy was not agreed by the parties to be as a part of the purchase price of the stock. The executive vice president and other minority stockholder of National Plywoods, Inc., came closer in his testimony to stating that the insurance policy was intended to be in partial payment for the surrender to the corporation by petitioner of his 45 shares of common stock of National Plywoods, Inc. His first testimony in this respect is as follows: At the conference we had the offer of the forty-five (45) shares of stock from Mr. Wilkin for two hundred fifty thousand dollars ($250,000.00) and the insurance policy; and it was agreed upon by Mr. Kerfin and myself. However, this witness also testified that he wrote and prepared the minutes of the meetings of the board of directors of National Plywoods, Inc., both at the regular and special meetings, and that the information in those minutes was correct. Those minutes show the purchase price of the stock to be $250,000. He also testified with respect to the original agreement for the purchase of petitioner's stock as follows: THE WITNESS: He had a certificate for forty-five (45) shares until we made the first redemption at which time it was redeemed through the bank and we had to break it up because the arrangement was to, at first the arrangement was to buy in nine (9) share lots. So we made five (5) certificates for nine (9) shares each. THE COURT: And he turned in one and got fifty thousand dollars ($50,000)? 686 THE WITNESS: He turned in one and got fifty thousand dollars ($50,000). It therefore appears that even this witness's testimony, considered in its entirety, supports the conclusion that the agreement between petitioner and National Plywoods, Accts. payable $ 36,282.19 $ 29,033.84 $ 31,044.97 $ 32,562.74 redeemed for a cash payment of $250,000 and that the insurance policy would be transferred to him upon his retirement. This witness's testimony certainly does not support a conclusion that the transfer of the insurance policy was part of the purchase price of the stock. All of the documentary evidence of record leads unmistakably to the conclusion that the transfer of the insurance policy was not in partial payment for the stock. The issue here is entirely factual. We conclude that the preponderance of the evidence supports the conclusion that the transfer of the insurance policy to petitioner was not in part payment for petitioner's stock. We therefore sustain respondent's determination. Decision will be entered for respondent.

Held: 1. Christmas tips given by petitioner to various office hands, delivery boys, elevator starters, doormen and maitre d's are not deductible under section 162(a) or were not substantiated as… Held: Christmas tips given by petitioner to various office hands, delivery boys, elevator starters, doormen and maitre d's are not deductible under section 162(a) or were not substantiated as required by section 274(d). 2.

Held, petitioners have failed to show that they are entitled to deductions claimed in their Federal income tax returns for the calendar years 1963 and 1964 for… Held: petitioners have failed to show that they are entitled to deductions claimed in their Federal income tax returns for the calendar years 1963 and 1964 for contributions, taxes, medical and dental expenses, outside salesman expenses, and certain bankruptcy losses in excess of those allowed by the respondent.

Held, the residuary testamentary trusts created under the wills of Harry and Rose Publicker had not come into existence for Federal tax… Held: the residuary testamentary trusts created under the wills of Harry and Rose Publicker had not come into existence for Federal tax purposes during the taxable years in question and, accordingly, petitioners' claims regarding the ownership of these trusts, and that the income and deduction items attributable thereto should be treated…

Held: The petitioner has failed to show that she provided more than one-half of the total support of the claimed dependents for 1963. Held: The petitioner has failed to show that she provided more than one-half of the total support of the claimed dependents for 1963.

Held: Petitioners have failed to prove that they provided more than one-half of the support for two of Mary's children in 1966, and, therefore, are not entitled to deductions for personal exemptions. Secs. 151(a), 151(e), and 152(a), I.R.C. 1954.

Held, that the petitioner has failed to prove that the respondent erred in determining that the principal purpose for the acquisition of… Held: that the petitioner has failed to prove that the respondent erred in determining that the principal purpose for the acquisition of control of petitioner on February 29, 1960, was the evasion or avoidance of Federal income tax by securing to the acquirer the benefit of a deduction of petitioner's claimed net operating losses and in…

Petitioner and his wife emigrated to this country from Europe just prior to World War II. Petitioner was a successful physician in Europe and claimed that he and his wife brought a substantial sum of money with them when they left Europe. During the years 1961-1963, the three years in issue, petitioners' professional activities were limited because of a debilitating heart condition. Respondent, using the "bank deposits and expenditures method" of computing income, determined that petitioner, within the meaning of section 6653(b), had fraudulently understated his gross receipts from the practice of medicine for each of the three years in issue. As to the years 1962 and 1963, petitioner claimed that the otherwise unexplained bank deposits uncovered by respondent's reconstruction of income were attributable to the aforementioned cash hoard which petitioner brought with him to this country. As to the year 1961, petitioner urged that respondent's reconstruction of income was largely inaccurate as a result of various computation erros made by respondent's agent. 857 Petitioner also urged that respondent was foreclosed from employing the "bank deposits and expenditures method" as a supplemental means of computing income, since, on their face, petitioner's books and records gave every indication of being both complete and accurate. Held: For each of the years in issue, respondent failed to prove by clear and convincing evidence that petitioner, within the meaning of section 6653(b), fraudulently understated his gross receipts from the practice of medicine. Held, further: Respondent's deficiency determination for the years 1962 and 1963 was correct only to the extent that petitioner failed to sustain his burden of proof with regard to certain disallowed business expense deductions. Held, further: Respondent's deficiency determination for the year 1961 was correct only to the extent that petitioner failed to sustain his burden of proof with regard to (a) certain disallowed business expense deductions and (b) a portion of respondent's reconstructed gross receipts computation. Held, further: Respondent was not foreclosed from using the "bank deposits and expenditures method" of reconstructing petitioner's income.

Dividends: Loans distinguished: Withdrawals by stockholders: Intent to repay; Evidence. - Petitioners' withdrawals of funds from dormart Panamanian corporation of which they were the only stockholders are taxable as dividends.

Held, that the petitioner was not in the business of buying and selling real estate and that a loss sustained upon the foreclosure of a… Held: that the petitioner was not in the business of buying and selling real estate and that a loss sustained upon the foreclosure of a parcel of real estate which he owned was not an ordinary loss, but was a capital loss which under section 172(d) of the Internal Revenue Code of 1954 was not deductible in computing a claimed net operating…

Held: That the petitioner transferred real property to his children for less than an adequate and full consideration and that the excess of the value of the property over the value of… Held: That the petitioner transferred real property to his children for less than an adequate and full consideration and that the excess of the value of the property over the value of the consideration received constituted a taxable gift. Section 2512(b) of the Internal Revenue Code of 1954.

In 1963 petitioner, who resided in Milwaukee, went to New York on a business trip and while there had an emergency appendectomy. Held: That the cost of the wife's transportation (including meals, taxi fares, and tips) to and from New York and the cost of her transportation to and from the hospital while in New York constituted transportation primarily for and essential to medical care and are includable in computing the petitioner's deduction for medical expenses…

Petitioners incurred indirect moving expenses and real estate selling expenses in connection with their move from Kansas City to San Francisco at the request of petitioner's employer, for which they were reimbursed by the employer. Held, the amounts received as reimbursements are not excludable from petitioners' gross income.

Petitioner, the widow of the former president of Astron Corporation, received funds from Astron for a limited period of time after her husband's death. The payments were made pursuant to two resolutions of the board of directors.

Petitioner had exclusive control over the checking accounts of several corporations. Held: Petitioner sustained his burden of proving that respondent's determination was erroneous with respect to 14 of the disbursement items. However, the remaining unexplained disbursements are includable in his gross income for 1954. 2.