Volume 3 — Tax Court Memorandum

Ordinary income v. recovery of capital: Tax benefit theory. - Cash and securities received by the taxpayer upon the liquidation of a partnership of which he had been a member do not constitute taxable income where taxpayer had in previous tax years claimed loss deductions for the full amount of his partnership contribution and where taxpayer had received no tax benefit from such deductions.

Estate tax: Power of appointment. - Where a father's will provided for transfer of property to "my son * * * or his heirs or devisees," the provision was sufficient to cause the property to be included in the son's gross estate, as property passing under a general power of appointment.

Held, that the value of a mortgage included in the gross estate of a decedent was, at the time of his death, $15,000 as determined by the respondent rather than $12,500 as shown in the estate tax… Held: that the value of a mortgage included in the gross estate of a decedent was, at the time of his death, $15,000 as determined by the respondent rather than $12,500 as shown in the estate tax return.

Gross income: Definition: Bank stock assessment: Recovery of amount allowed in prior year without tax benefit. - A bank assessment paid and allowed as a deduction in a prior year without tax benefit constitutes a contribution to capital in the year of recovery and is not includible in the gross income for such year.

Estates and trusts: Net income: Estate in process of administration. - Commissioner's determination that the executors unduly prolonged the administration of the estate so that the estate would not be recognized as a taxable entity during 1939 is reversed upon the evidence, and taxpayer, as beneficiary, is not held liable for tax on the net income of the estate.

Deductions: Expenses: Annuity payments as purchase price of property: Expense deductions v. capital expenditures. - Taxpayer corporation, owing seller the price of real estate, set up an annuity for her in 1933. In 1939 the value of such annuity, as fixed by taxpayer on its books, was exhausted by reason of the longevity of the beneficiary, so that a payment thereafter was regarded as a loss and deducted from income.

The respondent's determination that stock of the Railway Company did not become worthless in the taxable year sustained.

Prior to decedent's death, petitioners received certain property from him, given to them in contemplation of death, and also the right to purchase from decedent's estate certain stock at a fraction… Held: the interest so paid is deductible from their several individual gross incomes. Koppers Company, 3 T.C. 62, followed.

Held, that the amounts of write-downs, or charge-offs, against the cost of bonds made in years prior to the taxable years cannot be restored to the cost basis of the bonds for the purpose of computing gain or loss on the sales of such bonds in the taxable years.

Held, a certain option contract did not constitute a bona fide sale of stock for adequate and full consideration in money or money's worth and that respondent correctly held that the value of the… Held: a certain option contract did not constitute a bona fide sale of stock for adequate and full consideration in money or money's worth and that respondent correctly held that the value of the stock should be included in the gross estate of decedent.

Petitioner received additional income in 1939 by reason of the payment of its income taxes by the lessees of its properties. Held: under the provisions of section 13 (c), Internal Revenue Code, the amount of such additional income is to be computed by applying a tentative tax of 19 per cent to the petitioner's original income and deducting therefrom 2 1/2 per cent of the dividends paid credit.

Held, that the entire proceeds of a certain insurance policy in which decedent retained the right to borrow on the policy or to cash the same in the event insured survived the beneficiary, are… Held: that the entire proceeds of a certain insurance policy in which decedent retained the right to borrow on the policy or to cash the same in the event insured survived the beneficiary, are includible in the taxable estate.

Decedent was granted a general power of appointment over a fund by the will of her husband. Under the donor's will his grandson would take the entire interest in the fund in default of appointment. Decedent exercised the power by appointing the fund upon a testamentary trust for the use of the grandson but which provided for contingent remaindermen in the event the grandson should die before reaching the age of 35 without appointing the principal and accumulation of the trust. Held, that the entire value of the fund over which decedent exercised the power of appointment by will is includable in her gross estate under section 811(f) of the Internal Revenue Code. Rogers v. Helvering, 320 U.S. 410, followed.

1. The value of a trust, created in 1935, to pay so much of the income and principal as the settlor-trustee may in his discretion deem necessary or proper for the comfort, support, and/or happiness… Held: includible in the estate of the settlor-trustee as a transfer, the enjoyment of which was subject to a change through the exercise by him of a power to alter, amend, or revoke. Section 811 (d) of the Internal Revenue Code. 2.

Exchange of 6 1/2 per cent gold bonds of a corporation for 5 per cent cumulative income bonds of the same corporation, pursuant to a plan, held, a reorganization as defined in sections 112 (i) (1)… Held: a reorganization as defined in sections 112 (i) (1) and 112 (b) (3) of the Revenue Act of 1932, and no gain or loss is recognized. Commissioner v. Neustadt's Trust et al., 131 Fed. (2d) 528, affirming 43 B.T.A. 848.

In November 1939 petitioner, a corporation, caused to be organized a new corporation with an authorized capital stock of 1,000,000 shares of the par value of $1 per… Held: that there was no reorganization within the meaning of section 112(g)(1) of the Revenue Act of 1938 as amended by section 213(g) of the Revenue Act of 1939, and that, therefore, section 112(b)(4) does not apply and that the gain arising from the exchange of assets for stock is recognized for tax purposes.

1. Petitioner allowed a deduction of $102,335.58 in 1938 representing processing oil and manufacturer's excise taxes accrued on its books for that year. 2. A compromise payment in 1939 of such taxes, with others for prior years, does not result in taxable income. 3. The proper depreciation allowances for 1938 and 1939 determined. 4. The reasonable amount of officers' salaries paid in 1939 determined. 5.

1. Petitioner is a personal holding company. At the beginning of the taxable year 1938 it owed some indebtedness that had been incurred prior to January 1, 1934. Held: petitioner is not entitled to any reduction of its Title IA net income under section 405 (b) of the Revenue Act of 1938. 2.

1. A reasonable allowance for depreciation of a boat is determined from the evidence. 2. In a year prior to the taxable year petitioner caused certificates of "Guaranteed Prior Preference Stock" to be issued in place of certain demand notes held by its principal stockholder. The certificates carried no fixed maturity date but provided that the holder "shall be entitled to interest at the rate of seven per cent (7%) per annum, fully guaranteed and payable monthly whether earned or not" and that "This instrument shall enjoy all priority as to voting privileges and distribution of assets." Held, the certificates so issued did not constitute certificates of indebtedness and that the so-called interest paid thereon was not therefore deductible under section 23(b) of the Internal Revenue Code.

1. Since section 510 of the Revenue Act of 1932 makes a donee personally liable for a gift tax on the gift to the extent of the value of the gift, and there is therefore a liability at law of the donee for the tax, it is immaterial that there is no liability in equity on the part of the donee for the tax.

Estate tax: Stock in close corporation: Valuation based on worth of physical assets. - Shares of stock held by decedent in a close corporation engaged in a highly competitive business are valued on the basis of the worth of the physical assets.

Capital gains and losses: Assignment of purchase contract installments for annuity agreement: Gain from exchange of capital assets v. ordinary gain. - In determining the present value of the consideration paid by taxpayer for acquisition of an assigned purchase contract, annuity payments, as base cost, must be discounted, and the gain realized on payments received under the assigned purchase contract is not taxable as capital gain.

Held, the record does not establish that the transaction by which the petitioner, a subsidiary of Northwest Bancorporation, acquired two farms by transfer from Stock Yards Mortgage Co.… Held: the record does not establish that the transaction by which the petitioner, a subsidiary of Northwest Bancorporation, acquired two farms by transfer from Stock Yards Mortgage Co. constituted a reorganization under the provisions of section 112 (g) (1) (C) of the Revenue Act of 1938.

Petitioner paid a tax claim due to the Commonwealth of Pennsylvania from petitioner's dissolved subsidiary in order to obtain a license issued by that State to another subsidiary of petitioner. Such payment was not a necessary and ordinary expense of carrying on petitioner's business and deduction therefor is disallowed.

Where the precise point in question was litigated and finally decided in a proceeding involving tax liability for a prior year, and the facts and parties were the same as involved in the present proceeding, held, the issue is res judicata, and the respondent may not now advance a new argument to sustain his determination.

Petitioner kept his books on the accrual basis but filed his income tax return on the cash basis. Respondent audited his books for the year 1939, found his net income to be a certain amount on the accrual basis, added thereto amounts representing accounts receivable and inventory on January 1, 1939, and deducted items representing accounts, expenses and royalties payable on that date. His action in so doing is approved.

In 1887, 1894 and 1896, decedent purchased three separate policies of insurance, the proceeds of which were payable to decedent's mother, to decedent's executors, administrators and assigns, and to… Held: that no interest in, or control of the policies was reserved by decedent and that hence no sum is includible in the decedent's estate on account of such policies.

Held, that petitioner, an Associate Justice of the Supreme Court of North Carolina, is not entitled to deduct traveling expenses, including the cost of meals and lodging, incident to his attendance… Held: that petitioner, an Associate Justice of the Supreme Court of North Carolina, is not entitled to deduct traveling expenses, including the cost of meals and lodging, incident to his attendance upon the Court at Raleigh, the city in which the Court is required to sit.

In 1934 petitioners acquired certain real estate situated on the outskirts of a city. The property was acquired in a mortgage foreclosure proceeding. Held: during the taxable years all of the lots situated in Ebony Acres were held by petitioners primarily for sale to customers in the ordinary course of their business of selling real estate and could not therefore be included in the term capital assets as defined in section 117 (a) (1) of the Internal Revenue Code.

Held, that petitioner, while Attorney General of the State of Montana, received in 1937 a payment of $2,600 from one Joe K. Hart which was taxable income to petitioner and that he fraudulently omitted from his income tax return for the year 1937 this amount with intent to evade tax. Held, further, that as to other payments which the Commissioner determined in his deficiency notice and affirmatively alleged in his answer were made to petitioner by the same Joe K. Hart in 1937, the preponderance of the evidence favors petitioner and they should not be included in petitioner's income in a recomputation of the deficiency and fraud penalty for the year 1937.

In 1929, petitioners purchased considerable property known as the Port Avenue Property on the outskirts of a city in order to get a stip of… Held: during the taxable years all of the lots situated in the two subdivisions which petitioners plotted and placed on the market were held by petitioners primarily for sale to customers in the ordinary course of their business of selling real estate and could not therefore be included in the term capital assets as defined in section…

Held, that an instrument denominated non-cumulative 8 per cent debenture bond was an evidence of indebtedness and not a certificate of stock. Held: that an instrument denominated non-cumulative 8 per cent debenture bond was an evidence of indebtedness and not a certificate of stock.

Pursuant to advice and explanation of the 3-year statutory limitation, given to them by their tax consultant, all of the stockholders of Hazen, Trent & Harrell Co. adopted a plan to liquidate… Held: upon the facts, that a bona fide plan of liquidation was adopted under which the transfer of the property, thereunder was to be completed within the 3-year period specified in the plan, as provided in such statute.

(1) In the taxable years 1939 and 1940 petitioner, a corporation which kept its books and prepared its income tax returns on an accrual basis, contracted to pay its president, who was its sole stockholder, a certain monthly salary and additional compensation at the end of the year, also to pay him as rent for a building which he owned a certain annual rent. Parts of the salary and parts of the rent were paid in cash during the taxable years and the balance of the salary for 1939 and the balance of the rent for both 1939 and 1940 were unconditionally credited to his account at the end of those respective years. Petitioner's president returned these amounts as part of his gross income for the years in question. Held, petitioner was financially able to pay the amounts thus credited and petitioner's president had the unrestricted right to demand and receive these amounts in the taxable years in which they were credited. Held, further, that section 24 (c) of the Internal Revenue Code may not be interpreted to disallow to petitioner the deduction of these accrued expenses, for the doctrine of constructive receipt applies Michael Flynn Manufacturing Company, 3 T.C. 932 followed. (2) In the taxable year 1940 petitioner credited to an account designated "Reserve for Bonus" the sum of $10,000. This amount was not unconditionally credited to the account of petitioner's president until June 10, 1941. Therefore as to this amount there was no constructive payment by petitioner in 1940. A payment made by petitioner to its president of $10,000 on July 10, 1940, on an account payable which exceeded $100,000 was not a payment of this $10,000 which was credited on December 31, 1940 to "Reserve for Bonus". Held, that as to this particular $10,000 the limitations prescribed by section 24(c) apply and petitioner is not entitled to deduct this $10,000 from its gross income for 1940.

The petitioner was organized exclusively and, during the taxable years, was operated exclusively for charitable purposes and no part of its net income inured to the benefit of any private shareholder… Held: that it was therefore exempt from taxation under the provisions of the applicable Revenue Acts. A corporation otherwise exempt is not deprived of exemption because it incidentally carries on profitable activities in furtherance of its predominant charitable purpose.

Petitioners were residuary legatees. The testator had executed a note jointly with and as an accommodation to another. Held: that petitioners are not entitled to bad debt deductions under Section 23 (k) of the Internal Revenue Code.

Mays' Fifth Avenue Trust Barney May and his three sons, Walter A. May, Edwin C. May, and Herbert L. May, in 1917 created a trust naming… Held: that the income of the trust for 1936, 1937 and 1938 is not taxable to the grantors under section 22(a) of the Revenue Acts of 1936 and 1938; held, further, that in computing the net income of the trust no deductions are allowable in the taxable years for depreciation on the building erected on the premises by the lessees at their…

Where petitioners on the cash basis sought to include in their 1940 income fees which were credited to them on the books of a corporation controlled by petitioners, but which were not paid until the… Held: on the facts, the doctrine of constructive receipt does not apply, and the fees are income to petitioners for the year in which actually received.

Pursuant to a plan of reorganization under Sec. 77B of the National Bankruptcy Act approved by the court, the petitioner contributed one dollar per share and exchanged preferred stock solely for no… Held: Under section 112 of the Internal Revenue Code as retroactively amended by section 121 of the Revenue Act of 1943, no gain or loss is recognized on such exchange. 2.

Deficiency: Procedure: Jurisdiction. - The Tax Court has no power to determine that there has been an overpayment in excess profits tax where its jurisdiction is initially based on notice of deficiency in income tax.

1. Respondent, on whom rested the burden of proof of the issue, to establish that a certain transaction constituted a tax-free reorganization under section 112(g)(1)(B) of the Revenue Act of 1936, as amended by sections 213(f) and (g) of the Revenue Act of 1939. 2. Petitioner agreed to pay certain 15-year debentures dated as of January 1, 1936, with interest from that date. Petitioner was organized on July 24, 1936 and began business on July 29, 1936.

Prior to the enactment of the first estate tax statute decedent created a trust in which she retained the right to the income for life. After her death the income was to go to her two children for their respective lives with remainder to the issue of each child in the part held for his or her benefit. The corpus was to revert to the decedent upon the death of the survivor of her two children. The provisions of the trust instrument were not modified or changed during decedent's lifetime. She died in 1938. Held, that the entire value of the corpus at the time of the death of decedent should be included in decedent's estate under the provisions of section 302(c) of the Revenue Act of 1926, as amended. Held, further, that that statute as applied here is not unconstitutional.

Family partnership: Validity. - On the authority of Robert P. Scherer, 3 T.C. 776, CCH Dec. 13,914, it is held that a partnership consisting of taxpayer, his wife and three children, his brother and his cousin was valid.

Petitioner was the owner of certain Class A second mortgage bonds secured by a second lien on a large hotel building and grounds in the City of Philadelphia. Held: petitioner has met its burden of proof and has shown that the bonds had not become worthless in some prior year and that it is entitled to have allowed the deduction which it claims. G. E. Employees Securities Corp. v. Manning, 137 Fed. (2d) 637 followed.

1. Petitioners are husband and wife who report on the community property basis. Held: that the partnership acted as a mere conduit for the transfer of the so-called commissions from the oil company to the sales company and the so-called commissions were not a part of petitioners' gross income and the action of the partnership in not including them in its income tax returns either as income or deductions was proper. 2.

Money expended for the restoration of roof supports of a warehouse, out of alignment due to subsidence of subsoil, held, to represent repairs and hence deductible from petitioner's gross income.

Value of stock received by the decedent as compensation for services in connection with reorganization of the company, determined.

1. Petitioners were members of a partnership which in the year 1940 was a dealer in securities and entitled to use inventories in determining gain or loss in its business. Held: the shares of stock were the property of the individual partners and not of the partnership. Held, further, such shares constituted capital assets in the hands of the individual partners and are subject to the capital loss limitations prescribed by section 117, I.R.C. 2.

Held, that the stock of the East Tennessee National Bank became worthless prior to 1939. The loss on account of paying bank stock assessment was sustained in 1939 and is deductible in that year. Held: that the stock of the East Tennessee National Bank became worthless prior to 1939. The loss on account of paying bank stock assessment was sustained in 1939 and is deductible in that year.

In 1934 decedent purchased three single premium life insurance contracts, in conjunction with an annuity contract. Held: the proceeds of the insurance contracts are includible in decedent's gross estate as property of which he made a transfer intended to take effect in possession or enjoyment at or after death, or under which he retained for life the right to the income from the property. Section 811 (c) of the Internal Revenue Code.

Decedent in 1924 established a trust to pay the income to himself for life, and at his death the corpus to be distributed to his surviving issue, or in default thereof, to his brothers and sisters in equal shares, any child or children of a deceased brother or sister to take the share allocated to the parent, per stirpes. Decedent was survived by a brother of the full blood with two children, a sister of the full blood with one child, and four half-brothers with seven children. Held, the corpus of the trust is not includible in the estate of the decedent under section 302 (c) of the Revenue Act of 1926, as amended, as a transfer intended to take effect in possession or enjoyment at or after death.

Decedent created a trust under which, in the remote contingency of the death of the beneficiaries including those who would inherit under the laws of New York were the decedent to die intestate, the… Held: that the value of the corpus of the trust at the time of his death is not includible in the gross estate of decedent. Decedent paid premiums on life insurance policies held in trust, by way of gifts to the trust for that purpose.

(1) Petitioner's business for many years has consisted of stevedoring and renting piers for short periods to steamship companies. Held: such salaries were reasonable despite a temporary falling off in petitioner's business during the latter half of 1940 and the Commissioner's action in disallowing as a deduction $10,000 each of the two salaries paid in computing petitioner's net income is reversed.

The determination in Ward Kremer, Docket No. 105838, dated April 20, 1942, that Kremer was not an employee of the City of Asbury Park, New Jersey, and that the compensation received by him from that… Held: petitioner was not an employee of the city and the compensation paid him by the city is subject to taxation.

In the years 1928 and 1930 petitioner made loans to his brother-in-law who was in the business of selling advertising novelties manufactured of leather, metal, wood and paper materials. Held: the loans which petitioner made to his brother-in-law were bona fide loans and not gifts and the promissory note which the debtor executed to petitioner represented a valid debt.

Petitioner failed to distribute its current earnings, claiming that the amounts were needed to finance a planned expansion of its plant and equipment. Held: that petitioner was availed of in the taxable years for the purpose of preventing the imposition of the surtax upon its shareholder through the medium of permitting its earnings or profits to accumulate instead of being divided or distributed.