Volume 30 — Tax Court Reports

Held, that the sale by petitioners to a motor car dealer of all the outstanding stock of Dew Corporation, for a cash consideration, was a… Held: that the sale by petitioners to a motor car dealer of all the outstanding stock of Dew Corporation, for a cash consideration, was a bona fide sale of a capital asset resulting in long-term capital gain to petitioners, and was not a sale of automobiles by petitioners to a customer in the ordinary course of business, with the use of…

1. A contribution irrevocably paid in 1941 by taxpayer to a profit-sharing trust for employees, which contribution was distributed in 1942 and 1943, held deductible as a business expense under section 23 (a), I. R. C. 1939, where contribution together with regular wages and salaries paid constituted reasonable compensation for services rendered in 1941. 2.

Petitioner during the taxable years was a British subject residing in England. Held: petitioner during the taxable years was not engaged in a trade or business in the United States within the meaning of the income tax convention between the United States and the United Kingdom.

Petitioners are life beneficiaries under a trust which, in 1947, sold $ 1,500,000 face amount of bonds for $ 660,000, thereby sustaining a capital loss. Held: the allocated portion of the sales proceeds received by the petitioners, as life income beneficiaries from the trust, are includible in gross income for the year 1947. Johnston v. Helvering, 141 F. 2d 208, affirming 1 T. C. 228, certiorari denied 323 U.S. 715, followed.

Held, petitioner changed the character of its business during the base period within the meaning of section 722 (b) (4), I. R. C. 1939,… Held: petitioner changed the character of its business during the base period within the meaning of section 722 (b) (4), I. R. C. 1939, by reason of a difference in capacity for production or operation which was the result of a course of action to which petitioner was committed prior to January 1, 1940, and petitioner's excess profits tax…

Held, that under the facts of this case the cost of the warehouse constructed by the petitioner was depreciable over the period of its… Held: that under the facts of this case the cost of the warehouse constructed by the petitioner was depreciable over the period of its expected life of 20 years, and not over the 5-year term of the lease of the ground on which the warehouse was situated, it being reasonably certain that the tenancy was to continue for an indefinite period…

1. Excess Profits Tax -- Banks -- Recoveries of Bad Debts. -- Section 433 (a) (1) (L) of the Internal Revenue Code of 1939, as added by the Excess Profits Tax Act of 1950, provides… Held: that neither subparagraph (L) nor any other provision of section 433 (a) requires that there shall be included in excess profits net income of such a bank any income attributable to the recovery of bad debts which had been the subject of a deduction in prior excess profits tax years. 2.

Held, that the deduction for officers' compensation by petitioner in the fiscal year ending January 31, 1947, constituted a class of… Held: that the deduction for officers' compensation by petitioner in the fiscal year ending January 31, 1947, constituted a class of deductions for that year which exceeded 115 per cent of the average amount of deductions of such class for the 4 previous taxable years and that petitioner, having met its burden of proof under section 433…

Corpus of a trust created on December 30, 1938, held, not includible in decedent's gross estate under either subsection (c) (1) (B) or (d) (1) of section 811 of the Internal Revenue Code of 1939. Held: not includible in decedent's gross estate under either subsection (c) (1) (B) or (d) (1) of section 811 of the Internal Revenue Code of 1939.

Petitioner, an accrual basis taxpayer, was engaged in the business of constructing and selling houses. Held: the amounts withheld in the fiscal year 1953 and placed in a savings account in petitioner's name were includible in petitioner's income in that year.

1. Determination of petitioners' income by net worth method approved. 2. Petitioners' failure to file returns for the years 1944-1948, inclusive, held due to fraud with intent to evade tax. Held: further, additions to tax on account of fraud pursuant to section 293 (b), I. R. C. 1939, are measured by the tax originally due and cannot be erased or diminished by the subsequent filing of so-called delinquent returns. 3.

1. Held, the evidence failing to establish that a transmutation took place, respondent correctly determined that the entire gross estate of J. Leslie Vogel and Elizabeth Vogel was community property.… Held: the evidence failing to establish that a transmutation took place, respondent correctly determined that the entire gross estate of J. Leslie Vogel and Elizabeth Vogel was community property. 2.

1. Payments by a corporation of obligations of its stockholders incurred in their purchase of its stock, held, not allowable to the corporation as costs of land acquired pursuant to a preexisting… Held: not allowable to the corporation as costs of land acquired pursuant to a preexisting corporate contract to purchase such land. 2. Payments described above, held, taxable as dividends except to extent of indebtedness owing by corporation to stockholders.

Held, petitioner, a supervising brick mason, who lived in Iran for some 22 months in barracks provided by his employer, whose wife and… Held: petitioner, a supervising brick mason, who lived in Iran for some 22 months in barracks provided by his employer, whose wife and children remained behind in the United States, and whose right to remain in Iran was limited first by a visa, and then by a residence permit, was not a bona fide resident of Iran within the meaning of…

Petitioner's parent corporation, after an unsuccessful attempt to purchase the assets of Orr Cotton Mills, purchased all of the latter corporation's capital stock. Held: that the series of steps constitutes one transaction, i. e., a purchase of assets, and the basis of the assets in the hands of petitioner is the purchase price paid by its parent for the stock. Estate of James F. Suter, 29 T. C. 244, followed.

Trianon Hotel Company acquired all of the outstanding stock of the Allis Hotel Corporation and liquidated the latter corporation about a year later, thereby acquiring the… Held: on the facts, to result in capital gain and not in a distribution essentially the equivalent of a taxable dividend, under the applicable sections of the 1939 Code. Held, further, the fair market value of the stock of Allis Corporation, on the date of the transfer to Trianon, was $ 325 per share.

Petitioners received gains in 1952 from the transfer of all but a few qualifying shares in two corporations organized under the F. H. A. program. Held: section 117 (m) I. R. C. 1939, was applicable and the gains were to be treated as ordinary income as gains realized in the sale of stock in collapsible corporations.

Held, petitioner may not claim his parents, residents of a community property State, as dependents, where their gross income was not less than $ 1,200. Held: petitioner may not claim his parents, residents of a community property State, as dependents, where their gross income was not less than $ 1,200.

Held, the petitioner failed to qualify for relief under section 722 (b) (4). Held: the petitioner failed to qualify for relief under section 722 (b) (4). The petitioner's business was not commenced immediately prior to the base period, nor was there a change in the character of the business during the base period. ABC Brewing Corp., 20 T. C. 515 (1953), followed.

Attorney expenses incurred to contest Alien Property Custodian's seizure of petitioner's income-producing property, held, comparable to costs of defense of title and, as such, capital expenditures… Held: comparable to costs of defense of title and, as such, capital expenditures not deductible under section 23 (a) (2), I. R. C. 1939.

Held, bonds of a New Jersey corporation, which were owned by a nonresident alien at the time of their destruction in England, were not situated in the United States within the meaning of section 861… Held: bonds of a New Jersey corporation, which were owned by a nonresident alien at the time of their destruction in England, were not situated in the United States within the meaning of section 861 (a), I. R. C. 1939, at the time of the alien's death abroad some 3 years later.

The petitioner entered into a contract with an individual and his controlled interests whereby it agreed to acquire stock of a hotel… Held: that the petitioner was acting as agent for the corporation which ultimately received the stock; that the petitioner did not have beneficial ownership of such stock or the dividends paid thereon, and is not entitled to a dividends-received credit; that it did not sustain a loss upon the transfer of the stock to such corporation; and…

1. Respondent determined taxable net income for the years 1946 through 1949 by the increase in net worth plus nondeductible expenditures method. Held: determination of net taxable income by the net worth method is approved, and findings are made as to opening cash and other disputed items. 2. During 1946, taxpayer became temporarily liable as a guarantor for an obligation of a partnership, in which he was a member.

By his will, John Walker created a trust, gave Susan C. Walker, his widow, the net income therefrom for life and gave his son, Henry P.… Held: that during 1953 the distributee of the income received and accumulated by petitioner in that year was unascertained and its interest therein contingent upon the final decision of the Supreme Court of Pennsylvania; and that petitioner in computing its taxable net income for 1953 is not entitled under the provisions of section 162…

Respondent determined that petitioner, a Federal savings and loan association, was not entitled to deduct in 1952, the first year in which it was subject to the corporate income tax, dividends… Held: on the facts, dividends credited to petitioner's savings account shareholders as of December 31, 1951, were not deductible by petitioner in 1952.

Petitioner's board of directors, on December 16, 1953, adopted a resolution providing for the payment of $ 33,750 to an employee disabled because of illness, the payments to be made in 60 semimonthly… Held: petitioner, on the accrual basis of accounting, properly accrued the authorized payment of $ 33,750 in 1953 and was entitled to the deduction in that year as an accruable item of ordinary and necessary business expense.

Petitioner, a general line wholesale hardware dealer with a trade area consisting of a large portion of the State of Nebraska and portions of nearby States, seeks excess profits tax relief under… Held: for the respondent. A reconstruction of petitioner's base period earnings to the highest level justified by the record would not produce income credits in excess of the invested capital credits allowed by the respondent.

1. Petitioners deposited $ 45,000 pursuant to an agreement to prevent wasteful depletion of gas pressure and consequent reduction in the amount of oil recoverable from a producing field. Held: this expenditure should be allocated over a term of years. 2. Held, no portion of the $ 45,000 expended represents the cost of a future interest in minerals. 3. Held, entertainment and travel expenses incurred by petitioner W. T. Sesnon, Jr., are deductible in part. 4.

Held: 1. An instrument, transferring rights to a territorial franchise holder in a bookkeeping procedure, containing provisions which in combination… Held: An instrument, transferring rights to a territorial franchise holder in a bookkeeping procedure, containing provisions which in combination resulted in the retention by the transferor of substantial rights in the procedure, did not accomplish a sale or exchange within the meaning of section 117 (a), I. R. C. 1939.

Taxpayer was principal and income beneficiary of a trust which terminated in 1947. Held: the trustee's commissions are not deductible by the taxpayer-beneficiary.

Alimony -- Amounts Received by Wife under Agreement after Divorce. -- Amounts received by former wife under an agreement entered into several years after divorce, under which agreement she received periodic payments from her former husband in addition to amounts she was entitled to receive under a trust created in anticipation of divorce, held to be includible in her income under section 22 (k) of the Internal Revenue Code of 1939.

The president of both petitioner corporations, Roy Ryan, was killed in an accident; and shortly thereafter the board of directors of… Held: that such deductions, which were abnormal for excess profits tax purposes within the meaning of section 433 (b) (9), I. R. C. 1939, were not, in the case of either petitioner corporation, a cause or consequence of an increase in gross income or of a decrease of some other deduction in the base period, and were not a consequence of a…

Transfer of an interest in an invention by the wife of the inventor, who acquired such interest by gift from the inventor, held to be a sale of a capital asset held for more than 6 months. Held: further, that the wife is not precluded by the provisions of subsection (q) of section 117 of the 1939 Code from treating proceeds of such sale as capital gain under subsection (a) of section 117.

Held, that the product mined by petitioner was sand and not quartzite, and therefore entitled to a 5 per cent depletion rate rather than a 15 per cent depletion rate. Held: that the product mined by petitioner was sand and not quartzite, and therefore entitled to a 5 per cent depletion rate rather than a 15 per cent depletion rate. Sec. 114 (b) (4) (A), I. R. C. 1939, as amended by sec. 319, Rev. Act of 1951.

1. During 1951, petitioner mined coal from several economic interests in coal underlying various contiguous tracts of land located within one continuous boundary. Held: petitioner's return to the single property method in its income tax return for 1951 is sustained. On this issue the Commissioner is reversed. 2. Petitioner, under lease, acquired the right to mine all the coal contained in a certain seam underlying a tract of land in Brooke County, West Virginia.

Held, that the European trip taken by a doctor who operated a clinic for alcoholics was a pleasure trip and not a field trip undertaken by him as a physician specializing in the… Held: that the European trip taken by a doctor who operated a clinic for alcoholics was a pleasure trip and not a field trip undertaken by him as a physician specializing in the treatment of alcoholics and therefore the general expenses of the trip were not ordinary and necessary business expenses.

Petitioner represented a Japanese alien, Fujii, in a case to test the constitutionality of the California alien land acts. Held: on the facts, the $ 10,000 given to petitioner was intended to be, and was in fact, a gift and not compensation for services rendered.

1. Prize awarded in a charity drive through a drawing by lot similar to a lottery, held, taxable to the recipient irrespective of his motive for making the contribution required to… Held: taxable to the recipient irrespective of his motive for making the contribution required to qualify for participation in the drawing. 2. Petitioners having been allowed part of a claimed deduction for automobile expense, held, on the facts, not shown to be entitled to any greater deduction.

1. Petitioner, a producer of wood pulp, prior to the base period and in the years 1936 and 1937, sold a substantial portion of its production in Japan. Held: that the loss of these pulp orders does not qualify petitioner for section 722 relief under subsections (b) (1) or (b) (2). 2.

In 1950 petitioners owned and resided in a home located on 13 acres of land. In December of that year they bought a new home and sold their old home, together with the 3 acres surrounding it. Held: the gain resulting from 1951 sales not entitled to nonrecognition under section 112 (n) (1), I. R. C. 1939, as added to Code by section 318 of the Revenue Act of 1951.

A citizen of the United States, employed as a radio operator on a vessel owned by an agency of the United States and operated by the… Held: such compensation constitutes an amount paid by the United States or any agency thereof within the meaning of section 116 (a) I. R. C. 1939, and section 911 (a) I. R. C. 1954, and is not excludible from gross income even though the employee may be physically present in a foreign country or countries for 510 full days or more of an…

Petitioner, a United States citizen, was employed by the Territorial Government of American Samoa during the taxable years 1951 and 1952. Held: that the Government of American Samoa was an agency of the United States within the purview of section 251 (j), I. R. C. 1939, and that the amounts received for services performed for such government are not exempt from taxation.

Where preferred stock of the taxpayer-corporation was purchased from it in installments, the stock certificates not being issued until receipt from the subscribers of the final installments, and the… Held: the periodic payments by the taxpayer do not constitute a deductible interest expense under section 23 (b) of the 1939 Code nor do they constitute ordinary and necessary expenses under section 23 (a) (1) (A).

More than 6 months prior to November 1, 1952, the petitioner entered into certain contracts with eight oil producers. The contracts had no cost or other basis to the petitioner. Held: that the arrangement between petitioner and Signal did not constitute a sale by petitioner of the producers' contracts and that the amounts of $ 85,000 and $ 11,351.41 received by petitioner in 1952 under the arrangement were ordinary income to petitioner and not long-term capital gains.

On May 9, 1947, Group S which owned 7 per cent of the stock of petitioner's predecessor purchased the remaining 93 per cent from its… Held: all the steps taken by the parties were interdependent steps in an over-all plan, the objective of which was the acquisition of the assets of petitioner's predecessor for the benefit of Corporation N. Held, further, as a result of those steps there was a shift of control from one unrelated group to another, and not a reorganization…

A contractor required large amounts of fill dirt for use in constructing a railroad right-of-way and protecting levees; and its representatives entered into arrangements with petitioners who had extensive farmlands in the vicinity that were being used for dairy farming, for purchase of the soil down to the top of the water table on certain of their tracts.

Held, the deposits quarried and sold by petitioner in the years before us were quartzite within the meaning of section 114 (b) (4) (A) (iii) of the Internal Revenue… Held: the deposits quarried and sold by petitioner in the years before us were quartzite within the meaning of section 114 (b) (4) (A) (iii) of the Internal Revenue Code of 1939. Held, further, payments made by petitioner labeled rental were, in fact, partial payments on the purchase price of certain equipment.

Three partners acquired certain real estate in 1949 as to which their adjusted basis was approximately $ 69,000. Held: on these and other facts of record that the transaction in reality constituted an exchange under section 112 (b) (5), I. R. C. 1939, and basis of property to corporation was same as that of grantor-partners.

The petitioner and another agreed to obtain an automobile dealership franchise and operate in the form of a corporation. Held: that the distributions in redemption of the preferred stock were essentially equivalent to the distribution of taxable dividends under section 115 (g), I. R. C. 1939.

1. Petitioner, in 1925, filed an additional claim for obsolescence of its buildings and other properties for the year 1919, due to national prohibition legislation, in the amount of $… Held: that 55 per cent, $ 788,772.59, of the total obsolescence amount which formed the basis of the settlement, was allowable obsolescence for the year 1918 and that consequently the adjusted basis of certain buildings owned by petitioner in the fiscal years 1949 and 1950 was zero. 2.

Petitioner lost 17 trees in the year 1954 which he claimed were killed by drought, entitling him to a casualty loss deduction under section 165 (c) (3), I. R. C. 1954. Held: the evidence was insufficient to establish the trees died of drought or any casualty entitling him to the deduction claimed.

1. Accrual Method -- Reserves for Installation. -- Reserves for installation of machines sold by the petitioner which the petitioner was obligated to install for the purchasers, but which had not… Held: not deductible for the reason that installation services had not been performed. All that had accrued was the obligation to perform services. 2.

Petitioner, a citizen of the United States, was employed by the Territorial Government of American Samoa during the taxable years 1952 and 1953. Held: that the Government of American Samoa was an agency of the United States within the meaning of section 251 (j), I. R. C. 1939, and the amounts received by him as compensation for services performed for such Government are not exempt from taxation. Edward L. Davis, 30 T. C. 462, followed.

1. Held, that notwithstanding a high debt-to-capital ratio in respect of taxpayer corporation's financial structure, the indebtedness, when considered in the light of all the evidence, was bona fide,… Held: that notwithstanding a high debt-to-capital ratio in respect of taxpayer corporation's financial structure, the indebtedness, when considered in the light of all the evidence, was bona fide, and interest with respect thereto is deductible. 2.

1. Taxpayer corporation's financial structure consisted of stock and so-called debenture bonds, which were held by persons related to each other by blood or marriage. Held: on the entire record, that the debenture bonds represented equity capital rather than an indebtedness, and so-called interest payable thereon was not deductible in computing its net income. 2.

1. Petitioner owned 79.9 per cent of the stock of a corporation whose assets it acquired in the taxable year pursuant to a plan under… Held: the substance of the transaction was that petitioner acquired the assets of the transferor in part for the stock of the transferor owned by petitioner and in part for some of the petitioner's stock and, therefore, petitioner did not acquire the transferor's assets in exchange solely for its voting stock, and the transaction was not a…

Upon the entire record, it is held that petitioner, during the taxable year ended April 30, 1948, was not a resident * * * foreign corporation engaged in trade or business within the United States as that phrase is used in section 231 (b) of the Internal Revenue Code of 1939, as amended, and that it is therefore not taxable as provided in sections 14 (c) (1) and 15 of the 1939 Code.

Ordinary and Necessary Expenses -- Legal Fees Paid by Corporation in Suit by Stockholders. -- Amounts paid by the petitioner corporation, representing legal fees of all parties to a stockholders' suit against petitioner corporation and its directors brought to rescind acts of the directors with respect to salary allowances and issuance of stock, in which suit settlement was effected with approval of the trial court, held to be ordinary and necessary business expenses of the…

Petitioner paid excessive rentals to a dominant group of persons which managed its affairs, and it made valuable improvements upon the real estate owned by such persons. Held: that it failed to qualify as a corporation no part of the net earnings of which inures to the benefit of any private shareholder or individual. Sec. 101 (6), I. R. C. 1939.

In April 1951, and prior thereto, petitioner was a lawyer and economic adviser specializing in matters having to do with the oil industry. Held: petitioner's employment by the Federal Government constituted a trade or business regularly carried on by him within the meaning of section 122 (d) (5) of the Internal Revenue Code of 1939.

Income -- Gross Receipts From Illegal Operations. -- Not only did the petitioners fail to carry their burden of proof to overcome the presumption of correctness attaching to the Commissioner's determination and not only did they fail to show that his determination was arbitrary or capricious, but the evidence shows affirmatively that the taxpayer, now deceased, received in 1948 and 1949 from illegal operations gross amounts at least equal to the amounts used by the…

During January 1952 the petitioners were the owners of a lot, situated in a hillside or mountainous area of Los Angeles, California, and improved by a garage, a swimming pool, and a partially… Held: that no casualty loss in excess of the amount allowed by the respondent was sustained by petitioners and that no greater amount was allowable as a deduction.

1. Deficiency notices, improperly addressed, were not received by petitioner and were returned by postal authorities. Held: the Court had jurisdiction, since the petition was filed within 90 days of the successful (second) mailing, regardless of the fact that more than 90 days had elapsed from the date of the unsuccessful (first) mailing. 2.

1. Held, that the transfer of November 17, 1947, by Herbert C. Johnson to National Die Casting Company, Inc., a corporation of which he… Held: that the transfer of November 17, 1947, by Herbert C. Johnson to National Die Casting Company, Inc., a corporation of which he owned all the common stock, and his immediate family, all the preferred stock, of all his right, title, and interest in certain letters patent constituted a sale of assets held longer than 6 months by Herbert…

1. Accrual basis taxpayer may include section 722 refunds in determining its equity capital, within the meaning of section 437, I. R. C. 1939, when CABPNI'S are approved by the Executive Committee of the Excess Profits Tax Council, taxpayer having theretofore agreed to such CABPNI'S on Treasury Department Form EPC-1. 2. For income tax inclusion purposes, interest on above overassessments is not accruable until scheduled by Commissioner. 3.

Under the terms of a property settlement agreement incident to divorce the former wife of the taxpayer was entitled to occupy rent free the residence standing in the taxpayer's name. Held: The stipulated fair rental value of the residence was not deductible as periodic payments of alimony. Secs. 22 (k) and 23 (u), I. R. C. 1939, and secs. 71 and 215, I. R. C. 1954. 2. The taxpayer is not entitled to deductions for depreciation on the residence in the taxable years. 3.

Respondent determined that petitioner was liable as a transferee for the admitted income tax liability of her deceased husband to the extent of amounts received as beneficiary of policies of… Held: No liability of petitioner to the Government exists under the circumstances of this case. Commissioner v. Stern, 357 U.S. 39 (1958).

Petitioner, as beneficiary, received the proceeds of a policy of insurance upon the life of her deceased husband. Held: in the light of Commissioner v. Stern, 357 U.S. 39, and United States v. Bess, 357 U.S. 51, (both decided June 9, 1958) petitioner's liability under the above facts as a transferee must be determined by reference to State law.

1. By agreement of petitioner and his partner, petitioner's capital account in the partnership was charged as of December 31, 1951, with the… Held: that such charge to petitioner's capital account did not effect any reduction of his distributive share of the partnership income for the year; and also that said charge did not result in any business loss to petitioner for the year deductible under section 23 (e) of the Code, or any bad debt loss for the year deductible under…

The petitioner, a Hungarian, was employed as an economist in Budapest. In 1942 he purchased an apartment building there for 460,000 pengos. Held: as owner of the rental property the petitioner was engaged in a trade or business and by the nationalization he sustained a net operating loss which may be carried over to 1953 and 1954.

1. Year of Deduction. -- Amount paid by individual petitioner in 1950 to his controlled corporation equal to the amount of a legal fee paid by the corporation in 1947 for legal services rendered to the petitioner, held not to be an allowable deduction for the year 1950. 2. Issue not Pleaded. -- Issue as to adjustment under 1939 Code section 3801 not raised by assignment of error in petition is not properly before the Court for decision.

Petitioner incident to his operation of an interstate truck line had a terminal serving the New York metropolitan area consisting of two pieces of property practically adjacent and used as an… Held: the sale of both pieces of property constituted an involuntary conversion within the meaning of section 112 (f) (1), I. R. C. 1939.

Escambia, the owner and operator of radio station WBSR, after suffering losses for most of its period of operation, entered into a Lease and Option with petitioner in May 1950, which was in the… Held: that the $ 2,000 paid in 1950 constitutes rentals deductible under section 23 (a) (1) (A), I. R. C. 1939, and that the purchase price paid in 1951 when the option was exercised is all attributable to the physical assets acquired.

During the taxable years petitioner was employed as fashion coordinator by General Shoe Corporation, of Nashville, Tennessee, and as such, she was required to attend various meetings of style and… Held: that the expenditures made by petitioner for clothing used in the course of her employment and in earning her salary, and which was not suitable for personal and private wear and was not so worn by her, are proper deductions in computing net income for the taxable years.

Petitioner, dormant at the time, purchased a boat in 1946 for the purpose of entering into the commercial chartering business. It could not secure a license for the boat and decided to sell it. Held: the boat was not property used in trade or business and, therefore, there was no depreciation allowable in regard to it. Held, further, that the boat was a capital asset, rather than an inventory item or property held for sale in the ordinary course of trade or business.

From 1918 to 1942, proceeds of insurance were includible by statute in the estate of a deceased insured to the extent * * * receivable by all other… Held: The tax in question is an excise, and does not constitute a direct tax on property, unapportioned in violation of Article I, sections 2 and 9, of the Constitution of the United States. Estate of Clarence H. Loeb, 29 T. C. 22 on appeal (C. A. 2), followed. Kohl v. United States, 226 F. 2d 381 (C. A. 7), rejected. 2.

Petitioner, an accrual basis taxpayer, agreed to pay Kuhn the sum of $ 175,500 advanced by him for drilling 9 gas wells on leaseholds owned three-fourths by petitioner and one-fourth by Kuhn. Held: that section 24 (c), 1939 Code, is not applicable as all of the intangible development costs were expended by or on behalf of petitioner in 1950 or within 2 1/2 months thereafter. 2.

In 1920 petitioner and her mother, who owned all of the stock of a real estate corporation, created a trust to which they contributed the stock as corpus and of which petitioner's husband was trustee. Held: the transaction effected a transfer of the ownership of the life interest under the trust from petitioner to her husband and, consequently, the income thereof is not taxable as such to petitioner.

Sec. 722 (b) (4) -- Change in Character of Business -- Commitment to Increase Capacity for Operation -- Failure to Establish a Constructive Average Base Period Net Income in Excess of Allowance Under Sec. 713 (e). -- The petitioner was committed, prior to January 1, 1940, to a course of action which resulted during 1940 in the enlargement of its store building thus increasing its capacity for operation of its business, but it has failed to establish that such an increased capacity for operation, if available on December 31, 1937, would have resulted in greater earnings during the base period, and the petitioner has also failed to show that a fair and just amount to represent constructive average base period net income would have exceeded the amount to which it is entitled under section 713(e).

Sec. 812 (e), I. R. C. 1939 -- Marital Deduction. -- Held, widow's allowance under California Probate Code is an interest in property which will terminate or fail and for which no marital deduction… Held: widow's allowance under California Probate Code is an interest in property which will terminate or fail and for which no marital deduction is allowable.

Held, that amounts paid by a husband to his wife pursuant to a voluntary separation agreement which was not incident to any judicial decree of… Held: that amounts paid by a husband to his wife pursuant to a voluntary separation agreement which was not incident to any judicial decree of divorce or of separate maintenance, but which agreement was subsequently reformed by a court decree pursuant to the husband's consent and solely to the extent of revising the amounts of the…

Petitioners in 1952 filed elections to liquidate a corporation under the provisions of section 112 (b) (7) of the Internal Revenue Code of 1939. Held: the elections were valid and timely filed and they were not filed under a mistake of fact and they could not be revoked on the ground that they were based upon petitioners' misconception of their rights under section 112 (b) (7).

Petitioner transferred $ 175,000 of securities in trust to pay the income in monthly installments to four persons for their lives and the remainder over to charity. Held: for the petitioner. The income beneficiaries received a substantial present interest which had a value in excess of the $ 3,000 exclusion as to each beneficiary and the trustees could not properly exercise their powers in such a manner as to diminish that interest.

Petitioner, which was a refiner of metals, decided to construct and install a hydrogen-producing facility for use in its general plant. Held: that the facility was at no time abandoned; that the labor and material cost of the piping and fittings which were scrapped, constituted an integral part of the overall cost of the facility as ultimately completed; and that petitioner is not entitled to an abandonment loss, in respect of the scrapped materials and the labor…

1. Basis -- Stock Sold by Trust. -- Basis of stock sold by trustee under a trust instrument which granted trustee the right to invade corpus for benefit of settlor but did not reserve right to… Held: to be cost of stock to settlor under provisions of section 113 (a) (2) of 1939 Internal Revenue Code. 2.

Held, certain payments made under a Lease Form of Contract for a sprinkler system are not deductible as rental expenses under section 23 (a) (1) (A), I. R. C. 1939, but were capital expenditures. Held: certain payments made under a Lease Form of Contract for a sprinkler system are not deductible as rental expenses under section 23 (a) (1) (A), I. R. C. 1939, but were capital expenditures.

Petitioner owned an endowment insurance policy on his life in the amount of $ 27,000. Held: upon the facts, the sale was bona fide and is recognizable for tax purposes. Held, further, that petitioner is entitled to treat the increment received from such sale as gain from the sale or exchange of a capital asset.

Dependents -- Sec. 152 (a) (9), I. R. C. 1954. -- Held: Claimed dependents who became members of taxpayer's household in March of 1954 and lived there the remainder of the year did not have… Held: Claimed dependents who became members of taxpayer's household in March of 1954 and lived there the remainder of the year did not have their principal place of abode and were not members of the household for the taxable year of the taxpayer. Dependency exemptions properly denied.

1. Petitioner corporation acquired assets from its majority stockholder pursuant to an installment sales contract under the terms of which the consideration was to be paid in 7 annual installments. Held: That the transaction by which the assets were conveyed to the corporation was a sale and not an exchange of assets for stock within the meaning of section 112 (b) (5), I. R. C. 1939, and the gain realized by the transferors is recognized.

Petitioners, in 1952, sold property used in their trade or business realizing gains in the sum of $ 53,598.52. Fifty per cent of the gain, or $ 26,799.26, was included in their income for that year. Their net operating loss carrybacks for the years 1953 and 1954 totaled $ 27,746.56. Held, in computing the net operating loss deduction for 1952 under section 122 (c), I. R. C. 1939, resulting from the net operating loss carrybacks, the 1952 net income must be computed without the deduction of 50 per cent of the gain realized in the 1952 sale, or, in other words, $ 26,799.26 is to be subtracted from the $ 27,746.56 in order to arrive at the 1952 net operating loss deduction.

Transferee Liability -- Beneficiary of Life Insurance. -- The petitioner received proceeds of insurance as the beneficiary of policies on the life of her deceased husband. The laws of North Carolina exempt such proceeds from claims of creditors of the deceased husband in the absence of payment of premiums with intent to defraud creditors.

Held, that petitioner's payment of $ 50,000 on December 29, 1953, to Superior Feed Mills was a deposit against which any future purchases were to be applied. Held: that petitioner's payment of $ 50,000 on December 29, 1953, to Superior Feed Mills was a deposit against which any future purchases were to be applied. Such amount was not an ordinary and necessary business expense deductible in full in 1953 by petitioner.

The shareholders of a group of affiliated corporations wished to sell their stock therein. Held: the exchange by the old shareholders of their stock for cash, a note and bonds of the new corporation constituted the sale of a capital asset.

Sec. 214, I. R. C. 1954 -- Child Care Expenses. -- Husband and wife, separated in 1954, filed separate returns for 1954, each claiming son as dependent. Held: wife is entitled to claim son as dependent and also to deduction for expenses of child care under section 214. Thomas Lovett, 18 T. C. 477 (1952), acq. 1952-2 C. B. 2, followed.

1. Held, petition dismissed for lack of prosecution, and deficiencies and additions to tax under section 294 (d) (1) (A) and (d) (2), I. R. C. 1939, found as set forth in the notice of deficiency. 2. Held: petition dismissed for lack of prosecution, and deficiencies and additions to tax under section 294 (d) (1) (A) and (d) (2), I. R. C. 1939, found as set forth in the notice of deficiency. 2.

1. Held, petitioners, beneficiaries of life insurance policies upon the life of Harry Schneider, deceased, are not liable as transferees of the assets of Harry Schneider, deceased, on account of… Held: petitioners, beneficiaries of life insurance policies upon the life of Harry Schneider, deceased, are not liable as transferees of the assets of Harry Schneider, deceased, on account of funds received as such beneficiaries. Commissioner v. Stern, 357 U.S. 39. 2.

Deduction -- Contribution to Employees' Pension Trust in Property -- Paid. -- Transfer by employer of property having a fair market value in excess of amount claimed as contribution to an employees' pension trust was paid into a pension trust within the meaning of section 404 (a) (1) (C), I. R. C. 1954, notwithstanding leaseback of the property to the bank with option to repurchase at agreed price.

Held, that a testamentary trust, as modified by a later trust agreement, constitutes the instrument creating the trust within the provisions… Held: that a testamentary trust, as modified by a later trust agreement, constitutes the instrument creating the trust within the provisions of sections 23 (l) and 23 (m) of the Internal Revenue Code of 1939 and that under such instrument no portion of allowable deductions for depreciation and depletion is allocable to petitioner, an…

1. Securities payable only out of income being more like preferred stock than debentures, held, the receipt thereof resulted in continuation rather… Held: the receipt thereof resulted in continuation rather than termination of petitioner's interest in the issuing corporation; Carter Tiffany, 16 T.C. 1443, distinguished; and receipt of additional such securities in lieu of accrued dividends on previously existing preferred stock, held, essentially equivalent to a dividend. 2.

In 1952 petitioner sold 101 wire-drawing machines to 7 customers purchasing such machines in order to fulfill prime contracts with the United States Government. Held: petitioner is not entitled to the partial mandatory exemption of section 106 (c) of the Renegotiation Act of 1951, and the entire amount received on account of the sales in question is accordingly subject to renegotiation.

1. Held, contributions made by petitioners to various organizations in Burma are not deductible as charitable contributions under sec. 23 (o) (2), I. R. C. 1939, or as contributions to… Held: contributions made by petitioners to various organizations in Burma are not deductible as charitable contributions under sec. 23 (o) (2), I. R. C. 1939, or as contributions to or for the use of the United States under sec. 23 (o) (1), or as a business expense under sec. 23 (a) (1). 2.

Petitioner made alimony payments in behalf of his son. The payments constituted more than one-half of the support of petitioner's daughter-in-law and two grandchildren in 1953. Held: petitioner is not entitled to dependency credits for the support of his daughter-in-law and the two grandchildren in 1953.

Petitioners were the owners of all the stock of a corporation which, as its principal activity for the years pertinent herein, constructed apartment houses, which were financed by loans insured by… Held: that the corporation was a collapsible corporation within the meaning of section 117 (m) (2) (A) of the Internal Revenue Code of 1939.

Decedent, Maggie M. Holding, in 1952 and for several years prior thereto, owned some valuable unimproved land near the city of Raleigh, North Carolina. Held: the gifts were not made in contemplation of death or as a substitute for a testamentary disposition of the amounts of money included in the gifts. The value of the gifts is not includible in decedent's gross estate as the Commissioner has determined.

Since petitioner did not acquire before December 1, 1950, substantially all the properties (other than cash) of three other corporations here involved, it is held that petitioner is not a purchasing corporation within the meaning of section 474 (a) of the Internal Revenue Code of 1939, and is, therefore, not entitled to use the base period experience of the said three corporations in computing its excess profits credits for the years in question.

Depreciation -- Property Leased to Another for Use in Mining Coal -- Sec. 23 (l) and (m) -- Sec. 117 (k) (2) -- Revenue Ruling Held Invalid. -- The petitioner, as lessor, leased its coal in place and its depreciable property for the production of that coal.

Losses -- Sales to Controlled Corporation -- Sec. 24 (b) (1). -- The petitioner made separate purchases of mixed metal during 1950. He held the metal first purchased for more than 6 months and the second for less than 6 months. He sold both lots in 1951, that held for more than 6 months at a gain and that held for less than 6 months at a loss. Each sale was to a corporation, more than 50 per cent of the stock of which was owned by the petitioner and his wife.

1. During the years 1943 through 1948 petitioner, either as a partner or as sole proprietor, was engaged in the wholesale and retail selling… Held: that the fees and expenses so incurred and paid were not ordinary and necessary expenses in carrying on petitioner's business, within the meaning of section 23 (a) (1) (A) of the Internal Revenue Code of 1939, or for the management, conservation, or maintenance of property held for the production of income, within the meaning of…

1. Petitioners' income determined on the basis of the net worth plus nondeductible expenditures method. 2. Petitioner is not collaterally estopped to deny a determination of additions to tax for fraud under section 293 (b), I. R. C. 1939, by reason of a prior conviction for criminal fraud under section 145 (b), I. R. C. 1939. 3. A portion of the deficiencies determined for 1943, 1944, 1945, 1946, and 1948 is due to fraud with intent to evade tax.

Market Motors, Inc., was an automobile dealer (Ford franchise) corporation in which petitioner was sole shareholder. Held: the distribution of P. E. B. Inc. stock to petitioner was ordinary dividend income and not tax free under the provisions of sec. 112 (b) (11), I. R. C. 1939.

1. When taxpayers arrange their personal contractual relationships with their controlled corporations in such a way that mortgage loan proceeds will likely exceed costs of construction of rental… Held: such distributions are attributable to circumstances present at the time of construction and the corporations were availed of with the requisite view or intent proscribed by section 117 (m) (2) (A), I. R. C. 1939. 2.

George L. Castner Company, Inc., was engaged in the milk and ice cream business, and in the taxable year sold its machinery and equipment, receiving therefor $ 3,000 in cash and an… Held: that the $ 8,000 evidenced by the note was an accrued receivable at the date of the sale and, the taxpayer being on an accrual basis of accounting for reporting income, the entire $ 8,000 was properly includible in computing the gain realized in the taxable year from the sale in question.

Held, the petitioner is not entitled to section 722 (b) (4), I. R. C. 1939, relief. Held: the petitioner is not entitled to section 722 (b) (4), I. R. C. 1939, relief. The petitioner has not shown that its average base period net income was inadequate as a result of its commencing business during the base period.

The petitioner, a corporation doing oil and gas well drilling, commenced business with adequate management, equipment, and financial support immediately prior to the base period. Held: petitioner's average base period net income was not an inadequate standard of normal earnings because it commenced business immediately prior to the base period.

Deductions -- Travel and Other Expenses. -- Taxpayer was a scientist engaged in research. Held: on the facts, the Commissioner properly disallowed the travel expenses. Held, further, the $ 1,000 paid in 1952 was not taxable income.

1. Petitioners paid premiums on policies of insurance providing indemnity for accidental loss of life, limb, sight, and time and also providing for reimbursement of medical… Held: only that amount of the premiums which provided for reimbursement of medical expenses constituted a deductible medical expense under section 23 (x) of the 1939 Code. 2. Held, further, respondent properly determined additions to tax under sections 294 (d) (1) (A) and 294 (d) (2) of the 1939 Code.

Held, the petitioner failed to qualify for relief under section 722 (b) (2) or 722 (b) (4), I. R. C. 1939. The petitioner's industry was not temporarily depressed during the base period years. Held: the petitioner failed to qualify for relief under section 722 (b) (2) or 722 (b) (4), I. R. C. 1939. The petitioner's industry was not temporarily depressed during the base period years.

Sec. 722 (b) (4) -- Change in Character of Business. -- Held: Petitioner qualifies for relief. Held: Petitioner qualifies for relief. Determination made of a fair and just amount representing normal earnings to be used as petitioner's constructive average base period net income for the taxable years ended January 31, 1941 through 1946.

Held, that assuming (but not deciding) that petitioner has established a qualifying factor under section 722 (b) (1) or 722 (b) (2) of the… Held: that assuming (but not deciding) that petitioner has established a qualifying factor under section 722 (b) (1) or 722 (b) (2) of the Code of 1939 because of a drought and insect infestation, or under section 722 (b) (3) (A) because of a profits cycle differing materially in length and amplitude from the general business cycle,…

1. Trust required to accumulate current income and providing for future payment of gifts, annuities, taxes of grantor, and other purposes benefiting private individuals, held, not exempt under… Held: not exempt under section 101 (6), I. R. C. 1939, and, held, further, not entitled to deduction for income devoted to charity under section 162 (a), I. R. C. 1939. 2. Corporation organized to engage in business for profit, held, not exempt under section 101 (6), I. R. C. 1939. 3.

Petitioner was offered and accepted employment in Ethiopia on a project which was expected to last approximately 15 or 20 years. Held: on the facts, petitioner was not a bona fide resident of a foreign country or countries for a period including an entire taxable year, within the meaning of section 116 (a) (1) of the Internal Revenue Code of 1939, as amended by the Revenue Act of 1942.

1. Taxpayers organized two corporations for the purpose of constructing two housing projects with F. H. A.-secured loans. Held: the corporations were collapsible corporations and the distributions to the extent that they were made from the excess of mortgage proceeds over costs of construction were taxable to petitioners pursuant to section 117 (m), I. R. C. 1939. 2.

1. Petitioner was a subcontractor in the laying of gas pipelines. He obtained most of his construction equipment under conditional sale contracts with dealers. Held: that installment payments made under such conditional sale contracts are not deductible as rentals, but constitute capital expenditures representing part of the cost of such equipment.

1. Deductions -- Interest. -- Transaction whereby petitioner purported to purchase $ 10,000,000 face amount of United States Treasury notes, giving… Held: lacking in substance and insufficient to create indebtedness. Disallowance of claimed interest deductions approved. 2. Capital Gain -- Redemption of Debentures. -- Gain on redemption of debentures in registered form acquired at a discount and held for more than 6 months, held properly reported as long-term capital gain.

Held, in carrying back a 1946 net operating loss to the year 1945 the computation required by section 122 (b) (1) involves the use of the 1944 net income figure after renegotiation and… Held: in carrying back a 1946 net operating loss to the year 1945 the computation required by section 122 (b) (1) involves the use of the 1944 net income figure after renegotiation and accelerated amortization adjustments and the excess profits tax figure for 1944 before such adjustments.

During the years 1946, 1947, and 1948, Webb had no regular employment but engaged in numerous real estate transactions. Held: Webb was in the business of buying and selling real estate and gains from the sale of real estate during the years 1946 to 1948, inclusive, were taxable as ordinary income.

1. The phrase property of a corporation as used in section 112 (b) (10), I. R. C. 1939, construed as not requiring that all or substantially all of transferor's property be included in order to… Held: on facts, that property was acquired by petitioner solely in exchange for its stock or securities within the intendment of said section 112 (b) (10). 3. Requisite continuity of interest under said section 112 (b) (10) was preserved despite divisive character of reorganization.

Capital Gains v. Ordinary Income -- Grant of Exclusive Sales Territory for a Consideration. -- The cancellation of an indebtedness as part of the consideration for the granting by the debtor to the creditor of exclusive sales representation for the sale of the debtor's products in a stated area gives rise to ordinary income rather than capital gain.

1. Payments in the amount of $ 1,600 per year made by each of the petitioners to their brother, Charles Delp, during the years in issue represent personal expenditures arising out of a contractual obligation to compensate Charles Delp for loss of income from a partnership and are therefore nondeductible. 2. The cost of installing a dust elimination system in petitioners' residence is not deductible as a medical expense under section 213, I. R. C. 1954.

1. Petitioners' transferor was engaged in the construction of sawmill plants and equipment which it sold in the ordinary course of its business. It also engaged in experimental work. Held: the mill constituted property held primarily for sale to customers in the ordinary course of the transferor's business, and the gain on its sale was taxable as ordinary income. 2. The lease-option agreement provided for an initial payment by the lessee of $ 15,000 which it designated rent.

1. Decedent held an option dated in 1937 to purchase wife's 2,000 shares of class B stock in a corporation for $ 40,000, which option he relinquished in 1951 in a divorce settlement and decree. Held: the stock that was the subject of the option agreement was the same (after stock splits and stock dividends, etc.) as 20,000 shares of $ 2.50 common stock in wife's name in 1951, and so considered by the parties to the option agreement.

Petitioner sold 2 pieces of property at a loss on October 1 and 4, 1954, respectively. Held: a plan of complete liquidation of petitioner was not adopted by petitioner until October 22, 1954, and the sales on October 1 and 4 are not controlled by section 337 of the Internal Revenue Code of 1954.

1. Prior to his death decedent was copartner in an electrical contracting business. Held: that portion of the insurance held by decedent at his death on his own life which was payable to his copartner was properly includible in decedent's gross estate under section 811 (g) (2) (A) of the 1939 Code. 2. Decedent made a special bequest to one of his daughters of $ 1,000.

Petitioner, one of three lessees of certain oil properties, acquired his one-quarter of the working interest in the properties in consideration for his securing the leases and supervising the… Held: petitioner could not deduct the expenses for which he was not liable, and he realized no income from the properties until the oil produced exceeded the capital and expenses advanced by the other two lessees on behalf of his one-quarter of the working interest.

At the end of its wartime operations petitioner corporation had working capital of $ 15,000 and faced necessity of developing products for competitive peacetime market, which would require financing… Held: the advances to petitioner by its stockholders were contributions to capital and did not constitute indebtedness, the forgiveness of which could result in taxable income to petitioner.

Held, the amount in excess of the face amount of a mortgage note executed by petitioner and insured by the Federal Housing Administration, which was paid by the mortgagee, constituted a premium… Held: the amount in excess of the face amount of a mortgage note executed by petitioner and insured by the Federal Housing Administration, which was paid by the mortgagee, constituted a premium received by petitioner.

In an action brought by petitioner's wife against him an order was rendered by the court directing him to pay $ 110 a month (later amended… Held: payments made by petitioner pursuant to the order were not deductible by petitioner under section 215, I. R. C. 1954, because the wife was not legally separated from her husband under a decree of separate maintenance and hence the amounts paid were not includible in the wife's gross income under section 71 (a) (1), I. R. C. 1954.

Capital Gains -- Sales of Lots. -- Trust created by petitioners for purpose of liquidating a tract of land acquired by gift held not engaged in trade or business in selling 22 lots over an 11-year period and gain realized on sale of 6 lots in taxable year is entitled to capital gains treatment.

1. Corporate distributions to or on behalf of a stockholder held taxable as dividends to the extent of available earnings and profits. Held: on the facts deductible under section 23 (a) (1) (A), I. R. C. 1939. 3. Payments made by an artist's representative in an unsuccessful effort to promote the career of a potential star, with the reasonable expectation of deriving substantial fees in the event of success, held, deductible under section 23 (a) (1) (A), I. R. C. 1939. 4.

1. Attorneys' fees were paid by petitioner for defense against criminal charges of assault (which were dismissed) and for advice of counsel and settlement of claim of civil liability based upon… Held: that petitioner is entitled to deduct the said attorneys' fees and payment for release of civil liability as ordinary and necessary business expenses under section 162 of the Code of 1954. 2. The amount of petitioner's medical expense deduction will be determined under Rule 50.

A corporation took out a policy for its benefit with a life insurance company naming its president as insured; the corporation to pay… Held: such payment was not excludible from gross income under section 22 (b) (1) (A), I. R. C. 1939, as an amount received under a life insurance contract for neither the corporation nor the stockholder-petitioner had an insurable interest in the corporate president's life and the policy was a wager policy and not a life insurance contract.

1. Petitioner received $ 125,000 from its insurer as a compromise settlement under a policy affording direct damage and use and occupancy coverages. Held: on the facts, that the direct damage payment of $ 25,000 did not result in gain to petitioner.

1. Held, that in determining the excess profits credit for the years 1950 and 1951 and the unused excess profits credit to be carried… Held: that in determining the excess profits credit for the years 1950 and 1951 and the unused excess profits credit to be carried back from 1952 to 1951 of an affiliated group with one section 445 subsidiary, where there were unrealized profits in 1949 and 1950 resulting from intercompany transactions consisting of sales of tobacco by the…

1. Held, that a deduction is not allowable to petitioner corporation for the year 1948, in respect of an amount paid to its sole… Held: that a deduction is not allowable to petitioner corporation for the year 1948, in respect of an amount paid to its sole stockholder as salary for periods preceding its incorporation when he was operating as a joint venturer or sole proprietor, and as reimbursements of expenses incurred and paid by him in his operations during such…

In January 1952 petitioners, who were partners in the Maxwell Company, transferred capital interests in the partnership in separate trusts for the… Held: the transfers were not bona fide and respondent was correct in not recognizing the trustee as a partner for income tax purposes under the provisions of section 191, which was added to the 1939 Code by section 340 (b), Revenue Act of 1951, and section 3797 of the 1939 Code, as amended by section 340 (a), Revenue Act of 1951.