Volume 30 — Tax Court Memorandum

Held, the principal purpose for the merger of three corporations was the acquisition of patents and technical know-how in the investment casting field and not the acquisition of net operating loss… Held: the principal purpose for the merger of three corporations was the acquisition of patents and technical know-how in the investment casting field and not the acquisition of net operating loss carryovers.

1. In the factual situation presented, the excess of the fair market value over the price of a 9.3-acre tract of land sold by one corporation (San-Lo Corporation), wholly owned by decedent and his wife, to another (Belle Construction Corporation), wholly owned by a trust created by decedent, constituted a constructive dividend to decedent and his wife and a taxable gift by them to the trust.

Petitioner acquired more than 80 percent of the Flowood Corp. on January 24, 1964, and filed a consolidated return with Flowood for its taxable year ended May 31, 1964. On the consolidated return petitioner claimed as a deduction losses incurred by Flowood on the sale of two poultry farms and poultry inventory and supplies on or about February 12, 1964. In the notice of deficiency respondent disallowed the losses with the explanation that "you are not entitled to file a consolidated return with Flowood Corp." because "it has not been established that your intention in acquiring the stock of that corporation was to operate a business, rather than to take advantage of a loss." No other grounds for disallowance of the losses was mentioned in any of the pleadings. Respondent conceded on brief that petitioner was entitled to file a consolidated return with Flowood, but argued that petitioner was not entitled to deduct losses on the sale of sec. 1231 assets to the extent that such deductions otherwise allowable are attributable to events preceding the date petitioner acquired the stock of Flowood under sec. 1.1502-31A(b)(9), Income Tax Regs. Held: No issue was raised in this case with regard to the possible 84 disallowance of the losses of Flowood under sec. 1.1502-31A(b)(9), Income Tax Regs. Responden having conceded that petitioner was entitled to file a consolidated return with Flowood, decision will be entered for petitioner.

The petitioner established that, during the years 1966 and 1967, he provided over one-half of the support of his mother, who resided with him. Held: The petitioner is entitled to a dependency exemption deduction for his mother in both years under section 151 of the 1954 Code (2) The petitioner correctly calculated his 1967 income tax using the head of household rates provided in section 1 of the 1954 Code.

The petitioner held stock in an electing small business corporation, which sustained an operating loss in the year 1965. Held: he is not entitled to such a deduction because of his complete failure to prove his basis in the stock.

Petitioner, an attorney, claimed substantial deductions for entertainment and business gifts. Held: He cannot subpoena the tax returns of other attorneys because he has not shown that such returns would be relevant; and (2) He has failed to substantiate his alleged expenditures for entertainment and business gifts in the manner required by sec. 274(d), I.R.C. 1954, and failed to prove that his expenditures for entertainment were…

On May 30, 1966, the petitioner filed an amended income tax return for the taxable year, 1965, in which he calculated that he owed $45.55 in additional income taxes for that year. Held: the respondent was not bound contractually as to the amount of the petitioner's income tax liability for the year 1965 and was not estopped from issuing a statutory notice of deficiency for that year.

Petitioner was employed as a waitress at a Shoney's Big Boy restaurant during taxable years 1966 and 1967 and failed to maintain adequate records of income from tips received by her during these… Held: The formula used by respondent was reasonable and with one adjustment and the correction of an error in computation conceded by him, respondent's determination is sustained. Held further: Additions to tax under section 6653(a), I.R.C. 1954, were proper.

Held, numerous deductions for travel expenses, business promotion expenses, taxes, rental expense, dues and fees, advertising expenses and ordinary business expenses claimed by the individual… Held: numerous deductions for travel expenses, business promotion expenses, taxes, rental expense, dues and fees, advertising expenses and ordinary business expenses claimed by the individual petitioners, and the corporate petitioner are disallowed due to a failure of proof.

Held, petitioners' share of the net operating loss of a small business corporation limited to the adjusted basis in their stock, as… Held: petitioners' share of the net operating loss of a small business corporation limited to the adjusted basis in their stock, as determined by the Commissioner; held further, petitioners are not allowed an adjusted basis in an indebtedness owed by the corporation for purposes of computing their share of the net operating loss, since…

Held: Petitioner failed to prove that he provided more than one-half of the support in 1963 for two children, David and Marshall Freeman, and, therefore, is not entitled to deductions for personal exemptions. Secs. 151(a), 151(e), and 152(a), I.R.C. 1954. Held, further: Petitioner is not entitled to a child care deduction under sec. 214, I.R.C. 1954, with respect to David Freeman because petitioner failed to prove that David was his "dependent" within the meaning of the statute. Held, further: Petitioner is not entitled to a casualty loss deduction in 1963 because he failed to prove that he incurred any losses in excess of the amount for which he was compensated by insurance. Held, further: Since petitioner did not establish the amount of certain expenses and losses which he allegedly incurred in connection with an alleged consulting business and an auction sale of real estate, he is not entitled to deductions for these alleged expenses and losses. Held, further: Although he deducted $48 for state gasoline taxes in 1963, petitioner is entitled to deduct only a portion of that amount. Held, further: Several claimed itemized deductions were not considered because petitioner failed to prove that he was entitled to any such deductions in excess of the standard deduction allowed by respondent.

Petitioners purchased eight parcels of land in 1964 and one in 1965, and demolished the buildings thereon in 1966. Held: on the facts, petitioners did not intend at the time of purchase to demolish the buildings situated on the properties acquired in 1964; loss deduction allowed under sec. 165(a), I.R.C. 1954, as amplified by sec. 1.165-3(b)(1), Income Tax Regs., in amounts of the bases of the properties allocable to the buildings.

Held, section 152, I.R.C. 1954, does not contravene any constitutional guarantee secured to petitioner under the Ninth Amendment to the Constitution of the United States. Held: section 152, I.R.C. 1954, does not contravene any constitutional guarantee secured to petitioner under the Ninth Amendment to the Constitution of the United States.

The petitioner, who was married during all of 1965, filed a return for that year which purported to be a joint return, but which was signed by him only. Held: the 1965 income tax return filed by the petitioner was not a joint return; and the petitioner constructively received the proceeds of the check since it appears that he authorized his former wife to endorse his name and retain such proceeds.

Held: Petitioners proved that during 1966 they provided more than half of the total support of William's daughter by a prior marriage, Annette, and are therefore entitled to a dependency exemption deduction for Annette in that year. Held, further: Petitioners failed to prove that they furnished over half of the total support in 1966 of William's other two children by the prior marriage, James and Esther, and therefore are not entitled to dependency exemption deductions for these two children in that year. Secs. 151(a), 151(e), and 152(a), I.R.C. 1954.

The petitioner entered into an agreement with his attorney to credit the amount due to the attorney for legal services in the settlement of petitioner's tax liability against an amount owing by the… Held: Credit of an amount due for services against a loan due petitioner resulted in a payment on account of legal services, deductible by the petitioner in the year thus credited.

Held: (1) Petitioner Robert failed to establish that he employed a cash basis of accounting in the operation of his sole proprietorship engaged in the distribution of… Held: Petitioner Robert failed to establish that he employed a cash basis of accounting in the operation of his sole proprietorship engaged in the distribution of filtration equipment and consequently is not entitled to deductions for payments made on business obligations incurred prior to the taxable years.

Held: Property was not held primarily for sale to customers in the ordinary course of petitioner's trade or business within the meaning of Sec. 1221(1) after notice of condemnation of the property for state highway purposes.

Petitioner, a CPA, helped to initiate several corporations. One of these, A corp., never began the active conduct of business. Held: notes signed by petitioner as guarantor of B corp. were loans, not contributions to capital and petitioner's payment thereof gave rise to a nonbusiness bad debt, not a business bad debt, since there was no proximate relationship between petitioner's trade or business and the notes guaranteed.

Petitioners satisfied their obligation as guarantors on a note payable to a bank by Larson by transferring or adding their share of the obligation to their personal real estate account at the bank. Held Petitioners may not deduct as a debt due them by Larson which became worthless in 1966 the amount transferred to their real estate account in 1966. Donald M. Perry, 49 T.C. 508, 521-522. 322

Taxpayer was employed as the grounds superintendent by a country club. Held: Taxpayer was not required to accept the lodging as a condition of his employment. The fair rental value of the house, including the expenses for utilities, was compensation to petitioner for services rendered and not excludable from gross income under section 119, I.R.C. 1954.

Held: On the basis of the facts submitted, the salary paid to petitioner's president during the years in question was unreasonable and excessive to the extent it exceeded $4,800, as allowed by… Held: On the basis of the facts submitted, the salary paid to petitioner's president during the years in question was unreasonable and excessive to the extent it exceeded $4,800, as allowed by respondent.

Petitioner was granted an option to purchase stock of a corporation, by the corporation's sole stockholder. Held: the gain on the transfer is not capital gain since the option was granted to secure better services.

A, a general contractor, failed to complete a construction contract with B, and B completed it. Held: A's liability was in dispute and di did not accrue until 1965 when judgment was entered against him.

The petitioner, who was an independent coastal pilot, maintained his residence and office in Poughkeepsie, New York. Held: Poughkeepsie was his home for tax purposes and his principal place of business; and (2) The petitioner failed to prove that a radio used in his business had an estimated useful life less than that determined by the respondent.

The petitioner failed to file Federal income tax returns for the taxable years 1961 through 1964. Held: on the facts presented the respondent has failed to carry his burden of proving that the petitioner had the specific intent to fraudulently evade the payment of tax; accordingly, imposition of additions to tax under sec. 6653(b), I.R.C. 1954 is not justified.

Noncustodial parent failed to prove that he is entitled to dependency exemption for child in custody of divorced wife under either section 152(a) or section 152(e), I.R.C. 1954.

Held: (1) The lease of property by petitioner to a corporation, 50 percent of the stock of which was owned by petitioner, was a valid lease. Held: The lease of property by petitioner to a corporation, 50 percent of the stock of which was owned by petitioner, was a valid lease. Held: (2) Property leased by petitioner to a corporation, 50 percent of the stock of which was owned by petitioner, was utilized for both business and the personal activities of petitioner.

Held: (1) The lease of property by petitioner to a corporation was a valid lease and not a sham. Held: The lease of property by petitioner to a corporation was a valid lease and not a sham. Held: (2) Property leased by petitioner to a corporation was utilized for both business and the personal activities of the petitioner.

Petitioners had advanced money on open accounts to a corporation in which they were stockholders. Held: the loss on the note is not a business had debt loss since there was no debtor-creditor relationship between petitioners and the corporation after the sale. Held further, the note was not merely a substitution of one obligor (the purchasers) for another (the corporation) as to the open accounts.

Respondent reconstructed petitioner's income for 1964 and 1965 by using the source and application of funds method and determined that… Held: Petitioner failed to carry his burden of proving error, and respondent's determination is sustained. Held, further: Respondent properly increased petitioner's 1966 long-term capital gain from the sale of properties by excluding the cost of certain alleged improvements and furnishings from petitioner's basis in the properties sold.

Taxpayer husband, a construction worker, worked for the same employer over a period of years on different jobs at various locations in several states. Held: taxpayer husband's tax home was Colorado Springs and to the extent of substantiation he is entitled to deduct away from home traveling expenses in 1967 and 1968. Petitioners are also entitled to deduct some disallowed traveling expenses connected with their rental operation.

Respondent determined that the amount paid by petitioner in 1967 as tuition for her son, Philip, at a private school was not deductible as… Held: the educational program which was provided did not constitute medical care within the meaning of the statute; the school which Philip attended did not qualify as a special school within the purview of section 1.213-1(e)(1)(v)(a), Income Tax Regs., and the tuition expense was not incurred primarily for the purposes of medical care.

The petitioner was cohabiting with, and providing the total living expenses for, a woman to whom he was not 582 married. Held: he is not entitled to a dependency deduction for her, because he has failed to show that their relationship was not in violation of local law.

In 1963 and 1965, the petitioner, a cash method taxpayer, computed gross business receipts for tax purposes on the basis of deposits to his business checking account. In 1964, he computed his gross business receipts on the basis of certain invoices to his customers dated in that year. The respondent reconstructed the petitioner's income for 1964 on the basis of certain bank deposits. Held, the petitioner has failed to prove that the method of computing gross receipts used by the respondent for 1964 did not clearly reflect his income.

Held, the purchase of Aero preferred stock (80 percent of whose common stock was indirectly held by petitioner) by four insurance… Held: the purchase of Aero preferred stock (80 percent of whose common stock was indirectly held by petitioner) by four insurance corporations, all of whom were controlled by petitioner, was part of an integrated plan designed to fund Aero with cash so that it could repay petitioner for amounts spent and borrowed by him on Aero's behalf.

Held: On the facts submitted, petitioner is not entitled to a casualty or theft loss within the meaning of section 165, I.R.C. 1954. Held: On the facts submitted, petitioner is not entitled to a casualty or theft loss within the meaning of section 165, I.R.C. 1954.

Held: The entry of an indebtedness owing by a corporation to the petitioners by an accountant preparing the corporate return does not constitute other property within the meaning of sec. 351(b). Held: The entry of an indebtedness owing by a corporation to the petitioners by an accountant preparing the corporate return does not constitute other property within the meaning of sec. 351(b).

1. Held, Petitioner-husband, a physician practicing as an anesthesiologist may not deduct as business expenses the costs of traveling between his residence and a hospital in response to emergency… Held: Petitioner-husband, a physician practicing as an anesthesiologist may not deduct as business expenses the costs of traveling between his residence and a hospital in response to emergency calls.

Held: On the facts submitted, petitioner is not entitled to claimed deductions for meals, lodging, or automobile expenses in excess of the amount allowed by the respondent. Held: On the facts submitted, petitioner is not entitled to claimed deductions for meals, lodging, or automobile expenses in excess of the amount allowed by the respondent.

Petitioners owned directly three corporations - Home, Reserve, and Simplicity. They owned indirectly one corporation, Clinton, which distributed certain real estate to them in 1961. Respondent determined that petitioners received part of the real estate without paying any consideration therefor and further concluded that that amount constituted a dividend distribution from Home. Held, respondent sustained in that no consideration was paid for part of a distribution received by petitioners. Held, further, that part of the distribution shall be treated as a distribution from Clinton to Reserve and Simplicity, which in turn made a distribution to petitioners. Held, further, petitioners are taxable on the distributions as dividends only to the extent of accumulated and current earnings and profits of Reserve and Simplicity. Excess is return of capital.

Held, petitioners' underpayment of taxes for 1958 through 1963 was not due to fraud, sec. 6653(b), I.R.C. 1954; nor did they file false or fraudulent returns with the intent to evade tax for those… Held: petitioners' underpayment of taxes for 1958 through 1963 was not due to fraud, sec. 6653(b), I.R.C. 1954; nor did they file false or fraudulent returns with the intent to evade tax for those years, sec. 6501(c)(1), I.R.C. 1954.

Petition alleging only deprivation of constitutional rights because of conscientious objection to participation in any military activities does not raise issues cognizable or justiciable by this Court and does not comply with the Rules of Practice of the United States Tax Court. Motion to dismiss for failure properly to prosecute, granted.

During the taxable years 1959 through 1961, inclusive, petitioner-corporation owned and operated a racetrack at Ruidoso Downs, New Mexico. Held: That with respect to the deficiencies determined for the years 1959, 1960, and 1961, petitioner failed to meet the burden of establishing error on the part of respondent.

1. [Dependency exemption: Children of divorced parents: Support test.] Petitioner cannot meet his burden of proving that he furnished over one-half the support of claimed dependents if, to establish total support from all sources, he relied on papers containing unverified figures unsupported by courtroom testimony of the preparer, his former wife. 2.

(1) DP sold certain stock in 1963 in order to make a loan to a corporation. Held: DP realized a capital gain in 1964 when, in accordance with the agreement, she received payments in excess of the amount loaned by her. (2) JP was a member of a partnership, which in 1958 transferred substantially all of its assets and its business activity to a corporation.

In May 1963 petitioner, who had been employed and living with his wife in Augusta, Georgia, accepted a new job as an estimator with a firm in Decatur, located in the Atlanta area, which is about 165 miles from Augusta. In October 1963, petitioner was hired by the D.M. Weatherly Company in Atlanta as chief estimator and has continued in this job to the date of the instant trial. At all times during this employment, petitioner worked at the company's Atlanta office. During the entire period of his employment in Atlanta, petitioner's wife and son, who was born in 1966, lived in Augusta. She preferred to reside in Augusta because she was employed as a teacher, had her social ties, physicians, and felt more secure there. On petitioners' joint Federal income tax returns for the taxable years 1965, 1966" and 1967, they claimed traveling deductions for petitioner's meals and lodging while living in 851 Atlanta and for his traveling expenses betweenatlanta and Augusta on weekends, all of which respondent disallowed as nondeductible personal living expenditures. Held, that the deductions in question are personal and not allowable as ordinary and necessary expenses of "traveling * * * while away from home" as that phrase is used in sec. 162(a) (2), I.R.C. 1954.

Petitioner incurred approximately $190,000 improvement costs in the development and construction of a mobile home park. It assigned a useful life of 15 years to these improvements. Held: These costs were an integral part of the developemnt and construction of the mobile home park and, accordingly, are depreciable over the useful life of the trailer pads and other improvements, for which the respondent allowed a fifteen-year life.

Held, petitioner-corporation was not reasonably entitled to a bad debt deduction for its fiscal year ended October 31, 1964, in excess of that addition necessary to increase its reserve for bad debts… Held: petitioner-corporation was not reasonably entitled to a bad debt deduction for its fiscal year ended October 31, 1964, in excess of that addition necessary to increase its reserve for bad debts to 4.5 percent of its total accounts and notes receivable.

Petitioners transferred 51 percent of the stock in their wholly owned corporation to a church. The corporation thereafter redeemed the church's stock in exchange for a residence. Held: since petitioners made a completed gift of the stock to the church prior to the realization of any gain, the value of the residence is not taxable to them as a distribution essentially equivalent to a dividend within the meaning of sec. 302, I.R.C. 1954.

The petitioner was an elementary schoolteacher in a Los Angeles public school and during the year at issue incurred expenses which he attempted to deduct under various sections of the Code. Held: on remand, the petitioner is entitled to no deductions in excess of those allowed or conceded by the respondent.

Held, the petitioner failed to show that he contributed over one-half of the total support of his minor child, who was in the custody of the petitioner's former wife for 5 months of the year and in… Held: the petitioner failed to show that he contributed over one-half of the total support of his minor child, who was in the custody of the petitioner's former wife for 5 months of the year and in the custody of the county juvenile court for the other 7 months of the year.

(1) On November 30, 1966, C resolved to pay the medical expenses of K and S, its sole shareholders and only employees. Held: payments made with respect to expenses incurred prior to such date were not made according to a plan within the meaning of sec. 105, I.R.C. 1954, and such payments represent dividends to the extent of earnings and profits in 1966; held further, payments for medical expenses incurred subsequent to such date were made pursuant to a…

Decedent-taxpayer expected to make a substantial interest payment in 1964 to the Internal Revenue Service and attempted to accelerate his income in… Held: that the notice of deficiency was a proper notice and hence the Court is not without jurisdiction; and (2) that decedent made an anticipatory assignment of undeclared dividends which was lacking in any legitimate business purpose and accordingly the dividends, when paid in 1965, were taxable to decedent in that year. 1079

Bad debts: Advances to son: Business v. nonbusiness debts: Bona fide debts. - A mother advanced funds to her son and guaranteed loans to him from banks without his knowledge. The Court held that the advances did not create any bona fide indebtedness but that the guarantees were made with a real expectation of repayment and an intent to enforce collection.

Held: The separation agreement between the petitioner and her husband did not fix an amount of money or a portion of the payments to be made under the agreement as payable specifically for the… Held: The separation agreement between the petitioner and her husband did not fix an amount of money or a portion of the payments to be made under the agreement as payable specifically for the support of the minor children as required by sec. 71(b).

The petitioners have conceded that the respondent correctly calculated under section 167 of the 1954 Code the deduction to which they are entitled in 1968 for depreciation of certain rental properties. Held, the respondent properly determined a deficiency in the petitioners' income tax for the year 1968. Held, further, the respondent is not estopped from correcting errors made by his representatives.

Petitioner corporation during the taxable period had taken interest deductions under section 163(a) for interest paid on debentures it had issued upon its incorporation and a later reorganization. Held: petitioner is entitled to the interest deductions. The debentures in question had a fixed maturity date; there was a certainty of payment of principal and interest, and an absence of voting rights and rights to share in profits of the business.

Petitioner's principal business was the consumer finance business. Held: Petitioner's principal purpose in causing the assumption of the mortgage was not avoidance of tax on the exchange but was a bona fide business purpose. Section 357(b) was not applicable to the assumption.

Bell was the sole owner of the stock of three corporations, Fibre, Coal, and Buildings. In 1964 Coal sold all of its properties to Fibre and then liquidated, distributing the sale proceeds and other cash to Bell. In 1965 Buildings sold all of its properties to Fibre and then liquidated distributing the sale proceeds and other cash to Bell. Held: The purported liquidations of Coal and Buildings were in fact reorganizations with Fibre as defined in section 368(a)(1)(D). Held, further: The cash distributed to Bell constituted dividend income only to the extent provided in section 356(a)(2), measured by the earnings and profits of Coal and Buildings at the times of the distributions.

Held: On the facts submitted, no partnership existed between Victor and Billy Gregory. Held: On the facts submitted, no partnership existed between Victor and Billy Gregory. Held further: Billy has failed to show he is entitled to a deduction for additional business expenses in the amount of $196.

Petitioner was director of the pathology department of Holy Cross Hospital, Fort Lauderdale, Florida. Held: petitioner was an employee within the context of sec. 403(b), I.R.C. 1954, thereby permitting exclusion of the amounts paid for the annuity from petitioner's income.

Petitioner made three personal loans totalling $23,200 to the president of a closely held loss corporation. Held: petitioner did not receive compensation income equal to the amount by which the value of the stock he received upon cancellation exceeded the amount of the cancelled loan.

Business v. nonbusiness bad debt: Loan v. participation in joint venture: Fact finding. - Johns asked Browning and Cohen to obtain a loan for him of $35,000. Held: Petitioner had a nonbusiness bad debt under section 166(d) of $14,500 in 1966. 2. Held, further: Petitioner did not prove that he was entitled to deduct under section 162 any greater amount for repair of an apartment than had been allowed by respondent. 3.

Petitioner has established that his employer had a wage continuation plan under sec. 105(d) of the I.R.C. of 1954 and that its payments to him were made pursuant to such plan until October 1, 1967. However, it was a condition of the plan that payments would be made only so long as the employer understood that the recipient would return to work, and petitioner does not meet that test for post October 1, 1967, payments.

Travel expenses: Away from home: Proof. - The petitioner, an engineer, was transferred from Anaheim, California, to Hill Air Force Base,… Held: because the petitioner has failed to show that he has retained any significant connections with California in 1967 or that he incurred any additional or duplicative expenses as the result of his connections to California, the expenses for meals and lodging which he incurred in Utah in 1967 were not traveling expenses incurred while…

The petitioners received payments in settlement of a suit in which they alleged that a partnership existed between themselves and third… Held: Extrinsic evidence is admissible to determine whether the payments represented a finder's fee or payment for the petitioners' interests in the partnership; 1327 (2) A partnership existed with respect to the land; and (3) The payments are entitled to long-term capital gain treatment as the land held by the partnership was not held…

Reconstruction of income: Understatement: Fraud: False & fraudulent return: Statute of limitations. - 1. Adjustments of gross income and business expense deductions for 1962, 1963, and 1964 are redetermined. 2. The underpayments of tax for 1962, 1963, and 1964 were not due to fraud. Sec. 6653(b), I.R.C. 1954. 3.

On their return for the year 1956, petitioners reported income from a certain Navy Contract in the amount of $256,135.85. Held: Since petitioners failed to prove error, respondent's determination is sustained. Respondent determined in the statutory notice that petitioner's company had an ending inventory in the amount of $4,000 at December 31, 1953.