Volume 31 — Tax Court Memorandum

1. Petitioner and Guaranty were owned by the same interests. Held: Respondent was not arbitrary or unreasonable in using section 482 to deny petitioner deductions for subcontract work in excess of amounts actually paid by cash or check to Guaranty. 2.

Business expenses: Officer's compensation: Reasonableness: Attorneys Fees: Allocation. - 1. Petitioner was in the telephone answering service business. Held: A reasonable salary for Hendrix' services in each year would have been $13,000. 2 Held: Deductions for attorneys' fees were allocated between petitioner and Hendrix.

Petitioner-corporation, since 1959, has been engaged in developing subdivisions for sale in smaller parcels to builders of residential property. Held: that petitioner purchased and initially held Fair Oaks for sale to customers in the ordinary course of its business.

Respondent has determined that salary and bonuses in excess of $42,500 paid to petitioner's president during the taxable period were unreasonable in amount. Held: that the determination of the respondent is erroneous and that all amounts paid to petitioner's president during the taxable period were reasonable in amount and a proper reflection of the value of the president's services to the corporation.

For the years 1959 through 1964, inclusive, respondent has determined income tax deficiencies and additions to tax under section 6653(b) in regard to petitioners Moyer P. Hendrix and Office… Held: for the years 1959 through 1964, inclusive, petitioners understated their taxable income; the deficiencies for these years were due to fraud with the intent to evade income taxes; and the assessment of these deficiencies for these years was not barred by the statute of limitations.

Petitioner was engaged in the retail sale of fuel oil. Held: Petitioner is not entitled to deduct the cost of the customer list as a business expense under sec. 162, I.R.C. 1954.

Petitioners in 1964 sold at a loss a residential property which they had owned since 1956. Held: the loss is not deductible because petitioners have not shown that the property was used primarily in furtherance of a trade or business as required by sec. 274(a)(1)(B).

During 1966 petitioner was a postdoctoral research associate working at the University of Michigan, Ann Arbor, Michigan, under a basic research grant in the aggregate amount of $20,200 awarded… Held: no part of the stipend received from the University was excludable from petitioner's income in 1966 as a fellowship grant within the purview of sec. 117(a)(1)(B), I.R.C. 1954.

E. H. Hoover, Jr. owned all the stock of petitioner, a supplier of stone for road builders, and of Hot Mix, Inc., a corporation engaged in road construction. Held: Petitioner is not entitled to a deduction by reason of these transactions either as a bad debt, a business loss, or an ordinary and necessary business expense, and is not entitled to loss carrybacks to prior years, nor an interest deduction for 1967.

1. Held: Payments made by petitioner Royal Arrow Co., Inc. to Hugh P. and Rosa Emerson in the taxable years 1966 and 1967 pursuant to an… Held: Payments made by petitioner Royal Arrow Co., Inc. to Hugh P. and Rosa Emerson in the taxable years 1966 and 1967 pursuant to an employment contract entered into contemporaneously with the sale of its stock to petitioners Edward R. and Virginia Mims are deductible as reasonable compensation or as an ordinary and necessary business…

Petitioner and three related corporations engaged in similar businesses were owned by the same stockholders. Held: The net amount of petitioner's advances as of July 31, 1964, did not constitute a bona fide debt deductible under the provisions of sec. 166. Held, further, such advances were not deductible as ordinary and necessary business expenses under sec. 162(a), or as business losses under sec. 165(a).

Petitioners are two of four sisters surviving the decedent. In 1966 petitioners each received over $6,000 from the decedent's estate. After the distribution and after the estate was closed, the administrator of the estate discovered that no income tax return had been filed for the decedent's last taxable year. Decedent's other two sisters paid their ratable share of the taxes, penalties and interest due.

The petitioner's wife was granted an interlocutory order for temporary relief in 1966. She was granted a final judgment of divorce in 1967. Held: The petitioner was still married at the close of 1966 and is therefore not entitled to compute his tax liability for the taxable year 1966 as a head of household.

T entered into an arrangement in which he purported to purchase 13 television film episodes for an alleged purchase price of $365,000. Held: in the circumstances of this case, this was not a bona fide purchase, and T was not entitled to the claimed deductions.

Petitioner was married to decedent for 35 years and during this period they purchased several parcels of real estate in Indiana as… Held: one-half of all the property, real and personal, included in decedent's gross estate by respondent is excluded in computing his taxable estate under sec. 2040, I.R.C. 1954 June 28, 1966, by decedent was not in contemplation of death within the purview of sec. 2035; and (3) the Crider land transferred to petitioner on June 28, 1966,…

Petitioner sold all of its broadcasting facilities to Kaiser Broadcasting Corporation pursuant to a Purchase and Sale Agreement, which… Held: petitioner has not adduced strong proof to the effect that its covenant lacked economic significance or that it was not a negotiated provision of the Purchase and Sale Agreement; accordingly, the $ 45,000 must be regarded as having been received by petitioner for its covenant and not in exchange for assets resulting in tax-free gain…

Held: The issuance of multiple notices of deficiency to different taxpayers, asserting in each notice a deficiency predicated on the same item of income, is not invalid. Held: The issuance of multiple notices of deficiency to different taxpayers, asserting in each notice a deficiency predicated on the same item of income, is not invalid. In the absence of any proof with respect to the correctness of the assessment, the deficiency is sustained.

Petitioner has claimed his entitlement to dependency exemptions for his children for the years 1965 and 1966. Held: Petitioner has not presented evidence sufficient to infer the total support furnished his children from all sources during these years and has not otherwise been convincing that he furnished more than one-half of that total support. Determination of the respondent is sustained.

Held: Certain disputed gifts made by Hilda Beecher Stowe, deceased, in 1963 and 1964, were not made in contemplation of death within the meaning of sec. 2035, I.R.C. 1954. Held: Certain disputed gifts made by Hilda Beecher Stowe, deceased, in 1963 and 1964, were not made in contemplation of death within the meaning of sec. 2035, I.R.C. 1954.

Participants in the educational leave programs of the West Virginia Department of Welfare and the Florida Department of Public Welfare received monthly stipends. Held: the stipends are not excludable from income as scholarship or fellowship grants under sec. 117, I.R.C. 1954

Held, W, the custodial parent, clearly established that she provided more for the support of each of her three children during 1967 than H, the noncustodial parent.

Held: Petitioners' various claims for deduction disallowed. Held: Petitioners' various claims for deduction disallowed.

(1) Held: Petitioner was not entitled to greater deductions for medical expenses, charitable contributions, taxes, and "miscellaneous" expenses than had been allowed by respondent. (2) Held, further: Respondent correctly imposed additions to petitioner's tax under section 6651(a) and section 6653(a).

Held, petitioners are not entitled to deduct maintenance expenses and depreciation on old residence offered for sale after petitioners moved into new residence. Held, further, petitioners are not entitled to deduct FICA taxes paid for employees who helped them build new residence.

Petitioner purchased an advertising business from Mrs. Ward. Held: Petitioner cannot deduct under section 167 any part of the amounts paid under the purchase agreement as having been paid for Mrs. Ward's noncompetition covenant.

1. Six land transactions occurred involving several of the petitioners herein. Held: based on the evidence of record -- (a) the five land transfers to Builders were contributions to capital; (b) the aggregate basis to Builders in the Barnes and Shaw tract is $42,000, the fair market value of that tract when it was received by Irving, Arthur, and Shaw; (c) the basis to Builders in the Wyse tract is $60,000, and the…

Petitioner, employed as a mechanical aide in the Aerospace Division of Westinghouse Electric Corporation, enrolled in the Johns Hopkins University, Evening College, during 1968 where he undertook the bachelor's degree program which included mechanical engineering as his major. Held, absent convincing evidence to the contrary, the expenses incurred by petitioner during that year while attending school are not deductible since the engineering degree would qualify him for a new trade or business. Sec. 1.162-5, Income Tax Regs. 645

Held, petitioners did not prove that they contributed more than one-half of the support of two minor children during the year in issue, and therefore are not entitled to deductions for personal exemptions. Secs. 151(a) and (e) and 152(a), I.R.C. 1954.

Petitioner retired from General Motors employment in 1965. Held: Petitioner's home for tax purposes was Leqisburg and he is entitled to deduct expenses of weekly travel to Warren and return, and for lodging and meals at Warren. Joseph H. Sherman, Jr., 16 T.C. 332 (1951).

Transferor sold substantially all of its noncash assets to petitioner on November 17, 1965, pursuant to a plan of complete liquidation… Held: that the fair market values of transferor's land improvements, buildings and machinery and equipment were $22,000, $355,000 and $72,708, respectively, as of November 17, 1965; an allocation of the lump sum sales price according to relative fair market values for the purpose of determining transferor's ordinary gain under sec. 1245,…

Held: A power reserved by the grantor, in conjunction with the trustees, to direct the investment of the trust corpus did not constitute… Held: A power reserved by the grantor, in conjunction with the trustees, to direct the investment of the trust corpus did not constitute either (1) the right to designate the persons who shall possess or enjoy the property or the income therefrom within the meaning of sec. 2036(a)(2) or (2) the power to alter, amend, revoke or terminate…

1. Petitioner was a surgeon with a full-time practice. Beginning in 1965 he purchased show horses which members of his family would train and show. Held: Petitioner's losses from his horse operations were personal expenses whose deduction is barred by section 262. 2. Held, further: Petitioner failed to show that certain entertainment expenses were incurred in the course of his profession and that such expenses were deductible under section 162 and section 274. 3.

Petitioner was a farmer and a cash basis taxpayer. On December 31, 1966, he gave Hatchery a check for $20,731 for feed to be delivered in 1967. Although petitioner received a sales ticket from Hatchery indicating that he had purchased certain feeds at stated prices, petitioner was not required to accept delivery of the feeds listed on the sales ticket but could substitute other feeds as conditions warranted. In addition petitioner's account with Hatchery was to be debited with the market price of feed delivered rather than the sales ticket price. Held: Petitioner's transfer of $20,731 to Hatchery was a deposit and not an expense paid in 1966 for purposes of deduction under section 162. Held, further: Even if petitioner's transfer of $20,731 to Hatchery was not a deposit and was a payment, such payment was not an ordinary and necessary expense of petitioner's business under section 162.

Held, in determining the value of stock in a ranching corporation, asset value was not the sole determinant but was considered along with other factors such… Held: in determining the value of stock in a ranching corporation, asset value was not the sole determinant but was considered along with other factors such as earnings and dividends; and the possibility that the ranch would be purchased for a public park or monument was too speculative and uncertain to be considered.

Petitioner, a man of relatively modest means, incurred large expenditures in a horse racing and breeding operation. Held: Petitioner was engaged in the trade or business of racing and breeding horses.

(1) Petitioner, an officer and employee of a corporation, was assigned an office in the company's quarters, to which he had access (2) Petitioner claimed additional deductions for contributions at… Held: Petitioner is not entitled to deductions for expenses of his apartment-office as related to the company's business. to religious or charitable payments or to show that the organizations were exempt. Held: Petitioner is not entitled to the additional deductions claimed.

Held: Petitioner's earnings were permitted to accumulate beyond the reasonable needs of its business in the taxable years 1966 and 1967. Held: Petitioner's earnings were permitted to accumulate beyond the reasonable needs of its business in the taxable years 1966 and 1967. Accordingly, petitioner was subject to the surtax on such earnings under sec. 531, I.R.C. 1954.

Held: Reasonable compensation determined. Held: Reasonable compensation determined.

Held: The payment by petitioners' partnership of weekly compensation to petitioners' sister Beatrice in excess of the maximum number of weeks… Held: The payment by petitioners' partnership of weekly compensation to petitioners' sister Beatrice in excess of the maximum number of weeks provided by the Connecticut Workmen's Compensation Act and the payment of the travel expenses of Beatrice and her sister Ethel did not constitute expenses incurred as an obligation under the…

Contemporaneous agreements executed on November 2, 1959, by petitioners and corporation construed to be not a legal conveyance of the property involved, but rather an executory contract for a… Held: the sale of the property involved was consummated on March 30, 1960, and profit therefrom derived is subject to long-term capital gain treatment under sec. 1222(3), I.R.C. 1954.

The statutory notice of deficiency was mailed to petitioner within three years of the filing of each of the returns for 1962, 1964, 1965, and 1967. No return was filed for the year 1966. Held: That the assessment and collection of the deficiencies and additions to tax for the years 1962, 1964, 1965, 1966 and 1967 are not barred by limitations. Held further: That the assessment and collection of the deficiency and addition to tax for the year 1963 are barred by limitations.

P is the sole shareholder of S, a construction firm which has elected to be treated as a subchapter S corporation. Held: S is entitled to a partial bad debt loss during the year 1965 with regard to the account receivable relating to the construction contract; (2) S does not have to accrue interest on the account receivable during 1965; (3) S received more than a security interest in the transferred stock and realized income on its receipt; and (4) The…

Held, petitioners' claimed travel and entertainment expenses are disallowed. Kentucky.

Petitioner was sole shareholder of Civic, a subchapter S corporation during Civic's fiscal years 1963, 1964, and 1965. Civic engaged hostesses (acting as private contractors) to call on new residents on behalf of Civic's sponsors; the hostesses were compensated, in part, by being granted the use, based upon superior performance, of the Newcomer, a 42-foot Chris Craft yacht. Held, such use of the Newcomer qualified as directly related to Civic's business, as required by sec. 274, I.R.C. 1954, since it constituted a prize or award, taxable to hostesses. Held further, reservation calendar and monthly newsletter, maintained by Civic, provided the substantiation required by sec. 274, I.R.C. 1954, of the identity of the hostess users and their business relationship. The Newcomer was enroute to its "home port" during the fiscal year 1963. Held, during that time the Newcomer was not being used as an entertainment facility; consequently section 274 is inapplicable. Held further, respondent failed to timely raise the argument that the Newcomer was not "placed in service" during the fiscal year 1963. During a portion of the fiscal years 1964 and 1965, the Newcomer was used by employees. Held, such use is not excepted from the requirements of sec. 1.274-2(a) through (e), Income Tax Regs., since the use by employees was not on a nondiscriminatory basis as required by regulation section 1.274-2(f)(2)(v) when personal employee use is compared with use by owners, plus use which is deemed to be personal use. During the fiscal years 1964 and 1965, the boat was used for business purposes, for personal purposes, and was idle during a part of the two years. Held, in determining the disallowable portion of personal use of the facility, actual personal use plus actual use deemed to be personal is compared to the total actual use without considering periods of inactivity or nonuse. Held further, a portion of boat-related travel expense found nondeductible due to requirements of sec. 274, I.R.C. 1954.

Held: Joint will executed by decedent and his wife did not irrevocably bind the parties with respect to the disposition of their property so as to render the interest of the surviving spouse a… Held: Joint will executed by decedent and his wife did not irrevocably bind the parties with respect to the disposition of their property so as to render the interest of the surviving spouse a terminable interest within the meaning of sec. 2056(b), I.R.C. 1954.

Petitioners received as part of the proceeds from liquidation of a corporation a potential civil antitrust claim having no ascertainable fair market value. The claim was settled and petitioners deducted the attorneys' fees as expenses paid for the collection of income. Respondent determined such expenses to be an offset to the capital gain realized from settlement of the antitrust claim. Held, the expenses are deductible under section 212(1) I.R.C. 1954 as being paid for the production of income.

The petitioner supplied funds to enable another taxpayer to purchase certain stock pursuant to an agreement whereby the petitioner might, at the election of the other taxpayer, receive back either cash or a portion of the stock. When the taxpayer elected to pay the petitioner cash, the resulting gain was not realized on the sale or exchange of a capital asset within the meaning of sec. 1221, I.R.C., 1954.

Petitioner filed no Federal income tax returns for the years 1952 through 1961, inclusive. Held: petitioner failed to show that the burden of proof was shifted to respondent; held further, respondent's determination of deficiencies in income tax sustained, as petitioner failed to introduce credible evidence sufficient to carry his burden of proving by a preponderance of the evidence that respondent's determination of…

Held: Petitoner acquired intangible assets worth $87,500 upon purchasing an ice cream business on July 1, 1967. Held: Petitoner acquired intangible assets worth $87,500 upon purchasing an ice cream business on July 1, 1967.

Petitioners sold dirt and share from their land to a joint venture involved in highway construction. Held: Petitioners sold the dirt and shale in place and are entitled to report the proceeds from the sale as long-term capital gain.

Atlas Groves, Inc., all of whose stock was owned by the Mary T. Hickman Trust, claimed an investment credit on its corporation income tax return for its fiscal year ended August 31, 1968, totaling… Held: the investment credit in dispute is not deductible by reason of sec. 267, I.R.C. 1954. 1031

The petitioner had experience as a computer programmer. Held: no part of the stipend is excludable as a scholarship or fellowship under sec. 117, I.R.C. 1954.

Petitioner, a graduate engineer, was employed as a part-time patent trainee from January 1, 1966, through May 8, 1966. Petitioner was employed as a part-time patent agent for the remainder of 1966. Held: the doctrine of collateral estoppel is applicable to preclude petitioner from litigating the deductibility of his law school expenses for that portion of 1966 in which he worked as a parttime patent trainee.

Petitioner and Sidney B. Bette were the two equal shareholders of a Subchapter S corporation. Held: The common intent of adverse parties to an agreement having been established, the $97,968.98 is found to represent a dividend payment to Bette and not to be part of the purchase price of the stock, and hence the undistributed taxable income as defined in sec. 1373(c) is reduced by $97,968.98.

(1) The petitioners, psychiatric residents, received stipends from the State Department of Hospitals during the period of their training. Held: the stipends are not excludable scholarships or fellowship grants under sec. 117(a), I.R.C. 1954. (2) During the training period, two of the petitioners received additional grants which the respondent treated as excludable under sec. 117(a).

Held: Petitioners are not entitled to deduct as interest amounts purportedly paid to their parents as part of purchase-money mortgages on property transferred to them by their parents. Held: Petitioners are not entitled to deduct as interest amounts purportedly paid to their parents as part of purchase-money mortgages on property transferred to them by their parents. There was no bona fide indebtedness upon which interest was due.

As a result of extensive, arm's-length negotiations, the parties to a stock redemption agreed that no amount of the consideration paid for the stock was allocable to a noncompete covenant given by… Held: the bona fide terms of the stock redemption should be respected; respondent may not allocate a portion of the stock price to the covenant in light of the parties' clear intention that no allocation be made.