Volume 32 — Tax Court Memorandum

Petitioners' daughter, Suzanne, suffered from asthma aggravated by a bronchial infection and an allergy to dust. Held: The living expenses of Suzanne and her mother are not deductible medical expenses; (2) The petitioners have failed to show that certain telephone, travel, and automobile repair expenses are deductible medical expenses; and (3) The petitioners have failed to show that they are entitled to a greater deduction for medicine and drugs…

Held, that petitioner is not entitled to a loss deduction when the insurance proceeds received are greater than the adjusted basis of the property destroyed by fire. Held: that petitioner is not entitled to a loss deduction when the insurance proceeds received are greater than the adjusted basis of the property destroyed by fire.

Held: Petitioner did not incur a theft loss in 1968. Held, further: Petitioner was not a head of household as defined in section 1(b)(2) in 1968.

When depressed market conditions severely affected the profitability of color Shetland ponies, petitioners opted to convert their herd to show ponies in order to produce a more marketable pony. Held: Since the taxable years in question were formative years in the conversion of petitioners' pony herd, the petitioners were engaged in the business of breeding Shetland ponies with the intention of making a profit.

HELD: Despite large losses suffered during the years in issue and subsequent years, petitioners were engaged in the business of raising… Held: Despite large losses suffered during the years in issue and subsequent years, petitioners were engaged in the business of raising and breeding Tennessee Walking Horses during the five years in issue because these years were the formative years of the business and because petitioners evidenced an intent to make a profit from the sale…

Held, transferee liability not proved by respondent. Held: transferee liability not proved by respondent.

Held: Petitioner is taxable on the gain from the sale of certain lots in 1965 and 1966. Held: Petitioner is taxable on the gain from the sale of certain lots in 1965 and 1966.

Held, petitioners' motion for reconsideration and renewal of motion to dismiss filed under the provisions of Rule 19(e) of the Court's Rules of Practice do not raise matters affecting the prior opinion of the Court and are denied.

The petitioners were organized to subdivide and develop land, and from 1958 to 1965, they held certain land for the purpose of subdividing it and selling lots at retail. Held: the petitioners have failed to show that during 1967 they were not holding the land primarily for sale to customers in the ordinary course of business.

Held: The value of stock that petitioner received as compensation in 1967 determined to be $2 per share; Held, further: Petitioner was not entitled to any deduction for entertainment expenses in 1967.

Held: Petitioners did not sell their land under threat or imminence of condemnation and they are not entitled to defer any part of the gain from the sale under section 1033. Held: Petitioners did not sell their land under threat or imminence of condemnation and they are not entitled to defer any part of the gain from the sale under section 1033.

Held, bad debt losses suffered by petitioner are nonbusiness bad debts under section 166(d). Held: bad debt losses suffered by petitioner are nonbusiness bad debts under section 166(d).

Held, certain debts acquired by petitioner on March 31, 1962, in a Type C reorganization under sec. 368(a) (1) (C) 1Unless otherwise noted, all statutory references are to the 1954 Internal… Held: certain debts acquired by petitioner on March 31, 1962, in a Type C reorganization under sec. 368(a) (1) (C) 1Unless otherwise noted, all statutory references are to the 1954 Internal Revenue Code, as amended. were not wholly worthless, but only partially worthless when acquired.

Lakeside (now Leisure Dynamics) acquired the trademarks, trade names, and other property necessary for making Gumby toys under an agreement with Toy. Toy and its successors retained a security interest in the transferred property. Lakeside was required under the agreement to pay Toy or its successors for an indeterminate time a percentage of its sales of Gumby toys as part of the purchase price. Lakeside acquired the complete, unrestricted, and exclusive right to make Gumby toys under the agreement and subsequent modifications. Held: Lakeside's agreement with Toy comprised a sale rather than a license, and payments made thereunder were nondeductible capital expenditures. Held, further: Petitioner did not demonstrate that the intangible assets acquired by Lakeside under the agreement with Toy had a useful life which could be estimated with reasonable accuracy. Accordingly, Lakeside was not entitled to deductions for depreciation on these assets. 2

The petitioner contributed the cost of playground fencing, four parcels of residential property, and a tract of unimproved industrial property to charitable organizations. Held: the fair market value of such property is determined.

Held: Petitioner is not entitled to treat his pro rata share of the undistributed taxable income of an electing small business corporation as long-term capital gain,… Held: Petitioner is not entitled to treat his pro rata share of the undistributed taxable income of an electing small business corporation as long-term capital gain, pursuant to sec. 1375(b), I.R.C. 1954, because the electing corporation did not enter into any capital transactions during the year in issue.

The petitioner, a psychiatric resident, received stipends from the Terrell State Hospital during the period of his residency. Held: the stipends are not excludable scholarships or fellowship grants. Sec. 117(a), I.R.C. 1954.

Held, the deductibility of certain expenditures under secs. 162(a) and 274, I.R.C. 1954, determined. Held: the deductibility of certain expenditures under secs. 162(a) and 274, I.R.C. 1954, determined.

Held: That section 1239 of the I.R.C., 1954, does not require that the gain realized upon the sale of depreciable property by one corporation to another, both of which are controlled by the same… Held: That section 1239 of the I.R.C., 1954, does not require that the gain realized upon the sale of depreciable property by one corporation to another, both of which are controlled by the same individual, be considered as ordinary income. 10-42 Corp., 55 T.C. 593 (1971), followed.

Held, petitioner was not in the separate business of promoting, financing, managing, and organizing businesses, or of lending money during the taxable years 1964 and 1965,… Held: petitioner was not in the separate business of promoting, financing, managing, and organizing businesses, or of lending money during the taxable years 1964 and 1965, and certain losses sustained by petitioner in those years are not deductible as business bad debts under sec. 166(d) (2), I.R.C. 1954.

1. In December of each year Sons, Inc., accrued annual bonuses on its corporate books to Nathan Sanders and his three sons. In March of each year, the bonuses accrued from the prior year were paid out to the Sanders by check. The recipients endorsed the checks back to Sons, Inc., and the bonuses were then credited to officer 2 loan accounts by Sons, Inc. Held: The bonus accrual and payment procedure was a sham. The Sanders did not realize income therefrom, and Sons, Inc., is not entitled to a business expense deduction as a result of these transactions, Sanders and Sons, Inc., et al., T.C. Memo 1967-146. The Sanders realized nondeductible distributions from Sons, Inc., when they withdrew funds from the officer loan accounts. 2. In 1967 Nathan Sanders and his three sons closed out their officer loan accounts to Sons, Inc., which had been funded solely by the annually accrued bonuses, receiving cash in the amount of the balances therein or, in the case of Nathan, a credit against his liability to Sons, Inc. Held: Nathan Sanders and his three sons received nondeductible distributions from Sons, Inc., in amounts equal to their balances in the officer loan accounts. 3. In winding up its business affairs in 1967, Sons, Inc., wrote loans to Eagle Properties and Crest Interiors off of its books when it received a $17,000 check from C & D as payment for some of Sons, Inc., inventory. Held: The transaction resulted in a nondeductible distribution from Sons, Inc., to Nathan Sanders in the amount of $17,000 in 1967. 4. In 1967 Sons, Inc., transferred substantially all of its assets to C & D. Thereafter, C & D assumed the business of Sons, Inc., using essentially the same location, employees, and suppliers. Held: C & D received inventory and goodwill from Sons, Inc., for less than full consideration. C & D's cost of goods sold for 1967 is reduced by the amount of Sons, Inc., inventory received for less than full consideration. 5. C & D, Nathan Sanders, and his three sons are liable as transferees for the unpaid tax deficiencies of Sons, Inc., for 1962 through 1965, plus interest, in the amounts determined herein or hereunder.

Held, the dominant motivation of employee/stockholders in making loans to and guaranteeing obligations of their corporation was to protect… Held: the dominant motivation of employee/stockholders in making loans to and guaranteeing obligations of their corporation was to protect their investments in the corporation; losses suffered by them in connection with said loans and guarantees therefore resulted from nonbusiness bad debts, deductible only as short-term capital losses…

Held, the petitioners generally have failed to show that they are entitled to deductions in excess of those allowed by the respondent.

Held, the expenses incurred by a second-grade teacher on a trip around the world are not deductible as ordinary and necessary business expenses. Held: the expenses incurred by a second-grade teacher on a trip around the world are not deductible as ordinary and necessary business expenses.

Held: (1) The petitioner has not explained the source of $8,878.28 of bank deposits; and (2) The petitioner is liable for an addition to tax under sec. 6653(a), I.R.C. 1954.

Fred F. Adams died intestate on March 5, 1968, in the state of Texas. Held: the value of the real estate and automobile are determined for purposes of inclusion in the gross estate. Section 2031, I.R.C. 1954. Held further, 25 percent of certain attorney's fees paid by the estate and any portion of the Federal joint income tax paid for taxable year 1968 are not deductible by the estate.

Scholarships and fellowships: Excludability: Resident in psychiatry. - The stipend received by a doctor who was serving a residency in psychiatry was not excludable from income as a scholarship or fellowship. The payments represented compensation for services rendered.

Losses: Theft: Jewelry and furs: Stamp collection: Valuation: Substantiation. - The taxpayer who suffered the theft loss of jewelry, furs and a stamp collection was denied a deduction in the one instance and was granted an increased deduction in the other. He failed to establish the value of the jewelry and furs and his actual ownership of them.

Held, the amount of a charitable contribution deduction determined; held, further, petitioners are not entitled to deductions for travel expense, automobile expense and depreciation in excess of the… Held: the amount of a charitable contribution deduction determined; held, further, petitioners are not entitled to deductions for travel expense, automobile expense and depreciation in excess of the amounts allowed by respondent.

1. Based on all the facts presented, compensation paid by the petitioners to certain officers was unreasonable and excessive. Held: Reasonable compensation determined. 2. Petitioner Future Foam, a corporation, purchased stock in a corporation which it hoped would serve as a distributor for its inventory. Future Foam later sold the stock without gain or loss but evidenced by a note. Several years after the sale, and without any payment, the note became worthless. Held: Future Foam is entitled to an ordinary bad debt loss pursuant to section 166(a). 3. Charles, Inc. and its wholly owned subsidiary Chemical Corporation of America filed a consolidated return for the fiscal year ended June 30, 1968. The outstanding stock of Charles, Inc. was held entirely by Future Foam. Held: Charles, Inc. and Chemical Corporation of America were not privileged to file a consolidated return since Future Foam, a member of the affiliated group and parent corporation to Charles, Inc., did not join in such consolidation as required by section 1504(a) and section 1.1502-76(b) (1), Income Tax Regs.

Held: The transfers of real estate by Gould and by Hunter, Louis and Rosen to various corporations receiving notes in return, and the… Held: The transfers of real estate by Gould and by Hunter, Louis and Rosen to various corporations receiving notes in return, and the conveyances by several of these corporations to other corporations were not sales evidenced by debt obligations but rather were equity contributions controlled by the nonrecognition provisions of sec. 351.

Petitioner and a woman met in late December, 1969 and lived together until January, 1971 when he sent her away permanently. He took her as an exemption on his 1970 return. Held: While section 151(b) allows an exemption for a spouse and 152(a)(9) provides for an exemption for a person who has her principal abode with taxpayer, illicit nature of relationship causes both bites at exemption apple to turn sour and prohibits the allowance of any exemption.

Petitioner graduated from V.M.I. with a B.S. degree, major in civil engineering, and then attended University of Virginia Graduate School of Business Administration for 1 year before entering U.S. Air Force where he served as a flier for 5 years. Prior to his entering the service he was employed 2 summers in engineer-related work. Upon discharge from Air Force he attended Michigan State University Graduate School of Business Administration. Held: Petitioner's tuition and living expenses at M.S.U. nondeductible since he had not established himself in the trade or business of being an engineer within the purview of section 162.

The decedent established inter vivos trusts for various members of his family, reserving to the trustees broad powers of management and control with respect to both investments and distributions. Held: The de facto control excercised by the decedent as a result of the acquiescence of unrelated trustees was not a right to designate the persons who shall possess or enjoy the property or the income therefrom wtihin the meaning of sec. 2036(a) (2), I.R.C 1954. United States v. Byrum, 408 U.S. 125 (1972), followed. Held, further: Secs. 2033 and 2038 are not applicable. 2 The decedent's wife created an inter vivos trust within 3 years of decedent's death. Decedent managed and controlled said trust. Held: The unaccounted for increase in the corpus of the trust resulted from transfers made by decedent in comtemplation of death, and is therefore includable in decedent's gross estate under sec. 2035. The decedent transferred certain properties in trust within 3 years of the date of his death. Held: The transfers were gifts in contemplation of death, includable in decedent's gross estate pursuant to sec. 2035. The decedent purchased insurance policies on his own life and later transferred ownership thereof to members of his family. Held: Certain policies are includable in decedent's gross estate by virtue of his retention of incidents of ownership therein within the meaning of sec. 2042. Others are not includable.

Held: Petitioner had no present intent to make a gift when he mailed a letter to the Association allegedly giving it a four-fifths undivided interest in unimproved real estate and petitioner is not entitled to any charitable contribution deduction therefor.

During 1963 and the major portion of 1964 petitioners traveled throughout Europe selling the products of the American corporation. Held: Petitioners were bona fide residents of a foreign country for one entire taxable year and the income received while residents of France was attributable to services performed in a foreign country and therefore such income is excludable under sec. 911.

Held: On the facts presented, petitioner is not entitled to nonrecognition of the gains realized by him in 1966 and 1968 from the condemnation of his property. Held: On the facts presented, petitioner is not entitled to nonrecognition of the gains realized by him in 1966 and 1968 from the condemnation of his property.

In 1961 petitioner's predecessor partnership purchased all of the capital stock of Quality Door-Lite and Louver, Inc., for a stated purchase price of $325,000 plus the net worth of Quality, and also… Held: petitioner has failed to show by strong proof that the $325,000 was paid for the covenant not to compete.

Petitioner's petition to the Tax Court was filed with this Court after the 90-day filing period. Held: respondent's motion for dismissal for lack of jurisdiction is granted; petitioner's petition was not filed within the 90-day period and the requirements of sec. 7502 allowing in effect an extension of that period were not met.

Petitioners operated a car wash on leased land. As a result of condemnation proceedings, they received a net award of $53,461.11 which was subsequently reinvested in a printing company. Held: since petitioners failed to provide the necessary details on the replacement, sec. 1033 is unavilable to them. Moreover, even if the proper foundation had been provided, no election under that section was made within the requisite period.

HELD: Agreement whereby the purchaser of a going brokerage business paid the seller a percentage of the commissions earned on the existing accounts represented payments for the acquisition of goodwill and, as such, were not deductible as an ordinary and necessary business expense of the purchaser under Sec. 162, I.R.C. 1954.

In 1967, petitioner built a $150,000 house in Glencoe, Illinois which he used as a family residence immediately upon completion of construction. Held: petitioner was not in the trade or business of building luxury homes.

Accountants hired by petitioner reconstructed his business income and expenses each year by looking to his bank statements, deposit slips and cancelled checks. Held: The years in issue are barred from assessment. Respondent has failed to show that any of the alleged understatements of income were due to fraud with the intent to evade tax within the meaning of sections 6501(c) (1) and 6653(b).

Petitioners' wholly-owned corporation, Pica, was engaged in the real estate development business. Pica contracted to purchase two large tracts of land to subdivide and sell. Held: Petitioners' distributive share of the profits realized by the syndicates on the resale of the land to Pica is taxable as capital gain and not as ordinary income. 2

Petitioner owned 50 percent of the capital stock in Rolling Inn, Inc. During 1956 all of the real property of the corporation was condemned by the Maryland State Roads Commission and the corporation… Held: since the transfers in question left Rolling Inn, Inc. insolvent, petitioner is liable to the extent of $9,291.89, plus interest, as a transferee of assets for the deficiency in income tax, and the addition to tax of the corporation for the year ending March 31, 1957. 2

(1) P was an active partner in Eastern Shore, which computed its income in accordance with the bank deposits method of accounting. A substantial portion of the gross receipts of Eastern Shore were regularly placed in personal checking accounts of P; however, the records of such accounts were not provided to the accountant who prepared the Federal income tax returns for Eastern Shore for 1957 and 1958, and were not considered by the accountant who prepared the return for 1959. In the years 1957, 1958, and 1959, P often had his personal obligations and expenses paid by others or paid with undeposited funds. P "drank" heavily in those years and claims that he relied upon others to compute his income and taxes. Held, part of the underpayment of tax in each of the years 1957, 1958, and 1959 was due to fraud. 2 (2) P owned 100 percent of the stock in Delmarva, which failed to report a substantial part of the income earned during its first year of operation. Held, the respondent has not demonstrated fraud by clear and convincing evidence.

Petitioners, professional teachers, took a six-month trip around the world. Held: While traveling is broadening, enriching culturally, and may add to one's sensitivity to, and understanding of, others, there is no showing that the indisputable benefits of the trip bore a sufficiently direct relationship to the teaching activities of petitioners to convert what is normally a personal expense incurred on a holiday…

Income resulting from condemnation of two adjacent parcels of real property held not taxable to a corporation whose only function was to create an identity of interest in the two parcels. Beneficial ownership rested in the individual participants, to whom the income and expenses of the properties were properly chargeable. Moline Properties v. Commissioner, 319 U.S. 436 (1943), inapplicable. 2

Pursuant to a decree of divorce petitioner was required to make monthly cash payments and mortgage payments "for the care, support, maintenance and education" of his two children. Held: neither the cash payments nor the mortgage payments are deductible as alimony payments. Petitioner claimed deductions for business expenses, interest payments and payments of state and local taxes. Held: petitioner is not entitled to any deduction for business expenses due to lack of substantiation. For the same reason he is only entitled to the deductions for interest and taxes to the extent allowed by respondent. Petitioner did not file his Federal income tax on the date prescribed therefor. Held: petitioner is liable for an addition to tax because he has not proven that the late filing was due to reasonable cause.

Petitioners executed a contract to purchase property and made the downpayment with 2 borrowed funds. Four days later, the contract was assigned to a charitable family trust, subject to the payment by the trust of the full purchase price. Held, the purchase and subsequent transfer to the charitable family trust were not sham transactions. Held further, the fair market value of the property determined.

Held: 1. The separate cost of the two tracts of land purchased by Ronald and Ann Williams in 1959 determines the basis of the parcel he sold from one of these tracts during the taxable year 1963. 2. Held: The separate cost of the two tracts of land purchased by Ronald and Ann Williams in 1959 determines the basis of the parcel he sold from one of these tracts during the taxable year 1963. 2.

Petitioner purchased a dog track racing facility in Pensacola, Fla., for a lump sum in December 1965. Held: proper allocation of the lump-sum purchase price to the various depreciable and nondepreciable assets determined; useful lives of depreciable assets also determined. Held, petitioner may not deduct contribution made in 1968 to the Miami Beach Chamber of Commerce.

Petitioner-wife, a cash-basis taxpayer, incurred and paid for certain campaign expenses in calendar year 1966. Held: that petitioner was not entitled to deduct, in year 1967, expenses paid in 1966.

Petitioner owned two buildings that were connected by a breezeway. One building was utilized by petitioner in a small business while the other building was utilized as a residence. Held: petitioner has failed to prove that he is entitled to any loss deduction in excess of that allowed by resondent. Sec. 165(c), I.R.C. of 1954.

Held: In the absence of any election to be treated as a small business corporation, as required by section 1372, I.R.C. 1954, and the Regulations thereunder, The Herald Shoppe, Inc., was not an electing small business corporation and the losses claimed by petitioners as carryover losses for the taxable years 1968, 1969, and 1970, are not allowable as deductions under Subchapter S. Held, further, petitioners have failed to establish any other basis in fact or law which would entitle them to the deductions claimed.

Held: Petitioners' tip income determined to be 10 percent of sales of food and beverages. Held, further: Respondent correctly imposed additions to tax for negligence under section 6653(a). 2 Held: Petitioners' tip income determined to be 10 percent of sales of food and beverages. Held, further: Respondent correctly imposed additions to tax for negligence under section 6653(a). 2

Petitioners donated real estate to a school district for which they claimed a charitable contribution deduction for the value determined by petitioners' appraiser who before being retained by the… Held: The fair market value of the donated property determined. Petitioners also claimed a depreciation deduction on a residence which was inherited and held for sale only.

I. Held, on the facts, corporation's advances to its president and 99.9-percent shareholder were not loans, even though notes were executed, but were taxable dividends. II. Corporation's authorized bonuses for fiscal 1967 and 1968 to its president were neither paid nor credited on any corporate account within the 2-1/2 month period specified in sec. 267(a) (2) (A), I.R.C. 1954; consequently, held, claimed deductions for such bonuses were properly disallowed. III. Corporation's president indicated that a similar bonus in fiscal 1969 was to be credited on his note to the corporation. Such crediting would have required no further corporate action, but because of our holding on I, supra, this action must be characterized as a contribution to capital rather than a cancellation of indebtedness. Held, it follows that the fiscal 1969 bonus, which was reasonable in amount, was constructively received within the specified period and was properly deducted by the corporation. 2 IV. Held, corporation's president has failed to prove requisite profit motive as to purchase and lease of an airplane and consequently is not entitled to expense deductions or to an investment credit.

Held: That the stipend received by petitioner from Charity Hospital in 1968 was not a "fellowship grant" within the meaning of section 117(a) (1) (B), I.R.C. 1954, and petitioner is not entitled to any exclusion therefor.

Petitioner claimed net operating loss carryover deductions for the taxable years 1966, 1967 and 1968 which were based on a foreign expropriation loss claimed for the taxable year 1965. Held: Petitioner is not entitled to the carryover deductions based on the loss claimed for the taxable year 1965 since 1965 was not the proper year for deduction of the loss.

1. Payments made to Betty L. Cooper by Carpets on a note executed by William R. Cooper to Betty, pursuant to a property settlement agreement and divorce, were not made in redemption of stock of Carpets and Service, but were made in discharge of a personal obligation of William. The amounts so paid are taxable to William, the sole stockholder, as dividends. 2.

Petitioner was married on June 3, 1967, and he remained married throughout 1969. During 1969 petitioner's five children lived with him and he paid $1,166.97 to three women who cared for his children. Held: That even if the benefits of section 214 should be extended to men and women equally, petitioner would not qualify for the claimed deduction because he was married during the year in question, but he did not file a joint return as required by section 214.

Petitioner was in the costume jewelry business. Its officer-shareholders performed the duties of managers, salesmen and occasionally clerks. Held: a reasonable salary for the officer-shareholders is less than that claimed by petitioner. Held: that part of the bonuses represented distributions of earnings.

In 1968, Ellsworth C. Holman withdrew $14,250 from After Hours, Inc., a corporation in which he was a fifty percent shareholder. Held: the withdrawals were not loans, but distributions of property made by a corporation with respect to its stock. Section 301, I.R.C. 1954. Ellsworth C. Holman advanced funds to his son-in-law and nephew in 1968.

The petitioner was sole shareholder and president of a construction company which was engaged to construct a motel for Waxahachie Community Inn of America, Inc. Petitioner purchased a small… Held: the loss from sale of the corporation stock is deductible as a capital loss. Section 165(f), I.R.C. 1954. Held further, the loss arising from payments pursuant to the loan guarantees are nonbusiness bad debts, thus deductible as capital losses. Section 166(d) (1) (B), I.R.C. 1954.

In 1969, petitioner elected under section 1033 to defer the recognition of gain realized upon an involuntary conversion of property. Petitioner did not reinvest the proceeds in property within the statutory replacement period ending December 31, 1970. No application for extension of the replacement period was filed prior to or after December 31, 1970. Petitioner reinvested the proceeds in property in 1972. Held: Section 1033 is inapplicable because petitioner has failed to show reasonable cause for failure to file for an extension within the required time or that an extension was filed within a reasonable time after the expiration of the required period of time. Section 1.1033(a)-2(c) (3), Income Tax Regs.