Volume 35 — Board of Tax Appeals

The payment by a trustee of a trust made in contemplation of death, of a proportionate part of estate and inheritance taxes, the rest being paid by the administrator of the decedent's estate, does not entitle such trustee to a deduction on its fiduciary income tax return, and the taxable beneficiary of the trust is properly taxed on the trust income unreduced by such deduction.

The taxpayer, parent company, filed a consolidated return of income for 1929, which included the income of its subsidiary, Macdonald… Held: since the taxpayer's tax liability here depends on the taxable income of Macdonald Engineering Co. of California for 1929, the deduction of the debt of the Western Milling Co. to Macdonald Engineering Co. of California is allowed in the computation of that income, because (a) Macdonald Engineering Co. of California ascertained the…

An individual who in 1929 sustained gambling losses in Florida, where gambling is prohibited, and had gambling gains in Mexico, may not offset the gains by the losses in computing a net loss.

1. An organization of pilots held to be an association and taxable as a corporation. 2. Held: that the evidence herein fails to establish that an amount paid by an association to the widow of a deceased member thereof was either (a) a reasonable one for additional compensation for services rendered by the deceased husband or (b) an ordinary and necessary business expense of the association.

1. A partnership dealt in indivisible units, consisting of a share of preferred stock, a share of common, and a warrant to purchase an additional share of common. Held: the partnership was a dealer in and entitled to inventory the preferred shares, even though it was unable to sell them after the division. 2.

1. Income of 1931 from a trust of which a husband is a beneficiary, assigned by him in 1918 to his wife in contemplation of divorce, is within the husband's 1931 gross income. 2.

In December 1932 the petitioners each owned 25 shares of corporation A, which constituted all of the issued stock of that corporation. Held: that the petitioners are each entitled to deduct from gross income the excess of the cost of the three shares of corporation A over the amount received in liquidation.

Petitioner, a corporation, exchanged assets for all the stock of a new corporation and, pursuant to a plan of reorganization, exchanged 75 percent of that stock for stock of a third corporation. Held: that these transactions constituted a nontaxable reorganization.

At the time of his death in 1932, the decedent, a citizen of and domiciled in the United States, owned three hipotecas (liberally interpreted to mean mortgages) on land situated in Cuba. Held: that the value of such hipotecas is properly included in decedent's gross estate for Federal estate tax purposes, since they are not real property situated outside the United States. Revenue Act of 1926, sec. 302(a).

Petitioner, a foreign corporation, is not entitled to deduct from income earned within the United States, under sections 234(b) and 217(e) of the Revenue Act of 1926, a ratable part of losses sustained on accounts arising from loans to banks in Holland.

Petitioner, formed in 1926, issued substantially all of its capital stock (except stock dividends later issued) for securities owned by… Held: that the petitioner was formed and availed of for the purpose of preventing the imposition of the surtax upon its shareholders through the medium of permitting its gains or profits to be accumulated instead of being divided or distributed and that for 1931 and 1932 the petitioner is subject to the 50 percent tax provided for by…

1. Petitioner, the owner of certain oil and gas leases, in 1931 sold his entire interest therein for a cash consideration, retaining no interest in the production of oil from the… Held: that the transaction constituted a sale of property upon which petitioner is entitled to compute his profit upon the basis of the cost to thim of the leases sold, but is not entitled to percentage depletion upon the cash consideration under section 114(b)(3) of the Revenue Act of 1928. 2.

1. The determination, for depreciation purposes, of the cost of a building acquired upon foreclosure by the bondholders after a single conventional bid of one-half the amount of the outstanding bonds is not conclusively fixed by the bid price. 2. Where bonds are used in part payment of the purchase price upon foreclosure, the cost of the property is determined by the value of such bonds, plus cash, when paid in for the property. 3.

A corporation exchanged most of its assets for cash and stock of another corporation and pursuant to a plan of complete liquidation distributed assets to its stockholders in… Held: that all stockholders receiving distributions in complete liquidation of their stock are liable as transferees of the corporation, since a stockholder is not entitled to receive in such complete liquidation any assets of a corporation until all of its obligations to creditors are discharged.

- A decedent, by his will, devised his entire estate generally in specific shares to the beneficiaries with direction to the executor to… Held: the several beneficiaries took the properties of which they stood seized and possessed after the execution of the partition deed, as properties received under the will, and with bases for gain or loss upon their subsequent disposition in the amounts at which these several properties were appraised for Federal estate tax purposes.

Decedent, on March 19, 1917, immediately preceding resumption of marital relationship with her estranged husband, with whom she had had… Held: that the transfer made under the agreement of September 12, 1917, was not made in contemplation of death and was not to take effect in possession or enjoyment at or after decedent's death, and that no value on account thereof is to be included in decedent's gross estate, under section 302(c) of the Revenue Act of 1926 as amended by…

1. Petitioner, an attorney, was chosen by a county trustee (collector) of a county in Tennessee to prepare and file suits in the state courts for the collection of delinquent land taxes. He gave no bond, took no oath, handled no tax money, was compensated solely by receiving the 10 percent additional assessed against the delinquent taxpayer, employed his own assistants, and paid them out of his funds.

1. Petitioner, employed by the Board of Transportation of New York City as its chief engineer, was engaged principally in planning and supervising the construction of the subway system of the city. Held that the activities of the board were proprietary, rather than governmental and that the compensation received by the petitioner was not exempt from the Federal income tax. 2. Petitioner was paid for services rendered to a board of the city of Chicago under a contract specifying, in a general way, his duties as a consulting engineer and his compensation. Held that he was an independent contractor and that the compensation received by him was not exempt from the Federal income tax. 3. Deduction for loss on Kreuger & Toll American certificates allowed for taxable year 1932, the securities having become worthless during that year.

1. Income from an oil and gas lease obtained by petitioner from the State of California is not exempt from tax. Bankline Oil Co.,33 B.T.A. 910, followed. 2. Held: that the development and operation of the lease was the enterprise of the oil company and that petitioner may not include in her gross income for the purpose of computing her depletion allowance any portion of the proceeds received by the oil company in accordance with the agreement.

1. Where a corporation, owning shares of stock of another corporation fails to accept the terms of a proposal to sell those shares, but instead distributes them to its stockholders, who in turn accept the proposal to consummate the sale, the profit derived is not taxable to the corporation and, consequently, there is no transferee liability in respect thereto. 2.

1. DOWER RIGHTS - INSTRUMENT PROVIDING FOR TRANSFER, CONSTRUED. - Petitioner's husband died testate November 18, 1930. Held: said agreement did not effect a sale of petitioner's dower consummate for a consideration payable in installments, but created a trust of which petitioner is the income beneficiary; held, further, petitioner's share of the distributable net income is taxable to her as such.

Petitioner was incorporated in 1908 for the purpose of operating a chain of grocery stores. Very little of its profits has over been distributed to its sole stockholder in the form of dividends. During recent years a large part of its surplus profits has been invested in bonds and stocks, which suffered a large decline in market value during the fiscal year ended January 31, 1931. During that fiscal year, and for a number of years prior thereto, the petitioner loaned to its sole stockholder large amounts of money upon which no interest has been paid to the petitioner. Held that for the fiscal year ended January 31, 1931, the corporation is liable to tax under section 104 of the Revenue Act of 1928.

During the fiscal year ended September 30, 1930, petitioner operated a sugar mill in the Philippine Islands, grinding the cane of planters under long term contracts. Held: such sugar constituted income to petitioner at the place and time of receipt to the extent of its fair market value.

The decedent created a trust in which he reserved the right to control and manage the corpus and from which he was to receive the income for life. Held: that the powers reserved were sufficient to bring the value of the corpus within his gross estate as a transfer intended to take effect in possession or enjoyment at or after death.

1. BUSINESS EXPENSE. - Where respondent has determined that certain commissions paid to an agent on sales made to the State Highway Commission of Louisiana were not deductible as ordinary and necessary business expenses and the facts disclose that the agent was employed because of his close relationship and personal influence with the state administration or government, held the commissions paid are not deductible as ordinary and necessary business expenses, because the…

The owner of shares of stock, holding the certificates in a safety deposit box, directed the sale of the shares on December 30, 1930,… Held: that whether the transaction be considered as controlled by the Uniform Sales Act and the Uniform Stock Transfer Act in so far as transfer of title is concerned, or solely under the Federal revenue act without regard to state laws relating to refinements of title, the interest to sell the shares coupled with the broker's sale thereof…

Amounts expended in promoting legislation which would legalize horse racing in a state are not legal deductions from gross income.

1. Amounts paid by a corporation to two of its officers for architectural and other services relating to the construction of a building may be included in the cost of the building to determine gain… Held: upon the evidence, to be no part of the cost of the building sold in 1930. 3.

1. Where the taxpayer failed to obtain the respondent's approval to change its accounting period from a fiscal year to a calendar year for the reason that it did not comply with the provisions of article 361 of Regulations 74, the respondent did not err in refusing permission to make the requested change in its accounting period. 2. Where the taxpayer accrued at the end of the fiscal year (ended July 31, 1931) bonuses to the account of employees pursuant to an agreement to pay them bonuses out of net profits, if any, at the end of the calendar year (December 31, 1931) there was no liability to pay the bonuses nor could the amount be determined at the end of the fiscal year. Held, bonuses accrued at the end of the fiscal year are not deductible.

- Where, for the purpose of making sales of tractors to the Louisiana State Highway Commission, a certain agent was employed by petitioner because of his personal influence with the state administration and the highway commission officials, held that the commissions paid to such agent are not deductible as ordinary and necessary business expenses because the agreement under which they were paid was against public policy.

The decedent, with a view of adjusting property rights with his wife as the result of a divorce action filed against him, assigned a portion of his personal property to a third person, who… Held: that the right given the decedent to the income from the property and the restriction on the right of the decedent to convey his interest in the estate did not sever the joint tenancy.

A specialist is entitled to inventory his specialty regardless of whether a description of the method employed was included in the return.

1. Parties petitioner here include a taxpayer against which no deficiency was determined. Held, the petition is dismissed as to that taxpayer. Held: the petition is dismissed as to that taxpayer. Revenue Act of 1928, sec. 272(a); Rule 6, Rules of Practice of the Board of Tax Appeals; Fred Shingle,34 B.T.A. 875. 2. Oklahoma Co. was affiliated with Oklahoma Corporation, as its parent, throughout 1931.

On January 31, 1931, the petitioners, as trustees, were and had been for more than two years the owners of bonds which matured on February 1, 1931. Held: that the gains resulting from the sale are taxable as capital net gains under section 101 of the Revenue Act of 1928.

A corporation, all of whose stock was owned by the petitioners, caused the organization of corporation B for the concentration of title to… Held: The organization of B, the transfer of assets by A to B and the distribution of B's stock to stockholders of A was not a reorganization within the meaning of section 112(i)(1)(B) of the Revenue Act of 1928, not being within the corporate business of either corporation, nor was the distribution of stock in pursurance of a plan of…

1. ESTATE TAX - NET ESTATE. - Held, in computing value of the net estate respondent erred in disallowing, under section 303(a)(1), Revenue… Held: in computing value of the net estate respondent erred in disallowing, under section 303(a)(1), Revenue Act of 1926, deduction of valid claims against the estate contracted bona fide and for an adequate and full consideration in money or money's worth, in excess of the value of assets of the estate available for the payment of such…

Out of the sale price of real property in New York, a husband caused an amount to be paid directly by the purchaser to the wife, who had theretofore refused to release her dower. Held: the entire sale price inured to the husband and was property used to measure his taxable gain.

1. In a proceeding brought by the executor, in his representative capacity, to contest a deficiency in estate tax, the Board may not consider whether he is personally answerable under Revised Statutes, § 3467. 2. Value of a large block of stock at the date of a decedent's death is not conclusively determined by the mathematical use of the unit price at which small lots were sold on the Stock Exchange, and evidence of other factors affecting value may be considered. 3.

1. Bona fide discharge of an executrix of an estate without prior notice of claim for deficiency does not bar Commissioner's assertion of an income tax deficiency against the estate. Elnora C. Haag,19 B.T.A. 982. 2.

1. Decedent was the owner of several parcels of real estate which he had acquired primarily for the purpose of obtaining rents which… Held: that the loss sustained was a capital loss and, there being no capital gains, it may not be included in the computation of a net loss under section 117 of the Revenue Act of 1928. 2. In 1924 decedent leased, for a term of 99 years, certain unimproved real estate to another who, under the terms of the lease, erected a building thereon.

On December 16, 1929, the petitioner's decedent created an irrevocable trust and transferred to the trustee a large quantity of stocks, bonds, and other securities and provided that the income should… Held: that the principal of the trust did not constitute a part of the gross estate of the decedent.

Where a building is erected on leased premises by lessee under optional provision in the lease and is not subject to removal on termination of the lease, held, the aliquot part of the depreciated… Held: the aliquot part of the depreciated valud of the building, at the expiration of the lease, is taxable income to the lessor for a year prior to that expiration. Regulations 74, article 63, followed.

In 1932 the petitioners were the owners of lands in a reclamation district of California mortgaged to an amount in excess of their then fair market value. Held: that the amount thus added to the reported net income of each did not constitute taxable income of each in 1932.

The assignment to petitioner of certain patents held to be a gift, and the cost of the acquisition of the patents by the donors or their predecessors in title, if any, not being shown, the respondent committed to error in disallowing deductions for depreciation or amortization of the patents.

On April 1, 1918, the petitioners' decedent created an irrevocable trust to which he transferred valuable securities. The income of the trust was to be paid to his daughter for life. Held: that the decedent had no interest in the trust estate of a value to be included in the gross estate.

1. Where two attorneys performed services for clients and received a check in payment therefore payable to the order of both, who could not agree as to the amount to which each was entitled and the check was deposited in a bank to the joint account of both and there was drawn from the joint account during the taxable year such amount as each conceded the other entitled to, the balance to be drawn only upon settlement of the differences between them, each attorney on a cash receipts and disbursements basis is required to include in gross income only the cash withdrawn for his separate use. 2. Since the services for which the cash received by John W. Preston in 1930 were performed prior to July 29, 1927, under a contract entered into on October 8, 1925, the amount received by Present in 1930 did not constitute community property under the laws of California, but separate property of John W. Preston, who is taxable upon the entire amount received.

Where petitioner employed as sales representative a Louisiana State Senator because of his personal influence with the Louisiana State administration, held, that the commissions paid to… Held: that the commissions paid to such agent on sales made to the Louisiana State Highway Commission are not deductible as ordinary and necessary business expenses because the agreement under which they were paid was, as to such commissions, void and unenforceable as against public policy.

An amount received from the state as a lump sum purchase price for part of a tract of land used in a highway may not be treated after the event as a combination of factors such as selling price and compensation for damage to adjoining land, but only as selling price.

1. Where the respondent allowed as deductions under section 23(a) of the Revenue Acts of 1928 and 1932 the amounts of fixed salaries paid to petitioner's officers, held, that his disallowance of… Held: that his disallowance of additional salaries based upon a percentage of net profits was not error, under the facts presneted, upon failure to prove that the distribution of net profits was directly related to services performed so as to be earned. 2.

Petitioner was the legal owner and mortgagor of certain real estate in Michigan, which was sold under foreclosure in 1930 but in respect of which the mortgagor under local law retained for one year… Held: that the deductible loss resulting to petitioner from the mortgage foreclosure was sustained in 1931 when the right to redeem expired, not in 1930.

1. The petitioner drilled oil wells for others for specified amounts payable out of the proceeds derived from the sale of a proportion of the first oil produced and saved from the property. The rights thus acquired to future income are contingent and the fair market value thereof is not accruable as taxable income. 2.

In 1921 petitioner, an attorney at law, entered into a contract to institute and prosecute a suit for the cancellation of an oil and gas lease. Held: petitioner is not entitled to the statutory deduction for depletion, for the reason that the sum of $150,000 did not represent income derived by petitioner from an economic interest in the oil and gas production, under the prior contracts which were canceled by the agreement of October 11, 1930.

The Harris County Houston Ship Channel Navigation District is a political subdivision of the State of Texas and during the taxable year in question was engaged in the performance of usual and… Held: the petitioner, J. Russell Wait, during the taxable year in question was an employee of such political subdivision and was engaged in helping to carry on its usual governmental functions and his salary is not subject to Federal income tax.

1. The net losses of affiliated corporations under the Revenue Acts of 1921, 1924, and 1926 may not be used as a consolidated net loss of the affiliated group to be carried forward as a unit and applied against the consolidated group net income of the succeeding year. 2.

- Prior to August 1925 petitioner Berch owned all the stock of holding company B, which owned 20 percent of the stock of holding company C, which in turn owned all the stock of two operating… Held: that in the above transaction there was no reorganization to which holding company B was a party. In so far as it was concerned the plan was one to sell its interest in the operating companies for cash.

The petitioner in 1930 executed a license to a corporation giving it the exclusive right to manufacture, use and/or sell products embodying certain inventions and improvements he had completed in… Held: the petitioner's right to receive royalties was completely assigned to his wife and the royalties paid thereafter to the wife belonged to her and were not taxable to the petitioner.

A dividend was declared on preferred stock. The dividend check in favor of one stockholder was issued and delivered in the ordinary course of business. Held: under the circumstances, that the dividend was a cash dividend.

Held, that during the year 1931 the petitioner, as counsel for the board of education of the city of Elizabeth, New Jersey, was an employee of such board and that the compensation received by him… Held: that during the year 1931 the petitioner, as counsel for the board of education of the city of Elizabeth, New Jersey, was an employee of such board and that the compensation received by him therefrom is not subject to the Federal income tax.

1. In Texas, the husband's assignment to the wife of his interest in the future community income from the separate property of his wife, does not relieve him from income tax on that assigned income. 2. Under theTexas Community Property Law, husband and wife are each taxable upon one-half of the net community income after the deduction of the allowable expenses incident to its production.

A distribution by a corporation which is made as a step in the process of a complete liquidation must be applied against the aggregate basis of all the shareholder's irrespective of the contemporaneous surrender by the shareholder of some of his shares.

Respondent's determination that the individual petitioners received taxable distributions in liquidation in 1929, under the Revenue Act of 1928, section 115(c), and that the corporate petitioner was the owner and operator of a certain business, and, therefore, the proper taxpayer of the income taxes arising upon the income of that business for the taxable period, for which the pending deficiency was determined against it, is sustained.

1. Eight transactions whereby petitioner granted patent rights to corporations for stock considered and held to be nontaxable exchanges. 2. The granting of patent rights held to be assignments and not licenses; basis for gain determined. 3. Cost of conducting experiments directed to creating patentable inventions held to be capital expenditures and not deductible expenses.

The petitioner and its subsidiary, filing a consolidated income tax return, held entitled to deduction for annual amortization of discount at which bonds were sold by two predecessor corporations which were merged into the subsidiary by statutory mergers under the laws of Connecticut.

In computing depletion of oil wells under the Revenue Act of 1928, the net income from the property, of which 50 percent is the limit of depletion, may not be reduced by the development expense which the taxpayer deducts in computing taxable net income.

Petitioner contracted for drilling oil or gas wells under so-called turn-key contracts. Held: Regulations 77, article 236, does not apply. Payments for completed wells, under such contract, are payments for capital assets and not deductible expenses. No actual segregation, after the event, is possible. Old Farmers Oil Co.,12 B.T.A. 203, followed.

1. DISCOVERY IN EXISTING MINE. - Held, that a vein of lead-silver ore, first located by petitioner in its mine in December 1913, was… Held: that a vein of lead-silver ore, first located by petitioner in its mine in December 1913, was not merely the uninterrupted extension of a continuing commercial vein; that the discovered vein was developed by September 30, 1915, to an extent to show that the discovered minerals were of sufficient quantity that they could be separately…

The worthless obligation of the taxpayer's divorced husband to pay her a fixed amount for maintenance, held, not deductible by her as a bad debt. Held: not deductible by her as a bad debt.

1. Where petitioner had in prior years kept his books and computed his income on the inventory method at market, and the Commissioner recomputed his income on the basis of cost but considered the… Held: the petitioner having failed to show that the Commissioner's determination did not clearly reflect the income or that it resulted in a distortion of income, the action of the Commissioner is approved. 2. Petitioner was engaged in the business of buying and selling securities.

Where income taxes of a decedent, for years prior to that of his death, were then due, together with interest thereon, held, that interest, accrued to his death, is deductible in computing the… Held: that interest, accrued to his death, is deductible in computing the taxable income of decedent's estate for the period preceding his death. Revenue Act of 1934, sec. 43.

- In a prior proceeding certain points or questions were litigated and determined, after full hearing and consideration upon the merits. Held: the former judgment is not res judicata, nor determinative of the issues raised in the present proceedings.

A cemetery association issuing land share certificates and paying to the holders one-half of the amounts realized from the sale of lots is, nevertheless, exempt from tax under sections 231(5) of the Revenue Act of 1926 and 103(5) of the Revenue Acts of 1928 and 1932, since it was owned and operated exclusively for the benefit of its members, the lot owners, was chartered solely for burial purposes as a cemetery corporation, was not permitted by its charter to engage in any business not necessarily incident to that purpose, and no part of its net earnings inured to the benefit of any private shareholder or individual.

A railroad which has consistently used the retirement method of accounting, in accordance with the regulations of the Interstate Commerce Commission, can not for the taxable year 1930 obtain the benefit of a deduction for depreciation in respect of a part of its properties.

Petitioners, husband and wife, residents of the State of Washington, keeping their books and making their income tax returns on the basis of cash receipts and disbursements, in 1932, paid taxes… Held: the Commissioner erred, the tax incidence on real estate in the State of Washington not occurring until levy of the tax in October.

The petitioners sustained losses during the taxable year upon liquidation of a corporation in which they owned all of the preferred stock. They had owned the stock for a period of less than two years. Held: that the deduction of the loss sustained by each of the petitioners is barred by section 23(r)(1) of the Revenue Act of 1932.

A corporation (A) owning 58 percent of the shares of another (B), planned to acquire B's properties and have B liquidate and dissolve. A, after borrowing some of its own shares from a third corporation (C), transferred them, together with some treasury shares and some newly issued shares, to B in exchange for B's properties. B liquidated to its shareholders and A received as its distributive portion the same number of its own shares as it had borrowed from C. B dissolved. A returned the borrowed shares to C. Held, a reorganization, and gain may not be recognized as to A either on the transactions with B or the borrowing and return of shares to C.

Held, the gain derived by petitioner from the sale in 1929 of certain stocks acquired through the exercise of stock rights constituted… Held: the gain derived by petitioner from the sale in 1929 of certain stocks acquired through the exercise of stock rights constituted in part capital gain and in part ordinary income, where the stocks sold were held less than two years but the original stocks in respect of which the rights were issued had been held for more than two years.

Petitioners, together with 10 other corporations, were affiliated. December 1, 1932, the Savoy-Plaza Corporation, a subsidiary affiliate, was adjudicated bankrupt. Held: the action of the respondent in computing the income taxes of each member of the affiliated group on a separate basis for that year is sustained. Revenue Act of 1932, sec. 141(a), (b), (c), and (d); sec. 52(a); Regulations 77, art. 392; Regulations 78, arts. 12 and 18.

Under a partnership agreement providing for the determination of a deceased partner's interest by payment to his widow or estate, for a period of three years, of certain specified percentages of the… Held: on the record that the amounts so received were income.

1. The respondent disallowed a deduction for loss arising out of investment in stock on the ground that the alleged loss in the taxable year was not substantiated. Held: the evidence is insufficient to show that the loss was sustained in the taxable year and the disallowance of the claimed deduction is sustained. 2. Petitioner during the taxable year gave checks to an attorney employed by him which were never cashed and which were returned to petitioner.

1. INVENTORIES OF STOCK. - Although the statute gave the Commissioner a great deal of authority and discretion in regard to the use of inventories, the Commissioner, having promulgated a regulation of general application, can not deny its effect to one taxpayer which comes within its provisions. 2.

Decedent, who was a citizen and resident of Cuba, died in January 1934, the owner of certain bonds issued by public and private corporations of the United States, which bonds were all physically… Held: said bonds are not includable in the gross estate of decedent, subject to estate tax, under the provisions of section 303(b), Revenue Act of 1926.

1. Fair market value of certain properties, and deductions claimed as allowable for bad debts and stock losses, determined. 2. Held: that, as to the par value of the stock, the exchange of stock for bonds was a nontaxable exchange and the basis of the bonds to that extent was the basis of the stock exchanged; held, further, that the cost of the bonds, so far as issued for declared dividends, was the fair market value of the bonds at the time of the dividend…

1. Where salary of $8,400 paid during 1930 by a corporation to taxpayer as president thereof was reduced by agreement to $4,200 and $4,200 was returned by taxpayer to such corporation, all before the close of 1930, the $4,200 returned by the taxpayer was not income taxable to him in 1930. 2.

GIFT TAX. - Petitioners' decedent was a residuary legatee under the wills of her sister and brother who died on December 19, 1918, and… Held: the time at which petitioners' decedent received the stocks from the two prior decedents by bequest within the meaning of the words received by the donor * * * from a decedent by gift, bequest, devise, or inheritance as used in section 321(a)(4) of the Revenue Act of 1924, was the respective dates on which the two prior decedents…

A family owned or wholly controlled two corporations. The first in 1931 and 1932 sold stocks and bonds to the second at market price, which was below cost, and claimed deductions accordingly. Held: under the facts in this case, that said section 45 does not authorize the disallowance of deductions and that the deduction of losses by the taxpayer should be and is sustained.

1. The allegations of fraud contained in the Commissioner's answer are deemed to be admitted by reason of the failure of the petitioner to file a reply within the time prescribed by the rules of practice. 2. Assuming that the petitioner denied all the facts relating to fraud alleged by the Commissioner, the penalties are sustained on the ground that the evidence affirmatively establishes that a part of each deficiency is due to fraud with intent to evade tax. 3.

1. After his marriage petitioner purchased shares of stock in corporation A with borrowed money. Held: that the shares purchased with the proceeds of the loans were his individual property and not community property. 2. Corporation A, a party to a reorganization, exchanged its assets for all of the stock of corporation B, also a party to the reorganization.

1. Basis of stock received pursuant to a statutory reorganization held determinable by the average method rather than under the first in, first out rule. Christian W. Von Gunten,28 B.T.A. 702, followed. 2.

1. Corporation A, a domestic holding corporation, and others, owned stock in two California public utility corporations. Held: Corporation B was a mere agency or instrumentality of corporation A, created by the latter to make it appear that the sale had been made in Canada by a foreign corporation, and its separate corporate identity should be disregarded. (b) The real owner and vendor of the public utility stocks was corporation A. 2.

The petitioner, Joseph B. Strauss, was employed in 1933 and 1934 as engineer for the Golden Gate Bridge and Highway District of California under an employment contract, receiving as compensation for his services a fee based on the cost of construction of the Golden Gate Bridge. Held, that the petitioner was an independent contractor and that such compensation is not immune from Federal income tax.

Petitioner, an attorney, was appointed associate counsel by the Joint Legislative Committee of the State of New York, which was conducting an investigation of the governmental structure of the city… Held: petitioner was an employee of the State of New York and the salary received from the state was immune from Federal income tax.

Where the right to receive rentals under a lease was in question and litigation was pending until 1931, both lessor and lessee claiming breach of the lease by the other, held, rental accrued on the… Held: rental accrued on the books of the taxpayer-lessor for part of 1930 was not properly accruable as income and did not constitute taxable income for 1930.

Petitioner was retained by 10 municipalities of New Jersey to give legal advice to and take care of legal matters referred to him by the governing councils. His compensation in each instance was a nominal annual retainer and fees for services rendered. Although his appointment was in each case authorized by statutes which in every case except two provided for an office of township or borough attorney, neither the statutes nor local ordinances prescribed his duties or fixed his compensation. The services were rendered in fact under an oral agreement to advise the municipal councils and prepare matters referred to him and the services were intermittent rather than continuous. Petitioner maintained a law office and carried on concurrently a general law practice which took a major part of his time. Held, petitioner was an independent contractor rather than an officer or employee of each municipality and income received by him from the municipalities is not exempt from Federal income tax.

In the years from 1925 to 1931, inclusive, petitioner withdrew funds from a corporation of which he was the sole stockholder. Held: the amount constituted a dividend taxable to the petitioner in 1932.

Where the income of a continuing trust arises from taxable income and tax-exempt interest, the compensation of its trustees is deductible, wholly, from the taxable income, irrespective of the fact that the services of the trustees, for which that compensation was paid, were rendered in the collection of both taxable income and tax-exempt interest. Grace M. Knox et al., Executors,3 B.T.A. 143, followed.

1. Where corporation M had acquired by purchase a mixed aggregate of assets among which was certain preferred stock in another corporation and such preferred stock was shortly thereafter redeemed at… Held: the taxpayer is taxable on the profit which resulted from such redemption. Held, further, the Commissioner's allocation of cost to the preferred stock in question is approved for lack of evidence to overcome its correctness. 2. Corporation M was organized December 2, 1924.

The petitioner and one of his law partners were appointed jointly by municipal ordinance as city solicitor of the city of Linden, New Jersey, purportedly under the authority of a statute authorizing… Held: the petitioner was not an officer or employee of the city of Linden but the relationship was rather that of attorney and client, and it is not established that any burden on the state would result from Federal taxation of the petitioner's compensation.

1. Petitioner is not entitled under section 233 of the Revenue Act of 1928 to deductions allowed under section 23(p) of the act where it fails to include in its return the information deemed necessary by the Commissioner for the calculation of such deductions. 2.

1. DEPRECIATION. - Value of patent at March 1, 1913, determined from the evidence. 2. INVENTORIES. - Overhead costs, including labor, freight, and manufacturing expenses, from date of taking inventories to end of year, are essential elements of inventory determination. 3.

1. For a number of years prior to 1930 the petitioner was employed as manager of a branch store of J. C. Penney Co. at Modesto, California, under contracts which enabled him to purchase shares of… Held: that on the sale of some of the shares by the petitioner in 1930 and 1931 the basis for the purpose of computing gain or loss is the amount of cash which the petitioner paid in acquiring them. 2.

1. Anderson-Clayton Industries, Inc., an affiliate of petitioner, owned 100 percent of the preferred stock and 64 percent of the shares of common stock of each of six other companies. Held: the six companies were affiliated, within the meaning of section 141(d) of the Revenue Act of 1928; as Anderson-Clayton Industries, Inc., owned more than 95 percent of each of them. 2.

Taxpayer, a member of a partnership engaged in the stock brokerage business, operated three securities trading accounts as an individual and also operated four… Held: Section 23(r) of the Revenue Act of 1932, limiting the amount of losses on the sale of noncapital assets to the gains from the sale of such assets, is constitutional. (2) Taxpayer's gains from the partnership and from the joint accounts can not be offset against the losses sustained on his individual accounts.

Shares of stock sold not being identified, the respondent is sustained in applying the first in, first out rule.

1. Where, under the terms of a trust, the decedent was to receive the excess income above a specified amount and had a reversionary… Held: that the fair value of such property rights at the date of decedent's death should be included in the gross estate and the determination of such value according to the life expectancies of the income beneficiaries as ascertained by the generally recognized mortality tables should, under the facts in this case be computed at a rate of…

Petitioner and his wife each purchased two tickets in the Irish Hospitals' Sweepstakes and contemporaneously agreed, that if any ticket… Held: that although the agreement was void and unenforceable, nevertheless, since it was specifically complied with, petitioner is taxable only upon the portion which he retained, the portion received by the wife having been reported as gross income by her, and she having paid the tax thereon as required by United States v. Sullivan,274…

Petitioner purchased a sweepstakes ticket, causing it to be issued in the name of his wife. Held: the respondent erred in including the entire amount received in petitioner's gross income; further held, inasmuch as there is no deficiency, the 50 percent fraud can not be imposed.

TRUST INCOME. - Where certain trust income earned during the taxable calendar years 1929 and 1930 was distributable to petitioner on January 4 of the following year, if petitioner were then alive,… Held: such amount at December 31 of each year was income accumulated in trust for the benefit of unascertained persons or persons with contingent interests and is not taxable to petitioner under section 162(b), Revenue Act of 1928. Augustus H. Eustis,30 B.T.A. 820, followed.

Decedent, by his will, gave petitioner an annuity of $24,000 per year and made it a specific charge against certain real estate devised to others. Held: such annuity represented a bequest to petitioner, and the amounts received by her were, therefore, not taxable income. Revenue Act of 1928, sec. 22(b)(3).

Where a Delaware corporation, organized November 24, 1928, to effect a combination of the businesses of two Michigan corporations, acquired… Held: upon all the evidence, that the acquisition of the stock of the Michigan corporations by the Delaware corporation and the dissolution of the Michigan corporations and the transfer of their assets to the Delaware corporation constituted parts of an entire plan and not separate transactions; that the period January 1 to January 23,…

Held, following Eckert v. Commissioner,283 U.S. 140, that the assumption of a corporation's liability by a stockholder on a cash basis does not result in loss to the stockholder in the year he gives… Held: following Eckert v. Commissioner,283 U.S. 140, that the assumption of a corporation's liability by a stockholder on a cash basis does not result in loss to the stockholder in the year he gives his note which remains unpaid at the end of the year.

1. A gain to a corporation on the exchange of stock for stock, although not recognized under the provisions of section 112(b)(5) of the Revenue Act of 1928, increases earnings or profits available for dividends. Susan T. Freshman,33 B.T.A. 394, followed. 2. Book entries transferring surplus to no par common stock account in order to increase the stated value of such stock do not diminish the corporate earnings or profits available for dividends.

An antenuptial agreement provided that in the event the wife survived her husband she would receive $50,000 in lieu of dower or other rights provided by statute. Held: the death of the husband was a condition precedent to the right of the surviving spouse to receive the money and whether received under the will or by virtue of the contract the sum paid by the executors should be included in the gross estate of the decedent.

Interest on bonds issued by a city for sewer improvement and payable solely from the city treasurer's collections on installments of assessments against the benefited property, held, interest on the… Held: interest on the obligations of a political subdivision of a state and exempt from tax under section 22(b)(4), Revenue Act of 1928.

Petitioner, a national bank, paid $10,000 under an agreement whereby additional capital was raised and paid over to an out of town bank in consideration for the latter… Held: That petitioner's contract was a valid exercise of its incidental powers as a national bank. (2) That, since the expenditure was made to protect petitioner's business, its depositors, and its stockholders, it is an ordinary and necessary expense within the meaning of section 23(a), Revenue Act of 1928.

Charles Knoernschild died in 1927, leaving six children surviving. By his will he bequeathed his residuary estate to his six children in equal shares. Held: that no part of the bequest is deductible from the gross estate.

Where a corporate taxpayer by mistake used too large a cost base in computing the amount of gain upon the sale of a portion of its holdings of shares of stock in a corporation and thereby understated its real gain, it is not thereby estopped to use the actual cost in determining the gain upon the sale of the balance of its holding of stock in the corporation in a subsequent year. Lewis K. Walker,35 B.T.A. 640, distinguished.

Held, that amounts received by taxpayer for established fund for the permanent maintenance and upkeep of cemetery lots were received in trust and are not taxable as income. Held: that amounts received by taxpayer for established fund for the permanent maintenance and upkeep of cemetery lots were received in trust and are not taxable as income.

Loss deduction in the taxable year 1932 as to certain stock is denied, the evidence not overcoming the presumption of the correctness of the Commissioner's determination that the stock did not become wothless in that year.

1. A township attorney appointed to a statutory office pursuant to statute, held an officer of the township. 2. Held: all compensation exempt from taxation since it was received for performance of ordinary duties of a township attorney.

Preferred stock of a corporation was entitled at all times to full voting power, except that it could not be voted at any election for directors unless the dividends on the preferred stock remained… Held: such preferred stock was not nonvoting stock which is limited and preferred as to dividends, but was voting stock, preferred, but not limited as to dividends; and affiliation was, therefore, properly denied.

Checks given by a husband to his wife under circumstances showing that the husband did not give up complete control over the money, held not valid gifts to the wife.

1. An estate was insolvent, except for certain stock in a close, family-owned active mercantile corporation, which was through the Surrogate's Court sold for $3,500, leaving the… Held: that the price paid at such sale does not determine value, and that the respondent's valuation of $100 per share as value for the stock has not been overcome. 2. Two transferees held proceeds of life insurance policies, admittedly taxable in the estate; only one was assessed as transferee.

A stipulation of operating losses for the period following March 1, 1913, in the computation of which March 1, 1913, value (in excess of cost) was used, does not show that the capital or paid-in surplus of the company was ever impaired, consequently subsequent earnings did not have to be used to restore capital or paid-in surplus.

The petitioner, as executrix of an estate, in course of administration, paid estate and inheritance taxes in excess of the total amount of taxable items of gross income of the estate. Held: the estate had no taxable income and the petitioner was not liable for tax upon such distributions.

Over a period of several years, in pursuance of its policy of broadening its stockholding base, protecting its stock and business and to support the market, petitioner corporation bought shares of… Held: Petitioner's transactions were taxable transactions from which gain or loss resulted. Simmons & Hammond Manufacturing Co.,1 B.T.A. 803, overruled.

Two corporations contracting with operating companies to perform for them management and construction services in consideration of fees in large amounts, subcontracted the performance of the… Held: that such contracting corporations were not mere bookkeeping entities, corporations without substance, or agents, or conduits for the holding companies, and that the amounts received by them for such services constituted taxable income to them.

1. The income tax returns filed by the decedent for 1922 and 1923 were fraudulent and made with intent to evade taxes because of his omission therefrom of distributions of earnings of the Continental Trading Co., Ltd. The deficiencies, resulting, in part, from the action of the Commissioner in including the earnings in gross income of the decedent for the respective years, are approved.

1. In 1929 the petitioner, trustee of the estate of Otto Ernst Isenberg, received $287,323.40 from the former trustee of the estate in payment of a judgment against said trustee for breach of trust… Held: that the amount of the judgment is income to the trust, which, except the surcharge, was not distributable to the beneficiaries as it constituted corpus and is therefore taxable to the trust. 2.

A Texas joint stock association transferred all of its assets to two corporations for their entire capital stock, which was issued to such association and by it distributed, in dissolution, to the owners of beneficial interest certificates therein.

The Commissioner determined a deficiency against a deceased person and gave notice of his determination to another person who held no fiduciary relationship to the estate of the deceased person. Held: the Board is without jurisdiction.

A certain syndicate held not to have been an association taxable as a corporation.

Petitioner entered into an agreement with a trust company for the establishment of a $100,000 trust fund to be accumulated from the sale of crypts in so-called building No. 1, the income therefrom to… Held: that the percentage of the amount of sales for the taxable year agreed upon by the parties should be excluded from gross income, following Community Mausoleum Co.,33 B.T.A. 19.

1. Petitioner, a widow, during the taxable years, lived in an apartment maintained by her sister. Held: that she is not entitled to a personal exemption of $3,500 as head of a family. 2. Petitioner acquired 1,200 shares of stock from her husband by gift, but he remained the record owner. She authorized a bank to continue to hold the stock as collateral security for loans made by her husband.

Stock received subject to a restriction against sale for a certain period had no fair market value capable of being ascertained with reasonable certainty at date of receipt.

1. Gain from an exchange of real estate for preferred stock held taxable in the amount of the difference between the basis determined for the real estate to the petitioner and the amount determined… Held: sales for par value are evidence that fair market value was the par value. 2.

Decedent during his lifetime conveyed his remainder interest in his father's estate to a trust, reserving income for life and retaining power to… Held: the reserved power of appointment was a power to revoke the remainder interests of the four named beneficiaries or to change their shares and the value of the remainder interest of decedent, at his death, must, therefore, be included in his gross estate under the provisions of section 302(d) of the Revenue Act of 1926.

Where subdividers transferred property to petitioner in aid of construction in consideration of petitioner's promise to furnish an adequate supply of… Held: the assumption of the agreement to supply water constituted a return of the cost to petitioner for the property so acquired, and petitioner's base on subsequent sale of the stock and bonds received in exchange for his assets was the cost of the assets exclusive of the value of the property received from the subdividers.

A business corporation empowered by its certificate of incorporation to carry on various commercial businesses besides to hold title to property and collect income therefrom, which is not required by its certificate of incorporation to turn over its entire net income to an organization itself exempt from taxation, is held not exempt from taxation under section 103(6) or 103(14) of the Revenue Act of 1928 even though all of its stock is owned by trustees of a fund for the…

1. Where petitioner, a nonresident alien, failed to file individual income tax returns as required by law, the filing of withholding tax returns by his withholding agents and the filing of partnership returns by the said agents in their own behalf, did not start the running of the period of limitations. 2. An additional tax was properly assessed against the taxpayer because of his failure to file required income tax returns. 3.

1. Irrevocable assignment of a cause of action for breach of contract and of right to any money collected under judgment in the action, which was due and payable under contract… Held: money collected in a judgment on the action by the assignee is not taxable to the assignor. 2. Held, certain expenditures for dues and expenses in social, civic, and political clubs are not deductible as business expenses under section 23(a) of the Revenue Act of 1928 for lack of proof. 3.

CAPITAL GAIN. - Gain realized on the redemption in 1933 of preferred stock which had been held by the petitioner for more than two years, held to be capital gain. William C. Rands,34 B.T.A. 1107, overruled in so far as it treats as ordinary income the gain on redemption of stock constituting a capital asset.

The petitioner is not entitled to a deduction for a loss under section 23(e) of the Revenue Act of 1932. Property was used as a residence from the time of acquisition until sale and the facts fail to show that the purchase and sale thereof was primarily a transaction entered into for profit.

Under a joint income tax return of husband and wife, the wife is not individually liable for any part of the deficiency where no part of her income contributed to the deficiency.

Where a husband created a trust in 1928, the income of which was payable to his wife during her life, the income therefrom in 1932 is not taxable to the husband although his wife had instituted divorce proceedings prior to the creation of the trust and absolute divorce was granted to her subsequent to the creation of the trust, since no obligation on the part of the husband existed under the laws of Pennsylvania to support his former wife after an absolute divorce.

1. (a), (b), and (c). - The petitioner in 1927 sold shares of stock of a subsidiary corporation at an amount less than the cost of such shares but greater than the cost reduced by the prior years'… Held: that the transaction resulted in neither a deductible loss nor a taxable gain to the petitioner.

1. Prior to 1918 the decedent, who died in 1931, had taken out three insurance policies on his life, irrevocably naming his wife, May Billings, as beneficiary. Held: that the proceeds of the policies were not a part of the decedent's gross estate. 2. The decedent took out an insurance policy on his life in 1921, naming his estate as beneficiary and reserving the right to change the beneficiary.

1. Where husband and wife entered into a partnership agreement to carry on a business theretofore owned and carried on by the husband, the contribution of the wife being made by a charge to the… Held: the husband made an irrevocable gift of an interest in the business to his wife and a partnership relationship existed thereafter, since she became a co-owner in such business as required by the laws of Pennsylvania.

Petitioner created two trusts, reserving in each the right to remove and substitute another trustee and reserving in each case power to control the trustee as to investment of the corpus. Held: That, under section 166 of the Revenue Act of 1934, the income of each trust for that year is taxable to petitioner since he possessed, in that year, the right, at some future time, to repossess the corpus of each trust.

1. A syndicate, formed to acquire, develop, improve, manage and sell real estate, was by agreement of the subscribing members operated and controlled by petitioner and another as… Held: that the syndicate is an association to be treated as a corporation for all purposes of the revenue Act. 2. The income of a syndicate, qualifying as a statutory association, is not taxable to its members until distribution has been made or accrued similar to the declaration of a dividend. 3.

Petitioner paid income taxes for 1932 on March 15, 1933, and an additional payment on September 5, 1934. Thereafter, respondent determined a deficiency for that year. Held: that the portion of the overpayment which petitioner paid on September 5, 1934, was paid within two years before the filing of the petition as that term is used in section 504(a) of the Revenue Act of 1934.