Volume 4 — Tax Court Memorandum

Petitioner's decedent set up a trust in 1913 and died in 1940. His son and son-in-law were made trustees. Held: that the value of the trust corpus was not includible in decedent's estate, under section 811 (c) or (d) of the Internal Revenue Code.

The proof failing to establish ownership of certain property in the alleged transferor at the date of the transfer and the proof not establishing that such transfer rendered the transferor insolvent,… Held: petitioner is not liable as transferee of such property.

Value as of June 23, 1941 of shares in a voting trust, each share representing a corresponding share in a certain corporation, determined for gift tax purposes.

In the taxable year petitioner was in partnership with his wife in the conduct of an insurance brokerage business in New York City. Held: following Earp v. Jones, 131 Fed. (2d) 292 and Mead v. Commissioner, 131 Fed. (2d) 323, the entire net income of the partnership is taxable to petitioner. Humphreys v. Commissioner, 88 Fed. (2d) 430 distinguished.

At the beginning of the taxable year petitioner had outstanding certain class A common stock and certain preferred stock. Under its charter it was also authorized to issue class B common stock. Held: the class A debentures represented indebtedness and payments thereon were deductible as interest. Held, further, the class B debentures established a proprietary rather than a debtor-creditor relationship and payments thereon were not deductible as interest.

Petitioner for many years has been the owner of large acreages of coal lands in the State of West Virginia. Held: the losses thus sustained by petitioner were not operating losses within the meaning of the applicable statute and the Commissioner is sustained under authority of Dalton v. Bowers, 287 U.S. 404.

1. Petitioner engaged in the contracting business, using heavy machinery and equipment in his business. Held: the machinery and equipment constituted property held for productive use in the petitioner's business and under Section 112 (b) (1), I.R.C., no gain or loss is recognized; thus the basis for depreciation of the new equipment must be adjusted accordingly. 2.

Petitioner issued securities, called debenture stock, in which it acknowledged itself indebted to the holder for the repayment of the principal at a definite due date, with interest at 8 per cent,… Held: the debenture stock certificates are evidence of indebtedness and accrued interest thereon is deductible from gross income.

Petitioner, an awning manufacturer, received reimbursement from his vendors of material used in the manufacture of awnings in amounts covering the processing tax on such material which had been added… Held: the petitioner bore the burden of such taxes, did not shift such burden to his vendees, and is consequently not subject to the unjust enrichment tax imposed by section 501 (a) (2) of the Revenue Act of 1936.

Petitioner owns and operates radio station KSFO. Certain amounts were paid by it to obtain the release of radio time retained by the former owner of the station and to procure for it additional time for Sunday broadcasts, pursuant to a contract to that effect. Held, that the amounts so paid are ordinary and necessary expenses of carrying on petitioner's business.

Grantor created trusts for benefit of his children expressly reserving the right to modify or alter, from time to time, the trust agreements, including the power to change the beneficiaries of the… Held: the grantor is the owner of the trust property for purposes of section 22(a) of the Internal Revenue Code.

Held, that certain expenses incurred and paid by petitioner while away from home in pursuit of his trade or business are deductible… Held: that certain expenses incurred and paid by petitioner while away from home in pursuit of his trade or business are deductible business expenses under section 23 (a) (1) of the Internal Revenue Code; held, further, that expenditures for entertainment while petitioner was at the location of his home and principal place of business were…

Under a plan of recapitalization, each share of outstanding preferred stock was exchanged for 1 1/3 shares of new preferred stock of the same corporation and holders of the new preferred stock… Held: the common stock was issued as part of the plan of recapitalization and in a tax-free exchange, and was not a taxable dividend entitling the corporation to a dividends paid credit.

The petitioner rented five trucks at $75 each per month, from the owners of 49 out of 50 of its outstanding shares of stock, and also rented from them the real estate on which it was located at $100… Held: the truck rental was reasonable in amount and deductible in full from gross income. Held, further, that the real estate rental was not shown to be reasonable in an amount in excess of the deduction allowed by respondent.

Held, respondent's determination of reasonableness of salaries approved. Held: respondent's determination of reasonableness of salaries approved.

Fair market value at the date of the death of the decedent of a claim for refund of an overpayment of Federal income taxes on which suit was pending in the district court at that date, held to be $4,000.

Petitioner, on an accrual basis, credited to its president the full amount of his salary for the years 1941 and 1942 but paid in cash only parts thereof. Held: the conditions of disallowance imposed by section 24 (c), Internal Revenue Code, have not been met and the deductions of unpaid salary are allowed. P. G. Lake, Inc., 4 T.C. 1, distinguished.

1. The Commissioner determined deficiencies in petitioner's income tax and declared value excess profits tax for each of the years 1939 and 1940. Held: the determination of the Commissioner is presumed to be correct and must be sustained for the lack of any evidence to show that it is error. 2. Petitioner at the time provided by law filed capital stock tax returns, Form 707, for the years involved herein, disclosing the value of the capital stock to be none.

Petitioner, on an accrual basis, credited to its president the full amount of his salary and commissions for the period from January 1, 1940 to October 31, 1940, but paid in cash only a part thereof. Held: the deductions of unpaid salary and commissions are allowed since the conditions imposed by section 24 (c), Internal Revenue Code, have not been met.

Petitioner, on an accrual basis, credited to its president the full amount of his salary for the taxable year and paid in cash only part thereof. Held: the amounts credited were constructively paid and were includible in the gross income of the company's president. Held, further, conditions of section 24 (c), Internal Revenue Code, are not satisfied and deductions in the full amounts credited are allowed.

Petitioners owned all of the stock of Mountain States Rubber Company, which in turn owned all of the stock of Industrial Supply Company. Held: the transaction was a reorganization of the companies concerned and no gain or loss is to be recognized thereon. Section 112 (b) (3), 112 (g), 112 (h), Internal Revenue Code.

Petitioner, at a time when it was experiencing serious operating losses, entered into an oral contract of employment with one Kitfield whereby it was agreed that if Kitfield would become petitioner's… Held: under the facts and circumstances, a salary of $46,000 in a later profitable year was not excessive and was reasonable compensation for services rendered.

In 1936, petitioners, husband and wife, transferred community property to the husband as trustee for their four minor children. The trusts were irrevocable and for long terms. Held: no part of the income of the four trusts is taxable to the grantors under sections 22 (a), 166 or 167 of the Revenue Act of 1938 and of the Internal Revenue Code. J. M. Leonard, et al., 4 T.C. 1271, (promulgated April 30, 1945) followed.

A corporation engaged in the automobile business, from which it realized substantial profits, was liquidated and dissolved on July 31, 1941. Held: the respondent erred in determining that the corporation had distributed to its stockholders valuable intangibles and good will, the receipt of which had not been accounted for in their returns.

Relinquishment of marital rights by wife in property of her husband does not constitute adequate and full consideration within the meaning of the gift tax provisions. Merrill v. Fahs, 324 U.S. 308 (March 5, 1945); Commissioner v. Wemyss, 324 U.S. 303 (March 5, 1945).

In years prior to 1941 and 1942 petitioner imported merchandise into the United States and paid customs duties thereon in the years of importation on the basis of values approved by the… Held: that customs duties are taxes regardless of how they are treated in accounting practice and that as such they are accruable in the years of the importations of the merchandise to which they pertain unless all events had not transpired within such years to fix liability therefor.

1. A good many years prior to his death decedent took out certain insurance policies in which his wife was irrevocably designated as the… Held: the proceeds of the policies less the statutory exemption of $40,000, are includible in decedent's gross estate under section 811(g) of the Internal Revenue Code. Broderick v. Keefe, 112 Fed. (2d) 293, followed. 2. In 1924 decedent created a trust for the equal benefit of his five children, naming himself and another as trustees.

1. In 1937 the decedent, at the age of 78 and within ten months prior to her death, transferred 600 shares of stock representing approximately ealf of her estate, to her three children and two granddaughters. She had been in ill health for the preceding ten years. Held, that the statutory presumption that the transfers were made in contemplation of death has not been overcome. 2. Respondent's valuation of the gross estate of decedent sustained. 3. Deductions from gross estate of attorney fees incurred in the present proceeding not allowed.

1. In 1932 petitioner purchased, either alone or jointly with another person, five trac-trucks at a total cost of $32,500. Held: the cost of the machines for computing gain or loss thereafter on their disposal or for depreciation when used in petitioner's business was $11,029.92 as the Commissioner has determined. 2.

Where a Massachusetts Trust for tax purposes is an association taxable as a corporation, held, the criteria to be employed in determining… Held: the criteria to be employed in determining the value of the Trust shares are those provided for in the official Regulations for determining the value of shares of stock in a corporation; held, further, the separate identity of the Trust will not be disregarded, and the gift of shares of stock in the Trust will not be treated as the…

Petitioner acquired on different dates as a unit an equal number of shares of a bank and a securities corporation. Held: evidence does not furnish a factual basis upon which to make an apportionment. Barber Securities Corp., 45 B.T.A. 521, followed.

The will of George H. Wadleigh bequeathed a legacy to the Ruskin Art Club of Los Angeles. The Club was a non-profit corporation under the laws of California with approximately 50 members. It was not operated for profit, no part of its earnings inured to the benefit of any individual and it was not used to influence legislation. The club owned a bungalow in a residential section of Los Angeles which was used as a club house. The club held weekly meetings for members and their guests to hear lectures on artistic and literary topics. These lectures were usually prepared by club members but occasionally guest speakers addressed these meetings. The subjects were highly intellectual and notices of the meetings were published in the Los Angeles papers. Because of the location of the club the members prepared a luncheon at the weekly meeting which was served at cost. The luncheon was furnished only for the convenience of the members and was not a part of the program. In the past 20 years 3 attempted bridge parties failed for lack of interest. There were no other social functions. The receipts of the club were derived mainly from rental of its club rooms, dues and gifts. No art contests have been held nor art scholarships have been available because of the lack of funds. Until it received the Wadleigh bequest the club was in debt for the purchase of the club house. An archaeology library named for the husband of a member was founded and maintained by the club. Held, on the evidence, that the social features of the club were incidental to the main purpose of providing a forum for the discussion of educational and literary topics and that the club is organized and operated for literary and educational purposes within the meaning of section 812 (d), Internal Revenue Code. George E. Turnure, 9 B.T.A. 871.

Deductions from gross income: Traveling expenses of racing secretary and handicapper. - Where taxpayer's business necessitated his being away from his residence in Miami, Florida, for approximately 5 months of every year but he at no time gave up his home there, it is held that his home was in Miami and expenses incurred while conducting his business outside of Florida were properly deductible. On the evidence it is further held that the amounts expended were reasonable.

The New York World's Fair of 1939 was financed by the sale of interest bearing debentures which were payable out of gate receipts. Held: inasmuch as the debentures were not acquired for the purpose of resale but only as a condition precedent to obtaining its concessions the debentures were not excluded from the definition of capital assets contained in section 117 of the Internal Revenue Code.

1. Taxpayer corporation was not availed of during 1940 for the purpose of preventing the imposition of surtax upon its sole stockholder and therefore is not liable for surtax under section 102,… Held: taxpayers entitled to deductions for expenses of her trip paid by them. 5. Deductions of amounts paid to wife of petitioners' president as reimbursement of entertainment expenses disallowed for lack of proof that they constituted ordinary and necessary business expenses.

1. Petitioner in 1938 purchased certain real estate under foreclosure proceedings instituted by it under a first mortgage. Held: that the amount so held was not taxable to petitioner because it was being held in a fiduciary capacity. 2. In 1934 petitioner charged off certain spcdific bad debts and took same as a deduction in determining its net income and after taking such deduction its income tax return showed a loss of $652.59 for that year.

Taxpayer corporation, on December 27, 1940, declared a dividend payable in stock of another corporation. Held: the excess of the value of the stock on the date of distribution over its cost did not constitute taxable income to taxpayer. General Utilities & Operating Co. v. Helvering, 296 U.S. 200, followed.

In 1929, petitioner, a consulting engineer, became a member of a syndicate to buy some Seaboard Airline Railway Company stock. Held: petitioner's debt was at all times in Canadian dollars which was the exact amount repaid. He performed his agreement and since foreign money is property he merely repaid property with property which could not result in taxable gain.

On December 27, 1940, the X corporation, of which the petitioners were stockholders, declared a dividend payable in stock of another corporation. Held: the increase in the value of the stock did not constitute earnings and profits of X corporation and hence were not taxable to petitioners as dividends. Commissioner v. Estate of Timken, et al., 141 Fed. (2d) 625, followed.

1. Petitioner was a member of a partnership which secured a lease for the purpose of mining gold from certain land in California. The lessors reserved reversionary and other rights of ownership. Held: royalties paid pursuant to the lease agreement were includible in lessors' gross income and excludible from the partnership's gross income. 2. Pursuant to contracts, the partnership paid to an individual for his services in securing the lease, 2 1/2 per cent of its net profits.

Petitioner entered into two lease agreements for placer mining on the Yuba River, California. In both, the lessors reserved reversionary and other rights of ownership. Royalties paid to lessors were based on a percentage of net profits in one lease and on a percentage of mint or smelter returns in the other. Held, royalties so paid were includible in the lessors' gross income and hence, excludable from petitioner's gross income.

Petitioner failed to sustain his burden of proof that the common stock of Continental Shares, Inc. became worthless in the taxable year 1941.

Taxpayers were stockholders in a corporation which had originally been engaged in the wholesaling and jobbing of groceries and dry goods. Held: the cancellation and redemption of stock on November 30, 1939, was not made at such a time and in such a manner as to be essentially equivalent to a taxable dividend within the meaning of section 115(g), I.R.C.

In 1938 petitioner acquired through merger certain policies of insurance on the life of its president. Held: that no portion of the net abnormal income of petitioner is attributable to years other than the taxable year under section 721 (b), I.R.C.Premier Products Co., 2 T.C. 445, followed.

1. The petitioner, a domestic corporation, was controlled by the same shareholder who controlled a foreign corporation. Held: That the contract under which the allowances were paid and received by the taxpayer was executed by its agent, and that the allowances paid thereunder were received by the taxpayer as part of its gross income. 2.

Deductions: Expenses: Reasonable salary. - Taking into account not only services rendered by taxpayer's secretary during the taxable year, but also services rendered in prior years for which she may not have been adequately compensated, the Tax Court holds that $8,000 is allowable as reasonable compensation paid taxpayer's secretary in lieu of $15,251.38 claimed by taxpayer.

The petitioner gave his collateral note for $50,000 dated December 1, 1928 and thereafter, in 1930, made a payment on the note reducing the principal balance to $34,766.31. Held: Petitioner properly reported the receipt of taxable income from the settlement of his note in 1942.

1. Petitioner, an individual, was the majority stockholder in Edward R. Bacon Company, a corporation. Held: the transfer of the corporation's assets to the petitioner constituted a distribution in liquidation, the petitioner receiving long-term and short-term capital gain thereon; (b) amount of petitioner's gain determined. 2.

Where the petitioners and others, as tenants in common of undivided interests in oil and gas leases, arranged for the development and management of their property through agreements with agents whose… Held: that no association taxable as a corporation was thereby constituted, and respondent erred in his determination of deficiencies in so far as they resulted from adjustments of the income of petitioners with regard to the leases involved.

Held on the facts that in the taxable year petitioners were not carrying on business in partnership with their wives within the meaning of the revenue laws, and that petitioners are taxable on the entire income from their business.

By provisions of decedent's will, upon death of his brother-in-law trustee, decedent's estate passed to Ashtabula Foundation, a charitable organization, as a trustee. Held, that amount collected from recovered bank deposits in excess of their value as appraised and returned for Federal estate tax purposes constitutes taxable income to the estate.

1. Under mandate of the Circuit Court of Appeals for the Fifth Circuit, holding that burden of proof rests on respondent to show that petitioner and Costello were the equal partners operating the Bayou Novelty Company, when petitioner reported his income therefrom as one of four partners therein, Held, respondent failed to sustain his burden of proof and, therefore, deficiencies so based are not approved. 2. Held, further, petitioner is liable for tax on the entire amount received by him from Bayou Novelty Company, notwithstanding an agreement under which he divided his share with another. Burnet v. Leininger, 285 U.S. 136 3. Held, further, on the facts, that petitioner was domiciled in Louisiana during 1936 and 1937 and thus entitled to report his income on a community property basis, Louisiana being a community property State.

Pursuant to a plan of reorganization, a state bank, in 1933, subscribed to and received all of the capital stock of a newly organized national bank, except directors' qualifying shares, and the new… Held: the receipt of the new bank shares by the shareholders of the old bank was an exchange pursuant to a plan of reorganization and no gain is recognizable on their receipt. Section 112 (b), (g) and(h), Internal Revenue Code, as operative during the taxable year.

Sales of listed securities through the New York Stock Exchange by several members of a family, followed by purchases through the Exchange of like securities at the same prices by other members of the family, held, not sales "between members of the family" within the meaning of section 24(b) of the Internal Revenue Code. John P. McWilliams, 5 T.C. 623, and Pauline Ickelheimer, 45 B.T.A. 478, aff'd, 132 Fed. (2d) 660, followed.

In 1931, petitioner inherited an undivided one-half interest in certain re l estate from her mother who, prior to her death, had used the property as a private residence. Held: the loss sustained by the petitioner is deductible under Section 23(e)(2) except as limited by Section 117. N. Stuart Campbell, 5 T.C. 272; and Robert W. Williams, 1 B.T.A. 1101, followed.

1. Upon the evidence, held, the salvage value of certain machines determined by the respondent for depreciation purposes is sustained. 2. Held: the salvage value of certain machines determined by the respondent for depreciation purposes is sustained. 2.

In 1926 taxpayer purchased property which he occupied as a home until 1937. Thereafter taxpayer devoted the property to rental uses until 1941, when it was sold at a loss. Held, the improvements on the land did not constitute a capital asset within the definition of section 117 (a) (1) of the Internal Revenue Code and that portion of the loss allocable thereto is deductible in full as an ordinary loss.

Held, on the facts, that petitioner realized no taxable income in 1942 or 1943, and that penalties for failure to file income tax returns and for alleged fraud may not be imposed. Held: on the facts, that petitioner realized no taxable income in 1942 or 1943, and that penalties for failure to file income tax returns and for alleged fraud may not be imposed.

Held, that in the taxable year 1941 petitioner was engaged in raising and selling hunting dogs as a trade or business, and is entitled to a deduction for a loss sustained therein. Held: that in the taxable year 1941 petitioner was engaged in raising and selling hunting dogs as a trade or business, and is entitled to a deduction for a loss sustained therein.

A bondholders' committee, representing practically all of owners of bonds of defaulting debtor corporation, bid in properties at foreclosure sales pursuant to plan of reorganization, and transferred… Held: basis for computing gain or loss and depreciation is cost to predecessor corporation.

Certain sums received by taxpayer in the years 1929 through 1935, from his wholly owned corporation as the proceeds of the sales, repairs, and rental of surveying instruments and deposited in various… Held: dividends to taxpayer and therefore not subject to normal tax in said years.

During each of the years 1926 to 1932, inclusive, taxpayer made large currency deposits, the source of which was not disclosed on his books and which he failed to report for income tax purposes and… Held: such amounts constituted taxable income to the taxpayer in each year. Held, further, the fraud penalties are approved.

In 1941 a corporation whose stockholders consisted of petitioners and one other, paid certain salaries to themselves, as authorized by the board of directors composed of the three stockholders. Held: that petitioners are taxable on entire amounts received as salaries in 1941. North American Oil Consolidated v. Burnet, 286 U.S. 417.

Held, petitioner was engaged in business in the United States and is taxable according to the provisions of section 211 (b), Internal Revenue Code. Held: petitioner was engaged in business in the United States and is taxable according to the provisions of section 211 (b), Internal Revenue Code.