Volume 42 — Board of Tax Appeals

Petitioner's former husband, while a divorce action was pending between them, set up a trust providing that the income therefrom be paid after divorce to her during her life, the husband retaining no… Held: petitioner is taxable upon the trust income received by her from the trust.

Held, where petitioner formerly held a temporary position in the Canal Zone, followed by employment and residence in the United States,… Held: where petitioner formerly held a temporary position in the Canal Zone, followed by employment and residence in the United States, then later received a permanent appointment in the civil personnel in the Canal Zone which he still holds, the period immediately preceding the taxable year as used in section 251 of the Revenue Act of…

1. Amounts included by a producer of whiskey in the sale price as reimbursement of production tax paid by it, which amounts were not collectible until withdrawal of the whiskey from the warehouse, held accruable in the year of sale, despite the fact that the whiskey has not yet been withdrawn and the holders of the warehouse receipts are unknown to the producer. 2.

- The petitioner owned 2,500 shares of $100 par value stock, being all of the capital stock of a corporation. The corporation also owed a large debt to the petitioner on a promissory note. Held: that there was a recapitalization of the corporation and, therefore, a reorganization under section 112(g)(1)(D) of the Revenue Act of 1934, and, since the exchange made by the petitioner comes within section 112(b)(3), its loss, if any, is not recognized.

- Transfers in trust are gifts to the beneficiaries and not to the trusts, following Wilton Rubinstein,41 B.T.A. 220, and gifts of income and corpus after a life estate are gifts of future interests within section 504(b), Revenue Act of 1932, following Edith Pulitzer Moore,40 B.T.A. 1019.

1. A taxpayer may not create a partial bad debt deduction by voluntarily releasing a portion of the collateral held as security therefor without taking into consideration the value of the collateral so released. Value of collateral determined and held to be in excess of indebtedness. 2. Commissioner's method of computing depreciation on factory equipment, furniture and fixtures approved. 3. A gift tax return mailed to the office of the internal revenue agent in charge is not such a filing of the return under section 507(b), Revenue Act of 1932, as will start the tolling of the statute of limitations. 4. Value of common capital stock determined for gift tax purposes.

- A contract whereby four sole stockholders-directors agreed to vote for a dividend policy requiring the addition of $15,000 of annual earnings to surplus and to which contract the corporation was a party, does not entitled the corporation to a credit under section 26(c)(1) of the Revenue Act of 1936.

During the taxable years petitioner was a married man but was not living with his wife. Held: petitioner is not entitled to the personal exemption of $2,500 granted to a married man living with his wife; held, further, petitioner is not entitled to the personal exemption of $2,500 granted to the head of a family, Meier S. Block,37 B.T.A. 945, distinguished; held, further, petitioner is not entitled to $400 credit for a…

In 1935 petitioner made complete delivery of the materials under a Navy contract. Held: that the contract was completed by petitioner in 1935 within the meaning of section 3 of the Vinson Act of March 27, 1934, as amended by the Act of June 25, 1936; held, further, that in its annual report of profit on Navy contracts for 1936 petitioner could not offset a loss sustained on a Navy contract which was completed by…

SEPARATION AGREEMENT - TRUST INCOME TAXABLE TO GRANTOR - Pursuant to a separation agreement, petitioner established a trust in 1924 for… Held: the entire income derived by the trust during the taxable years 1934 to 1937, inclusive, is taxable to petitioner, since he had a continuing obligation to maintain and support his children during those years, which obligation he could neither commute nor discharge by agreement or creation of the trust, and petitioner has failed to…

Held, profits realized by petitioner, a nonresident foreign corporation, from certain futures purchase and sale contracts entered into and liquidated for its account by a domestic broker on the New… Held: profits realized by petitioner, a nonresident foreign corporation, from certain futures purchase and sale contracts entered into and liquidated for its account by a domestic broker on the New York Coffee and Sugar Exchange, were income from sources within the United States.

1. Where taxpayer owned all the capital stock of two corporations which performed no functions except to hold title to his country estate, it is held that he may deduct taxes and mortgage interest on such real estate which were paid by him. 2. Taxpayer may not deduct net losses suffered by two wholly owned corporations where such corporations carried on businesses of publishing magazines since, under those circumstances, their corporate entities must be respected.

- Interest on loans on life insurance policies, which was not canceled or paid, but was added to the loans, was not deductible as interest paid within the taxable year by one on the cash basis.

Petitioner was indebted in the sum of $130,000 to a corporation of which he held a majority stock interest. Held: the value to petitioner of this distribution was less than the face amount of such account. Warren Service Corporation v. Commissioner, 110 Fed.(2d) 723.

Petitioner entered into contracts with lessees of oil producing land whereby in return for furnishing equipment needed in exploiting such… Held: that petitioner's income realized pursuant to such contracts was not derived from royalties within the meaning of section 351(b)(1) of the Revenue Acts of 1934 and 1936, and petitioner was not a personal holding company within the meaning of those acts; held, further, that petitioner is entitled to depletion calculated upon such…

1. The amount paid by petitioner to induce a solvent bank to assume the liabilities of another, under the same circumstances as those existing in Robert Gaylord, Inc.,41 B.T.A. 1119, held, following… Held: following that case to be deductible as ordinary and necessary expenses of carrying on its business, the evidence indicating that such payment was made to preserve, protect and promote petitioner's busness. 2.

HEAD OF FAMILY. - Petitioner is not the head of a family by reason of his maintenance of a son who was an adult, in good health, well educated, and engaged in the practice of a profession, but whose income from the profession was less than expenses.

- Income which the petitioner received under an annuity contract purchased for her by a former husband from whom she was divorced in Texas, was taxable to her in the absence of evidence showing that there was some continuing liability on the part of her husband to support or maintain her.

Petitioner's wife secured in California absolute divorce previous to the taxable year. Decree provided that petitioner should pay alimony in fixed monthly amounts. Held: further, that during the taxable year the trust was an instrumentality in the performance of petitioner's alimony obligation and that the income therefrom in such year was taxable to petitioner.

Petitioners were officers, directors, and the only stockholders of a manufacturing corporation. In order to reduce taxes on both the corporation and themselves as stockholders, they adopted, as directors, a resolution to sell treasury stock to members of their families at $10 per share, which was substantially less than the market or intrinsic value of the stock. All legal formalities necessary to transfer the new stock to the new stockholders were complied with.

Petitioner created a trust for his son, the corpus consisting of a note secured by a mortgage under seal. Held: not deductible, since the note was given without consideration and hence constituted an unenforceable obligation. Johnson v. Commissioner, 86 Fed.(2d) 710, followed; William Park,38 B.T.A. 1118, distinguished.

Under his father's will petitioner received certain shares of stock, the income from which was charged with making good the deficit, if any, in trust income required to pay certain annuities. Held: petitioner is not entitled to a dividend credit in the amount of the remaining dividends under section 163(b), Revenue Act of 1934.

Petitioner, about 50 years of age, employed as a bookkeeper, maintained an apartment in which she and her adult niece, about 30 years of age, who had part time employment as a stenographer, lived. Held: under the facts petitioner is not entitled to an exemption of $2,500 as head of a family under section 25(b), Revenue Acts of 1934 and 1936.

A voluntary contribution by a taxpayer to a corporation of which he and his family were sole shareholders, held a gift subject to gift tax, and, since the corporation and not each shareholder was the donee, there is only one $5,000 exclusion.

A partner withdrew from a partnership by agreement, though he had not given the notice provided in the articles of copartnership. Held: respondent's limitation of loss to $2,000 as capital loss is affirmed.

1. Respondent's determination of value at which blocks of stock and warrants owned by decedent on the date of his death should be included in his estate for estate tax purposes is sustained. 2. A sum of money paid to the executrix of decedent as a bonus for services rendered by him to a corporation for the period of the year ending with his death is includable in his gross estate.

- The running of the period of limitation upon assessment and collection is not suspended under section 277 of the Revenue Act of 1928 by the sending of a notice which is not a proper notice under section 272(a). There can be no suspension of the running after the period has completely run.

Decedent's father bequeathed to him certain property to be held in trust until decedent became 28 years old, at which time decedent would become the absolute owner, if alive. Held: Decedent was domiciled in North Carolina, the trust properties did not pass pursuant to the power of appointment granted him under the trust instruments, and no estate tax is due under section 302(f), Act of 1926.

1. Petitioner Alice duPont Ortiz maintained certain long and short accounts with her brokers through which she bought and sold securities. Held: under the circumstances the sales so made were ordinary sales and not short sales; held, further, petitioner is chargeable with dividend income only to the extent the dividends credited to the long account exceeded those charged to the short account. 2. Petitioner was engaged in the business of buying and selling securities.

- A stockholder, receiving property in liquidation, computes his gain on his shares by taking the value of the property on the day he receives it where it was received by him by mail in due course and he had no reasonable means of anticipating the date of distribution.

A cotton processor in 1935 accrued its liability for processing taxes and contracted to readjust its sale prices to relieve its vendees of so much as represented the passing on of the processing tax if and when the tax were held invalid. after the tax was held invalid on January 6, 1936, it canceled the accrual of 1935 taxes and substituted the amount of its contractual liability to vendees.

Where taxpayer corporation on the accrual basis declared a dividend of its annual net profits in December and credited it on its books,… Held: that the credit does not constitute payments of the dividend in the prior year within the meaning of section 27, Revenue Act of 1936; held, further, that it is immaterial whether the taxpayer's shareholders had constructively received the dividend in the prior year for tax purposes, since symmetry of the statute is not to be presumed.

1. Under laws of California, community property acquired prior to July 29, 1927, passes to the wife by succession upon the death of her husband and the whole of the community estate is properly includable in the gross estate of the husband for Federal estate tax purposes. 2. The value of installment notes received by husband upon sale in 1929 of stock acquired prior to July 29, 1927, is properly includable in its entirety in the gross estate of the husband.

- Damage to a residence by termites was not a loss from other casualty deductible under section 23(e)(3) of the Revenue Act of 1934.

1. Petitioners, foreign corporations, realized gains from sales of certain bonds in the taxable year. Held: that on the evidence, the bonds were sold and delivered to dealers in Canada and that such gains were not gross income from sources within the United States, under section 119 of the Revenue Act of 1934. 2. Petitioners also realized gains from the redemption of certain other bonds in the taxable year in the United States.

Petitioner released certain first mortgage debts in return for bonds of the Home Owners' Loan Corporation, less in amount than the debts, and for notes in the amount of the difference, secured by second mortgages on the properties. Held the second mortgage debts may not be charged off as worthless in the absence of a showing that the debtors were unable to pay or that a possible defense to an action on the notes has been raised.

1. Petitioner created a trust, the income to be accumulated by the trustee and, together with the corpus, to be held and distributed in amounts, within the discretion of the latter, when called for… Held: that the conditions giving rise to the exercise of the discretion to distribute on the part of the disinterested trustee are so broad as to reserve to petitioner, in conjunction with the trustee, the right to revest both income and corpus.

A domestic corporation owned a majority of the voting stock of a Canadian corporation which, in turn, owned a majority of the voting stock… Held: that no part of the amount which was paid by the British corporation as British income tax upon the dividend and served to reduce the amount received by the Canadian corporation may be regarded under setion 131(f) of the Revenue Act of 1934 as any income, war-profits, or excess-profits taxes paid by the Canadian corporation to any…

Where it is shown that certain stock became worthless prior to the taxable year, claimed loss deduction is disallowed.

1. Where a 99-year lease upon which a building had been erected by the lessee was forfeited and the property repossessed by the lessor in the taxable year, held, the added value to the… Held: the added value to the property at the time of forfeiture of improvements erected thereon at the cost of the lessee, is income to the lessor. Helvering v. Bruun,309 U.S. 461; held, further, that under the facts the building so erected did not increase the value of the property. 2.

Payments received in the tax year by petitioner in liquidation of amounts due under a prior contract which in turn settled a dispute under an earlier employment agreement, held ordinary income and not capital gain.

1. The income of a trust was all to be distributed to the wife of the grantor and the corpus was to revert to him only in the event that he survived her and exercised the power to revoke. Held: the income of the trust is not taxable to him under section 166 of the Revenue Acts of 1934 and 1936. 2.

Petitioner entered into an antenuptial agreement with his intended wife in which she released all rights which she might acquire by marriage in certain stock which he owned, and other statutory… Held: that such release was adequate and full consideration in money or money's worth under section 503 of the Revenue Act of 1932 and the transfers are not subject to gift tax.

Interest paid on money borrowed on the general credit of petitioner, and used to purchase part of the property from which oil and gas was produced, must be deducted from gross income in arriving at the net income from the property for the purpose of computing percentage depletion.

An individual who had been an administrator and had paid the other debts of the estate without satisfying the estate's debt for income tax due to the United Statesheld, despite his discharge by the probate court, liable in his own person and estate to the extent of such unpaid tax, under Revised Statutes, section 3467, and Revenue Act of 1934, section 311(a)(2).

1. Held, the income of certain trusts for the benefit of the wife and children of grantor was taxable to grantor under the principles laid down in Helvering v. Clifford,309 U.S. 331. 2. Held: the income of certain trusts for the benefit of the wife and children of grantor was taxable to grantor under the principles laid down in Helvering v. Clifford,309 U.S. 331. 2. Held, that the income of certain irrevocable income trusts was not taxable to grantor. 3.

1. INCOME - TRUSTS. - Petitioner created five separate trusts, one each for the benefit of his wife and his four children, each containing a so-called "year and a day" provision. Thereafter, he twice modified those trusts and extended their operation for certain definite periods, the first extension being for approximately five years and the second extension being for approximately six years, provided he was living at the time of the expiration of such periods. In the trust instruments as operative, during the taxable year, petitioner retained to himself as an individual the power to control investments of the corpus, to vote all stock held by the trusts, and to appoint a new trustee at any time in lieu of the trustee named in the trust instruments. Held, that during the year 1934 the petitioner continued to be the owner of the corpus of the five trusts for the purposes of section 22(a) of the Revenue Act of 1934 and that the income therefrom is taxable to him, with the exception of the income of certain portions of the corpus of two of the trusts, which the beneficiaries thereunder had the right to, and did, withdraw prior to January 1, 1938, when the trusts would terminate if the petitioner was then living. 2. Certain income from two "income trusts" created by petitioner for the benefit of his two minor children, during the taxable year, was expended under the provisions of the trust instruments for their support and maintenance. Held, that the amount of the income so expended is taxable to petitioner.

Decedent, at the age of 74 years, about five months after a slight stroke of apoplexy, and about seven months prior to a second and fatal stroke, transferred securities to her daughter. Held: under the facts, that the presumption of correctness of determination of deficiency and of transfer made in contemplation of death within the meaning of section 803(a) of the Revenue Act of 1932 has not been overcome.

- During the taxable year 1935 petitioner was engaged in the business of selling merchandise at retail, and was subject to the tax imposed on gross receipts from sales by the… Held: a reserve set up by petitioner on its books to cover the state tax in respect of accounts receivable, uncollected at the close of the taxable year, may not be accrued and deducted from gross income for Federal income tax purposes, although included in the gross sales price accrued as income.

In December 1936 the board of directors of petitioner met and declared a dividend out of surplus. On or before December 31, 1936, petitioner delivered the dividend checks to its shareholders. Held: petitioner is entitled to a credit against the undistributed profits surtax for dividends paid equal to the face amount of the checks.

Petitioner's brother transferred in trust for her benefit certain stock, part of which was owned by petitioner, insurance taken out on petitioner's life, and a note of petitioner. Held: that the petitioner was the grantor of the trust executed by her brother and that the income of the trust, part of which was used by the trustee to pay premiums on the life insurance, is taxable to petitioner under the provisions of section 22(a), 166, and 167 of the Revenue Act of 1932.

1. Where the settlor of a trust reserves the power to borrow from the trust corpus up to $100,000 on his unsecured notes and reserves further all rights of the insured under certain insurance… Held: the trust is revocable within the meaning of section 166 of the Revenue Act of 1934. 2. Interest from municipal bonds issued under the California Municipal Improvement District Act of April 20, 1915, held, exempt from Federal income tax.

The income in the taxable years of an irrevocable funded insurance trust created by petitioner was used in part to pay premiums on policies of insurance on the life of petitioner's… Held: that the trust income which was used to pay premiums on insurance policies and the trust income which was accumulated and added to trust corpus was accumulated for future distribution to petitioner and is taxable to her under section 167(a)(1). Commissioner v. Morton, 108 Fed.(2d) 1005.

1. The income of a trust, created by petitioner and her divorced husband, and payable to petitioner for the support of their minor child, is not taxable to petitioner, because the trust did not discharge any legal obligation of petitioner to support the child. 2.

1. Liquidating dividends paid by a personal holding company (Revenue Act of 1934, sec. 351), which had no accumulated earnings, held, not to entitle it to a dividends-paid credit. Held: not to entitle it to a dividends-paid credit. Foley Securities Corporation,38 B.T.A. 1036; Gaston & Co.,39 B T.A. 640, followed. 2.

1. DEDUCTION - EXPENSE. - A railroad required its subsidiary to pay over all profits in excess of $500 from the operation of motor lines. Held: the payments were not ordinary and necessary expenses of the business of the subsidiary. 2. AFFILIATION - RAILROADS. - A company operating motor buses and trucks is not a common carrier by railroad and may not be included in a consolidated return with railroads. Sec. 141(d)(3), Revenue Act of 1934. 3.

The petitioners are stock insurance companies which pay dividends to policyholders. They are not exempt from income tax. In the determination of deficiencies in income tax the respondent has permitted them to deduct from gross income all dividends paid to policyholders. The deficiencies determined by the respondent are sustained. Opinion at 40 B.T.A. 291, modified.

1. Where petitioner, on the accrual basis, furnishing water hydrant service to the city of New York for the years 1923 to 1928, inclusive, sought… Held: that the amount of settlement is taxable to petitioner in year of settlement. 2. Where petitioner in taxable period received refunds of compensation insurance premiums paid and properly deducted in a previous year, held, income to petitioner when returned to it. 3. Other issues determined for respondent on failure of proof.

Petitioner was organized in 1928 by the Texas Corporation and Empire Gas & Fuel Co., for the purpose of constructing a pipe line from the Mid-Continent oil area to Illinois and Indiana, where… Held: petitioner is taxable upon such liquidation and the assets received should be appraised at a figure giving effect to their value as a going concern; held, further, that a dividend declared and paid by the subsidiary to petitioner on November 30, 1932, was a liquidating dividend.

1. Taxpayer was organized to carry on the business of selling a sales promotion or advertising plan, originated by its two chief stockholders, known as Bank Night, or the Affiliated System. Held: petitioner did not derive over 80 percent of its income from royalties and it was not a personal holding company within the definition in section 351(b). 2.

1. Petitioner's wife loaned him $53,000 and a large amount of corporate stock, in order to satisfy calls made by his broker for margin. Held: no error in Commissioner's treatment of petitioner as settlor of the trust and in including all trust income in computing petitioner's net income, under sections 166 and 167 of the Revenue Act of 1932. 2. The petitioner executed a trust for the benefit of each of his four children.

GIFT TAX. - In 1928 petitioner and her husband executed a joint will and covenant providing that the survivor was to receive a life interest in their entire community… Held: under the facts shown, that the subject matter of the gifts was a full life interest in one-half of the original community estate plus one-half of the net revenues of the estate from the date of the husband's death to the date of the gifts which were not shown to have been withdrawn by petitioner.

- An amount set aside annually pursuant to certificate of incorporation to retire preferred stock is not set aside to retire indebtedness within the meaning of section 351(b)(2)(B), Revenue Act of 1934.

A taxpayer with others as joint venturers purchased a farm subject to mortgage; after the mortgagee had bid in the property at a foreclosure sale and during the period of redemption the taxpayer paid… Held: the taxpayer is not entitled to a loss deduction in 1936.

Petitioner was engaged in the conduct of a trade or business within a possession of the United States for more than three years prior to… Held: the applicable portion of the three-year period immediately preceding the close of the taxable year 1936 for applying the 80 percent test specified in section 251(a)(1) of the Revenue Act of 1936 is the period January 1, 1934, to August 28, 1936, and, inasmuch as more than 80 percent of petitioner's income during that period was…

Petitioners were holders of class B common stock of the X corporation. Held: petitioners acquired this stock as a stock dividend, its basis to them was zero, and all of the proceeds derived by them in 1933 from its disposition were taxable to them. Helvering v. Gowran,302 U.S. 238.

Held, determination by the respondent that stock was worthless in 1933 and not 1936, has not been overcome by the evidence, and the respondent's disallowance of loss deduction for 1936 is sustained. Held: determination by the respondent that stock was worthless in 1933 and not 1936, has not been overcome by the evidence, and the respondent's disallowance of loss deduction for 1936 is sustained.

During the taxable year petitioners' decedent was the sole support of her adult niece, who was totally blind and unable to earn her own support, and whose father and mother were both dead. Held: the taxpayer was the head of a family within the meaning of article 25-4, Treasury Regulations 94. Charlotte Hoskins,42 B.T.A. 117, distinguished.

1. GIFT TAX - GIFT. - The promise of an individual to make transfers of $10,000 annually for a period of years does not constitute a present gift taxable under section 501 et seq. of the Revenue Act of 1932. 2. GIFT TAX - CONSIDERATION. - Surrender of dower rights by a prospective bride is not shown to have been full and adequate consideration in money or money's worth for the amount transferred by the prospective groom.

- During 1936 and for several years prior thereto, petitioner resided in Chicago, Illinois, where he was engaged in the practice of law. Held: there being no reasonable necessity for petitioner to maintain his parents in a separate household, petitioner was not the head of a family within the meaning of section 25(b), Revenue Act of 1936, and art. 25-4, Regulations 94.

1. Where the evidence shows that a sweepstakes ticket was given to both petitioner and his wife prior to its winning any prize, petitioner is taxable only in respect of one-half the prize money, less one-half the cost of the ticket. Christian H. Droge,35 B.T.A. 829, and Samuel L. Huntington,35 B.T.A. 835, followed. 2.

1. Petitioner, having earned certain commissions, transferred its right to receive them to a corporation for all its stock, which was issued to petitioner's nominee. Held: the petitioner retained the absolute control and the unfettered command of the commissions when paid to its controlled transferee in the taxable year and such commissions should be included in petitioner's gross income. 2.

Corporation A owned all the stock of B. In 1913 it had acquired substantially all the assets of B. B owed to holders of bonds $27,633,000, principal amount of first mortgage bonds. Held: the reorganization under section 77B of the Bankruptcy Act constituted a reorganization under section 112(b)(3) of the Revenue Act of 1936, coming within the definition of a reorganization in section 112(g)(1)(C).

1. A stock dividend paid in nonvoting common stock to the holders of voting common stock and nonvoting common stock is a taxable dividend to the holders of voting common stock. 2. A stock dividend paid in nonvoting 7 percent preferred stock to the holders of voting common stock and to the holders of nonvoting common stock is a taxable dividend to both classes of stockholders. Koshland v. Helvering,298 U.S. 441.

Petitioner exchanged oil, gas, and mineral rights in certain lands for an undivided one-half of the fee in a parcel of improved realty. Held: the properties conveyed were of a like kind as required by section 112(b)(1) of the Revenue Act of 1936 and the gain realized on the exchange is, therefore, not taxable.

A partnership of which taxpayers were members began business in Mexico in August 1937. Held: the income tax assessed by the Mexican Government neither accrued nor was paid in 1937 and petitioners are not, under section 131, Revenue Act of 1936, entitled to a credit against their 1937 income tax for a proportional part of the income tax which accrued and was paid to the Mexican Government during the year 1938.

1. Where the taxpayer corporation, nearly all of whose stock was held directly or beneficially by relatives of the same family, sold certain… Held: a deduction in full for loss on the sale is not prevented by the provisions of section 24(a)(6) of the Revenue Act of 1934 and, since the sale was bona fide, must be allowed. 2. Losses suffered by petitioner as a result of foreclosure of properties owned by it are deductible in the year in which the equity of redemption expires.

1. JURISDICTION. - The Board has jurisdiction to vacate its decision and to correct an error prior to the expiration of the time for taking an appeal and prior to any appeal. 2. DEDUCTION - LOSSES - SALES. - Sales of stock to a wholly owned corporation were too insubstantial to give rise to deductible losses. Higgis v. Smith,308 U.S. 473, followed.

Under a trust instrument the grantor transferred to petitioner certain real estate in fee, subject to a lease for years thereon in favor of… Held: that, considering all the provisions of the lease contract together, the bonds constituted additional rental, or bonus in the nature of rental, for the real estate; held, further, that the purported separate transfer of the right to receive the bonds in the future, and subsequent to the execution of the trust instrument, did not…

1. APPLICABLE ACT. - The Revenue Act of 1936, and not that of 1934, applies to a short period of three months beginning January 1, 1936. 2. UNDISTRIBUTED PROFITS TAX - CONSTITUTIONALITY. - The undistributed profits tax provisions are constitutional as applied to a short period ending before the act was approved.

The petitioner was the owner of an oil and gas lease, and acquired by warranty deed, as to the greater portion of the land, the remaining interests of the lessor, i.e., the fee, less approximately a… Held: petitioner is not entitled to percentage depletion upon the consideration received.

1. The petitioner, by written agreements, granted the right to mine coal from lands owned by it in consideration for the payment of sums… Held: that the amounts received by the petitioner under the contracts constitute mineral royalties within the meaning of section 351(b) of the Revenue Acts of 1934 and 1936, and section 353(b) of the Revenue Act of 1936, as amended. 2. Petitioner is liable to delinquency penalties for failure to file returns as a personal holding company.

In 1923 petitioner contracted with the life tenant of the building it occupied for the continued use and possession thereof in consideration of an agreement to pay the life tenant $200 per month… Held: such payments are capital in nature and are not deductible.

1. Petitioner refused to accept a certain amount declared by resolution to be due to him from the Bancitaly Corporation as compensation for services performed from January 1, 1927, to January 20,… Held: the amount of the donation was not income to petitioner. 2.

- Notes owned by a debtor in the possession of a taxpayer creditor to become his property in case a note of the debtor was not paid, were not held by taxpayer within the meaning of section 117(a) of the Revenue Act of 1934 until the debtor failed to pay the note on the day specified.

Petitioner was in the business of selling school supplies and in the course of such business sold supplies to certain school districts, political subdivisions of the State of Pennsylvania, on open… Held: the alleged interest was not paid pursuant to any obligation executed the delivered by the respective school districts in the exercise of their borrowing power, and the interest in question is not exempt from taxation.

1. The redemption at par value by a corporation in 1935 of shares of stock owned by its two principal stockholders who were indebted to the corporation in amounts exceeding the par… Held: essentially equivalent to the payment of a taxable dividend; held, further, that the failure of one of the stockholders to report the transaction in his income tax return for 1935 did not, in the circumstances of the case, make the return false and fraudulent with intent to evade tax. 2.

1. An agreement whereby a patentee does grant, bargain, sell, convey, transfer, assign, set over and deliver certain patent applications to a corporation in consideration of the latter's promise to… Held: to be contract for the sale of a capital asset, and moneys received thereunder by the seller and/or his assignee are capital gains under section 117 of the Revenue Act of 1934, rather than royalties. 2.

Petitioner was a stockholder and one of the creditors of a New Jersey corporation. Held: that section 112(b)(5), Revenue Act of 1934, is applicable; when the plan was completed the stockholders and creditors of the New Jersey corporation were in complete control of the New York corporation and no gain or loss is recognizable to the creditors who transferred their notes against the New Jersey corporation solely for stock…

1. DEDUCTION - PERCENTAGE DEPLETION - ELECTION. - An election to take percentage depletion for 1933 and subsequent years does not carry over for 1934, since section 114(b)(4) of the Revenue Act of 1934 required a new election. 2. Id. - An amended return for 1934 filed years after the 1934 return was due is not a first return within the meaning of section 114(b)(4) of the Revenue Act of 1934. 3.

1. Losses sustained in trading in commodity futures contracts are held to be capital losses subject to the limitation of section 117(d) of the Revenue Act of 1936. 2. Commissions paid on completed transactions are held deductible to the extent attributable to sales.

- Property the subject of an inter vivos gift to a needy sister may not be included in the gross estate under 302(a) or (c) of the Revenue Act of 1926, as amended.

The petitioner is a nonprofit corporation organized under the laws of the State of California for furnishing laboratory facilities at cost to its members. Held, not exempt from income tax. Held: not exempt from income tax.

1. Petitioner withdrew certain amounts from a partnership of which he was a member, such withdrawals being carried on the books of the partnership as overdrafts in his personal drawing account. Held: under the facts shown, that the petitioner realized taxable income in the amount so canceled and written off. 2. During 1934 petitioner received $2,400, $200 each month, from the partnership, allegedly for traveling and automobile expenses.

1. During 1935 the petitioners, mother and daughter, were engaged as equal partners in the operation of a horse farm for profit. The operation resulted in a large net loss for 1935. Held: that the losses sustained are deductible from the gross incomes of the petitioners. 2. On May 25, 1928, petitioner Wegeforth created an irrevocable trust, the net income of which was to be paid to the petitioners in equal shares during the lifetime of the grantor.

In a property settlement agreement entered into in 1933 petitioner transferred to his wife certain shares of stock equaling her community interest in such shares. Held: that the petitioner is not taxable upon any gain from the liquidating distributions on the wife's shares in 1935.

Petitioner, during the taxable year paid out $49,165.51 in purchase of shares of its preference stock Pursuant to an agreement by which… Held: petitioner is not entitled to a credit, under section 26(c)(2) of the Revenue Act of 1936, of the amount of either the profits required to be set aside or the amounts spent retiring the preference stock; held, further, petitioner may not claim a dividends-paid credit under section 27(f) of the Revenue Act of 1936 for that part of the…

1. REORGANIZATION. - The transfer by a parent of some stock of its wholly owned subsidiary to the subsidiary in exchange for some stock of the parent and cash, all of which stock was then retired, constituted a statutory reorganization within section 112(g)(1) of the Revenue Act of 1934. 2.

In 1935 the petitioner received $35,000 from his lessee for breach of covenant of a lease entered into in 1924. Held: that the amount received was not from the sale or exchange of a capital asset and that the petitioner is taxable upon the entire amount as ordinary income.

The petitioner owned a sublease on certain oil-bearing lands near Bakersfield, California. Held: that the advances were not income from the property within the meaning of section 114(b) of the Revenue Act of 1934, and that upon the evidence the petitioner is not entitled to any depletion allowance for 1935.

Compensation under contracts requiring petitioner to supply musical material for certain motion pictures held to constitute ordinary income rather than gain from the sale of capital assets. Sabatini v. Commissioner, 98 Fed.(2d) 753.

The petitioner was incorporated as a nonprofit organization under the laws of California, for the advancement of cinematography. Held: that the petitioner is exempt from income tax.

1. On the facts petitioner is an association taxable as a corporation. 2. Petitioner made a lease of land though to be oil producing. Held: the bonus was not a royalty within the meaning of section 351, Revenue Act of 1934. 3. On the facts, the fair market value of certain land payment contracts transferred to petitioner, as of the time of transfer, was the face amount of the balances due thereon. 4.

- The petitioner created a trust for her life. The income was payable to others and could not be paid to or accumulated for the petitioner. Held: the income was not taxable to her under sections 166, 167, or 22(a) of the Revenue Act of 1934.

The gain derived by a taxpayer on the receipt from an executor of a share of the proceeds of sale of the residuary estate, which share had been purchased for a less sum from the original residuary legatee, is not a capital gain the recognition of which is limited by section 117(a), Revenue Act of 1936.

During the taxable years petitioner sold certain securities which it had acquired from a bank at the cost of the securities to the bank. Held: the evidence supports respondent's determination that the amount paid the bank in excess of market was for a purpose other than the acquisition of the securities, and petitioner's basis for determining gain or loss on sales during the taxable years is the prevailing market prices of the securities at dates of acquisition.

- Portions of salaries credited to stockholders but consistently undrawn and extinguished by debits to the individuals' accounts and credits to surplus were income to corporation when credited to its surplus.

In the course of readjustment of the capital structure of a corporation petitioner exchanged preferred stock upon which dividends were in… Held: that receipt of the new stock was neither a dividend nor essentially equivalent to a dividend under section 115(a) and 115(g) of the Revenue Act of 1936; held, further, that the stock, debenture bonds, and cash were received by petitioner in the course of a reorganization and gain is recognized under section 112(c)(1) only to the…

Interest received during the taxable years 1934 - 1936 on bonds issued under certain California improvement acts, held, not subject to Federal income tax, following Bryant v. Commissioner, 111… Held: not subject to Federal income tax, following Bryant v. Commissioner, 111 Fed.(2d) 9, and District Bond Co. v. Commissioner, 113 Fed.(2d) 347.

1. ACCRUAL. - An item need not be accrued as income for a year if at the end of the year there is no reasonable anticipation of its receipt when due. 2. PERSONAL HOLDING COMPANY - ANY CORPORATION. - A dissolved corporation continued under the laws to wind up its affairs is, during the period of liquidation, a corporation within the meaning of section 351 of the Revenue Act of 1934. 3.

A parent corporation in 1935 transferred to a group of its stockholders, who collectively owned approximately 5 percent of its stock, all of the stock of one of its subsidiaries in exchange for their stock in the parent. The stock received by the parent was not retired, but was placed in its treasury as treasury stock. Held, following William A. Smith,38 B.T.A. 317, that the transaction was a "sale or exchange" by the stockholders of their stock in the parent. The amount of the gain or loss to be taken into account in computing the net income of each stockholder is governed by section 117 of the Revenue Act of 1934.

1. In 1930, while an action for divorce was pending, decedent entered into a settlement contract with her husband whereby he agreed that if a decree of divorce should be entered he would, among other… Held: that the sum of $3,000 interest paid on the note in 1936 constituted alimony, or a payment in lieu of alimony, and was not taxable income. 2.

- Loss on property acquired after December 31, 1920, by a gratuitous transfer in trust is determined under subparagraph (3) rather than (2) of section 113(a) of the Revenue Act of 1934.

Under the Illinois Business Corporation Act, actions may be brought against a corporation within two years after dissolution on any liability incurred prior to dissolution. Held: that, since the petition shows on its face that it was filed by a dissolved Illinois corporation, the proceeding must be dismissed for lack of jurisdiction. Billiard Table Manufacturing Corporation v. First-Tyler Bank & Trust Co.,16 Fed.Supp. 990 followed.

Petitioner is a personal holding company and in the taxable year 1934 distributed to its stockholders a property dividend consisting of… Held: since petitioner's stockholders are only taxable on the fair market value of these shares at the time they were received as a dividend, petitioner, in determining its undistributed adjusted net income, is only entitled to a deduction as dividends paid under section 351(b)(2)(C), Revenue Act of 1934, of the fair market value of the…

Petitioner purchased real estate subject to delinquent tax assessments. It did not assume liability for the delinquent taxes and was under no personal obligation to pay them. Held: that the petitioner derived no taxable gain from payment of the tax claim with municipal bonds at face value which it acquired for that purpose at a large discount.

1. Where powers to revoke inter vivos trusts were vested only in the holders of interests nonadverse to the grantor, the cost basis to be used in computing gain or loss upon a disposition by the trustees of securities forming part of the trust corpora after the grantor's death is the same as it would have been in the hands of the grantor. Sec. 113(a)(3), Revenue Acts of 1934 and 1936.

1. The petitioner and another entered into a partnership agreement in 1929 under which they were to purchase certain wheat lands, leases,… Held: that the petitioner is taxable upon the entire amount of the partnership profits in each of the years 1935, 1936, and 1937. 2. The partnership sustained a loss in 1935 of $12,480.19 from trading in grain futures on grain exchanges. The respondent allowed the deduction of the loss in the computation of the deficiency for 1935.

Income of a trust created by petitioner for the benefit of his wife and children held taxable to petitioner by reason of his retention of direct and indirect benefits approximating ownership. Helvering v. Clifford,309 U.S. 331.

RES ADJUDICATA. - A corporation held to be organized and operated exclusively for charitable purposes so that a gift by this petitioner was deductible for gift tax purposes under section 505(a)(2)(B) of the Revenue Act of 1932 is, under the rule of res adjudicata, organized and operated exclusively for charitable purposes so that the same gift is deductible for income tax purposes under section 23(o)(2) of the Revenue Act of 1934.

1. In order to reduce labor turnover and enable its employees to become stockholders, petitioner established a successive series of employees' savings and investment plans, each plan maturing four… Held: Petitioner is not taxable in respect of stock and cash left over at the maturity of each series after distributions to remaining participants.

Decedent during his lifetime contracted for certain life insurance with 5 companies, the petitioners herein. Prior to his death, he executed with each company a written settlement option contract. Held: petitioners are liable for the tax and interest in question as transferees, under section 315(b) and section 316 of the Revenue Act of 1926, as amended.

In September 1930 the petitioner became the purchaser of a meat packing plant for a consideration of $125,000, represented by a promissory note for that amount, specified payments on principal and… Held: that petitioner received no taxable income during the year 1934 as a result of the transaction described.

1. Held, that petitioner made a valid gift of certain shares of stock to his wife; held, further, that when petitioner's wife… Held: that petitioner made a valid gift of certain shares of stock to his wife; held, further, that when petitioner's wife transferred a portion of those shares back to him under certain trust agreements, she conferred on him such substantial rights of ownership of the corpus of the trusts as to make him taxable on the income of the trusts…

Petitioner created two irrevocable trusts for the life of the named beneficiary, each to receive a stated annual sum out of trust income, the excess to be distributable to grantor. Held: since the trustee had no substantial adverse interest, and could, in the exercise of his discretion, have distributed the entire capital gains, such gains, to the extent they were undistributed, are taxable to the grantor.

Under an irrevocable trust a specified portion of the trust income was distributable to the grantor and the balance was to be accumulated… Held: that during the taxable years there was no power vested in the trustee to revest any part of the corpus in the grantor or to make future distributions of accumulated trust income to the grantor and, further, that respondent erred in taxing undistributed trust income to the grantor, under sections 166 and 167 of the Revenue Acts of…

1. In addition to the income reported on his returns for the taxable years, it is held on the evidence of record that petitioner received, and there should be included in computing the deficiencies herein, the following items of income: (1) Protection payments received from various cleaning and dyeing establishments; (2) $5,000 representing the value of a proprietary interest received in the New Drexel Cleaners; (3) amounts reflected by deposits made in a bank account under…

Petitioners, husband and wife, filed no returns of income for several years. In 1933 a joint return was filed. Held: That no showing has been made by the petitioners that the Commissioner acted arbitrarily in determining the deficiencies or that they are excessive.

1. DEDUCTION - TAXES. - Unconstitutional taxes, resisted, and never paid are not deductible when accrued on the books. 2. UNDISTRIBUTED PROFITS TAX - CREDIT - No credit is allowed for dividends which would have been paid had the unconstitutional taxes not been accrued. 3. Id. - No credit is allowable upon theory that Pennsylvania statute and corporate charter constitute written contract restricting dividends.

1. Petitioner was a corporation engaged in the manufacture of cotton goods and subject to the payment of processing taxes under the Agricultural Adjustment Act, declared unconstitutional January 6,… Held: such taxes were not deductible in 1935. 2.

1. In anticipation of a divorce, which was obtained in 1927, petitioner and his wife entered into an agreement settling their property… Held: that under such agreement the petitioner was under no continuing obligation during the taxable years 1935 and 1936 to contribute to the support of his divorced wife; held, further, that under the laws of the State of Oregon petitioner was fully discharged, during the taxable years, from any obligation, other than that assumed in the…

1. A corporation is not entitled to a dividends paid credit under section 27(a) of the Revenue Act of 1936, to the extent that the dividend checks were endorsed back to the corporation by the stockholders before the effective dividend declaration date. 2. A credit for dividends paid is allowable, following Valley Tractor & Equipment Co.,42 B.T.A. 311, where the dividend checks were not endorsed back to the corporation until after they had become due and payable.

Petitioner, a lawyer, in 1931 received a note for $40,000, secured by a mortgage, in payment for legal services. His client defaulted in interest payments. The note was due and unpaid in 1934. Held: petitioner failed to prove a sale of the note and the income is taxable as ordinary income.

Petitioner is not a holding company within the statutory definition of section 351(b)(1) of the Revenue Act of 1934, and hence is not taxable under section 351(a).

Petitioner's wife instituted an action against him for absolute divorce. While it was pending the parties thereto entered into a written agreement providing for a property settlement. Held: the rights received by petitioner under the agreement had no fair market value, and he realized no taxable income as a result of the transaction.

In 1928 petitioner's wife brought suit against him for a limited divorce in the State of Pennsylvania, where they both resided, in which… Held: that, following the stipulation of settlement, there was no continuing obligation either by voluntary agreement or under the laws of the State of Pennsylvania that petitioner should maintain and support his divorced wife, and the income of the trust which was set up with the part of the property awarded to her, which was paid to her…

1. Under a contract for the future sale of shares and their deposit in escrow until the price was paid, held, the seller continued to be the owner of the shares and a dividend declared and paid while… Held: the seller continued to be the owner of the shares and a dividend declared and paid while they were still in escrow is included in his income even though it operated to reduce the price. 2.

1. GIFT TAX - INCOME PAYMENTS FROM REVOCABLE TRUST. - Neither the payment of income to petitioner's son and wife from a trust of which a brother of the petitioner was the nominal settlor and over which the petitioner and two others had power to vest the corpus in the petitioner, nor the payment of income to a brother's family from a similar reciprocal trust of which the petitioner was the nominal settlor, constituted a taxable gift from the petitioner, following Estate of…

The estate of a restricted Creek Indian dying January 10, 1935, is subject to Federal estate tax.

In 1935 decedent taxpayer was engaged in the business of slaughtering hogs and was subject to the payment of processing taxes pursuant to the Agricultural Adjustment Act. Held: taxpayer is not entitled to a deduction from gross income for 1935 of such taxes thus accrued.

1. A taxpayer, acting through a trustee, purchased land subject to a mortgage which he did not assume, and later had the trustee convey his interest in it by a quitclaim deed to the mortgagee's nominee without consideration. Held, the conveyance was not a sale or exchange and the resulting loss was not a capital loss. 2. Under a determination, assailed by the taxpayer, that his loss on the conveyance of mortgaged property to the mortgagee was a capital loss, the Board, in the absence of timely pleading, is not required to search the record to ascertain whether the taxpayer is relieved of other items than the mortgage liability, such as taxes or interest. 3. A portion of taxpayer's expenses was properly allocable to interest on tax-exempt securities. Held, such portion does not reduce the deduction for expenses. Sec. 24(a)(5), Revenue Act of 1934.

James M. Botts died in 1934. After his death his widow filed a joint return including their income and deductions for the year 1933. Held: the statute of limitations does not bar respondent in his action against these petitioners; held, further, that petitioners received the shares from the estate of James M. Botts and not by virtue of joint tenancy.

1. Where community funds were used to pay premiums on decedent's life insurance policies issued subsequent to his marriage, which policies were payable to his wife and other members of his family, and one-half of the community funds applied to the payment of premiums was property of the wife under Texas community property statutes, one-half only of the proceeds of the policies should be included in computing decedent's gross estate. 2.

Decedent at the time of his death was insured under life insurance, some of the premiums on which had been paid prior to his marriage and others had been paid out of community funds after his… Held: The value of the policies measured by one-half of the premiums paid out of community funds may not be included in decedent's gross estate. DeLappe v. Commissioner, 113 Fed.(2d) 48, followed.

A taxpayer corporation which in 1932 received from New York City the refund of moneyed capital taxes paid by its predecessor having the same shareholders, which had taken deductions for such local taxes in earlier years when they were paid, the claim for refund having been acquired by the taxpayer in exchange for its shares, which were immediately distributed by the predecessor to its shareholders, held to realize gain in the refund received measured upon the same basis as…

A voluntary contribution by a taxpayer to a corporation of which he is the sole owner, held not a gift subject to gift tax. Frank B. Thompson,42 B.T.A. 121, distinguished.

In its fiscal year ended October 31, 1935, petitioner accrued $46,622.72 as Federal processing tax under the Agricultural Adjustment Act, which it never paid to the collector of internal revenue. Held: that respondent correctly disallowed the deduction of the amount of processing tax in question on petitioner's corporation income and excess profits tax return for its fiscal year ended October 31, 1935.

Petitioner executed a mortgage to a trust company in which it agreed to pay Federal income tax up to an amount not in excess of 2 percent per annum on interest paid to the holder or holders of the… Held: Under the provisions of sections 144 of the Revenue Act of 1928 and 143 of the Revenue Act of 1932, petitioner is liable for the payment to the Federal Government of the 2 percent specified in the mortgage.

Petitioner is a corporation organized under the statutes of Louisiana relating to industrial life insurance companies. Held: petitioner is not a life insurance company within the meaning of section 201 of the Revenue Act of 1936, even though the reserves which it maintained were approved by the insurance commissioner as adequate for purposes of insuring solvency.

Petitioner, on the accrual basis, accrued during the taxable year interest represented by debenture mortgage coupons. Held: petitioner is entitled to deduct the interest accrued. Hummel-Ross Fibre Corporation,40 B.T.A. 821, followed.

In Mary duPont Faulkner v. Commissioner (C.C.A., 1st Cir.), 112 Fed.(2d) 987, it was held that a gift made by the petitioner in 1935 to the Birth Control League of Massachusetts was made to a charitable organization and hence was a legal deduction from gross income in the donor's income tax return. The Board held in an opinion at 41 B.T.A. 875, that the same gift was subject to gift tax.

Petitioner, a corporation, distributed from earnings and profits accumulated since February 28, 1913, and in complete liquidation,… Held: that under section 27(f), Revenue Act of 1936, the distribution to the parent corporation was properly chargeable to earnings or profits, and must be treated as a taxable dividend paid for the purpose of computing dividends paid credit without limitation by subsection (h) and in the calculation of tax upon undistributed net income it…

The petitioner was organized and operated under the laws of Virginia as an industrial loan association and during the taxable years was not a bank within the meaning of section 104 of the Revenue Act of 1936.

1. Held, under the facts, that taxpayer is not entitled to deduction for a bad debt or a loss from a transaction entered into for profit,… Held: under the facts, that taxpayer is not entitled to deduction for a bad debt or a loss from a transaction entered into for profit, where there has been no accounting with the debtor or ascertainment of the worthlessness of taxpayer's claim against the purported debtor, and no evidence that loss was sustained in the taxable year. 2.

Trust income of the tax year undistributed during beneficiary's minority and properly paid to him on reaching majority in the same year held taxable to the trust and not to the beneficiary. Spreckels v. Commissioner, 101 Fed.(2d) 721, followed.

Cattle purchased after February 28, 1913, for breeding purposes and so used, held, depreciable assets, and the purchase price of any of such cattle as perish, during the taxable year, less any… Held: depreciable assets, and the purchase price of any of such cattle as perish, during the taxable year, less any depreciation allowable thereon, may, if not compensated for by insurance or otherwise, be deducted as a loss.

Shortly after the processing tax under the Agricultural Adjustment Act was held invalid on January 6, 1936, petitioner received from a bank an amount of money which had been deposited in escrow for… Held: that respondent erred in including the amount in question in petitioner's taxable income for 1936.

Petitioner entered into contracts with drilling contractors for the drilling and completing of oil and gas wells on its properties for a stipulated price per well. Held: that petitioner is not entitled to deduct as intangible drilling and development costs any portion of the amounts paid to the drilling contractors under these contracts.

All of a subsidiary company's operating losses for the years 1924 to 1931, inclusive, which were availed of to reduce the taxable incomes of an affiliated group of which the petitioner and the subsidiary were members, must be taken into account in the determination of the deductible loss sustained by the petitioner in 1932 when the stock of the subsidiary became worthless, and not merely the losses of the subsidiary company for the years 1929 to 1931, inclusive.

The decedent on February 25, 1931, conveyed certain personal property in trust with a limited power of revocation, reserving the income for life, and after his death the principal and income to be… Held: that the trust created by the trust agreement of February 25, 1931, continued as a separate trust entity after decedent's death and that the income of the trust is not taxable to the executor of decedent's estate in process of administration.

Decedent, who was 71 years of age at death, was an exceptionally energetic woman, actively interested in music, travel, and the welfare of her children. Held: the gifts which decedent made to her children in April 1932, at a time when she was in good health and with no thought of approaching death in mind, were not transfers made in contemplation of death within the meaning of section 302(c) of the Revenue Act of 1926.

- The petitioner in 1933 accepted 200 shares of its own stock in exchange for an account receivable and released the former guarantor of the account and also gave him an option to repurchase the… Held: no loss occurred in 1936 when the option expired.

Petitioner is a corporation which during the taxable years 1934 and 1935 was engaged in the processing of tobacco and paid in each of the taxable years certain amounts of processing taxes under the… Held: petitioner is entitled to a deduction as taxes paid of the amounts of such processing taxes which it incurred and paid in each of the taxable years 1934 and 1935. Cartex Mills, Inc.,42 B.T.A. 894 followed.

1. The owner of certain patents, having made a contract to license their use by H Co. and to sell necessary machinery to the latter, adopted a plan whereby: (1) The patents and other property were… Held: Respondent's determination that the patents were acquired by petitioner in a statutory reorganization may not be challenged by petitioner, even though L Co. was a mere conduit and the transaction not for a business purpose. Higgins v. Smith,308 U.S. 473, followed.

- Petitioners owned preferred stock of a corporation for which a receiver was appointed in 1932. The receivership also included two subsidiary corporations. Held: petitioners sustained a deductible loss in 1936 of the stipulated cost basis of their preferred stock.

On January 30, 1935, a creditor canceled petitioner's note, with the result that petitioner's status changed from insolvency to solvency. Held: that the equity in insurance is not includable in assets because it is exempt from claims of creditors under local law. sec. 55(a), Insurance Law of New York; In re Messinger, 29 Fed.(2d) 158. Petitioner is taxable only on gain in the amount of the assets actually freed from claims of creditors.

The salary received by the petitioner as an associate justice of the Supreme Court of the Territory of Hawaii during the calendar years 1934 and 1935 under an appointment made in 1931 is subject to Federal income tax.

In determining the 50 percent limitation on percentage depletion allowable under section 114(b)(3), Revenue Act of 1936, amounts of income tax paid to the State of Oklahoma must be deducted in computing net income from the property, where such state tax was based wholly on income derived from such property.

1. GAIN OR LOSS - BASIS. - The necessary continuity of proprietary interest in transferred property was lacking where the transferor received only bonds of transferee, there was no reorganization and no retention of the old basis. 2.

AFFILIATION - WHAT STOCK IS INCLUDED IN 100 PERCENT FROM WHICH 95 PERCENT IS MEASURED UNDER SEC. 141(d) OF REVENUE ACTS OF 1932 AND 1934. - The 100 percent includes a small number of shares for which stock trust receipts issued in 1919 were never presented in exchange for stock certificates after the trust was terminated in 1931.

Petitioner was organized in June 1933 and began the drilling of an oil well which was not completed prior to December 31 of that year. Held: petitioner in its amended return for 1933 made a binding election to treat intangible drilling costs as deductible expense rather than to charge same to capital, recoverable through depletion allowances.

- Where assets worth about $19,660 were transferred to petitioner for 75 percent of its stock and $1,300 in cash and, pursuant to the same plan, $1,500 in cash was paid by others for 25 percent of the stock, the petitioner's basis for the assets is cost to it of those assets and section 113(a)(8) of the Revenue Act of 1932 does not apply.

Petitioner, the inventor of a new method of processing coffee, entered into an agreement with a coffee importer wherein he agreed to give the importer the exclusive right to use the patented process… Held: the royalties retained by the improter under the terms of the agreement did not constitute income taxable to petitioner.

1. Petitioner is not taxable under section 166 of the Revenue Act of 1936 on the incomes of four trusts created for the benefit of his children, where he reserved no power of… Held: Petitioner is taxable on the income of the trusts for the minor children only to the extent such income was actually paid over for their maintenance, support, and education; and (b) Petitioner is not taxable on the income of any of the trusts under section 167 of the Revenue Act of 1936. 3.

1. ESTATE TAXES - DEDUCTIONS - MORTGAGES. - An estate is not eentitled to deduct, under section 303(a)(1)(D) of the Revenue Act of 1926, as amended by section 805 of the Revenue Act of 1932, the entire amount due on seven mortgages the lien of which was spread over six properties, two owned by the decedent and four owned by her husband, where the benefits of the loans on the property of the husband flowed to him and not to her. 2.

The petitioner, a corporation, by indenture of lease transferred possession of all its properties to a lessee for an annual rental, the maximum amount of which was an amount equal to the sum of 7… Held: the entire rental provided in the indenture of lease was income to the petitioner in the taxable year.

Petitioner's entire physical property was sold to an individual, acceptable title being perfected by sale under a trustee's deed to the… Held: on the facts, that the creditor's president was trustee for petitioner and stockholders, and the sale was not to him, but to his transferee; held, further, that petitioner has not shown excessive deduction of depreciation in prior years; held, further, that conveyance to the creditor's president was not distribution in liquidation,…

Where petitioners claim losses upon their investment in a wholly owned corporation and on a debt of the corporation upon dissolution… Held: first, that effect should be given to a bona fide sale of a mortgage from one corporation to another, even though petitioners owned the stock of both; second, that a stock sale transaction between petitioners and the corporation, where petitioners sold stock at a price in excess of market value, did not create a valid debt of the…

During 1936 petitioner purchased installment notes and mortgages at a discount, of which over $578,000 were forged and fictitious, but were represented by the vendor to be genuine. Held: under the circumstances the vendor obtained petitioner's money by deceit and artifice which amounted under the Missouri law to theft, and petitioner's loss was sustained in 1936 when it parted with the money.

Petitioner's decedent, a teacher employed by the board of education of New York City, contributed to the teachers' retirement fund by amounts deducted from his salary. Held: that the funds payable to the wife after death are not insurance, within the meaning of section 302(g), Revenue Act of 1926, as amended, and were properly included by the Commissioner in the gross estate of the decedent. Kernochan v. United States,89 Ct.Cls. 507; 29 Fed.Supp. 860.

1. In computing net taxable income, a cooperative association, making sales to members and nonmembers, is entitled to deduct the profits accruing upon sales to members because refundable to such members as rebates or so-called patronage dividends. 2.

Petitioner was organized in 1924 as a common law trust, and is an association taxable as a corporation. Held: that in the taxable years petitioner permitted its earnings and profits to accumulate beyond the reasonable needs of its business and that during these two taxable years petitioner was availed of for the purpose of preventing the imposition of the surtax upon the owners of its units of beneficial interest through the medium of…

Petitioners are the owners of ten oil payment contracts which entitle them to specified amounts payable out of oil if, as, and when produced. Held: that the petitioners are the owners of an economic interest in the oil in place under each of the ten contracts, regardless of the presence or absence of formal words of assignment of such interest. F. H. E. Oil Co.,41 B.T.A. 130, and Cook Drilling Co.,38 B.T.A. 291, to that extent overruled.

ASSOCIATION - TAXABLE AS CORPORATION. - There was no association taxable as a corporation where, during the taxable years, a receiver of a closed insolvent national bank held and administered some segregated assets for the purpose of liquidating them for the benefit of holders of mortgage trust certificates.

Petitioner, a foreign personal holding company, filed a timely personal holding company tax return on Form 1120 H showing no surtax due, but filed no normal tax return on… Held: Petitioner is liable for a deficiency in normal tax under section 233 of the Revenue Act of 1934, because it did not file a true and accurate return of normal tax in the manner prescribed by Title I, which contains the income tax provisions of the act, and hence lost its right to certain deductions.

In 1927 respondent determined deficiencies for 1923 and 1924 in the income tax liability of a deceased taxpayer and issued one notice of such deficiencies to petitioner and others as executors of… Held: respondent is barred from such assertion by the statute of limitations as to the 1923 deficiency, but not as to the 1924 deficiency.

Held: (1) The ordinary income of two trusts was currently distributable and distributed to named beneficiaries other than grantor. The capital gains of the trust were accumulated and added to corpus for distribution as such at termination of the trusts. The trusts were not revocable.

Taxpayer is a New York corporation, with principal offices in California. In the taxable year 1936 and for several years previous thereto, the taxpayer had accumulated all net earnings. Held: the taxpayer was availed of for the purpose of preventing the imposition of a surtax on its stockholders, and is therefore liable for the surtax imposed by section 102 of the Revenue Act of 1934.

1. A corporation all of whose shares were owned by five individuals and over 97 percent of whose gross income was dividends on corporate shares which it owned, held, a personal holding corporation… Held: a personal holding corporation under section 352, Revenue Act of 1937, even though under the law of the state of its organization it might be prohibited from owning such shares and even though its principal shareholder might be shown not to be a wealthy man. 2.

1. The estate of decedent at the time of her death in 1933 consisted of community property and separate property. Held: under Texas law such distribution to himself of the community property of which he was sole legatee and devisee after all community debts had been paid was proper and no part of the income therefrom was taxable to the estate of decedent, which was still in process of administration as to her separate property during the taxable year.…

Petitioner, though in arrears to the extent of $45.50 per share upon cumulative undeclared dividends on preferred stock, had only from operations… Held: that the receipt of the new stock by the stockholders was not a taxable dividend nor essentially equivalent to a taxable dividend under section 115(a) and (g), Revenue Act of 1936, and therefore under section 27(h), Revenue Act of 1936, did not entitle the petitioner to dividends paid credit; held, further, that expense for…

Decedent left a will providing that a specific legacy be paid his widow and that the residue of his estate be paid to the Lord Provost of Glasgow, Scotland, for charitable purposes. Held: that the deduction may not include the amount payable by the residuary legatee to widow of decedent under the compromise settlement. Lyeth v. Hoey,305 U.S. 188, followed.

1. During the taxable year a portion of the income of the decedent's estate in process of administration or settlement was turned over to the trustee of a testamentary trust, which returned it, less… Held: following Estate of Ida A. White,41 B.T.A. 525, that the amount so turned over to the trustee is a legal deduction from gross income under section 162(c) of the Revenue Act of 1934. 2.

1. The cancellation by court decree of bonds of a corporation whose assets have decreased in value to such an extent that the corporation is insolvent, held, to… Held: to result in no taxable gain. 2. A corporation which has in earlier years taken deductions for interest paid on its bonds but which is insolvent at the time a recovery of such interest is applied to the debt upon cancellation of the bonds, held, to realize no taxable gain upon any part of the cancellation. 3.

1. Contracts passing to petitioner along with other assets and good will upon its purchase of going concern, which contracts called for sale of the concern's product at prices not above market, which… Held: on the facts, not to justify deductions for exhaustion claimed on the ground that such contracts expired by the end of the tax year. 2.

Prior to the taxable years, petitioner entered into an agreement with the United States Shipping Board for the purchase of certain vessels which it agreed to operate over specified routes. Held: petitioner may not exclude the sum of $250,000 from its taxable income since there is no showing that these amounts deposited pursuant to contract were required to be made up from the postal subsidy.

Petitioners entered into contracts with a partnership for the drilling of oil wells on their properties on a cost-plus basis. Held: petitioners are entitled, under Regulations 86, article 23(m)-16, to deduct the intangible drilling and development costs of the wells paid during the taxable year.

- A dividend paid pro rata on outstanding shares was not preferential within the meaning of section 27(g), Revenue Act of 1936, even though two large stockholders had previously made substantial contributions to the capital of the corporation without receiving any stock in exchange.

Debentures were issued by a personal holding company prior to January 1, 1934. Held: that amounts of income used by the corporation in a later year to retire the second bond issue were used to retire indebtedness incurred prior to January 1, 1934, within the purview of section 351(b)(2)(B), Revenue Act of 1936, as amended by section 355(b), Revenue Act of 1937.

Petitioner in 1932 executed four indentures by which he created four trusts, one for the benefit of each of his four minor children. Held: that power was vested in petitioner's wife and his brother prior to the amendment to revest in petitioner title to the corpora of the trusts; that petitioner's wife and his brother did not have substantial adverse interests in the disposition of the corpora of the trusts; and that petitioner was taxable during 1934 and during the…

1. INCOME. - Petitioner was employed by the State of Georgia and certain named political subdivisions thereof as a special tax investigator to discover taxable property not returned for taxation… Held: that petitioner was neither an officer nor an employee of the State of Georgia or the named political subdivisions thereof, but was an independent contractor, and that the compensation received for such services during the taxable years is subject to Federal income tax. 2.

1. Petitioner, a nonresident alien individual engaged in the exporting of rugs from Turkey to the United States for sale here through a resident commission merchant, must pay income taxes on the proceeds of the sales for the years 1933, 1934, and 1935. Secs. 211(a), 212(a), and 119(e), Revenue Acts of 1932 and 1934. 2. Section 211 of the Revenue Act of 1936, exempting persons in the situation of petitioner from income tax, has no retroactive application. 3.