Volume 45 — Tax Court Reports

1. Corporate petitioner engaged in the manufacture and sale of locks expended large sums for research and development of locks and other products not related to locks. Held: all such research and development expenditures were paid in connection with petitioner's business and deductible under section 174(a)(1), I.R.C. 1954. 2.

1. Held, a corporation called Supreme and five corporations called the Monette companies were separate, distinct, viable, legal entities… Held: a corporation called Supreme and five corporations called the Monette companies were separate, distinct, viable, legal entities engaged in business activity during the years 1956 through 1959 and the net income reported by them was earned by them and is not taxable to a corporation called Incorporated under either section 61 or 482…

Petitioners, who use the cash method of accounting, made substantial end-of-year payments to cattle-feeding companies for feed and services to be supplied in subsequent years. Held: that such payments were in reality deposits and therefore not deductible as ordinary and necessary business expenses in the years of payment but only in the years when the feed and services were supplied.

Held, where subsidiary corporation is merged into its parent in a transaction to which section 334(b)(2), I.R.C. 1954, is applicable, balance in reserve for bad debts of subsidiary constitutes income… Held: where subsidiary corporation is merged into its parent in a transaction to which section 334(b)(2), I.R.C. 1954, is applicable, balance in reserve for bad debts of subsidiary constitutes income to subsidiary for its final taxable year.

Pacific corporation was engaged in the telephone business in California and other western States. Held: the transaction was a tax-free spin-off under section 355, I.R.C. 1954, and petitioner-stockholders who obtained Northwest stock by exercising their rights did not thereby realize taxable income at that time.

In a family corporation the father owned 1,509 shares of stock, and each of his three sons owned 1 share. Held: that such transfer to the corporation constituted a gift by the father of a portion of his interest to each of his sons, decreasing his own interest to a one-fourth interest and increasing each son's interest to a one-fourth interest; and that under section 1015 of the Internal Revenue Code of 1954, the basis of the interest of each…

In December 1958 Jack Winston Londen, president of Green Shield Plan, Inc., told Shoemaker, secretary of Shield, that he wished to donate a portion of the Shield shares represented by an endorsed… Held: that the charitable contributions were not completed in 1958 and 1959, respectively.

The owners of two vessels agreed to transfer them to the X corporation. As required by the agreement and as an incident to the transfer the owners made expenditures for needed repairs to the vessels. Held: such expenditures were capital in nature and were not deductible as ordinary and necessary expenses.

1. On the facts presented, held, that the mother, to whom the custody of three minor children had been awarded by the divorce court, furnished more than one-half the total support and is entitled to… Held: that the mother, to whom the custody of three minor children had been awarded by the divorce court, furnished more than one-half the total support and is entitled to the dependency exemptions for the three children for the year 1961. 2.

In April 1959, Credit, Inc., an accrual basis taxpayer, agreed to pay a retiring employee $ 100 per month until such payments totaled $ 10,000 or until she died, whichever occurred first. Held: the obligation arose from a plan deferring receipt of compensation, and payments in satisfaction thereof are deductible only when actually paid under section 404 (a) (5) of the 1954 Code.

Petitioner's transferor sold one of its films to its controlling stockholder for cash in an effort to avoid being treated as a collapsible corporation. Held: the asset so sold was of a character subject to the allowance for depreciation in the hands of the purchasing controlling stockholder, and, hence, section 1239, denying capital gain on the sale, is applicable.

Held, that the petitioner is not entitled to deduct, in computing his adjusted gross income for the taxable year 1962 under section 62(1) of the Internal Revenue Code of 1954, West Virginia… Held: that the petitioner is not entitled to deduct, in computing his adjusted gross income for the taxable year 1962 under section 62(1) of the Internal Revenue Code of 1954, West Virginia individual income tax paid in that year on his business income.

Petitioner and his wife owned all but one share of the stock of a corporation which was an electing small business corporation under… Held: petitioner's deduction for his prorata share of the corporation's net operating loss is limited to his adjusted basis in his stock of the corporation, which was his cost in the stock and not the share of the net worth of the corporation represented by his stock at the time the corporation made the election under subchapter S. Held,…

1. T corporation, an accrual basis taxpayer, was a franchise dealer in electric appliances, and was obligated to render service to the ultimate purchasers in accordance with warranties given by the… Held: the entire sales price received or properly accrued is required to be included in income in the year of sale. 2. Depreciation allowance determined in respect of certain assets. 3. Amounts of awards to individual petitioners for foreign trips held includable in gross income.

Petitioner is the widow of Clarence Lilly who for many years prior to 1948 was a member of the Baltimore City Police Department. Clarence retired in 1948 and died in 1955. Held: the amounts so received are taxable annuities received by virtue of her husband's employment and are excludable only to the extent that they represent a return of the investment of $ 430.56, plus the death benefit limitation of $ 5,000 provided for in section 101(b)(2)(A), I.R.C. 1954.

Held, petitioner failed to show compliance with Mimeograph 6209, 1947-2 C.B. 26, and Rev. Rul. 54-148, 1954-1 C.B. 60, in computing a… Held: petitioner failed to show compliance with Mimeograph 6209, 1947-2 C.B. 26, and Rev. Rul. 54-148, 1954-1 C.B. 60, in computing a reasonable addition to a reserve for bad debts in the following respects: (a) A failure to eliminate the insured portion of Government-insured loans from the loans outstanding at the end of the year before…

In an employment agreement dated April 22, 1957, between petitioner and his employer, Edison Co., petitioner was granted an option to purchase a 20-percent interest in the business of Edison Co., or… Held: Petitioner's gain on his exchange of an option to purchase a 20-percent interest in Edison for stock of Colgate did not qualify for nonrecognition under section 354(a) (1) of the 1954 Code. 2.

The petitioner Myrtis C. Usher entered into a binding contract to sell certain stock to a third party and then, prior to the actual consummation of the sale, transferred such stock, subject to the… Held: that in substance the sale was made by the petitioner through the trust as a conduit and that the petitioner is taxable in the year of sale upon the full amount of the gain realized upon the sale.

Petitioner, a construction worker, used his car to transport himself and his 32-pound bag of tools from his home to various job locations where his employer was constructing buildings. Held: the amounts paid for such transportation were personal expenses and not deductible as business expenses.

Held, petitioner's automotive price information service was not a periodical within the meaning of section 455, I.R.C. 1954, and petitioner must report… Held: petitioner's automotive price information service was not a periodical within the meaning of section 455, I.R.C. 1954, and petitioner must report income from sales thereof in the year of receipt or accrual, even though a substantial portion of the costs related to the income was not incurred until the following year.

1. Held, the Tax Court has jurisdiction under sections 273(c) of the 1939 Code and 6861(c) of the 1954 Code to decide a question concerning interest on a deficiency, where the interest has been… Held: the Tax Court has jurisdiction under sections 273(c) of the 1939 Code and 6861(c) of the 1954 Code to decide a question concerning interest on a deficiency, where the interest has been assessed in connection with the jeopardy assessment of the deficiency. 2.

Petitioner, a financially distressed producer of rubber products, was acquired by Cooper, who leased petitioner's assets and transferred its production… Held: Cooper did not purchase petitioner for the principal purpose of avoiding Federal income taxes. Sec. 269(a), I.R.C. 1954, inapplicable. 2. Libson Shops, Inc. v. Koehler, 353 U.S. 382 (1957), inapplicable on these facts. 3. Petitioner continued to carry on the same business after resuming production and sales activities.

1. Decedent's power as trustee to pay out portions of corpus to herself as beneficiary at such times, in such amounts, and for such purposes as the trustees in their unrestricted discretion may deem… Held: further, the general practice of following a State court adjudication of a property interest does not apply when the decree has no effect under State law as a determination of such an interest.

1. Petitioner, a woman of substantial means, sustained large losses in the raising of Hungarian Half-Bred horses. Held: Petitioner bred and raised these horses in an attempt to perpetuate and establish them as a recognized breed in the United States. She conducted the operation for personal satisfaction and not in order to obtain a profit. Losses thus sustained are not deductible. 2.

Held, under the unique facts and circumstances of this case, petitioner was a bona fide resident of a foreign country and the income earned without the United States during the taxable year is exempt… Held: under the unique facts and circumstances of this case, petitioner was a bona fide resident of a foreign country and the income earned without the United States during the taxable year is exempt from taxation under the provisions of section 911(a) (1), I.R.C. 1954.

1. Held, that certain transactions between petitioner Comtel Corp. and Zeckendorf Hotels Corp., which in form purported to be, first a… Held: that certain transactions between petitioner Comtel Corp. and Zeckendorf Hotels Corp., which in form purported to be, first a purchase by Comtel from Zeckendorf of most of the capital stock of Commodore Hotel, Inc., for a price of more than $ 8 million in cash, and then a sale back to Zeckendorf of this same stock about 7 months…

Held, that if petitioner expects to contest the correctness of a deficiency where an addition to tax under section 6653(b) (fraud… Held: that if petitioner expects to contest the correctness of a deficiency where an addition to tax under section 6653(b) (fraud penalty) has been determined by respondent, petitioner must allege, under Rule 7(c)(4)(B)5 of the Court's Rules of Practice, facts in his petition upon which he relies as sustaining such an assignment of error.

Petitioners were partners in Perl-Mack Construction Co., which subdivided land and built and sold homes located in two subdivisions, Perl-Mack Manor and Northglenn, in Adams County, Colo. Held: the transfers do not qualify as charitable contributions under section 170(c).

Petition was received by ordinary mail and filed in the Tax Court on July 23, 1965, which was the 91st day after the notice of deficiency was mailed. The postmark on the covering envelope is illegible but indicates that it was mailed from the General Post Office Station, New York, N.Y., 10001. The postmark has a "PM" notation on it, evidencing the fact that it was mailed sometime after 12 m. on the date of mailing. First-class mail which is postmarked July 23 "PM" at the General Post Office Station, New York, N.Y., cannot under any circumstances be delivered in Washington, D.C., on the same day of mailing. Held, petitioners have met their "burden of proving the time when the postmark was made" as required by regulations section 301.7502-1(c) (1) (iii) (a) and that this time was within 90 days after the notice of deficiency was mailed, thus making the petition timely within sections 6213(a) and 7502(a), I.R.C. 1954.

Decedent entered into a property settlement agreement with his then wife, Jane, prior to divorce, in which the wife relinquished all of her rights against decedent… Held: The transfers in trust were made for adequate consideration to the extent of the value of Jane's right upon divorce to one-third of decedent's personal property which she relinquished, and to that extent the property transferred is therefore not includable in decedent's gross estate under section 2036.

Held, that where under the provisions of a trust the trustee was to set up a reserve for depreciation in respect of the trust properties, the allowable deduction for such depreciation is, under the applicable regulations, first allocated to the trustee; and that under the facts here present, no portion of said depreciation deduction is allowable to the income beneficiary.

Petitioner Irvine and his wife owned real property which was encumbered by two mortgages. Held: the transaction, viewed in its totality, lacked economic reality, and the trust will be treated as a nullity for Federal income tax purposes.

Respondent determined a deficiency in the income tax of the transferor for its taxable year ended January 31, 1959. The transferor's proper taxable year was the fiscal year ended October 31, 1959. Held: there is no deficiency for the period November 1, 1958, to January 31, 1959, and we have no jurisdiction over any other period.

Held, where a wife executes a document simultaneously with the execution of her husband's will, consenting and electing to be bound by… Held: where a wife executes a document simultaneously with the execution of her husband's will, consenting and electing to be bound by her husband's will, wherein the will disposes of not only the husband's interest in the community property but also his wife's interest, the wife's interest in the community property passes to the devisee…

In the written agreement of sale freely entered into between the seller and the buyers of a service business $ 142,000 of the total purchase price of $ 147,000 was allocated to a covenant not to… Held: that the $ 1,000 monthly payments were for the covenant not to compete, deductible by the buyers and taxable as ordinary income to the seller.

Held, where the Commissioner in his notice of deficiency determined an overassessment in income tax (due to allowance of a net operating… Held: where the Commissioner in his notice of deficiency determined an overassessment in income tax (due to allowance of a net operating loss carryback) in excess of the amount he determined as deficiencies in additions to tax for the same year, there is no determination of deficiency for that year and this Court is without jurisdiction…

On January 10, 1950, petitioner Winthrop M. Crane, Jr., his two sons, a business associate of his, Laurence R. Connor, and a bank executed an instrument… Held: A valid trust was created under Massachusetts law. 2. The purchase of the stock by Crane's sons and Connor under these circumstances was merely the exercise of an option to purchase such stock. Therefore, the optionees' basis therein is their cost under section 1012, I.R.C. 1954. Section 1223(2) is inapplicable. 3.

Petitioner Dorothy L. Reese was a candidate for the degree of master of arts in teaching at Johns Hopkins University in 1960. All candidates for such degree were required to teach for one semester. Held: the payments are not excludable as a scholarship within the meaning of section 117, I.R.C. 1954.

Lump-sum payments of $ 80,000 in each of the years involved, paid pursuant to the terms of a supplemental lease agreement wherein additional property was added to the original lease between… Held: not to be deductible in full in the years in which paid either as rental or ordinary and necessary business expenses.

On the sale of a collection agency business which he had operated as a sole proprietorship petitioner reported only long-term capital gain. Held: The parties being agreed that the contract price for the furniture and fixtures was unreasonably high, the fair market value of such item is determined. 2. The white files were a mass asset in the natured of goodwill and petitioner's gain on them was long-term capital gain. 3.

Petitioner entered into an antenuptial agreement which determined rights of his spouse upon dissolution of the marriage by annulment or divorce. Held: the legal expenses of defending an action to declare an antenuptial contract invalid are personal and not deductible.

1. Respondent's determination of loss carryover sustained for failure of proof by petitioner. 2. An amount properly assessed against petitioner as income tax prior to issuance of notice of deficiency and not subsequently abated does not constitute a portion of the statutory deficiency under the definition of deficiency contained in section 6211, I.R.C. 1954. 3.

Griswold and Fielden, individuals, purchased the entire outstanding stock of a corporation engaged in the retail cigarette vending machine business. Held: The purchase of stock and the liquidation in the circumstances of this case were not parts of one transaction and did not amount to a purchase of the assets of the corporation by Griswold and Fielden.

Petitioner, an osteopathic doctor, paid $ 3,000 in 1960 for staff privilege fees in a hospital, which in effect, secured such staff privileges for him for an indefinite period extending well beyond… Held: the expenditure was a capital outlay and not deductible in full as an ordinary and necessary business expense under section 162(a), I.R.C. 1954.

Held, the expenses of a psychiatrist for psychoanalytic training were not deductible under circumstances which cannot be distinguished from the circumstances present in Arnold Namrow, 33 T.C. 419… Held: the expenses of a psychiatrist for psychoanalytic training were not deductible under circumstances which cannot be distinguished from the circumstances present in Arnold Namrow, 33 T.C. 419 (1959), affd. 288 F. 2d 648, and Grant Gilmore, 38 T.C. 765.

Petitioner acquired obligations in the form of negotiable promissory notes at sizable discounts. The obligations were usually secured by second deeds of trust on residential property. Held: with some exceptions, the obligations owned by petitioner as measured by defined critical factors were speculative. Held, further, that petitioner was not required to report, as discount income, a prorata portion of payments on obligations found to be speculative.

Rules of Practice -- Proper Party -- Verification of Petition -- Rules 6, 7(a)(2), and 7(c)(4)(D). -- After filing a joint income tax return, the husband died… Held: that the granting of letters of administration to the surviving wife relates back to the death of the husband and therefore the act of the wife in filing the original petition for the decedent is validated. Alex H. Davison, 13 T.C. 554, distinguished. Motion to dismiss denied; motion to amend petition granted.

1. Held, that an alleged loss on the sale of residence property is not deductible, because the property which had theretofore been occupied… Held: that an alleged loss on the sale of residence property is not deductible, because the property which had theretofore been occupied by the seller as her personal residence, had not prior to the sale been converted to any profit-inspired use; and hence, that the alleged loss was not incurred either in a trade or business or in any…

Central States Electric Corp. and two subsidiary investment companies were reorganized in a chapter X bankruptcy reorganization. Held: The losses incurred by Blue Ridge which had been deducted without tax benefit determined the basis for the claims and such basis became petitioner's basis when the lawsuits were assigned to petitioner in 1951 in a nontaxable exchange pursuant to the bankruptcy reorganization plan.

Petitioner sought review of an asserted liability as transferee of assets. Held: the admitted allegations of respondent's answer are sufficient proof of transferee liability.

In the course of a divorce trial brought by the wife the judge stated from the bench that he would approve an order requiring the husband pay $ 75 a week for the support of his three children, whose… Held: a 1964 nunc pro tunc order that corrected the decree retroactively to show the $ 75 weekly payment was for support and maintenance of the three children operated to exclude the 1960 payments from the wife's 1960 income under section 71(b), I.R.C. 1954.

During its taxable years ended March 31, 1953 and 1954, the petitioner operated the Cornelius mill at a loss. Held: under the principle of Libson Shops, Inc. v. Koehler, 353 U.S. 382, that the petitioner is not entitled to carry over and deduct from its income for its taxable years ended March 31, 1957, March 29, 1958, and March 28, 1959, the net losses sustained in its taxable years ended March 31, 1953 and 1954.

Petitioners were partners in an insurance agency business. In 1959 they sold their partnership interests to a single buyer who assumed all of the partnership liabilities. Held: Petitioners do not qualify for installment reporting of the gains on sales of their interests under section 453, I.R.C. 1954. The partnership liabilities paid by the purchaser in the year of sale must be deemed part of the initial-year payments.

Petitioner, unhappily married to a domineering and sometimes violent man, signed joint income tax returns at his direction, but, held , since she has failed to prove that she did so unwillingly, she… Held: the question of whether a joint return is made within the meaning of section 6013(d)(3) is to be determined under a uniform, Federal standard.

In 1956, petitioner, who had been in the food brokerage business in Florida for many years, formed a Panamanian corporation for the purpose of having it invest in a joint venture to conduct farming… Held: there were bona fide business reasons for forming the corporation, and its corporate entity may not be disregarded so as to attribute its income to its sole stockholder.

Held, on the facts, appointive assets distributed to takers in default pursuant to an agreement compromising the contest of decedent's will purportedly exercising general powers of… Held: on the facts, appointive assets distributed to takers in default pursuant to an agreement compromising the contest of decedent's will purportedly exercising general powers of appointment over the trust assets are not includable in the gross estate under section 2041, I.R.C. 1954.

Petitioner purchased his decedent partner's share in a two-man partnership and, within a period of less than 6 months from decedent's death, petitioner realized a capital gain from the sale of some… Held: Petitioner's holding period for the partnership assets relating to the decedent partner's partnership interest does not include the partnership's holding period for such assets within the meaning of section 735(b), I.R.C. 1954, but begins from the date of such purchase.

Rental (a subchapter S corporation) was engaged in the business of leasing or renting construction equipment. Held: useful lives of categories of equipment and salvage values for purposes of depreciation should be determined from Rental's past experience with respect to holding periods and resale prices.

1. Held, petitioner, Eugene A. Mohr, was not engaged in a business of buying and selling automobile dealerships; interest, bad debts,… Held: petitioner, Eugene A. Mohr, was not engaged in a business of buying and selling automobile dealerships; interest, bad debts, and worthless stock losses related to dealerships promoted by petitioner were nonbusiness deductions and, under section 172(d) (4), I.R.C. 1954, could not give rise to net operating loss carrybacks to the years…

1. Partnership contracted to build military housing for the Government in the State of Washington under the Capehart Act. Held: the Washington retail sales tax was not properly accruable in the years 1960 and 1962 and could not be deducted in computing the taxable income of the partnership and the partners for those years. 2.

Petitioner asserts nonrecognition of condemnation gain under section 1033, I.R.C. 1954. Held, nonrecognition denied because: 1. Held: nonrecognition denied because: 1. One of the five alleged replacement properties was purchased by his controlled corporation, rather than by petitioner; 2. Three of the five alleged replacement properties were purchased out of time; and 3.