Volume 49 — Tax Court Reports

Held, a separation agreement providing a single sum as support money for the wife and support and maintenance of children without… Held: a separation agreement providing a single sum as support money for the wife and support and maintenance of children without designating a specific sum payable for the support of the children either in dollar amount or proportion of the total sum paid is not cured to come within sec. 71(a)(2) and (b), I.R.C. 1954, by a subsequent…

In 1947 petitioners sold real and personal property to their own corporation and elected to report the substantial gain realized on such sale… Held: The assignment of the installment obligations to the partnership in December 1958 may be disregarded. Hence, the merger of the estates of obligor and obligee as a result of the January 1959 corporate liquidation constituted a disposition in 1959 of the installment obligations under the provisions of section 453 (d), 1954 Code.

1. Sec. 722(b)(4) -- Pushback -- Cabpni. -- In determining CABPNI for a power company which built new plants and came under sec. 722(b)(4) all earnings due to the increased capacity and all related changes must be considered. Amount of CABPNI determined. 2. Sec. 711(b)(1)(J). -- Abnormal deductions. Jefferson Amusement Co., 18 T.C. 44, followed.

Standard Kollsman Industries Inc. owned 91 percent of the shares of Old Casco. Held: the transaction was a redemption of the minority shares of Old Casco, the merger being merely incidental thereto, with the result that petitioner may carry back its operating loss against the taxable income of Old Casco.

In 1945, the Pine Street apartment building and realty was acquired by petitioner and his wife, Ann, and Jack and Annie Chow. The Gunns and Chows each owned a one-half interest. Held: That the legal fee of $ 10,000 awarded by the court to petitioner's lawyer, H, was solely for H's services with respect to the sale of the property, and the obtaining of the highest price for it, under the court proceeding.

Petitioner retired from the U.S. Army based upon his length of service. Held: petitioner may not exclude any part of the retirement pay received by him from the U.S. Army from gross income pursuant to sec. 104(a)(4), I.R.C. 1954.

Held, the surrender of restricted stock options by petitioner, who was a key employee of RCA, resulted in gain taxable as ordinary income. Held: the surrender of restricted stock options by petitioner, who was a key employee of RCA, resulted in gain taxable as ordinary income.

Held, a carved-out oil payment transferred from petitioner to a subsidiary in exchange for common stock constituted property within the meaning of sec. 351(a), I.R.C. 1954. Held: a carved-out oil payment transferred from petitioner to a subsidiary in exchange for common stock constituted property within the meaning of sec. 351(a), I.R.C. 1954.

Held: In determining when and what gifts were made -- 1. When Donald established savings accounts in the name of himself and one of his children, he remained the owner of the funds in the account; 2. Held: In determining when and what gifts were made -- 1. When Donald established savings accounts in the name of himself and one of his children, he remained the owner of the funds in the account; 2.

Petitioner, a closely held corporation engaged in the tool and die business, sold all of its machinery, fixtures, and inventory in 1958 after suffering net operating losses. Held: Rev. Rul. 63-40, 1963-1 C.B. 46, and the many cases distinguishing between net operating loss deductions and excess profits tax credit deductions, support petitioner's position.

Held, that the fair market value of common stock of a corporation held by the estate on the valuation date is the price at which other common stock of such corporation was sold in the… Held: that the fair market value of common stock of a corporation held by the estate on the valuation date is the price at which other common stock of such corporation was sold in the over-the-counter market on such date. Sec. 2031, I.R.C. 1954, and sec. 20.2031-2, Estate Tax Regs.

1. For several years prior to 1963 Shamrock had sought to purchase a ready-mix concrete plant and business conducted by petitioners as a sole proprietorship. Held: that the sale of the properties did not constitute a true statutory installment sale. 2.

Held, the amount of $ 15,000 received by petitioner in 1964 upon his discharge as an officer from the U.S. Air Force based upon his length of service was severance pay taxable in full as ordinary… Held: the amount of $ 15,000 received by petitioner in 1964 upon his discharge as an officer from the U.S. Air Force based upon his length of service was severance pay taxable in full as ordinary income.

Upon the termination of a lease on the building where he operated a drugstore, petitioner purchased the business of his only competitor in a community of 1,500 persons. Held: petitioners failed to established a cost or limited useful life of the prescription file entitling them to amortize its cost over a 3-year period. Held, further, since the covenant not to compete was separately bargained for, the cost was properly amortized over its 5-year life.

1. Decedent created a trust, naming himself as trustee, for the benefit of his children. The trustee was given the power to pay income or invade corpus in his discretion for the beneficiaries' education, maintenance, medical expenses, or other needs occasioned by emergency. In addition, the trustee was given the power to determine the division of the trust estate and to allocate receipts between principal and income. Held, that the trustee's power to distribute income or principal was limited by an external standard and not includable in his gross estate under sec. 2038(a)(1), I.R.C. 1954. 2. Held, further, that the managerial power retained by the trustee was not a power to designate the persons to enjoy the property within the meaning of sec. 2036(a)(2), I.R.C. 1954. 3. Held, further, that so much of the trust necessary to satisfy decedent's legal obligation under a divorce decree is includable in his gross estate under sec. 2036(a)(1), I.R.C. 1954. 4. Held, further, that real estate taxes on property included in decedent's gross estate had "accrued" by the date of his death and are deductible under sec. 2053, I.R.C. 1954.

Held: 1. Petitioner is not entitled to carry over and deduct from the income of its postreorganization business, under sec. 122, I.R.C. 1939, net operating… Held: Petitioner is not entitled to carry over and deduct from the income of its postreorganization business, under sec. 122, I.R.C. 1939, net operating losses which it had sustained in its prereorganization business. Continuity of business enterprise principle of Libson Shops, Inc. v. Koehler, 353 U.S. 382, applied. 2.

Held, on the facts disclosed by the record, petitioner failed to establish that it was entitled to a deduction for a contribution made to a profit-sharing trust. Held: on the facts disclosed by the record, petitioner failed to establish that it was entitled to a deduction for a contribution made to a profit-sharing trust.

Held: 1. Reallocation of partnership income determined on the basis of services rendered and respective capital interests of the partners. 2. Held: Reallocation of partnership income determined on the basis of services rendered and respective capital interests of the partners. 2. Income from the sale of certain cattle was constructively received in 1958. 3. In 1960 the partnership made a nontaxable exchange of cattle under sec. 1031(a), I.R.C. 1954. 4.

1. Petitioners, having reason to know that an estate tax return was required, relied upon an attorney to prepare and file this return. Held: this reliance upon the attorney did not constitute reasonable cause under sec. 6651, I.R.C. 1954, for petitioners' failure to file a timely estate tax return. 2.

Decedent, who died on Nov. 18, 1953, and her former husband resided in New Mexico from the time of their marriage in 1905 until the date of their divorce in 1936 and both… Held: Decedent's interest in the property held in her husband's name at the date of her death is includable in her gross estate to the extent of its value at the date of her death taking into account that the property in which she had such interest was unestablished and subject to contest at that time. 2.

Held, a technically deficient verification of a petition under Rule 7(c) (4) (D), Tax Court Rules of Practice, can be corrected by filing a… Held: a technically deficient verification of a petition under Rule 7(c) (4) (D), Tax Court Rules of Practice, can be corrected by filing a properly verified amended petition under Rule 17(b). Respondent's motion to dismiss for lack of jurisdiction denied because faulty verification does not affect the jurisdiction of this Court.

Investment Credit. -- On Dec. 4, 1957, petitioners entered into a lease agreement with the owners of certain premises located in Tucson, Ariz., for a period of over… Held: the said property sold on Apr. 2, 1962, and reacquired on Apr. 4, 1963, may not be treated as used section 38 property as that term is defined in sec. 48(c) (1), I.R.C. 1954, and petitioners are, therefore, not entitled to an investment credit regarding such property under secs. 38 and 46 of the said Code.

In a proxy contest between management and a group of insurgent stockholders, the latter prevailed and obtained a majority of seats on petitioner's board of directors. Held: on this record, the payment of the insurgents' expenses was no less proximately related to petitioner's business than the payment of the ousted management's expenses, and the former are also deductible as ordinary and necessary business expenses. Sec. 162, I.R.C. 1954.

1. On Jan. 3, 1961, petitioners conveyed by deed 1,115.96 acres of farmland in Phillips County, Ark., to Radcliffe Investment Co. in exchange… Held: that the Missouri farm received in the exchange was other property held primarily for sale and did not come within the nonrecognition-of-gain provisions of sec. 1031(a), I.R.C. 1954, 1Unless otherwise indicated, all references are to the Internal Revenue Code of 1954, as amended. and the entire gain of $ 86,631.92 realized by…

Pauline E. Nock was bequeathed a restricted stock option by her late husband. Held: A person who acquires the right to exercise a restricted stock option by bequest qualifies for the special tax treatment of sec. 421 of the 1954 Code, as it existed in 1961, if the deceased employee qualified for such treatment on the date of his death.

Petitioner for 35 years capitalized only the direct costs of labor and materials connected with self-constructed items. Held: petitioner, under all the circumstances involved, utilized an acceptable method of accounting for such overhead and its treatment thereof will not be disturbed. Held, further, that certain fringe items and the cost of this petitioner's drafting department were properly treated as overhead.

Held, on the facts disclosed by the record, that petitioners had commenced construction of a new residence prior to the expiration of 1 year… Held: on the facts disclosed by the record, that petitioners had commenced construction of a new residence prior to the expiration of 1 year after the date of sale of the old residence and had used the newly constructed residence as their principal residence within 18 months of said sale date and that, therefore, they are entitled to…

1. Held, that for each of the taxable years 1949 through 1958 the husband-petitioner received taxable income which was not reported in the joint income tax return filed by him and his wife. Held: that for each of the taxable years 1949 through 1958 the husband-petitioner received taxable income which was not reported in the joint income tax return filed by him and his wife.

In 1956 an executory contract was entered into by three corporations engaged in various aspects of the motor transportation business to sell all of their assets, provided, however, that the requisite… Held: the liquidating distributions received by Shaw's estate and by Mary Ann Keck in exchange for and in cancellation of the stock held by them are taxable as income in respect of a decedent within the meaning of sec. 691, I.R.C. 1954.

Taxpayer sold the assets of his business for $ 50,000. Held: The payments received by taxpayer must be allocated ratably among the three groups of assets sold according to the respective values thereof as set out in the agreement of sale.

Where prior to the filing of a petition with the Tax Court for prebankruptcy years a taxpayer had been adjudicated a bankrupt and the bankruptcy proceeding terminated, but the respondent had not made… Held: the Tax Court has jurisdiction to redetermine the deficiencies.

Petitioners exchanged 20 shares of common stock, having a basis of $ 10,000, for 171,800 new shares of common stock in the same corporation. Held: Under the circumstances, petitioners have a basis in the 171,800 shares of new common stock of $ 10,000 and in the 11,500 shares of new common stock of $ 50,000. 2. The corporation's payment of expenses attributable to petitioners constituted a dividend to them.

It was necessary for petitioner, a minor league baseball club, to enter into working agreements and a league agreement in order to obtain player contracts and… Held: This entire arrangement was an integral part of, and at the heart and core of petitioner's business; therefore, the player contracts were a part of petitioner's stock in trade and petitioner's primary and principal purpose in holding such contracts was to sell them in the ordinary course of its business.

Petitioner was a personal holding company during the taxable years ended May 31, 1954, 1959, 1960, and 1961. Held: Assessment of personal holding company tax for the taxable year ended May 31, 1954, is not barred by sec. 275(a), I.R.C. 1939. The applicable statute is sec. 276(a). Commissioner v. Lane-Wells Co., 321 U.S. 219, followed. 2.

Postage meter stamp date accepted as postmark date. Petition timely filed. Respondent's motion to dismiss for lack of jurisdiction denied.

Pamela T. Turner transferred certain shares of stock on the condition that the various recipients pay the resulting gift tax liability. Held: the donor intended and in fact made a net gift to each recipient. Held, further, the period for which the shares were held by the recipient Richard H. Turner included, pursuant to sec. 1223(2), I.R.C. 1954, the period for which the shares were held by Pamela T. Turner prior to the transfer.

On the sale of a house petitioner received cash from the purchasers, cash from a savings and loan association on a mortgage loan to the purchaser, and a savings account or savings and loan… Held: An accrual method taxpayer was required to include in gross income the face amounts of the savings accounts or savings and loan shares when received. 2. A cash method taxpayer was not required to include in gross income the face amounts of savings accounts or shares when received.

Petitioners were stockholders of an Iowa corporation engaged in publishing a newspaper and operating a commercial printing plant and a radio station in Dubuque. Held: the litigation expenses are capital expenditures not deductible under sec. 212, I.R.C. 1954, as ordinary and necessary expenses paid for the production or collection of income, or for the management, conservation, or maintenance of property held for the production of income.

Petitioner was a candidate for a Ph. D. in electrical engineering at the Ohio State University in 1964. All candidates for such degree were required to do research. Held: the payments received by petitioner are taxable as compensation for services and are not excludable as a scholarship or fellowship within the meaning of sec. 117, I.R.C. 1954.

Petitioner was the sole shareholder of Massachusetts Enterprises. The sole asset of the latter corporation was a parcel of unimproved land. Held: sec. 311(a), I.R.C. 1954, does not preclude the application of Commissioner v. Court Holding Co., 324 U.S. 331 (1945), and United States v. Cumberland Pub. Serv. Co., 338 U.S. 451 (1950), and petitioner is taxable under the principles enunciated by those cases on the gain from the sale of the shares of Massachusetts Enterprises.

Petitioner, a coal geologist assigned to the Henderson, Ky., field office of the Kentucky Geological Survey, maintained his residence in Evansville, Ind., directly across the Ohio River from… Held: petitioner may deduct his moving expenses incurred in the intercity job transfer. The expenses were, and the deduction is permitted as, an ordinary and necessary business expense under sec. 162, I.R.C. 1954.

Incident to a corporate reorganization in which the assets and liabilities of one corporation were transferred to another in exchange for stock, a distribution was made to petitioner within 1 taxable… Held: the distribution to petitioner was not made on account of the employee's * * * separation from the service and therefore the amount received by him in 1962 is taxable as ordinary income and not as a long-term capital gain under sec. 402(a)(2), I.R.C. 1954.

Trustee of petitioner was the defendant in a State court litigation brought by the beneficial remaindermen of petitioner to have their interests accelerated… Held: the attorneys' fees incurred by petitioner in connection with the State court litigation were deductible expenses pursuant to sec. 212(2), I.R.C. 1954, and were not capital expenditures incurred in defending or perfecting title to property; and these expenses were the ordinary and necessary expenses of petitioner.

Under California law, community property transferred to a partnership becomes specific partnership property and loses its character as community property. Held: sec. 351, I.R.C. 1954, applies, and petitioner is not entitled to a stepped-up basis for the transferred assets.

Petition was mailed in envelope timely postmarked but addressed to U.S. Board of Tax Appeals, Washington, D.C. 20044. Held: The envelope in which the petition was originally mailed was not properly addressed within the meaning of sec. 7502 of the 1954 Code and that section is not applicable. The petition was not timely filed under sec. 6213 of the Code and the Tax Court does not have jurisdiction. Respondent's motion to dismiss granted.

The Clark Trust was created to provide perpetual care for cemetery lots located in the trustee's cemetery. Held: the trust agreement must be interpreted so as to fulfill the purposes of the grantor, and due to the nature of those purposes, the Clark Trust is not required to distribute all of its income currently.

The petitioners owned all the stock of a small business corporation which was engaged in the business of renting furnished bungalows to vacationers. Held: these receipts constituted rents within the meaning of sec. 1372(e)(5), I.R.C. 1954, and sec. 1.1372-4(b)(5)(iv), Income Tax Regs. thus causing a termination of the election of the corporation under sec. 1372(a), I.R.C. 1954.

1. Held, limitation of trustees' power to invade corpus for the benefit of income beneficiary to the event of sickness, accident, misfortune… Held: limitation of trustees' power to invade corpus for the benefit of income beneficiary to the event of sickness, accident, misfortune or other emergency, or to cases in which income available to the income beneficiary from all sources is insufficient to provide for the proper care, support and medical attention of such beneficiary…

In order to improve the corporate balance sheet in connection with an application for a television station pending before the FCC, a corporation in 1954 temporarily transferred to its majority… Held: under these circumstances, the redemption of stock from petitioner in 1961 was not essentially equivalent to a dividend within the meaning of sec. 302(b)(1) of the 1954 Code.

Sec. 71(a)(2) and (d). -- This case comes precisely within sec. 71(a)(2) and (d) and is decided in accordance with those provisions.

Renegotiation -- Exemption. -- Petitioner is a chemical company which in 1957 entered into a contract with the Atomic Energy Commission to process yttrium oxide from a cerain raw material supplied to… Held: Petitioner's claim for exemption under sec. 106(a) (3), Renegotiation Act of 1951, is denied. 2. Petitioner realized excessive profits from its contract with the AEC in the sum of $ 250,000.

1. Held, the decedent's estate was not entitled to a deduction under sec. 2053, I.R.C. 1954, for that portion of the decedent's… Held: the decedent's estate was not entitled to a deduction under sec. 2053, I.R.C. 1954, for that portion of the decedent's administrative and funeral expenses, debts, and mortgages and liens which were properly chargeable to his surviving spouse's share of community property under applicable California law, notwithstanding a provision in…

Subchapter S -- Election of Small Business Corporation as to Taxable Status. -- Held, Apache Park Development Corp. was not entitled to be treated as a small business corporation under subchapter S,… Held: Apache Park Development Corp. was not entitled to be treated as a small business corporation under subchapter S, I.R.C. 1954, for the calendar year 1963, since no valid election was filed under sec. 1372(a) and (c)( 1), I.R.C. 1954.

1. P and D were partners whose proportionate share of the profits and losses of the partnership were 75 percent and 25 percent respectively. Held: the partners, anticipating a substantial operating loss, properly incorporated their business and effectively transferred all of the partnership assets to the corporation. 2. The corporation then properly elected to be taxed as a small business corporation under subchap. S, I.R.C. 1954.

Held, petitioners are not entitled to deduct, as expenses for medical care under sec. 213, I.R.C. 1954, legal expenses paid by them in connection with guardianship proceedings… Held: petitioners are not entitled to deduct, as expenses for medical care under sec. 213, I.R.C. 1954, legal expenses paid by them in connection with guardianship proceedings instituted at the time the petitioner-wife went to receive treatment at a sanitarium for her mental and emotional condition.

Held, petitioners are not entitled to deduct a loss occasioned by the worthlessness of their stock in Bernie's Mens Shop, Inc., in the year 1962 as an ordinary loss or as a loss carryback to the year… Held: petitioners are not entitled to deduct a loss occasioned by the worthlessness of their stock in Bernie's Mens Shop, Inc., in the year 1962 as an ordinary loss or as a loss carryback to the year 1959.

Petitioner received from American Metal monthly payments of $ 1,000 during 1959 for his efforts in designing an electric hospital bed under a… Held: the payments were compensation for services rendered and are taxable as ordinary income under sec. 61(a)(1), I.R.C. 1954. Held, further, business expense deductions under sec. 162, I.R.C. 1954, denied with respect to rent and utility expenses on petitioners' personal residence but allowed with respect to certain travel expenses.

1. Moneys advanced to a corporation by its principal stockholder to finance the development of a real estate subdivision, held, on the facts, to be loans rather than… Held: on the facts, to be loans rather than contributions to capital. 2. Cost to a real estate developer of constructing a shelter in a city-owned park which the city required as a condition to its approval of the developer's subdivision plat, held, a capital expenditure rather than a business expense. 3.

Petitioner, a child actor, and his mother lived in New York City during 1963, where petitioner appeared in two plays. Held: Petitioner's expenses for food and lodging in New York City in 1963 were not deductible traveling expenses, because he was not away from home. 2. Petitioner's expenditures in 1963 for tuition were nondeductible personal expenses. 3.

Held, periodic support payments made to a former wife and child, under a New York annulment decree granted after 5 years of marriage on grounds of the husband's premarital fraud, are tantamount to payments under a "decree of divorce" and are includable in the former wife's gross income under sec. 71(a)(1), I.R.C. 1954, and deductible by the former husband under sec. 215, I.R.C. 1954.

Petitioner was organized as a wholly owned subsidiary to take over an area of existing business of its parent. Held: under all the circumstances, the advances represented bona fide indebtedness and the interest paid was a proper deduction.

Decedent, a retired businessman and farmer, owned a valuable family farm and other unimproved real estate on the outskirts of Louisville, Ky. Held: The 1958 and 1959 gifts were not made in earlier years when he executed a power of attorney and a further document expressing his wish that the proceeds of the condemnation proceedings be divided upon receipt in accord with his testamentary plans.

In 1963 petitioner became entitled to, and received, readjustment pay in the amount of $ 12,600 under the provisions of the Act of June 28, 1962, Pub. L. 87-509, 87th Cong., 1st Sess., 76 Stat. 120, 50 U.S.C. sec. 1016. Held, the amount so received was includable in petitioner's gross income under sec. 61 (a), I.R.C. 1954, and was not excludable therefrom under sec. 113, I.R.C. 1954.

Petitioners were stockholders of APC, which owned the patents for the first workable automatic pinsetting machine for bowling. Held: the rights of petitioners to receive future percentage-of-profits payments had no ascertainable fair market value on Sept. 16, 1954, and therefore the amount received by them are taxable as long-term capital gains.

Since petitioner kept a permanent room in San Antonio, Tex., at a rental cost to him of approximately $ 600 a year, considered San Antonio as his headquarters, worked for an employer with its offices in San Antonio, and received per diem only when away from San Antonio, he had his home in San Antonio within the meaning of sec. 162(a)(2), I.R.C. 1954, and is entitled to deduct his traveling expenses when away from San Antonio in pursuit of his business.

Sec. 162(a) -- Unreasonable Salary Repaid to Payor. -- A repayment of a part of an officer's salary for 1960 is deductible where made as required by a bylaw adopted by the payor corporation at the time of its incorporation in 1952 which required, inter alia, that a part of an officer's salary disallowed as a deduction for income tax purposes be repaid to the corporation.

Petitioner, a sales agent, customarily maintained running accounts with its principals. Held: under all the circumstances, petitioner's net advances to Harriston Lumber as of June 30, 1960, represented bona fide indebtedness; its net advances thereafter did not.

1. Held, where petitioner received stock and notes in exchange for assets transferred to controlled corporations pursuant to sec. 112(b)(5), I.R.C. 1939, and… Held: where petitioner received stock and notes in exchange for assets transferred to controlled corporations pursuant to sec. 112(b)(5), I.R.C. 1939, and where the payout period on the notes was 20 years, in equal monthly installments, each monthly note payment consisted of return of principal, interest, and gain.

Petitioner is in the business of issuing cancelable and noncancelable accident and health insurance policies on the assessment plan in Illinois. Held: that petitioner is taxable as a mutual insurance company under sec. 821, I.R.C. 1954, and not as an insurance company other than life or mutual under secs. 831 and 832.

A property settlement agreement incident to a Texas divorce provided for payment to the wife by the husband of $ 23,000 to be evidenced by a… Held: The $ 300-a-month payments by the husband to the wife were under the agreement incident to the divorce and Texas law installment payments discharging a part of an obligation, the principal sum of which is in terms of money specified in the agreement and therefore under sec. 71(c)(1), I.R.C. 1954, not to be considered as periodic…

Held, that the claim of decedent's husband against decedent's estate cannot be deducted by said estate under sec. 2053(a), I.R.C. 1954, as a… Held: that the claim of decedent's husband against decedent's estate cannot be deducted by said estate under sec. 2053(a), I.R.C. 1954, as a claim which is allowable by the laws of the jurisdiction where the estate was administered because the claim was barred by the Michigan statute of limitations, notwithstanding that such claim was…

On Aug. 30, 1949, petitioner entered into an agreement obligating him to make monthly payments to his wife, a nonresident alien, for her support and maintenance. Held: such payments constituted income to petitioner's former wife from sources within the United States in respect of which petitioner incurred liability as a withholding agent under sec. 1441(a), I.R.C. 1954, and sec. 143(b), I.R.C. 1939.

Petitioner, a travel agent, regularly transacted a large portion of her business with clients which were exempt as charitable organizations under sec. 170. Held: under all the circumstances, such payments were not charitable contributions and, therefore, the limitation of sec. 162(b) did not preclude deductibility in full as business expenses.