Volume 5 — Tax Court Memorandum

Gross income: Compromise of indebtedness to bank. - Capital gain was not realized from a transaction in which taxpayer assigned to a bank securities which the bank held as collateral on his loan in settlement of his obligations to the bank.

Distributions by corporations: In kind: Appreciation in value. - Taxpayer realized no taxable income by virtue of a distribution in kind to its stockholders of property which had appreciated in value between the time of its acquisition and of its distribution, where it was found that immediately prior to the distribution taxpayer had no earnings or profits and that the property in question was purchased out of capital and not out of earnings or profits.

Debt from son to father which became worthless in 1939 allowed as deduction from father's income for that year. Section 23 (k) (1) I.R.C. of 1939, as amended.

Held, that the respondent erred in making additions to each of petitioner's income as reported from a partnership. Held: that the respondent erred in making additions to each of petitioner's income as reported from a partnership.

Held, stock owned by taxpayer did not become worthless in 1940 and he is entitled to deduct the loss sustained on the sale thereof in 1941. Held: stock owned by taxpayer did not become worthless in 1940 and he is entitled to deduct the loss sustained on the sale thereof in 1941.

To the extent club dues were incurred for business reasons they are deductible as ordinary and necessary business expenses.

Petitioner purchased certain real estate in his own name in 1936. He contends that he is taxable on only one-half the income from the purchased property because his wife is a half owner thereof. Held, that the evidence fails to establish that petitioner is other than sole and exclusive owner of the property and the entire net income therefrom is taxable to him.

Held that certain real estate sold in the taxable years was held by petitioner primarily for sale in the ordinary course of her business.

Held, respondent did not err in taxing the income from the family partnership to petitioner, who formerly operated the business as a sole proprietorship.

In his income tax return for 1940 the petitioner claimed the deduction from gross income of $5,034.36 owed to him by the Pittsburgh Dry Stencil Co. Held, that the debt became worthless in 1940 and… Held: that the debt became worthless in 1940 and that the amount is a deduction from gross income. In years prior to 1941 the petitioner spent $17,769.45 in the development of an invention of an electel machine. Litigation starting in 1938 was terminated in 1941.

Petitioner organized, financed, managed and controlled successively three different partnerships of which his wife, three children, a brother-in-law and his secretary were named as partners. Held: under the facts, petitioner is taxable on all of the income of the partnerships.

Gifts in trust. - Held, that the gifts of trust corpus were future interests. Held, further, there is no proof that the gifts of the trust income had any value. Held: that the gifts of trust corpus were future interests. Held, further, there is no proof that the gifts of the trust income had any value. Accordingly, no exclusions are allowable.

The respondent's determination of allowable salaries for petitioner's three principal officers in 1941, held, reasonable on the evidence as to the officers' qualifications and services performed by them.

Upon the facts the reasonableness of salaries of petitioner's two principal officers determined; the transfer arranged by petitioner's two controlling stockholders to a corporation owned by one of them of a long-term engineering contract then being performed by petitioner and sale of certain machinery and equipment in connection therewith was an arm's length transaction, and where petitioner, on a percentage of completion basis, reported a profit on the contract in 1938 and…

On the evidence held, petitioner maintained consistently an accounting system on a cash receipts and disbursements basis. Held: petitioner maintained consistently an accounting system on a cash receipts and disbursements basis. Further held, that ten per cent was a reasonable composite rate for depreciation on petitioner's equipment.

In 1937, petitioner, a Minnesota corporation, in a reorganization exchanged its stock and debentures for the stock of the predecessor corporation. On the facts it is held, that the interest paid or properly accrued in the taxable years on such debentures was deductible from gross income under section 23 (b), I.R.C.

Upon consideration of all the relevant factors, the fair market value, on May 28, 1941, of 3,560 shares of the common capital stock of The Andrew Jergens Company, a corporation whose stock is closely… Held: is fixed at $110 per share for gift tax purposes.

Issue (2). 1Note: The official Tax Court headnote, reproduced here, does not cover all issues. - CCH. Petitioner filed income tax returns for 1940 and 1941. Held: there is no issue raised by the pleadings as to whether the returns filed were other than the separate returns of petitioner and if the respondent desired to contend that the returns were joint returns he should have raised the issue by affirmative allegations in his answer. This he did not do.

The petitioner carried on a rendering business in 1941 which was started in 1933 with only a nominal capital. Held: that the alleged partnership may not be recognized for income tax purposes.

Petitioner's principal source of income was from mortgages secured by real estate located in New York City. Held: the property was used in the trade or business of petitioner and was of a character which is subject to the allowance for depreciation provided in section 23 (1) and was not a capital asset as that term is defined by section 117 (a) (1), I.R.C. and petitioner's loss in so far as it is attributable to the sale of the improvements is…

In 1935 petitioner and its wholly owned subsidiary jointly executed a promissory note given as part consideration for 6,200 shares of stock. In 1936, petitioner dissolved the subsidiary and took over the stock which was its sole asset. During the taxable years petitioner paid the installments due on the note and deducted them as bad debts on its income tax returns. Held: no debtor-creditor relationship existed between petitioner and its wholly owned subsidiary during the taxable years and petitioner is not entitled to deduct the annual payments as bad debts or as an addition to its reserve for bad debts.

1. Held, on the facts, that for the year 1940 the business of Alexander Jarvis Company of Manchester, Connecticut, was conducted as a sole proprietorship, and all the net income therefrom is taxable… Held: on the facts, that for the year 1940 the business of Alexander Jarvis Company of Manchester, Connecticut, was conducted as a sole proprietorship, and all the net income therefrom is taxable to petitioner, Alexander Jarvis.

On the record, held, that petitioner has failed to sustain his burden of proving that he, as distinguished from his wife and daughter, was not the real partner of his son. Held: that petitioner has failed to sustain his burden of proving that he, as distinguished from his wife and daughter, was not the real partner of his son. Held, further, that petitioner is taxable on the income from the partnership in 1941 which was claimed by his wife and daughter.

1. Petitioner has failed to prove that respondent abused his discretion in disallowing any addition in the taxable year to petitioner's reserve for bad debts. 2. Depreciation allowable on certain fixed asset accounts determined. 3.

Household and garage rental expenditures paid by the petitioner in New York where he was employed by the Continental Can Company are not deductible as traveling expenses under section 23 (a) (1) (A). Commissioner v. Flowers, 326 U.S. 465 (Jan. 2, 1946), followed.

1. Under the facts, respondent's disallowance in part of petitioner's addition to its reserve for bad debts, held, not unreasonable. 2. Held: not unreasonable. 2. Petitioner in 1938 entered into a management contract with its president, owner of 55 percent of its voting stock which provided for a salary fixed by the board of directors and a share of the profits on a graduated scale based upon the net profits realized after payment of all expenses and after provision for…

1. The decedent transferred certain securities to his two children within two years of his suicidal death. Held: the transfers were not made in contemplation of death within section 811(c) of the Internal Revenue Code. 2. Fair market values of certain securities as of optional valuation date ascertained. 3.

1. A reasonable allowance for salaries of petitioner's two officers and sole stockholders is determined from the evidence. 2. Petitioner was incorporated in 1938. Held: the partnership was not a sham but was a valid and bona fide partnership. Held, further, the respondent erred in including the net income of the partnership in petitioner's gross income under section 45, Internal Revenue Code. Seminole Flavor Company, 4 T.C. 1215, followed. 3.

Held, that petitioner is liable as transferee of The Koppers Coal Company for such deficiencies as are found against such taxpayer for the years 1936 and 1937 in its proceeding under Docket No.… Held: that petitioner is liable as transferee of The Koppers Coal Company for such deficiencies as are found against such taxpayer for the years 1936 and 1937 in its proceeding under Docket No. 108492.

1. Held, that in determining the tax liability of petitioner's transferor for the year 1938 for which liability the petitioner is liable as transferee, the… Held: that in determining the tax liability of petitioner's transferor for the year 1938 for which liability the petitioner is liable as transferee, the basis for depreciation or exhaustion of certain assets of the transferor is $7,600,000 plus cost of additions made subsequent to original acquisition of such assets. 2.

Where law partnership agreement provided for payment of a percentage of the partnership earnings to the senior partner for a limited period, and in the event of his prior death such percentage should… Held: income of the partnership, paid pursuant to such agreement, not taxable to surviving partners.

In 1934 George A. Bass established a general contracting business under the name of Bass Engineering & Construction Co. In 1935 his father, Benjamin H. Bass, contributed capital and joined the… Held: George A. Bass owned and is taxable on only one-half interest in the income derived from the operation of the Bass Company.

Held, that in the taxable years petitioner's wife, who had contributed her own capital, was a bona fide partner in a cotton brokerage and merchandising business with petitioner and others, but that petitioner's minor daughter, who contributed neither services nor capital originating with her, was not a bona fide partner.

Stockholders of two separate corporations created a trust and assigned their stock to themselves as trustees for the purpose of insuring continuity and stability of policy and management. Held: The trust is not a joint enterprise for the transaction of business. It is not, therefore, an association taxable as a corporation, or a personal holding company, and is not liable for penalties asserted for failure to file personal holding company returns.

Petitioner, an automobile dealer using the accrual method of accounting, sold its conditional sales contracts to a finance company under an agreement whereby the finance company retained a portion of the selling price in a loss reserve. Accumulated loss reserves in excess of 3 percent of the aggregate unpaid balance on paper purchased from petitioner were paid over to petitioner twice a year and returned by petitioner as income. Petitioner did not consider amounts remaining in the loss reserve account as income. Held, petitioner's income should be determined by accruing the amounts remaining in the loss reserve account, following Shoemaker-Nash, Inc., 41 B.T.A. 417.

A corporation distributed to its stockholders in 1940 participating oil royalty interests in wells it operated under lease. Held: following General Utilities & Operating Co. v. Helvering, 296 U.S. 200, the corporation did not realize upon such distribution taxable income from the appreciation in value of such interests while held by it; (2) the appreciation in value of the interests is not to be included as earnings in determining whether distribution is from…

Fair market value of land and buildings which petitioner acquired in 1936 from bondholders who had acquired the property shortly prior thereto at foreclosure sale determined from the evidence. The parties are agreed that all remaining issues in the case can be determined under Rule 50, once this issue is determined, such issues being the amount of the depreciation allowable on the buildings and the gain or loss on the sale of the property made in 1943.

1. In 1936, petitioners Reyburn and Vandivort and two other individuals purchased several thousand acres of farm lands and buildings in Missouri. Held: the Cape Trust was an association taxable as a corporation and the holders of the beneficial certificates realized long-term capital gains upon the liquidation of the trust in 1940. 2. In 1941, petitioners sold some of the lands and buildings they had received from the liquidation of the trust in 1940.

A partnership of which petitioner was a member loaned money at interest to a group, two members of which were minor sons of the petitioner, to enable them to purchase a cargo boat. Held: the sons' share of the income was not attributable to the petitioner's labor or resources but represents income properly reportable by them. 2. An amount paid by way of compensation for injury to the property of another held not deductible under section 23 (e)(3). 3.

Petitioner, a non-profit cemetery corporation, operated a memorial park cemetery in California. Held: petitioner is an exempt corporation within the meaning of section 101 (5) of the Revenue Act of 1938 and section 101 (5) of the Internal Revenue Code.

Under the facts, held, a distribution on January 16, 1940 was not one in complete liquidation under section 115 (c), I.R.C., prior to the 1942 amendment, and the gain realized therefrom is taxable as… Held: a distribution on January 16, 1940 was not one in complete liquidation under section 115 (c), I.R.C., prior to the 1942 amendment, and the gain realized therefrom is taxable as ordinary gain.

Held, petitioner has failed to prove worthlessness of an alleged debt. Held: petitioner has failed to prove worthlessness of an alleged debt.

In about 1937, petitioner, Walter G. Hougland, Jr., with the cash and credit assistance of his father, purchased a towboat for $158,000, and engaged in the river transportation business under the… Held: respondent properly included all the income from the partnership Hougland's in the year 1940, in the gross income of petitioner, Walter G. Hougland, Jr. The useful life of certain river craft for depreciation purposes is fixed at 25 years.

Held, an assignment of property by decedent to his wife was made in contemplation of death, within the purview of section 811 (c), Internal Revenue Code.

1. Held, petitioner is not exempt from taxation as a business league. 2. Held, further, penalty for failure to file timely returns was properly imposed, where delay was not due to reasonable cause.

1.In 1924 petitioner acquired $10,000 face value of bonds, due in 1943, of a silk manufacturing corporation at a cost of $10,000. Held: under the facts, that petitioner is entitled to take his loss in 1941, the year of sale, limited by the long-term capital loss provisions of section 117, Internal Revenue Code. 2.

Upon the facts, held, stock owned by one of the petitioners did not become worthless in 1941. Held: stock owned by one of the petitioners did not become worthless in 1941.

The salaries and bonuses, totaling $67,000, paid by petitioner as compensation to its three executives, is held to be properly deductible as being reasonable compensation for the fiscal year ending September 30, 1941.

Taxable net income for 1939 determined from the evidence. Delinquency penalty is imposed, but fraud penalty is disallowed.

Upon the facts, held, that the partnership conducted under the name of David O. Davis & Son was not valid for Federal income tax purposes; petitioner was properly taxed on the income from such… Held: that the partnership conducted under the name of David O. Davis & Son was not valid for Federal income tax purposes; petitioner was properly taxed on the income from such business for the taxable year 1941.

Upon the facts, held, the compensation paid petitioner's salesman and general manager was reasonable. Held, also, golf club dues paid by petitioner are not deductible as a business expense. Held: the compensation paid petitioner's salesman and general manager was reasonable. Held, also, golf club dues paid by petitioner are not deductible as a business expense.

Under the facts, held, gains and profits from dealing in commodity futures through petitioner's account and in its name are gains and profits of two of its officers and are not includible in… Held: gains and profits from dealing in commodity futures through petitioner's account and in its name are gains and profits of two of its officers and are not includible in petitioner's income.

Petitioner held not entitled to a new election, in the taxable year, as to its basis for depletion by reason of the modification in that year of the lease under which its coal lands were held.

On the evidence, held, the fair market value on December 31, 1941 of 9.847 acres on which the Mansbach Metal Company, Inc. carried on its business was $29,541; and such corporation as of that date… Held: the fair market value on December 31, 1941 of 9.847 acres on which the Mansbach Metal Company, Inc. carried on its business was $29,541; and such corporation as of that date had no intangible asset value based on good will.

A fire insurance company which is within the provisions of section 204, I.R.C., organized and maintaining its home office in Pennsylvania was entitled to use the Convention Form of underwriting and investment exhibit of Annual Statement submitted to State Insurance Commissioner in computing its gross income for Federal income tax purposes without making adjustments for transactions with unadmitted companies not shown on Convention Form and without adjustments respecting…

Bad debt deduction claimed by petitioner for the year 1942 is denied, on the ground of failure of proof.

In pursuance of a plan of liquidation of the petitioner, Borall Corporation, the directors passed a resolution reciting that the corporation declare a liquidating dividend of $8.00 per share payable… Held: That the sale was for and on behalf of the corporation and it is taxable on the profits derived therefrom; (2) that the individual petitioners are liable as transferees of the corporation.

Petitioner, a divorced wife in the taxable years 1939, 1940 and 1941, received certain payments under agreement of her former husband establishing certain trusts. Held: the income of such trusts was received by petitioner as alimony, or in lieu of alimony, and she is not taxable thereon. Princess Lida of Thurn and Taxis, 37 B.T.A. 41, followed.

The taxpayer corporation, engaged in operating a broadcasting station, in 1940 and prior years accumulated earnings which its sole shareholder loaned to an oil corporation in… Held: on the evidence that in 1940 equipment for television, frequency modulation, facsimile reproduction and other improvements were not needs of its business, and that surplus was accumulated to prevent imposition of surtax on its shareholder within the meaning of section 102, Internal Revenue Code.

Petitioner was grantor and co-trustee of a trust created for the benefit of his wife and his three children. Held: no part of the income from such trust was taxable to the petitioner under the provisions of section 22 (a) of the Internal Revenue Code.

Value of stock on date of death of controlling stockholder determined.

1. Payments made by petitioner, as executor, to a bank and to decedent's daughter and son-in-law in satisfaction of notes held by the bank and signed by the daughter, and of interest paid by the daughter and her husband on such notes, which evidenced the loan of funds borrowed and used for the support of the decedent, held to be proper deductions from the gross estate as valid claims against the estate. 2.

On the facts, held, that petitioner through the device of a sale in the taxable year 1941, was not entitled to deduct a loss on the shares of the Petroleum Rights Corporation which became worthless sometime prior to such taxable year.

Held, that in the taxable year a bona fide partnership existed between petitioner and his wife, who were engaged in business as manufacturers' agents or representatives. Held: that in the taxable year a bona fide partnership existed between petitioner and his wife, who were engaged in business as manufacturers' agents or representatives. The wife contributed capital originating with her, which helped to get the business started.

Held, that petitioner and his wife were partners within the meaning of the applicable Revenue Acts in conducting the business and earning the… Held: that petitioner and his wife were partners within the meaning of the applicable Revenue Acts in conducting the business and earning the income of Woosley Knitting Mills, but not to the extent claimed by petitioner, and that the shares of partnership income attributable to the real interest of the wife in the partnership are not…

1. Amounts paid to and received by the former wife of petitioner during the years 1937 and 1938, under the provisions of a contract with a motion picture corporation calling for her services over a five-year period, are not includible in the gross income of the petitioner. 2.

Held, that in the taxable year petitioner's wife, who contributed no capital orginating with her and who rendered services of only a minor routine character, was not a bona fide partner in… Held: that in the taxable year petitioner's wife, who contributed no capital orginating with her and who rendered services of only a minor routine character, was not a bona fide partner in petitioner's furnace business for income tax purposes.

Where the inventory method is used, an adjustment to the closing inventory requires a corresponding adjustment to the opening inventory of the same year.

Held, the deduction, in computing equity invested capital, of the amount of earnings and profits of another corporation, which… Held: the deduction, in computing equity invested capital, of the amount of earnings and profits of another corporation, which previously had been included in the accumulated earnings and profits of petitioner by reason of a tax-free reorganization, is mandatory, irrespective of the fact that because of operating losses in the intervening…

During the taxable year petitioner, A. Ray Elsea, was the bureau manager in Los Angeles, California, of an organization or cult known as "Mankind United." In such capacity he gave lectures and exhibited moving picture films for the organization. The principal part of his income from such activities was from enrollment fees received from those who enrolled in the organization for lecture courses. Part of each enrollment fee went to petitioner and parts to the district superintendent of the organization and to two others, one designated as captain and the other as lieutenant. Other receipts of petitioner were from offerings received at the lecture meetings. In his activities as lecturer and teacher for the organization petitioner incurred and paid certain necessary expenses. Held, from the evidence that certain of petitioner's receipts constituted gross income and certain expenditures constituted deductible necessary expenses. The respective amounts thereof are determined from the evidence.

Petitioner owned 230 of 260 outstanding shares of Gumbiner Amusement Company, of which he was president. Held: that petitioner, during the taxable years, was a stockholder of the Company and that the advances made in his behalf during 1938, 1939 and 1941 were dividends to the extent of the net earnings of the Company and that the advances made in 1940 were not dividends, there being an operating loss in 1940 and no accumulated surplus.