Volume 53 — Tax Court Reports

Held, petitioners are not entitled to deduct a loss occasioned by the worthlessness of their stock in Bromley & Siebert Excavating, Inc., in the year 1963, as an ordinary loss. Held: petitioners are not entitled to deduct a loss occasioned by the worthlessness of their stock in Bromley & Siebert Excavating, Inc., in the year 1963, as an ordinary loss. The stock in question was not issued to petitioners pursuant to a sec. 1244, I.R.C. 1954, plan.

In June of 1961 petitioner acquired from the owner of a tract of realty an option to lease it for certain primary and renewal terms upon stated monthly rentals. Held: petitioner's gain from the sale of the option was short-term capital gain and no part of the unexercised June 5, 1961 option can be tacked on to make a holding period of more than 6 months for long-term capital gains treatment.

Held, the failure of Allied Building & Loan Association to establish the reserves required by sec. 593, I.R.C. 1954, as amended by the… Held: the failure of Allied Building & Loan Association to establish the reserves required by sec. 593, I.R.C. 1954, as amended by the Revenue Act of 1962, until 23 months and 11 months, respectively, after the close of its taxable years, precludes the allowance of any deductions for 1963 and 1964 for additions to its bad debt reserves.

The petitioner had an employment contract with Constitution under which he and his subordinates were to sell insurance in a stated territory. Held: the termination of the employment agreement did not constitute the sale or exchange of a capital asset, and the consideration received by the petitioner under such termination agreement is taxable as ordinary income.

S.F.H., Inc., petitioner, for a number of years was engaged in the retail furniture business. Held: sec. 382(a) is applicable to disallow petitioner's use of its net operating loss carryover from the previous taxable year.

Petitioner transferred all the assets of a sole proprietorship to a controlled corporation pursuant to sec. 351, I.R.C. 1954. Held: petitioners were not allowed a deduction for an addition to the reserves immediately before the transfer because sec. 1.166-4, Income Tax Regs., specifies that additions are to be made only at the end of the taxable year.

Petitioner, a practicing physician and surgeon, deducted in full in 1964 and 1965 the dues and fees he paid to two country clubs at which he entertained his professional associates and their… Held: a part of the dues and fees paid to one of the country clubs is deductible under sec. 274(a) (1)(B), I.R.C. 1954. Held, further, none of the out-of-pocket expenses incurred is deductible because petitioner did not meet the substantiation requirements of sec. 274(d), I.R.C. 1954.

Petitioner paid $ 4,250 pursuant to an agreement with MPG, a West German company, relating to the use of the entire rights to a trademark over an indefinite period of time. Held: Regardless of how West German law affects the rights of the parties, Federal tax consequences flow from Federal law.

Petitioner, a widower, provided all the support for his adopted son and his son's family during the taxable years 1962, 1964, and 1965. Held: petitioner does not qualify as head of a household within the meaning of sec. 1(b), I.R.C. 1954.

Chicora Apartments, Inc., was formed to construct and operate an apartment project. Held: The stock received by James was issued for services and not in exchange for property; the fair market value of the stock is taxable to James as ordinary income. 2.

A mutual savings bank on the accrual basis of accounting declared that interest on deposits for the second 6 months of 1962, 1963, and… Held: The interest is deductible exclusively under sec. 591, I.R.C. 1954, and not sec. 163(a); (2) the interest is deductible in the later, not earlier, years because it was not withdrawable until January; and (3) the interest amount at year end is a liability and not a reserve for purposes of computing additions to bad debt reserves under…

The decedent was insured under two group life insurance policies. He was issued individual-form certificates, specifying his coverage pursuant to the master insurance policies. Held: The provisions in the master policies permitted assignments and prevailed over the individual certificates. Further, such assignments were otherwise permissible under applicable California law.

Held, a sprinkler system installed in 1964 throughout petitioner's manufacturing, office, storage, and sorter buildings is a structural component of the buildings and therefore not Section 38… Held: a sprinkler system installed in 1964 throughout petitioner's manufacturing, office, storage, and sorter buildings is a structural component of the buildings and therefore not Section 38 property eligible for investment credit.

1. Held, that some part of the underpayment determined for each of the years involved is due to fraud with intent to evade tax on the part of petitioner wife within the purview of sec. 6653(b),… Held: that some part of the underpayment determined for each of the years involved is due to fraud with intent to evade tax on the part of petitioner wife within the purview of sec. 6653(b), I.R.C. 1954. 2.

1. Held, the impelling motives for decedent's transfer of State and municipal bonds to his daughter within 3 years of his death were associated with life rather than death, and therefore, such… Held: the impelling motives for decedent's transfer of State and municipal bonds to his daughter within 3 years of his death were associated with life rather than death, and therefore, such transfer was not in contemplation of his death within the meaning of sec. 2035, I.R.C. 1954. 2.

On Mar. 27, 1957, the Shea Co. and four other corporations, formed a joint venture for the purpose of constructing the Clear Creek Tunnel near Whiskeytown,… Held: The income realized upon the subsequent settlement of the claims is not allocable to the final taxable period of the Shea Co. 2. The shareholders of the dissolved Shea Co. cannot be required to report the income realized upon the settlement of the claims as distributive shares of partnership ordinary income. 3.

Held: On the facts presented, the amounts paid by each of the petitioners as compensation for the services of their respective officers were unreasonable and excessive. Held: On the facts presented, the amounts paid by each of the petitioners as compensation for the services of their respective officers were unreasonable and excessive. Reasonable compensation determined.

Petitioners' corproration acquired a nontransferable license to operate food concessions at the Seattle World's Fair, Apr. 21 to Oct. 21, 1962. Held: The license had no market value on July 1, 1962, and (2) the license issued to the corporation is not amortizable by the partnership.

The petitioners were members of a syndicate formed in mid-1962 for the purpose of acquiring, holding, and eventually selling at a profit 51 percent of the common stock of a stock… Held: The stock was not property held for the sale to customers of either the syndicate or its members in the ordinary course of the trade or business of either; it was held as an investment. Therefore, the sale of the stock by the syndicate on behalf of its members was the sale of a capital asset.

Held, no portion of the payments received by petitioners under a license agreement for patents for inventions of one of petitioners which he… Held: no portion of the payments received by petitioners under a license agreement for patents for inventions of one of petitioners which he transferred to a corporation in which he was the controlling stockholder was unstated interest within the provisions of sec. 483 because of the provisions of subsec. (f)(4) of that section.

Petitioner purchased vendor's undivided one-half interest in certain sec. 38 assets. Petitioner's husband owned the remaining one-half interest in such property. Held: Petitioner is entitled to an investment credit on her purchase of such assets. Such assets constitute used section 38 property under sec. 48(c)(1), I.R.C. 1954.

Petitioners are partners in a law firm which specializes in plaintiffs' personal injury litigation. Their firm customarily advances litigation costs to clients under contingent-fee contracts. Held: that the advanced costs operated as loans and are not deductible business expenses under sec. 162(a), I.R.C. 1954, and (2) that the firm is not entitled to a reserve for bad debts under sec. 166(c) because no valid and enforceable obligation existed until the cases were closed.

Petitioner's late husband embezzled funds during 1963 and 1964, the years in issue, without petitioner's knowledge. Held: Petitioner tacitly consented to her late husband's filing of the joint return for 1963. Petitioner was not under duress when she signed the 1964 joint return. Accordingly, petitioner is severally liable for the deficiencies determined for the years in issue.

Held, evidence of the timely mailing in a properly addressed envelope of petitioner's election under subch. Held: evidence of the timely mailing in a properly addressed envelope of petitioner's election under subch.

Petitioner mines and processes garnet ore, producing sized garnet grains and garnet powders which it packages and sells for use as… Held: Petitioner's processes involving (1) a dryer, which removes moisture, chemicals, and contaminants accumulated in prior mining processes and protects overall color uniformity; (2) air tables, which sort the garnet from non-garnet materials by means of vibration and air currents; and (3) separators which remove impurities by magnetism,…

T corporation and its 19 wholly owned subsidiary corporations elected to file a consolidated Federal income tax return for their fiscal year ended Jan. 31, 1964. Held: these regulations are valid, and T and its subsidiaries were required to file a consolidated return for their taxable year ended Jan. 31, 1965.

Petitioner was employed by the Boeing Co. in Seattle, Wash. In June 1964 Boeing assigned petitioner to Los Angeles for what it told him would be a 1-year period. Held: While he was in the Los Angeles area in 1964, petitioner was in temporary status and therefore away from home; accordingly, he was entitled to deduct meal and lodging expenses during that period under sec. 162(a)(2), I.R.C. 1954. 2.

1. Held, petitioner's payments to the district director during that part of its taxable year preceding its submission of offers in compromise were credited pursuant to the offers upon their… Held: petitioner's payments to the district director during that part of its taxable year preceding its submission of offers in compromise were credited pursuant to the offers upon their acceptance by the Government. 2.

In an agreement for the sale of a fuel business, the purchaser agreed to make installment payments amounting to $ 23,787.50 and to pay an annual license royalty for 99 years, the amount… Held: In the circumstances of this case, the seller retained a continuing interest in the fuel business. The royalty payments are deductible by the purchaser or his assignee-subchapter S corporation as ordinary and necessary business expenses and represent ordinary income to the recipient.

Held: 1. Because of his criminal conviction of willful attempt to evade income tax for the years 1959 through 1962, petitioner Henry M.… Held: Because of his criminal conviction of willful attempt to evade income tax for the years 1959 through 1962, petitioner Henry M. Rodney is collaterally estopped to deny that the joint income tax returns that he filed with his wife for the years 1959 through 1962 were false and fraudulent or that a part of the underpayment, if any, in…

Dale Carnegie & Associates, Inc., licenses persons (designated sponsors) to promote and conduct classes in several courses of instruction created by… Held: petitioner's predecessors did not possess a retained income interest in the amounts paid them by petitioner; rather, these amounts were part of petitioner's cost of obtaining the franchise licenses in issue. Held, further, these amounts were neither amortizable nor depreciable during the years in which payment was made.

Friedrich, petitioner's corporate employer, adopted a profit-sharing plan in which petitioner was a qualified participant. Held: the distribution to petitioner from the retirement plan was not made on account of * * * separation from the service and therefore does not qualify for long-term capital gains treatment under sec. 402(a)(2), I.R.C. 1954.

A separation agreement provided for periodic payments of $ 111.46 each week for 525 weeks by the husband to the wife. Held: a part of such payments (57 percent) was made in satisfaction of wife's property rights and therefore was not deductible, while a part (43 percent) was made for support because of the marital or family relationship and therefore was deductible.

Petitioner applied for and received a policy of life insurance upon the life of her former husband prior to their divorce. Held: because petitioner at no time either actually or constructively received the premium payments, and because she gained no economic benefit thereby, such payments are not includable in her gross income.

In 1961 the petitioners, previously engaged separately in their common specialty of radiology, formed a professional service corporation, validly incorporated pursuant to State law. Held: on the facts, the corporation did not earn any of the income generated from petitioners' services and such income is taxable to petitioners. United States v. Empey, 406 F. 2d 157 (C.A. 10, 1969), distinguished.

The petitioner's wife was a nonresident alien for over 3 months in 1966. Held: such provision does not violate the due process clause of the fifth amendment to the Constitution.

Petitioner established a profit-sharing plan with its two sole shareholders as the only participants. Held: the profit-sharing plan when read in conjunction with the pension plan meets the coverage requirements of sec. 401(a)(3), I.R.C. 1954.

Petitioner became a resident alien on Mar. 1, 1961, and held this status through Dec. 31, 1961. Held: that under sec. 551(b), I.R.C. 1954, the portion of the taxable income of the foreign personal holding company allocable to that part of its fiscal year during which petitioner was a nonresident alien is not includable in petitioner's gross income for 1961 as undistributed foreign personal holding company income.

In 1962, after a judicial determination that MB was an income beneficiary of a trust during the period 1949 through 1955, the trustee distributed to MB's estate the income attributable to such period. Held: MB was taxable in 1949 through 1955 on trust income attributable to such period. Held, further, expenses in connection with litigation paid by trustee in 1959 through 1962 do not affect taxability of income withheld from MB in taxable years.

Frazier & Co. is a partnership which has been engaged in the general insurance agency business since 1940. Held: Frazier & Co. sold valuable assets to Aetna in the nature of goodwill and, except for amounts representing compensation for employment services rendered by the individual partners Frazier and Johnson after the sale, petitioners are entitled to treat the proceeds of such sale as capital gains.

Petitioner was a member of a joint venture organized to perform a single construction contract. Held: the joint venture reported its income on the basis of a calendar, rather than a fiscal year; held, further, the existence of contingent claims for additional compensation did not cause the time for reporting the joint venture's gross income from the contract to be deferred beyond the year in which the contract was finally completed…

From 1954 through 1961 petitioner used a type of completed-contract method, which employed the following criteria to determine when gross income from its long-term contracts was to be included in… Held: utilization of only the two criteria in 1962 constituted a change in petitioner's method of accounting, for which approval of the Commissioner had not been secured. Held, further, the change was initiated by petitioner within the meaning of sec. 481(a), I.R.C. 1954.

Petitioner corporation was formed to rehabilitate the former owners, to avoid liquidation, and to keep the business within the community. Held: the notes represented a bona fide indebtedness and not a capital contribution, entitling petitioner to interest deductions under sec. 163, I.R.C. 1954.

By separate declarations of trust made and executed on Sept. 20, 1960, petitioners Harry Epstein and Robert Levitas, the two controlling stockholders of United Management Corp. each created two… Held: The fair market value of the properties sold by United Management Corp. to the trusts exceeded the fair market value of the consideration received by it from such trusts. 2.

Held, petitioners are not entitled to deduct depreciation or amortization on the cost of a patent law practice purchased for a lump-sum… Held: petitioners are not entitled to deduct depreciation or amortization on the cost of a patent law practice purchased for a lump-sum payment since (1) the asset acquired was an intangible capital asset in the nature of goodwill, (2) the asset had no ascertainable useful life, and (3) the payment was not for a personal privilege, the…

Held, petitioner, suffering from pulmonary emphysema, was not entitled to claim as a medical deduction amounts expended in the taxable year for transportation to and from a golf course, even though… Held: petitioner, suffering from pulmonary emphysema, was not entitled to claim as a medical deduction amounts expended in the taxable year for transportation to and from a golf course, even though his playing golf had been recommended by his doctors.

1. Held, that petitioners failed to prove that a debt for advances made to a partnership in which Herbert was a limited partner became worthless in 1961 and petitioners were not entitled to a bad… Held: that petitioners failed to prove that a debt for advances made to a partnership in which Herbert was a limited partner became worthless in 1961 and petitioners were not entitled to a bad debt deduction under sec. 166(a)(1), I.R.C. 1954, for 1961. 2.