Volume 56 — Tax Court Reports

1. Certain service stock was unrestricted when first acquired by promoter; it was later placed in escrow and subjected to certain restrictions. Held: gain thereafter realized by promoter upon subsequent sales of his rights in such escrowed stock was capital gain rather than ordinary income. 2. Held, petitioners failed to carry burden of proving error in Commissioner's determination that an item of $ 8,217.91 represented unreported income. 3.

On Feb. 28, 1963, and Feb. 29, 1964, a qualifying subchapter S corporation issued checks to its shareholders, including the petitioners,… Held: that in substance the issuance by the corporation of the above checks did not constitute distributions of money in the full amounts thereof, but rather the transactions constituted in substance distributions by the corporation of money in the amount of $ 227,500 and property in the amount of $ 117,500 on Feb. 28, 1963, and money in…

During 1966 petitioner was a temporary corporate employee who daily traveled considerable distances by automobile to work and home again. Held: petitioner is a commuter, and his transportation expenses are not deductible under either sec. 162(a) or sec. 162(a) (2), I.R.C. 1954.

A power of appointment authorized the decedent and a bank as cotrustees of a testamentary trust to pay over to the decedent part or all of the principal of the… Held: the power exercisable in favor of the decedent was not limited by an ascertainable standard relating to the health, education, support, or maintenance of the decedent. Held, further, the decedent as coholder of the power had at the time of her death a general power of appointment created after Oct. 21, 1942.

Corporation A owned 67 percent of the common stock of corporation B. Petitioner and another individual received all of said B stock in a prorata… Held: Corporation A was not actively conducting the trade or business of corporation B as required by sec. 346(b)(1). Hence, the transaction does not qualify under sec. 346(a)(2) and 346(b) as a partial liquidation of corporation A. Accordingly, the value of corporation B stock received by petitioner is taxable as a dividend.

Petitioner's daughter received funds from scholarships, student loans, and earnings, as well as contributions from petitioner, which she used for her support during 1966. Held: the amounts received as student loans and earnings are not to be disregarded under sec. 152(d), I.R.C. 1954, in computing the amount of the daughter's total support.

1. Held, for purposes of determining his holding period under sec. 1222, I.R.C. 1954, petitioner acquired ownership of the real property in… Held: for purposes of determining his holding period under sec. 1222, I.R.C. 1954, petitioner acquired ownership of the real property in question when he entered into a Contract of Sale on Sept. 23, 1963; at that time, he acquired an unconditional right to the delivery of the deeds of title upon payment of the remainder of the purchase…

1. By December 1962, PMC had advanced a total of $ 2,987,000 to MFP which had been operating at a considerable loss for the prior 14 months. Held: deduction allowed, respondent exceeded his discretion under sec. 166(a)(2), I.R.C. 1954. 2. PMC owned a 50-percent interest in a joint venture. The other 50 percent was owned by Simpson Redwood Co., a corporation.

For 4 years (1957 through 1960) while contesting an FPC order disapproving a rate increase, petitioner deducted as accrued liabilities the amounts of refunds which it would have been required to make if the FPC order had not been rescinded in a later year (1961). Held, petitioner realized taxable income in the year in which the FPC order was rescinded; petitioner was estopped, because of its conduct, to deny that the deductions of accrued liabilities for the earlier years were properly claimed.

1. Held, value of Southeastern Conference grant-in-aid athletic scholarship did not constitute support furnished by petitioner for himself in 1961 within the meaning of sec. 1303(c)(1), I.R.C. 1954.… Held: value of Southeastern Conference grant-in-aid athletic scholarship did not constitute support furnished by petitioner for himself in 1961 within the meaning of sec. 1303(c)(1), I.R.C. 1954. 2.

Held, petitioners constituted a brother-sister controlled group of corporations within the meaning of sec. 1563(a)(2), I.R.C. 1954. Held: petitioners constituted a brother-sister controlled group of corporations within the meaning of sec. 1563(a)(2), I.R.C. 1954. Employees' stock in the employer corporation subject to a condition which extends to such corporation a right of first refusal is properly to be treated as excluded stock under sec. 1563(c)(2)(B) (ii).

Petitioner accrued officers' salaries but did not in actuality pay them within 2 1/2 months after the close of the taxable year. Held: sec. 267(a)(2), I.R.C. 1954, inapplicable; the amounts were constructively received by those entitled to them.

Petitioners, after a prior decision had been affirmed on appeal and had become final, filed a motion for leave to file a petition to reopen proofs on the ground that the prior decision was based upon… Held: motion denied since application should properly be addressed to the appellate court.

Held: That the filing of the declaration of taking and offer to pay compensation by the Urban Redevelopment Authority of Bradford, Pa., resulted in a sale… Held: That the filing of the declaration of taking and offer to pay compensation by the Urban Redevelopment Authority of Bradford, Pa., resulted in a sale of petitioner's property under the Eminent Domain Code of Pennsylvania (Pa. Stat. Ann., tit. 26, sec. 1-101 et seq.) which preceded adoption of the plan of liquidation.

A parent company which had consistently computed its income on an accrual basis, organized a subsidiary to engage in livestock raising. Held: sec. 1.1502-44A, Income Tax Regs., is valid, and since the parent and subsidiary did not obtain consent of the Commissioner to use different methods of accounting in filing a consolidated return or show that the consolidated income was clearly reflected when different accounting methods were used, respondent did not err in…

Complying with the terms of Edward Orton, Jr.'s will the trustees of the Edward Orton, Jr., Ceramic Foundation took over and operated the testator's pyrometric cone manufacturing business, and… Held: for the years 1962, 1963, and 1964 petitioner was an organization of the type described in sec. 501(c)(3) and is thus exempt from taxation for those years under sec. 501(a). Edward Orton, Jr. Ceramic Foundation, 9 T.C. 533 (1947), affd. 173 F. 2d 483 (C.A. 6, 1949), followed.

In 1962, M entered into a contract for the purchase of certain stock from S and into another contract for the sale of a portion of such stock to G. G agreed to make a downpayment and to make periodic… Held: the amount of G's payments not returned to him in 1963 constituted liquidated damages and is taxable to M as ordinary income in such year.

In 1962, decedent, then 77 years of age, rented her farm to her daughter and son-in-law under a 5-year crop-share lease which was to remain in effect even if the farm was later conveyed to the… Held: the value of the farm is includable in decedent's taxable estate under sec. 2036(a)(1); decedent retained the enjoyment of the income from the farm for a period which did not in fact end before her death.

Petitioner as part-owner of certain real property entered into a contract with the grantee. Held: the substance of the agreement governs its Federal tax consequences. The payments received by the petitioner for sand and gravel were ordinary income subject to the 5-percent allowance for percentage depletion under sec. 613(b)(6)(A), I.R.C. 1954, rather than capital gains.

Petitioners entered into a number of real estate transactions in 1964, the tax consequences of which are in dispute. Held: under sec. 1034(a) petitioners are entitled to defer recognition of $ 926.81 in gain realized on the exchange of an apartment house located on Camden Road. The remainder of the gain is subject to recognition in 1964.

Respondent's Motion to Deny Petitioner's Request for Conduct of Proceedings Under Section 7463, I.R.C. 1954, filed at the time he filed his answer in accordance with the provisions of Rule 36(c)(2), is denied since respondent has not shown the issue raised by the petition to be one of importance which will establish a principle of law applicable to other tax cases.

The petitioner, a physician, grossly understated his income for 3 consecutive years. Held: His criminal conviction collaterally estops him, but not his wife, from denying fraud in this proceeding; 2. Without relying on the conviction, the respondent has proved the petitioner's fraud by clear and convincing evidence; and 3.

Prior to September 1963, petitioners, husband and wife, were both U.S. citizens and resident-domiciliaries of Texas. During 1958 H performed certain services. Held: despite the fact that H was a U.S. citizen when he earned the amounts in question he was an alien at the time of receipt and, since, he was at all times on a cash method of accounting he was not taxable as a U.S. citizen.

Petitioner's sailboat had some planks shaken loose and caulking fall out during a race on August 27, 1965, in foul weather. Held: petitioner has failed to prove that he is entitled to a deduction in 1965 for a casualty loss; and (2) petitioner has failed to show that respondent erred in determining that he was liable for additions to tax for negligence.

In 1961 the taxpayers (husband and wife) sold their controlling stock interest in American Gas to Union Oil under an installment sale contract payable over a 5-year period. Held: the taxpayers disposed of the installment contract otherwise than by sale or exchange and must therefore include in their 1964 gross income that portion of their gain which had not theretofore been recognized to the extent required by sec. 453(d)(1)(B).

1. Held, the petitioner is not entitled to an estate tax marital deduction with respect to property received by the survivor of a joint will. Estate of Edward N. Opal, 54 T.C. 154 (1970), on appeal (C.A. 2, Aug. 14, 1970), followed. 2. Held, the penalty due under sec. 6651(a) for failure to file a return must be based on correct tax liability rather than on the amount of tax shown to be due on the return. C. Fink Fischer, 50 T.C. 164 (1968).

During the taxable years 1943 through 1953, inclusive, petitioner Dave Beck was an officer of several union entities, including the presidency of the Western Conference of Teamsters and the Joint… Held: Underpayments of income tax by the Becks for each of the taxable years 1943 through 1953, inclusive, and 1958, determined.

A former wife received payment from her former husband after her remarriage even though their agreement upon divorce provided such payments would cease upon her remarriage. In a later year the former husband sued his former wife for repayment of the funds on the theory of unjust enrichment and recovered a judgment for repayment of all amounts paid after his former wife's remarriage. Petitioner who in April 1964 filed a joint return with his then wife who had received the funds was notified of the receipt of the funds by his then wife in February 1964. Petitioner and the recipient of the funds are now divorced. Petitioner and his then wife claimed dependency exemptions for her three children on their joint return. Held: 1. The payments are includable in the former wife's income in the year received. James v. United States, 366 U.S. 213 (1961). Martha K. Brown, 50 T.C. 865 (1968), affirmed per curiam 415 F. 2d 310 (C.A. 4, 1969), distinguished. 2. Petitioner is not entitled to the three dependency exemptions claimed in his income tax return for his then wife's children for failure to prove they paid over one-half of the support of the claimed dependents, and respondent's determination of addition to tax for negligence is sustained for failure of proof by petitioner. 3. Under the provisions of sec. 6013(e), I.R.C. 1954, petitioner is not relieved from tax on the funds received by his former wife with whom he filed a joint return since he knew of her receipt of the funds at the time their joint return was filed.

1. Petitioner Transport Manufacturing & Equipment Co. of Delaware (T.M.E.) and its sister corporation, Riss & Co., Inc. (Riss), were controlled by the same family interests. Riss was, during all of the years under consideration, a common carrier, authorized to use certain trucking routes granted to it by the Interstate Commerce Commission (Commission). In accordance with an industry-wide practice T.M.E. was brought into being in 1938 to serve as a conduit through which Riss could procure equipment (both rolling and stationary) which it otherwise would have had difficulty in obtaining because of certain Commission regulations. The equipment purchased by T.M.E. was leased to Riss at an annual stipend which was calculated to exceed T.M.E.'s depreciation deductions on such equipment by a prearranged nominal amount. (No question exists as to the bona fides of this relationship.) Because T.M.E. employed the "double declining balance" method in depreciating its assets, the annual rental charged to Riss was high during the early years of an asset's service and low during the later years. In 1957, T.M.E. and Riss determined that certain of the trailers being leased to Riss were handicapping that company in its efforts to secure new business. As a result, the two companies decided that it would be in their mutual interest to sell these trailers and purchase new ones. However, both recognized that were such a sale to occur, Riss would lose out on the later-year, low rentals associated with the trailers which were to be sold. Accordingly, to compensate Riss for what might, otherwise, have been a devastating blow to Riss' economy, T.M.E. agreed that it would pay Riss any gain which it (T.M.E.) realized on the disposition of the trailers. As a result, no income was recognized by T.M.E. when the sale finally occurred. Held, to the extent of the later-year, low rentals which Riss stood to lose as a result of the trailer sale described above, T.M.E. was not required to recognize gain. Held, further, the value to Riss of these low rental payments is determined to have been $ 1,997,929.50. 2. During the years 1953 through 1960, Riss experienced a series of severe economic blows. As a result, its revenues dropped precipitously, some of its trucking routes were allowed to go unused and, by the end of 1960, it owed petitioner T.M.E. $ 1,383,029.71. Nevertheless, it remained a going concern and continued to receive credit from T.M.E. Held: The $ 1,383,029.71 owed to T.M.E. had not become wholly worthless at the end of 1960. Accordingly, it was improper for T.M.E. to treat that amount as a bad debt on its income tax return for that year. 3A. Prior to June 1, 1957, T.M.E. owned residential property located in the community of Shawnee Mission, Kans. Until May 31, 1956, the property had been used as a residence by Robert Riss, one of T.M.E.'s shareholders. On that date, however, the property was abandoned and was left unoccupied until June 1, 1957, when it was sold to an outside party. Prior to August 23, 1960, T.M.E. owned residential property located in Kansas City, Mo. From the time of its acquisition in 1949 until October 1, 1958, the property had been used as a personal residence by the former wife and daughter of T.M.E.'s principal shareholder, Richard Riss, Sr. (Richard). On that date, however, the property was abandoned and was left unoccupied until Aug. 23, 1960, the date of its disposition to Richard. Held: At no time was either property held for the production of income or used in T.M.E.'s trade or business. Accordingly, all expenditures associated with the maintenance of such properties, subsequent to their respective dates of abandonment and prior to sale, are denied. 3B. During 1958 and 1959, T.M.E. claimed long-term capital losses attributable to the sale of certain automobiles which had been devoted to the personal use of T.M.E.'s shareholders and their wives. Held: Because section 165 does not limit corporate taxpayers to the type of losses they may claim, the losses incurred by T.M.E. as a result of the automobile sales described above were properly deductible to the extent permitted by section 165(f). Legislative history discussed. 4. Held, T.M.E. was not entitled to a net operating loss carryback from the year 1960. 5. Pursuant to a letter of guarantee which he had executed to the Commercial National Bank of Kansas City, Kans. (Commercial), Richard was required to satisfy certain obligations (totaling $ 125,000) which were owed to National by the Riss Corp. Payment of the $ 125,000 was made during 1963. In his income tax return for the year 1963, Richard treated this amount as a bad debt. Held: The $ 125,000 obligation which arose in favor of Richard, as a result of his having satisfied Riss Corp.'s debt to Commercial, was not wholly worthless during 1963. Accordingly, the bad debt deduction taken by Richard on his income tax return for that year was improper. 6. During the years 1957 through 1963, Richard was the owner of an 82-acre tract of land located in Kansas City, Mo. (Pittman Road property). Richard had purchased the property in 1937 at a cost of $ 35,500. At the time of the within proceeding, it was worth almost $ 900,000. Various species of animals were raised on the property during the years under consideration. Only one major building stood on the property. Built originally as a barn, during 1956, the building was converted to a residence facility at a cost to Richard of $ 66,678.04. A rock wall, which, in part, abutted the building, was also constructed in that year. Held, certain expenditures associated with the maintenance of the Pittman Road property for the production of income were properly deductible during the years under consideration. Held, further, those expenditures which were incurred as a result of petitioner's breeding activities were not deductible. Held, further, expenditures associated with the maintenance of the residence facility were, similarly, not deductible. 7. On September 9, 1958, T.M.E. sold Richard its 50-percent interest in the stock of six related corporations. The price paid by Richard ($ 150,000) was equal to T.M.E.'s basis in the stock. Held, the fair market value of the stock on the date of sale was $ 246,000. Held, further, as a result of the above sale, Richard received a constructive dividend from T.M.E. in the amount of $ 96,000. 8. Held, Richard was not entitled to a net operating loss carryback from the year 1963.

Petitioners seek to amortize the cost of certain taxicab licenses acquired in 1963. Held: the licenses have an indeterminate useful life. The 5-year period is not determinative of the useful life of the licenses herein.

T, which was insolvent, transferred its remaining assets to the petitioner in 1965. Held: under the circumstances, the respondent is entitled to share pro rata with the petitioner in the assets transferred in 1965, in accord with Texas law.

Petitioner deducted $ 5,500 in interest accrued in connection with certain of its debentures in each of the taxable years 1965, 1966, and 1967. Respondent, in reliance upon sec. 267(a)(2), disallowed these claimed interest deductions to the extent of $ 4,100 in 1965, $ 5,500 in 1966, and $ 3,100 in 1967. Held: On the facts, the interest income was constructively received by the respective debenture holders within the statutory period set out in sec. 267(a)(2)(A). Therefore, sec. 267(a)(2) does not apply so as to disallow claimed interest deductions.

Bonuses paid by an accrual basis corporate petitioner to its controlling cash basis shareholder were not paid within the required 2 1/2-month period following the close of petitioner's taxable year. Held: all requirements of sec. 267(a)(2), I.R.C. 1954, being met the deductions for the bonuses in question are disallowed.

In connection with their divorce, Yvonne Colton and her former husband entered into a written agreement whereby he obligated himself to make payments for the support of each of… Held: even though his earnings were community income, Yvonne Colton's former husband provided at least $ 600 for the support of each of the children within the meaning of sec. 152(e)(2)(A)(ii), I.R.C. 1954; therefore, he rather than Yvonne Colton is entitled to the exemption deductions for them.

Petitioner husband incurred certain expenses in an unsuccessful attempt to be reelected president of a large labor union. Held, the expenses of seeking reelection are not allowable as a deduction. Held: the expenses of seeking reelection are not allowable as a deduction. Held, further, that petitioner is entitled to deduct under sec. 162, I.R.C. 1954, the legal expenses incurred in defending an action arising out of the performance of his duties as president of the union.

Decedent purchased an annuity for $ 2,200,000 and established irrevocable trusts for his beneficiaries. Held: proceeds of life insurance were properly includable in decedent's gross estate under sec. 2039, I.R.C. 1954.

Petitioner was incorporated in Arizona as a limited stock life insurance company in July 1957 and received its certificate of authority to transact life insurance business in Arizona on… Held: petitioner was not a life insurance company within the meaning of sec. 801(a), I.R.C. 1954, during the years 1958 through 1961. 2. Held, certain expenses incurred in 1958 by officers of petitioner on a trip to Hawaii are not deductible as ordinary and necessary business expenses. 3.

The petitioner sought to show the total support of his son by reference to information secured by a revenue agent who interviewed the boy's mother, the petitioner's former wife, with respect to her contributions to the child's support. Such agent did not testify; and it is not clear whether the list of her contributions was complete. Held, under the circumstances, a revenue agent's report is not admissible in evidence for the purpose of showing the accuracy of its contents, and in any event, the petitioners have failed to show the total support of the child.

From the summer of 1963 through July 1967, petitioner was employed as a secretary. Prior to such employment, she taught secretarial skills at the secondary school level. From February through August 1967, petitioner incurred expenses in taking graduate education courses to prepare for resuming employment as a teacher. She began teaching in late August 1967. Held: At the time petitioner incurred her education expenses, she was not engaged in the trade or business of being a teacher. Such expenses were incurred in preparation for resuming such occupation and accordingly are not deductible under sec. 1.162-5, Income Tax Regs.Held, further, petitioner's education expenses are not deductible in her trade or business of being a secretary, since they were not incurred for the purpose of improving skills and in fact did not improve skills required in that trade or business.

In September 1964 petitioner purchased all of the stock of another corporation, S. Pursuant to an agreement between petitioner and S and in substantial accordance with Kansas corporation law, S was… Held: petitioner's basis in the assets it acquired from S as a result of the December transaction must be measured by reference to the September stock purchase price and not by reference to S's basis in those assets. Sec. 334(b)(2), I.R.C. 1954.

1. In 1961 petitioner, as a mortgage broker, received $ 145,186.37 in commissions or fees from borrowers for obtaining loans on their behalf from Marshall Savings & Loan, which was controlled by the… Held: the commissions are fully includable in petitioner's 1961 gross income. Sec. 61, I.R.C. 1954. Held, further, petitioner's payments to the Moravecs are not deductible as ordinary and necessary business expenses. Sec. 162, I.R.C. 1954. 2.

Petitioner, as sole proprietor, operated an automobile body repair business during 1967, when he was a bona fide resident of Canada. For use in his business, he rented and later purchased garage space; owned necessary machinery, including air compressors, welding equipment, grinders, sanders, and paint-spraying equipment; and carried an inventory of fenders, bumpers, and other parts. Held, petitioner was engaged in a business in which capital was a material income-producing factor and is subject to the 30-percent limitation on the exclusion from gross income prescribed by sec. 911(b), I.R.C. 1954.

Petitioners were involved in an auto accident which rendered their auto a total loss, save salvage. They filed suit to recover. The other driver cross-complained and petitioners settled. Held: the only amount allowable is the value of the auto. Sec. 165(c)(3), I.R.C. 1954; sec. 1.165-7(b), Income Tax Regs.

A corporation issued certificates labeled as preferred stock as a means of obtaining additional capital. Held: The certificates issued by the corporation were preferred stock and not evidence of indebtedness. (2) The prorata distributions made by the corporation in redemption of its preferred stock were essentially equivalent to a dividend and do not qualify as a distribution or payment in exchange for stock under sec. 302 (a).

In 1963, petitioners reported the proceeds from the sale of certain property under the installment sale provisions of sec. 453, I.R.C. 1954. Held: on the record, respondent's determination sustained.

1. Decedent's grandson did not owe interest on a land purchase contract at the time of decedent's death; consequently, no claim for such interest is includable in her taxable estate under sec. 2033, I.R.C. 1954. 2. Decedent did not make completed gifts to her children of certificates of deposit or of funds deposited in certain savings accounts, all of which were maintained in the joint names of decedent and one of the children; therefore, such certificates and funds are includable in her taxable estate under sec. 2040, I.R.C. 1954. 3. Decedent's deposit of funds in a joint savings account with her daughter and the subsequent withdrawal of such funds by her daughter prior to decedent's death was a gift not in contemplation of death within the meaning of sec. 2035, I.R.C. 1954.

Petitioner and three of its wholly owned subsidiaries filed a consolidated return for the taxable year 1965. Held: since such subsidiary could obtain no benefits from sec. 931, sec. 1504(b)(4) did not apply and such subsidiary was properly included in the consolidated return; Rev. Rul. 65-293, 1965-2 C.B. 323, is invalid.

T and his immediate family owned over 96 percent of C's outstanding stock; T and his wife alone held 51.25 percent of its stock. Held: the gains derived from the sales of the securities must be included in T's gross income.

Petitioners owned all of the capital stock of Garth's Poultry & Egg Service, Inc., which together with several other entities owned by petitioners comprised an integrated poultry operation for the production and sale of chickens and eggs. The chickens were raised primarily for the production of eggs but they were also sold for meat at the end of their normal egg-laying cycle, which was about 12 months. Held, Garth's flocks of laying hens were properly includable in inventory. Held, further, Garth's farm-price method of valuing its flocks of hens for inventory purposes, which it had used in prior years without adjustment by respondent, clearly reflected its income. Held, further, respondent was not entitled to change Garth's method of accounting for its flocks of hens, requiring the cost of raising them to the egg-production age to be capitalized and amortized over an 11-month period, for the last 7 months of Garth's existence.

The petitioner sought to deduct a payment made to settle the liability of himself and his younger son with respect to lawsuits brought against them by the petitioner's elder son. Held: the petitioner cannot deduct either the settlement payment or the legal fees, because the payments in part constituted nondeductible capital expenditures made in defense of title to stock, and the remainder of such payments arose from a claim that was personal in its origin.

Held, a sale of goodwill occurred during 1959, the year in which petitioner Charles M. Miller (Charles) sold his city directory business to petitioner Southern Directory Co., Inc. (Southern), a… Held: a sale of goodwill occurred during 1959, the year in which petitioner Charles M. Miller (Charles) sold his city directory business to petitioner Southern Directory Co., Inc. (Southern), a corporation controlled by Charles.

Petitioner obtained a divorce from his wife in Texas on June 24, 1957. Held: the Oklahoma proceedings did not transfer any beneficial interest in the trust to petitioner's ex-wife; held, further, sec. 682(a) is not applicable because the payments were in discharge of petitioner's obligation to support his wife; held, further, the payments were not periodic payments under sec. 71(a)(1), and sec. 71(d) and sec.…

1. Pursuant to an Indiana divorce decree and a "Separation Agreement" incorporated therein petitioner received from her former husband five payments aggregating $ 25,000 over a 4-year period as well as 20 weekly payments aggregating $ 1,000 for the first 20 weeks following the divorce. Both sets of payments were labeled "alimony." Held, the payments aggregating $ 25,000 were in fact in respect of a division of property jointly held during the marriage and were therefore not includable in petitioner's gross income under sec. 71(a)(1), I.R.C. 1954. Held, further, the payments of $ 50 per week aggregating $ 1,000 were includable in petitioner's gross income under sec. 71(a)(1), I.R.C. 1954, as "periodic payments * * * in discharge of * * * a legal obligation * * * [arising out] of the marital or family relationship." 2. Held, deduction for legal expenses claimed under sec. 212(1), I.R.C. 1954, denied because petitioner failed to carry burden of proving what portion, if any, of legal expenses incurred in the divorce proceedings were attributable to the collection of amounts includable in her gross income under sec. 71, I.R.C. 1954.

As the result of one transaction petitioner acquired (1) a loan-servicing business as a going concern, (2) that business's rights to service existing loans of various lending institutions, (3) an… Held: The rights to service existing loans and the opportunity to utilize escrow funds associated therewith may be separately valued apart from other intangibles acquired in the transaction.

The City of Joplin, Mo., issued special tax bills to petitioner in payment for street and sewer improvements which petitioner performed under contracts with the City. Held: the special tax bills are governmental obligations and the interest thereon received by petitioner is tax-exempt income under sec. 103.

Held: 1. Evidence of petitioner's net wagering income, taken from his books and records seized pursuant to valid search warrants issued prior to the decision in Marchetti v. United States, 390 U.S.… Held: Evidence of petitioner's net wagering income, taken from his books and records seized pursuant to valid search warrants issued prior to the decision in Marchetti v. United States, 390 U.S. 39 (1968), is admissible. None of petitioner's constitutional rights were violated.

1. Neither the individual petitioners who are members of the Strain family nor the trusts which they created in 1963 had recognizable capital gain in 1964 (other than the gain referred to in issue 2) when stock was sold to Brigham Young University; the transaction was not an exchange of stock for annuities, but was a deferred-payment sale by the trusts. 2. Neither William Russell Strain nor Harriet Strain realized taxable income in 1964 on the sale by two trusts of stock which was subject to liens, securing notes previously given by William Russell Strain and Arthur W. Strain; however, the trusts which made the sales of such stock realized income in that year in the amounts of the respective liens. 3. As compensation for the services which he performed in arranging the sale of the stock of the Strain corporations, Glenn E. Edgar realized taxable income measured by the difference between the price paid and the fair market value of the shares his trust was permitted to purchase; the income is taxable in 1964, when the repurchase option retained by William Russell Strain and Arthur W. Strain lapsed. 4. Glenn E. Edgar had no recognizable gain in 1963 or 1964 as the result of his transfer of a duplex residence to a trust and the trust's subsequent sale of the residence, or as a result of the sale of stock and the loan of cash by another trust; his only income from these trusts was the interest paid on the obligations which they held. 5. William Russell Strain and his wife and Harriet Strain, who filed a joint return for herself and her deceased husband, Arthur W. Strain, are entitled to charitable contribution deductions for the value of the remainder interests of trusts created in 1963. Such interests were irrevocably dedicated to charitable use. If the foundations originally named as remaindermen do not meet the requirements of sec. 170(c), I.R.C. 1954, the remainder interests will pass to qualified charities. 6. Glenn E. Edgar is entitled to charitable contribution deductions for the value of the remainder interests in trusts created in 1962, even though the corpus of one consisted of an interest in a business venture and of the other consisted of depreciable real estate. 7. William Russell Strain and his wife and Harriet Strain are not entitled to charitable contribution deductions in 1964 for amounts contributed to two foundations, because it was not shown that the foundations were organized and operated exclusively for charitable purposes. 8. Harriet Strain is not entitled to a charitable contribution deduction in 1964 for the relinquishment of her rights under an agreement whereby a corporation continued her husband's salary after his death. 9. William Russell Strain and his wife and Harriet Strain, who filed a joint return for herself and her deceased husband, Arthur W. Strain, realized constructive dividends upon the transfer of the Strain Ranch to two foundations which they controlled. 10. Raymond P. Murphy and Mary Jean Murphy failed to substantiate a capital loss claimed in their return for 1964. 11. Even though Glenn E. Edgar was grantor and life beneficiary of certain trusts which had become members of two partnerships, he was not entitled to deduct the trusts' shares of the operating losses incurred during 1962, 1963, and 1964. 12. The failure of William Russell Strain Trust No. CR-1 and Arthur W. Strain Trust No. CR-1 to file timely income tax returns for 1964 was not due to reasonable cause and, therefore, the sec. 6651(a), I.R.C. 1954, additions to the tax apply. Since none of the other trust petitioners had taxable income in that year, sec. 6651(a), I.R.C. 1954, does not apply to them. 13. Although there were errors in the 1964 income tax return of Glenn E. Edgar and his wife, the underpayment of tax thereon was not due to negligence or intentional disregard of the rules and regulations; therefore, the addition to tax under sec. 6653(a), I.R.C. 1954, does not apply.

With respect to 18 pieces of used property, petitioner, in his original 1964 return, applied the double declining-balance method of depreciation to 16 of the items and the straight-line method to the remaining two items. The double declining-balance method is not available for used property. Petitioner by an amended return for 1964 applied the 150-percent declining-balance method to all 18 items. The Commissioner determined that only the straight-line method was available to petitioner. Held, since the petitioner had not previously regularly used the double declining-balance method in depreciating the 16 items to which the method was erroneously applied, he can adopt the 150-percent declining-balance method for those items. Held, further, utilization of the straight-line method for the remaining two items was a correct application of an acceptable method, and petitioner, not having obtained the consent of the Commissioner, cannot change from that method.

1. Three corporations (A, B, and C) were organized to carry on a potato-processing business. Held: C, but not A, was organized for the principal purpose of evasion or avoidance of Federal income tax, by securing an additional surtax exemption. Sec. 269(a), I.R.C. 1954. 2.

On Mar. 15, 1962, in a series of transactions qualifying under sec. 334(b)(2), I.R.C. 1954, the stock of a corporation owning television station WNCT-TV was acquired by petitioner and then liquidated, petitioner receiving all the assets of the corporation in liquidation. The parties agree that an aggregate basis of $ 695,640 is to be assigned under sec. 334(b)(2) to the entire class of intangibles so acquired, but disagree as to the further allocation of this sum among the various assets which the parties agree comprise this class of assets, namely, network affiliation contracts, FCC license, advertising contracts, goodwill, and going-concern value. The network affiliation contracts referred to consist of two such contracts held by WNCT-TV at the time of acquisition -- a primary affiliation with CBS and a secondary affiliation with ABC. The latter, upon commencement of operation by a new station on Sept. 1, 1963, was terminated by ABC in favor of a primary affiliation with the new station. Held: 1. Allocation among intangible assets determined. 2. Petitioner is entitled to a loss deduction in the year of the ABC contract termination. Useful life of ABC contract determined. 3. Respondent's determination, disallowing a deduction for amortization of the CBS contract, is sustained for failure of petitioner to establish that the useful life of such contract was not indeterminate.

Decedent's life was insured under a group term life insurance policy paid for entirely by his employer, and the beneficiaries of the policy were designated by the employer. Held: decedent did not possess any of the incidents of ownership of the policy within the meaning of sec. 2042, I.R.C. 1954.

Petitioners Harry and Carl Hagemann held all of the stock of Cedar Investment Co. Cedar, through outside agents, sold life insurance policies on the premises of two banks. In addition, Harry and Carl furnished management services to American Savings Bank which, in return, paid management fees to Cedar Investment Co. Held, the commissions on the insurance policy sales were earned by, and properly taxable to, Cedar Investment Co. Held, further, the fees paid for management services were earned by, and properly includable in the gross income of, Harry and Carl Hagemann. Held, further, the fees paid for management services by American Savings Bank were ordinary and necessary business expenses and deductible under sec. 162, I.R.C. 1954.

The envelope containing the petition in this case bore a U.S. postmark dated Feb. 16, 1971, the 151st day after the mailing of the notice of deficiency. The petitioners had a 150-day period for timely filing the petition. Held, Feb. 15, 1971, the 150th day, was a legal holiday in the District of Columbia, and therefore, the petition is considered to have been timely filed.

1. Four stockholders of International transferred their stock in Campex to International in return for International's common stock. Held: in the circumstances of this case, that only the transferors of the Campex stock may be considered as transferors of property for purposes of sec. 351, I.R.C. 1954; that the fifth stockholder may not be so considered; that the control requirement imposed by secs. 351(a) and 368(c), I.R.C. 1954, as interpreted by regs. sec. 1.351-1…

Petitioner, a certified public accountant, expended amounts for membership dues in a country club and for the purchase of food and beverages for others, all but two of whom were also members of the… Held: that the petitioner failed to establish that such amounts expended constituted business expenses within the contemplation of secs. 162 and 274 of the Internal Revenue Code of 1954, rather than personal expenses.

During the taxable years 1960, 1961, and 1962 petitioner's leased mining property had reached the development stage. Held: that all expenditures reasonably connected with preparing the two commercially marketable ore deposits in the mine for extraction, including expenditures to further delineate the location and extent of such ore deposits, constitute deductible development expenditures within the meaning of sec. 616 of the Internal Revenue Code of 1954.

Petitioner entered into an employment contract with a corporation. The question of whether amounts he received thereunder were partly in payment for transfers of property to the corporation was litigated before this Court with respect to the taxable year 1961 (George A. Dean, T. C. Memo. 1966-258). Attempting to introduce evidence which by due diligence he could have presented at the prior proceeding, petitioner now seeks to litigate the same issue with respect to the taxable years 1962 and 1963. Held, petitioner is collaterally estopped from relitigating the issue decided in the prior proceeding because the evidence sought to be introduced was available to him and by due diligence could have been there introduced. Held, further, amounts expended by petitioner in 1963 in searching for a new business opportunity did not qualify as deductions under secs. 162, 165, or 212 of the Internal Revenue Code of 1954.

Held, the attorney's fees in question represent the cost to the petitioner of acquiring a life estate. Held: the attorney's fees in question represent the cost to the petitioner of acquiring a life estate. Consequently, the fees are amortizable over the period of the petitioner's life expectancy and deductible under sec. 167(a)(2).

1. Respondent determined that purported loans did not constitute bona fide indebtedness of petitioner corporation and that repayments thereof and payments of interest thereon constituted dividends. Held: the purported loans were bona fide indebtedness with the result that the repayments thereof were nontaxable and the interest was deductible by petitioner corporation. 2.

Held: 1. Interest paid by a United States corporation to a corporation organized under the laws of Honduras to collect such interest on behalf of a Bahamian corporation was not exempt from United… Held: Interest paid by a United States corporation to a corporation organized under the laws of Honduras to collect such interest on behalf of a Bahamian corporation was not exempt from United States income tax under art. IX of the United States-Honduras Income Tax Convention.

Held: 1. The petitioner has failed to meet the substantiation requirements of sec. 274(d) with respect to entertainment expenses claimed to have been incurred in 1965 and 1966 in his capacity as an employee of This Week Magazine. 2. The petitioner has failed to demonstrate that entertainment expenses claimed to have been incurred in connection with his business as a playwright were "ordinary" within the meaning of sec. 162. 3. The taxi expenses claimed by the petitioner in 1965 and 1966, in excess of the amounts allowed by the respondent were reimbursable by the petitioner's employer, This Week Magazine, but not claimed by the petitioner. Therefore, those expenses are not deductible by the petitioner.

Decedent, an employee of a State university, died in possession of two annuity contracts. Held: under sec. 2039(c)(3), I.R.C. 1954, petitioner may exclude from the gross estate that portion of the annunity proceeds attributable to contributions made by decedent's employer.

Various taxpayers entered into so-called option agreements with Johnson County Rentals, Inc. Each of the agreements was in reality a rental agreement coupled with an option to purchase. Held: taxpayers are not entitled to interest deductions in respect of properties covered by the agreements because they did not incur indebtedness within the meaning of sec. 163(a), I.R.C. 1954.

During its fiscal years ending June 30, 1959, 1960, 1961, and 1962, petitioner paid a Virgin Islands and a Puerto Rican corporation, controlled by the same interests as petitioner, excessive prices… Held: respondent's reallocations were arbitrary and unreasonable. Pursuant to sec. 482, I.R.C. 1954, arm's-length prices for terrazzo strip and rod are determined under the standards prescribed by sec. 1.482-2(e)(2), Income Tax Regs., and gross income reallocated.

Petitioners' personal residence and its contents were totally destroyed by fire in March 1964. Held: The fair market value (cost less depreciation) of the household contents immediately before the fire was $ 42,520.97. The deductible amount of the casualty loss with respect to the household contents was $ 28,020.97 ($ 42,520.97 less the insurance recovery of $ 14,400 less the $ 100 floor for a personal casualty loss).

Held: 1. Testimony of an unavailable nonparty witness given at a prior criminal income tax evasion trial involving Thomas Wheeler and the Lynn Corp. is… Held: Testimony of an unavailable nonparty witness given at a prior criminal income tax evasion trial involving Thomas Wheeler and the Lynn Corp. is admissible in evidence in subsequent Tax Court proceedings. An affidavit and question and answer transcript of the same unavailable nonparty witness are also admissible. 2.

1. Taxable Year 1960. -- The petitioners, who owned the controlling interests in Omark (U.S.) and Omark 1959 (Canadian), caused Omark 1959 to transfer all of its operating… Held: on the facts presented the fair market value of the assets transferred to Omark 1960 by Omark 1959 did not exceed the consideration received in exchange; therefore, the respondent's determination that the alleged excess consideration was constructive dividend income to petitioners was erroneous. 2.

Petitioners entered into an agreement to sell fill dirt from their land. The agreement set forth the areas from which the dirt was to be removed, estimated the amount of dirt in place in these areas, and imposed upon the buyer of the dirt an obligation to remove and pay for all of the dirt in place situated in these areas. Held, petitioners' profit from the sale of fill dirt is taxable as long-term capital gain.

Petitioners entered into an agreement to sell fill dirt from their land. Held: petitioner's profit from the sale of fill dirt is taxable as ordinary income.

1. The Commissioner sought to recompute petitioner's income for the short taxable period Dec. 22 to 31, 1961, which was closed by the statute of limitations. Held: such recomputation is permissible for purposes of determining the amount of a 1964 net operating loss carryback absorbed in that short taxable period, in order to compute the remaining amount of that carryback that would be available to petitioner in a subsequent (1962) open year. 2.

The petitioner was the postmaster of the LaVergne, Tenn., Post Office and an officer in the Tennessee National Guard. Held: the petitioner is not entitled to deduct his expenses for meals and lodging while at Fort Knox, because he has failed to provide the required substantiation for such expenses or to show that they were not reimbursed; but he is entitled to deduct his automobile expenses for returning to LaVergne each weekend.

Gordon Erickson and Mid-States Construction Co., a subchapter S corporation, entered into a written agreement in 1965 providing for the redemption of Erickson's 250 shares of stock for a redemption… Held: that the amounts received by Erickson are taxable as capital gain from the redemption of stock, and not as ordinary income from dividend or joint venture distributions.

Petitioner sold various tracts of land at a gain in 1965, reinvested part of the proceeds therefrom, and claimed nonrecognition treatment under sec. 1033. Held: petitioner did not sell his property as a result of the threat or imminence of condemnation. Held, further, allocation of sales proceeds to various properties determined.

Petitioners had income in 1966 from Irish Sweepstakes winnings. Held, such income constitutes wagering income and is not entitled to the benefit of the averaging provisions in effect during that year. Held: such income constitutes wagering income and is not entitled to the benefit of the averaging provisions in effect during that year. Sec. 1302(b)(3), I.R.C. 1954.

During 1965 there were distributed to petitioner from a qualified pension trust eight contracts with an insurance company upon the trust's termination. Held: that at the time of distribution these seven contracts were annuity contracts since the life insurance protection had ceased, and that under section 1.402(a)-1(a)(2) of the Income Tax Regulations petitioner need not include the cash surrender values of these seven contracts in his income.

Park and Dorman Mills, two corporations, entered into a contract whereby the former was to provide management services for the latter. Held: sec. 482 may be employed in the present circumstances to allocate income from Park, the corporation, to petitioner, an individual.

Robert A. Eubanks, guardian, entered into negotiations for the sale of a parcel of improved real estate belonging to petitioner, Nannie Carr Harris, incompetent. Held: petitioner is entitled to use installment sale provisions of section 453 since she did not constructively receive in 1964 $ 110,000 deposited in the irrevocable escrow account.

In 1962 Shassian, a residential builder and developer, agreed to have facilities for a swim club constructed and to lease and then sell them to a community group organized for the purpose of… Held: by reason of sec. 337(c)(1)(A), I.R.C. 1954, gain realized by L, a collapsible corporation under sec. 341(b), I.R.C. 1954, cannot escape recognition under sec. 337(a) -- regardless of the applicability of sec. 341 (d)(3) to gain realized by its sole shareholder, Shassian.

1. More than 3 years prior to his death decedent assigned all interest in nine insurance policies on his life to his wife. Held: at the time of his death decedent possessed no incidents of ownership in the nine life insurance policies, and the proceeds were therefore not includable in his gross estate under section 2042(2), I.R.C. 1954. 2. Prior to his death decedent created substantially identical accumulation trusts for each of his three grandchildren.

T, a resident physician in psychiatry at the Philadelphia Psychiatric Center, received payments from the Center totaling $ 7,415.37 during 1967. Held: T may not exclude any portion of the payments from his gross income as a scholarship or a fellowship grant. Sec. 117, I.R.C. 1954; sec. 1.117-4(c), Income Tax Regs.

In determining the taxability of distributions by Rapid American Corp. (Rapid) to its shareholders, including petitioners, during its fiscal year ending January 1962. Held: 1. Held: Rapid's deficit in earnings and profits as of July 31, 1961, may not be used to offset earnings and profits of corporations acquired by Rapid on July 31, 1961, under sec. 332, I.R.C. 1954. 2.

Held: 1. Depreciation, operating expenses, and investment credit for a boat purchased with corporate funds are not deductible since corporation did… Held: Depreciation, operating expenses, and investment credit for a boat purchased with corporate funds are not deductible since corporation did not meet substantiation requirements of sec. 274. Once personal use of an entertainment facility is shown to have occurred, taxpayer must clearly prove the limit of such occasions. 2.

The State Highway Commission condemned 19.91 acres of petitioners' land for public use in the construction of an interstate highway system. Held: petitioners' economic unit, their farming business, was not rendered impractical by the taking, they had sufficient remaining cropland to continue their business, and sec. 1033(a)(3)(A) will not apply to reduce the gain from the sale in question here.

A partnership, composed of petitioners, owned an apartment building from which it received rent income in 1965, 1966, and 1967. Held: that in substance the transaction was a loan and not a sale of future rents; (2) that the mere assignment of the right to receive the rent income was not enough to relieve petitioners of the tax in 1967; and (3) that the $ 225,000 constituted rent income to petitioners in 1967 rather than 1966.

The petitioner was an officer and a director of a corporation which paid group-term life insurance premiums for petitioner, in his capacity as a… Held: that the premiums paid by the corporation to provide the petitioner with group-term life insurance coverage in his capacity as a director are not subject to the limited exclusion allowed by sec. 79(a), I.R.C. 1954, as premiums paid by an employer for an employee pursuant to a plan of group-term life insurance, but are rather…

In 1961, C & D corporation borrowed money from a bank in order to purchase two notes from Commonwealth corporation. Held: the amounts transferred from Commonwealth to C & D in 1966 constituted constructive dividends to S. E. Copple and are taxable as such under sec. 301(c)(1), I.R.C. 1954. Held, further, other petitioners who were shareholders in both corporations did not receive constructive dividends.

1. Petitioner was an integrated miner-manufacturer of granite products. Held: petitioner must compute gross income from property under section 613, 1954 Code, for purposes of its deduction for depletion by use of the proportionate-profits method.

Petitioners incurred substantial losses in their sole proprietorship and, on May 14, 1965, filed a petition in bankruptcy. Held: in computing their net operating loss for 1965, petitioners must aggregate the income and expenses from all their business endeavors during the entire year and may not reduce their business income by their personal exemption and nonbusiness deductions. Sec. 172(d)(3) and (4), I.R.C. 1954.

Petitioner taught remedial English and developmental reading under a provisional credential from the State of California until June 1967. Held: petitioner was in the trade or business of teaching while in Norway.

Decedent assumed certain obligations to his divorced wife in a property settlement agreement that was adopted and approved in a California interlocutory decree of divorce which he agreed not to… Held: The foregoing obligations were founded on a promise or agreement not shown to have been contracted for an adequate and full consideration in money or money's worth (secs. 2053(c)(1)(A), 2053(e), and 2043(b), I.R.C. 1954), and therefore are not deductible under sec. 2053(a).

1. The corporate petitioner constructed custom-made signs which it leased to customers. Lease durations varied from 1 to 10 years, the most common duration being 5 years. Held: The costs of constructing the signs must be treated as capital expenditures, depreciable over the term of the original lease in each case. An adjustment under sec. 481, I.R.C. 1954, must be made with respect to the transitional year. 2.

One of petitioners, a construction worker (petitioner), was employed through his local union hiring hall in 1965 on the Blanco Tunnel, which was 60 miles from the home he had maintained for… Held: Petitioners are not entitled to the claimed deduction since petitioner's work at the Blanco Tunnel was indefinite and not temporary.

Held, amounts of financial aid received by petitioners Robert Henry Steiman and Helen S. Lieberman during 1967 as graduate assistants while… Held: amounts of financial aid received by petitioners Robert Henry Steiman and Helen S. Lieberman during 1967 as graduate assistants while studying for doctoral degrees are excludable from income as scholarships or fellowship grants under sec. 117, I.R.C. 1954; the primary purpose of the payment of such amounts was to further their…

Held, the expenses incurred in 1968 by petitioner, a schoolteacher, in attending law school are not deductible under sec. 162(a), I.R.C. 1954, or the amplifying regulations, sec. 1.162-5(a) and (b),… Held: the expenses incurred in 1968 by petitioner, a schoolteacher, in attending law school are not deductible under sec. 162(a), I.R.C. 1954, or the amplifying regulations, sec. 1.162-5(a) and (b), Income Tax Regs.

Decedent left his entire residuary estate to his wife with a condition that if she died before she was entitled to any part or share of my residuary estate * * *, then said residuary would go to his… Held: the personal property in decedent's residuary estate was not an interest in personal property includable for purposes of determining the marital deduction under sec. 2056(a), I.R.C. 1954.

Petitioner paid certain sums to his employer because his sale and purchase of stock constituted an apparent violation of sec. 16(b) of the Securities Exchange Act of 1934. Held: petitioner's payment constituted ordinary and necessary business expense. William L. Mitchell, 52 T.C. 170 (1969), revd. 428 F. 2d 259 (C.A. 6, 1970), reaffirmed.

Held, the limitations of sec. 214(b), I.R.C. 1954, in respect of deductions for child care expense are not violative of petitioner's rights under the fifth amendment. Held: the limitations of sec. 214(b), I.R.C. 1954, in respect of deductions for child care expense are not violative of petitioner's rights under the fifth amendment.

1. Held, during the taxable years 1959 and 1960 the corporate petitioner was a personal holding company within the meaning of sec. 542, I.R.C. 1954. 2. Held: during the taxable years 1959 and 1960 the corporate petitioner was a personal holding company within the meaning of sec. 542, I.R.C. 1954. 2. Held, further, the corporate petitioner's subch. S election to be taxed as a small business corporation was involuntarily terminated in 1960. 3.

Petitioner deducted accrued but unpaid interest on two purported bond issues which were each held by its parent corporation. Held: neither bond issue represents a valid indebtedness on which interest can be deducted under sec. 163, I.R.C. 1954.