Volume 63 — Tax Court Reports

A corporation, of which petitioners were transferees, used the reserve method authorized by sec. 166(c), I.R.C. 1954, in computing its bad debt deductions. Held: the corporation is not entitled to add to its bad debt reserve for the taxable year ended June 30, 1969, the amount of the discount allowed the purchaser of its accounts receivable.

B-G corporation made entries on its books at the end of each year accruing liabilities for payments under a profit-sharing plan meeting the requirements of secs. 401 and 501,… Held: B-G corporation did not pay into the profit-sharing trust the amounts of $ 24,236.67 and $ 11,807.48 within the time prescribed by law for filing the [returns] for such taxable [years], as required by sec. 404(a)(6), I.R.C. 1954, and, accordingly, is not entitled to deductions for such amounts.

Rule 121, Tax Court Rules of Practice and Procedure. -- The issue raised by the pleadings is whether certain payments made to petitioner wife by her former husband constitute property settlement or… Held: there is a genuine issue of material fact and, therefore, petitioners are not entitled to summary judgment.

Petitioners' home was damaged in 1971 by an earthquake. They received an unsecured loan from the Small Business Administration in 1971 and a portion of the loan was canceled in 1971. Held: the petitioners must reduce the amount of their casualty loss in an amount equal to the cancellation of indebtedness because petitioners were compensated by such cancellation within the meaning of sec. 165(a).

Held, in the transaction whereby petitioner acquired the assets and business of its subsidiary, meeting both the provisions of sec. 332,… Held: in the transaction whereby petitioner acquired the assets and business of its subsidiary, meeting both the provisions of sec. 332, I.R.C. 1954, with respect to liquidation of a subsidiary and sec. 368(a)(1)(F) with respect to a reorganization which amounts only to a change in identity or form, petitioner is not prohibited by sec.…

Petitioner contracted to lease an IBM computer from Boothe Leasing Corp. The computer was on petitioner's premises on or before Dec. 31, 1961. Held: petitioner is entitled to an investment credit under secs. 38 and 48(b)(2), I.R.C. 1954. Held, further, the contract between petitioner and Boothe was in substance as well as form a lease entitling petitioner to rental deductions under sec. 162(a)(3), I.R.C. 1954.

Petitioner was a partner with his son-in-law in a legal Nevada gambling establishment. Held: the search warrant was valid and not overbroad, and the search party acted within its authority. Held, further: The fifth amendment privilege against self-incrimination did not preclude the respondent's use at trial of partnership records seized in the raid.

Rules 31(a), 36(b), and 51(a), Tax Court Rules of Practice and Procedure. -- Petitioners filed a motion for a more definite statement under Rule 51(a) regarding certain affirmative allegations of… Held: The motion is denied because the answer is not so vague and ambiguous that petitioners cannot reasonably be required to frame a reply. Respondent's answer meets the fair notice requirement of Rule 31(a) and the required form and content of an answer under Rule 36(b).

Petitioners Jackson E. Cagle, Jr., and Charles L. Webster, Jr., along with John F. Eulich, formed a partnership in 1968 to deal in warehouses, office buildings, and other commercial property. Held: the $ 90,000 payment made in 1968 is not deductible by the partnership and hence the losses distributed by the partnership and reported by petitioners are reduced accordingly since the payment was not incurred for ordinary and necessary business expenses.

Held, under sec. 214, I.R.C. 1954, as applicable to the calendar year 1969, petitioners are entitled to deduct the pro rata portion of the… Held: under sec. 214, I.R.C. 1954, as applicable to the calendar year 1969, petitioners are entitled to deduct the pro rata portion of the expenses paid for the care of their three minor children applicable to the period the husband had no income and was incapable of self-support because of being hospitalized for high blood pressure and…

An agreement entered into by the parties for the purchase of a truck route provided for the payment of $ 10,000 on account of the purchase and the payment of additional sums of $ 5,000 the first year… Held: Respondent is not bound to the allocation of the total consideration in the agreement as between the purchase price and the consideration for the seller's services. Commissioner v. Danielson, 378 F. 2d 771 (C.A. 3, 1967), certiorari denied 389 U.S. 858 (1967).

Petitioner transferred to a bank with recourse loans made to ranchers and farmers. Held: under sec. 166(g)(2), petitioner, an endorser and a guarantor within the language of that provision, is prohibited from deducting additions to a reserve for bad debts to reflect the loans transferred.

1. Petitioners, employees of the City and County of Los Angeles, belonged to retirement plans which required that portions of their earnings be contributed to their respective retirement funds. Held: amounts withheld from their earnings and paid to the respective funds on their behalf were not excludable from their gross income. 2. Disallowance of deductions for educational expenses approved. 3. Disallowance of commuting expense deductions approved.

Five trusts for minor grandchildren were created whereby the income interests during minority qualified as present interests for the… Held: the income interests under these facts are to be treated in toto, i.e., as income interests for the life of the grandchild named in each trust, and not as separate components, and as such constitute single forms of property which are present interests for the purpose of the annual exclusions by virtue of sec. 2503(b) and (c), I.R.C.…

1. Held, certain parcels of real estate sold by petitioners in 1968 and 1969 were not held by petitioners primarily for sale to customers in the ordinary course of business and the profit realized on… Held: certain parcels of real estate sold by petitioners in 1968 and 1969 were not held by petitioners primarily for sale to customers in the ordinary course of business and the profit realized on such sales is taxable as capital gain. 2.

1. As a consequence of the individual petitioners' default on a note which was secured by a trust deed pledging their real property community asset, Pacific, the holder of the note, foreclosed, and… Held: there was an indirect sale between each of petitioners and U.L.C. under sec. 267(a)(1), I.R.C. 1954, and therefore petitioners are prohibited from deducting their loss which resulted from the foreclosure sale.

The notice of deficiency was not mailed to petitioners at their last known address and petitioners did not receive the notice in time to file a timely petition in this Court. Held: Under the circumstances, this Court may, and should, first determine the validity of the notice of deficiency, and if it is invalid, grant petitioners' motion to dismiss for lack of jurisdiction. Petitioners' motion to dismiss granted; respondent's motion to dismiss denied.

Held, petitioner, a subdivider, recognized ordinary income on sales of the portions of a tract of land which were held for sale in the ordinary course of business and capital gain on sales of the… Held: petitioner, a subdivider, recognized ordinary income on sales of the portions of a tract of land which were held for sale in the ordinary course of business and capital gain on sales of the portions of that same tract which were held for investment.

1. The petitioner resided in an apartment in which he maintained a room for his son to occupy when not away at school. Held: the petitioner was the head of a household within the meaning of sec. 1(b)(2), I.R.C. 1954, because his household was the principal place of abode of his son. 2.

Petitioners were members of a group of investors who contracted to purchase, as tenants in common, the leases and buildings (improvements) of a certain shopping center. Held: that the transactions constituted a sale for tax purposes, and that petitioners, as owners of the improvements, are entitled to deduct a pro rata share of operating losses and interest on their Federal income tax returns.

Petitioner operated two trucks, on separate newspaper delivery routes. Held: petitioner's two trucks were employed in a single integrated operation and he is allowed only substantiated specific deductions for expenses incurred in their operation.

1. Petitioner adopted a profit-sharing retirement plan in which all of its employees were eligible to participate. Held: respondent properly found this plan discriminatory within the meaning of sec. 401(a)(3)(B), I.R.C. 1954, as amended. 2. Due to a misapprehension of a material fact, respondent initially issued a determination letter holding the aforesaid plan qualified within the meaning of sec. 401(a).

Held: Fact that statute requires agreement of Federal civil service employee to a portion of his salary being withheld and placed in… Held: Fact that statute requires agreement of Federal civil service employee to a portion of his salary being withheld and placed in civil service retirement fund to provide a retirement annuity for him does not cause the withheld amount to be excludable from his taxable income reported on the cash basis as deferred compensation, since the…

Held: Respondent's motion to dismiss for lack of jurisdiction because petition not timely filed, denied. The 90-day period for timely filing a petition expired Jan. 31, 1974. Held: Respondent's motion to dismiss for lack of jurisdiction because petition not timely filed, denied. The 90-day period for timely filing a petition expired Jan. 31, 1974.

Decedent, coexecutor and beneficiary of an estate, did not report income of the estate on either fiduciary income tax returns for the estate or on his individual returns. Held: the underpayment of tax on decedent's individual returns was due to fraud and the 50-percent addition to tax under sec. 6653(b), I.R.C. 1954, is approved.

Rule 60(c), Tax Court Rules of Practice and Procedure. -- Petitioner was legally dissolved on Dec. 22, 1969. Held: respondent's motion to dismiss will be granted.

Transaction in which donee agreed to pay donor's gift taxes held not to result in realization of taxable income by donor measured by the excess of such gift taxes over donor's basis in the donated property. Richard H. Turner, 49 T.C. 356, affirmed 410 F.2d 752 (C.A. 6), followed; Joseph W. Johnson, Jr., 59 T.C. 791, affirmed 495 F. 2d 1079 (C.A. 6), certiorari denied 419 U.S. 1040, distinguished.

Petitioners were the sole officers, directors, and shareholders of their controlled corporation. Held: petitioners are not qualified electing shareholders under sec. 333 because they have not filed written elections as required by that section.

Held, transactions whereby J. W. Kelley and Margaret I. Kelley, in 1954, transferred to their children and grandchildren remainder… Held: transactions whereby J. W. Kelley and Margaret I. Kelley, in 1954, transferred to their children and grandchildren remainder interests in certain land in consideration of notes secured by vendor's liens were gifts within the meaning of sec. 1000, I.R.C. 1939, only to the extent that the value of the transferred interests exceeded the…

Held: (1) Computax was formed by petitioner as a wholly owned subsidiary and availed of with a view to the sale by petitioner to CCH of… Held: Computax was formed by petitioner as a wholly owned subsidiary and availed of with a view to the sale by petitioner to CCH of some of its stock prior to the time that a substantial amount of income had been realized from the use of the program for computer preparation of income tax returns developed by petitioner and transferred to…

Petitioner is a nonprofit family cemetery company owned and operated exclusively for the benefit of its members. Held: sec. 501(c)(13) does not require a cemetery company to be public or to serve exclusively public interests, therefore petitioner is an organization described by sec. 501(c)(13) and it is exempt from income tax under sec. 501(a).

Petitioner, a life insurance company, had at the end of each taxable year amounts which represented deferred premiums on life insurance contracts. Held: petitioner is entitled to deduct commissions payable on the deferred premiums in determining gain from operations under sec. 809, I.R.C. 1954.

Held, petitioner was not in the business of raising, training, and breeding German shorthaired pointers and consequently his losses were not deductible. Held: petitioner was not in the business of raising, training, and breeding German shorthaired pointers and consequently his losses were not deductible.

A qualified profit-sharing trust was terminated as of Jan. 2, 1971. The employee-participant died on Feb. 23, 1971. Held: the distribution was made on account of the termination of the trust and not on account of the employee-participant's death and is therefore not entitled to capital gains treatment under sec. 402(a) (2) or to the death benefit exclusion under sec. 101, I.R.C. 1954.

A decedent had disposed of property pursuant to an arrangement which was adjudicated to be a long-term installment sales contract bearing an interest rate of 7 percent for purposes of computing the… Held: that amounts received by petitioner pursuant to the installment sales contract were income in respect of a decedent under sec. 691(a), I.R.C. 1954, and were reportable by petitioner in the same manner that the decedent would have been required to treat them had she lived.

Rules 70 and 72, Tax Court Rules of Practice and Procedure. -- Petitioners filed a motion to compel respondent, pursuant to Rule 72, to produce (1) the investigative report prepared by the special… Held: These documents were not prepared in anticipation of litigation and are, thus, not protected by the work product doctrine. 2. Portions of the special agent's report are protected by a qualified privilege and are not relevant. 3.

Rodeway granted to RIS, subject to certain conditions, the exclusive rights to construct or cause to be constructed Rodeway motels in a specified area. Held: such payment did not constitute a business expense within sec. 162(a), I.R.C. 1954, but was a capital expenditure under sec. 263(a), I.R.C. 1954, and amortizable under sec. 167(a), I.R.C. 1954.

TASCO owned 100 percent of the stock of both Houston and North American in addition to operating a telephone-answering service directly and providing managerial services to those two subsidiaries,… Held: the transaction in question did not satisfy the requirements of sec. 337, I.R.C. 1954.

In 1967 WWB-Cal acquired all the assets of HSI, a corporation which had suffered net operating losses in several of its preceding taxable years. Held: the acquisition was not made for the principal purpose of evading or avoiding Federal income tax.

Petitioners, residents in surgery, received payments from Wood Veterans Administration Hospital and Milwaukee County General Hospital during their residencies. Held: the payments are not excludable scholarships or fellowship grants. Sec. 117(a), I.R.C. 1954.

Rule 121, Tax Court Rules of Practice and Procedure. -- (1) Respondent's motion for summary judgment, insofar as it seeks to sustain his disallowance of certain deductions for payments made by petitioner to an organization which petitioner contends is exempt from tax under a section of the Internal Revenue Code of 1954 which permits contributions to it to be deductible, is denied since there is a genuine issue of material fact with respect to the deductibility of these items.

Petitioners husband and wife, residing in a community property State, owned all the stock of corporation A, an electing small business corporation, and corporation L. A borrowed $ 110,000 from L.… Held: A's note to Underwood is not an indebtedness which increases Underwood's adjusted basis under sec. 1374(c)(2)(B), I.R.C. 1954, for the purpose of determining the amount of A's net operating loss petitioners may deduct for 1969.

The estate incurred expenses in selling stock in a secondary offering. The stock was sold to a group of underwriters for $ 18.095 per share. Held: Expenses incurred in making the sale are deductible. Sec. 2053, I.R.C. 1954. The deductibility of such expenses is not limited by the provisions of sec. 20.2053-3(d)(2), Estate Tax Regs., allowing a deduction for any loss on the sale of stock.

Held, value of shares of stock of a closely held investment company which represented a small minority interest in the company, determined. Held: value of shares of stock of a closely held investment company which represented a small minority interest in the company, determined.

Subsequent to the filing of the opinion in the case of Harry Gordon, 63 T.C. 51 (1974), both parties jointly and individually petitioned this Court for a Revision of Opinion. Upon consideration of these motions, certain changes are hereby made. Harry Gordon, 63 T.C. 51 (1974), modified.

Petitioners vacated their old residence in August 1966, moved to another city, and rented a house there until September 1968 when they purchased a new residence. Held: Each case arising under sec. 1034 must be decided on the facts and circumstances presented.

Petitioner incurred legal expenses in connection with the disposition of a patent and deducted them as an ordinary and necessary expense under sec. 212(1). Held: these legal expenses have their origin in the disposition of a capital asset and must be used to offset the realized capital gains.

Petitioner filed a joint Federal income tax return with her former husband for the taxable year 1968. Held: petitioner does not qualify for relief from an agreed deficiency for 1968 as an innocent spouse under sec. 6013(e), I.R.C. 1954, because the tax liability resulted from respondent's decrease of cost of goods sold rather than from his inclusion in gross income of an amount erroneously omitted from gross income.

Rucind, Inc., owned a tract of undeveloped land which it agreed to sell under contract dated Feb. 18, 1969. Held: sale of the land must be considered as made by Rucind, rather than by the stockholders. Held, further, petitioners are not entitled to revoke their sec. 333 elections since they did not rely upon a material mistake of fact.

Held, a line date stamped on an envelope by the receiving Post Office for postal control purposes is not a postmark. Held: a line date stamped on an envelope by the receiving Post Office for postal control purposes is not a postmark.

Decedent Cary W. Salter, Sr., died on Mar. 1, 1968, leaving all of his property to his surviving widow, Medora L. Salter, with any residual after her death to his three children in equal parts. Held: decedent's will gave his widow a life estate with power to dispose of the property only for her maintenance and support; consequently, the interest she received under the will did not qualify for the marital deduction under sec. 2056(b)(5), I.R.C. 1954.

Petitioner acquired ICC operating rights at a sealed bid sale of seized property conducted by the respondent. Held: this agreement did not transform the transaction into a lease and petitioner is unable to deduct payments made pursuant to its terms as rental expense. Held, further, legal fees incurred in connection with the acquisition of these operating rights must be capitalized and included in their acquisition cost.

Petitioner, a cash basis taxpayer, borrowed from a bank, late in the calendar year, amounts totaling $ 5,388,600. Held: petitioners paid $ 377,202 as an interest expense in 1969 under sec. 163(a). Newton A. Burgess, 8 T.C. 47 (1947), followed. Held, further, respondent did not abuse his authority under sec. 446 by disallowing the major portion of the deduction for prepaid interest in order to clearly reflect petitioners' income for 1969.

Held: (1) Amounts advanced by an attorney on behalf of his clients for litigation costs with the understanding that he would be repaid… Held: Amounts advanced by an attorney on behalf of his clients for litigation costs with the understanding that he would be repaid from the recovery at the conclusion of the case are in the nature of loans which are not deductible as business expenses under sec. 162(a), I.R.C. 1954, and nothing in the holding of the United States Court of…

Suits were filed against petitioner for damages totaling $ 14,781,150 allegedly resulting from trespass and negligence claimed to have been committed in carrying out two construction jobs. Held: the $ 1,100,000 was transferred to the trustee in accordance with sec. 461(f), I.R.C. 1954, and is deductible in computing petitioner's income tax liability for 1964.

Deceased taxpayer was a partner, with a 30-percent interest, in two partnerships. Held: The meaning of the phrase amount of gross income stated in the return used in sec. 6013(e)(1)(A), I.R.C. 1954, must be determined by reference to sec. 6501(e)(1)(A) as required by sec. 6013(e)(2)(B). 2.

Held, sec. 1.165-7(b)(2)(i), Income Tax Regs., relating to the computation of casualty losses incurred in a trade or business or in a transaction entered into for profit, is valid. Held: sec. 1.165-7(b)(2)(i), Income Tax Regs., relating to the computation of casualty losses incurred in a trade or business or in a transaction entered into for profit, is valid. Held, further, respondent's computation of casualty loss sustained.

Petitioner Fred A. Berzon transferred stock of the Simons Co. to trusts for the benefit of his children and grandchildren in each of the years 1962 through… Held: the fair market value of the gifts of Simons Co. stock as of the date of each gift in the years 1965 through 1968 determined. Held, further, use, possession, or enjoyment of the interests in corpus was postponed with the result that petitioners are not entitled to any exclusions for gifts thereof under sec. 2503.

Three dentist-partners formed a corporation in 1962 to own the building in which they practiced and to lease it and dental equipment to the partnership. Held: The former employees of the partnership were not common law employees of the partnership after Aug. 1, 1968.

Rules 22 and 60(a), Tax Court Rules of Practice and Procedure. -- A notice of deficiency was sent to petitioners on Apr. 24, 1974. Held: The petition was not timely filed. Sec. 7502(a)(2), I.R.C. 1954, is not applicable because the envelope containing the petition was not properly addressed to the Court in Washington, D.C., as required by Rule 22, Tax Court Rules of Practice and Procedure.

In their joint Federal income tax return for the taxable year 1970 petitioners denied liability for the amount of the income tax surcharge authorized by sec. 51 of the Internal Revenue Code on the… Held: the tax surcharge imposed by sec. 51(a)(1)(A) of the Code is constitutional, and petitioners are liable for taxes due thereunder for 1970.

Held, certain expenditures made by petitioner banks in adopting a consumer credit card plan to expand their installment credit operations are currently deductible under sec. 162, I.R.C. 1954. Held: certain expenditures made by petitioner banks in adopting a consumer credit card plan to expand their installment credit operations are currently deductible under sec. 162, I.R.C. 1954.

Petitioner, a United States taxpayer residing in a foreign country, earned no income from biological research activities in 1970. Held: petitioner is entitled to deduct the biological research expenses under sec. 162(a), where he received no earned income within the intended scope of sec. 911(a) to which his expenses would be properly allocable or against which they would be chargeable.

Held: Recovery of previously expensed items in a liquidating sale is not protected from recognition by sec. 337. Held: Recovery of previously expensed items in a liquidating sale is not protected from recognition by sec. 337. Therefore, the recovery is taxable under the tax benefit rule to the extent of the tax benefit, and petitioners are liable for the tax as transferees of the assets of the corporation.

National Co., which was engaged in the mortgage banking business, sold all of its assets and then distributed the proceeds to its shareholders in… Held: the entire portion of the gain realized from the sale of National Co.'s mortgage servicing agreement is entitled to nonrecognition treatment under sec. 337. Held, further, legal and accounting fees incurred in connection with the sale of National Co.'s assets are not deductible as ordinary and necessary business expenses.

Petitioners entered into an oil- and gas-drilling program under which they agreed to pay $ 13,500 ($ 15,000 in some instances) to Drilling Co. for drilling a well on locations assigned to… Held: Petitioners are not entitled to deductions for intangible drilling and development costs in 1968 or 1969. Petitioners have failed to prove that they were participants in any sort of a pooling arrangement that would qualify them as operators under sec. 1.612-4(a), Income Tax Regs.

Rules 34(a), 34(b)(7), 41(a), and 60(a), Tax Court Rules of Practice and Procedure. -- Petitioners filed a joint Federal income tax return for 1972 and received a joint statutory notice of deficiency… Held: respondent's motion to dismiss for lack of jurisdiction as to the wife will be denied because she has clearly established that she intended to join her husband in filing the timely petition and has ratified his act in filing the petition on her behalf.

Pursuant to a settlement agreement incorporated in a Nevada divorce decree, decedent maintained life insurance policies of which his former wife was beneficiary. Held: the proceeds of the policies, which were included in decedent's gross estate, are deductible by reason of sec. 2053(a)(4), I.R.C. 1954.

Held, that the decedent's estate, having elected the alternate valuation method permitted by sec. 2032, I.R.C. 1954, for valuing the… Held: that the decedent's estate, having elected the alternate valuation method permitted by sec. 2032, I.R.C. 1954, for valuing the gross estate, did not realize gain when its stock in Consolidated Cigar Corp. was exchanged for stock, purchase warrants, and cash in Gulf & Western Industries, Inc., in a reorganization of the type described…

Petitioner held stock in 1966 in a corporation. Held: A theft loss deduction can be sustained only if a theft occurred under the applicable State law. Petitioner has failed to prove that, under Texas law, the misconduct of the corporate officers constituted a theft from him. The theft loss deduction was properly denied.

Held, even though the State of Illinois did not assess a real estate tax in 1964, the county collector acted as the agent for the State in collecting the real estate taxes for the county and other… Held: even though the State of Illinois did not assess a real estate tax in 1964, the county collector acted as the agent for the State in collecting the real estate taxes for the county and other political subdivisions.

1. D, who was then 65 years old, conveyed all but 18 acres of his 260-acre residential and recreational estate (Bellevue Hall) to his… Held: the foregoing arrangement was not the kind of bona fide transaction that would have been entered into by parties dealing with one another at arm's length; in substance D retained * * * the possession or enjoyment of (or an interest in) the property which did not in fact end before his death, and the value thereof is includable in his…

D, who owned most of the stock of C, entered into an agreement providing that his estate would sell such stock to C and that C would purchase it at its book value. Held: the second agreement is to be given effect in administering the estate, and the parties are released from the obligations under the first agreement.

Petitioner entered into two forward sales contracts with respect to the British pound. After devaluation of the pound in November 1967, these contracts had substantially appreciated in value. Held: petitioner did not realize income as a result of the contribution and subsequent sale of the forward sales contracts.

Petitioner is the transferee of Colortype, against which a deficiency was assessed for 1968. Held: upon the deemed disposition of McDonald's stock Colortype must include in income its excess loss account of $ 312,683 (the excess of McDonald's losses taken into account in computing taxable income over Colortype's basis in McDonald's stock). Treasury regulations sec. 1.1502-19 as in effect for 1968 is valid.