INDEX-DIGEST

ACCOUNTING METHODS

See also RENEGOTIATION.

Accrual Method-Vacation Pay-Fixed Liability.—Amendment effec-
tive in 1954 of contract between railroad on accrual basis and its
employees, which previously provided for forfeiture by employees of
vacation with pay or payment in lieu thereof upon termination of
employment except for retirement prior to scheduled vacation, to
provide for nonforfeiture of such allowances for employees who quali-
fied for vacations but died prior to such vacations survived by widow
or dependent minor children, did not remove conditions precedent
to employer's liability to pay vacation allowances to entitle employer
to deduct in 1954 vacation allowances earned by its employees in 1954
but payable in 1955. Postponement during taxable years of applica-
bility of Rev. Rul. 54-608, 1954-2 C.B. 8, revoking I.T. 3956, 1949-1
C.B. 78, which had provided that vacation allowances were accruable
as of end of year in which qualifying services were rendered, was not
intended to permit taxpayers such as petitioner who were properly
deducting vacation pay in year paid to accrue such pay contrary to
new ruling. Denver & Rio Grande Western Railroad Co.......

Change of Method-Amendment of Sec. 481-Initiation of Change.-
Taxpayer's method of accounting employed in keeping books need
not be changed when in 1954 he changed method of accounting
used in computing income for tax purposes from cash to accrual to
conform with bookkeeping in order for sec. 481 (1954 Code) to apply,
and Commissioner properly added to 1954 income inventory and ac-
counts receivable at Jan. 1, 1954, and deducted therefrom accounts
payable at time and determined one-tenth of net amount constituted
additional income in each of taxable years 1954-1958, even though
adjustments were based on pre-1954 income-producing items and
sec. 481 as originally enacted limited adjustments to those with respect
to taxable years beginning with 1954, in view of its amendment by
1958 Tech. Amdts. Act retroactively permitting such adjustments
attributable to change in method of accounting initiated by taxpayer.
Court construed "initiated" as referring to movant or originator of
change without regard to why change was made. Fred P. Pursell_.
Change of Method-Cash to Accrual-Sec. 481 Adjustments.-Argu-
ment that transitional adjustment in taxpayer's income under sec. 481
(1954 Code), as amended by 1958 Tech. Amdts. Act, necessitated by
changeover in method of accounting used to report income from cash
to accrual method, be limited to net total of items of income not taxed
prior to 1954, so that net total estimated by Commissioner would be
reduced by amount of closing inventory for 1949 not utilized by Com-
missioner as opening adjustment for 1950 plus 1947 adjustment to in-
come made by internal revenue examining officer, was without merit
as sec. 481 does not provide means for correction of errors of past
years but permitted only adjustments made necessary by taxpayer's
change in method of accounting for income, as to hold otherwise
would construe sec. 481 as providing for correction of errors otherwise
barred by limitations. Fred P. Pursell__

Change of Method-Depreciation-Commissioner's Prior Consent.-
Court denied to owners of hotel, who computed depreciation on their
books for 1956 to 1959 and deducted depreciation on their 1956 income
tax return based upon straight line method, right to retroactively
amend 1956 return to use 150% declining balance method for comput-
ing depreciation without first securing consent of Secretary as required
by sec. 446(e) (1954 Code), there being no evidence such consent was
arbitrarily withheld, and further, there being no showing straight
line method produced unreasonable depreciation figures based on Com-

1047

Page

557

263

263

ACCOUNTING METHODS-Continued

missioner's determination and taxpayers actually used straight line
method. Court rejected hotel owner's argument that use of straight
line method in 1956 was not an election of method because Commis-
sioner redetermined remaining useful life and salvage value for that
year entitling them as new owners in 1956 to amend their 1956 returns
and have their free choice of methods. M. Pauline Casey‒‒‒‒‒
ACCUMULATION OF SURPLUS

Avoidance of Tax on Shareholders-Business Purpose.-Sharehold-
ers' inability to pay income tax on dividends in form of discharge of
their non-interest-bearing notes issued to corporation was not business
purpose which justified corporation with more than sufficient accumu-
lated earnings and profits but relatively little cash failing to declare
appropriate dividend, nor were corporation's nebulous plans to expand
oil and gas interests previously acquired with borrowed funds, which
subsequent acquisitions it in fact financed primarily with borrowed
funds, adequate justification for corporation's failure to distribute its
current earnings, and corporation was liable for accumulated earn-
ings tax. Nemours Corporation_-_

Avoidance of Tax on Shareholders-Business Purpose.-Court deter-
mined (1) publishing and printing corporation did not accumulate
earnings and profits beyond reasonable need of its business, without
having to decide whether its sec. 534 (c) (1954 Code) statement of
grounds for accumulations shifted burden of proof to Commissioner,
since it was justified in its accumulation to meet heavy operating ex-
penses of each year, and to meet serious competition, it actively con-
sidered installation of new equipment in taxable years and was aware
of need to stay in sound financial condition to pay for potential plant
improvements and buy out minority shareholders, and (2) its motives
were geared to reasonable corporate needs and not any desire to avoid
imposition of tax on shareholders, who were consistently paid substan-
tial dividends even in loss or low earnings years, notwithstanding some
indication that funds were not required, i.e., large withdrawals by cor-
porate officer, since he concealed borrowings from others by tempo-
rary borrowings from bank on his own credit and was sued for
recoupment on discovery. James M. Pierce Corporation__.
ADDITIONS TO TAX

Failure to File-Income Tax Return-Reasonable Cause.-In absence
of evidence divorced wife obtained competent professional advice that
payments received in 1957 were not taxable as income to her but were
for support of children, where husband paid less than amount stipu-
lated under decree providing for support of wife and children which
did not specify amount for child support, Court held that wife's mis-
taken belief that no return was required did not constitute reasonable
cause for her failure to file return sufficient to relieve her from im-
position of addition to tax under sec. 6651 (1954 Code), thereby reject-
ing wife's contention that she could not make intelligent decision on
question of whether to report income for 1957 until Supreme Court
decision in 1961 as to whether wife is taxable upon all amounts re-
ceived for support of both herself and children where amount intended
for child support is not specified. Eleanor C. Shomaker_-_-_

Fraud-Burden of Proof-Mental Competency of Taxpayer.-Proof
that taxpayer omitted substantial amounts of income from his returns
for 1951-1955 did not satisfy Commissioner's burden of proving fraud
where taxpayer had been found to be suffering from severe psychosis
and mentally incompetent to stand trial on criminal charge of willful
evasion of Federal income taxes and Court had continued civil pro-
ceeding, upon motion of Commissioner, until appointment of guardian
ad litem, despite taxpayer's involvement in intricate financial opera-
tions during tax years involved and his Court testimony which dis-
played astuteness and awareness of matters that made it difficult to
say his mental condition was responsible for understatements of in-
come. Emanuel Hollman__

357

585

643

192

251

ADDITIONS TO TAX-Continued

Late Filing-Income Tax Return-Proof.-Court determined that tax
payer's 1956 income tax return filed jointly with his wife, which was
required to be filed Apr. 15, 1957, bore signatures dated Apr. 12, and was
stamped "received" by district director's office Apr. 19, was timely filed,
finding credible taxpayer's testimony that he mailed it Apr. 12 and
inferring therefrom that it would have been received by Apr. 15, and
absent rebuttal evidence by Commissioner regarding actual receipt of
return and production of envelope in which return was enclosed. Max
Kralstein

ALIMONY

See also CAPITAL GAINS AND LOSSES.

Payments Incident to Divorce—Alimony or Property Settlement.-
Monthly payments to wife by husband domiciled in separate property
State, under written instrument incident to divorce which specifi-
cally stated payments were not alimony but part of property settlement
to foreclose divorce court from raising or lowering payments, were
nevertheless includible by wife in gross income under sec. 71(a) (1)
(1954 Code) as payments to discharge legal obligation to her incurred
by husband because of marital relationship, since contrary to peti-
tioner's contention, written agreement is not in itself necessarily de-
terminative of issue, and facts disclosed payments were not made as
consideration for any property petitioner owned but were designed
primarily for her support. Elizabeth H. Bardwell___

Payments Incident to Divorce-Alimony or Support-Periodic Pay-
ments.-Payments of $6,400 and $18,450 for 1956 and 1957 under di-
vorce decree requiring husband to pay to wife for support and main-
tenance of herself and their minor children, including their higher
education, $15,000 per year for 5 years, $10,000 per year for succeeding
5 years, $7,500 per year for next 5 years, and $2,500 per year for follow-
ing 10 years, were not excludible by wife from her gross income under
sec. 71(b) (1954 Code) because decree did not fix amount payable
for support of children, or under sec. 71(c) (2) because principal
sum of $187,500 was payable over period of more than 10 years from
date of decree and yearly payments, which did not exceed 10% of
principal sum, were periodic payments in discharge of legal obligations
imposed on husband because of marital relationship under divorce
decree and taxable to her. Eleanor C. Shomaker_

Support Payments-Taxability to Wife-Constitutionality.-Court
found divorced wife was free to spend as she saw fit entire amount
paid to her by husband for support of herself and their minor chil-
dren, under divorce decree which did not designate amount paid for
support of children, and concluded requirement under sec. 71 (1954
Code) that full amounts received by wife be included in her taxable
income did not, as contended by wife, amount to imposing tax upon
wife measured by husband's income resulting in denial to her of due
process of law. Eleanor C. Shomaker__

AMORTIZATION

Premiums-Convertible and Callable Bonds-Stock Conversion.-Peti-
tioners were not entitled to deduct unamortized bond premiums, not
attributable to conversion feature, of convertible and callable bonds
in years bonds were converted into stock of issuing corporation, under
sec. 125 (1939 Code), or 1954 Code provision, since Congress in enacting
this legislation did not intend to permit such deduction on happening
of event wholly unrelated to "call" provisions of debentures, such as
conversion was in instant case. Albert J. Ades---

BAD DEBTS

of bad

Nonbusiness-Involuntary-Deductibility.-Worthlessness
debts at time of creation was irrelevant in considering deductibility
when involuntarily assumed, and houseowners who, upon failure of
builders to pay claims of mechanics and materialmen totaling in ex-
cess of $6,000, turned over builders' surety bond later discovered to
be forged to loan company financing construction, paid claims secured
by liens on house, which were deemed uncollectible against builders,
676308-63- -67

810

84

192

192

501

BAD DEBTS-Continued
upon advice of counsel that they would lose their home unless claims
were satisfied, and sought to execute judgments obtained against
builders, were involuntary creditors of builders by subrogation and
entitled to deduct as nonbusiness bad debts $1,000 each taxable year
until deducted in full. Haywood P. Martin____.

BASIS

See also DEPRECIATION and ESTOPPEL.

FNMA Stock Acquired as Condition of Mortgage Sales.-Federal
National Mortgage Association stocks required by FNMA to be received
as part of consideration for mortgages sold to FNMA, which were held
by subscriber for varying periods of time up to 42 months, in absence
of proof, are assumed to have been held at time of sale for purpose of
investment, either for receipt of dividends or in hope market price
would increase, and constituted capital assets with bases to subscriber
of fair market value at date of issue. Ancel Greene & Co---

Partnership Interests-Distributions.-In computing adjusted basis
of each trust-partner's interest in partnership real property upon 1955
liquidation of partnership, Court (a) rejected partners' contention
losses and distribution erroneously charged to undistributed income
rather than to capital accounts were either offset by earnings in 1944-
1947 or deducted elsewhere in Commissioner's determination in absence
of sustaining evidence and held such losses and distributions were
deductible; (b) held originally reported partnership income in 1955
must be added to partners' bases and deficits in undistributed income
accounts at end of 1955 created by prior excess distributions deducted
from basis in absence of proof deficits were created by 1955 liquida-
tion of partnership; (c) decided excess liabilities assumed by 1 partner
upon liquidation of partnership should be added to basis of partner's
interest at time of liquidation under sec. 752(a) but that its share of
partnership liabilities assumed upon entering partnership should not
be added at time of liquidation since they had already been taken
into account in determining original basis; (d) decided in absence of
proof to contrary, partnership income not currently distributed in 1934-
1936, 1948, and 1949 must have been used to offset prior deficits in
undistributed income accounts and should not be added in determining
partners' final adjusted bases; and (e) increased adjusted basis of 1
partner by $12,500 upon proof partner had made $12,500 payment in
1936 on partnership note held by bank but refused to infer from facts
of payment by 1 partner and reduction of partnership note that year
by $25,000 that other partner had made $12,500 payment also and
should have its basis increased. M. Pauline Casey---

Property Other Than Money-Feeder Corporation-Gift or Capital Con-
tribution. Used articles obtained from public by feeder organization
by solicitation in name of Disabled American Veterans and sold with
purpose of using profits over expenses of feeder organization for dona-
tion to DAV constituted contributions by nonshareholders to feeder
organization's capital in form of inventory rather than gifts to or-
ganization, donative intent of public being to benefit DAV and not
taxpayer corporation, and therefore corporation's basis for such prop-
erty was zero under sec. 362(c) (1) (1954 Code) and receipts in excess
of operating costs were taxable profit. Veterans Foundation___.
CAPITAL EXPENDITURES

Compromise_Settlement-Suit to Test Validity of Trust-Capital Ex-
penditure or Expense.-Payment by life tenant of trust to widow of
settlor in settlement of her claim trust was invalid was not deductible
as ordinary and necessary expense paid for conservation or mainte-
nance of property held for production of income as claimed by tax-
payer but was to protect life tenant's right to receive for his life the
income from trust corpus, not just to determine proper allocation of
income among claimants, and so was of capital nature and nondeduct-
ible under sec. 212(2) (1954 Code). Arturo H. P. Ramos__.

New Printing Press-Leased Property-Capital Expenditure or Ex-
pense. Court determined that printing press equipped for multicolor
printing, which petitioner purchased to replace old press without this