CAPITAL EXPENDITURES-Continued
equipment, represented replacement of property held by it under leases,
except to extent of color half-deck which constituted addition to
leased property, but that expenditures were capital expenditures and
not deductible as ordinary expense, since expenditure was clearly for
permanent improvement made to increase value of leased property and
to restore property or make good the exhaustion thereof, not to main-
tain leased property, and it appreciably extended property's useful
life. Journal-Tribune Publishing Co----
Stock Foreclosure Costs-Reorganization-Capital Expenditure or Ex-
pense.-Railroad reorganizations under sec. 77 of Bankruptcy Act are
covered by sec. 373 (1954 Code), which provides for nonrecognition of
loss, and reorganized railroad could not deduct as business expense its
reimbursement of mortgage trustees for expenses incurred in fore-
closure of lien on stock of predecessor corporation, which railroad was
required to pay as reorganization cost (nondeductible capital expendi-
ture) by bankruptcy decree which specifically provided such expenses
should be deemed incurred in connection with bankruptcy proceeding
or plan of reorganization. As further reasons for refusal to allow
deduction, Court pointed out reorganized railroad was not same legal
entity as debtor, even though it utilized debtor's charter, because equity
incorporation was completely changed, charter was substantially
modified, and railroad did not assume debts of predecessor corpora-
tion. Denver & Rio Grande Western Railroad Co__
See also ESTATES AND TRUSTS, INCOME, and PARTNERSHIPS.
Proceeds of Shopping Center Sale-Collapsible Corporation-Capital
or Income.-Gain realized by petitioner corporation, herein determined
to be collapsible corporation, on sale of shopping center was taxable as
long-term capital gain and not ordinary income, since center was not
held primarily for sale to customers in ordinary course of business,
although some of corporation's shareholders were actually engaged in
real estate business, but was held for lease purposes and was sold only
after corporation failed in its extensive efforts to obtain mortgage
financing, at which time it decided to liquidate. There was no evidence
to substantiate Commissioner's alternative theory that price received
by corporation included moneys for services performed which would
represent ordinary income to corporation. Sproul Realty Co‒‒‒‒‒‒‒‒
Sale of Patents-Manufacturing Information-Capital or Income.-En-
tire proceeds of sale of petitioner's patents, sold with engineering and
manufacturing know-how, were from sale of capital assets taxable as
long-term capital gain, and no part was for services rendered or to be
rendered and taxable as ordinary income as Commissioner maintained,
since there was no contract provision for services to be rendered and
information or know-how transferred was incident of patents, took
on nature of such property, and constituted capital asset. Commis-
sioner was not justified in construing contract to effect that existing
patents were sole properties of capital nature sold, because of uni-
lateral bookkeeping entries of petitioner's employees evaluating only
existing patents for tax advantage, since contract covered transfer
of patents coming into existence in future and pertinent manufactur-
ing information. Heil Co...
Transfer of Realty to Ex-wife-Alimony-Gain to Husband.-Court
held divorced husband who transferred to former wife as alimony,
pursuant to court decree, his undivided one-half interest in realty
owned by parties realized long-term capital gain of one-half difference
between fair market value and adjusted basis of his one-half interest
in property, following United States v. Davis, 370 U.S. 65. Robert K.
Stephens
Husband's Income-Allocated to Nonresident Alien Spouse-State
Law.-Ex-serviceman, domiciled in New Jersey prior to Army service,
employed by United States Army in Germany, and married to German
national, could not split income with wife and report only half his in-
come by reason of oral agreement with her to treat property as com-
COMMUNITY PROPERTY-Continued
munity property or intent to become resident of Washington, a
community property State. Asserted unconstitutionality of Commis-
sioner's action in denying to United States citizens married to nonresi-
dent aliens and not domiciled in community property States right to
split incomes for tax purposes, was fallacious, since it failed to dis-
tinguish between privilege granted husband and wife to split income
for tax purposes by filing joint return, denied in all States to spouse
married to nonresident alien, and property rights in earnings of spouse
granted by property laws of community property States. George D.
Hampton, Jr.--
Charitable For Use of Municipality.-Transfer by railroad of loco-
motive to local pioneer association, not qualified as exempt organiza-
tion, for display in public park pursuant to agreement between rail-
road, pioneer association, and city that locomotive was transferred for
purpose of such display was deductible as charitable contribution for
use of city, which qualified as exempt organization under sec. 170
(1954 Code). Denver & Rio Grande Western Railroad Co____.
Charitable-Forgiveness of Indebtedness-When Deductible.-Tax-
payer who advanced sum of money to charitable organization to build
chapel as memorial for son and took back promissory note, which he
indicated at time he might not attempt to collect and might cancel
portions of from time to time, was not required to deduct entire amount
in year advanced but could deduct as separate charitable contributions
amounts canceled in each year by endorsements on back of note, be-
cause he did not actually part with all dominion and control over
money contributed at time it was advanced and intended to make con-
tributions advanced over period of years rather than all at one time.
Nelson Story III__
Charitable Repair of Roman Catholic Chapel on Taxpayer's Prop-
erty-Deductibility.-Expenditures for repairing, redecorating, refur-
bishing, and rehabilitating chapel built on his private estate by ances-
tor of taxpayer and operated exclusively for 240 years as public oratory,
mission, and parish church of Roman Catholic church did not benefit
taxpayer or increase value of his estate and were deductible as chari-
table contributions to church under sec. 23(o)(2) (1939 Code) and
sec. 170 (c) (1954 Code). Estate of Philip A. Carroll__-
Miscellaneous-Proof.-Commissioner's disallowance of $615, claimed
by taxpayer as miscellaneous contribution, for lack of substantiation
was upheld on failure to prove that any part was in fact paid to a
qualifying organization; hence, there was no basis for apportionment
under Cohan rule. Max Kralstein____
Religious Organizations-Substantiation Requirement-Constitutional-
ity. Requirement that contributions to religious groups be substan-
tiated is so closely tied in with allowance of deduction of such
contributions for tax purposes that holding such requirement invalid
as violative of taxpayer's rights under first amendment of United
States Constitution would necessitate going further and invalidating
entire provision insofar as it grants deduction for contributions to re-
ligious groups. Kenneth Lingenfelder___
Acquisition to Avoid Tax-Bona Fide Business Purpose.-In finding
investment corporation owning newspaper corporation failed to meet
burden of proof it did not acquire mining company for tax-reducing
purpose under sec. 269 (1954 Code), Court rejected its claim that acqui-
sition was bona fide business move placing ownership of mining com-
pany with true investor with principal purpose to realign structure of
commonly owned corporations to reflect changed relationship and
more effectively utilize strength of 2 corporations to bring mining com-
pany to prosperity and profitable investment, and found, contrary to
taxpayer's contentions, that sec. 269 applied to situation where cor-
poration acquired commonly controlled corporation, and that where
taxpayer acquired corporation anticipating that it would benefit tax-
wise from future operating losses of corporation acquired and in addi-
tion subsidiary went bankrupt and sold plants and equipment at loss,
taxpayer was not only precluded by sec. 269 from claiming tax benefits
of operating losses but also from benefiting from loss on sale of assets.
Zanesville Investment Co___.
Acquisition to Avoid Tax-Bona Fide Business Purpose.-Court de-
termined that petitioner, merged corporation whose entire stock was
acquired before merger by shareholders of 2 other corporations which
merged with petitioner, could not deduct for its taxable years 1954
and 1955 net operating losses of petitioner prior to merger and interest
on debentures paid in those years by merged corporations, under ap-
plicable sec. 269 (1954 Code) disallowing such allowances if corpora-
tion is acquired for principal purpose of evading tax, on facts, inter
alia, that stockholders knew of petitioner's substantial potential carry-
overs during stock purchase negotiations, petitioner had premerger
liabilities far greater than its assets and operating loss for 10 years
prior to sale, debentures had no significant value except for tax avoid-
ance, potential profits from petitioner's part of business were prob-
lematical, and evidence was lacking of its contribution to profits after
merger, which was not outweighed by facts that petitioner had good
manufacturing reputation throughout the country and approximately
$25,000 worth of assets and its premerger business activity was con-
tinued with improvements to its product. J. T. Slocomb Co--
Liquidation of Captive Corporation-Goodwill-Transferability.—As-
sets of creamery corporation, 77% owned by 5 supermarkets which
were its only customers and which could be expected to purchase
from it only during time they owned stock in it, did not include rec-
ognizable goodwill for tax purposes at time it was liquidated, assets
distributed to its stockholders, and successor partnership formed to
which stockholders contributed corporate assets distributed to them,
because as captive corporation of supermarkets, although its earnings
were high, creamery would not transfer to buyer in sale, which would
result in loss of all of its customers, an expectancy of any continued
earnings whatsoever, which is essence of commercial goodwill. Donal
A. Carty_---
CREDITS AND EXEMPTIONS
See also RETURNS.
Blindness-Correcting Lenses-Definition.-Taxpayer was entitled
to statutory exemption for blindness at close of taxable years where
his vision would be corrected beyond minimum statutory requirements
only by use of special type of contact lenses that could be worn only
for brief periods and with pain and which produced infection and cor-
neal ulcers, Court having determined that Congress intended, in using
term "correcting lenses" in sec. 151(d) (3) (1954 Code) defining blind-
ness, to refer to lenses ordinarily and normally worn by a taxpayer
and not to lenses of character involved. Emanuel Hollman___.
Nonresident Citizen-Earned Income-Sources Outside U.S.-Congress
intended same tests used to ascertain residency of aliens in United
States should determine residency of U.S. citizen in foreign country
for Federal income tax exemption purposes. Therefore, Court held
earnings of airline employees under annually renewed contract with
United States for management, operation, and maintenance of its
guided missile test range facilities on various British island possessions
were exempt from income tax, where it was clear missile testing would
continue for indefinite period, contract with airline would probably be
renewed yearly, men intended to make careers of working downrange
and in fact had so worked for periods of 5 to 7 years, and men had
entered into life of communities in which they worked, notwithstand-
ing their exemption from foreign tax under agreement between United
States and Great Britain, their numerous trips back to United States
to visit families and for other personal reasons, and their representing
themselves as residents of Florida on documents relating to homestead
tax exemption, marriage certificates, and complaints for divorce.
Lyon Tyler Matthew..
See also ACCOUNTING METHODS, ESTATES AND TRUSTS and
EXPENSES-TRADE OR BUSINESS.
Hotel-Useful Life-Salvage Value.-Court balanced testimony of ex-
pert witnesses produced by Commissioner and hotel owners and deter-
minations in 1951 and 1955 by Commissioner as to useful life and
salvage value of hotel, and ruled hotel owners met burden of proving
correctness of 1951 determination that useful life of hotel ended in
1965 with testimony of accountant, who handled hotel account for 20
years, specialized in hotel accounts, and exhibited considerable knowl-
edge of economic factors affecting useful life of hotel, i.e., motels, de-
creased local population, air travel, television, etc., rejecting 1955
determination that useful life of hotel ended in 1970 as contended by
Commissioner, whose expert based estimate on thinly financed offer
to purchase hotel for price in excess of adjusted base (which did not
extend economic life of hotel) and $400,000 worth of improvements
made before report on which 1951 determination was based, but found
hotel owners did not meet burden of proof hotel would have no salvage
value in 1965 as determined by Commissioner in 1951 and sustained
Commissioner's 1955 determination hotel would have 10% salvage value
at end of useful life. M. Pauline Casey----.
Improvement to Leasehold-Indefinite Duration-Depreciation
Amortization.—Because taxpayer citrus fruit wholesaler leased prem-
ises in market since 1929, landlord never refused to renew leases
of any of 70 market tenants, and no evidence existed suggestive of
uncertainty of renewal of taxpayer's lease, Court found there existed
reasonable certainty that lease would be renewed and that tenancy of
indefinite duration existed for tax purposes, so that cost of refrig-
eration equipment with useful life of 111⁄2 years and its installation
in leased premises 1 month before expiration of 3-year lease, providing
that such improvements belonged to lessor and were to be surrendered
at end of lease, constituted capital expenses entitling taxpayers to
deduction for depreciation over useful life of equipment, not to amorti-
zation over balance of lease. Andrew Morris....
Leasehold-Fair Market Value-Basis.-Court disallowed auction
firm's claim to depreciation deduction of so-called bonus value of
lease based on rent allegedly being less than fair rental value of
property conveyed by it to trustee, as instructed in will of deceased
sole stockholder, and exercise of right under will to long-term lease
at $600 per month, provided firm paid real estate taxes, repair, and
maintenance expenses, and continued business under same name and
on same high standards, on grounds lease was fair to both lessor and
lessee considering building's decrepitness, disproportionate moderniza-
tion cost, and lease provisions required by will, and so had no fair
market or bonus value as of decedent's death; further, inasmuch as
lessee did not inherit leasehold from decedent but in effect carved it
out of fee owned by it at stockholder's death, auction firm was not
entitled to any depreciable basis in lease due to decedent's death or
will provisions. C. G. Sloan & Co.--
Lessee's Improvements-Useful Life After Lease Term.-Where indi-
vidual taxpayer leased properties to family corporation, which occu-
pied them without leases prior to 1951, under 5-year-term leases from
1952 without permission to construct improvements, and under new
5-year-term leases from 1953 permitting improvements on properties,
to remain for lessor's benefit at leases' termination, Court determined
there was reasonable probability that corporation would continue to
occupy and use properties indefinitely and depreciation allowance for
lessee's improvements should be based on useful life of 301⁄2 years from
1953 as determined by Commissioner, considering controlling stock-
holder's concurrence in expenditure of substantial sums by corporation
for improvements, language of 1953 lease, and testimony of corpo-
ration's witness, indicating intention that corporation's occupancy
commencing in 1953 would be continued for indefinite period. Peter
Theodore____
Lessee's Improvements-Useful Life After Lease Term-Option to
Purchase.-Cost of improvements made to leased premises by lessee
with option to purchase was depreciable over useful life of improve-
ments, rather than over 7-year lease term, since from lessee's testi-
mony of intention to purchase if business was success, sizable amount
spent for improvements and equipment under short-term lease making
no provision for renewal or removal of improvements, and immediate
success of operation, Court concluded, that it was lessee's intention to
buy property and acquisition was reasonable certainty. Suil J. Moss__
Realty-Basis, Useful Life, Etc-Proof.-Taxpayer could not deduct
for depreciation of interests acquired beginning in 1941 in real prop-
erty in which he held 40% interest in 1911 and in real property in
which he acquired 25% interest in 1914, where there was no evidence
in record (1) of taxpayer's bases in properties, (2) on which Court
could base allocation of costs between lands and improvements, and
(3) of remaining useful lives of improvements at time interests were
acquired. Leo R. Cohn-_-
Cancellation of Note-Stock Redemption-Dividend Equivalence.—Cor-
poration's cancellation of $40,000 note of sole stockholder's wife in
1954 in consideration for redemption of all shares of stock he had
purchased from others, using proceeds of formal loan from corporation
evidenced by note and made to his wife acting on his behalf, left him
sole stockholder as before, and was in substance a distribution to him
of $40,000 in cash and his use of funds to discharge debt, so that con-
sidering that surplus was available for dividends in 1954, no dividends
had been paid since 1950, and there was no convincing evidence of
corporate purpose for redemption, Court determined transaction was
essentially equivalent to dividend distribution under sec. 302(b) (1954
Code), taxable to stockholder to extent of available corporate earnings
and profits. Aloysius J. McGinty_-
Constructive Dividends-Earnings and Profits-Computation.—In de-
termining accrual basis corporation had sufficient earnings to make
payments to trustee, held to be constructive dividends to stock pur-
chaser, under agreement whereby it redeemed stock of former owner
and issued new stock to purchaser, Court ruled (1) entry on corporate
books transferring sum from surplus to capital upon issuance of stock
dividend had no effect, (2) deficiency in income tax, even though not
paid, was properly to be taken into account in year for which de-
ficiency was determined, and (3) in case of accrual basis taxpayer,
income tax refund arising from net operating loss carryback should
be taken into account as of close of taxable year in which loss occurred,
at which time right to refund for prior years was as fixed and its
amounts as determinable as in case of obligation to pay income taxes.
Robert Deutsch....
Corporate Payments-Stock Redemption-Dividend
Trust agreement between widow who was sole stockholder and em-
ployee of corporation, pursuant to which employee bought 35 shares
of stock, received all dividends during period of agreement, and was
issued 300 new shares of stock by corporation subsequent to its re-
demption of 315 shares still owned by widow, and widow remained di-
rector of corporation until agreement was executed, effected purchase
by employee of all of corporation's stock and resulted in dividend dis-
tributions to employee in amount of consideration paid to widow by
corporation out of its earnings. Court specifically found employee was
not acting as agent of corporation in acquiring its stock even though
corporation would benefit by reason of his acquisition of control, it
being clear primary purpose of agreement was to transfer ownership
of corporation to employee and not to sell widow's stock to corporation.
Robert Deutsch__.
Payment of Stockholder's Debt-Dividend Equivalence.-Series of
transactions, wherein recent purchaser of corporate stock deposited
$60,000 in corporate bank account, corporation paid $60,000 to former
stockholder, former stockholder transferred shares held in escrow as
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