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INCOME Continued

Commodity Credit Loan Proceeds-Wheat Redemption in Taxable
Year-Election.-Without prior permission to change accounting
method, taxpayer, who elected under sec. 77 (1954 Code) to treat loans
from Commodity Credit Corporation as income during year received,
must continue to report each year as income Commodity Credit Cor-
poration loans received during year, including loans repaid by him be-
fore close of his taxable year; contrary to taxpayer's contention, this
requirement would not result in his being taxed twice on redeemed
wheat, or distort his annual income, or force him to be on crop inven-
tory accounting basis for such wheat contrary to his election, since re-
payment in redemption of wheat would be considered as repurchase
of wheat under this statute. Fritz Thompson_-_-

Constructive Receipt-Claim of Right-Exception.-Because tax-
payers must account on annual basis, Court held truck transport
hauler, who in 1957 was overpaid $444 under 1956 rental agreement,
renounced his claim of right to money, and contracted for its repay-
ment, was not liable for income tax in 1957 on $444, Court having
accepted doctrine of United States v. Merrill, 211 F. 2d 297, and recog-
nized payment as being exception to claim-of-right doctrine set forth
in North American Oil Consolidated v. Burnet, 286 U.S. 417, although
1957 contract, intended to achieve repayment of $444 and 1956 over-
payment of $14,990 by rate reduction, actually resulted in additional
overpayments of $24,411 in 1957 and $18,262 during 1958, of which
total of $10,000 was repaid under contract executed in 1958; however,
$24,411 received in 1957 but not discovered or renounced until 1958
was within scope of claim-of-right doctrine and therefore reportable
as gross income in 1957 by truck transport hauler. J. W. Gaddy....

Contest Prize-Ineligibility of Winner as Recipient-Taxability.—
Prize of annuity policy won by taxpayer but payable to his daughter as
his designated recipient in contest, rules of which required him to
designate at time of entry a recipient under 17 years and 1 month of
age, was not includible in his gross income, since while it was tax-
payer's effort that generated income, he had no right to its receipt or
enjoyment or to dispose of it, and existence of power to appoint or
designate its recipient alone did not give rise to taxable income in his
hands. Paul A. Teschner__

Embezzlement-Cotton Sale Proceeds-Restitution.-Proceeds from
sale of cotton, which petitioner illegally removed from his warehouse
and sold as his own in 1955, without consensual recognition of obliga-
tion to repay owners and with unrestricted use of funds until 1958
when defalcations were discovered by warehouse inspectors, were prop-
erly included by Commissioner in his gross income, and any belated
acknowledgment of liability could not be related back to year of con-
version even though he reported income on accrual basis of accounting.
L. M. Muldrow__

Exlusions-Gift by Incompetent-Partial Restitution.-Petitioner
was not entitled to exclude from 1955 gross income, as gift under sec.
102(a) (1954 Code), properties she received that year, since donor was
then legally incompetent to make valid gift, and value of properties
was includible in gross income under sec. 61 (a) under well-established
judicial interpretation that gross income includes economic gains not
covered by any specific statutory exclusion even though realized with-
out consideration; nor was value not includible because petitioner did
not acquire valid title because in 1956 she restored part of properties to
donor's estate under court judgment, since she had complete domin-
ion and control over them in taxable year. There was no warrant for
taxing portion of retained improvements in her net worth again in 1956
when she made partial restitution. David L. Zins_-

Exclusions-Interest on Governmental Obligations-Issued by Volun-
teer Fire Departments. Although volunteer fire departments perform
public function, they are private nonprofit corporations not created by
special statutes and as no functions of local government have been
delegated to them they cannot be called subdivisions of States, so
interest paid on notes issued by them to manufacturer for purchase

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INCOME-Continued

of fire-fighting equipment was not excludible by it from gross income, under sec. 103(a) (1) (1954 Code), as interest received from obligations issued by political subdivisions of States. Seagrave Corporation_ Exclusions-Motor Carrier Claims Award-Advances, Interest, and Contingent Attorney Fees.-Credit for amounts advanced by United States to taxpayer and for its profit during period of Government operation against award in 1952 by Motor Carrier Claims Commission to cash-basis owner of motor transportation system taken over by United States Government in 1944-1945 was tantamount to simultaneous payment to taxpayer of full amount owed him by United States and repayment to United States by taxpayer of money advanced to him, and taxpayer's election under sec. 99 (1958 Tech. Amdts. Act) to be taxed on award during 1944 and 1945 excluded from 1952 income amount received in settlement under award, including credit for amounts advanced by United States to taxpayer. Likewise excluded from 1952 income were interest on principal amount, specifically termed by Claims Commission part of compensation though computed as interest, and contingent attorney fees, properly deducted from 1952 income, absent any statutory exception to rule that cash basis taxpayer's deductions are to be taken in year paid or any applicable State law that such fees constituted payments to lawyer and not to client. Walter Petersen--

FNMA Stock-Acquired as Condition of Mortgage Sales--Includibility. Court held contracts for purchase of mortgages from corporation by Federal National Mortgage Association, conditioned upon deduction from mortgage purchase price of percentage of outstanding principal balances due under mortgages and retention by FNMA of such amounts as subscriptions by corporation to FNMA's capital stock at par value, did not constitute 2 separate transactions, 1, for purchase of mortgage by FNMA, and 2, of capital contributions by petitioner, so that FNMA stock was capital asset with cost basis to petitioner as contended by Commissioner, but rather contracts were not severable and provided for receipt by petitioner of cash and stock as claimed by petitioner so that petitioner must include in income as receipts from mortgages sold to FNMA cash receipts plus fair market value of FNMA stock at dates of issue. Ancel Greene & Co---.

In Respect of Decedents-Mixed Claims Commission Award.-Interest from Jan. 1, 1920, to date of payment awarded on principal amount, which represented recognized debt, awarded by Mixed Claims Commission did not constitute return of capital and so part of basis of award to be recovered tax free but was interest income to recipient. Taxpayer contended its dollar basis on property supporting award exceeded amount of award but failed to prove how debt arose, that any amount in excess of that used by Commissioner was proper basis, or what rate or rates of exchange would be proper to translate debt into dollars for purpose of award and Court, following Edna S. Ullman, 34 T.C. 1107, affirmed Commissioner, holding basis of award, based on compromise settlement of claim for commissions earned in Germany, equaled amount of_award, even though original debt might possibly have been larger. Estate of Adolf Kuttroff_

Patent Royalties-Transfer of All Substantial Rights-Capital or Income.-License agreement authorizing corporation to use and sell Japanese-manufactured device embodying patented parts throughout United States for life of patent in exchange for royalties paid to patent owner, who retained right to manufacture in United States goods covered by patents, right to sell in United States goods manufactured in United States which were covered by patents, and right to cancel license at will upon 6 months' notice, did not transfer all substantial rights of patent owner under patents entitling him to declare royalties as gain from sale or exchange of capital asset rather than ordinary income. Franz Martini_.

Payments to Employee-Per Diem-Includibility in Income.-Armed Forces Procurement regulation allocating to contract for reimbursement of contractor per diem allowances paid employees coupled with contract provision for reimbursement of aircraft corportaion by Gov

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INCOME-Continued

ernment for employees' traveling expenses, which aircraft corporation
employee contended designated per diem allowances as travel expenses
deductible from income, did not govern character of per diem allow-
ances in hands of employee-recipients, and also, revenue ruling on
deductible travel expenses, which employee contended characterized
per diem allowances as amounts paid in lieu of subsistence to em-
ployees in travel status not in excess of 125% of maximum authorized
by Government and so were not accountable for by employee to em-
ployer and not reportable as income, did not determine what are travel
expenses, and Court found per diem allowances paid to Missouri air-
craft corporation employee assigned indefinitely (ultimately 41⁄2 years)
to Holloman Air Force Base as data engineer on testing project, during
which time he had his family with him, were includible in his gross
income. Leo C. Cockrell_

Prepaid Subscriptions-Reserve Balance-Assumption of Liabilities by
Purchaser of Assets.-Commissioner properly included in taxpayer cor-
poration's income for taxable year amount of its liabilities for unex-
pired subscriptions assumed by purchaser of taxpayer's assets on its
liquidation that year, since although taxpayer received advance pay-
ments for subscriptions it did not include them in income for taxable
year, but reported only aliquot portion in income, carrying unearned
portion in reserve account, so that when purchaser assumed liabilities
for unearned subscriptions, taxpayer in effect realized income to extent
of amounts held in reserve, which otherwise would escape taxation,
James M. Pierce Corporation_-_

Redemption and Sale of Stock-Collapsible Corporation.-Corporation
organized in 1954 for purchase and operation of office building and
adjacent parking lots and dissolved in 1956 immediately following sale
of property, for price previously offered by unrelated party, to bank in
which incorporators owned stock and whose president and 1 of 13 di-
rectors owned half of corporate stock, received no recognizable gain
under sec. 337 (1954 Code) as it was not collapsible corporation within
meaning of sec. 341(b), evidence preponderating at time corporation
was formed showing bank recognized necessity of acquiring new facil-
ities but lacked intention to relocate in corporate property vicinity ac-
cording to testimony of bank directors without interest in corporation,
bank officials owning corporate stock initially opposed sale of property
to bank and other offerors, and corporate stockholders were known to
purchase such property for investment rather than resale. Southwest
Properties, Inc___.

Redemption and Sale of Stock-Collapsible Corporation.-Corporation
organized to construct shopping center for rental, which after prelimi-
nary site-purchasing, zoning, building permit, leasing, and mortgage-
seeking activities, but before physical construction began or income
was realized, sold project, completed construction, received payment,
and then distributed its assets to stockholders in complete liquidation,
was collapsible corporation and so not entitled to nonrecognition of
gain under sec. 337(a) (1954 Code), since in statutory definition of
collapsible corporation, its preliminary activities constituted "con-
struction," and necessary elements of "view," i.e., distribution to share-
holders before realization of substantial part of taxable income to be
derived from project and realization by them of gain attributable
to project, would have been present had petitioner first distributed its
interest to shareholders who then sold project, so that under applicable
regulations found to represent reasonable interpretation of congres-
sional intent, corporation remained collapsible when it sold its property
pursuant to sec. 337 liquidation plan, notwithstanding it realized long-
term capital gain and not ordinary income. Sproul Realty Co‒‒‒‒‒
Rent-Commonly Controlled Businesses-To Whom Taxable-Alloca-
bility. Regarding corporations which were formed 1921-1943, never
paid dividends, had as stockholders 2 brothers, their wives, and chil-
dren, deducted taxes and depreciation on rental properties owned and
leased by corporations to partnership formed in 1918 by brothers,
and regarding successor partnership formed upon death of 1 brother
by survivor, widow of deceased, children, and husbands of 2 children,

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INCOME-Continued

none of whom contributed working capital, which partnership paid salaries to working partners prior to allocation of profits in accordance with capital interests, sublet properties to tenants, and paid operating expenses, including rents, Court held partnership was formed for legitimate business purpose of carrying on managerial functions of earlier partnership and was not sham, and that common control of corporations and partnership, where there was no shifting of income from 1 controlled unit to other, did not justify allocation of rental income from partnership to corporations under sec. 482 (1954 Code). Interior Securities Corp_

Sale of Charitable Corporation Memberships-Capital or Income.Payment to members of tax-exempt nonprofit hospital corporation by charitable organization of $710,000 for membership certificates, conditioned upon transfer of certificates to buyer or its nominees and election of trustees and officers named by it, resulted in ordinary income to transferors since membership certificates were not property and transaction was in substance sale of hospital assets and distribution of proceeds to members. Portion of payment evidenced by negotiable note of fair market value of face amount, payable 2 years from date, was equivalent to cash and ordinary income to transferors. Estate of Grace M. Scharf ___

Sale of Lease-Related Taxpayer-Capital or Income-Depreciability.— Gain from $30,000 cash sale in 1956 by lessees to wholly owned corporation of $7,000 per year 10-year lease on farmland commencing Jan. 1, 1957, which lease was acquired by lessees at no cost in 1955, was taxable to lessees as ordinary income under sec. 1239 (1954 Code) as gain from sale between individuals and controlled corporation of property not to be classed as capital asset because of character subject to allowance for depreciation under sec. 167, not as capital gain, as petitioner contended, because leasehold property was not depreciable but was subject to allowance for amortization deductible under sec. 162. Court construed congressional intent in using word "character" in sec. 1239 to include leasehold property of kind involved, based upon judicial interpretation of similar wording in 1939 Code prior to enactment of sec. 1239. Tom F. Baker III__

Sale of Realty-Investment or Sale Property-Earlier Judicial Decision Controlling.-Where Court of Claims determined in 1956 in case involving same taxpayer as in instant case, same real estate subdivision, and sales of lots from same units of tract as are involved in instant case but taxable years 1946-1949, that taxpayer held lots sold during years there involved primarily for sale to customers in ordinary course of his trade or business, and taxpayer dealt with property during 19571958 in same manner as in 1946-1949, gains realized by landowner during 1957-1958 from sale of lots were ordinary income realized from property held primarily for sale to customers in ordinary course of his trade or business. Fritz Thompson---

INSTALLMENT SALES

Sale of Realty-Manner of Reporting-Election-Additions to Tax.Petitioner's income tax returns for 1953 and 1954, filed Mar. 26, 1957, reporting profit from 1953 sale of farm on installment basis with payment of income tax thereon, were not timely filed through her negligence, so that she thereby forfeited her right to report profit on installment basis and all profits were includible in 1953. Additions to tax for negligence in not filing returns until Mar. 26, 1957, for filing delinquent returns without reasonable cause, and for failure to file estimated tax returns, under secs. 293 (a), 291(a), and 294(d) (1) (a) (1939 Code), and applicable 1954 Code sections for 1954, were properly imposed. Marion C' de Baca----

INSURANCE COMPANIES

Mutual Insurance Company-Business Expenses-President's Travel.— Court upheld Commissioner's disallowance of claimed travel and entertainment expenses of mutual insurance company's president, which were not recorded and estimated at $500 for each taxable year, on fail

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INSURANCE COMPANIES-Continued

ure of proof to afford any substantial basis for approximation of
amounts expended or proof of any arrangement between company
president and company for him to bear cost. Peter Theodore-----

Mutual Insurance Company-Income-Allocation to Principal Policy-
holders.-Commissioner was not warranted in allocating certain por-
tion of net income of mutual insurance company to principal policy-
holder, owner of taxicab fleet, and portion to his taxicab company, on
basis that insurance was issued as tax-avoidance scheme to divert
income from taxicab operation and under guise of insurance pay-
ments channel it to insurance company which paid no tax, consider-
ing that insurance company was mutual insurance company and
taxable as such, its premiums were lower than those usually charged
by insurers for like coverage, and its surplus was inadequate for lia-
bility to which it was exposed for large numbers of accident-prone
taxicabs. Hence, business expense deduction for insurance payments
was allowed policyholder. Peter Theodore____

Mutual Insurance Company-Loan Repayment to Policyholder-Divi-
dend Equivalence.-Amounts received by principal policyholder in pay-
ment of surplus contribution notes issued to him in prior year by mu-
tual insurance company did not represent taxable dividends, but were
in payment of indebtedness arising from sums advanced as loans and
payable from surplus with approval of State insurance commissioner.
Peter Theodore....

Mutual Insurance Company-Qualification As.-In absence of statu-
tory definition and on authority of Citizens Fund Mutual Fire Insur-
ance Co., 28 T.C. 1017, Court determined that taxpayer met prerequi-
sites of mutual insurance company contrary to Commissioner's claim
it did not as it (1) lacked mutuality because taxicab owner who was
principal policyholder held as much as 89% voting rights in taxpayer
and 93% equitable ownership of its assets, and (2) it increased pre-
mium rates on taxicabs in 2 years and accumulated unnecessarily
large surplus, thereby failing to provide insurance substantially at cost,
since taxicab owner's percentage of voting rights and ownership was
attributable to amount of premiums he paid and did not cause company
to be lacking in mutuality, increase of premium rates on advice of
company's attorney handling accident suits served valid business pur-
pose, premiums charged by taxpayer were lower than usually charged
for like coverage, and surplus was inadequate considering amount of
liability to which taxpayer was exposed for accident-prone taxicabs
and other expenses. Peter Theodore___.

De-

Mutual Marine Insurance Company-Deductions-Dividends
clared.-Court interpreted resolution providing for contributions of
policyholders from dividends declared by accrual basis mutual marine
insurance association as having legal effect of entitling subscriber to
dividend part payable in cash and part to be credited for future pay-
ment or to represent portion of his equitable interest on association's
dissolution, and allowed association to deduct same as dividends de-
clared in year declared, but determined that amounts withheld under
resolution as loss retentions with no interest in such retention remain-
ing in policyholders were not deductible, since there existed no liability
to pay so that such amount was not declared as dividend; association's
reporting of amounts as income was in error. Commercial Fishermen's
Inter-Insurance Exchange--

Mutual Marine Insurance Company-Losses Incurred or Bad Debt-
Uncollected Reinsurance Proceeds.-Mutual marine insurance associa-
tion could not deduct in 1957 as losses incurred amount of uncollected
reinsurance proceeds recoverable from bankrupt French insurance
company, since claim against company therefor arose in 1956, this
amount was outstanding at end of 1956, and under sec. 832(b) (5)
(1954 Code) amount would have to be added to losses paid by asso-
ciation in 1957 and deducted as outstanding reinsurance recoverable at
end of 1957, and to result obtained would be added all unpaid losses
outstanding at end of preceding taxable year; nor could it deduct
amount as bad debt, since association was still trying to collect claim in
1957 and there was no basis at year's end to determine amount, if any,
uncollectible. Commercial Fishermen's Inter-Insurance Exchange----

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