LIMITATIONS

See also TRANSFEREES.

Assessment and Collection-Fraud Additions-Computation Error.Statute of limitations did not bar 1960 assessment and collection of addition to tax for fraud under sec. 293(b) (1939 Code) for taxable years ended July 31, 1944 and 1945, where originally omitted tax and additions thereto were assessed in 1953 and paid in 1954, but where additional additions to tax for fraud were omitted from 1953 assessment because of improper computation, since when fraud is determined and admitted, tax may be assessed at any time under sec. 276(a), 6-year limitation of sec. 276(c) applying only to collection of tax after it first has been properly assessed, and waivers executed by petitioner were not final closing agreements under sec. 3760 and would not therefore preclude assertion of further deficiencies in manner provided by law. Gum Products, Inc---

Extension of Period-Assessment Under Existing Act-Waiver.-Taxpayers presumably knew what they were doing when, after enactment of 1958 Tech. Amdts. Act and before expiration of period agreed upon under earlier waiver, they executed waiver of statutory limitation of period during which income tax deficiency could be assessed for 1954 extending period of assessment under "existing acts, or under prior revenue acts," and by so doing authorized assessment of income tax for 1954 under 1958 Act. Fred P. Pursell____

Extension of Period-Omission of Income-Return Requirements.— Omission of over 25% of 1953 gross income in original 1953 return, timely filed by petitioner's wife with his authorization, invoked 5-year period of limitations, notwithstanding his presence in combat zone permitted him to postpone filing under sec. 3804 (1939 Code) and he filed later return within 180 days of cessation of hostilities and included omitted income. Nor did letter of June 27, 1955, and enclosures, which fully disclosed his 1954 income, serve as his 1954 return to start running of 3-year limitations period under sec. 6501(a) (1954 Code) and bar consents he later executed to extend period, since letter and enclosures did not meet test of substantial compliance in absence of pertinent information to permit computation and assessment or proper verification. John H. Houston_.

Validity of Waivers-Burden of Proof-Mental Competency of Taxpayer. Finding in 1959 that taxpayer was mentally incompetent to stand trial on criminal charge of willful evasion of Federal income taxes and continuance in 1961 of civil proceeding, upon motion of Commissioner, until appointment of guardian ad litem, did not satisfy taxpayer's burden of proving invalidity of consents executed in 1957 extending period of limitations upon assessment and collection of any deficiency, particularly, as reasonable reliance by Government upon waivers, which were in all respects regular in form, should preclude any successful attack upon their validity, whether situation be one calling for application of estoppel or some cognate doctrine. Emanuel Hollman____.

LOSSES

See also INSURANCE COMPANIES. Cotton Futures Transactions-Capital or Ordinary Loss-Hedges.Loss sustained by petitioner on trading in cotton futures contracts, designated by him in dealings with brokers as hedging transactions and so claimed as ordinary loss, was properly determined by Commissioner to be capital loss, since facts relative to petitioner's operations and transactions failed to disclose any justification for designating dealings as hedges or for considering them an integral part of petitioner's warehouse business or a conduct of business, in that he had no inventory of spot cotton, he was not producer or processor of cotton, he owned no cotton during taxable year, and there was no proof that dealings were other than speculative. L. M. Muldrow_-

Embezzlement of Funds-Year Discovered-Deductibility.-On facts that mother withdrew from bank account and used for her own purposes part of daughter's inherited funds she as guardian had received and deposited jointly with her daughter, with knowledge she was mis

700

263

486

251

907

LOSSES Continued

appropriating funds and contra to understanding with daughter that
she had no ownership rights, as shown by mother's letter and deathbed
confession, Court decided that daughter carried burden of proof that
mother had no ownership interest and her action therefore was fraudu-
lent appropriation of property by person to whom it was entrusted,
constituting embezzlement under applicable California law. In allow-
ing theft loss deduction she was therefore entitled to under sec. 165
(1954 Code), it made no difference that there was no formal trust, that
mother was not prosecuted for offense, or that she expressed intention
to treat amounts as loans and make repayment. Deduction was limited
to initial deposit less balance in account, in absence of proof that later
deposits by mother belonged to daughter. Saul M. Weingarten_-_-

Sale of Realty-Loss Attributable to Restrictive Covenants.—Tax-
payer was not entitled to claimed loss deduction on sale of realty she
acquired under will of deceased husband for amount of difference be-
tween realty's valuation for husband's estate tax purposes and lower
sale price attributable to restrictive covenants she included in deed of
conveyance, since evidence was clear that property itself suffered no
loss of value and that taxpayer retained limited interest in property
through restrictive covenants which supposedly was subject to further
barter and sale between her and grantee. Gary Black_--

NET OPERATING LOSS

Carryback-Affiliated Corporations-Not in Existence During Earlier
Year. Business losses may be offset only against gains of taxpayer
who suffered loss so that consolidated return reporting taxable earnings
for 1955 of corporation and 14 affiliates, 8 of which were defunct by
1957, could not be amended by consolidated return in 1957 to show con-
solidated net operating loss carryback in 1957 by corporation and 12
affiliates, 6 of which were affiliated in 1955 and had combined net
earnings in 1957 and 6 of which were incorporated in 1956 and 1957
and had combined net loss in 1957. Midland Management Co-‒‒‒‒‒
Carryback-Deductibility as Current Operating Expenses.-Agreement
providing for delivery of share of stock to sole proprietor, payment
to him of percentage of brokerage income as lease expense, and his
employment as president of successor corporation executed by him,
his son-in-law, who was manager of proprietorship and with wife
owned all but 1 share of corporation stock, and by newly formed
Indiana corporation was in actuality sale of business assets to corpora-
tion so that payments to president, who resided continuously in
Florida, to his ex-wife, and to third party under contract for sale to
him of interests in brokerage agreements assumed by corporation
were part of consideration paid for business assets and of capital
nature, not deductible by corporation as current operating expenses
or allowable as net operating loss carryback deductions. Nicholas
Co

Carryover-Corporate Reorganization—Business Continuity-Net Op-
erating and Capital Losses.-Corporation, which underwent radical
changes in stock ownership, capital structure, location, management,
and type of busines when reorganized after bankruptcy, could not
carry over and deduct net operating and capital losses sustained in
business of manufacturing candy and operating restaurants engaged
in prior to reorganization from income earned subsequent to reorgan-
ization in metal products manufacture, as carryover privilege is not
available unless there is continuity of business enterprise. Huyler's---
Carryover-Liquidated Sudsidiary.-Parent corporation, which in 1953
claimed bad debt deduction for money loaned to subsidiary and worth-
less stock deduction for stock owned by it in subsidiary, cannot in 1956
and 1957, after subsidiary was liquidated in 1956 as solvent corporation,
carry over and deduct net operating losses of subsidiary arising out of
subsidiary's indebtedness to parent directly traceable to bad debt
previously deducted by parent in 1953, as allowing it to avail itself of
subsidiary's net operating losses would be to permit parent double de-
duction, which was not allowed by Court in absence of specific pro-
vision in sec. 381 (1954 Code). Marwais Steel Co..

PARTNERSHIPS

See BASIS, GIFT TAX, GIFTS, PARTNERSHIPS, and INCOME.
Sale of Interest-Capital or Income.-Sale to real estate develop-
ment investor and dealer and his wife by builder and architect of
partnership formed with substantial cash investment to acquire land,
erect houses, and sell them, at time when 156 hourses were built, 1 was
sold, purchasers were found for 96, of which escrow accounts were
opened for 45, and houses were incomplete, admittedly for principal
purpose of reducing Federal income taxes owed by builder and archi-
tect by having principal portion of profit treated as long-term capital
gain from sale of partnership interest rather than their share of
partnership's ordinary income from sale of inventory, constituted sale
of active, going concern, not of business in state of liquidation, and
gain realized was long-term capital gain from sale of partnership
interest, not ordinary income from sale and transfer of partnership
assets. John W. Lenney--

Sale of Interest-Partnership Profits-Capital or Income.-Retiring
partner's share of unwithdrawn net profits for Oct. 1, 1954, to Mar. 31,
1955, from accrual basis partnership in which he sold his interest as of
Mar. 31, 1955, and which had fiscal year ended Aug. 30, 1955, consti-
tuted ordinary income for his taxable period Jan. 1 to June 30, 1955,
and was not part of entire partnership interest sold and capital asset
as partner contended, since Court, in interpreting applicable provisions
of 1939 Code in cases with similar facts, has consistently held that sale
of partnership interest does not effect transmutation of distributable
share of partnership net income from ordinary income into capital for
computation of capital gain or loss. Hyman Myers---
PERSONAL HOLDING COMPANY

Definition-Finance Company Excepted-Interest as Business Ex-
pense. Because sec. 162 (1954 Code) does not limit deductible business
expenses to those specifically enumerated therein or deny deduction
under it of business expenses specifically deductible under some other
Code section, sec. 162 overlaps sec. 163 which specifically allows deduc-
tion of interest, so that interest specifically deductible as such under
sec. 163 which is also business expense under sec. 162 may be deducted
under either section and corporation in business of purchasing in-
stallment notes and contracts on heavy machinery can deduct as busi-
ness expense interest on money borrowed to enable it to purchase
notes and contracts, and inasmuch as interest and other corporate ex-
penses, other than compensation for personal services rendered by
shareholder and family, allowable under sec. 162 exceeded 15% of
gross income, corporation met requirement or finance company quali-
fying for exception to personal holding company in sec. 542(c) (9) and
did not have to pay personal holding company income tax. McNutt-
Boyce Co---.

Income-Contract Charges in Fact Interest.-Contract charges to
help cover credit investigation cost, which were fixed amounts com-
puted in advance, adjusted to amount of loan, made known to borrower
in advance as used charge not related to duration of loan or refundable
on repayment nor for services which borrower would otherwise employ
third person to perform, and which constituted more than 20% of
gross income of nonregulated small loan company, more than 50% of
whose stock was owned by 5 or fewer individuals, were in fact part
of cost to borrowers for use of lender's money, although authorized by
State law to cover additional costs of operation, and constituted inter-
est so that corporation was personal holding company 80% of whose
income was derived from interest and subject to surtax. Western
Credit Co----

RENEGOTIATION

Government Contracts-Excessive Profits-Cost Accounting Method.—
Court determined that contractor realized excessive profits for taxable
year 1952 in amount of $20,000, rather than $50,000 determined by Re-
negotiation Board, from renegotiable contracts completed that year,
taking into consideration good performance and efficient management

287

658

462

979

RENEGOTIATION-Continued

in executing projects, unusual engineering skills and risks assumed in
unfamiliar work, and losses sustained on other contracts because of
need to sacrifice efficiency for subject contracts, plus statutory factors
including amount of private capital used, contribution to defense effort,
profit ratio, etc. Court rejected petitioner's claim, on various grounds,
that it could use any method of overhead allocation for renegotiation
purposes, even though it used direct cost method taken from books and
records in amended statement submitted to Board on request that es-
tablished cost accounting method should be used, since direct cost
method was applied for all contracts directly or indirectly and was
adopted by contractor as acceptable and reasonably accurate method,
so it must continue to use such method for renegotiation purposes,
absent circumstances warranting change, under sec. 103 (f) (1951
Reneg. Act) Bay Co. v. Renegotiation Board___.

Government Contracts-Excessive Profits-Partnership.-Court de-
termined that of renegotiable net income of $36,423 realized in 1954 by
manufacturer's representative doing business as partnership $15,000
represented excessive profits, considering sister-partners paid no con-
sideration for partnership interests conveyed to them by their father
and brother, made no contributions to capital, left little profits in part-
nership, were protected from personal liability by brother's assumption
of liability, hired father and brother as employees to render all techni-
cal and managerial services, and performed only clerical duties averag-
ing 1 hour per day for 5-day week. Beets v. Renegotiation Board----
RETURNS

See also ADDITIONS TO TAX and LIMITATIONS.

Amended Return-Motor Carrier Claims Commission Award—Validity
of Election.-Validity of taxpayer's election under sec. 99 (1958 Tech.
Amdts. Act), to amend 1944 and 1945 income tax returns to include
that portion of award made in 1952 by Motor Carrier Claims Commis-
sion to cash-basis owner for use of motor transportation system taken
over by United States Government in 1944-45 which was not attributa-
ble to expense of accountant and fee for attorney retained on con-
tingent fee basis incurred and paid during 1952, was not impaired by
taxpayer raising questions of substantive law on amended returns as to
total amount of award and whether it was capital gain or income.
Walter Petersen_-_

Consolidated-Election Irrevocability-Failure of Subsidiaries to File
Consents.-Court held filing of consolidated income tax returns for
1954-1956 by parent corporation, listing of wholly owned subsidiaries
and incomes, and payment of taxes due constituted irrevocable election
by corporations to be taxed as affiliated group, and subsequent refusal
of subsidiaries to file authorization and consent forms required under
regulations did not make it mandatory upon Commissioner to issue
notice under regulations requiring parent and subsidiary corporations
to file separate returns, as purpose of regulation is to provide means
of curing defects in consolidated returns and permit Commissioner to
require compliance, not to enable subsidiaries to vitiate election to be
taxed as affiliates of parent corporation. Landy Towel & Linen Service,
Inc

Joint-Illegal Marriage-Dependency Credit.-In view of New Jersey
court ruling domiciled taxpayer was estopped from attacking validity
of wife's Nevada divorce from her first husband, its finding his Mexican
divorce from her was invalid, and its grant of separate maintenance to
her, thus in effect recognizing existing marriage between parties, Tax
Court found taxpayer's second marriage was invalid and sustained
Commissioner's determination he was not entitled to file joint return
with his second wife and further denied his claim of her as dependent
because he was living with her in violation of local law. John J.
Untermann

Joint-Not Signed by Wife-Ratification.-Court determined that pe-
titioner was deemed to have filed and could compute his tax liability
on basis of joint return for 1955 filed in April 1956, even though his
wife did not sign or then intend to file joint returns, as manifested by

535

677

137

296

93

RETURNS-Continued

her filing of tentative separate return dated 5 days later, since al-
though sec. 6013(b) (1954 Code) permits either spouse to elect to
file separate return after filing joint return, wife's subsequent action
in terminating her action in filing tentative separate return, by letter
to Commissioner, amount to an acceptance and ratification of pe-
titioner's joint return, unaffected by her attempted revocation in
August 1959, which was after prescribed time for filing had expired
and when election to file joint return was irrevocable. Matthew L.
Ladden

TAX COURT OF THE UNITED STATES

Commissioner's Pleadings-New Issue-Burden of Proof.-Commis-
sioner's failure to do anything affirmatively or negatively, after tax-
payer's opening statement that no issue of substantiation of certain
medical expenses had been raised, and where Commissioner mentioned
substantiation for first time in argument portion of his brief, was suffi-
cient to relieve taxpayer of burden of presenting evidence to establish
amounts expended. Leo R. Cohn__.

Commissioner's Pleadings-New Matter-Burden of Proof.-Court
held once Commissioner determined that amounts received by peti-
tioners were ordinary income and not capital gain, even though rea-
son given by Commissioner for his determination might have been
erroneous and Commissioner subsequently amended his answer to rely
specifically on another theory to support his determination, burden of
proof rested on petitioners and amendment did not constitute plead-
ing of new matter as to which burden of proof was upon Commissioner.
Estate of Grace M. Scharf....

Commissioner's Pleadings-New Matter-Burden of Proof.-Burden
of proving petitioner corporation permitted earnings and profits to
accumulate beyond reasonable business needs rested on Commissioner
in proceedings in which in his amended answer to petition Commis-
sioner as alternative determined reduced deficiency on theory peti-
tioner was subject to accumulated earnings tax rather than to personal
holding company tax as originally determined in deficiency notice,
alleged in answer, and abandoned at trial, although petitioner still had
ultimate burden of proving purpose of accumulation of earnings. Prior
business history, ordinarily of considerable importance in accumulated
earnings tax cases, was of limited relevance since petitioner was per-
sonal holding company prior to taxable year and so not subject to such
tax. Nemours Corporation-----

Jurisdiction-Adjustments to Excess Profits Income-Increased De-
ficiencies.-Court had jurisdiction to determine increased deficiencies
claimed by Commissioner for 1952 and 1953 because of adjustments to
excess profits credit carryovers from 1950 and 1951, where notice of
deficiency determined deficiencies in income tax for 1952 and 1953,
since excess profits tax imposed by sec. 430 (1939 Code) is additional
tax under ch. 1 of Code. Commercial Fishermen's Inter-Insurance
Exchange

Jurisdiction-Death of Taxpayers-Rule 23.-Failure to substitute
parties under Rule 23 of Rules of Practice of Tax Court after death
of taxpayers represented by counsel and leaving adult children surviv-
ing did not divest Court of Jurisdiction over case, which attached when
petition was filed, and Court dismissed case upon Commissioner's
motion to dismiss for want of prosecution. Clyde L. Martin_-_-
Jurisdiction-Jeopardy Assessment-Petition Filed After Receiver-
ship Proceedings.-Court lacked jurisdiction to redetermine tax de-
ficiencies assessed against taxpayer because petition was filed after
District Court, in separate proceeding to enforce liens arising out of
jeopardy assessment, appointed receiver of taxpayer's property within
United States and such redetermination after appointment of receiver
was specifically prohibited by sec. 6871 (1954 Code), it being clear
that once matter was before District Court its jurisdiction continued
with regard to entire controversy. Leon I. Ross--

Jurisdiction-Petition-Signature and Verification.-Court dismissed
for lack of jurisdiction proceeding in which attorney acting upon

530

387

15

585

915

416

309