ally by contractual obligation is evelopment Costs to be borne by lessee s; Retirement of Bonds. Taxpayer sold new L ute; Sec. 24 (c), I. R. C. Interest payable accrued on in two and one-half months after close of period is not creditor was on cash basis and not required to include d. P. G. Lake, Inc-... m that there was constructive payment within the period SATION PAID FOR PERSONAL SERVICES. Loyee Retirement Fund. A payment to a retirement trust for executives and employees, reasonably related to services peris deductible under sec. 23 (a), I. R. C., irrespective of its aspect ontribution under sec. 23 (p). Gisholt Machine Co- Id. Fact that majority of those benefited were stockholders does not note a disguised dividend distribution, where payments to fund were proportioned either to amount of stock owned or to sales during the Id. eriod. 3. Pension and Salary. Annual payments to ex-president and present chairman of board of directors intended as compensation for both past and current services, held reasonable and deduction is allowed. General Smelting Co. 634 669 1242 613 775 1 699 313 EVIDENCE: INDEX Inadmissible Evidence. Sec. 722, I. R. C., requires that claim be presented in full first to Commissioner, and evidence not then submitted is not admissible in hearing of application for review by Tax Court. Blum Folding Paper Box Co.... EXCESS PROFITS TAX: 1. Equity Invested Capital. Sec. 718 (b) (3), I. R. C., requires the elimination from earnings and profits as of beginning of tax period of earnings and profits of another corporation acquired by a tax-free reorganization. Crossett Western Co... 2. Id. Having decided that assets were acquired by a nontaxable exchange transferor's basis is amount to be included. 3. Borrowed Capital. Advances not evidenced by one of the forms Clyde Bacon, Inc. enumerated in sec. 719, as amended by Second Revenue Act of 1940, and letters of credit are not within the statutory classes of borrowed capital. Flint Nortown Theatre Co.. Wm. A. Higgins & Co. 4. Id. Letters of credit have been previously held not "any other written form of indebtedness." Wm. A Higgins & Co. - 5. Id. After acceptance of drafts drawn by purchaser against letter of credit, an indebtedness arises. Id. 6. Id. The requirement is that indebtedness be that of the taxpayer, but does not require that the instrument evidencing the debt also be his. Id. 7. Excess Profits Tax Credit. Having determined taxpayer to be a personal holding company Commissioner's adjustment to excess profits tax credit becomes moot. Southeastern Finance Co. 8. Id. Right Declared Value; Additional Declaration Years; Act 1939. to revise declared value for the years 1939 and 1940 depends upon timely filing of returns and is not available on forms delinquently filed." Shortway, Inc_ _ Venetian 9. Id. Invested Capital Computation. Having decided that debentures issued with stock were capital contributions, their value may be included in invested capital for computation of credit. 1432 Broadway Corp-_ 10. Excess Profits Tax Income; Carriers. Deduction claimed for retirements made in tax year, where railroad used retirement method for accounting for depreciation, is not required to be reduced by depreciation sustained prior to March 1, 1913, unless account is also increased by additions and renewals previously made. Los Angeles & Salt Lake R. R. Co.......... 11. Election as to Treatment of Costs must be exercised in valid return, timely filed, for first year such expenses arise. Held, where first return was improperly executed, and corrected return, making the election, was filed after expiration of filing period, the privilege is not available. Burford Oil Co.. 12. Relief Provision; Sec. 722; Jurisdiction. Development of the provision discussed. Held, such claims must first be made to the Commissioner, and only his adverse action confers jurisdiction on this Court to reconsider. Pioneer Parachute Co___ 13. Id. Above applies also to claims filed with the Court before legislation was amended changing the procedure. Id. 14. Id. Tax Court will not consider a review of Commissioner's rejection based on data not accompanying claim when presented to Commissioner. Blum Folding Paper Box Co... EXCLUSIONS AND IMMUNITIES: Tax-free distributions. See DIVIDENDS, 11–17. 1. Compensation of Federal Judges taking office after passage of statute taxing their compensation may not be excluded from gross income. liam E. Baker_ Wil 2. Earned Income; Sources Without United States. services performed in Germany as agent to sell German securities owned by Compensation for a United States corporation, held (1) to constitute earned income within sec. 25 (a), I. R. C., and (2) excludable from gross inccme under sec. 116 (a), I. R. C., taxpayer having resided without the United States the required number of months during the year earned. Herman A. Kollmar.... 3. Id. The place where services are performed is controlling as to source of income, and fact that payment is made within the United States will not defeat claim for the exclusion. Id. Page 795 783 1107 536 1033 1033 1069 244 1158 634 613 27 795 307 727 EXEMPT CORPORATIONS. See ASSOCIATIONS; INSURANCE COM PANIES, 1, 2. EXPENSES: I. Generally, p. 1309. II. Compensation Paid for Personal Services, p. 1309. IV. Insurance, p. 1310. V. Nontrade and Nonbusiness Expense, p. 1310. I. GENERALLY. 1. Transferee-Stockholders. Taxpayer's contribution to fund to cover possible future expenses of a liquidation, none of which was disbursed in tax period is not deductible where cash basis is used. D. Bruce Forrester __ 2. Business Expense or Capital Investment; Improvements by Lessee. Lease provided that cost of improvements by lessee to a stipulated amount could be credited against rent due. Held, Commissioner erred in reducing deduction for rent claimed and treating such costs as capital invested by lessee. Your Health Club, Inc... 3. Payments on Pehalf of Subsidiaries. Interest on Subsidiary's Indebtedness, paid by parent to protect its investment, is a capital expenditure and not deductible. Eskimo Pie Corp- 4. Id. Reimbursements to subsidiaries for losses sustained in operating businesses in which a railroad company was prohibited from engaging are not deductible. Los Angeles & Salt Lake R. R. Co.......... 5. Id. Congress had withdrawn the privilege of filing consolidated returns and such allowance would result in consolidation of income and deductions. Id. 6. Id. Fact that expense recurs annually by contractual obligation is insufficient to support a deduction not allowable to taxpayer under sec. 23 (a), Act 1936. Held, royalties paid to avoid pressure of claims against subsidiary are not deductible. Eskimo Pie Corp__ 7. Elective Items. Drilling and Development Costs to be borne by lessee as part of consideration for acquisition of lease are capital expenditures and no election is available as to treatment. Alex McCutchin__. 8. Id. The right to elect method of reporting certain items, such as percentage depletion, drilling and development costs, etc., depends upon its exercise on a valid first return which has been timely filed. Burford Oil Co... 9. Unamortized Expenses; Retirement of Bonds. Taxpayer sold new bonds through underwriters, proceeds being used to retire old bonds. Held, fact that underwriters sold some of new bonds to old bondholders does not bar corporation's right to deduct unamortized expenses on old issue. Congress Square Hotel Co.. 10. Barred by Statute; Sec. 24 (c), I. R. C. Interest payable accrued on books not paid within two and one-half months after close of period is not deductible, where creditor was on cash basis and not required to include items not received. P. G. Lake, Inc... ... .... 11. Id. Claim that there was constructive payment within the period rejected. Id. II. COMPENSATION PAID FOR PERSONAL SERVICES. 1. Employee Retirement Fund. A payment to a retirement trust for selected executives and employees, reasonably related to services performed, is deductible under sec. 23 (a), I. R. C., irrespective of its aspect as a contribution under sec. 23 (p). Gisholt Machine Co. 2. Id. Fact that majority of those benefited were stockholders does not connote a disguised dividend distribution, where payments to fund were not proportioned either to amount of stock owned or to sales during the period. Id. 3. Pension and Salary. Annual payments to ex-president and present chairman of board of directors intended as compensation for both past and current services, held reasonable and deduction is allowed. General Smelting Co... Page 907 385 669 634 669 1242 613 775 1 699 313 EXPENSES-Continued. 4. Id. able. Id. Allocation is not required where amount is found to be reason 5. Denial of Liability by Employer. Employee sued for wages due and litigation was settled by payment in tax year. Held, deduction was properly claimed for year paid. Atlantic Coast Line R. R. Co 6. Chauffeur; Moving Picture Actor. Commissioner allowed one-half of depreciation sustained on automobile as the proportion due to business use. Held, one-half of chauffeur's salary is allowable. Estate of Frederick Cecil Bartholomew_. III. LEGAL EXPENSE. See V, 3, infra. Page 140 349 1. Preparation of Income Tax Returns. Attorney fees are not deductible. Don A. Davis. 329 2. Attorney's Fee covering two types of service, one of which was of a capital expenditure nature, not allocated by taxpayer, held properly disallowed in its entirety. Sayers F. Harman__. 335 IV. INSURANCE. Prepaid Insurance is an asset to be exhausted ratably over period of coverage, notwithstanding taxpayer uses cash basis. Martha R. Peters__ V. NONTRADE AND NONBUSINESS EXPENSE. 1. Limitation on Sec. 121, Act 1942. The intent of Congress was to permit to individuals deductions previously not available because they were not engaged in a business enterprise, but claims under the section are subject to all limitations which apply to claims under sec. 23 (a) (1) (A), I. R. C. Ralph D. Hubbart_-- Don A. Davis _ _ 2. Id. Cost of transportation between home and office and commissions and selling expenses paid by one not engaged in the business of buying and selling securities, both continue to be nondeductible. Ralph D. Hubbart__ Don A. Davis _ _ 3. Legal Expense; Protection of Income. Costs of litigation involving custody of minor and control over his estate are deductible as business expense where minor had earned and accumulated the estate to be conserved, and continued to earn income, the right to keep which for himself was the litigated issue. Estate of Frederick Cecil Bartholomew_- 1236 121 329 121 329 349 4. Statistical Expense paid in connection with investment income earned is deductible. Edward E. Bishop-- 862 VI. TRAVELING, SUBSISTENCE, AND ENTERTAINMENT. Banquet. Contribution toward cost of a banquet given by a customer was properly disallowed. E. C. Ellery -- 407 FEDERAL JUDGES. See EXCLUSIONS AND IMMUNITIES, 1. FOREIGN CORPORATIONS: 1. Office or Place of Business implies a place for the regular transaction of business, and not a place where only casual or incidental transactions occur. Held, taxpayer fails to meet the test and is taxable as a nonresident. Linen Thread Co., Ltd.. 2. Id. Sec. 160, Act 1942, which eliminates the phrase "having an office or place of business therein" is applicable to years beginning after Dec. 31, 1941. Id. 3. Deduction for Tax Paid Foreign Government. Correct ratio for computation is total income from sources within United States, including income tax-exempt under its law, although taxable by foreign law, to total income from all sources, with no further limitation. Palatine Insurance Co., Ltd... FOREIGN TAXES. See CREDITS, 8-12. FORGIVENESS OF INDEBTEDNESS. See GAIN OR Loss, I, 1, 2. 802 239 GAIN OR LOSS: I. Realization of Gain or Loss, p. 1311. (1) Determination of Cost or Value, p. 1311. See CAPITAL GAINS AND LOSSES; Losses. I. REALIZATION OF GAIN OR LOSS. 1. Nature of Transaction; Canceled or Forgiven Indebtedness. Sale was rescinded and consideration returned. Held, not a cancellation of indebtedness, as claimed by Commissioner, and no gain or loss was realized. Main Properties, Inc__ 2. Id. Stockholder's indebtedness to corporation was purchased at a substantial discount by his wife with her own funds. Held, effect on taxpayer was a substitution of creditors, not a forgiven indebtedness, and no gain was realized. D. Bruce Forrester. 3. Distributions from Appreciation in Value Realized Prior to March 1, 1913. No gain is realized but basis is to be reduced by amount received for computation of future gain or loss. Ernest E. Blauvelt_ 4. Title to Gain; Husband or Wife's Heirs. After moving from a state not having community property law taxpayer acquired assets in a state having such a law. Held, gain upon disposition was derived from his separate capital; and is taxable to him, not divisible between him and his children by a deceased wife. Albert Fleming... 5. Id. Corporation or Successor Partnership. After giving option to purchase its assets corporation dissolved and transferred assets to stockholders who operated the business. Option was exercised. Held, gain is taxable to corporation. Chilhowee Mills, Inc.. 6. Id. Partnership or Individual. Investment was made by partnership with its funds. Held, income is partnership income although transaction was conducted in name of one partner. Rose Mary Hash_. 7. Id. Estate or Life Tenant. Under code of West Virginia, legal title to undivided interests for life vests under the will, and gain or loss from sale of the land is realized by devisees, not by testator's estate. Sayers F. Harman... 8. Id. Tenants by Entireties. Under statutes of Michigan and Pennsylvania income from property owned as tenants by entireties is divisible between the spouses for tax purposes. H. D. Webster__ George K. Brennen__ 9. Id. The products from the land are deemed to be held by the same tenancy, and it is immaterial that one spouse paid entire consideration therefor. George K. Brennen___. 10. Year Gain Realized is not deferred by accepting note due in later tax period, not shown to be worth less than face, or because of oral guaranty given by vendor with sale. Walter I. Bones_ II. RECOGNITION OF GAIN OR Loss. 1. Exchange Pursuant to Reorganization. Stockholders of "A" corporation surrendered their stock to "A" at same time that "A" transferred all its assets to "B" corporation, and “B” issued its stock to stockholders of "A." Held, transaction was a reorganization and no gain or loss is recognized. Clyde Bacon, Inc _ _. 2. Id. It is immaterial that "B" gave its stock directly to "A" stockholders. Id. Commissioner erred in determining there were two transactions, a liquidation by "A" and reinvestment by its stockholders in "B". Id. 3. Id. III. BASIS FOR DETERMINING GAIN OR LOSS. (1) Determination of Cost or Value. See I, 3, infra. 1. Cost; Sale of Notes; Accrued Interest. Interest already accrued on notes at date of purchase is a part of the investment, to be included in basis upon future sale, but interest accruing subsequently is not a part of cost. Adrian & James, Inc.-- Page 364 907 10 168 558 878 335 1169 1260 1260 415 1107 708 |