INDEX-DIGEST

ACCOUNTING METHODS

See also BAD DEBTS.

Page

Depreciation-Adoption of Acceptable Method in Lieu of Unacceptable
Method-Commissioner's Consent.-Where petitioner, which was in-
corporated Dec. 27, 1965, conceded it was not entitled in 1966-67 under
sec. 167(c) to use double-declining-balance method in depreciating
certain properties used in operating motel because original use did not
commence with it, contrary to Commissioner's contentions, petitioner
was not restricted to use of straight-line method by sec. 167(a) or
reg. which was not intended by Congress to be regulatory as are regs.
under other Code sections but was to provide only collateral clarifica-
tion of statute, and petitioner's adoption of acceptable 150%-declining-
balance method was not change of depreciation method requiring Com-
missioners' consent, since petitioner never had opportunity to use
"regularly" method of computing depreciation, Commissioner having
denied petitioner's attempted use of unacceptable method for first year
of its existence, so that sec. 446 (e) did not apply. Silver Queen Motel__ 1101

Sale of Stock-Pending Rescission Suit-Year Taxable.-Petitioner
seller's filing of suit in 1960 to rescind stock sale in same taxable year
because of his dissatisfaction with price did not postpone realization
of taxable gain, since exception to claim-of-right doctrine did not apply
absent existing and fixed obligation to repay sale proceeds, character
of proceeds as income was not changed because petitioner voluntarily
held sale proceeds in cash and marketable securities, contingent liability
to pay back amount equivalent to sale proceeds if suit were successful
imposed no restriction upon use of proceeds, and under long-established
principle of annual accounting for tax purposes in case law gain was
taxable in 1960. Karl Hope----

ADDITIONS TO TAX

Failure to File-Gift Tax Return-Reasonable Cause.-Where dece-
dents mistakenly believed that value of units in voting trust, which
was virtually family owned, did not exceed first-offer formula price in
trust agreement so that gifts thereof were within $3,000 exclusions,
and 2 expert witnesses expressed opinion that through 1953 value of
units was equal to formula price, failure to file gift tax returns in
1947-48, 1950, and 1953 was due to reasonable cause so as to preclude
imposition of penalties under sec. 6651(a) and sec. 3612(d) (1) (1939
Code), but not in 1958 when relying on formula price as only indicator
of units' value was not exercising ordinary care and prudence, since
significant difference between market value of underlying shares and
formula price should have indicated professional help was needed.
Estate of Pearl Gibbons Reynolds_-_.

Failure to File-Gift Tax Return-Transferee's Liability.-Court hav-
ing herein determined that petitioner was liable as transferee for gift
tax due from A, Commissioner's imposition of penalty under sec. 6651
(a) for A's failure to file gift tax returns, which petitioner failed to
challenge, was sustained as to amounts of gifts herein determined to
have been made. Lillian Pascarelli__

Failure to Pay Estimated Income Tax.-Where petitioner failed to pay
estimated income tax for taxable years and showed no reason why
sec. 6654 additions to tax were not applicable to income she received,
Commissioner's determination of penalty for failure to pay estimated
income tax was sustained to extent applicable, if at all, in light of
Court's findings. Lillian Pascarelli__.

1020

172

1082

1082

1159

ADDITIONS TO TAX-Continued

Fraud-Spurious Business Deductions-Family Corporation.-Various
claimed business expense deductions on family-dominated X corpora-
tion's income tax returns for 1950 and 1951, including substantial
amounts of overstated costs charged on related corporation's purchase
invoices for purported commissions channeled to president's son, per-
sonal expenses to maintain Florida home and yacht, and purported
compensation paid son's friend, were fictitious, unrelated to X's busi-
ness operations, and benefited X's president and family by having funds
diverted for their personal use, so that returns were false and fraudulent
with intent to evade tax, president's fraud being imputed to X, and
assessment was not barred by limitations, as adjusted for some items
by Court. American Lithofold Corp‒‒‒‒‒

Fraud-Underpayment of Income Tax. Some part of corporate
officer's underpayment of income tax for 1956-62 was due to fraud
with intent to evade tax, he having failed to file returns for 1956-62
although as CPA who had practiced before IRS he was aware of tax
responsibilities, concealed fact he had not filed 1961 return in con-
ferences with IRS agents, and later admitted he had not filed 1957-62
returns for fear his failure to file 1956 return would be discovered, and
Court was not persuaded he was continuously in such physical and
emotional state during period involved, because of financial difficulties
and ill health, that he was rendered incapable of preparing and filing
returns. Anson Beaver__

ALIMONY

Divorce Settlement Agreement-Installment Payments-Marital Rights,
Partition, or Sale of Joint Property.-Court determined that $125,000
payable to W in installments over 121⁄2 years, in addition to award of
specific property and alimony, in ambiguous oral settlement agree-
ment summarized in divorce decree, was not in settlement of W's
marital rights to H's property as Commissioner maintained or in lieu
of property division as W maintained, but was for sale to H of W's
interest in certain stock, considering W's record or equitable joint
ownership of stock and that payments were (1) secured by stock,
(2) to be reduced if corporate earnings decreased in any year, (3)
in line with reasonable value of her interest, and (4) so treated by
parties' attorneys in negotiations, so that W properly treated 1966
installment on return as part payment of sale price of her stock
interest subject to capital gains treatment, and there was no deficiency
or overpayment of tax. Edith M. Gerlach___.

Payments After State Court's Denial of Temporary Alimony on Con-
dition H Continue Voluntary Payments-Taxability to W-Requirement
of Currently Enforceable Decree.-In petitioner W's action for separa-
tion against H, New York Supreme Court's denial of W's motion for
temporary alimony on condition that H continue his voluntary support
payments did not constitute currently enforceable judicial order or
decree "requiring" payments to be made, so that payments by H before
separation decree directing that support payments be made, were not
includable in W's gross income under sec. 71(a), considering legislative
history, State law, and statutory language. Sylvia E. Taylor_‒‒‒‒

Payments to W—Acquisition of Community or Alimony-Dual Char-
acter.-H's monthly payments to former W during 1964 were deductible
alimony within secs. 71 and 215 to extent of $1,000 and nondeductible
capital investments for acquisition of her share of community to ex-
tent of $700, based on evidence of purpose of payments including (1)
$1,000 voluntarily paid to W for support after separation and during
negotiations for integrated separation, property, alimony, and child
support agreement, (2) parties' contemplation of property division in
negotiations, (3) statement in agreement that H fully disclosed com-
munity assets and any later discovered assets would be awarded to
w, and (4) provision for continuation of payments for 11-year mini-
mum by H or his estate in event of his death. Grant R. Bishop-------

ALIMONY-Continued

Periodic Payments-Educational Support-Incurment as Marital Obli-
gation.-Periodic payments received by W from former H to provide
her support in pursuing further education, under agreement incident
to divorce, were in discharge of legal obligation incurred by H because
of marital relationship within sec. 71(a) (1) and taxable as alimony
to W, notwithstanding obligation was voluntarily assumed by H, con-
trary to W's contention that section did not apply because payments
arose out of H's moral obligation to financially assist her because she
financially assisted him in pursuing an education. Ruth E. Kern‒‒‒‒‒‒
AMORTIZATION

Payment to Acquire Additional Leased Space-Lease Supplement-
Deductibility.-Where petitioner paid $40,000 to acquire right to lease
additional space, under supplement to lease having 17 months of
original term remaining with 1-year renewal option, sec. 178(a)
governed amount of amortization deduction to which petitioner was
entitled and under that section, $40,000 was amortizable over period
of remaining term of lease plus option period. Giumarra Bros. Fruit
Co

BAD DEBTS

Reserve Additions-Savings & Loan Company-Accounting Require-
ments.-Building and loan association which claimed deductions on
1965 and 1966 returns for additions to bad debt reserve account for
qualifying real property loans, but did not maintain any ledgers or
accounts relating to such reserves, failed to satisfy accounting require-
ments of sec. 593 and regs. so was not entitled to deductions, since (1)
assuming that copies of income tax returns could otherwise qualify as
part of books of account, it failed to establish any such copies were in
fact maintained as permanent part of regular books of account under
regs. 1.593-7(a), and (2) alternatively, copies of tax return do not meet
bookkeeping requirements of statute and regs., under which strict com-
pliance is necessary. Leesburg Federal Savings & Loan Association_-_-

Reserve Additions-Savings & Loan Company-Accounting Require-
ments. Building and loan association, which was disallowed claimed
deductions for additions made to a bad debt reserve for qualifying
real property loans because it failed to meet accounting requirements of
sec. 593 and regs., effect of which being to increase its taxable income for
year in issue and amount of taxable income being factor to be used
in computation of deductible reserve addition, was not permitted under
regs. 1.593–5(b)(2) to deduct recomputed addition to reserves meas-
ured by increase in taxable income, since deduction for additions was
fatally defective in first instance. Ohio Pike Savings & Loan Co------
Stockholder's Loans as Investor-Business or Nonbusiness-"Signifi-
cant" vs. "Dominant and Primary" Motivation Test.-Where petitioner
showed that advances to his controlled oil-well-servicing corporation
were also to protect his credit rating necessary to his road-construction
business, under Golsen rule, Court applied, but did not adopt,
significant-motivation test, endorsed by Fifth Circuit to which appeal
would lie, expressing its opinion that proper test was dominant and
primary motivation test in Niblock, and finding that losses incurred
from debts becoming worthless were proximately related to petitioner's
trade or business and were deductible as business bad debts under
sec. 166 (a) (1). Oddee Smith..

CAPITAL EXPENDITURES

Cost of Cotton Acreage Allotment-Capital Expenditure or Expense.-
Cost of acquiring upland cotton acreage allotments was capital expendi-
ture and not deductible ordinary and necessary business expense,
acreage allotment being akin to license entitling holder to certain
benefits, renewable in succeeding year and so of benefit to holder for
more than 1 year. George Wynn Smith___.

Page

405

460

378

388

260

133

CAPITAL EXPENDITURES-Continued

Initiation Fee-Realtors' Multiple-Listing Service-Capital Expenditure
or Expense. Initiation fee paid by real estate broker for membership
in multiple-listing service, being membership yielding him business
benefits which were expected to continue until membership was ter-
minated, was capital expenditure and not deductible expense under
sec. 162(a) or 212(1). Ralph B. Webb---.

Interest and Realty Tax Payments-Election to Capitalize-Revoca-
bility. Court determined that Ts who elected on 1963 return to cap-
italize realty tax and interest payments, under sec. 266 and regs., could
not revoke initial election upon Commissioner's subsequent determina-
tion denying claimed deductions involving unsubstantiated stock loss,
which made it possible to utilize tax and interest deductions because of
increase in taxable income to $4,855 from $1.26 loss, distinguishing
Meyer's Estate, relied upon by Ts, as involving material mistake of fact,
whereas in instant case any mistake of fact did not relate to any
operative term under sec. 266 and regs., or to object of election and
so was too remote to be considered "material." Estate of George
Stamos__

Legal Fee-Partition of Inherited Realty-Capital Expenditure or
Expense.-Legal fee paid by petitioner in connection with partition of
inherited lands was nondeductible capital expenditure, having been
paid to obtain sole legal title to portion of lands held by tenancy in
common and operate it for production of cotton, thus for acquisition
of capital asset. George Wynn Smith....

Legal Fees and Related Expenses-Litigation to Acquire and Perfect
Title Capital Expenditure or Expense.-Legal fees and related ex-
penses incurred in unsuccessful litigation pertained not to income but
to title and hence were capital expenditures not deductible under secs.
212 or 162(a), since Court determined (1) under origin-of-claim test
(not primary-purpose test) as required by Woodward, in first cause
of action for constructive trust on partnership interest and reconvey-
ance thereof with accounting for profits, which was incidental to and
dependent upon obtaining title, that expenses were costs of acquisition,
and (2) under origin and character of the claim test under Woodward
as interpreted in Anchor Coupling Co., in second cause of action for
rescission of partnership agreement, which in essence was attempt to
remove restrictions upon possible future sale of petitioner's partner-
ship interest, that expenses were incurred in perfecting title to prop-
erty. Stass Reed__.

Payment to Marketing Organization-Securement of Supervisor Posi-
tion-Capital Expenditure or Expense.-Amount paid by T to marketing
corporation in 1967, and claimed to be fully deductible as liquidated
damages paid to void contract of then supervisor who was to be
replaced, as required by corporation for T to obtain supervisor's con-
tract rights within corporation's promotional network of operations,
constituted cost of purchasing intangible capital asset, a nondeductible
capital expenditure and properly disallowed by Commissioner. Darrell
D. Hudgins‒‒‒‒‒

Replacement Cost-Hotel Garage Areas-Work Survey Cost.-Corpo-
ration's expenditures for replacement of portions of garage floor, which
required substantial structural work including installation of steel rein-
forcing rods and steel beams, were nondeductible capital expenditures
and not currently deductible expense, since new floor areas repre-
sented replacements and improvements and not merely repairs to keep
building in ordinarily efficient operating condition, but cost of patch-
work of smaller floor areas was deductible as repair expense in amount
determined under Cohan rule, absent proof of portion allocable thereto.
Survey expenditures were related to recommended floor replacements
and so were capital expenditures and nondeductible as current expense.
Jason L. Honigman__

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743

468

133

32

534

1067

CAPITAL GAINS AND LOSSES

See also INCOME.

Assignment of Patent Interests-Less Than All Original Rights--
Capital or Income.-Where petitioners transferred to wholly owned
X corporation all their interest in U.S. and Canadian patents on hard-
board manufacturing process purchased from Y corporation, in final
transaction of series of transfers of various rights in patents and with
result that X held U.S. patents, subject only to royalty-free license
granted to hardboard manufacturer to use process at certain U.S. plant,
and Canadian patents, subject only to Canadian corporation's license
in British Columbia, transfer represented sale of 100% of whatever
petitioners received from Y, which was held for 6 months and not held
primarily for sale to customers, so as to qualify for capital gains treat-
ment, contrary to Commission's contention that transfer was dis-
qualified under sec. 1235 as not sale of "all substantial rights" in that
less than 100% of original patent rights was transferred. Petitioners'
rights under sales contract to receive future payments based on hard-
board feet produced had no ascertainable value in sale year and was
open transaction, so no immediate gain was realized. Donald C.
MacDonald

Involuntary Conversion-Fire Insurance Proceeds-Timely Election to
Postpone Recognition.-Petitioner who received $50,000 insurance pro-
ceeds on building destroyed by fire which was situated on leased land,
who used proceeds to help W's financially troubled corporation, and
who replaced property more than 1 year after close of taxable year,
(1) realized long-term gain on proceeds, which he held under claim of
right despite lease provision that proceeds would be used to replace
building, and (2) could not avail himself of sec. 1033 to postpone recog-
nition of gain, having failed to show reasonable cause for not filing
timely application for extension of replacement period or to show his
later filing for extension was within reasonable time after expiration
or required period. James E. Latimer_

Liquidating Distribution-Collapsible Corporation-Capital or In-
come.-Petitioners' wholly owned corporation, which was organized
for development of real estate subdivision and construction and sale
of houses and was liquidated in 1963 after realizing 100%, 93%, and
56%, respectively, of taxable income to be derived from 3 projects,
was not collapsible corporation under sec. 341 because of status of
3d project, which parties agreed was determinative, since under case
law "substantial part" of taxable income refers to income already
realized, rather than to income not yet realized as Commissioner con-
tended, and 56% was clearly substantial, so that gain realized on
liquidation was not taxable as ordinary income. George W. Day‒‒‒‒‒
Liquidating Distribution-Deductibility of Capital Loss on Stock.-
Petitioner was not entitled to 1965 capital loss deduction on X cor-
poration stock, which she offset against long-term capital gain on
1965 sale of realty used by X, where X under complete liquidation
plan distributed pro rata proceeds of sale of tangible assets in 1965,
leaving her with equity interest in remaining assets, since there was no
redemption of all her stock under secs. 302 and 317(b) in 1965, she
having retained beneficial ownership in stock through interest in
remaining assets; nor was deduction allowable under exception to
sec. 331(a) (1) where stock is shown to be completely worthless before
final liquidation, there being reasonable certainty of further liquidat-
ing dividend but in amount not definite or certain at end of 1965 for
loss to be determinable, or under secs. 331(a) (2) and 346; moreover,
stock was clearly not worthless under sec. 165(g), and since liqui-
dation had not been completed and final distribution made, no com-
pleted sale or exchange of stock occurred in 1965 within sec. 165 (f).
Ethel M. Schmidt_.

Sale of Realty-Joint Venture for Purchase, Renovation, and Sale-
Capital or Income.-1964-65 oral agreements, whereby petitioner at-
torney advanced funds for purchase and renovation of residential real

Page

840

515

257

335