ACCOUNTING METHODS
See also INSURANCE COMPANIES.
Change of-Sec. 481 Adjustment-Incorporation of Sole Proprietor-
ship as Cessation of Business.-Where as result of change of
accounting in 1968 from cash to accrual method utilizing procedure in
Rev. Proc. 67-10 as amplified by Rev. Proc. 70-16, sec. 481 required net
adjustment to be taken into income over 10-year period, and in 1970
petitioners incorporated their proprietorship but continued to report
adjustment on their personal returns, Court determined that petition-
ers by incorporating their sole proprietorship, ceased their trade or
business within meaning of revenue procedures and as result were
required to bring remaining amount of adjustment into income in year
of incorporation and not over remainder of 10-year period. Shore v.
Commissioner
Completed Contract Method-Legal Fees in Negotiating Long-Term
Contracts-Year Deductible.-Legal fees, incurred in negotiating and
drafting specific long-term contracts which were later entered into by
petitioners' subch. S corporation which used completed contract method
of accounting, under sec. 451(a), regs., and case law were not currently
deductible but were deductible in taxable year of corporation in which
contracts were completed. McMaster v. Commissioner
Imputed Interest Deduction-Corporate Transaction as Sale with
Deferred Payment-Contingent Upon Exercise of Put or Call.—Where
X and Y corporations agreed to form new Z corporation, with X
contributing assets and liabilities of one of its divisions for stock and
debentures of Z, and Y contributing cash for Z stock; X had right to put
its Z stock to Y on set terms during 8/1/70-7/31/71, and Y had right to
call X's stock in Z on same terms during 8/1/71-7/31/72; and X
exercised its put 7/31/71, Court determined 1968 agreement did not
constitute sale with deferred payment of X's entire interest in its
division with result that Y was not entitled to deduction for imputed
interest for fiscal year ended 1/1/72, under sec. 483. Penn-Dixie Steel
Corp. v. Commissioner ...
Failure to File Returns and Withhold Tax-Reasonable Cause.-
Court having determined herein that payments from 1963-69 by
petitioner corporation to its Icelandic parent were interest within
meaning of secs. 1441 and 1442 on which petitioner was liable for 30%
tax it failed to withhold on such payments, petitioner carried burden of
showing sec. 6651(a) addition to tax for failure to file for 1963-68
United States Annual Returns for Income Tax to Be Paid at Source
required by sec. 1461 did not apply, since certified public accountant's
advice on necessity of filing returns, while erroneous, was not so clearly
wrong as to permit inference petitioner was negligent or willfully
disregarded law. Coldwater Seafood Corp. v. Commissioner
Late Filing-Corporate Income Tax Returns-Reasonable Cause.-
Sec. 6651(a)(1) penalties were properly imposed where petitioner
corporations' president signed requests for extensions of time on 5 of 6
returns required to be filed for taxable years and hired attorney and
accounting firm to file returns, since record did not support finding
that late filing was due to reasonable cause, considering that general
rule is that filing of return when due is personal, nondelegable duty of
taxpayer, and reliance upon accountant or attorney to file is no excuse
for late filing, and that narrow exception to rule is limited to situation
where taxpayer relies upon professional advice as to question of law.
Latham Park Manor, Inc. v. Commissioner.
Negligence or Intentional Disregard of Rules and Regulations-
Family Trust as Tax Avoidance Scheme-Burden of Proof.-On facts
and absent any evidence by petitioner on this issue, Court determined
Commissioner did not err in determination that any part of underpay-
ment was due to negligence or intentional disregard of rules and
regulations within meaning of sec. 6653(a), since considering petition-
er's education and intellectual ability, Court found it difficult to believe
that he envisioned family trust as anything other than flagrant tax
avoidance scheme. Wesenberg v. Commissioner
Monthly Payments-Decree of Separate Maintenance-Support or
Discharge of Principal Sum Obligation.-(1) $400 monthly payments
to W under decree of separate maintenance based on extreme cruelty,
including those awarded retroactively, were periodic payments under
sec. 71(a)(3) on account of family or marital relationship in recognition
of general obligation to support and were not in discharge of obligation
specified as principal sum in decree, (2) $1,125 paid by H in restitution
of amount by which W overpaid her fair share of taxes was not
includable in W's gross income under sec. 71(a), since payment resulted
from W's rights under contract with H rather than from his general
obligation of support, and (3) amount paid by H for interest was
includable in W's gross income and deductible by H under sec. 163(a).
Capodanno v. Commissioner
Pollution Control Facilities-Certification Requirement-Validity
of Election.-Where petitioner corporation acquired pollution control
facilities and stated on its tax return for fiscal 1972 that it elected to
amortize expenditure therefor under sec. 169, but at time of filing
return had not applied for certification of such facilities, Court
determined election was invalid, since regs. were promulgated under
specific legislative authority and were not "unreasonable and plainly
inconsistent with the revenue statutes," and implicit requirement that
such application must have been made goes to essence of statute and
cannot be dismissed as mere procedural detail. Penn-Dixie Steel Corp.
v. Commissioner .
See also SMALL BUSINESS CORPORATIONS.
Stockholders' Advances-Wholly Owned Corporation-Capital Con-
tribution or Loan.—Where petitioners advanced funds to their wholly
owned corporation represented by unsecured demand notes, Court
determined advances were contributions to capital and not loans which
became uncollectible in fiscal 1970, since inter alia advances were for
operating expenses and expansion of business, petitioner testified that
due to poor financial condition of corporation he foresaw possibility
advances would not be repaid, due to character of notes only source
from which advances might be repaid was from future profits of
business, and petitioner's primary concern was future success of
corporation. Davis v. Commissioner ....
Corporate Assets-Acquired in Liquidation of Subsidiary-Sec.
334(b)(2) Computation.-Where after filing of opinion herein (T.C.
Memo. 1977-23), parties submitted conflicting computations of tax
under Rule 155 which involved interpretation of regs. under sec.
334(b)(2), and basic disagreement involved manner in which to compute
basis in former corporation's assets which necessitated making
refinements to petitioner corporation's adjusted basis in stock and
allocating resulting basis among acquired assets, Court, using residual
method, determined petitioner's refined adjusted basis in stock,
calculated fair market value of intangibles received in liquidation, and
provided and applied formula for allocating refined adjusted basis to
certain assets. R. M. Smith, Inc. v. Commissioner
Securities-Computation of Gain or Loss-Adequate Identification
of Lots.- Where petitioners, who sold securities acquired in different
lots and at different prices, identified securities on their ledger sheets
but did not deliver to transferees specific certificates representing such
securities, Court determined (1) petitioners failed to adequately
identify securities in compliance with reg. 1.1012-1(c)(2), with result
that bases in securities sold were to be determined using FIFO method,
and (2) petitioners failed to show Commissioner acted arbitrarily in
reconstructing their incomes using such method. Kluger Associates,
Inc. v. Commissioner
Sale of Stock-Acquired for Business or Investment-Capital or
Income. Where petitioner bank purchased stock of X corporation
from which it obtained credit information, stock ownership was not
prerequisite to obtaining X's services, and acquisition of stock had no
appreciable effect on bank's methods of seeking credit information,
Court determined that even though petitioner had significant business
motive in acquiring stock, it also had substantial investment motive, so
that Corn Products doctrine was inapplicable and stock constituted
capital asset. W. W. Windle Co. v. Commissioner, 65 T.C. 694.
Continental Illinois National Bank & Trust Co. of Chicago v.
Commissioner
Stock Transfer-Gift Tax Paid by Donees-Net Gift or Part
Sale. Where petitioner made gifts of securities for benefit of her
grandchildren to trusts which were required to pay all gift taxes
resulting from transfers and did so by borrowing funds for such
purpose, Court determined petitioner did not realize taxable gain in
amount of difference between gift taxes paid and her basis in securities
transferred. Turner v. Commissioner, 49 T.C. 356, followed; Johnson v.
Commissioner, 59 T.C. 791, distinguished. Estate of Henry v. Commis-
sioner
Stock Transfer-Guaranty Obligation in Corporate Transaction-
Capital or Ordinary Loss.-Where petitioner corporation, party to
transaction involving revamping of capital structure of X corporation
in which petitioner held 55 percent stock interest, as part of such
transaction contributed some of its shares to capital of X, also
warranted net worth of X as of given date to third party which made
substantial investment in X, and in satisfaction of warranty gave up all
its remaining shares in X, Court determined on facts and under case
law that petitioner's loss in respect of its shares was capital loss under
secs. 1221 and 1222, and not ordinary loss under sec. 165. Fred H.
Lenway & Co. v. Commissioner
COMMISSIONER OF INTERNAL REVENUE
See INCOME and NET OPERATING LOSS.
COMMUNITY PROPERTY
See ESTATES AND TRUSTS.
COMPENSATION
Stock Issued for Promotional Services-Subject to Restrictions—
Realization of Income. Where petitioner held 5,000 shares of stock
issued for promotional services and under California permit, which
imposed restrictions that had significant effect on stock value, Court
determined (1) stock was stock subject to restrictions significantly
affecting its value, rather than second class of unrestricted stock, for
purposes of regs. 1.61-2(d)(5) and 1.421-6(d)(2)(i); (2) restrictions
imposed under California securities laws are "restrictions" within
meaning of such regs. (Frank v. Commissioner, 54 T.C. 75, distin-
guished on ground that securities law restrictions therein did not have
significant effect on value); and (3) on facts restrictions imposed by
permit were terminated in 1968, so that petitioner realized ordinary
income. Bayley v. Commissioner
CONSOLIDATED RETURNS
See NET OPERATING LOSSES.
CONTRIBUTIONS
See also ESTATES AND TRUSTS and INCOME.
Charitable-Private Fund and Other Organizations-Charitable
Purpose.-Commissioner properly disallowed (1) petitioner's claimed
carryovers and current contributions to Special Appointment Fund,
which petitioner contended was extension of his ministry, absent
evidence of distributions to unrelated needy and on evidence showing
that proceeds were used to pay for petitioner's automobile and
daughter's college education, and (2) other contributions made to
organizations as to which petitioner offered no evidence that they were
organized and operated exclusively for charitable purposes, except $20
substantiated contribution to conference of church recognized as
qualified charitable organization. Boyer v. Commissioner
Charitable-Qualification of Religious Organization-Burden of
Proof.-Petitioners were not entitled to any deduction for contribu-
tions made to religious organization formed by them, since they failed
to carry burden of proving that organization was operated exclusively
for religious purposes, no part of net earnings of which would inure to
benefit of any private shareholder or individual, considering that upon
dissolution (occurrence wholly within petitioners' control) its assets
would revert to petitioners or they would have ultimate authority over
their disposition. Calvin K. of Oakknoll v. Commissioner
Charitable-Stock Basis in Excess of Fair Market Value-Measure
of Deduction.-Petitioners' charitable contribution deduction for
corporate stocks donated to qualified charity with bases for gain or loss
in excess of fair market value was limited under sec. 170 and regs. to
fair market value of shares, contrary to petitioners' contention that
unrealized depreciation in stock value was deductible as charitable
contribution. Withers v. Commissioner
CORPORATIONS
Intercorporate Transfers in Consolidated Bankruptcy Proceedings-
Controlling Shareholder-Dividend Equivalence.-Where in consoli-
dated proceeding for ch. XI arrangement under Bankruptcy Act,
proceeds from sale of assets of 3 corporations were used to pay off
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