War Contracts-Transfer of Partnership-Assignment Prohibitions.-
Pursuant to Court of Appeals' mandate, Tax Court set aside earlier opinion
that certain war contracts, transferred to partnership by stockholders of
dissolved corporation, had no basis by reason of prohibitions against their
assignment rendering them valueless as contribution to partnership,
ignored these prohibitions, and determined contracts' fair market value
at time of assignment. Murray Thompson_
See also BAD DEBTS, Discount of Notes, No Bona Fides.
Stockholder's Stock Purchase-Transfer to Corporation-Nature of
Transaction. Although petitioner contended that certain securities were
purchased erroneously in his name and were intended for his wholly owned
corporation, to which he later transferred large portion thereof, factors
repugnant to this contention, such as his including in his tax return divi-
dends received and losses sustained on sale of some of the securities on the
market, determined a holding that they were his individual property and
their transfer to corporation was a sale. Jacob M. Kaplan__
CAPITAL EXPENDITURES
Development Expenses-New Product.-Development expenditures
made by frozen egg dealer in exploring possibilities of adding powdered
eggs to its line, which expenditures were charged off as cost expense on first
order sold thereafter, constituted capital costs, but were not shown to rep-
resent cost of wasting assets giving rise to amortization or depreciation de-
ductions.
Fire Protection-Improvement or Betterment.-Installation of sprinkler
system in hotel, on orders of municipal government, was improvement or
betterment, cost of which was recoverable through depreciation deductions
in years of system's useful life, rather than deductible as ordinary business
expense, even though cost was greater than it would have been had system
been installed in newly constructed building. Hotel Sulgrave, Inc............
Legal Fees and Expenses-Recovery of Capital.-Fees and expenses paid
counsel in litigation seeking recovery of capital are nondeductible capital
expenses, not ordinary and necessary business expenses under sec. 23 (a)
(1) (A), notwithstanding their being paid from petitioner's general funds
and petitioner's being unconditionally liable therefor irrespective of
outcome of litigation. Pennroad Corporation..
Machinery Plans-Abandonment-Nonuser.-Commissioner did not
err in disallowing claimed deduction of fee paid by petitioner corporation
for machinery plans, which were not shown to have been abandoned even
though machinery was not built, nonuser of plans alone being insufficient
to show abandonment. Mid-State Products Co.---.
CAPITAL GAINS AND LOSSES
See also INCOME and LOSSES.
See EXPENSES-NONBUSINESS, Discharge of Liability, Breach of
Covenant, Capital Loss.
Movie Screenplay-Capital Asset.-Petitioners, movie star and pro-
ducer-director, who purchased movie screenplay intending to sell same to
corporation owned by them, acquired capital asset and not "property
held primarily for sale to customers in ordinary course" within sec. 117
(a) (1). Fred MacMurray_.
Movie Screenplay-Deferred Payment-Capital Gain or Ordinary
Income. Petitioners, who purchased story and sold same to two corpora-
tions, one of which was owned by petitioners, part of consideration being
deferred and payable out of receipts from movie of story, realized capital
gain, not ordinary income in nature of dividend or additional compensa-
tion from corporation owned by them. Fred MacMurray_-
Movie Screenplay-Sale Arrangement-Six-Month Holding Period.-
Petitioners purchasing capital asset and, by instrument containing present
words of conveyance, selling same more than 6 months after acquisition
thereof, held asset requisite 6-month period, even though there was prior
understanding that that particular sale would be made. Fred Mac-
Murray---
CAPITAL GAINS AND LOSSES-Continued
Oil and Gas Leases-Held Less Than 6 Months.-Sales of undivided
interests in oil and gas leases, otherwise qualifying for capital gains treat-
ment, will be denied that treatment if petitioner fails to introduce evidence
that such interests were held for more than 6 months. Vern W. Bailey...
Oil and Gas Leases-How Allocable.-Entire gain realized on sale of
undivided interests in oil and gas leases and reported by petitioners is
properly allocable to them, and none to coventurer, no assignment of
error being made in petition relative to proportion allocable to petitioners.
Vern W. Bailey...
Oil and Gas Leases-Sale of Capital Assets.-Determinative factor in
giving or denying capital gains treatment to transaction is purpose for
which property was acquired, and in conforming thereto sales of portion of
undivided interests in oil and gas leases, originally acquired for exploita-
tion of oil and gas resources, with dominant motive of raising funds for
initial and subsequent development costs and current living expenses, were
accorded capital gains treatment under sec. 117, sales not being made con-
tinuously but only as capital was required and would-be purchasers being
turned down when sufficient funds available. Vern W. Bailey..
Sale of Equipment-Sale and Leaseback Arrangement-Settlor-
Trustee. The Court, having upheld validity of trust established for
benefit of minor children of partners in coal mining companies and bona
fides of sale and leaseback arrangement between companies and trust for
mining equipment, determined that capital gain realized from sale of
some of the equipment was properly taxable to trust, not to partners.
Albert T. Felix_
Stock Acquisition-Subsidiary Corporation-No Business Purpose.-
Corporation, which purchased remaining interest in capital stock of
insolvent Mexican subsidiary and immediately liquidated it, did not
thereby become affiliated with its subsidiary within meaning of sec. 23 (g)
(4), and loss sustained from stock's worthlessness was capital loss under sec.
23 (g) (2) and not ordinary loss. Hunter Manufacturing Corporation..
CAPITAL TRANSACTIONS
Bond Retirement-Tax-Free Reorganization-No Taxable Gain.-
Corporation, which issued bonds of $50 face value to its stockholders, in
proportion to holdings of preferred stock of $5 issue value and $50 stated
face value (difference in value being represented on books as unrealized
appreciation in value of assets, on determination of industrial engineers)
and subsequently purchased for retirement some bonds for amount less
than face value, but more than issue price, of stock, realized no taxable
gain. Rail Joint Co., 22 B. T. A. 1277, affd. 61 F. 2d 751, followed.
Fashion Park, Inc..
Contributions to Capital.-Absent any evidence of agreement requiring
application of proceeds of sale of interests in oil and gas leases to develop-
ment of well, as distinguished from their being at unconditional disposal
of sellers, Court held such proceeds not contributions to capital. Vern
W. Bailey..
See ALIMONY, Deductions, Community State; DEPRECIATION,
Community Property, Separate Property; LOSSES, Community
Property.
COMPENSATION
See EXPENSES, Expense Allowance.
Living Expenses-Maintenance Engineer.-Rental allowance, included
in gross salary paid petitioner, maintenance engineer, and deducted from
salary because living quarters were provided for him, was clearly part of
compensation for services, even though employee was required as condi-
tion of employment to live on premises, "convenience of the employer"
being merely one test. Joseph L. Doran____
Reasonableness.-Petitioner sustained as to reasonableness of salaries
paid where testimony bearing upon the issue was adduced and Com-
missioner failed to refute; Commissioner sustained as to those salaries
unsupported by petitioner's evidence as to reasonableness. Polak's
Frutal Works, Inc....
See INCOME, Donations to Radio Minister, Donee as Agent.
Charitable-Public Beach Foundation.-Contributions made for pur-
chase and upkeep of bathing beach for use of all persons in defined area
without discrimination, making of contributions not being condition prece-
dent to use of beach and no fees being charged for use thereof, were de-
ductible as contributions to charitable organization under sec. 23 (o) (2).
Isabel Peters____
Charitable-Tax-Exempt Ruling.--Fact that organization does or does
not qualify as tax exempt under sec. 101 is not automatically determina-
tive of deductibility of contributions thereto under sec. 23 (o) (2). Isabel
Peters...-
CORPORATIONS
See also other titles.
See ACCUMULATION OF SURPLUS; BAD DEBTS, Recoveries.
Sale of Own Stock-Nature of Transaction.-By transaction in which
petitioner corporation sold to its president treasury stock, portion of
which was acquired for distribution as additional compensation to key
personnel and remainder was traceable to another corporation's stock
acquired under merchandise purchase agreement, it was not dealing in its
shares as a corporation would in shares of another corporation and did
not realize taxable gain. Timken- Detroit Axle Co..
Subsidiary-Separate Taxable Identity.-Petitioner, wholly owned
subsidiary corporation engaged in business activity, is taxable upon
income earned by it, despite parent's direction of its affairs, provision
of its assets, and treatment of its profits as parent's own, following National
Carbide Corp. v. Commissioner, 194 F. 2d 535. City Machine & Tool
Co.....
Charitable Corporations-Benefits for Individual.-Charitable cor-
poration, which received gift with proviso that income therefrom should
be paid to named person for life, mingled gift with other assets, and paid
income in excess of that earned by gift, is not entitled to exemption under
sec. 101 (6), having permitted a portion of its general assets to inure to
benefit of private individual. William L. Powell Foundation___
Child-In Boarding School.-Mother cannot under sec. 25 (b) claim
as a dependent her son attending boarding school, cost of attending which
was borne by others who also paid fixed amount monthly for son's support
prior to his being placed in school. Martha J. Blyth_
Dependent Mother-Separate Income-Gross Income.-Petitioner is
not entitled under sec. 25 (b) (1) (D) to dependency credit claimed for
mother, owner of realty with gross receipts exceeding $500 gross income
limitation, deductions for taxes, maintenance, and depreciation of property
being allowable only in determining statutory net income under sec. 23 and
not statutory gross income under sec. 22 (a). John H. Gooch..
Dependent Mother-Support by Several Children.- Where each of
four petitioners contributed equal amounts in payment of medical expenses
incurred by their mother, but no one petitioner contributed more than
one-half of her support, she is not a dependent of any one petitioner within
sec. 25 (b) (3), and deduction may not be taken under sec. 23 (x) for medical
expenses paid in her behalf. Thomas G. Russoniello....
Nonprofit Organization-Aviation Club.-Aviation club, which recited
in its articles of incorporation that it was established for civic, educational,
scientific, and social purposes, and not for pecuniary benefit, and which in
addition to conducting recreational events and educational meetings on
leased premises sponsored magazine and donated money from time to
time for charitable or educational purposes, qualified as organization
exempt from taxation under sec. 101 (9). Aviation Country Club, Inc..
Overpayment of Tax-Credit to Another.-Taxpayer's claim to credit
against deficiencies, for amounts advanced by him to pay taxes of officers
of his wholly owned corporation on fictitious salaries actually paia to
taxpayer and for agreed liability of his wife as transferee of his assets, was
denied, Tax Court being without power to require Commissioner to credit
an overpayment of taxpayer to account of another, remedy being an appli-
cation for relief through appropriate director of internal revenue.
nett E. Meyers___
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Punitive Damages-Compromise Settlement-Allocation.-Net pro-
ceeds of lawsuit damages awarded petitioner corporation by jury which
designated certain sum for compensatory damages, without specifying
what kind, and another sum for exemplary damages, were allocated one-
sixth for nontaxable punitive damages and five-sixths for compensatory
damages, of which one-half was for loss of profits, taxable as income, and
remaining half for destruction of business and goodwill, ordinarily taxable
as income to extent it exceeded unrecovered basis of property, taxable in
full because petitioner failed to show any unrecovered basis. Telefilm,
Inc
Franchise Taxes-Accrual Basis Taxpayer-Contested and Uncon-
tested Adjustment.-Where Commissioner made adjustments to income
tax increasing thereby amount of State franchise tax owing by petitioner,
accrual basis taxpayer, petitioner could deduct franchise tax increase based
upon proper and uncontested adjustments only. Jack M. Chesbro.....
Repayment of Subsidies-Accrual Basis Taxpayer-Contingent Future
Liability. Petitioner, livestock slaughterer on accrual basis, which had
received Government subsidies which later in same year Government
examiner indicated petitioner possibly incligible to receive, could not
deduct amount thereof as liability to repay, Government agency having
made no decision on liability for repayment and there having been enacted,
even prior to application for subsidies, a statute forgiving such liability
upon a showing of good faith, so that petitioner was under no "obligation
to pay [which had] become final." S. Loewenstein & Son...
DEPENDENTS
See CREDITS AND EXEMPTIONS.
DEPLETION
Basis of Computation-Discovery Value-Gypsum Mine.- Where peti-
tioner established that it discovered gypsum deposit, date of discovery,
fair market value on date of discovery, and that fair market value on date
of discovery was materially disproportionate to cost, it was entitled to
depletion allowance based upon discovery value. H. M. Holloway, Inc..
Bonus Payment-Option and Operating Agreement.-Bonus payments
for option and operating agreement on oil and gas land were includible in
gross income and subject to depletion notwithstanding no production on
lease, subject to rule that depletion must be reported as income if rights
granted are abandoned without production. Westates Petroleum Co..
Coal Mining-Gross Income From Property-Oil Treatment.-Oil
treatment applied by petitioner at mine to portion of its coal was not shown
to be ordinary treatment process normally applied in order to obtain com-
mercially marketable mineral product within sec. 114 (b) (4), so as to
permit inclusion of proceeds thereof in gross income from property for pur-
poses of computing percentage depletion. Black Mountain Corpo-
ration.............
DEPRECIATION
Apartment Building-Basis-Cohan Rule.-Where petitioner made im-
provements to building in conversion thereof to apartment but failed to
prove satisfactorily cost thereof, Court applied Cohan rule to determine
cost, which, added to initial outlay, gave basis for depreciation. W. B.
Mayes, Jr...
Assets-Several Classes-Composite Lives.-Petitioner corporation
failed to discharge its burden of proving Commissioner erred in his de-
termination of composite lives for assets in various classifications by a
mere showing that certain of assets had shorter expected useful lives than
Commissioner determined for classification in which they were included.
Mid-State Products Co...
Canceling of Lease-Purchase of Realty.-Payment by petitioner cor-
poration for purchase of land, on which it had erected building, in excess
of fair market value of realty in unimproved condition at time of purchase,
to procure cancellation of its own burdensome long-term lease, may not be
allocated for depreciation purposes as additional cost of building, petitioner
already having been permitted to recover full amount of cost of building.
Millinery Center Building Corp..
Community Property-Separate Property.-Deductions for depreciation
on separately owned property, income from which falls into marital com-
munity, are to be equally divided between spouses and may not be taken
in their entirety by owner of property. Leo Sanders..
Office Equipment—Establishment of Basis.-Petitioner, who failed to
establish value of office equipment either for beginning or end of period
during which it was held, cannot take a deduction for depreciation because
no basis therefor has been established. W. B. Mayes, Jr.
Owner Out of Possession-Equitable Title Retained.-Petitioner was
entitled to deduct depreciation on certain realty for years effect could be
given to loss carry-overs during period of accounting, when he was still out
of possession, subsequent to State court decision establishing his right to
reconveyance, in situation, as here, where taxpayer retained equitable
interest, legal title being held by mortgagees only for security purposes until
end of accounting period. E. J. Murray..
Patents-Method of Computation.-Proper method of computing annual
allowance for depreciation or amortization of group of patents, value of
patents individually not being ascertainable, is to compute number of days
of unexpired patent life at beginning of taxable years for all patents and the
number of days remaining life expiring in each taxable year for all patents
and then apply percentage, which latter figure is of former, to basis for all
patents. Kraft Foods Co..
Used Car-Basis-Cohan Rule.-Petitioner purchased two used cars,
combined them to make one usable car, and made capital expenditures
which were not satisfactorily shown; under Cohan rule, basis for deprecia-
tion and prospective life determined. W. B. Mayes, Jr..
See EXCESS PROFITS TAX, Equity Invested Capital, Stock Dividends.
Definition-Earnings and Profits of Taxable Year-Accumulated
Deficit. A dividend, as'defined in sec. 115 (a), includes distribution made
by corporation to its stockholders out of earnings and profits of taxable
year, even though those earnings and profits were insufficient to wipe out
accumulated deficit existing at beginning of taxable year. William G.
Maguire
Distribution of Assets-Corporate Liquidation-Transferee Liability.-
Petitioner, who received distributions of corporate assets under claim of
right and without restrictions on use, was taxable thereon as for dividends,
even though deductions therefor were denied corporation, and, as result of
such denial, petitioner was fixed with transferee liability for additional
taxes of transferor corporation. Bennett E. Meyers_-_
Officers' Salaries-Payment to Sole Stockholder.-Sums in excess of
actual compensation paid to corporate officers and by them paid to or for
account of petitioner, sole stockholder, as well as other corporate dis-
bursements for petitioner's benefit, constitute dividends taxable to peti-
tioner, there being no contention that corporation had no earnings out of
which to pay dividends. Bennett E. Meyers-
Profits Exceeding Taxes-Taxable to Stockholders.-Petitioners, sole
stockholders of corporation, were taxable for dividends on all corporation's
profits in excess of taxes, though no dividends declared, where corporation
had income in excess of amount reported and books failed to show that any
amounts were retained or spent for business purposes, and petitioners
personally received amounts in excess of reported income. Jack M.
Chesbro..
Sale Proceeds of Stock Rights-Dividends Received Credit.-On
rehearing granted petitioner to present more fully facts which might show it
entitled to dividends received credit under sec. 26 (b) on proceeds received
from sale of certain stock rights, opinion was modified to treat such pro-
ceeds, concededly taxable as ordinary income, as dividends for purposes of
dividends received credit. Tobacco Products Export Corporation....
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