EXCESS PROFITS TAX-Continued
Sec. 722 Relief-Change in Character-Reconstruction of Earnings-
Yarn Manufacturer.-Upon agreement of parties that petitioner, yarn
manufacturer, was entitled to relief under sec. 722 (b) (4) by reason of
changes in character of its business, namely introduction of new product
and expansion of warehouse facilities, and finding it futile to reconcile
Commissioner's position with overoptimistic reconstructed average base
period net income contended for by petitioner, Court found record satis-
factory to establish proper basis for reconstruction. Lily Mills Co....
Sec. 722 Relief Commencement in Base Period-Noncompetitive
Business. Relief was determined for machinery manufacturer, which
commenced business in base period, thereafter expanded its capacity, and
has no competition in its special field of machinery repair, it being reason-
able to assume costs would have been well in hand by end of base period
so that projected level of earnings of that date would be normal. Punch
Press Repair Corporation....
Sec. 722 Relief-Commencement in Base Period-Yeast Manufac-
turer.-Petitioner, who commenced business during base period years and
was forced immediately into experimentation and development activities
with attendant losses in materials and labor costs, did not by end of base
period attain earning level attainable by having begun 2 years earlier;
average base period net income inadequate standard. Yeast Products,
Sec. 722 Relief-Commencement Prior to Base Period-Greyhound
Racing Track.-Petitioner, who was organized 6 years prior to base period,
leased land and constructed spectator facilities (subsequently purchased
by petitioner), suffered receivership which terminated 3 years prior to base
period, and thereafter itself operated track continuously, did not com-
mence business immediately prior to base period, evidence revealing that
petitioner and competitors had achieved normal level of operations and
earnings prior to commencement of base period. Del Mar Turf Club, 16
T. C. 749, and Victor Glass Co., 17 T. C. 381, distinguished. West Flagler
Amusement Co..
Sec. 722 Relief-Commitment to Course of Action-Bus Company.
Mere threat of competition, too remote to establish fact of detriment, and
indefinite oral promises made by petitioner bus company to provide addi-
tional transportation service, without proof of change in position unequivo-
cally establishing intent to make promised change in reasonably definite
period, are insufficient to establish prior commitment within meaning of
sec. 722 (b) (4). Pittsburgh & Weirton Bus Co.......
Sec. 722 Relief-Constructive Average Base Period Net Income-
Yeast Manufacturer.-Court, not accepting petitioner's reconstruction in
toto because not fully supported by evidence, determined constructive
average base period net income by considering statistics on general busi-
ness and disposable income, disclosing, inter alia, a steadily expanding
market for petitioner's goods and recession conditions elsewhere. Yeast
Products, Inc.
Sec. 722 Relief-Invested Capital-Ratio to Equity.-An attempt to
establish that its invested capital was abnormally low by ratio showing
of average of annual average equity invested capital to 100 per cent of its
annual average borrowed capital, by ratio showing of capital stock and
surplus and mortgages of its predecessor payable at end of each base period
year, and by percentage comparison of turnover of its capital in sales
during fiscal years 1942 through 1946 with that of its predecessor during
base period, without showing ratio of borrowed to total invested capital,
was insufficient to qualify petitioner for relief under sec. 722 (c) (3). Metal
Hose & Tubing Co..
Sec. 722 Relief-"Other Factors" (Sec. 722 (b) (5))—Metal Products
Manufacturer. Factors relied upon unsuccessfully by petitioner for relief
under sec. 722 (b) (2) and (4) cannot be considered jointly as new and
different basis for relief under sec. 722 (b) (5), since to do so would violate
sec. 722 (b) (5)'s prohibition against granting relief inconsistent with
principles, conditions, and limitations contained elsewhere in sec. 722 (b).
Pratt & Letchworth Co..-
EXCESS PROFITS TAX-Continued
Sec. 722 Relief-Temporary Economic Circumstances-Paper Board
Manufacturer.-Claim based upon abnormally low selling prices during
base period, caused by alleged overproduction of paper board products in
temporary overexpansion of kraft paper board industry, was insufficient to
afford relief under sec. 722 (b) (2), petitioner having failed to show close
relationship between prices for its product and industry's varied products
or that competition was temporary and not permanent. Hummel &
Downing Co
Sec. 722 Relief Variant Profits Cycle-Difference in Length and
Amplitude-Restaurant Chain.-Petitioner was determined to have been
subjected to profits cycle differing materially in length and amplitude from
general business cycle because its periods of prosperity, recession, and
depression, as well as its peaks and low points, did not coincide with those
of all corporations; its index figures contrasted markedly with those of all
corporations; and Pearsonian correlations showed similarity of earnings
patterns of petitioner and representative members of its industry and con-
trast to those of business generally. Waldorf System, Inc..
Sec. 722 Relief Variant Profits Cycle-Industry-Restaurant Chain.
Operation of chain restaurants, purveying food at lowest price possible
consistent with realizing profit, with substantial numbers of units, central-
ized managements, and central commissaries, constituted an industry of
which petitioner was a member, Waldorf System, Inc...
Sec. 722 Relief Variant Profits Cycle-Industry Generally Depressed-
Restaurant Chain. -Depression suffered by petitioner in base period was
due to conditions generally prevailing in its industry, earnings of petitioner
and five representative chains following same profits cycle and there being
testimony establishing depressed condition of low-priced restaurant busi-
ness generally. Waldorf System, Inc.......
Expense Allowance-State Trooper.-Sum received by State trooper as
reimbursement for expenses, including meals purchased while on official
duty, was not excludible from gross income under sec. 22 (n) (2) or de-
ductible as expenses under sec. 23 (a) (1) (A), trooper being regularly
employed in area within maximum distance of 20 miles from home.
Charles H. Hyslope.......
Expense Allowance-State Trooper.-Sums received by State trooper as
reimbursement for meals while on duty are not deductible under sec. 22
(n) or 23 (a) (1) (A) and are includible in gross income, notwithstanding
that those sums were not regarded by State as compensation and that
trooper was required to live at his station, 22 miles from home he main-
tained for his family. Charles H. Hyslope, 21 T. C. 131, followed.
Robert H. Saunders..
Discharge of Liability-Breach of Covenant-Capital Loss.-Payments
made and legal expenses incurred to secure discharge of liability for breach
of covenants in warranty deed given in sale of income-producing realty
must be treated as capital loss, and not nonbusiness deduction within sec.
23 (a) (2), liability having arisen from transaction wherein realty was sold.
Carl W. Braznell, 16 T. Č. 503, and Samuel G. Swaim, 20 T. C. 1022, dis-
tinguished; Arrowsmith v. Commissioner, 344 U. S. 6, followed. Estate of
James M. Shannonhouse_.
Guaranty Fee.-Amounts paid to trustee "as compensation for holding
[securities] and handling the payments" of alimony, to guarantee which
securities registered in petitioner's name were deposited, are not deductible
under sec. 23 (a) (2) as expenses incurred for management, conservation,
or maintenance of property, even though substantial income therefrom
was realized by petitioner. F. Ewing Glasgow..
Travel and Entertainment-Production of Income-Corporate Bene-
fit.-Expenses of petitioner, stated to be for production of income and
made by him as shareholder of wholly owned corporation, were not per-
sonal to him but inured solely to benefit of corporation; hence, they are
not deductible by him under sec. 23 (a) (2). Jacob M. Kaplan..........
EXPENSES-TRADE OR BUSINESS
See also ACCOUNTING-ACCRUAL BASIS and CAPITAL EXPENDI-
TURES.
Attorney Fees Costs of Options.-Attorney fees and costs of options
to purchase property, expended by petitioner corporation during a pre-
operating and development period and deducted by it as repairs in its
fiscal year following, are not so deductible. Mid-State Products Co...
Attorney Fees-Redemption of Realty-Allocation.-Attorney fees,
paid by petitioner in year of termination of successful litigation to redeem
realty, were allocable one-half to period of litigation, for which fees were
deductible as ordinary and necessary business expense in year paid, and
one-half to period of accounting proceeding after petitioner's right to
property was conclusively determined, for which fees are to be capitalized.
E. J. Murray_.
Attorney Fees-Year Deductible-Accrual Basis Taxpayer.-Peti-
tioner, which was billed by its attorney for services in connection with
petitioner's business rendered in 1948, paid bill in 1950; since petitioner
was on accrual basis, it could deduct the amount in taxable year 1948.
East Coast Equipment Co..
Compromise Settlement-Stockholders' Dispute.-Payment by peti-
tioner corporation of part of consideration, payable to one stockholder
who transferred his stock to an officer to effect settlement of certain disputes
and litigations in which petitioner had been made a party, did not constitute
ordinary and necessary business expense of petitioner. Mid-State Prod-
ucts Co....
Cost of Canceling Lease-Purchase of Realty.-Payment by peti-
tioner corporation 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,
was not deductible as ordinary and necessary business expense under sec. 23
(a). Millinery Center Building Corp...._
Entertainment and Boat Maintenance-Partially Deductible.-Amounts
expended by physician, in entertainment and maintenance of cabin
cruiser, were 25 per cent deductible as ordinary and necessary business
expenses, absent showing of exact amount by which these expenditures
were means of enhancing petitioner's prestige and of creating a capital
asset comparable to goodwill. Richard A. Sutter...
Equipment Rental Sale and Leaseback Arrangement-Settlor-Trus-
tee. The Court, having determined that irrevocable trust established
by partners of coal mining companies for benefit of their children was
valid, that sale and leaseback agreements concerning mining equipment
between partnerships and trust were bona fide transactions, and that
rentals paid to trustee were reasonable, allowed deduction by companies
of rentals as ordinary and necessary business expense under sec. 23 (a) (1)
(A). Albert T. Felix__
Equipment Rental and Compensation-Payment by Promissory Note.-
Payments to construction supervisor for services rendered and use of equip-
ment, paid in part by negotiable promissory notes payable 2 months
after close of taxable year, constituted effective payment, deduction of
which is not barred by sec. 24 (c), in absence of showing petitioner corpo-
ration was at any time incapable of paying notes. Mid-State Products
Co....
Interest on Overassessment-Payment to Settlor-No Legal Obli-
gation. Trust, having received interest payments on overassessments,
received income to extent of interest; it could not deduct as ordinary and
necessary business expense or interest on indebtedness amount of that
interest paid over to settlor without legal obligation to do so. Wayne
Hugh Easley Trust........
Litigation Expenses and Attorney Fees-Criminal Action Against
Corporate Officer.-Payments required by corporate bylaw and made by
petitioner to indemnify its vice president for costs incurred in his defense
against criminal charge resulting from an act in his official capacity were
deductible by petitioner as an ordinary and necessary business expense,
and did not tend to frustrate public policy since officer was acquitted.
Union Investment Co..........
EXPENSES-TRADE OR BUSINESS-Continued
Officer's Salary—Part-Time Services-Unreasonable Amount.—Salary
of corporation's secretary-treasurer, wife of its president, who devoted
little time to business and had no office, although she attended formal
meetings, signed documents, and par'icipated in consultations on sales
volume, expenses, and personnel, was found to be unreasonable and
reasonable amount was determined as deductible. East Coast Equip-
ment Co...
Penalties-O. P. A. Violation.-Deductions under sec. 23 (a) (1) (A)
of overcharges paid into United States Treasury by partnership, which
knowingly and willfully violated O. P. A. regulations, were disallowed as
contrary to public policy. Joseph Salzman..
Physician's Promotion Expenses-Failure of Proof.-Physician oper-
ating industrial surgical clinic sent gifts to various lay persons with whom
he dealt; made hunting trip; sent gifts to various medical associates;
published and circulated article on industrial surgery-expenses of these
items were not deductible because not shown to have contributed to
earning of income. Richard A. Sutter........
Away From Home.-Expenses of operation of automobile insofar as in-
curred within city where petitioner resided and where his employer's place
of business was located not deductible under sec. 22 (n) (2); nor may those
incurred traveling outside said city (but within county) be deducted, absent
evidence as to what portion of stipulated expenses was incurred in county
traveling. Frank N. Smith....
Basis-Carrying Charges-Interest and Taxes.-Mortgage interest and
real estate taxes paid on property while used and occupied as residence are
deductible as paid, and are not carrying charges to be capitalized as part of
cost of property, under secs. 24 (a) (7) and 113 (b) (1) (A). Isaiah
Megibow..
Property Dividend-No Monetary Obligation-No Loss Recognized.-
Resolution of petitioner's board of directors declaring dividend of specified
amount payable partly in securities and partly in cash did not create
monetary obligation to extent of securities which was satisfied by their
distribution, and hence no recognizable loss was realized by the transaction.
Natural Gasoline Corporation..........
Real Property-Stockholders' Contribution to Corporation.—Transfers
by petitioners of real property to corporation, whose stock was owned 40
per cent by them and 30 per cent by their children, are taxable as gifts to
full extent and each transferor is entitled to one exclusion. Frank B.
Thompson, 42 B. T. A. 121, followed. Stephen F. Heringer.......
GIFTS
Definition. A gift is a voluntary transfer from one person to another
without any consideration or compensation therefor, and, for income tax
purposes, the transfer must be accompanied by donative intent.
May Audigier...
Donations to Radio Minister-Business for Profit-Ordinary Income.-
Funds sent in by listeners in response to solicitations by petitioners, con-
ductors of religious radio broadcasts, categorized by petitioners as being for
them personally, were income, not gifts, since petitioners were conducting
a business for profit and there was no evidence that contributors intended
money sent in as gift rather than as compensation for services. Edward
F. Webber.__
Interest in Novel-Transfer to Wife-Intent. In absence of showing of
consideration by preexisting agreement for petitioner's transfer to his wife
of certain interest in his novel and from disclosure of record that transfer
was made, on advice of attorney, for tax savings, Court determined wife's
services in preparation of novel did not constitute valid consideration and
transfer was taxable as gift. Sax Rohmer......
Property Outside United States-Canadian Serial Rights.-Part of in-
terest in novel, transferred by petitioner to wife, allocable to Canadian
serial rights was not property situated outside United States so that pro-
ceeds therefrom were exempt from tax under sec. 501 (b) of Revenue Act
of 1932. Both proceeds of serial rights and manuscript were property
situated within United States at time of sale, and transfer of interest therein
is properly subject to gift tax. Sax Rohmer...
Rent-Consideration and No Donative Intent-Income.-Amounts re-
ceived by petitioner under terms of lease agreement whereby lessor turned
over one-half of rent were taxable income, not gifts, Court having found
consideration and lack of donative intent, either of which defeats gift. Im-
position of sec. 291 (a) penalty sustained, absent explanation for filing late
return. Carro May Audigier....
Trust-Lump-Sum Payment-Income or Principal.-Amount received
by petitioner under terms of trust indenture providing for lump-sum gift,
payable in any event either out of income or principal of trust property,
was properly excluded from petitioner's gross income under provisions of
sec. 22 (b) (3). Miriam C. Lindau.....
Valuation-Book and Movie Rights to Novel-Agent's Commission.-
Value of book and movie rights, sold subsequent to transfer by petitioner
to wife of part interest in his novel, at date of assignment is measurable by
subsequent sale prices, but agent's commissions are not deductible from
wife's portion in determining valuation of gift, since gift tax is transfer tax
reaching entire value of interest transferred at time of transfer.
Rohmer....
Valuation-Income Withheld at Source-Deductibility.-Petitioner's
withholding tax payments on total proceeds of rights to novel, portion of
which rights he transferred by gift to his wife, were not made a charge
against wife's interest in the assignment and cannot be used to lower value
of gift. Sax Rohmer.... ... ....
Valuation-Transfer of Literary Rights-Agent's Commission.-One-
half of commissions retained by agent, the whole being a charge upon pro-
ceeds of all sales of rights to petitioner's novel, must be deducted from value
of one-half interest in novel transferred by petitioner to his wife to deter-
mine value of such interest for tax purposes, absent any specific instruc-
tions in assignment removing this burden. Sax Rohmer...
GOVERNMENT CONTRACTS
See INCOME, Compromise Settlement, Government Contract, Tax
Liability.
Cost-Plus-A-Fixed-Fee-Reimbursement Disallowance.-Commodity
Credit Corporation's offsets in 1946 and 1947 of certain amounts, disallowed
as reimbursable costs paid to petitioner corporation in 1944 and 1945 under
cost-plus-a-fixed-fee contracts, against sums due petitioner for deliveries in
1946 and 1947 should be used to reduce petitioner's income for 1944 and
1945, under sec. 3806 (a) (2), following Cramp Shipbuilding Co., 17 T. C.
516. Mid-State Products Co...
See GIFTS, Rent; PARTNERSHIPS, Limited, Amounts Credited to
Partner.
Allocation-Organizations Under Common Control.-Income of partner-
ship and successor corporation may, under sec. 45, be allocated to petitioner
only upon showing both common ownership or control and shifting or diver-
sion of petitioner's income; Commissioner's evidence (alleged undercharging
for petitioner's services to partnership and successor) on latter requirement
determined insufficient to overcome petitioner's evidence as to reasonable-
ness of amounts charged for its services. Polak's Frutal Works, Inc...
Bank Deposits-Funds Supplied by Another.-Money, given petitioner
by husband and an amount transferred from another bank account, de-
posited in petitioner's bank account, were not, whole record considered,
income to her. Jack M. Chesbro...
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