Oil Leases. Leased property was not abandoned on drilling a dry well
where subsequent drilling, though unsuccessful, was undertaken. L. M.
Fischer
Accounting Periods-Partnerships.-Partnership tax year to be rec-
ognized where validity of partnership membership but not validity of
the partnership itself was put in issue. Russell Giffen__
Accrual Basis-Bond Interest-Deferment.-Interest on bonds held
accrued income during the taxable year despite deferment of part of the
payment until a later year. Union Pacific Railroad Co.
Accrual Basis-Credit Subject to Renegotiation.-Held that where notes
were given as patronage dividends by a cooperative on the accrual basis
to a partnership on the accrual basis, they were accruable income to the
partnership for the years when credited and issued to the partnership.
George Bradshaw, et al..
Accrual Basis-Credit Subject to Renegotiation.-A cooperative asso-
ciation issued to petitioner (on the accrual basis) credit memorandums
covering rebates and credited them on its books, but advised that it would
not distribute the amounts thereof pending the result of renegotiation
proposed by the Government, the amounts credited to taxpayer are taxable
to it in the years when the memorandums were received. Harbor Plywood
Corporation.
Accrual Basis-State Tax.-State tax deficiency which is litigated is
accruable in the year of judgment. Controversial deficiency which
petitioner took no steps to litigate is deductible in the year tax is due.
Franchise tax on the privilege of doing business during the taxable year is
accruable after the end of the taxable year, not before. ACF-Brill
Motors Co..
Accrual Basis-Taxes. -Month to month deduction of property taxes
due January 1 by petitioner, on accrual, fiscal year basis, allowed for tax
year although petitioner had not protested disallowance of that basis in prior
years. Whitney Manufacturing Co...
Cash Basis-Constructive Receipt-Funds Placed in Escrow.-Money
placed in escrow for purchase of stock owned by petitioner was not con-
structively received by petitioner, on the cash basis. Harold W. John-
ston..
Cash Basis-Improper. Commissioner was justified in recomputing
petitioner's income from purchase and sale of merchandise on the accrual
basis, rather than using cash basis formerly employed by petitioner.
Z. W. Koby....
Change in Accounting Period-Partnership.-Donation of partnership
interests to aged relatives, not recognized for income tax purposes, and
periodic renewal of partnership agreement without change in manner of
doing business is insufficient to justify a change in accounting period.
Vera Melin Britz..
Mixed-Foreign Corporation.-Foreign corporation keeping books
abroad on a fiscal year basis and in the United States on a calendar year
basis is taxable on the basis of its books in this country. Linen Thread
Co., Ltd..
Treatment of Items-Income or Liability. The recording as liabilities
of deposits received on returnable milk bottles pursuant to O. P. A. re-
quirements clearly reflected income. Farmers Creamery Co. of Fred-
ericksburg, Va....
Life Insurance Premiums.-Pursuant to a separation agreement, peti-
tioner paid premiums for life insurance held by a trustee as security against
default in payment of alimony. Held, deduction of premiums as alimony
under sec. 23 (u), I. R. C., was properly disallowed. Lemuel Alexander
Carmichael 14 T. C. 1356, and Meyer Blumenthal 13 T. C. 28, followed.
William J. Gardner....
Payments Pendente Lite.-Payments made by husband as alimony
pursuant to court order pendente lite are not taxable to the wife under
sec. 22 (k), I. R. C., because made prior to decree of divorce and, there-
fore, are not deductible by the husband under sec. 23 (u). Joseph A.
Fields
Periodic Payment.-Life insurance policy delivered to divorced wife,
on which petitioner was liable for life, was alimony encompassing periodic
payments deductible by petitioner. However this was not true of policies
held in escrow as security for cash alimony, other policies of which one
other than the wife was primary beneficiary, or payments on a sum due in
toto within 10 years. Lemuel Alexander Carmichael_.
Pre-Divorce Payments.-Payments to wife before divorce are not
deductible by husband under sec. 23 (u), I. R. C., nor are payments after
marriage under an agreement to pay a specific sum within 5 years. Joseph
D. Fox___
Support of Children-Periodic Payments.-Amounts designated in the
decree for support of minor child are not deductible by the husband.
Specific amount to be paid in less than 10 years is not deductible. Harold
M. Fleming..
AMORTIZATION
Prepaid Expenses.-Prepaid expenses on a contract are not amortizable
beyond the time required for performance of the contract. Foundation
Co..
War Facilities-Closing Agreements.-Petitioner's election under sec.
124, I. R. C., to terminate its period of amortization at the date pro-
claimed by the President as the end of the emergency period, allowed.
Closing agreement provided that petitioner could take amortization under
sec. 124 was binding. Cramp Shipbuilding Co....
Capital Stock Tax Returns: See RETURNS, Association Taxable as a
Corporation.
Taxable as Corporation: See also CORPORATIONS, Association
Taxable as.
Taxable as Corporation-Partnership.-Family partnership in contracting
business consisting of three general partners and seven limited partners
held, a bona fide partnership, not an association taxable as a corporation.
Western Construction Co.
Forfeited Stock Bonus.-Unearned portion of a stock bonus, never taken
into income, which taxpayer forfeited on his separation from his company,
disallowed. ́ John L. Seymour__
Moral Obligations.-Assumption of liability for repayment of loans
made to petitioner's son by bank of which petitioner was president was a
moral obligation not in line of business and loss was nonbusiness. W. A.
Dallmeyer..
Nonbusiness-Husband and Wife.-Guaranty of husband's indebted-
ness and settlement of liability thereon created a nonbusiness bad debt
and was not entered into for profit. Agnes I. Fox.
Recovery.-Petitioner charged off unpaid balance on notes it held.
Charge-offs were allowed in full as deductions in the proper years. Subse-
quent sale of the notes resulted in ordinary income. Merchants National
Bank of Mobile__
Reserves-Increased.-Increase in reserve for bad debts by petitioner
in the business of selling insulating equipment held reasonable in view of
extraordinary circumstances of war years. H. W. Porter & Co....
Reserves-Reasonable Addition.-Textile factor's addition to reserve in
excess of original returns shown to be excessive in view of past history,
general business conditions and the fact that wartime textile business
negated any large amount of unpaid accounts. Mill Factors Corpora-
tion..
Depletion-Oil Properties.-Fair market value of properties and value
of stock determined. Amos L. Beaty & Co..
Depreciation-Pre-1913 Depreciation Adjustment.-Sec. 113, I. R. C.,
does not require adjustment in depreciation basis for pre-1913 depreciation.
Union Pacific Railroad Co..........
Depreciation-Successor Corporation.-Transfer of assets for stock,
gaining immediate option on the stock to a second corporation also trans-
ferring its assets to the new corporation, was not, in fact, a transfer of prop-
erty for stock and did not constitute reorganization under sec. 112 (g) (i)
(D), I. R. C. Basis of the first transferor in the assets for depreciation
and excess profits tax may not be continued. Ericsson Screw Machine
Products Co..
Stock-Reorganization after Purchase. Purchase of stock by two
companies followed by reorganization to form petitioner's predecessor
held, not be be steps of a single transaction. Petitioner therefore held
stock at other than cost basis of transferor, after acquiring it through
nontaxable reorganization. Cost basis not available in computing invested
capital for excess profits tax. ACF-Brill Motors Co...
Husband and Wife-Sale of Business.-Sale of a business by husband
to wife, with her note given in payment, was a bona fide sale, and income
from that business is not taxable to husband. Thomas B. Lilly..........
CAPITAL EXPENDITURES
Commissions.-Commission paid by lessors for securing a 5-year lease
on their oil properties was a capital expenditure. L. S. Munger.
Capital Contributions or Cost of Goods Sold.-Corporation formed to
procure meat for member dealers during wartime shortages required con-
tributions to make up losses. Held, such contributions were capital, not
an increased cost of meat (which would be in violation of O. P. A. ceilings).
Harry Sackstein__.
Expense or Capital Expenditure-Repairs.-Cost of replacing rotted
portions of floors and walls which did not appreciably prolong the original
useful life of the property was an expense of trade or business. Farmers
Creamery Co. of Fredericksburg, Va___.
Rent or Purchase Price-Royalties for Use of Plant.-Petitioner entered
stoker business on agreement with owners to pay royalties on each stoker
sold but if royalties should reach $70,000 title would vest in petitioner.
There was no obligation to buy. Held, royalties were in fact purchase
price and are not deductible as rent. Chicago Stoker Corporation____
Taxes: See TAXES, Paid for Another.
Trade Name Infringement Action.-Suit to enjoin the use of peti-
tioner's trade name by a competitor was to protect title to the trade name,
not to protect or maintain income, and was a capital expenditure. Food
Fair of Virginia, Inc.........--
Breeding Cattle.-Sale of breeding cattle not held primarily for sale
to customers resulted in capital gain. Franklin Flato_.
Foreign Exchange.-Loss on conversion of Peruvian and Chilean money,
paid for construction work and not held for investment is deductible as
ordinary loss. Foundation Co.....
Holding Period-Effective Date of Sale.-Sale was completed on the
date petitioner made formal conveyance, not the date of the agreement to
sell or of election by purchaser under an option to buy. L. M. Fischer__
CAPITAL GAINS AND LOSSES-Continued
Liquidation of Affiliate-Effect of Intervening Trust.-Banking Act of
1933 required petitioner, a national bank, to liquidate its affiliate. Peti-
tioner had stock and assets of the affiliate transferred to it in trust. On
final liquidation of the affiliate by the trust in 1943, the petitioner suffered
a loss.
Held, loss on sale of stock of the liquidated affiliate was a long
term capital loss. The trust held the stock as a capital asset even though
it might have been held for sale to customers had the bank held the stock
outright. Merchants National Bank of Mobile
Liquidation-Purchase of Remaining Stock and Liquidation.-Petitioner,
sole active stockholder, purchased remaining stock of corporation at
higher than market value of the assets represented thereby, and liqui-
dated the corporation in order to continue the business as a sole proprietor-
ship. Held, (1) purchase of remaining stock and liquidation was in sub-
stance purchase of assets to the extent of the interest represented by that
stock and no capital loss was realized; (2) petitioner realized capital gain
on the interest in assets represented by his original stock. Ruth M.
Cullen..
Motion Picture Rights. The proceeds of sale by playwright of the mov-
ing picture rights to his plays are ordinary income, since those rights were
not property used in the playwright's business, but were held primarily
for sale to customers in the course of his business. Joseph A. Fields.... 1202
Real Property-Construction Guarantees.-Escrowee of construction
loans, which guaranteed completion of real estate projects and insured
titles, completed and sold the property. It actively engaged in the real
estate business for that purpose and its loss is deductible as an ordinary
loss. Lawyers Title Co. of Missouri..
Real Property-Deferred Payment.-Petitioners sold property in 1944
for $70,000 plus a note for $10,000 secured by a second lien. They re-
ported gain on the $70,000 only for 1944. The $10,000 note, paid in full
in 1945, resulted in ordinary income in 1945, not capital gain on a de-
ferred payment. A. B. Culbertson__.
Sale of Accounting Practice.-Amounts received by petitioner on sale
of his accounting practice to a firm, of which he then became a limited
partner, are taxable as capital gains. Richard S. Wyler..
Sale of Business-Individual Assets Exceeding O. P A. Ceilings.-
Petitioner in fact sold its embroidery business, not merely machines and
equipment. O. P. A. ceilings on machinery are therefore not material.
August Braun
Sale or Joint Venture Agreement.-Agreement under which petitioner
received cash from associate who could elect to receive repayment or take
title to interest in property involved, and elected to take title, was a sale,
not a joint venture agreement. L. M. Fischer_
Securities-Worthless Stock-Recognition of Corporate Entity: See
CORPORATIONS, Corporate Entity.
Theft-Proof.-Evidence does not prove that the gold coin and silver
gravy ladle involved were stolen rather than mislaid. John L. Seymour. 1111
COMMISSIONER OF INTERNAL REVENUE
Acquiescence-Erroneous Interpretation.-Commissioner's action in
following an erroneous expression of the law, before the question of the
proper rule to be applied in determining whether a transfer to a trust re-
sulted in the transfer of a present or a future interest had been settled by
the Supreme Court, does not have the binding effect of a Treasury Regu-
lation. Estate of Louis Stockstrom___
Estoppel-Acceptance of Profit Sharing Plan.-Commissioner is not
estopped in disallowing petitioner's deduction for profit sharing plan,
later determined not to conform to the statute, by reason of having al-
lowed deductions for prior years. South Chester Tube Co..
Estoppel-Acceptance of Returns. Acceptance by Commissioner of
petitioners' returns, which did not mention a $10,000 note given in pay-
ment of real property held, not an admission by Commissioner that the
note had a valuation of zero. A. B. Culbertson....
Farm Income; Allocation-Farm Improvements Acquired by Inherit-
ance.-Income from operation by husband and wife of his separately
owned farm held to have been allocable one-third as the rental value of the
farm and two-thirds to the operation thereof by husband and wife. The
two-thirds is community income. C. Clifford Minnick_.
Back Pay-Compromise Payment in Breach of Contract.-Payment in
compromise of suit for breach of employment contract held, not "back
pay" attributable to prior years in which the contract would have run.
(Sec. 107 (d), I. R. C.). Estate of Lester O. Stearns.
Back Pay Owner of Secret Patent.-Petitioner, inventor and president
of a corporation whose only assets were patents classified by the Govern-
ment, received no pay during the years of adapting the patents to Navy
uses, since the corporation had no income. On securing Government
contracts, the corporation immediately paid petitioner a salary for past
services. Held, petitioner is entitled to prorate the salary over prior
years. Sec. 107 (d) (1) and (2) (iv). Frederick H. Hagner_
Essay Award.-Award for manuscript on postwar employment given by
Pabst Brewing Co. for advertising purposes was compensation for services.
Allocation of percentage of award to wife for her assistance denied. Her-
bert Stein_
Payable After Death-Income or Gift.-Continuation of decedents'
salaries for 1 year after death payable directly to the estates was compen-
sation for past services and did not represent gifts from the decedents'
employer. Estate of Edward Bausch_.
Period of 36 Months.-Petitioner's services prior to 1943 in connection
with an estate as an accountant may not be tacked on to services as trustee
to make 36 months total services required by the statute for allocation of
income. Gordon S. Wayman...
Period of 36 Months-Author.-Petitioner who collected notes and
worked on a book for more than 36 months held entitled to allocate his
income over that period (sec. 107 (b), I. R. C.) even though his earliest notes
were not incorporated in the book. Iliff David Richardson -
Period of 36 Months-Corporate Officer.-Lump sum payment for peti-
tioner's services in preparing patent proceedings over a period of 36 months
or more was separate from his regular officer's salary and allocable over the
entire period under sec. 107 (a), I. R. C. E. A. Terrell____
Period of 36 Months Partnerships. Allocation of partner's income re-
ceived in 1943 and 1945 over the period in which it was earned by his
partnership allowed although he had not been a member of the firm during
the entire period. Sec. 107 (a), I. R. C. Elder W. Marshall
Salaries-Reasonable Allowance-Renegotiation: See RENEGOTIA-
TION, Salaries.
Services Rendered in Prior Years-Management Partnership.-Retro-
active compensation paid to a newly formed management partnership
composed of corporate officers and directors who had individually rendered
services prior to the date of the agreement without compensation held,
deductible as ordinary and necessary business expenses. (Lucas v. Ox
Fibre Brush Co., 281 U. S. 115.) Associated Theatres Corporation....
Widow's Pension: See PENSIONS AND PENSION PLANS.
COMPUTATION OF TAX
Inadequate Records.-Petitioner, employed on a percentage basis to
secure liquidation of a company and sell assets of the corporation, did not
keep complete records. Amounts estimated from the evidence are allowed
for his traveling and other expenses. Frank Hodous_
Income Less Than $5,000—Validity of Sec. 400.-Tax based on use of
the table of sec. 400, I. R. C., is valid. Gussie P. Chapman-
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