EXCESS PROFITS TAX-Continued
Equity Invested Capital Property as Paid-in Surplus. The peti-
tioner's equity invested capital includes property purchased by stock-
holders and turned in to petitioner, excluding purchase money mortgage
which petitioner assumed. Paid-in means money or property transferred
to the corporation free and clear of any obligations except as may be
represented by capital stock. Lansdale Structural Steel & Machine
Co..
Equity Invested Capital Property Paid In for Stock.-Petitioner, a
power company, was formed to take over the business of a subsidiary com-
pany which ceased business due to the Public Utility Holding Company
Act of 1935. The old company transferred property to the petitioner in
exchange for its stock, by means of an underwriter which paid cash for
the stock to the old company. Held, the value of the property, and not the
amounts paid for the stock, should be included in the petitioner's equity
invested capital. The assets were in fact property paid in for stock, basis
of which is the amount the underwriter received for that stock on the
open market. Black Hills Power & Light Co..
Equity Invested Capital-Stock-Cost Basis.-Five individuals ac-
quired options on stock of A Co., incorporated petitioner, and transferred
the options to it. Petitioner issued its stock to the individuals, exercised
the options, and liquidated A Co. Held, the various steps constituted
a single transaction of purchase and the stock had a "cost basis" under
sec. 761, I. R. C. John Simmons Co..
Equity Invested Capital-Successor Corporation.-Transfer of assets
for stock, gaining immediate option on the stock to a second corporation
also transferring its assets to the new corporation, was not, in fact, a
transfer of property for stock and did not constitute reorganization under
sec. 112 (g) (1) (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..
Excess Profits Credit Abnormal Deductions.-Bad debts during base
period based on defalcations and bad debt losses on accounts receivable
taken over from predecessor were abnormal to petitioner and are disal-
lowed in computing excess profits credit. Denman Tire & Rubber Co..
Excess Profits Credit-Carry-Backs-Sale of Principal Business.-Carry-
back of credits from 1943 and 1944 to 1942 allowed taxpayer which had sold
its principal assets and business and continued to operate a minor branch
of its business during 1943 and 1944. Whitney Manufacturing Co...
Exempt Corporations.-Corporation having no income from sources with-
out the United States is not entitled to exemption under sec. 727 (g),
I. R. C. Douglas Hotel Co..
Exempt Income-Sec. 735-Gas Pipe Line Company.-Held, petitioner,
which received its income from the transportation of gas through its pipe
lines and not from the sale of gas, had no income exempt under sec. 735,
I. R. C. Barnes Transportation Co..
Inconsistency with Prior Income Tax Liability-Sec. 734.-Use of
different rate of depreciation in determining income in the excess profits
tax years without recomputing base period income by changing the rate of
depreciation used by petitioner does not affect excess profits credit, but
excess profits income, and sec. 734 is not applicable. Vegetable Farms,
Inc.
Invested Capital Reserve Reduction.-Reserves for depreciation were
for replacement of capital assets. Upon removal by petitioner's sole
stockholder of reserves for depreciation as well as all earnings, invested
capital is reduced by the amount of such reserves. Douglas Hotel Co.. 1136
Sec. 721 Relief Jurisdiction.-Tax Court has jurisdiction of a petition
claiming relief under sec. 721 although petitioner did not furnish the
necessary information therefor on its return as required by Regs. 112, sec.
35.721-3. H. S. McClelland, Inc..
Sec. 721 Relief Magnesium Smelting Process.-Income derived from
research in magnesium smelting which had extended from 1936 to 1943
was abnormal and allocable to prior years. Toledo Engineering Co...---
Sec. 721 Relief Research and Development.-Purchase of existing
knowledge is not research and development. Toledo Engineering Co..
EXCESS PROFITS TAX-Continued
Sec. 721 Relief-12-Month Period.-Petitioner failed to show that ex-
perimental work had not been completed when the contract under which
income was received was made or that the work extended over a period of
more than 12 months. Held, the income is not allocable to years prior to
the tax year. H. S. McClelland, Inc...
Sec. 722 Relief-Base Period Depression-Prohibition.-Prohibition
was not a temporary event, whatever its economic consequences may have
been, but a legislative event, and not a basis for constructing base period
net income. Acme Breweries__.
Sec. 722 Relief Change in Character.-New contract in 1939 consti-
tuting petitioner a direct insurance agent rather than subagent of another
company, resulting in higher earnings, was a change in the character of the
business to which it was committed before 1940. Wisconsin Farmer
Co
Sec. 722 Relief Change in Character-Brewery.-Manufacture and
sale of beer in 1933 was not "immediately prior to" the base period under
sec. 722 (b) (4), I. R. C. Acme Breweries__
Sec. 722 Relief Change in Character-Bus Company.—(1) Addi-
tion of new bus route not a qualifying factor without showing that profits
would have been greater had it been in operation two years earlier. (2)
Annual mail carrying contract award applied to prior years for credit
adjustment. (3) Mere addition of improved equipment to replace old or
to meet expanding business is not a change in the business. Suburban
Transportation System.
Sec. 722 Relief Claim for Relief-Limitations: See STATUTE OF
LIMITATIONS.
Sec. 722 Relief Commencement of Business During Base Period-
Construction of Normal Earnings.-Air conditioning company's recon-
struction of base period income based on experience of the construction
industry held, erroneous, since petitioner was not a member of the con-
struction industry. Pabst Air Conditioning Corporation__
Sec. 722 Relief Commencement of Business During Base Period-
Fair and Just Amount for Normal Earnings.-Petitioner, formed during
the last months of the base period, may not use base period experience of
its affiliate to establish a "fair and just" amount to be used as normal
earnings under sec. 722 (b) (4), I. R. C. This base period experience had
previously been used by another affiliate. Industrial Loan Society,
Inc., (Md).
Sec. 722 Relief Constructive Average Base Period Net Income-
Failure to Construct.-Petitioner, organized in 1940, had benefit of good
will not includible in invested capital. In its business, capital was not an
important income producing factor. It, however, failed to offer sufficient
evidence for determination of a fair and just amount representing normal
earnings to be used as constructive average base period net income. Held,
relief under sec. 722 (c), I. R. C., denied. Danco Co.
Sec. 722 Relief Industry Wide Depression-Air Conditioning Busi-
ness.-
.-Application for relief by air conditioning business based on base
period industry wide depression in the construction industry held, denied
for lack of showing that petitioner was depressed because of industry wide
conditions or that petitioner was a member of the construction industry.
Pabst Air Conditioning Corporation
Sec. 722 Relief-"Other Factors" (Sec. 722 (b) (5)).—Amortization
deductions during base period years did not distort normal income or
qualify petitioner for construction of income under sec. 722 (b) (5), I. R. C..
Clinton Carpet Co.
Park & 46th Street Corporation.
Sec. 722 Relief-Predecessor's Experience. Use of predecessor's
base period experience held reliable notwithstanding practice of prede-
cessor of subletting part of its work. Pabst Air Conditioning Corpo-
ration..
Sec. 722 Relief-"Other Factors" (Sec. 722) (b) (5)).-Early opera-
tional losses on bus route did not result in distortion of income.
ban Transportation System.
EXCESS PROFITS TAX-Continued
Sec. 722 Relief Temporary Economic Circumstances.-Active compe-
tition did not constitute a price war or depression of business due to tem-
porary economic circumstances unusual in the case of petitioners' waste-
paper business. Relief denied. Winter Paper Stock Co
Sec. 722 Relief Temporary Economic Circumstances Competition.-
Petitioner, a liquor dealer, had keen competition during base period.
Held, there was no showing of temporary economic event depressing peti-
tioner or its industry under sec. 722 (b) (2). Keen competition was not
a "ruinous price war." Harlan Bourbon & Wine Co....
EXEMPT INCOME
See EXCESS PROFITS TAX; Exempt Income.
EXEMPT ORGANIZATIONS
University-Owned Business.-Business not connected with education
operated for profit, though income goes to an educational institution, is not
an exempt organization under sec. 101 (6) and (14), I. R. C. C. F.
Mueller Co.
Traveling Air Pilot.-Air pilot's traveling expenses not shown to ex-
ceed the amount allowed by the Commissioner. Joseph H. Imeson.......
Traveling Computation.-Living expenses required by petitioner's
travel in the United States and foreign countries, held, in fact, to be not
less than the $8 per day allowed by petitioner's employer. Idus A. Inglis
Traveling-Line of Duty.-Petitioner failed to show that traveling
expenses were in performance of his duties of employment and may not
deduct such expenses. Raymond E. Kershner__
Traveling Railway Employee.-A railway postal clerk left his home
town at 8 p. m. and arrived at the end of his route at 10:40 p. m., where he
ate a meal each day. He arrived back at home at 2:15 a. m., being em-
ployed about 7 hours. The cost of the meals was personal expense and
not deductible under sec. 23 (a) (1) (A), I. R. C. Fred Marion Osteen__
EXPENSES-NONBUSINESS
Medical Household Conveniences.-Disallowance of deduction for
cost of oil-heating furnace which was secured with a medical certificate
and installed to replace a coal furnace the ashes from which injured tax-
payer's health. John L. Seymour__
EXPENSES-TRADE OR BUSINESS
Advertising.—Held, show horses and dogs were acquired and maintained
for advertising purposes of petitioner's business and expenses in con-
nection therewith were deductible. Rodgers Dairy Co.........
Automobile Allocation, Business and Personal Use.-Expenses and
depreciation of automobile purchased for officer and used by him to a small
extent for personal purposes allocated as business or personal according to
extent of use. Rodgers Dairy Co...
Entertainment Expenses-Petitioner's Suppliers.-Cost of liquor served
in office of petitioner to representatives of business supply house held,
expended on behalf of the petitioner and deductible as ordinary and
necessary expense. Rodgers Dairy Co..
Expense or Capital Expenditure-Repairs. Oil-proofing of basement to
permit continued operation, not for expansion, of plant was essentially a re-
pair, an ordinary and necessary expense. Sec. 23 (a), I. R. C. Midland
Empire Packing Co...
Independent Contractor or Employee.-Insurance agent in subordinate
office held to be an employee, not an independent contractor, because sub-
ject to the control of higher offices. "Trade or Business" expenses there-
fore were not allowable, because petitioner was an employee. Raymond
E. Kershner_.
Kickbacks. Kickbacks to oculists who referred their patients to peti-
tioners disallowed as against public policy. Thomas B. Lilly_ -
O. P. A. Penalty.-Allowance of deduction for voluntary payment to O. P.
A. for inadvertent_overcharge not considered to be contrary to public
policy. Farmers Creamery Co. of Fredericksburg, Va..
EXPENSES-TRADE OR BUSINESS-Continued
Royalties-Royalty-Free License with Stockholder.—Reasonable com-
pensation paid to stockholders for use of invention during term of royalty-
free license in which determination of a specific royalty was be to made, held,
deductible as an ordinary and necessary expense. Heatbath Corporation.
Salaries-Reasonableness.-Disallowance of salaries of officers not
performing services for an inactive corporation sustained. Vegetable
Farms, Inc.
Salaries-Widow's Pension: See PENSIONS AND PENSION PLANS.
Year Deductible.-Advanced funds expended during the development
of an invention which had to be returned to the backer after its failure,
were expenses in the year paid out, and not deductible in the year the funds
had to be repaid to the backer. Estate of L. O. Koen.
Year Deductible Forfeit of Escrow Deposit.-Escrow deposits under
1945 agreement for goods to be delivered in 1947, forfeited not before 1946,
did not constitute business expenses in 1945. Samuel Hellerman.............
FOREIGN CORPORATIONS
Residence. Petitioner, not authorized by state law to do business,
routed two minor orders through its agent. Held, petitioner was not a
resident corporation under sec. 231 (b), I. R. C., tests of which are both
qualitative and quantitative. Linen Thread Co., Ltd....
FOREIGN CURRENCY
Valuation. Gain or loss on exchanging Chilean pesos for dollars is to
be measured by value on the free exchange rather than at official rates.
Foundation Co..
Compromise Settlement.-Sale of notes to maker for 60 per cent of face
value, in order to obtain cash, resulted in deductible business loss. West
Coast Securities Co...
Loss-Carry-over.-Insolvent corporation in the book business acquiring
a successful container business is entitled to carry over the net loss and
excess profits credit from the old business to the new. A. B. & Container
Corporation.
Recognition Recapitalization-Modification of Bond Obligations.
Modification of bonds as to interest charges and payments approved by a
court resulted in a nontaxable recapitalization under sec. 112 (g), which did
not change the basis in hands of petitioner. Union Pacific Railroad
Co.....
Closing Agreement Effect on Estate Tax.-Closing agreement as to
gift tax liability of wife does not bar inclusion of the property in husband's
gross estate for estate tax. Estate of E. A. Showers
Completed Gift.-Intra-family transfer by petitioner of real estate held a
completed gift although property was reconveyed on petitioner's learning
that his purpose to avoid estate tax could not be achieved.
Board
Future Interests.-Gifts to trust prior to 1938, conferring future benefits
on the beneficiaries, not entitled to annual exclusions, although at that
time common practice was to treat such gifts as to the trust rather than
the beneficiary. Estate of Louis Stockstrom..
Future Interests-Insurance Policies.-Petitioner, by taking out insur-
ance policies for the benefit of each of his children separately, then trans-
ferring all incidents of ownership, including right to change beneficiaries,
to the children jointly, made gifts of future interest, not absolutely vesting
immediately. Spyros P. Skouras.
Valuation-Inclusion of Excise Tax.-For computation of gift tax, the
value of a ring held to include the amount of excise tax paid as part of the
purchase price. Estate of Frank Miller Gould........
Intent to Make a Gift-Transfer of Dominion.-Securities dealer's
instruction that accounts be opened for his children, without transfer of
stock certificates or relinquishment of dominion, did not amount to a
transfer of the stock and petitioner may not deduct interest he paid thereon.
Ludwig Bendix........
Assignment: See also PARTNERSHIPS, Transfer of Interest-Trusts;
ESTATES AND TRUSTS, Trusts.
Assignment-Literary Rights.-Petitioner, a British author, assigned
one half of his interest in a manuscript to his wife. Held, the income from
sale of the literary work was taxable to petitioner alone. Sax Rohmer... 1467
Bequest of Income Producing Property.-Payments received under a
contract received by bequest exceeded value of the contract as determined
for estate taxes. Such excess held, income to petitioner, not a part of the
original bequest, not capital gain, and not allocable to years prior to ex-
haustion of basis. May D. Hatch....
Cancellation of Debts.-Cancellation of debts owed the Government
growing out of predecessor's excise taxes was income, not a gift to
petitioner. Denman Tire & Rubber Co...
Constructive Receipt-Company-Maintained Credit Balance.-Credit
balance was maintained on petitioner's account by his employer and was
subject to payment of salaries and expenses incurred by the petitioner.
Held, petitioner was taxable on income as withdrawn from the account
by him through the year and as consistently reported by him. Amounts
credited to petitioner's balance at the time of termination of his employ,
immediately available to him and subject to no further liabilities, held,
constructively received by petitioner during the tax year. C. H. Becker..
Contributions from Customers for Advertising.-Contributions from
petitioner's customers specifically for national advertising campaign were
not taxable income. Commingling of the funds did not destroy their
identity. Seven-Up Co...
Sources Within the United States.-Held, lump-sum payments for
literary rights constitute gross income from sources within the United
States. Petitioner sold both American and Canadian rights in his works
to American periodicals. Since he was a resident of England, he was
taxable only on that portion of the income attributable to United States
rights. Value of the Canadian rights held ascertainable by means of
circulation figures and expert witnesses. Sax Rohmer..........
Sources Outside United States.-Held that amounts credited to a non-
resident foreign petitioner in a New York bank at the direction of a foreign
company were a share of profits of the foreign company, not royalties on
an interest in patents paid to petitioner by a domestic company. Petitioner
was not a holding company having royalty income from sources within the
United States. Hopag S. A. Holding De Participation Et De Gestion
De Brevets Industriels..
Sources Outside United States.-Distributive share of partnership
income earned outside the United States as consulting engineers for the
United States is not excludible from gross income. Other income earned
outside the United States by petitioner, a nonresident, is excludible.
Leif J. Sverdrup-
Sources Outside the United States Residence.-Petitioner, unable
because of travel restrictions to return to Sweden, accepted employ in
New York and established his family there. Held, petitioner was not a
resident of a foreign country. Robert W. Seeley...
Title Corporation or Stockholders.-Petitioner, in liquidation, gave
to its stockholders a bill of sale for stock of another company held by
banks as security for petitioner's debts. Sale by stockholders and appli-
cation to petitioner's debts was not taxable as a sale by the corporation.
West Coast Securities Co___.
United States Possessions-Husband and Wife.-Texas residents,
husband and wife, may not ignore Texas community property law to claim
exemption for income from United States possessions, for which husband
alone would have qualified. Taken together, community income was less
than 80 per cent earned in the United States possession (Puerto Rico).
Francis Mullen.
Year Received.-Check received on December 31, 1942, with request,
complied with, that it not be deposited, was income when cashed. L. M.
Fischer..
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