EXPENSES-Continued.
I. OPERATING BUSINESS EXPENSE.
1. Commissions on Sales of Securities paid by one who is not a dealer are
not deductible. Estate of Benjamin Loewnstein___
2. Expense incurred in earning commissions is deductible as business
expense.
Edwin J. McEnaney-.
3. Finance Charges in Addition to Legal Interest. Payment of 25% of
profits to president, in addition to usual interest, for advances made, held
not an ordinary business expense. Geo. J. Haenn, Inc..
4. Payment made to be relieved from guaranty given when stock was
issued, held made for business purposes and is deductible. Camp Mfg. Co.
5. Contribution to organization formed to influence legislation which, if
passed, would benefit taxpayer in his profession, is deductible. Luther
Ely Smith.
6. Expenditures, such as costs of drilling, or payments to be made
grantors from profits, required to be made as conditions precedent to passing
of title, are not deductible as operating expense. F. H. E. Oil Co....
Burton-Sutton Oil Co...........
7. Publishing Business; Circulation Structure. The cost of establishing
circulation is a capital expenditur. but cost of supporting or maintaining
the structure is deductible expense. Held, additional expenditures resulting
in new business, as well as in replacements of lost business, is to be allo-
cated, and only amount attributable to restoration of former circulation is
deductible. Journal of Living Publishing Corp--.
8. Employees' Annuities; Premiums Paid. Under the contract em-
ployees had no rights until reaching stated age; employer reserved right
to cash surrender value and was beneficiary if annuitant died before ma-
turity. Held, liability was not binding; employer could revest cost in
itself, and premiums are not deductible. Wilcox Investment Co..
1. Expenses attributable to income not subject to tax are not deductible.
Sec. 24 (a) (5), I. R. C. National Engraving Co_ .
James F. Curtis-
2. Accruals Not Paid Within Two and One-Half Months After Close of
Period. The prohibited deduction is based upon the existence of three
conditions, and the absence of one eliminates the bar. Michael Flynn
Mfg. Co..
3. Id. Accrued salaries credited to accounts of payees are construc-
tively received by payees and required to be reported by them for tax,
whether or not claimed. Held, the condition in sec. 24 (c) (2), I. R. C.
being absent, deduction may be claimed. Id.
III. COMPENSATION PAID FOR PERSONAL SERVICES.
1. Salaries. Amount representing reasonable pay for services performed
determined. Pierce Estates, Inc...
2. Id. Expenses for research assistants, etc., in connection with
publications, prepared for purpose of demonstrating author's scholarship,
not for purpose of becoming either an author or a publisher, held, not in-
curred in carrying on a business, and not deductible. James M. Osborn. -
IV. LEGAL EXPENSES.
1. Defense of Title. Costs of actions brought for return of capital
assets or to defend title are not deductible. Margery K. Megargel..........
James C. Coughlin.
2. Id. Effect of Sec. 121, Act 1942. In Bowers v. Lumpkin, 140 Fed.
(2d) 927, it was held that the alleviation accorded by the section respect-
ing certain nontrade and nonbusiness deductions, previously not deduct-
ible, does not abrogate the settled rule that expenditures to defend title are
capital items. James C. Coughlin -
3. Id. Condemnation Proceedings. The important factor in defend-
ing against condemnation is that the litigation costs are made to prevent
property from being taken. Held, not expended to defend title, and are
deductible as business expense. (L. B. Reakirt, 29 B. T. A. 1296, followed.)
4. Id. Reg. 94, sec. 24 (a) (2), art. 24-2, held not applicable, Id.
5. Id. Action brought in form of trespass to try title was in fact an
action to determine right to income, and costs are deductible. Pierce
Estates, Inc...
6. Cost of Defending State Charge of anti-trust law violation, held
related to taxpayer's continuance in business and deductible. Longhorn
Portland Cement Co.--
7. Id. Where suit was closed by compromise to avoid publicity and
protect future business, payment was not penal in nature, and is deduct-
ible. Id.
V. NONTRADE AND NONBUSINESS. See IV, 2-4, infra.
1. Investment Counsel; Litigation Involving Right to Income. Held
such expenditures are related to production of income and are deductible.
Sec. 121, Act 1942. Elma M. Williams....
2. Expenses Related to Income Tax Matters. Preparation of returns or
refund claims is not related to production of income and costs are not
deductible. Ralph J. Green_.
3. Id. Where litigation related to production of income with resultant
tax consequences, cost of resisting assessment is deductible. Charles N.
Manning
VI. TRAVELLING, SUBSISTENCE, AND ENTERTAINMENT.
Expenses for travel, board and lodging, in pur-
suit of taxpayer's regular employment away from his home city are de-
ductible. Harry F. Schurer__-
2. Entertainment. Reduction by Commissioner of amount claimed
sustained for lack of evidence proving expenditures. Edwin J. Mc-
Enaney-.--
FORGIVENESS OF INDEBTEDNESS. See ACCOUNTING, 11; EXCESS
PROFITS TAX, 9.
FRACTIONAL PERIODS. See TAXABLE YEAR.
See ASSIGNMENTS AND GIFTS, 1.
FUTURE SERVICES; ACCOUNTING
I. Realization of Gain or Loss:
(1) Nature of Transaction, p. 1309.
(2) Year of Realization, p. 1310.
(3) Title to Income, p. 1310.
II. Recognition of Gain or Loss, p. 1310.
III. Basis for Determining Gain or Loss, 1311.
See CAPITAL GAINS AND LOSSES; LOSSES.
I. REALIZATION OF GAIN Or Loss.
(1) Nature of Transaction.
1. Transactions in Treasury Stock. Art. 22 (a)–16, Reg. 94 requires that
to be a taxable transaction the "dealing" in its own shares must be analo-
gous to a "dealing" in the shares of another corporation. Cluett, Peabody
& Co---
2. Id. Where shares had been acquired as a step in an employees' profit-
sharing plan, later abandoned, and were reissued, not to make a sale but to
procure additional working capital, excess of issue price over cost is not
taxable gain. Id.
3. Forgiven Indebtedness, held to have been gratuitous, although debtor
made a partial payment and procured from creditor an extension on its
note, in addition to a cancellation of the balance: debtor realized no in-
Liberty Mirror Works-..
4. Liquidation; Wholly Owned Corporation. At time of liquidation lia-
bilities exceeded assets, and evidence established that good will had no
value. Held, sole stockholder who received its assets and assumed its lia-
bilities realized no gain. D. K. MacDonald___
5. Sales; Determination of Selling Price; Assumption of Mortgage. Vend-
or inherited real estate encumbered by a mortgage which she did not as-
sume. Held, upon a sale for cash and assumption of mortgage by vendee,
amount of the latter is not to be included as part of price realized from the
sale. Beulah B. Crane....
6. Id. Insolvent Vendors; Cash and Release From Liabilities. An in-
solvent corporation sold all assets for a consideration, in excess of their
cost, consisting of cash and release from current obligations and a note.
Held, corporation became solvent to extent of cash received, and taxable
gain is limited to that amount. Texas Gas Distributing Co.
7. Id. Book Entries transferring reserves to surplus made before sale did
not change corporation's condition as to solvency, and resulted in no tax-
able gain. Id.
8. Redemption of Bonds at less than par by insolvent taxpayer not rend-
ered solvent by the transaction, results in no taxable gain. Kramon De-
velopment Co...
9. Exchanges. Option warrants received in an exchange of debentures
for stock constitute other property and their value is gain realized by the
exchange. James F. Curtis...
10. Id. Method of distribution is not determinative, and acceptance of
stock in lieu of option warrants does not convert exchange into one of stock
for stock. Id.
11. Id. A mere exchange of common for new preferred stock, without
effecting any changes in surplus account, made for no business purpose,
but solely for the convenience of stockholders making the exchange, does
not result in realized income. Louis Wellhouse, Jr.---.
(2) Year of Realization. See LOSSES, 11.
12. Notes; Constructive Receipt. As part consideration for transfer of oil
and gas leases vendee agreed to discharge taxpayer's indebtedness to C.
Vendee's notes were given to C in tax year; a part was redeemed in same
year and remainder in succeeding year. Held, notes were constructively
received by vendor in tax year, and to extent of their fair market value
were then taxable. D. D. Oil Co.
13. Id. Fact that creditor "C" did not release taxpayer but accepted
vendee's notes as collateral only does not affect this decision. Id.
14. Condemnation Award With Interest is taxable for year decree is en-
tered and payment becomes determinable, rather than for year payment
is received where accrual basis is used. Koppers Co...
15. Sole Stockholder or Corporation. Corporate entity is to be disregarded
where facts establish that it transacted no business and was organized
solely to serve its stockholder's purposes. Thomas K. Glenn__
16. Id. After corporate dissolution, but before transfer of assets, sole
stockholder contracted to sell assets. Held, gain is taxable to stockholder.
George T. Williams__.
17. Trust or Corporation. Where dissolution is effected by means of a
trustee income during statutory dissolution period is taxable to the cor-
poration, not to the trust. (Art. 22 (a)-21, Reg. 101.) First National Bank
of Wichita Falls____
II. RECOGNITION OF GAIN OR LOSS.
1. Exchange Pursuant to Reorganization. A corporation in liquidation
before all assets had been distributed formed a new company to which
remaining assets were transferred. Stockholders of liquidating company
exchanged its shares for those of new corporation. Held, gain or loss is not
recognized. Morley Cypress Trust, Schedule “B”.
2. Id. Notes surrendered by creditor to debtor for debentures, in same
amount as previous indebtedness, and stock of debtor, held not securities
and as to them exchange is not nontaxable. Sisto Financial Corp., 47
B. T. A. 425, distinguished. Neville Coke & Chemical Co..
3. Id. Since debentures received were for same amount as notes
surrendered, value of stock received in addition is the taxable gain. Id.
III. BASIS For DetermINING GAIN or Loss.
1. Basis of Zero. A devisee of realty encumbered by a mortgage,
equivalent to its value when inherited, who during her tenure neither
reduced principal nor paid interest has a basis of zero upon its sale. Beulah
B. Crane__
2. Id. Where previous owner had recovered cost through annual de-
ductions, basis to those acquiring by operation of law or by gift is zero.
Pierce Estates, Inc.
Catharine G. Shatzer--.
3. Acquired by Exchange. Shares acquired in 1917 in exchange for other
stock were sold in tax year. Held, 1917 Act contained no nonrecognition of
gain on exchanges clause and basis when sold is fair market value at time of
exchange in 1917. George S. Gaylord..
4. Acquired by Gift; Sale of Life Insurance Contract. Donee is entitled to
use donor's basis plus premiums paid after acquisition. Haverty Realty &
Investment Co....
5. Acquired by Reorganization. Right to Use Transferor's Basis depends
upon complying with all conditions described in sec. 112 (b) through (e),
inclusive, Act 1934, as amended by 1939 Act. New Jersey Mortgage &
Title Co..
6. Community Estates. In making sales of the assets of an estate pre-
⚫viously owned in community, executor must use value at date of deceased
spouse's death for one-half of property sold and cost to the community for
the one-half belonging to surviving spouse. Estate of James F. Waters---.
7. Cost Determinations; Demolition of Building. Price paid for land and
building must be allocated to determine basis applicable to building
separately. George S. Gaylord____
8. Id. Notes of Vendor Canceled in a collateral agreement at time
property was purchased, unrelated to purchase contract, may not be added
to basis when property is later sold, as part of its cost. J. V. Vandenberge
9. Id. Stock Acquired at Option Price. Right to purchase stock of an
estate at less than market was exercised by legatee. Held, basis upon sale
of stock is option price paid, and may not be increased by any figure
representing a value for the option right. J. Gordon Mack.
10. Liquidations; Gains of Stockholders. Corporate earnings at time of
liquidation, a factor in determining amount of gain, must include excess of
percentage depletion deductions over depletion based on cost. Jacob H.
Wood_..
I. What Constitute Gifts, p. 1311.
II. Valuation of Gift, p. 1312.
III. Net Gifts, p. 1312.
IV. Liability for Tax, p. 1312.
V. Computation of Tax, p. 1312.
I. WHAT CONSTITUTE GIFTS.
1. Community Property; Gifts Between Spouses Prior to July 1927.
At date of gift wife's community interest was a mere expectancy, the re-
lease of which in consideration for transfer of community assets to her as
her separate property, is not a fair consideration. Held, transfer was a
taxable gift. Estate of E. Clemens Horst__
2. Conversion of Separate Property Into Community Property.
separate and community funds of a business were commingled and allowed
to remain in the business, a written declaration by spouses that all property
be community, results in a gift to wife of one-half of husband's separate
property. Herbert L. Damner
3. Incomplete Gift To Trust. The reservation by grantor of power to
divert income and corpus to others than named beneficiary renders gift
incomplete and not subject to gift tax, but income as distributed is then a
gift and is subject to the tax. William Fleming--.
4. Gift by Irrevocable Trust. Settlor gave his mother the life income of
an irrevocable trust, naming himself and two others as trustees. By agree-
ment of a majority, trustees could transfer entire corpus to life beneficiary
upon her request. Held, donor parted with dominion over trust res and its
entire value, unreduced by actuarily-valued remainders and reversions,
is a taxable gift. John A. Griswold, Jr..
GIFT TAX-Continued.
II. VALUATION OF GIFT.
1. Stock. Use of median between high and low sale prices on date of
gift rejected in case of transfer of large block, and valuation based on
secondary distribution method is approved. Sewell L. Avery---
2. Id. Use of median between high and low sale prices for a large
block approved, where that figure is substantiated by other evidence.
Vivian B. Allen__
3. Stock Subject to Restrictive Sale Agreement. Value for gift tax is not
limited to amount stated in restrictive agreement as to future sales, and
value determined by Commissioner, based on all factors is approved.
Raymond J. Moore..
4. Future Interests are to be valued in same manner as present interests,
not discounted to present worth. Vivian B. Allen---
5. Id. Actuarial computations, not refuted by evidence of record,
accepted as establishing value for interest received. Fidelity-Philadelphia
Trust Co...
1. Exclusions; Future Interests. Trust income was payable to mother
until child became of age. Held, gift to child was a future interest and no
exclusion is allowable. Margaret A. C. Riter_.
2. Id. Discretion as to distribution to beneficiary of trust income was
vested in trustee and parents; corpus and accumulations were payable upon
attaining 35 years of age. Held, gift was a future interest, and no exclusion
is allowable. Vivian B. Allen_.
3. Id. Present Interests. Gift by means of a trust was a present interest
as to one donee but value is not determinable because trustee had power
to terminate trust and distribute corpus. Held, no exclusion is allowed.
Margaret A. C. Riter----
4. Id. Trust gave trustee the discretionary power to decide whether
to pay direct to minor or to his guardian. Held, trustee had no power to
withhold the income; gift was a present interest, and exclusion is allowable.
Madeleine N. Sharp--
5. Specific Exemption. Donor who, under a mistake of law, fails to
claim exemption on gift tax return may claim it in a redetermination pro-
ceeding. Herbert L. Damner__.
Donees, Fiduciaries, Trustees, etc., are liable as transferees for gift tax
due from donor to extent of value of gift received and it is immaterial that
donor is solvent. Margaret A. C. Riter -
Fidelity-Philadelphia Trust Co.___
1. Net Gifts of Prior Years must be corrected for excessive exclusions
previously allowed in computing current gift tax. George James Nicholson_
2. Id. Revaluation of prior gifts denied for failure to plead properly.
HUSBAND AND WIFE. See COMMUNITY PROPERTY; CREDITS, 7;
INTEREST, II, 1.
Marital partnerships; validity. See PARTNERs, 1–7.
State Income Tax, under California statute is the joint and several liabil-
ity of both spouses, and payment by husband after divorce is not the pay-
ment of the liability of another. Held, entitled to the deduction.
Jolson_...
INSURANCE. See ESTATE TAX, I, 10, 16, 17; ESTATES AND TRUSTS,
II, 11-14.
1. Assigned Contracts. Where assignee paid no consideration for the
transfer, and transferor continued to pay premiums, proceeds paid assignee
upon death of the insured are to be excluded from gross income. Sec. 22 (b)
(2), I. R. C. Haverty Really & Investment Co.__
2. Purchased With Community Funds. Although usual incidents of
ownership were stated to belong to the insured spouse such contracts are
not separate property of the insured. William Fleming__
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