INSURANCE COMPANIES:

1. Health and Accident Insurance is not included in the term "casualty
insurance" and where substantially all business is of the former type cor-
poration is not exempt under sec. 101 (11), Act 1936 and Internal Revenue
Code. Postal Mutual Indemnity Co

2. Title Companies. Certificates of title are not insurance contracts and
where the major part of the income was from that source, although some
certificates with insured guaranties were issued, taxpayer is not entitled
to be classified as an insurance company. Columbia Title Insurance Co----
INTEREST:

1. State Obligations. Dealer in state warrants who purchases at a dis-
count from payees is not in receipt of tax-exempt interest when warrant is
paid. M. C. Parrish & Co..

2. Id. The Port of New York Authority and the Triborough Bridge
Authority, held to be political subdivisions of a state and interest on their
bonds is exempt from Federal taxation. Estate of Alexander J. Shamberg. -
Estate of Caroline White.

3. Id. Political subdivisions and state instrumentalities discussed and
Helvering v. Gerhardt, 304 U. S. 405, held not applicable. Estate of Alexan-
der J. Shamberg – –

II. DEDUCTION.

1. Right to Deduction. Notes Given in Divorce Settlement constitute a
contractual liability, not a satisfaction of duty to support, and interest
paid when default in principal occurred is deductible. John R. Buchanan

2. Id. Interest on Tax Deficiencies; Transferees. Beneficiaries and
residuary legatees are transferees of estate's assets and liable for estate tax
deficiencies plus interest. Held, entitled to deduction of the interest.
Ralph J. Green__.

3. Id. Inter Vivos Transfers. Amount which accrued before transfer
is the liability of transferor and if paid by transferee is not deductible, but
transferee may deduct that which accrued after transfer. Koppers Co---
Ralph J. Green__.

4. Id. Assumption of Tax Deficiency Liability by Transferee. Where
additional tax against transferor resulted from sales of property trans-
actions, and was not a factor in gain or loss computation, payment by
transferee is allowable, not as interest, but as a loss. Koppers Co---

5. Id. Joint Obligor on Mortgage is personally liable for the debt and
interest paid is deductible. Elma M. Williams..

6. Id. Nature of Security; Capital Investment or Loan. Notes issued
by a family corporation in exchange for outstanding stock, bearing interest
to be determined on basis of profits, and principal of which was subject to
subordination to creditors, held not evidence of indebtedness, and payments
to holders are not deductible. Talbot Mills.......

7. Id. Debentures having no maturity date, no fixed annual return,
and then only by declaration of directors, no remedy for defaulted returns,
held not evidences of indebtedness, and payments to holders are dividends,
not deductible interest. Green Bay & Western Railroad Co___.

8. Id. Preferred Stock Not Evidence of Indebtedness. Amendment to
articles of incorporation by which preferred stock was callable for redemp-
tion on fixed dates, and posting of collateral to guarantee performance do
not convert stock into an indebtedness and dividends paid are not deduct-
ible as interest. Verifine Dairy Products Corp. ---
INTERLOCUTORY DIVORCE DECREE. See COMMUNITY PRO-
PERTY, 2.

INVENTORIES. See AccoUNTING, 12.

INVESTED CAPITAL. See EXCESS PROFITS TAX, 9-11.

1. Unrecognized Gains may not be included in accumulated earnings used
to compute invested capital. (Sec. 501 (a), Second Revenue Act, 1940.)
Butter-Nut Baking Co--

2. Earlier Revenue Acts permitted any realized gain to become part of
invested capital, but 1940 Act permits only recognizable gains to be used.
Id.

JOINT VENTURES:

Gains from Exchange and Sale Transactions are to be included in gross
income, whether or not distributed, and regardless of type of distribution;
i. e., whether in cash or property. James F. Curtis_-
JUDGMENT AND COMPROMISE:

Compromised Litigation. In a suit for the recovery of property com-
promised by the acceptance of cash, there is a recovery of the capital
parted with, but if cash exceeds basis, transaction becomes a sale of capital
assets, and gain is taxable at capital gain rates. Margaret K. Megargel____
JURISDICTION:

1. Scope of Jurisdiction. This Court takes no jurisdiction over proceed-
ings based on invalid or incomplete petitions. First National Bank of
Wichita Falls.

George James Nicholson

2. Id. Claim for Relief Under Sec. 722, I. R. C. Tax Court has juris-
diction only after claim has been filed with and adjudicated by Commis-
sioner, and an amendment to petition filed, without complying with above
does not confer jurisdiction. Uni-Term Stevedoring Co.

Page

648

238

203

596

917

3. Id. Interest on Overpayments. The Court has jurisdiction to find an
overpayment, but not over the issue of interest due thereon.
Genevieve Brady Macaulay

Estate of

350

LEASES:

State owned lands. See EXEMPT INCOME, 1.

1. Technical Requirements. The absence of forfeiture clause for failure
to perform does not convert an otherwise leasing agreement into a sale.
Wesley W. West.__.

2. Id. Absence of lease nomenclature is one factor only to be considered
in arriving at the intent of the parties. Id.

LEGAL PRESUMPTIONS. See ESTATE TAX, I, 8; EVIDENCE, 3.

LIFE INSURANCE. See ESTATE TAX, I, 10, 16, 17; ESTATES AND
TRUSTS, II, 11-14.

LIMITATIONS:

1. Assessment. Commissioner has an additional year within which to
proceed against transferees. Fidelity-Philadelphia Trust Co------

2. Id. Donees are transferees and subject to extended assessment period.
Margaret A. C. Riter...

The ex-

3. Id. Sec. 275 (c), Act 1936; Omissions From Gross Income.
tension of assessment period is based upon omission of items from gross in-
come reported, and the disclosure of income elsewhere in return will not
relieve taxpayer from assessment proposed within the extended period.
M. C. Parrish & Co...

4. Waivers. Bond given in abatement proceedings constitutes a waiver.
Edwin J. Schoettle Co.

LIQUIDATIONS. See LOSSES, 8.

1. Liquidations in December 1938; Computation of Earnings; Treatment
of Excess of Percentage Depletion Allowances Over Those Computed on Cost.
Excess of percentage depletion over cost depletion represents gains realized
by corporation free from tax which are to be restored to earnings account
in determining stockholder's ratable share recognized for tax under sec. 112
(b) (7) (E), Act 1938, when corporation is liquidated. Jacob H. Wood...
2. Id. The term "earnings and profits" as used in sec. 112 (b) (7) (E),
Act 1938 carries same meaning as when used elsewhere. Id.

3. Id. There is no postponement of the tax on earnings, but only on
unrealized appreciation, an unrelated subject. Id.

4. Partial or Complete. Banks organized under the Federal Farm Loan
Act voluntarily liquidated after complying with requirements of the act
which created them; distributions were made over a three-year period
starting after December 31, 1937. Held, procedure was a complete liquida-
tion, gains to stockholders being taxable as long-term capital gain. Charles
N. Manning...

431

670

301

119

712

186

853

LIQUIDATIONS-Continued.

5. Id. Commissioner's contention that the Emergency Farm Mortgage
Act of 1933 required such banks to liquidate without the voluntary act of
stockholders, and that distributions were not pursuant to a bona fide plan
within the meaning of sec. 115 (c), I. R. C., rejected. Id.

6. Complete Liquidation Within Three Years. Under sec. 115 (c), Acts
1936 and 1938, the test is bona fides of plan, and completion after three-
year period is not fatal to taxation to distributees under the section.
Mary Dupont Faulkner..

George G. Mason__.

7. Id. Sec. 112 (b) (6), Acts 1936 and 1938, in which completion
within three-year period is mandatory applies to the liquidation of a
subsidiary and is not applicable. George G. Mason - - -

8. Id. Where dissolution is effected by means of a trustee income dur-
ing statutory dissolution period is taxable to the corporation, not to the
trust. (Art. 22 (a)-21, Reg. 101.) First National Bank of Wichita
Falls--

9. Concurrent Reorganization. There is no rule of law requiring a stat-
utory reorganization to be disregarded because it occurs during a liqui-
dation. Morley Cypress Trust, Schedule "B".

LOSSES:

1. Federal Income and Excess Profits Taxes are not deductible, and pay-
ment made pursuant to judgment on bond given in abatement proceed-
ings does not lose its character as a payment of taxes. Held, fact that
collection was barred when bond was given will not sustain a loss deduc-
tion claimed for year judgment was paid. Edwin J. Schoettle Co-----

2. Nondeductible Losses. The prohibition, in sec. 24 (b), I. R. C.,
against deduction of losses on sales of property between members of a
family is not limited to losses on sales of stock in a corporation, but ap-
plies to all such sales, Lewis L. Fawcett____

3. Id. Loss realized by corporation on sale of farm to a stockholder
who owned more than 50% of taxpayer's stock falls within the prohibi-
tion, notwithstanding fact that payment was made with the stock, thereby
reducing purchaser's percentage of corporate ownership. W. A. Drake,
Inc.--

4. Id. Corporation entirely owned by a father and his three sons may
not deduct losses sustained on sale of any asset to one stockholder. Hosch
Brothers Co..

5. Id. In determining whether purchasing stockholder owned a 50%
interest in corporation he is considered as also owning shares owned by
the members of his family. Id.

6. Losses Due to Assumed Liabilities. Guarantee given purchasers
when selling stock on commissions, on which taxpayer made payments
in tax years, held made in connection with business activities, and pay-
ments are deductible losses. Frank G. Hogan_----

7. Id. Income taxes assumed by taxpayer in prior years when sales and
purchases of property were consummated, not used then in computing gains
or losses, when paid in tax year require adjustments to bases used when
sales were made, and if transaction resulted in a loss the taxes and interest
are deductible for year paid as losses, not as taxes or interest. Koppers Co-
8. Investment Loss. Taxpayer created a corporation to which he trans-
ferred stock and real estate comprised of his home and other residential
properties. Corporation transacted no business. Held, corporation was
serving taxpayer's personal needs; is to be disregarded as an entity apart
from its stockholder; and loss claimed to result from dissolution is not
deductible. Thomas K. Glenn_.

9. Id. Demolition of Business Building. Commissioner, after denying
loss claimed, conceded loss, but disputed basis. Held, loss allowed on
basis used by taxpayer. George S. Gaylord_ _ _

10. Id. Destruction of Orchard; Conversion of Land to Other Uses. Value
of orchard determined on basis of purchases of similar property and
amount of loss determined.

Id.

11. Year Loss Sustained; Property Sold for Defaulted Taxes. Taxpayer
disputed the validity of sale and title of purchaser for a period of years,
finally abandoning his claim to redeem in tax year. Held, dispute was
analagous to litigation and loss was realized in the year claim was aban-
doned, not year sale was made. Edward and John Burke, Ltd...

Page

1082

1087

1087

203

84

712

308

33

279

691

62

328

281

1031

LOSSES Continued.

12. Casualty. The term does not exclude the intervention of human
agency, such as the setting off of a blast. Held, damage to property
resulting from quarry blasts is a deductible loss. Ray Durden

13. Id. The term is limited to property losses, and is exclusive of
those resulting from bodily injuries. Postal Mutual Indemnity Co_-

14. Bailments. Payment by gratuitous bailee to bailor for damages
to bailed property while in bailee's possession is not a deductible loss.
Luther Ely Smith__

NOTICE. See DEFICIENCY.

OBSOLESCENCE. See DEPRECIATION, 5-7.

OFFSETS. See PARTNERS, 8; TRANSFEREES, 2.

OMISSIONS FROM GROSS INCOME. See LIMITATIONS, 3.
OPTIONS. See ESTATE TAX, I, 2; GAIN OR Loss, I, 9, 10; III, 9.
PARTIAL LIQUIDATIONS. See LIQUIDATIONS, 4–7.

PARTIES. See ESTOPPEL, 5, 6; PLEADING, 3.

PARTNERS:

1. Marital and Family Partnerships. Wife contributed capital and
services to husband's business, but formal partnership agreement was
not entered into until tax year. Held, from date of the agreement wife
was a partner and spouses are taxable accordingly. Felix Zukaitis.

2. Id. Husband gave wife a share of his interest in an existing partner-
ship; other partners accepted her as a partner, and husband's personal
services were thereafter decreased, although wife performed no services
for the business. Held, wife was a valid partner and spouses are taxable
accordingly. J. D. Johnston, Jr.____.

3. Id. Conversion of Sole Proprietorships Into Partnerships. Husband
gave a one-half interest to wife, who assumed joint liability on his obli-
gations. Husband made irrevocable gifts to wife and minor children of
interests. Held, partnerships immediately formed following the gifts in
both cases were valid. Robert P. Scherer-

M. W. Smith, Jr. -

4. Id. Gift to wife of funds conditioned on her using them to purchase
a one-half interest in partnership to be formed by sole proprietor and
wife, held not a valid gift, donee not having acquired dominion over sub-
ject matter, and valid partnership did not result. A. L. Lusthaus.

5. Id. If earnings of business are due mainly to activities and abilities
of one partner, and not to the capital interests, under principles in ad-
judicated cases, an arrangement between the active partner and members
of his family who contributed no capital and only minimum services, is
not a valid partnership. M. M. Argo---

6. Id. Failure to carry drawing account for wife or to distribute to her
profits due at end of year defeats claim for partnership status. Frank
J. Lorenz

7. Id. Conversion of Corporations Into Partnerships. Immediately be-
fore liquidating corporation, stockholders gave wives shares, conditioned
on their becoming members of partnerships to be formed. Held, wives
had no dominion over stock given and valid partnerships did not result.
Francis E. Tower --

O. William Lowry---.

8. Capital Losses sustained by partnership, in excess of statutory lim-
itation on amount deductible may be offset by individual partners against
individual capital gains reported. Thomas W. Lamont..

PENALTIES:

1. Delinquent Return. No reasonable cause for delay having been
shown, penalty was properly assessed. Insular Sugar Refining Corp - - - - -
2. Failure to File Return renders imposition of penalty mandatory.
Ethel B. Dunn....

Adolphus Busch, III_

William Fleming..

3. Fraud. Deductions for salaries paid individuals with knowledge
that no services had been performed renders return fraudulent and sub-
jects taxpayer to the penalty. J. L. Norie_ _ .

Page

1

1212

696

814

799

776

894

540

1120

746

396

730

1217

922

319

547

974

676

PERSONAL EXEMPTION. See CREDITS, 7.

PERSONAL HOLDING COMPANIES:

1. Liability As Such. Taxpayer agreed to finance a new nonstock mutual life insurance company for a consideration based upon latter's profits, payable only if business conditions warranted. Held, advances were not loans; payments received were not interest; taxpayer's interest was contractual, not proprietary, and it is not a personal holding company. Pacific Northwest Finance Corp--

2. Gross Income; Treatment of Recoveries When Reserve Method of Accounting Used. Inclusion of recoveries in income had been consistently done over a period of years without question by Commissioner. Held, the latter may not, in tax year, eliminate them from income, add them to reserve balance, thereby reducing gross income, and thus cause "personal holding" income to reach the percentage necessary to subject taxpayer to the surtax. Ohio Loan & Discount Co...

PERSONAL SERVICE CORPORATIONS:

Stock Ownership of One Spouse constitutes ownership by the other, and other statutory conditions having been met, held, taxpayer is entitled to personal service classification and as such is exempt from excess profits tax. Henry Van Hummell, Inc.-

PLEADING:

1. Allegation of Error with no statement of facts to sustain allegation does not conform to Rule 6 (e) of this Court. George James Nicholson_.

2. Amended Petition; Claim for Relief Under Sec. 722, I. R. C. Petition for relief may be filed with Tax Court only after claim has been filed with and adjudicated by the Commissioner, and pleading already filed may not be amended to include plea for such relief. Uni-Term Stevedoring Co---3. Proper Parties. Petition filed by former corporate officers after expiration of statutory dissolution period which terminated corporate existence is invalid. First National Bank of Wichita Falls - - -

4. Issues Not Pleaded, but raised upon brief are not properly before the Court. George James Nicholson_.

596

James F. Curtis -

648

5. Rule 17. Taxpayers are limited to deductions in amount assigned as error in petition unless amended assignments of error to conform to proof have been filed. M. C. Parrish & Co...

PORT OF NEW YORK AUTHORITY. See EXEMPT INCOME, 2.
PRACTICE AND PROCEDURE. See PLEADING.

1. Claims for Statutory Exemptions must be timely made. Although not made in the petition, taxpayer had made the claim in protest against deficiency proposed. Held, protest antedated assessment and claim is timely. William Fleming - .

2. Proof of Existence of Factors Requisite to Deductions. Deficiency notice was based on theory that bonds redeemed were the indebtedness of taxpayer. Held, in meeting the four requirements of sec. 22 (b) (9), I. R. C., taxpayer need offer no evidence on this factor. Southeastern Building Corp

3. Renegotiation of War Contracts. Contractors and/or representatives are required to comply with Rule 64 as nearly as possible. Allen Tool Corp.

PRESUMPTIONS. See ESTATE TAX, I, 8; EVIDENCE, 3.
PROCESSING TAX:

1. Reimbursement to Vendees. Tax was charged to vendee in year of sale, but not paid to collector by vendor. Held, vendor is not entitled, on amended return, to deduct reimbursements to vendees made two years later. Stanard-Tilton Milling Co.......

2. Settlement by Closing Agreement. Commissioner and taxpayer adjusted unjust enrichment tax liability and overpaid processing taxes by closing agreement. Held, Commissioner may not thereafter reduce the process tax deduction claimed for any of the years involved in such agreement. Id.

RECOVERIES. See EXCESS PROFITS TAX, 3; PERSONAL HOLDING COM-
PANIES, 2.

119

974

381

847

1026