SECTION 152.-DEPENDENT DEFINED

26 CFR 1.152-1: General definition of a

Rev. Rul. 67-61

A taxpayer whose mother is confined in a mental institution under an agreement in which the taxpayer promised to pay a specified amount per year for her support, and to pay the remainder of her support if and when it is possible for him to do so, will not be considered to have supplied the unpaid remainder of her support.

Revenue Ruling 58-404, C.B. 1958–2, 56, clarified.

Advice has been requested whether a taxpayer will be considered to have supplied his mother's support for 1965, where she is confined in a mental institution under an agreement in which the taxpayer promised to pay 6x dollars per year to the institution for her support, and to pay the remainder of her support (10x dollars per year) if and when it is possible for him to do so. Taxpayer paid 6x dollars toward his mother's support in 1965. The remainder of her support for the year (10x dollars) was supplied by the institution.

Where the taxpayer has neither furnished in kind nor paid for the support received during the calendar year by the individual he claims as a dependent, the following requirements must be met in order for him to be considered as having provided support: (1) The taxpayer must take affirmative steps to provide support for an individual he claims as his dependent; and (2) incur an unconditional obligation to pay for the items of support. John L. Donner, 25 T.C. 1043 (1956), illustrates the principle that section 152 (a) of the Internal Revenue Code of 1954 requires something more than a taxpayer's unfulfilled duty or obligation to pay items of support in order to have them considered received from him.

A promise to pay for support, if and when it is possible to do so, is not an unconditional obligation for payment. Accordingly, a taxpayer, whose mother is confined in a mental institution under an agreement which requires the taxpayer to pay 6x dollars per year toward her support, and in which he promises to pay the remainder of her support (102 dollars per year) if and when it is possible for him to do so, will not be considered to have supplied the remaining 10 dollars of her support.

For the reasons stated above, the taxpayer is not considered as providing over half the support received by his mother in 1965. Accordingly, the taxpayer cannot claim a dependency exemption for his mother in the taxable year under consideration.

Revenue Ruling 58-404, C.B. 1958-2, 56, involves a father who arranged with a college to provide tuition and board for his son in the fall of 1956 under an agreement to pay for these items of support in January 1957. There the father not only had an unconditional obligation to pay for the support items furnished; but he also, through his arrangement with the college to provide his son with tuition and board in 1956, took affirmative steps to provide his son with these items of support. These facts meet the requirements that there be "something more than an unfulfilled duty or obligation to pay" referred to in the Donner case.

Revenue Ruling 220, C.B. 1953-2, 22, holds that where a divorced husband, in violation of a court order, fails to make payments of "child support" for a calendar year, but pays the arrearage in a subsequent year, the amount thereof does not constitute support of the child furnished by the husband, either for the year in which such payments were in arrears or for the year in which the arrearage was paid. The father, in that case, failed to take any affirmative steps to provide for the support of his child during the calendar year. The arrearages paid in a subsequent year were merely reimbursements to his divorced wife for amounts she had paid for the child's support. Since the divorced husband took no affirmative steps to provide for the support of his child for the calendar year to which the arrearages related, he was not considered to have furnished the items of support which were received by his child in that year.

Revenue Ruling 58-404, C.B. 1958-2, 56, clarified.

PART VI.-ITEMIZED DEDUCTIONS FOR INDIVIDUALS AND CORPORATIONS

SECTION 162.-TRADE OR BUSINESS EXPENSES

26 CFR 1.162-1: Business expenses.

1

Rev. Rul. 67-1 1

The Internal Revenue Service will follow the decision of the U.S. District Court for Connecticut in the case of Locke Manufacturing Companies v. United States, 237 F. Supp. 80 (1964), with respect to the deductibility of certain corporate proxy fight expenditures involving solicitation and shareholder relations expenses. The decision in this case held that such expenditures were primarily concerned with a question of corporate policy and were ordinary and necessary expenses deductible by the corporation as business expenses under section 162 of the Internal Revenue Code of 1954.

However, the Service will continue to scrutinize expenditures made by corporations in proxy contests to determine whether such expenditures are made primarily for the benefit of the interests of individuals rather than in connection with questions of corporate policy. Thus, for example, if it is determined that such expenditures are in the nature of preferential dividends to stockholders or excessive compensation to officer-stockholders, deductions claimed by corporations for such expenditures will be disallowed.

The decision in the Locke case is analogous to the position stated in Revenue Ruling 64-236, C.B. 1964-2, 64, which relates to the deductibility of proxy fight expenditures by an individual stockholder under section 212 of the Code, if such expenditures are proximately related to either the production or collection of income or to the management, conservation, or maintenance of property held for the production of income.

1 Based on Technical Information Release 871, dated Dec. 16, 1966; see also Technical Information Release 885, dated Feb. 15, 1967.

(Also Section 461; 1.461-1.)

Rev. Rul. 67-12

Ordinary and necessary expenses, incurred in a trade or business in prior years and paid in the current taxable year, by an individual taxpayer using the cash receipts and disbursements method of accounting, are deductible under section 162 of the Internal Revenue Code of 1954 even though the trade or business has been discontinued.

Advice has been requested whether ordinary and necessary business expenses, incurred in prior years and paid in a year subsequent to the termination of the business by an individual taxpayer, using the cash receipts and disbursements method of accounting, may be deducted under section 162 of the Internal Revenue Code of 1954.

The taxpayer operated a business as a sole proprietor. He had incurred debts for ordinary and necessary business expenses which he was unable to pay because of financial problems, and had entered into an agreement with his creditors under which he would pay his debts when he was able to obtain funds. He then discontinued his business. In a year subsequent to the termination of his business, the taxpayer paid the debts he had incurred while carrying on the business.

Section 162 of the Code provides, in part, for the deduction of all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business.

Section 461 (a) of the Code sets forth the general rule that the amount of any deduction or credit allowable shall be taken for the taxable year which is the proper taxable year under the method of accounting used in computing taxable income.

Section 1.461-1(a)(1) of the Income Tax Regulations provides that under the cash receipts and disbursements method of accounting, amounts representing allowable deductions shall, as a general rule, be taken into account for the taxable year in which paid.

In the instant case, expenses represented by the debts would have been deductible under section 162 of the Code had they been paid by the taxpayer while he was still carrying on the business. The fact that the business has been discontinued does not prevent the deduction of expenses otherwise allowable to an individual taxpayer using the cash receipts and disbursements method of accounting. See Waters F. Burrows v. Commissioner, 38 B.T.A. 236 (1938), acquiescence, C.B. 1938-2, 5. Also, compare I.T. 4071, C.B. 1952-1, 148.

Accordingly, the ordinary and necessary expenses, incurred in a trade or business in prior years and paid in the current taxable year, by an individual taxpayer, using the cash receipts and disbursements method of accounting, are deductible under section 162 of the Code, even though the business has been discontinued.

Rev. Rul. 67-98

A taxpayer engaged in a trade or business paid a reward to a person who found and returned the taxpayer's stolen business checks. Held, the amount of the reward is deductible by the taxpayer as an ordinary and necessary business expense under section 162 of the Internal Revenue Code of 1954.

(Also Section 262; 1.262-1.)

Rev. Rul. 67-1151 Amounts expended by members of the armed services of the United States on active duty for the purchase and maintenance of required military fatigue uniforms, where local military regulations prohibit their off-duty wear, are, to the extent the expenses exceed allowances received therefor, deductible for Federal income tax purposes as ordinary and necessary business expenses under section 162 (a) of the Internal Revenue Code of 1954, provided such taxpayers itemize their deductions.

Advice has been requested as to the deductibility of amounts expended for the purchase and maintenance of military fatigue uniforms by members of the armed services of the United States on active duty.

The facts presented indicate that military personnel are often required to wear a fatigue uniform while on duty. Local military regulations frequently require that the fatigue uniform may be worn only while on duty or while traveling to and from duty provided the individual does not leave his car. The fatigue uniform referred to is distinguishable from the regularly authorized uniform of the day for the season which the member is permitted to wear off duty.

Section 1.262-1(b) (8) of the Income Tax Regulations governs the deductibility of amounts expended for the purchase and maintenance of uniforms, including fatigue uniforms, of members of the armed services. Section 1.262-1(b) (8) of the regulations provides as follows:

(8) The cost of equipment of a member of the armed services is deductible only to the extent that it exceeds nontaxable allowances received for such equipment and to the extent that such equipment is especially required by his profession and does not merely take the place of articles required in civilian life. For example, the cost of a sword is an allowable deduction in computing taxable income, but the cost of a uniform is not. However, amounts expended by a reservist for the purchase and maintenance of uniforms which may be worn only when on active duty for training for temporary periods, when attending service school courses, or when attending training assemblies are deductible except to the extent that nontaxable allowances are received for such amounts.

The first sentence of the above-quoted regulations prescribes the tests for deductibility. The second and third sentences of the regulations are intended to be explanatory of these tests rather than to establish an inflexible rule that the cost of any military uniform is a nondeductible personal expense.

Thus, where a required military uniform "does not merely take the place of articles required in civilian life," deduction of the amounts expended in the purchase and maintenance of such uniform would not be precluded by such regulation to the extent such amounts exceed nontaxable allowances received for such equipment. Where a member of the armed services is required to wear a fatigue uniform when on duty and local military regulations require that it be worn only while on duty, or while traveling directly to and from duty, in his car, the fatigue uniform does not take the place of articles required in civilian life.

Accordingly, amounts expended by members of the armed services on active duty for the purchase and maintenance of required military fatigue uniforms, where local military regulations prohibit their offduty wear, are, to the extent the expenses exceed allowances received

1 Also released as Technical Information Release 893, dated Mar. 23, 1967.

therefor, deductible as ordinary and necessary business expenses under section 162(a) of the Internal Revenue Code of 1954, provided the deductions are itemized.

This holding does not represent a change in position with respect to the nondeductibility of the costs related to uniforms worn without restriction. In such cases the uniform is considered to replace ordinary civilian clothing and does not meet the tests of the above-quoted provision of the regulations.

(Also Section 263; 1.263 (a)-1.)

Rev. Rul. 67-125

Legal fees incurred by a corporation in securing advice on the tax consequences prior to the consummation of a merger with another corporation, a subsequent stock split, and proposed distribution in redemption of a portion of the outstanding stock under section 302 of the Internal Revenue Code of 1954 (which distribution in redemption would not qualify as a partial liquidation under section 346 of the Code) are expenditures which are capital in nature and therefore not deductible as ordinary and necessary business expenses.

However, in the event the proposed redemption of a portion of the stock is subsequently abandoned, the capitalized fees attributable to such proposed redemption are deductible in the taxable year of the abandonment.

Advice has been requested whether legal fees incurred by a corporation in securing advice on the Federal tax consequences of the following transactions before they are consummated can be deducted as ordinary and necessary business expenses under section 162 of the Internal Revenue Code of 1954: (1) A merger, (2) a stock split, and (3) a proposed distribution in redemption of outstanding stock under section 302 of the Code (which distribution would not qualify as a partial liquidation under section 346 of the Code).

The legal fees in this case were incurred in connection with the merger of one corporation into another, followed by a split of the stock of the surviving corporation. It was also proposed that the surviving corporation would distribute property acquired in the merger in redemption of a portion of its stock to meet certain anticipated conditions in connection with the future operations of the surviving corporation. Since these conditions did not materialize, the planned redemption was tentatively abandoned for the year of the merger and the stock split. However, no final decision has been made as to whether the redemption will be made or finally abandoned.

Section 162(a) of the Code allows as a deduction all the ordinary and necessary business expenses paid or incurred during the taxable year in carrying on a trade or business. Section 263 of the Code precludes a deduction for capital expenditures.

It is well established that expenditures incident to the alteration of the capital structure of a corporation are to be capitalized. See Mill Estate, Inc. v. Commissioner, 206 Fed. 2d 244 (1953), and Missouri-Kansas Pipe Line Co. v. Commissioner, 148 Fed. 2d 460 (1945). Thus, legal fees incurred for services performed in drafting a corporate merger agreement are to be capitalized as incident to the. reorganization since the effect of a merger is to change the capital tructure of the surviving corporation.