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COMPENSATION-Continued
market values of option privilege and warrants were not readily ascer-
tainable upon date of transfer to petitioners, and therefore petitioners
realized compensation upon sale of warrants. Frank L. Shamburger---
Reasonableness-Executive Officer's Salary and Bonus.--Despite show-
ing that Commissioner's determination was erroneous, petitioner cor-
poration's salary and bonus payments to sole executive officer were
unreasonable under sec. 162 to extent they exceeded amounts deter-
mined herein by Court, since controlling resolution, 12 years old in first
taxable year, was no longer realistic and reasonable because contingent
compensation fixed therein, although pursuant to free bargain, ignored
marked corporate growth over same period and varied widely from
industry averages. Pepsi-Cola Bottling Co. of Salina, Inc____.

CONTRIBUTIONS

Charitable Accrual-Basis Corporation-Substantial Compliance with
Election.-Failure by accrual-basis corporation to include in its 1969
return copy of resolution authorizing charitable contribution and offi-
cer's written and verified statement that resolution was adopted during
taxable year, both of which documents were subsequently furnished
Commissioner, did not disqualify charitable contribution deduction
for 1969, since (1) petitioner substantially complied with sec. 170(a) (2)
election requirements by furnishing sufficient notice of election on
return and by making payments within 22 months after close of tax-
able year and (2) formal compliance is not sine qua non for deduction
under regs., so that denial of deduction would be unwarranted sanction.
Columbia Iron & Metal Co‒‒‒

Charitable-Additional 10% Deduction-Public or Private Foundation.-
Petitioner physician, who established and funded charitable foundation
with cash and building in which he maintained offices, was not entitled
in 1968 to additional charitable deduction to extent of 10% of adjusted
gross income under sec. 170(b) (1) (A) (vi), since foundation failed to
meet statutory requirement that it received substantial part of its
support from general public; moveover, since petitioner was sole con-
tributor, foundation failed to meet threshold requirement for Court
to consider facts and circumstances test, and even so, foundation would
not come within its terms, since (1) foundation was not constituted
to attract substantial public contributions from persons in community
or area in which it operated, (2) its research objectives were elusive,
(3) no evidence existed of bona fide solicitations for broad-based
public support, (4) foundation's governing body lacked public repre-
sentation, and (5) it was not required to publish financial reports
or to provide facilities or services to public at large. Robert F.
Collins

Charitable Donation of Stadium Improvements in Sale of Land to
City-Deductibility as Gift or Bargain Sale.-Where petitioner corpora-
tion and Seattle agreed that City would purchase petitioner's land on
which baseball stadium was located for $1.5 million and that petitioner
would donate stadium improvements on land for use until highway was
constructed, and petitioner claimed that there was donation of im-
provements in transaction separate from sale of land or that, if trans-
action were viewed as single transaction, then transfer was bargain
element constituting contribution, Court determined under case law
and on facts that "free stadium" offer was inducement for purchase
of land, that petitioner was motivated primarily by benefits of selling
land and not by satisfaction that might come from generous act, and
that value of any benefit conferred on City, under either theory, could
not constitute charitable deduction under sec. 170, since donative intent
was lacking. Rainier Companies, Inc.

CORPORATIONS

See also other titles.

Acquisition--Same or Stepped-Up Basis in Assets-Carryback of Net
Operating Loss of Acquiring Corporation.-Transaction whereby X

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CORPORATIONS Continued

corporation, which unsuccessfully sought to purchase Y corporation's
assets and transfer them to newly organized subsidiary, proceeded to
purchase 85% of Y stock and caused Y to transfer all assets subject
to liabilities assumed to new Z corporation, which then issued 1 share
of Z stock for every 3 shares of Y stock held by X and made cash
payments for stock of most of Y's minority shareholders, constituted
acquisition of assets and liabilities by way of purchase with accom-
panying stepped-up basis in assets to Z under integrated-transaction
doctrine, contrary to Commissioner's contention that assets had same
basis as in hands of Y because acquired in sec. 368(a) (1) (F) or (D)
reorganization; hence, net operating loss Z sustained in first 6 months
was not to be carried back to Y's taxable years before carrying it over
to Z's subsequent taxable years. Yoc Heating Corp------

Acquisition to Avoid Tax-Bona Fide Business Purpose or Potential
Depreciation/Loss on Yacht.-Where P, parent of affiliated corpora-
tions, initially contemplated exchanging stock for yacht convertible
to business use but, on discovering yacht was owned by corporation N
and had $769,632 undepreciated basis, instead acquired all N's stock
for some of its nonvoting preferred stock, on facts and under case
law (1) value of P's stock exchanged for N's stock was $177,500, (2)
P's principal purpose in acquiring stock was tax avoidance under sec.
269 (a), considering P dictated transaction, and despite initial legiti-
mate reasons to seek vessel for oceanographic and geodetic charter
purposes, once P's representatives became aware of N's corporate
existence and yacht's undepreciated cost basis, overriding reason for
acquiring N's stock was to reduce P's consolidated tax liability, and (3)
depreciation deduction and loss on sale of yacht must be computed
in consolidated return using $177,500 as cost basis of yacht. Canaveral
International Corp----

Extension of Credit-Between Wholly Owned Corporations-Dividend
Equivalence.-Extension of credit on its books by Puerto Rico cor-
poration X to its New York sister corporation Y did not constitute con-
structive dividend to their common shareholder A, since advances were
not made primarily for A's benefit and did not result in his receiving
direct benefit, on facts showing X was wholly dependent on Y for sales
of its metal containers, either X or Y had to carry surplus of containers
so that X might meet its employment commitment to Puerto Rico,
Y paid X in cash and raw materials to fullest extent possible consider-
ing it was experiencing financial difficulties and had to carry increased
accounts receivable and inventories for both corporations to survive,
working capital provided to Y by X remained in corporate solution,
there was no basis for disregarding Y as entity separate and apart from
A, and arrangement was not tax-avoidance device considering con-
gressional enactment of sec. 957 (c) to exempt corporations like X
from sec. 956. Rapid Electric Co‒‒‒‒‒‒

Tax-Free Liquidation-Prepaid Interest on Note Distributed-Tax-
ability to Corporation.-Where petitioner's accrual-basis transferor, X
corporation, sold its shopping center following adoption of complete
liquidation plan under sec. 337, receiving in payment promissory note
plus 5 years' prepaid interest in addition to mortgage assumption and
cash, and 41 days later distributed corporate assets in liquidation to
shareholders including petitioner, X received interest income taxable in
full in its final taxable period, since contrary to petitioner's contention,
interest was not part of sale proceeds or amount realized on sale, for
purpose of nonrecognition of gain or loss provision of sec. 337, but
was payment for seller's extension of credit. Jack A. Mele---
CREDITS AND EXEMPTIONS

Foreign Taxes-Imposed on Banking Activities-Qualification for In-
come Tax Credit.-Taxes imposed on bank association's banking activi-
ties of branches in Thailand, Philippines, Republic of China, and Buenos
Aires, which in all cases were levied on gross income, did not consti-
tute income taxes within sec. 901(b) (1) for allowance of credit against
Federal income tax, since taxes were imposed on gross income without

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CREDITS AND EXEMPTIONS-Continued

deduction for any related costs and expenses, so that none of taxes
satisfied governing test that they were designed to fall on some net
gain or profit, or were gross income tax likely to reach net gain because
costs or expenses would not be so high as to offset net profit. Bank of
America Natl. Trust & Savings Assn----

Investment Credit-Sec. 38 Property-Sewage Disposal System.-Peti-
tioners, who purchased and installed underground sewage disposal
system connected to shopping center they owned, including grocery
business they owned and operated and laundromat in which they held
50% partnership interest, as well as to personal residence, were not
entitled to investment credit for cost of system (1) under regs.
1.48-1(c) and 1.48-1(e) (2), since system was inherently permanent
structure necessary to operation and maintenance of buildings, not
to be considered "tangible personal property," or (2) under reg. 1.48-1
(b) (2), since sec. 38 property applies only to property for which depre-
ciation is allowable, which would disqualify proportionate part of
system used by personal residence, but petitioners failed to make
required allocation. C. C. Everhart---.

Investment Credit Recapture-Former Partnership Property-Gifts of
Interest in Corporate Successor.-Petitioner's disposition by gift in 1968
of 53.33% of his stock interest in corporation, succeeding in sec. 351
conversion to partnership in which petitioner had same percentage
interest, triggered recapture of 53.33% investment credits taken in
1965 and 1966 on partnership purchase of sec. 38 property, since peti-
tioner's interest prior to change in form was in partnership so that
reg. 1.47–3 (f) (5) (iv) directs taxpayer to reg. 1.47-6(a)(2) to determine
if recapture is warranted by interest reduction, and applying percent-
age test of latter reg., there was reduction in petitioner's interest from
45% to 21% which was 46.67% of his original 45% on which he secured
investment credits as partner and recapture was warranted. W. Frank
Blevins

Investment Credit Recapture-Triggered by Subch. S Election-Valid-
ity of Reg. 1.47–4(b)(2).—Petitioner corporation, which claimed sec. 38
investment credit for taxable year ending Mar. 31, 1969, had been
allowed similar credits for prior years, and elected under sec. 1372(b)
to become electing small business corporation for taxable year begin-
ning Apr. 1, 1969, and subsequent years, but did not execute with
shareholders, as prescribed by reg. 1.47-4(b) (2), agreement to pay
"recapture tax" if property prematurely lost its sec. 38 property char-
acter with respect to corporation in any taxable year for which subch.
S election was effective, was liable for sec. 47(a) (1) investment credit
"recapture tax" in taxable year ending Mar. 31, 1969, since contrary
to petitioner's contention, reg. was valid as reasonable interpretation
and implementation of sec. 47(a) (1), considering distinctive policy
purposes of investment credit and subch. S Code provisions, statutory
language, legislative history, and case law, and fact that reg. was more
liberal to taxpayer than statute would be without it was no ground for
complaint. Tri-City Dr. Pepper Bottling Co---
DEFICIENCY NOTICE

See also COMMISSIONER OF INTERNAL REVENUE and UNITED
STATES TAX COURT.

Mailed to Transferee-Dissolved Corporation-Limitations.-Where X
corporation sold its assets to Z in October 1966 for cash and other
consideration, most of cash proceeds of sale were distributed to peti-
tioner shareholder A upon X's liquidation in November 1966, and
Commissioner determined deficiencies of X and a predecessor corpora-
tion attributable to allowance of tentative net operating loss carryback
adjustments, assessments of transferee liability against A were not
barred by limitation period under sec. 6901 (c) (1), since, contrary to
A's contention, under case law and legislative history there is no need
to issue statutory deficiency notice to transferor within 3-year statutory
period, for to make such requirement when taxpayer has been dis-
solved and has no assets would require useless act. Morris Alexander--

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DEPLETION

River Sand and Gravel Deposits-Economic Interest-Qualification as
Wasting Asset.-Petitioner corporation which extracted sand and
gravel from Kansas River under exclusive State contract and permit
to remove mineral from designated area was entitled to percentage
depletion deduction under secs. 611 and 613, since on facts and in light
of case law and congressional intent (1) petitioner had economic inter-
est in resource both by its investment in adjacent land and by its
exclusive State contract and permit, and (2) sand and gravel deposits
were found to be exhaustible asset considering grade and quality of
replenishment sand was diminishing. Victory Sand & Concrete, Inc__
DEPRECIATION

See also CORPORATIONS.

Additional First-Year-Citrus Trees-Sec. 179 Property.-Petitioners'
partnerships were not entitled to claimed additional first-year depre-
ciation on citrus trees, since, in light of regs., related Code sections,
legislative history, and case law, citrus trees do not qualify as tangible
personal property within meaning of sec. 179 because they are more
commonly associated with land and have an inherently permanent
nature. Kenneth D. LaCroix..........

Buildings-Amortization of Initial Lease Terms-Useful Lives.—Peti-
tioners could not amortize any part of costs of buildings, purchased
subject to leases, over initial lease terms because of substantially
higher rentals provided than for renewals, as claimed in amended
petition, since they purchased physical properties and not leases,
they elected to compute depreciation on 15-year useful life under
declining-balance method provided in sec. 167(b) (2) so that any shift
to alternate method was subject to sec. 167 (b) limitations on claim
for accelerated depreciation, and they failed to show any extraor-
dinary obsolescence for consideration in determining useful lives by
reason of magnitude of space leased by 1 tenant which might be
difficult to replace, or otherwise; based on record including obsolescence
factor, Court determined that as group, useful lives of buildings were
33 years rather than 40 years determined by Commissioner.
Court Realty, Inc‒‒‒‒‒

Midler

Main, Guest, and Pool Houses-Cattle Ranch Operation-Business
Use.-Petitioners were not entitled to depreciation deduction for main
house, guest house, and pool house located on cattle ranch which they
purchased and operated as business merely because buildings were on
ranch when they bought it (1) under sec. 167(a) (1), absent evidence,
other than of limited and incidental use of main house in conferring
with foreman, that buildings were used or were acquired for use in
ranching business and considering buildings were residential-type
property not useful in ranching operation, or (2) under reg. 1.167(a)–
6(b), since buildings cannot be construed to fall within "farm build-
ings," and were frequently used for purposes unrelated to cattle
business. John T. Steen_-

Noncompete Covenant-Payments to Owner's Widow-Insurance
Agency/Brokerage Business. Where petitioner corporation purchased
insurance agency and brokerage business from deceased owner's
estate and under prior agreement entered into contract with owner's
widow who covenanted not to compete with petitioner and agreed to
perform consultation services, contrary to Commissioner's contention
that agreement was sham, devoid of economic substance, and vehicle
of tax avoidance and that payments were capital expenditures for
goodwill, payments were properly deductible under sec. 167(a) (1),
on record showing inter alia parties considered their respective tax
interests, widow could have effectively competed as to prior customers,
terms of covenant were genuinely but realistically restrictive, and
covenant arising by operation of law did not deprive petitioner's
express covenant of economic reality. O'Dell & Co-----

Recapture-Percentage Payments for Patents-Acquisition in Subsidi-
ary's Liquidation.-Where (1) X's transferor Y was granted by non-

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DEPRECIATION-Continued

profit corporation Z exclusive full-term rights to patents, acquired
from Y's major shareholder-inventor A in 1961, for sales percentage,
(2) Y acquired exclusive rights to other patents from A for sales
percentage in 1966, and (3) X purchased all of Y's stock in 1967 and
on sec. 332(b) liquidation of Y, allocated portion of adjusted basis
of Y stock to license agreements under sec. 334(b) (2), Court deter-
mined (1) 1961 agreement effected sale of underlying patents to Y
and (2) annual payments under both agreements, which Y deducted
each year, were allowable depreciation of patents, so that on prop-
erties' disposition when Y was liquidated into X sec. 1245 required
recapture of depreciation to extent of lesser of patents' fair market
value at disposition date or depreciation amounts previously deducted.
Newton Insert Co----.

DISTRIBUTIONS

See also GAIN OR LOSS.

Before Stock Gift to Governmental Agency-Dividend or Proceeds of
Sale, Redemption, or Partial Liquidation-Capital or Income.-Hospital's
distribution of cash, deposits, and accounts receivable to petitioner
shareholders before transfer of stock to governmental agency under
their gift proposal was in form and substance sec. 316 dividend and
not long-term capital gain from (1) sale of stock, since facts showed
petitioners intended to make gift only after distribution had removed
certain assets from hospital, and there were no bilateral negotiations
determining sale price, no binding sales contract on day dividend was
declared transferring beneficial ownership, and no contract expressly
or impliedly treating dividend as part of sale, (2) redemption of por-
tion of petitioners' stock, since hospital did not redeem petitioners'
stock, or (3) partial liquidation under sec. 346, since liquidating divi-
dend 4 months after transaction was not paid to petitioners. Percy A.
Reitz

Partial Stock Redemption-Dividend Equivalence-Meaningful Reduc-
tion in Shareholdings.-Partial redemption of petitioner-brothers' X
corporation stock, under plan to redeem stock of troublesome minority
shareholder operating competing business and include other minority
shareholders as well, increased their proportionate holdings when sec.
318 family attribution rules were applied to stock held by father and
family trust, so distributions did not qualify for preferred capital gains
treatment, under sec. 302(b) (1) requirement that there be meaningful
reduction of their proportionate interests after redemption, and were
equivalent to dividends taxable as ordinary income; any business pur-
pose did not extend to redemption of petitioners' stock and was irrele-
vant under statute in determining dividend equivalence. William A.
Sawelson

Stock Redemption-Divorce Settlement Agreement-Dividend Equiv-
alence.-X corporation's redemption of stock owned by children's
trusts, under divorce and property settlement of H and W, to avoid
future family disputes by terminating trusts' interest in X, resulted
in ordinary income to trusts as dividend equivalent under sec. 302
(b) (1) in total amount based on amount of earnings shown on X's tax
returns, rather than capital gain on exchange under sec. 302(a),
since trusts owned actually or constructively 31% of stock before
and 33% after redemption, which was not meaningful reduction of
shareholders' proportionate interest under sole test given in Davis case,
using sec. 318 family attribution rules, which are applicable notwith-
standing purported business reason for redemption by reason of familv
disagreement and in absence of trusts' filing of sec. 302(c) (2) (A) (iii)
agreement required to completely terminate trusts' interests within sec.
302(b) (3). Robin Haft Trust_____

Stock Redemption-Termination of Interest-Independent Contrac-
tor. Decedent's interest in corporation was completely terminated
before his death under sec. 302(b) (3) upon redemption of his 3 stock
interest and resignation as director and officer, since son's ensuing

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532-904-74-57

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