1973-281 Sturgill, Charlie and Chris- 1973-240 Washington, James R. and
Working Capital Needs-Current Assets-Includability of Municipal Warrants.-Interest-bearing special-assessment warrants having fair market value of 92-96% of face value, which municipalities gave paving contractor in payment for services and were listed on contrac- tor's books as current assets at yearend, were properly considered as current assets available for working capital, other business purposes, or dividend payments, in resolving determinative issue and finding con- tractor accumulated earnings and profits beyond reasonable business needs, for imposition of sec. 531 accumulated earnings tax, consider- ing that warrants were marketable and marketed in tax years, treated as current assets by contractor's bonding company, and otherwise usable continuously to increase accumulations as ready made method to avoid dividend payments and imposition of tax. Ready Paving & Construction Co----
Fraud-Burden of Proof-Intent to Evade Tax.—Commissioner failed to carry burden of proving by clear and convincing evidence that petitioner knowingly understated his income with specific purpose of evading tax believed to be owing, since circumstances on which Com- missioner relied were not sufficient to show intent to conceal taxable income believed to be due and owing in 1966, and as to 1967, peti- tioner's statement referring to embezzled funds and indictment, at- tached to return filed while he was incarcerated for misappropriating funds, was not so misleading as to support finding that petitioner attempted to evade tax which he believed to be due and owing. Blaine S. Fox-
Fraud-Omission of Income From Kickbacks-Pre-James Years.— Where petitioner did not report kickbacks admittedly received in 1957-63 from marine contractor, whom he instigated to hike bills for work on employer's ships, but contended that kickbacks were embezzled funds not taxable under case law for years before James decision in 1961 even if intent was fraudulent, that 1957-62. years were barred, and that fraud was not proved, Court determined amounts were tax- able income before and after James, having reviewed leading cases, and concluded inter alia (1) purpose of James case was to preclude criminal penalties for nonreporting of embezzled funds in pre-James years, not to allow pre-James embezzlers to escape paying taxes owed, and did not prohibit finding of fraudulent intent, (2) it was sufficient under definition of civil fraud that taxpayer intended to evade taxes he believed he owed, (3) petitioner obtained funds through swindle, rather than embezzlement, under State law, and (4) his denial to revenue agent that he received kickbacks, while reporting kickbacks from another source, and continued omission of subject kickbacks after James decision was sufficient to establish fraudulent intent to remove bar of limitations and support fraud additions. George C. McGee_____ Late Filing-Income Tax Return-Reasonable Cause.-Petitioner, who at time of transfer to Germany in March 1969 had not accumulated information necessary to file his 1968 return and, although his re- quest for extension of time within which to file was denied, made no attempt to file such return until after his return from Germany in August 1970 when his return for another year was being audited, under case law failed to prove his delinquency was due to reasonable cause rather than willful neglect under sec. 6651 (a), having argued only that had he prevailed on first issue herein and been entitled to use head-of-household rates, his withheld taxes would have covered his tax liability and no addition to tax would have been owed. John A. Bayless
Monthly Payments-Incident to Divorce-Alimony or Property Settle- ment.-H's payments to W of $400 per month to maximum of $29,000, which totaled almost exact amount of advance W received on family inheritance for use in purchasing their home and were in addition to regular alimony payments provided in divorce agreement, were not alimony payments includable in W's income and deductible by H, but were for property settlement even though agreement denominated them as support payments, since parties' intention in making payments governs and here it was clear that they intended payments to compen- sate W for her property rights in home which was awarded to H under agreement. Walter H. Weiner_
Payments to W-Incident to Divorce-Periodic or Installment.-H's payments to W of $600 per month, payable under divorce decree for 54 months but without specifying total sum or expressly or implicitly subjecting payments to contingencies of death, remarriage, or change in economic status, were nondeductible installment payments under sec. 71(c) (1), since mere mathematics could ascertain exact principal sum specified in decree, and alternatively under operation of State law, which imposed no contingencies on such payments that would make total sum payable indefinite and so periodic; moreover, on facts, Golsen rule was not applicable to require following Myers decision in Ninth Circuit, in view of 19 years' development in law thereafter and regs. adopted, which have been upheld by many court decisions as reasonable and consistent with statute. George B. Kent, Jr----.
Periodic Payments-Annulment Decree-Alimony Equivalent.-Peri- odic support payments made to former W under New York annulment decree were alimony to W under sec. 71(a)(1) and hence deductible by H under sec. 215, following George F. Reisman, and considering that under New York law, void or voidable marital relationships are not distinguished for purposes of support in annulment action, putative marriage between H and W was recognized for purpose of creating legal obligation to support W, which annulment decree fixed in mone- tary terms, and fact that support issue is discretionary does not make it any less a legal obligation. Andrew M. Newburger___. AMORTIZATION
See DEPRECIATION.
BAD DEBTS
Demand Note-Personal Loan-Worthlessness.-Petitioner failed to prove he was entitled to deduction in 1966 for worthlessness of A's $2,500 demand note 32 months after he made loan, which he did not ask A to repay in 1966, having failed to prove debt was not worthless when made or became worthless before yearend, in that, in 1966 A (1) owned home and corporate stock, sale of which in 1967 yielded $520-per-month payments to A over 20-year period, and (2) intended to repay note and had reasonable prospect of doing so as of 1966 yearend. C. James Mathews___.
Guarantor's Payment-Loan Proceeds Used for Stock Purchases- Qualification as Business Use.-Petitioner's $30,000 payment in settle- ment of liability as guarantor of $100,000 loan to A, which was used to purchase stock in insurance company A hoped would develop type of insurance policy he had originated, was not deductible as (1) sec. 166(f) business bad debt since A did not use loan proceeds in his trade or business but to acquire stock as investment in business in which he previously held no interest or position and his activities did not con- stitute business of promoting life insurance companies, or (2) sec. 165 (c) (2) loss incurred in transaction for profit, since guaranty pay- ment was governed exclusively by sec. 166 as attributable to worthless- ness of debt, there being implied promise on A's part to reimburse petitioner, under applicable Arkansas law. Robert E. Imel--------- Loans to Foreign Subsidiary-Worthlessness-Manipulation of Ac- counts or Assets.-P, parent of affiliated corporations, was not entitled to sec. 166(a) bad debt deduction on consolidated return for inter-
company debts owed by foreign subsidiary to 2 domestic subsidiaries, since P failed to show debts became worthless in 1966 or that P did not strip foreign subsidiary, without full consideration, of assets which could have been applied on debts, on facts showing (1) foreign sub- sidiary's balance sheet did not reflect value of intercompany receiv- ables and lots which would have been available for application on debts, (2) when foreign subsidiary transferred investment to P in settlement of its account payable, it received credit only for book value of land, and (3) P's or foreign subsidiary's allegedly worthless securities were not worthless in 1966 but to the contrary had substantial value. Canaveral International Corp‒‒‒‒
Personal Loan-Bank Executive-Business or Nonbusiness.-Peti- tioner's $5,000 loss sustained in 1968 when debt owed him became worthless was deductible as sec. 166(d) nonbusiness bad debt, rather than sec. 166(a)(1) business bad debt absent showing that debt was created in connection with his trade or business either as (1) lender, since making of 8 or 9 loans during 4-year period did not elevate activity to level of business, or (2) bank executive, since debt was not proximately related to petitioner's employee status considering that dominant motive for making loan was to secure new business for bank, not to retain employment. Robert E. Imel_.
See CORPORATIONS, GAIN OR LOSS, and VALUATION. CAPITAL EXPENDITURES
Payment to Seller-Acquisition of Customer Lists and Exclusive Sales Agency or Consultant's Fee-Capital Expenditure or Expense.-$8,500 paid by petitioner subch. S corporation to X corporation under agree- ment whereby petitioner replaced X as exclusive sales agents in Okla- homa for manufacturer of electronics equipment which petitioner represented in Texas and parts of Louisiana, contrary to petitioner's contentions, was not in nature of consultant's fee for introducing petitioner to customers and acquainting it with products deductible as ordinary and necessary business expense under sec. 162, but on evidence and under case law was for purchase of customer lists and right to represent manufacturer in Oklahoma, both of which were intangible capital assets acquisition of which was nondeductible capital expenditure under sec. 263. Elgin B. Robertson, Jr‒‒‒‒‒‒‒ CAPITAL GAINS AND LOSSES
See also COMPENSATION, CORPORATIONS, and INCOME. Patent Transfer-Limited Geographical Area-Capital Gains Treat- ment.-Payments received by taxpayer in 1966-68 under exclusive li- cense agreement, for use of his patented process in specified geograph- ical area, qualified for capital gains treatment under sec. 1235, since agreement granted all substantial rights to patent, contrary to Com- missioner's contention in reliance on reg. that grant limited to geo- graphical area within country of issuance was not grant of all substan- tial rights. Vincent B. Rodgers, 51 T. C. 927, followed. Estate of George T. Klein___.
Purchase of Unregistered Stock-Bankrupt Corporation-Theft Loss or Capital Loss.-Petitioner surgeon A, who purchased stock in Las Vegas casino for $52,000, which he paid to patient and casino's president, was not entitled to deduct loss on investment in 1968, year he was advised by his attorney that casino had filed petition in bankruptcy and there was little likelihood of recovery, as sec. 165(c) theft loss, since under Court's definition of "theft," deduction has been allowed where taxpayer suffered loss as result of false representation of another person but never where false representation was not in fact made but was merely implied by law, and here mere showing that stock was sold without permit in violation of California's securities laws was not sufficient to prove B obtained A's money for his own use or through any guile, absent evidence of guilty knowledge or intent on B's part, and record failed to show B fraudulently misrepresented casino's financial condition. Carroll J. Bellis.......
CAPITAL GAINS AND LOSSES-Continued
Sale of Partnership Interest-Franchise Operation-Noncompete Cov- enant. In 1966 installment sale by S to B`of partnership interest in franchise under agreement containing noncompete covenant, both parties being knowledgeable in the field of Federal taxation and each having chosen to treat transaction for tax purposes in manner most favorable to himself, Court was unable to assign value to covenant absent "strong proof" as to what its value might be, in that no value was allocated to covenant in sale agreement and no credible evidence was adduced which would permit allocation, so that C correctly re- ported installment payments as long-term capital gain and B was not entitled to amortize deductions claimed for amortization of covenant. Libero P. Baldarelli.
Sale of Realty-Holding Period-Tacking on Prior Leasehold Period.— Where petitioners shareholders on Apr. 28, 1967, in sec. 333 liquidation of their controlled corporation acquired 92-year leasehold of 6-acre tract with option to purchase, which they exercised May 15, and 4 days later sold part of tract, under case law, exercise of option consti- tuted purchase of legal title and, contrary to petitioners' contention, did not result in sec. 1031 exchange of leasehold for fee, so that peti- tioners were not entitled to tack holding period of their stock to holding period of fee and therefore realized short-term capital gain on their pro rata portion of gain on sale. Petitioners' alternative argument, that they sustained loss on alleged worthlessness of lease and subordi- nation agreement when option was exercised, which constituted new issue raised first time on brief and hence could not be considered, nevertheless failed on merits. Vernon Molbreak_. COMMISSIONER OF INTERNAL REVENUE
Reopening of Closed Year-Procedural Requirements-Validity of De- ficiency Notice.-Contrary to petitioner's contentions, Commissioner's second investigation of petitioner's tax liability for 1968, based on conclusion that petitioner erroneously employed higher percentage limitation associated with public foundations in calculating his char- itable deduction to his private foundation, was not "unnecessary" under sec. 7605(b) considering legislative history and case law and absent evidence of arbitrariness, transcendence of authority, or har- assment, and Commissioner did not transgress Rev. Proc. 68-28, so that deficiency notice was not deprived of validity. Robert F. Collins
Deferred-Salary Payments-Deposited in Trust Fund-Economic-Bene- fit Doctrine.-In arrangement established at petitioner's instigation in 1960, whereby his corporate employer unconditionally paid his pre- viously earned compensation for services into 15-year trust established for him, after which funds were to be distributed to him or to suc- cessor family beneficiaries, and petitioner had no restrictions placed on assignment of his interest and could terminate trust earlier in his capacity as president of his employer, petitioner realized taxable income in 1960 when employer placed accumulated salary amounts in trust for benefit of him and his family, since present, nonforfeitable economic benefit was thereby conferred on him. Sproull and McEwen cases fol- lowed. Drysdale distinguished. Candido Jacuzzi__
Employees' Stock Option-Sale of Warrants-Realization of Capital or Income.-Petitioners realized ordinary income and not long-term cap- ital gain from sale of stock warrants purchased from life insurance company under employees' stock warrant restricted stock option plan, since record showed that petitioners were employees of company, war- rants were grants for reasons connected with petitioners' employment and were sold by company to petitioners for nominal amounts to secure better services from them rather than to assure petitioners' continued control over company, and that under applicable reg. 1.421-6 warrants, which were not actively traded on established market, were not exer- cisable immediately in full by petitioners under State law, and fair
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