Bank Deposits and Cash Expenditures Method-Gambling In-
come-Burden of Proof.-Commissioner's use of bank deposits and
cash expenditures method of reconstructing income in determining
deficiencies was valid, and Commissioner proved unreported income, at
least in amounts determined in statutory notices, since petitioners
offered no documentary support for their claimed nontaxable sources
and Commissioner established gambling as likely source of unreported
income. Nicholas v. Commissioner
Contested Liability-Certified Check Returned-Taxable Year for
Deduction. Where cash basis petitioner contested amount of sewer
service charges imposed by town and county governmental units on his
trailer court business and on Dec. 28, 1972, sent certified checks in
amount of charges he admitted owing which town and county returned
to him in early 1973 under policy of not accepting payments of less than
amount billed, Court determined petitioner failed to satisfy require-
ments of sec. 461(f) and was not entitled to deduct amount of checks in
1972, since under subsec. (2) there was no completed transfer of money
or property in satisfaction of sewer charges, and under subsec. (4) his
failure to pay charges would result in denial of deduction apart from
contest of amount of liability. Weber v. Commissioner
ACCUMULATION OF SURPLUS
See DISTRIBUTIONS.
Failure to File-Income Tax Returns-Reasonable Cause.-Where
no record of filing 1971 corporate income tax return existed, request for
extension of time to file return was received in 1972, incomplete
unsigned returns were received in 1974, and corporate president gave
conflicting testimony as to filing of tax returns, Court determined
petitioner corporation failed to timely file 1971 corporate income tax
return and absent any indication that its failure to do so was due to
reasonable cause and not to willful neglect, was liable for addition to
tax under sec. 6651(a). Magill v. Commissioner
ADDITIONS TO TAX -continued
Fraud-Failure to Report Gambling Income-Lack of Records.-
Where petitioner failed to report income from gambling, Court
determined on facts that part of deficiencies was due to fraud, since
inter alia petitioner submitted no records of gambling wins and losses,
he had exchanged large numbers of small bills for $100 bills, and
financial statements he submitted to obtain credit controverted his
testimony of cash hoard. Nicholas v. Commissioner
Negligence-Omission of Discharge of Indebtedness and Salary-
Burden of Proof.-Where petitioners failed to report $87,871 in
discharge of indebtedness, which Court determined was taxable income
in 1971, and $21,000 salary payments in 1972, Court determined
petitioners were negligent within meaning of sec. 6653(a) for 1971 and
1972, since on evidence omissions of income were due to petitioners'
failure to furnish accountants with pertinent data rather than good
faith reliance on advice of competent tax expert, so that additions to
tax were properly imposed. Magill v. Commissioner
Monthly Payments and Car Payments Under Divorce Decree-State
Law-Alimony or Property Settlement.-Where final divorce decree
dated Dec. 18, 1970, required petitioner to pay alimony in lump sum of
$60,000 payable in 120 monthly installments of not less than $500 each,
commencing on Jan. 15, 1971, and to deliver title to automobile after
settlement of lease, and chancellor's opinion modifying original divorce
decree interpreted Mississippi law as allowing for 30-day period
following payment date, Court determined $500 monthly payments
were deductible under sec. 215, since payment period exceeded 10-year
period required by sec. 71(c)(2), and monthly lease payments which
petitioner chose to complete were in nature of nondeductible property
settlement. Tracy v. Commissioner
Variable Child Support Payments-Retroactive Modification of
Earlier Divorce Decree-State Law. Where original divorce decree
provided for alimony, fixed child support, and variable child support
based on increase in H's earnings, Court determined under New
Hampshire law that State court consent decree modifying retroactively
terms of divorce decree, under circumstances, was ineffective for
Federal income tax purposes to recharacterize as alimony previous
variable child support payments. Gordon v. Commissioner
AMORTIZATION
Sewer Tap Fee-Use as Intangible Asset-Useful Life.-Where
petitioner's businesses were required to hook up to new city sewage
system and pay city one-time "tap fee" to cover part of system's capital
costs, Court determined that intangible asset (use of city sewer system)
purchased had useful life coextensive with life of sewer system, and
absent proof as to what that life was, under Rev. Proc. 72-10 was
amortizable over period of 50 years. Noble v. Commissioner
Appreciated Real Property Received for Annuity-Allocation of
Aggregate Value.-Where corporation received two pieces of appreci-
ated real property in exchange for annuity, value of which was
determined herein, Court allocated aggregate basis, which was same as
value of annuity, between two properties considering lands' minimal
value and useful life of improvements thereon. 212 Corp. v. Commis-
sioner
Condemned Property-Apportionment of Cost Basis-Allocation of
Condemnation and Rezoning Expenditures.-Where part of petition-
er's property was condemned and petitioner received jury award of
$10,000 per acre and $18,000 severance damages, Court determined,
contrary to petitioner's contention that retained property's basis would
be lower than basis of condemned property reflecting severance
damages and loss of frontage, that apportionment of cost basis was to
be made as of acquisition date and such basis was to be increased by
allocable portions of legal fees and appraisal fees, with portion
attributable to condemnation award added to basis of land taken, and
that attributable to severance damages, along with amounts expended
in connection with rezoning retained property, added to basis of
retained property. Soelling v. Commissioner.
Corporate Assets-Acquired in Liquidation of Subsidiary-Sec.
334(b)(2) Objective Tests.-Where petitioner banking corporation
acquired 100% of stock of S corporation, which petitioner constructively
owned under attribution rules of sec. 318(a), for sole purpose of
liquidating S to obtain its assets, Court determined (1) petitioner did
not "purchase" S stock within meaning of sec. 334(b)(3) and was
therefore not entitled to stepped-up basis under sec. 334(b)(2) in assets
received upon liquidation; and (2) on facts, basis of assets received by
petitioners was determined under sec. 334(b)(1), since enactment of sec.
334(b)(2) supplanted subjective intent test of Kimbell-Diamond doc-
trine with series of objective tests. International State Bank v.
Commissioner
Disgorged Insiders' Profits-Origin of the Claim-Capital Expendi-
ture or Expense.-Where petitioner broker-dealers, who took advan-
tage of "inside" information to purchase stock and settled SEC
securities fraud action by disgorging profits to make whole defrauded
sellers, deducted amounts paid alleging their primary purpose was to
protect their business reputations, Court determined amounts were
capital expenditures and not deductible business expenses, since origin-
of-the-claim test rather than primary-purpose test was applicable, and
claims originated in investment transactions and not in broker-dealer
business. Bradford v. Commissioner
CAPITAL EXPENDITURES -continued
Priming Fields-Sugar Cane Cultivation-Capital Expenditure or
Conservation Expenditure.-Petitioner corporation was not entitled to
deduct costs of priming 3 fields for cultivation of sugar cane as
expenditure for soil or water conservation, since (1) in light of
legislative history, sec. 175 was not intended to apply to development
costs or costs of making field cultivable, (2) petitioner was not type of
farmer Congress attempted to benefit, and (3) where total work area
must be developed before cultivation, simultaneous use requirement in
sec. 175(c)(2) definition of "land used in farming" does not encompass
incremental planting of area as development of each portion is
completed. Amfac, Inc. v. Commissioner
Professional Fees in Condemnation and Rezoning Proceedings—
Origin and Character of Activity Test-Capital Expenditure or
Expense.-Amounts petitioner expended in 1971 for professional fees
in connection with condemnation of property and rezoning remainder
of tract were not deductible under sec. 212 or 162(a) in year paid, but
were capital in nature and served to increase basis, since on facts and
under case law origin and character of claim test rather than primary
purpose test must be applied. Madden v. Commissioner, 57 T.C. 513,
overruled. Soelling v. Commissioner.
Sewer Tap Fee-Hookup Required by City-Deductible Tax, Busi-
ness Expense, or Capital Expenditure. Where petitioner's businesses
were in city which built sewer system and enacted ordinance requiring
petitioner to disconnect private sewage system, hook up to new system,
and pay city one-time tap fee for system's capital cost and monthly
service charge for operating expenses, Court determined "tap fee” was
special assessment for improvement of kind tending to increase value
of petitioner's property and therefore was capital expenditure, and not
deductible tax or business expense. Noble v. Commissioner
CAPITAL GAINS AND LOSSES
See also LOSSES.
Corporate Sale of Petitioners' Securities-Debentures Exchanged
for Stock-Capital or Ordinary Losses.-Where in 1962, petitioners
entered into agreement with X corporation which provided that certain
of their cash and securities would be held by X, subordinated to claims
of X's creditors, and upon notification, liquidated with proceeds to be
utilized by X, X was to pay petitioners $5,000 annually, and that if
securities were liquidated, petitioners would be entitled to subordinated
debentures in face amount of liquidation proceeds and cash would be
deposited with X; in 1970, X gave petitioners notice and sold stock at
price less than petitioners' bases; and later petitioners exchanged
subordinated debenture rights for senior preferred stock in X, Court
determined (1) petitioners were not entitled to any sec. 165(c)(2)
ordinary losses; (2) petitioners sustained capital losses on sale of
securities equal to excess of bases over sales prices; (3) no additional
|