final installments of $250, such payments to be reduced if W
remarried, and agreement was ambiguous in that 61 monthly
payments in specified amounts totaled only $30,000, Court deter-
mined (1) parties intended that $60,000 was to be paid by H in 119
monthly payments of $500 and 2 final monthly payments of $250 for
total of 121 monthly payments (period of more than 10 years), so that
payments were periodic in nature of alimony or support, includable
in W's gross income and deductible by H under secs. 71(a) and 215,
and (2) payments were also periodic under reg. 1.71–1(d)(3)(i) because
subject to reduction if W remarried. Suarez v. Commissioner ....
Temporary Support Payments-Court Separation Decree-
"Separated" Defined.-Where petitioner H and W under court
separation decree, continued, without cohabitation, to share common
residence, and H paid W temporary support payments, Court
determined that H was not separated from W within meaning of sec.
71(a)(3) and regs. and was not entitled to deduct support payments
under sec. 215(a), since, absent duplicate living expenses and
legislative history elucidating congressional intent, "separated"
means living in separate residences; moreover, Court should not be
required to delve into intimate question of whether husband and wife
are living apart while residing in same house. Sydnes v. Commis-
sioner.
Medical Record Files-Animal Hospital-Deductibility.-
Where petitioner acquired assets of veterinary hospital, including
medical record files containing names and addresses of pet owners
and medical histories of each animal patient over preceding 2 years,
Court determined on facts and under case law (1) medical informa-
tion was intangible property with useful life of 7 years, rather than 5-
year life claimed by petitioner, and contrary to Commissioner's
contention, its value was separate from good will and going-concern
value of acquired business, and (2) contract allocation of $120,500 to
medical files, with resulting value of $20 a card, was excessive, and
$85,000 was proper allocation. Los Angeles Central Animal
Hospital, Inc. v. Commissioner
Guarantors' Payments-Corporate Employees or Investors—
Business or Nonbusiness.-Contrary to petitioners' assertion that
their primary motive in guaranteeing X corporation's bank loan was
to protect their jobs, Court determined on facts that petitioners were
acting in their interests as investors rather than employees, since
they received no compensation from X and had entered into no
employment contract, and any understanding as to services peti-
tioners might perform did not create existing employment relation
but mere expectation thereof, so that losses as guarantors on
obligation of X were properly deductible under sec. 166 as nonbusi-
ness bad debts. Scifo v. Commissioner
Reserve Additions—Partial Writeoff of Account Receivable
From Acquired Debtor Corporation-Burden of Proof.-Where
petitioner corporation X, as principal creditor of corporation Y which
was one of its largest customers, in attempt to enable Y to avoid
bankruptcy and continue in business, agreed with other creditors to
cancel portions of past due receivables and at same time acquired all
outstanding stock of Y, Court sustained Commissioner's disallowance
of (1) X's 50% writeoff of account receivable from Y, since X failed to
establish that any portion of receivable became worthless in taxable
year within meaning of sec. 166(c), and (2) X's increase in previous
reserve based principally on writeoff, since X failed to meet burden of
showing that addition was reasonable and that Commissioner's
disallowance amounted to abuse of discretion. Roth Steel Tube Co.
v. Commissioner
Reserve for Losses on Qualifying Real Property Loans-
Savings and Loan Association-Foreclosure Costs as Reserve
Adjustment or Deductible Expense.-Contrary to petitioner's
contention that commissions and other expenses incurred by building
and loan association in selling foreclosed property were ordinary and
necessary expenses separately deductible under sec. 162(a), Court
determined that such expenses must be reflected in adjustments to
reserve for losses on qualifying real property loans under sec. 595(b)
and regs., since statutory purpose was to telescope foreclosure,
purchase, and resale into single taxable event. Allstate Savings &
Loan Association v. Commissioner.....
CAPITAL EXPENDITURES
See also EXPENSES-TRADE OR BUSINESS.
Litigation Expenses and Settlement Payment-Origin of
Claim-Capital Expenditure or Expense.-Contrary to petitioner
savings and loan association's contention that legal fees and
settlement payment were incurred to protect its business against
large claim for fraud and were thus deductible as ordinary and
necessary business expense under sec. 162, Court determined under
case law and origin-of-claim test that evidence showed claim was to
recover unpaid portion of purchase price of realty or realty itself, and
hence expenditures were nondeductible capital outlays. Redwood
Empire Savings & Loan Association v. Commissioner...
CAPITAL GAINS AND LOSSES
Foreclosure-Sale or Abandonment Loss-Capital or Ordi-
nary Loss. Where petitioner purchased real estate subject to first
deed of trust, and seller subsequently defaulted, trustee's foreclosure
sale, in which petitioner did not participate, received no considera-
tion, and lost her interest in property, under case law constituted
sale for sec. 1211 purposes, so that petitioner sustained capital loss,
contrary to her contention that she was entitled to ordinary
abandonment loss under sec. 165. Russo v. Commissioner ......
CAPITAL GAINS AND LOSSES -continued
Sale of Colt-Horseracing Business-Capital or Income.-
Where petitioner, who among other business and investment
interests was engaged in business of racing thoroughbred horses,
purchased pregnant broodmare for use in business, intended to
exploit colt either by selling it or racing it or in some other manner,
which intention to sell did not predominate over other possible
objectives, and made highly profitable sale of colt when it was about
16 months old, Court determined (1) colt was not held by petitioner
"primarily" for sale to customers in ordinary course of his business
(Malat v. Riddell, 383 U.S. 569), (2) gain realized was entitled to
capital gain treatment under sec. 1231(a), and (3) on record cost basis
of colt was $20,000. Gamble v. Commissioner
Sale of Option or Sale of Portion of Land-Bona Fides—
Capital or Income.-Petitioners properly reported their gain on
sale to their accountant of option to buy realty as long-term capital
gain, even though accountant, after exercising option, sold portion of
realty to same party who had made purchase offer to petitioners and
had given them $5,000 check which they returned, and even though
thereafter petitioners were involved as secured creditors in manage-
ment of remaining realty, since transaction was not sham and was
not to be treated as sale of portion of realty by petitioners,
considering petitioners never had title to realty and their participa-
tion was consistent with their creditor interest and close business
relationship with accountant who profited from exercise of option
and subdivision. Anders v. Commissioner..........
Sale of Realty-Bona Fides, Points, Prepaid Interest, and
Holding Period of Partially Completed Building-Capital or
Income. Where partnership on Dec. 31, 1971, purported to sell
property on which it had constructed building, most of exterior of
which was completed more than 6 months before transaction and
interior remained to be completed, Court determined (1) on evidence,
transaction was bona fide sale, contrary to petitioner partner's
contention that transaction was loan, (2) petitioner failed to prove
amounts designated as prepaid interest and "points" in sale
agreement represented part of downpayment, hence such amounts
were ordinary income to partnership, and (3) on evidence, completion
date of building was July 3, 1971, and under case law holding that
apportionment is to be made of basis of building attributable to work
completed more than 6 months before sale and Cohan rule, 40% of
gain was short-term and 60% was long-term capital gain. Russo v.
Commissioner .................
Sale of Undeveloped Realty-Savings and Loan Association-
Capital or Ordinary Loss.-Court sustained Commissioner's con-
tention that loss on sale of tract of undeveloped real estate located
about 500 miles from principal office of petitioner savings and loan
association was capital and not ordinary loss, since tax treatment
was to be determined without benefit of any presumption derived
CAPITAL GAINS AND LOSSES -continued
from California code, and on facts property was not held for sale to
customers in ordinary course of taxpayer's business, contrary to
petitioner's alternative contentions that property fell within sec.
1221(1) exception to definition of capital assets or that Corn Products
doctrine required ordinary treatment for loss. Redwood Empire
Savings & Loan Association v. Commissioner.
COMMUNITY PROPERTY
See ESTATES AND TRUSTS.
CONSOLIDATED RETURNS
Carryover of Member's Pre-Consolidation Losses Separate
Return Limitation Years-Validity of Regs.-Where petitioner X
and Y, corporations owned by substantially same shareholders, after
X acquired 80% of Y's outstanding common shares, filed consolidated
returns on which Y reported no taxable income, Court sustained
Commissioner's contention that affiliated group was not permitted
deductions for carryover of Y's pre-affiliation net operating losses,
since contrary to petitioner's contention, reg. 1.1502, which limits net
operating loss carryover from separate return limitation years to
portion of taxable income of group attributable to that member, did
not exceed sec. 1502 authority in light of legislative history which
clearly demonstrated congressional purpose and approval of reg.
Wolter Construction Co. v. Commissioner..........
Dairy-Net Operating Loss Carryovers-Deductibility.-Com-
missioner erred in disallowing petitioner dairy cooperative's sec. 172
net operating loss carryovers from years 1959-61 to years 1962-66,
since Commissioner's contention based upon "cost principle" of
cooperative operation was conceptually strained and lacking in
fundamental policy support; moreover, utilization of net operating
loss deduction by cooperatives is implicit in certain subsections of
Code, regs., and Commissioner's rulings dealing with cooperatives.
Associated Milk Producers, Inc. v. Commissioner
CORPORATIONS
See also FOREIGN CORPORATIONS, GAIN OR LOSS, and
INCOME.
Acquisition of Corporation-Net Operating Loss and Invest-
ment Credit Carryovers-Tax Avoidance or Business Pur-
pose.-X corporation, and ultimately its shareholders, in business of
crude oil refining, which acquired through tax-free merger surviving
corporation Y, operator of natural gas distribution system with loss
history, did not acquire control for principal purpose of tax avoidance
under sec. 269, but rather for substantial business reasons, including
diversification of X, balancing seasonal cash flow, and belief, since
validated, that Y could be highly profitable public utility under
better management. VGS Corp. v. Commissioner
Liquidation-Sale of Uncompleted Contracts for Underwrit-
ing of Securities-Nonrecognition of Gain or Assignment of
Income. Where corporation in investment banking business under
sec. 337 liquidation plan sold its entire business, including numerous
uncompleted contracts for underwriting of securities which were
transferred to, and completed by, purchaser which received compen-
sation upon completion, Court determined no portion of purchase
price received by corporation represented assignment of income from
partial performance of services under transferred underwriting
contracts, since under case law and practice of industry, due to
material contingencies, corporation had not perfected its right to any
income from contracts before their completion. Storz v. Commis-
sioner
Merger-Net Operating Loss Carryover-Portion Deductible
by Surviving Corporation.-Where two unrelated families each
owned 50% of fair market value of corporations X, Y, and Z; in tax-
free reorganization Y and Z merged into X which had substantial
premerger loss carryover; and shareholders of X received 10% of fair
market value of surviving corporation, Court determined X, Y, and Z
were not "owned substantially by the same persons in the same
proportion" within meaning of sec. 382(b)(3), so that loss carryover
was reduced under formula in sec. 382(b)(2) following Commonwealth
Container Corp. v. Commissioner, 48 T.C. 483; moreover, attribution
rules of sec. 318 could not be indirectly applied to invoke benefits of
sec. 382(b)(3). Kern's Bakery of Virginia, Inc. v. Commissioner......
Merger Qualification as Sec. 368(a)(1)(F) Reorganization-
Net Operating Loss Carryback.-Where X was one of 4 active
corporations which merged into active petitioner corporation Y,
disparate and nonintegrated business activities of premerger corpora-
tions were continued as separate divisions of Y, and premerger
corporations and Y had one common shareholder but significant
difference in shareholders and proprietary interests, Court deter-
mined merger did not constitute sec. 368(a)(1)(F) reorganization, so
that postmerger net operating loss incurred by business formerly
operated by Y could not be carried back against premerger income of
X under sec. 381(b)(3); moreover, even if F reorganization were
present, Y did not meet requirement that sec. 381 carryback be used
only to offset income generated by same business unit or division
that sustained loss. Romy Hammes, Inc. v. Commissioner...........
Merger-Sec. 368(a)(1)(F) Reorganization-Qualification As.-
Where four active corporations, stock of which was owned in varying
proportions by related individuals, were combined in statutory
merger which resulted in change in relative percentages of stock held
by individual shareholders, Court determined in light of case law
that merger was not "a mere change in identity, form or place of
organization" within meaning of sec. 368(a)(1)(F), so that sec. 381(b)(3)
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