Tax Law Commons^™

Income Tax- Corporations-Legal Expenses Incurred In Sale Of Assets Pursuant To A Section 337 Liquidation Are Deductible-United States V. Mountain States Mixed Feed Co., Michigan Law Review

Michigan Law Review

In 1961, the stockholders of the Mountain States Mixed Feed Co. voted to liquidate the corporation in such a way as to comply with the requirements of section 337 of the Internal Revenue Code of 1954 (Code). That section provides that if a corporation adopts a plan of complete liquidation, and then within twelve months distributes all its assets, it will not recognize a gain or loss for income tax purposes from the sale or exchange of certain types of property. The corporation sold all of its assets and qualified for non-recognition treatment under section 337. It then claimed a …

A Tax Formula To Restore The Historical Effects Of The Antitrust Treble Damage Provisions (An Open Letter To The Senate Antitrust And Monopoly Committee), L. Hart Wright

Michigan Law Review

Following the well-publicized criminal conviction of a major segment of our electrical equipment industry for conspiring to fix and maintain prices, terms, and conditions of sales made to both private industry and the government, almost 2,000 private antitrust treble damage suits were brought against those convicted. In July, 1964, when at least 1,500 of these suits were still pending, the Commissioner of Internal Revenue publicly announced that amounts paid or "incurred" by the defendants in those actions to private plaintiffs, either pursuant to judgment or by way of settlement, together with legal expenses pertaining thereto, were deductible as ordinary and …

The Accumulated Earnings Tax And The Problem Of Diversification, James C. Westin

Michigan Law Review

While diversification is now considered a legitimate corporate need authorizing the accumulation of earnings and profits, the present standards of the Regulations under section 531, which, in general, test the reasonableness of corporate accumulations by the requirement of "specific, definite, and feasible plans" for use of the funds, seem too restrictive in terms of the problems of diversification as outlined above. In light of this criticism and of recent developments, the purposes of this comment are (1) to indicate the basic principles of section 531, an understanding of which is vital to corporations anticipating retention of funds for the purpose …

Principal And Income Allocation Of Stock Distributions--The Six Per Cent Rule, Michael C. Devine

Michigan Law Review

A productive trust is usually dynamic in two ways: the principal assets appreciate in value, and their use produces income. When the beneficial interests in such a trust are successively divided between income recipients and principal remaindermen, every payment to the trust must be characterized either as income or as an addition to principal. The most difficult categorization problems arise when the receipt is of corporate stock.

Joint Tenancy: The Estate Lawyer's Continuing Burden, John E. Riecker

Michigan Law Review

The discussion which follows will be divided into three major parts. First, it will be important to see why so much real and personal property remains in joint tenancy between husband and wife or in entireties tenancy. It has been almost eighteen years since Congress eliminated the necessity of holding property in this form in order to split income therefrom for income tax purposes. Is inertia the only reason for the popularity of joint ownership, or are there other reasons? Second, we shall review the familiar but false assumptions most laymen (and even a few attorneys) commonly make regarding the …

Bootstraps And Capital Gain--A Participant's View Of Commissioner V. Clay Brown, William H. Kinsey

Michigan Law Review

A closely held corporation may be sold in a variety of ways. At one end of the spectrum is an all-cash sale. In such a transaction, the seller receives the purchase price and has no further concern with the economic well-being of the business. The difficulty with this method, of course, is finding a purchaser with sufficient cash who is willing to pay a fair price.

At the other end of the spectrum is a full-fledged bootstrap sale, where there is no down payment other than from the underlying assets of the sold corporation, and the purchaser's obligation to pay …

"Primarily For Sale" In I.R.C Sections 1221 And 1231 Held To Mean "Principally For Sale" Rather Than "Substantially For Sale" --Malat V. Riddell (U.S. 1966), Michigan Law Review

Michigan Law Review

Sections 1221 and 1231 of the Internal Revenue Code disqualify from capital gains treatment profits derived from the sale or exchange of property "held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business." In deciding whether these sections deny capital gains treatment to profits realized by real estate dealers from the sale or exchange of land, the circuit courts, while examining similar facts in relation to the same criteria, have reached divergent conclusions. Two recent decisions, Municipal Bond Corp. v. Commissioner and Malat v. Riddell, illustrate these discordant results. In Municipal …

Identification Of Property Subject To The Federal Estate Tax, Charles L.B. Lowndes, Richard B. Stephens

Michigan Law Review

Although the federal estate tax is imposed on the "transfer" of property, the amount of the levy is a specified percentage of the taxable estate. Correct computation of the tax depends, therefore, upon accurate identification of the property included in the taxable estate. However, the determination and application of the rules governing identification are relatively uncharted areas.

Private Federal Tax Rulings Are Governed By Standard Of Equality And Fairness Of Internal Revenue Code, Section 7805(B)--International Business Machines Corp. V. United States, Michigan Law Review

Michigan Law Review

In a private ruling the Commissioner of Internal Revenue concluded that certain computers produced by Remington Rand, International Business Machines' sole competitor in the manufacture of that type of computer, were not subject to a previously imposed excise tax. IBM immediately requested a similar ruling concerning its identical machines. After a 2½-year delay, the Commissioner ruled adversely on IBM's request and at the same time prospectively withdrew the favorable ruling from Remington. IBM thereupon sued to recover the tax paid during the period Remington enjoyed the exemption. The Court of Claims held, one judge dissenting, that when two taxpayers …

Equitable Considerations Held Not Applicable To Defense Of Lack Of Overpayment--Dysart V. United States, Michigan Law Review

Michigan Law Review

Taxpayer treated the proceeds of a judgment recovered in 1954 as capital gain. Although the Commissioner of Internal Revenue did not object to the capital-gain treatment, he assessed a penalty tax for failure to report the judgment in a declaration of estimated income for 1954. In 1958 the regulation providing for the penalty tax was declared invalid, and taxpayer filed a timely claim for refund. Although an independent affirmative action by the Commissioner contesting the 1954 return would have been barred by the statute of limitations, the Commissioner disallowed the refund, contending that because the proceeds of the 1954 judgment …

Uninsured Casualty Losses Are Within The Scope Of I.R.C. Section 1231--E. Taylor Chewning, Michigan Law Review

Michigan Law Review

Petitioners reported profits from the sale of breeding cattle as a long-term capital gain under section 1231 of the Internal Revenue Code. In the same return, petitioners deducted from ordinary income, under section 165(c)(3), losses sustained from the destruction of their uninsured residential shrubbery. The Commissioner disallowed the casualty-loss deduction from ordinary income, ruling that the loss was subject to the netting provisions of section 1231 and that, since the sale profits exceeded the casualty losses, the loss was to be characterized as a capital loss to be offset against the capital gain. Contrary to previous federal court decisions, the …

Income Tax-Deductions-Lessor's Amortization Of The Amount By Which The Purchase Price Of Improved Realty Exceeds The Appraised Value Of Land-Bender V.United States, Michigan Law Review

Michigan Law Review

Taxpayer, upon being informed that his tenant would not renew his lease unless he could be assured of additional parking facilities, purchased three lots adjacent to the leasehold and immediately demolished the houses thereon in order to provide the necessary space. Since the owners of these residential properties knew of taxpayer's special need, taxpayer was forced to pay substantially more than the total appraised value of the land. In computing his income tax, taxpayer sought to amortize over the life of the lease the cost of razing the buildings and the amount of the purchase price in excess of the …

Collateral Estoppel In Civil Tax Fraud Cases Subsequent To Criminal Conviction, Michigan Law Review

Michigan Law Review

To secure compliance with federal income tax laws, Congress has provided both criminal and civil penalties. Fines and imprisonment are imposed under section 7201 of the Internal Revenue Code if the Government can prove beyond a reasonable doubts a willful attempt to evade or defeat taxation. Section 6653(b) authorizes, as a civil sanction, a fifty per cent addition upon findings by the Commissioner of fraudulent underpayment. These findings, if challenged by the taxpayer, need only be sustained by a preponderance of the evidence. Because of the similarity between the acts condemned by sections 7201 and 6653(b), conviction under section 7201 …

Stock Received In Lieu Of Salary By Stockholder-Employees Whose Proportionate Interest Remains Unchanged Is Taxable Income--Commissioner V. Fender Sales, Inc., Michigan Law Review

Michigan Law Review

Transactions involving forgiveness by stockholder-employees of corporate indebtedness are shrouded in legal uncertainty. The conflicting positions espoused by the Commissioner, the Tax Court, and the circuit court in the principal case focus attention on a few salient problems. The Commissioner, in arguing that the receipt of stock by the individual taxpayers constituted taxable income, considered the individuals solely as employees, believing it immaterial that they were also stockholders. Thus, he reasoned that when they, as employees, received stock in payment of their accrued salaries, they realized income. In contrast, the Tax Court viewed the individual taxpayers as stockholders who had …

Widow's Succession In Common-Law Property State To Husband's Rights In Her Half Of Community Property Is Taxable And Valued At One-Half Of Entire Community--In Re Kessler's Estate, Michigan Law Review

Michigan Law Review

While residing with his wife in California, decedent purchased stock, which under California law became community property. The couple later moved to Ohio, a common-law property state, where decedent died. An Ohio probate court approved the executor's determination that the widow's one-half interest in the stock was not subject to the Ohio succession tax. On appeal by the state tax commissioner to the Ohio Supreme Court, held, reversed, three judges dissenting. A wife's succession to her husband's right to manage and control her half of the community property is subject to the Ohio succession tax on joint and survivorship …

Costs Of Unsuccessful Criminal Defense Are Deductible "Ordinary And Necessary" Business Expenses--Tellier V. Commissioner, Michigan Law Review

Michigan Law Review

Taxpayer, a broker and underwriter, was convicted for violations of the Securities Act of 1933 and the federal mail fraud statute, and for conspiracy to violate those statutes. He claimed a deduction for the legal expenses incurred in his defense. The Commissioner's disallowance of the deduction was sustained by the Tax Court. On appeal to the Court of Appeals for the Second Circuit sitting en banc, held, reversed. Legal expenses incurred in an unsuccessful defense against criminal charges arising out of a trade or occupation are deductible "ordinary and necessary" business expenses.

Retention Of Control Over Stock Constitutes "Ownership" Under Section 1239 Of The Internal Revenue Code-Harry Trotz, Michigan Law Review

Michigan Law Review

Petitioner set up a corporation, retaining seventy-nine per cent of the stock and -distributing the remainder to a third party. The third party borrowed from petitioner, pledging his stock as security and executing an option agreement under which the petitioner could recover the stock at any time. Subsequently, the newly organized corporation purchased all the depreciable assets of petitioner's proprietorship at a price in excess of their adjusted basis; petitioner reported the difference as a capital gain. The Commissioner declared a deficiency, relying on section 1239 of the Internal Revenue Code, which treats as ordinary income the gain recognized from …

Net Operating Loss Sustained By Taxpayer Prior To Marriage Cannot Be Applied Subsequently Against Spouse's Income- Calvin V. United States, Michigan Law Review

Michigan Law Review

Prior to marriage, plaintiff-wife sustained net operating losses which she was entitled to carry over under section 172 of the Internal Revenue Code. For the year 1959, the plaintiffs filed a joint return in which they applied the wife's net operating loss carryover deduction to both of their incomes. The Commissioner allowed the loss carryover to be applied to the wife's but not to the husband's income. In a suit for refund of taxes withheld from the husband's wages, held, judgment for defendant. If a husband and wife elect to file a joint return, net operating losses sustained by …

The Report Of The President's Cabinet Committee On Private Pension Plan Regulation: An Appraisal, Thomas B. Ridgley

Michigan Law Review

The growth of private employee pension plans in the American economy is astonishing. From 1953 to the end of 1964, the accumulation of assets of private pension funds has grown from 16.9 billion dollars to 75 billion dollars, with a projected accumulation of 225 billion dollars by 1980. At present, private retirement plans cover approximately 25 million workers, which is one-half of all employees in private non-farm establishments. Moreover, unions increasingly stress both the creation of pension plans where none exist and increased benefits from current plans. Thus, during the recent United Auto Workers negotiations the union sought and received …

The Solely-For-Voting-Stock Requirement In "B" Reorganizations Satisfied By Cash Payments For Fractional Shares-Mills V. Commissioner, Michigan Law Review

Michigan Law Review

The Internal Revenue Code requires recognition of gains or losses realized upon a sale or exchange of property. An exception to this general rule is found in section 354(a)(1), the basic nonrecognition provision for stock-for-stock reorganizations. This section provides that a stockholder need not recognize gains or losses "if stock or securities in a corporation a party to a reorganization are, in pursuance of the plan of reorganization, exchanged solely for stock or securities in such corporation or in another corporation a party to the reorganization." However, before section 354 can be reached, the exchange must satisfy one of the …

Commissioner May Examine Taxpayer's Records For Years Barred By Statute Of Limitations Without Proving Reasonable Suspicion Of Fraud--United States V. Powell, Michigan Law Review

Michigan Law Review

The Commissioner of Internal Revenue has power to summon witnesses and to examine records in order to ascertain the correctness of a taxpayer's return. If a summons is not obeyed or if the records sought are not produced, the Commissioner may seek enforcement by applying to the proper federal district court. Although the Commissioner's investigative powers are broad, they are not unlimited. In the absence of fraud, he must act within the confines of a three-year statute of limitations. In addition, the Code makes it abundantly clear that taxpayers may not be subjected to unnecessary examinations or investigations and that …

Marital Deduction Formula Clauses In Estate Planning-Estate And Income Tax Considerations, Alan N. Polasky

Michigan Law Review

Once upon a time, and not so very long ago, a child was born, much to the delight of its lawyer-parents. As children will, it brought much joy and only occasional moments of dismay and concern during its early, formative years. But one day it entered the terrible teens, and at age sixteen it became, like many teen-agers, baffling, confusing, and frustrating, giving rise to frenzied attempts to cope with and control the complexities of its behavior. Its name? The Federal Estate Tax Marital Deduction.

Recovery Of Accrued But Unpaid Interest On War-Lost Investments Taxed As Capital Gain To Extent It Exceeds Basis-Horst V. United States, Michigan Law Review

Michigan Law Review

Prior to the United States entry into World War II, taxpayer acquired certain Japanese bonds. In December 1941, pursuant to section 127(a) of the Internal Revenue Code of 1939, he suffered a war loss with respect to these investments and took the proper deduction. When trading restrictions on Japanese bonds were lifted in 1950, taxpayer enjoyed a war loss recovery. At that time, bonds of this type were being traded flat, the quoted price reflecting both principal and accrued but unpaid interest thereon to the date of recovery. As the defaulted interest coupons were paid on their extended maturity dates, …

Personal Holding Companies And The Revenue Act Of 1964, Jerome B. Libin

Michigan Law Review

By 1964, many years had elapsed since significant changes were made in the federal income tax treatment of so-called "personal holding companies." For that reason alone, any amendments contained in the Revenue Act of 1964 that dealt with personal holding companies would have deserved attention. But the fact is that the changes made by the 1964 Act are so powerful in their thrust that they require the most careful kind of study by every practitioner charged with advising closely held corporations. Since the new provisions are rather complicated in nature, such a study cannot lead to a full understanding of …

Testamentary Option To Purchase Realty Can Be Exercised Under Anti-Lapse Statute By Heirs Of Beneficiary--Tuecke V. Tuecke, Michigan Law Review

Michigan Law Review

Testator devised his farm to his son and two daughters. The son, who predeceased his father, was bequeathed an option to purchase the daughters' two-thirds interest in the farm for a specified amount. Over the objection of the daughters, the heirs of the son sought to exercise the option under an anti-lapse statute. The trial court concluded that the son's heirs had inherited the right to purchase. On appeal to the Supreme Court of Iowa, held,affirmed. An option to purchase is a valuable property right inheritable under an anti-lapse statute.

Differing Views On Repayments By Manufacturers To Dealers For Expenses Required By The Manufacturers As Price Readjustments Under I.R.C. Section 6416(B)(1)--General Motors Corp. V. United States; Waterman-Bic Pen Corp. V. United States, Michigan Law Review

Michigan Law Review

The Internal Revenue Code of 1954 exacts a manufacturer's excise tax based on sales price; if the sales price is readjusted by means of a "bona fide discount, rebate or allowance," the manufacturer is entitled to a tax credit under section 6416(b) (1). In two recent cases, General Motors Corp. v. United States, and Waterman-Bic Pen Corp. v. United States, manufacturers have sought tax credits, claiming that their reimbursements to dealers for expenses which the manufacturers had required the dealers to incur subsequent to the time of sale constituted price readjustments. The Court of Claims in General Motors …

Substantive Retroactive Remedial Tax Legislation And The Statute Of Limitations, Michigan Law Review

Michigan Law Review

Since 1953, Congress has enacted at least forty-eight retroactive amendments to the revenue laws, thirty-nine of which have provided for substantive remedial change. While nine of these thirty-nine amendments have contained specific provisions for extending the limitations period, sixteen have retroactively amended substantive law applicable to years normally barred by the statute of limitations but have not contained a provision extending the limitations period. The question is thus raised whether a provision, silent as to its procedural effect, implicitly repeals or modifies the applicable statute of limitations on claims for refunds brought under the retroactive change in the law.