Tax Law Commons^™

Bonds - Income Bonds - Rights Of Bondholders And Deductibility Of Interest For Federal Income Tax Purposes, Guy B. Maxfield S.Ed., Michael M. Lyons S.Ed.

Michigan Law Review

An income bond is an obligation of a corporation on which interest is payable only out of earnings, as distinguished from the ordinary corporate bond on which interest is a fixed charge regardless of earnings. Long regarded as a hybrid security which is to be issued only as a last resort, income bonds have grown surprisingly in popularity over the past two decades. It is the purpose of this comment to consider the historical background of income bonds, to make a comparative analysis of the bond indentures as they affect investors' rights, and to consider the deductibility of income bond …

Taxation - Federal Estate Tax - Insurance And Annuity Combinations, John B. Schwemm S.Ed.

Michigan Law Review

Decedent, aged seventy-six, invested in three single premium life insurance policies. Issuance of each was conditioned on the purchase of a single life, nonrefundable annuity of specified value, and no physical examination was required. Each combination was balanced so that the total premium, exclusive of loading charges, equalled the face value of the insurance. The resulting correlation between compound interest and annuity disbursements made the guaranteed payments to the annuitant correspond precisely with the expected income of a reinvestment of the entire deposit by the insurer. Decedent retained the annuity rights, but all present and future interests in the life …

Constitutional Law - Intergovernmental Tax Immunities - Erosion Of Distinction Between Taxation Of Property And Of Privilege, Barry L. Kroll S.Ed.

Michigan Law Review

Plaintiff Murray Corporation, a manufacturer of airplane parts for the federal government, was assessed a tax by the city of Detroit under the General Property Tax Act of Michigan, based in part on the value of materials. which the corporation had in its possession. Legal title to these materials was in the federal government. The corporation paid the taxes under protest and sued for a refund, contending that the taxes infringed the federal government's immunity from state taxation to the extent the taxes were based on the value of government property. The district court entered judgment for Murray and the …

Taxation - Federal Income Tax - Right Of Donee To Deduct Expense Of Contesting Gift Tax Asserted Against Donor, William J. Wise S.Ed.

Michigan Law Review

ln 1948 taxpayer's mother gave him 410 shares of stock in the family enterprise. She filed a gift tax return, but the government, in auditing it, disagreed with her valuation of the stock. Donor had no desire to contest the government's valuation, but since his mother and father still held substantial stock in the business which would eventually go to him, donee desired a lower valuation for estate tax evidentiary purposes. Allegedly fearing personal liability for any deficiency assessed against his mother as well as a lien against the corpus of the gift for any unpaid tax, he decided to …

Tax Accrual Accounting For Contested Items (Without The Benefit Of I.R.C. Sections 452 And 462), Harrop A. Freeman

Michigan Law Review

A spate of cases in 1956-1957 has required us to examine again the tax handling of accrual accounting in an attempt to find some way through the judicial morass. This study is concerned primarily with proper income and expense accrual reporting in cases in which some form of controversy exists or may exist between the taxpayer and another party concerning the item to be accrued.

Bankruptcy - Priorities - Priority Status Of Tax On Wages Earned But Unpaid At Time Of Bankruptcy, John F. Powell

Michigan Law Review

The State of California demanded that a trustee in bankruptcy pay the employer's tax due on wages earned by the employees of the bankrupt. The wages were earned within the three-month period prior to the petition in bankruptcy but had not been paid prior to bankruptcy. The trustee did not continue the operation of the bankrupt's business. The United States district court reversed the Referee and ordered the trustee to pay the tax claim. The court of appeals affirm. ed. On rehearing, held, affirmed. Since the tax is not due until the wages are actually paid, the tax accrues …

The Impact Of The 12% Reserve Income Tax Provivsion Upon The Banking Structure, Paul D. Lagomarcino

Michigan Law Review

Ordinarily, it is difficult, if not almost impossible, to measure with any degree of accuracy the impact of a tax provision upon an industry. This is often so even after years of experience under it. Moreover, with few exceptions, it is an unusual tax provision that shapes the fundamental ·practices and competitive relationships within an industry, unless it is purposely directed to that end as a matter of policy, and, even then, it may (and frequently does) fail of its objective. Section 593 of the Internal Revenue Code of 1954 is unique in all these respects; on its face-a provision …

Taxation - Income Tax - Accurabilty Of Dealer Reserves Withheld By Finance Company, A. Duncan Whitaker S.Ed.

Michigan Law Review

Petitioner, a dealer in new and used trailers, had agreements with several finance companies whereby they agreed to buy promissory notes he received on installment sales. The agreements permitted the finance company to withhold a portion of the unpaid balance on each note and credit such amount to the petitioner's "dealer reserve" account. The petitioner was liable for all notes in default and the finance company could charge the reserve with any unpaid balance. The reserve could also be charged with any debts of the petitioner to the company. Periodically, the dealer was to receive portions of the reserve in …

Taxation - Federal Estate Tax - Interpretation Of "In Fact" Clause Of Section 2036 And Deductibility Of Support Rights Of Wife, Nathan B. Driggers S.Ed.

Michigan Law Review

Having decided to separate, but desiring to avoid the publicity of a judicial proceeding, decedent and his wife executed an agreement which called for the transfer of securities to a trust, the income of which was to be paid to the wife for her life or until her remarriage, with a reversionary interest in the decedent. In consideration for the transfer, the wife relinquished her right to support by the decedent. Both parties were represented by attorneys in the arms-length negotiations leading to the agreement. About six years after the separation, during which time neither party took steps to procure …

Income Tax - Non-Business Bad Debt Deduction - Deduction For Partially Secured Bad Debt Deferable Until Liquidation Of Collateral Regardless Of Tax Avoidance Motive, Robert H. Elliott Jr.

Michigan Law Review

In 1944 the taxpayer liquidated security held for a non-business debt and deducted the balance of the debt as worthless. The creditor had been insolvent for some time. The commissioner disallowed the deduction on the grounds that the taxpayer had held the security after the debt was worthless in order to obtain a larger tax benefit from the deduction. The district court upheld the Commissioner. On appeal, held, reversed. A partially secured debt is not worthless as long as security is available for its satisfaction. The taxpayer's intent is not a factor in determining worthlessness. Loewi v. Ryan, …

Taxation - Federal Income Tax Deductibility Of Interest On Debentures Issues As A Dividend, Jules M. Perlberg

Michigan Law Review

Taxpayer, a wholly-owned subsidiary corporation, had filed consolidated returns with its parent prior to 1934. When Congress abolished consolidated returns in that year, the subsidiary issued 6% debentures as a dividend to the parent company and subsequently deducted the interest paid on these bonds. The Commissioner claimed the interest payments were really dividends and were not deductible. The Tax Court upheld the Commissioner pointing out the tax-saving motive, absence of new investment, and parent-subsidiary relationship as factors indicating that no genuine debtor-creditor relationship existed. On appeal, held, reversed. The debentures involved were conventional in form and created a valid …

Taxation - Federal Income Tax - Secret Withdrawals Of Corporate Receipts By Stockholders As Income In Absence Of Surplus, Kenneth H. Haynie S.Ed.

Michigan Law Review

As sole stockholder of the Robbins Tire and Rubber Company, the defendant managed and controlled the affairs of the corporation. Over a period of years he intercepted the company's receipts from several of its large customers and diverted them to his own use. No entries of such receipts were made on the books of the company, nor was any tax paid on them. Defendant was convicted for attempted evasion of his personal income tax on these funds. On appeal, held, affirmed. Taxation is concerned with actual command over property: If does not matter whether defendant got the funds as …

Constitutional Law - Due Process - Notice Required To Validate Tax Foreclosure Of Property Of Known Mental Incompetent, Frank M. Lacey S.Ed.

Michigan Law Review

On May 8, 1952, the town of Somers instituted an action to foreclose a number of tax liens. One of these was upon the property owned by a person known in the community to be a mental incompetent, but who had not yet been so certified by a court. Notice was given to the incompetent taxpayer in compliance with the statute by mail, posting, and publication. When she failed to answer within the prescribed period, foreclosure was entered and a deed to her property delivered to the town. Five days later she was declared a person of unsound mind, and …

Transfers Of Joint Property In Contemplation Of Death: A Call For Immediate Statutory Revision, L. Hart Wright

Michigan Law Review

For years the Tax Court sided with the government and the Court of Appeals for the Third Circuit in asserting that the contemplation-of-death provision of the estate tax act was sufficiently elastic to include the tax concept of ownership reflected in the joint-property provision of the same act. The alliance between those tribunals on this point was recently broken, however, when the Tax Court shifted to the competing view supported by taxpayers and the appellate court for the Ninth Circuit. It now believes that the two provisions mentioned above are complete strangers even though at one time these two were …

The Martial Deduction And Equalization Under The Federal Estate And Gift Taxes Between Common Law And Community Property States, Paul E. Anderson

Michigan Law Review

In 1948, as the culmination of much dissatisfaction with the treatment of community property under the federal estate and gift tax laws, Congress adopted a new formula for the treatment of gifts and bequests between spouses; this formula was known as the marital deduction. It has remained practically unchanged since its adoption and still stands as an integral part of our federal estate and gift tax structure.

The basic purpose of the deduction was to provide equalization in estate and gift tax treatment between spouses residing in community property states and those residing in common law property states. The plan …

Taxation - Liens -Priority Of A Subsequent Federal Tax Lien Over An Antecedent Inchoate Lien, John B. Huck S.Ed.

Michigan Law Review

The purpose of this comment is to analyze the rationale, in terms of both statutory construction and policy, of the theory that only a choate garnishment lien is superior to a subsequent tax lien.

Taxation - Federal Income Tax - Damages For Injury To Business As Return Of Capital Or Income, Eric Bergsten S.Ed.

Michigan Law Review

The taxpayers, owners of two movie theatres, recovered $36,000 in a compromise settlement of a Clayton Act suit against the major distributors and exhibitors. The taxpayers claimed that the amount received was a return of capital. The Commissioner claimed the amount received represented the recovery of lost profits. Held, Commissioner upheld. The evidence presented did not warrant a finding that any part of the sum recovered represented a return of capital. Chalmers Cullins, 24 T.C. 322 (1955).

Taxation - Federal Income Tax - Treatment Of Gains From Commodity Futures Transactions Of Manufacturing Consumer, Neil Flanagin S.Ed.

Michigan Law Review

Taxpayer, a manufacturer of products made from corn, purchased and sold corn futures contracts as a part of its regular buying program in order to protect itself against a possible shortage of raw materials. Taxpayer contended that the gains realized on these transactions should receive capital asset treatment. The Tax Court and the court of appeals held that the gains constituted ordinary income. On appeal, held, affirmed. The transactions, though not true hedges, were entered into for business purposes and as an integral part of taxpayer's operations. Consequently, they should be treated the same as hedges, and the gains …

Taxation - Federal Income Tax - Deductibility Of Transportation Expenses Between Two Places Of Current Employment, George E. Ewing S.Ed.

Michigan Law Review

Petitioner was employed as a high school principal by the city of Attleboro, Massachusetts, where he lived. He was also employed as an accounting instructor by Boston University, thirty-seven miles distant, two evenings a week for thirty-two weeks during the taxable year. He used his personal automobile to travel between the two cities and did not remain overnight in Boston. Neither employer expressly required him to incur any transportation expenses in connection with his teaching duties and there was no arrangement for reimbursement of transportation costs. The Tax Court affirmed the Commissioner's disallowance-- of a deduction for the automobile expenses …

Taxation - Federal Estate Tax - Includibilty Of Accumulated Income Of Trust Where Corpus Included In Gross Estate, Neil Flanagin S.Ed.

Michigan Law Review

Decedent created eight inter vivos trusts for the benefit of his immediate family, reserving the power as trustee to invade the corpus in unusual circumstances for the benefit of the beneficiaries, and to accumulate all or part of the income and add it to the corpus. The Commissioner included both the corpus and the accumulated income in the decedent's gross estate. The Tax Court held that the corpus was properly included, but not the accumulated income. On appeal by the Commissioner, held, affirmed. The accumulated income of the trusts should not be included in the decedent's gross estate as …

Torts - Master And Servant - Payment Of Social Security Tax As Evidence Of Relationship, Irving L. Halpern S.Ed.

Michigan Law Review

Plaintiff's decedent was killed when his tractor-truck collided with an automobile driven by defendant's salesman. In an action to recover damages for the death of decedent, the trial court submitted to the jury, as evidence bf a master-servant relationship, the payment of social security taxes by the defendant on behalf of the salesman. Judgment was rendered for the plaintiff. On appeal, held, the record of social security payments by defendant on behalf of its salesman was properly submitted to the jury as evidence of a master-servant relationship. Peetz v. Mazek Auto Supply Co., (Neb. 1955) 70 N.W. (2d) …

Taxation - Federal Income Tax - Purchase By Network Of Corporation Producing Entertainer's Radio Show As Compensation To Entertainer, Jerome K. Walsh, Jr.

Michigan Law Review

Prior to 1947, Jack Benny produced a complete radio show for his sponsor, American Tobacco Company. In January 1947 Amusement Enterprises was incorporated with Benny taking 60 percent of the stock and the remainder going to three of his business associates. Amusement contracted with American to produce a complete radio show, exclusive of Benny's services, to be broadcast over the NBC network on Sunday evenings. Benny signed a separate contract with American as the star of the show. Under the American-Benny contract American could make no change in the time of the broadcast or the network facilities without Benny's approval. …

Taxation - Federal Income Tax - Stockholder's Contractual Duty To Creditors To Finance Corporation As A Business For Purposes Of Bad Debt Deduction, Norman A. Zilber S.Ed.

Michigan Law Review

In 1946 petitioner organized a wholly-owned corporation for the sole purpose of producing a single motion picture at the estimated cost of $175,000. He obtained loan commitments from two lending institutions for $170,000 in exchange for his agreement to increase the paid-in capital to $25,000 and to guarantee personally the financing of the completion of the picture should the budgeted funds prove inadequate. In addition, petitioner made further commitments to secure the institutions' loans. Eventually, $53,273.65 was advanced by petitioner to fulfill his obligations under the agreements. In 1948 the debt which the corporation owed him was deemed worthless and …

Taxation - Federal Estate Tax - Deductibility Of Contingent Bequests To Charity, Jack G. Armstrong S.Ed.

Michigan Law Review

Testator bequeathed a remainder interest to charitable organizations which was contingent upon her sister, age eighty-two, predeceasing two other women, ages sixty-seven and sixty-eight. The Commissioner disallowed a deduction for this bequest on the ground that it was not certain that charity would receive any benefit. In the district court the parties stipulated that there was an eleven to one chance that charity would receive the bequest. On the basis of this stipulation the district court found for the taxpayer. On appeal, held, reversed. In order for a deduction to be allowed the possibility that charity will not take …

Taxation - Federal Income Tax - Renting Out A Single Home As A Trade Or Business For Purposes Of Capital Loss Carry-Over, Alice Austin S.Ed.

Michigan Law Review

Taxpayer, who was not in the real estate business and who was involved in only occasional real estate transactions, inherited a house which he rented out until he sold it at a loss. He treated the transaction as a capital loss, taking advantage of the capital loss carry-over provisions of the Internal Revenue Code. Deficiency assessments were levied against the taxpayer upon the theory that the loss sustained upon the sale of the house was an ordinary loss which could not be carried over to later years. Taxpayer paid the deficiency assessment and sued for a refund. The district court …

Taxation - Inheritance Tax - Transfers Subject To Take Effect At Or After Death, Harvey A. Howard S.Ed.

Michigan Law Review

Decedent was a participant in a company profit-sharing savings and retirement trust. Under the terms of the plan, the company made deposits with a trustee on an annual basis and relinquished the right to recapture or impair the fund for its own use or benefit. The contributions were to be held for ten years with accrued interest, and then were to be distributed to the employees in three annual instalments. Should an employee leave the company, he was entitled to his share in three instalments; in the event of retirement or illness he was to receive his entire share in …

Taxation - Federal Income Tax - Punitive Damages And Recovered "Insider's Profits" Taxable As Income, Alice Austin S.Ed.

Michigan Law Review

In previous litigation one of the defendant taxpayers received punitive damages for fraud practiced upon it and both received treble damages for injuries to business caused by conduct in violation of the federal antitrust laws. The court of appeals affirmed the Tax Court's rulings that these receipts were not taxable as gross income. On certiorari to the Supreme Court, held, reversed. Money received as punitive awards is includible in gross income under section 22 (a), I.R.C. (1939). Commissioner v. Glenshaw Glass Co. and William Goldman Theatres, Inc., 348 U.S. 426, 75 S.Ct. 473 (1955).

Constitutional Law - Federal Immunity From State Taxation - Validity Of State Sales Tax Upon Purchases And Sales By National Banks, Julius B. Poppinga

Michigan Law Review

The 1949 revision of the Michigan Sales Tax Act changed the federal exemption provision so as to permit taxation of sales to corporations acting as agents or instrumentalities of the federal government but not wholly owned by the United States. Accordingly, defendant department of revenue took the position that sales to plaintiff, a national banking institution organized under the National Banking Act, are taxable. In the course of its operations, plaintiff purchases office equipment and other tangible personal property from Michigan. retailers. It also sells food and services to employees through its cafeteria, and sells repossessed merchandise to other parties. …

Legislation - Application Of Merchantile License Tax To Lawyers, Edward H. Hoenicke

Michigan Law Review

The Philadelphia City Council passed an ordinance entitled "An Ordinance--To provide for revenue by imposing a mercantile license tax on persons engaging in certain businesses including manufacturing, professions, occupations, trades, vocations, and commercial activities in the City of Philadelphia. . . ." Under this ordinance the city required lawyers to register, pay a registration fee, and pay a tax on a percentage of their gross volume of business; thereupon, "mercantile licenses" were issued to them. The city charter required each ordinance to deal with one subject only and to express that subject in the title. The application of the ordinance …

Tax-Free Corporate Acquisitions - The Law And The Proposed Regulations, Robert L. Merritt

Michigan Law Review

The quest for interpretation is indeed an ancient one. Our life path is pervaded by a search for meanings.

It has been said of the law that it is sometimes better to have a bad rule than to have no rule. I suppose the rationale is that unsatisfactory certainties at least permit action, and are susceptible to a change for the better, the very badness of the rule serving to accelerate the equitable resolution. Being neither philosopher nor historian, I do not know whether that patience which awaits ultimate improvement is always a virtue.