Taxation-Federal Commons^™

Taxation-Federal Tax Liens-Section 6321 Of The Internal Revenue Code As Basis For Injunction Binding Assets Of Foreign Branch Of American Bank, Gerald J. Laba

Michigan Law Review

The Commissioner of Internal Revenue issued jeopardy assessments against the taxpayer, Omar, S.A., a Uruguayan corporation. To avoid payment, Omar began to liquidate its American-held assets by transferring receipts out of the country. Pursuant to its statutory right, under section 6321 of the Internal Revenue Code of 1954, to impose a lien upon all property of a delinquent taxpayer, the United States brought suit against Omar and various New York banks in the domestic and foreign branches of which Omar's funds were deposited. The district court granted a preliminary injunction restraining certain of the banks from transferring any property whether …

Federal Income Tax-Deductibilty Of Depreciation In Year Of Sale Where Sale Price Exceeds Adjusted Basis Of Asset, Paul A. Rothman

Michigan Law Review

Plaintiff sold all the assets used in its business, in the middle of a fiscal year, at a price in excess of their depreciated cost at the beginning of the year. When plaintiff purchased the assets in question, it intended to use them until they became scrap. The assets were sold as part of a going concern years before plaintiff originally intended to dispose of them. A depreciation deduction claimed in the year of the sale was disallowed. An additional assessment was paid, a claim for refund was denied, and this suit was instituted. Held, judgment for plaintiff. Depreciation …

Federal Income Tax-Definition Of Collapsible Corporation, John E. Mogk

Michigan Law Review

In 1948 petitioner and several other taxpayers, who had previously been active in constructing homes, formed two corporations to build apartment houses. As a result of decreases in the price of building materials and savings on labor and architectural costs, each corporation was left, after completion of construction, with borrowed funds which exceeded costs of construction. In the year following completion of construction the taxpayers distributed the excess borrowed funds of the two corporations and then sold their stock in each at a substantial profit. Petitioner reported, his receipts from the distribution of the loan funds and the profit on …

Taxation-Federal Tax Liens- First In Time Determines Priority Between State And Federal General Tax Lien, James B. Goodbody

Michigan Law Review

The United States brought an action in a federal district court to foreclose a tax lien against a solvent taxpayer. Vermont held a lien against the same taxpayer for unpaid withholding taxes which antedated the federal lien, and was joined as a defendant. The state lien was authorized by a statute drawn practically verbatim from the federal tax lien statute. Thus both liens dated from a refusal to pay assessed taxes on demand, reached all interests in property of whatever nature, and were enforceable either by distraint or civil action. The state claimed priority as first in time. The United …

Taxation-Federal Tax Liens--Priority Of Senior Federal Lien Over Local Tax Lien In Mortgage Foreclosure, Samuel J. Mckim Iii

Michigan Law Review

Plaintiff, a first mortgagee, instituted a foreclosure proceeding joining the mortgagors, a second mortgagee, several judgment creditors, and the United States Government. The Government's lien had been recorded subsequently to the first mortgage but had attached prior to the accrual of various local real estate taxes. Plaintiff's motion for summary judgment, that the premises be sold free of the United States lien but subject to all local real property taxes, was granted. After reversal on appeal, the court again granted summary judgment and effected the same distribution, this time by directing that all local real property taxes be paid as …

Taxation-Federal Income Taxation-The Three-Party Sale And Lease-Back, Lawrence R. Velvel S.Ed.

Michigan Law Review

The so-called sale and lease-back device has long been the subject of judicial and governmental scrutiny. The Internal Revenue Service has recently decided to begin a more active campaign of enforcement against a certain three-party variation of the sale and lease-back device. The structure of this variation can be best understood by considering the following hypothetical situation.

Taxation--Federal Income Tax--Treatment Of Nondistributable Capital Gains Of Domestic Trust With Foreign Beneficiaries, William C. Brashares

Michigan Law Review

Taxpayer, trustee of a domestic inter vivos trust, sued for a refund of United States income taxes paid on nondistributable capital gains of the trust. Trustee claimed that since all the beneficiaries of the trust were United Kingdom residents, this income was tax-exempt under the United States-United Kingdom tax convention provision that a United Kingdom resident "shall be exempt from United States tax on gains from the sale or exchange of capital assets." On appeal by the United States from a district court judgment for the trustee, held, reversed. Although distributable gains are allowed the exemption, long term capital …

Taxation-Federal Income Tax-Enjoining Collection, D. Michael Kratchman S.Ed.

Michigan Law Review

Taxpayer sued to enjoin collection of federal insurance contributions and unemployment taxes with respect to certain fishermen who worked on boats operated by the corporate taxpayer. The Government contended that under the Internal Revenue Code an injunction could not be sustained on a showing of non-liability. The district court issued the injunction on the grounds that the tax was illegal because no employer-employee relationship in fact existed and that collection of the tax would ruin the corporation financially. The court of appeals affirmed, holding that a taxpayer may enjoin the collection of a federal tax when he shows its illegality …

Federal Income Taxation-Accounting Methods-Accounting For Prepayments And Estimated Future Expenses, Jerome M. Salle S.Ed.

Michigan Law Review

"It is the essence of any system of taxation that it should produce revenue ascertainable, and payable to the government, at regular intervals." In order to obtain regular periodic revenues from the federal income tax, Congress requires all taxpayers to determine their taxable income annually.

Income may be defined as "value added" as a result of a given economic activity. Logically, the most opportune time to measure income occurs whenever that activity has ended, for at that time the continuous growth or contraction in the attributable value will likewise have ended and the income or loss from the activity will …

Taxation-Federal Income Tax- Taxpayer's Dividend To Shareholders Allowable As Amortizable Bond Premium Deduction, H. C. Snyder Jr., S.Ed.

Michigan Law Review

In an effort to make an amount distributed to its shareholders tax deductible, taxpayer bought utility bonds which were selling at a large premium and which were callable on thirty days' notice. Taxpayer borrowed an amount equal to the lowest call price, mortgaged the bonds to secure the loan, and paid cash equal to the difference, i.e., the premium in this case. After holding the bonds for thirty days, taxpayer declared a dividend of the bonds and distributed them to its shareholders subject to the indebtedness. The shareholders sold the bonds, paid off the loan from the proceeds, and …

Taxation-Federal Income Tax-Transfers Of Mineral Rights In Soil Deposits As Lease Or Sale, Philip Sotiroff

Michigan Law Review

Petitioner executed a written agreement with a contractor in 1954 whereby the contractor acquired the right to enter petitioner's land and extract sand and gravel for a fixed amount per cubic yard. This agreement was terminated in 1955 when the excavations had reached the desired level of street access. Petitioner had entered into a previous oral agreement in 1949 with a different party for the sale of the gravel on the same land down to the same elevation, but that party had not fully exploited the agreement. Petitioner claimed that the agreements were sales of sand and gravel in place …

Taxation-Federal Income Tax-Worthless Debt Of Corporation Deductible Only As A Nonbusiness Bad Debt By Creditor-Partnership, Larry W. Waggoner

Michigan Law Review

A partnership formed for the purpose of holding and renting real estate and "such other business and enterprises" as might be agreed upon by the partners loaned 120,000 dollars to a corporation which manufactured liquid hair spray for women. This was the only loan the partnership had made. The controlling shareholder in the debtor-corporation was another corporation of which every shareholder was either a parent or grandparent of the partners. The debtor-corporation was to repay the loan in monthly installments of 3,000 dollars plus interest at the rate of twelve percent on the unpaid balance. When the debt became worthless, …

Taxation-Federal Income Tax-Liquidation Distributions Entitled To Both Capital Gains Treatment And Foreign Tax Credit, Lloyd C. Fell

Michigan Law Review

Plaintiff, Associated, is an American corporation whose wholly-owned subsidiary, Automatic, owned all the stock of Filcrest, a Canadian corporation. In 1954 all the assets of Filcrest were distributed to Automatic pursuant to a plan of complete liquidation, accomplished in accordance with Canadian law. In its 1954 consolidated return, plaintiff treated the gain realized on the Filcrest liquidation as a capital gain, and also claimed a foreign tax credit for any Canadian income, war or excess profits taxes which Filcrest had paid over the years to Canada on that part of the liquidation distribution which represented Filcrest's accumulated earnings and profits. …

Taxation-Federal Income Taxation-Examination Of Certain Problems Under Section 335, Roger B. Harris S.Ed.

Michigan Law Review

Stock and securities of controlled corporations may be distributed to shareholders, tax free, in cases of corporate separations which qualify under section 355 of the Internal Revenue Code of 1954. A corporate separation is effected by the transfer of part of a corporation's assets to a subsidiary, the stock of which is distributed to the parent's stockholders. Such distributions are generally classified into three categories: spin-off, split-off, and split-up. A spin-off occurs when corporation A forms corporation B to which A transfers certain assets, receiving in exchange, the stock of corporation B. A then distributes the stock of …

Taxation-Federal Income Tax-Religious Order Not Exempt From Supplment U Tax As A Church, Alan Rothenberg

Michigan Law Review

Plaintiff, a non-profit, membership corporation consists of members of the Christian Brothers Order, and was established to furnish religious and secular education to youth. The Catholic Church considers religious instruction to be the performance of a church function, and property of the Christian Brothers Order is church property according to Roman Catholic canon law. During the taxable years in question plaintiff owned and operated a novitiate, Catholic schools, homes for the Brothers, and a winery and distillery. Plaintiff was assessed and paid $489,800.83 as a Supplement U tax on its unrelated business income realized from the winery and distillery operation. …

Taxation-Federal Income Tax-Strike Insurance Agreements, Robert A. Butler S.Ed.

Michigan Law Review

Contracts indemnifying persons or corporations for losses and damage resulting from an interruption of business due to strikes have existed at least since the beginning of this century. The Mutual Security Company of Connecticut, for example, wrote such a policy for the Buffalo Forge on April 9, 1906. In more recent times, strike insurance agreements have been instituted in major industries, and their impact on collective bargaining has been the subject of some controversy. The purpose of this comment is to consider the federal income tax questions which arise from such arrangements. Specifically, attention is directed to the deductibility of …

Taxation-Federal Income Tax-Accrual Of State Property Taxes Paid Under Protest, Robert L. Harmon

Michigan Law Review

During the years 1946 to 1950 a local tax upon respondent's real property was assessed at one hundred dollars. Respondent paid the full assessment to avoid interest penalties and seizure and sale of the property under tax liens, but contested the assessment in the state court, denying any liability greater than eighty-five dollars. In each of the preceding years, complying with a private ruling directed to it by the Commissioner, respondent had deducted the full one hundred dollars, and, when in 1951 the tax was fixed by the state court at ninety-five dollars, respondent included the five-dollar refund in its …

Bankruptcy-Federal Tax Claims-Accrual Of Post-Petition Interest, Robert Lane

Michigan Law Review

In 1953 taxpayer filed a petition and was discharged in bankruptcy owing federal withholding and social security taxes for 1951. In 1958 taxpayer became entitled to a refund on his 1953-1954 taxes. The Commissioner applied a portion of this ·refund against the balance of the tax for the year 1951, plus accrued interest to 1958. Taxpayer claimed that he was not liable for the interest which had accrued during the period between the date of petition in bankruptcy and the date of refund. When the Commissioner disallowed his claim, the taxpayer brought an action in district court to recover the …

Taxation - Federal Income Tax - Deductibility Of Seminar Cruise As Business Expense, Thomas W. Van Dyke

Michigan Law Review

Petitioner, a physician, participated in a postgraduate medical seminar held aboard a passenger ship during an eighteen-day cruise of the Mediterranean. A number of hour-long lectures followed by discussion periods were held on the ship during each of the six or seven days it was at sea and occasionally while in port; additional study was not required. Petitioner spent most of his time in leisurely activities aboard ship and in sightseeing. All expenses of the course and cruise were included in one charge which petitioner claimed as an ordinary and necessary business expense under section 162 (a) . The Commissioner …

Taxation - Federal Income Tax - Capital Gain Treatment Of Amount Received From Sublessee By Lessee-Sublessor For Surrender Of Lease To Lessor, Paul Tractenberg

Michigan Law Review

The lessor and the sublessee of a valuable piece of business property sought to remove the intervening interest of petitioner, the lessee-sublessor. Petitioner agreed to release to the lessor all his right and interest in the leasehold and in consideration therefor petitioner received a sum of money from the sublessee. The Tax Court decided in a deficiency proceeding that the entire amount should be taxed as ordinary income on the ground that it was merely a substitute for future rental payments. On appeal, held, reversed. Since the substance of the transaction was the transfer of the leasehold from the …

Taxation- Federal Income Tax-Status Of Stock-For-Stock Exchange Where Boot Is Involved, Roger B. Harris S. Ed

Michigan Law Review

Taxpayer was the sole stockholder of International Dairy Supply Company. In 1952, Foremost Dairies, Inc. acquired from taxpayer all his stock in Supply Company in exchange for 82,375 shares of Foremast's common stock and 3,000,000 dollars cash. Taxpayer reported as gain from the transaction only the 3,000,000 dollars "boot" received, less allowable expenses. The Commissioner determined a deficiency of 278,823 dollars, asserting that the nonrecognition provision of the 1939 Code counterpart of section 356 (a) (1) was inapplicable and therefore taxpayer's entire gain realized on the disposition must be recognized. The Tax Court upheld taxpayer's contention that by virtue of …

Taxation - Federal Income Tax - Published Opinions Of The New Tax Officialdom: A Review, David G. Hill S.Ed.

Michigan Law Review

President John F. Kennedy has appointed as his principal tax officials two men who have long been on record as proponents of tax reform. This comment is a collection and, to a small extent, an analysis of the opinions found in their published statements on taxation. Stanley S. Surrey, fifty-year-old Assistant Secretary of the Treasury for Tax Policy, first served with the Treasury Department in 1937. He was Tax Legislative Counsel from 1942 to 1947 and later served as Special Counsel to the House Ways and Means Subcommittee on Administration of the Revenue Laws. He also has served as Reporter …

Taxation-Federal Income Tax-Corporation Held Not Collapsible Where View To Sell Arose After Construction Completed, Amalya L. Kearse

Michigan Law Review

Petitioners had formed a corporation for the purpose of building and operating a housing project. After the construction was completed and most of the apartments rented, small cracks were discovered in the buildings. Without soliciting engineering or other technical opinion, petitioners sold their stock in the corporation. The Tax Court upheld respondent-commissioner's taxing the profit from the sale of stock as ordinary income rather than capital gain, on the theory that the corporation was "collapsible" under section 117 (m) of the Internal Revenue Code of 1939. On appeal, held, reversed. Since the view to the sale of stock did …

Taxation - Income Tax -Gross Income From Mining As The Basis For Computing Percentage Depletion Allowances, John Niehuss

Michigan Law Review

Respondent, a miner of raw fire clay and a manufacturer of such clay into vitrified products, claimed a percentage depletion deduction based upon the gross income from the sale of its finished goods, contending that because its crude minerals could not be sold profitably in a local market, these final products were the first to meet the statutory standard of "commercially marketable mineral product." The district court and the Court of Appeals for the Seventh Circuit accepted respondent's contention. On certiorari to the United States Supreme Court, held, reversed, one Justice concurring. The fact that a taxpayer himself cannot …

Taxation-Federal Income Tax-Strike Benefits May Be Gifts, Christopher Cobb

Michigan Law Review

Taxpayer received assistance from a labor union while he was participating in a strike called by the union. The area in which he lived had become a distressed area as a consequence of the strike, and the union had established a general program of aid for strikers with no other source of income. Both before and after he joined the union payments were made to taxpayer under this program. Taxpayer sued for a refund of the income tax he payed on the value of the assistance so received, and the jury returned a verdict in his favor, finding the payments …

Taxation - Federal Income Tax- Full Payment A Prerequisite To Refund Suit, Stuart S. Gunckel

Michigan Law Review

A tax deficiency of $28,908.60 including interest was levied by the Commissioner of Internal Revenue against the petitioner for a single tax year. Petitioner paid $5,058.54 but later filed a claim for refund which was disallowed by the Commissioner. On suit by petitioner in a United States district court for the refund, the court held the petitioner was not entitled to the refund because the claimed losses were actually capital in nature. The Court of Appeals for the Tenth Circuit reversed and dismissed the complaint on the ground that the district court could not have jurisdiction until there had been …

Taxation - Federal Income Tax - Section 355 Held Applicable To The Division Of A Single Business, James N. Adler

Michigan Law Review

Petitioner, E. P. Coady, and M. Christopher each owned 50 percent of the stock of the Christopher Construction Co., a corporation engaged for more than five years prior to November 15, 1954, in the conduct of a construction business. On that day the parent, Christopher Company, organized a subsidiary, E. P. Coady & Co., to which it transferred approximately one half of its contracts, equipment, and cash. In exchange, the parent company received all the stock of the subsidiary. Immediately thereafter, the parent distributed to petitioner, one of the two equal shareholders of the parent company, all the stock of …

Taxation- Federal Income Tax - Deductible Contributions To Nonqualified Profit-Sharing Plans, Robert M. Steed

Michigan Law Review

In 1942 plaintiff employer adopted a profit-sharing plan under which a percentage of each year's profits was to be deposited in irrevocable trusts for distribution to its employees in succeeding years. The plan was not "qualified" under the Internal Revenue Code. Although under the terms of the trusts each employee's rights in the fund vested at the time the contribution was made by the employer, these rights would be forfeited by voluntary resignation prior to a fixed date. In 1945 plaintiff deducted the amount contributed to the trust in that year as a contribution to a non-qualified profit-sharing plan under …

Taxation - Federal Income Tax - Contract Right Income To Cash Method Taxpayer Who Refused Cash Offer, Eldon Olson

Michigan Law Review

During 1951 petitioner, a cash method taxpayer, executed a mineral lease. As part of the consideration petitioner was to receive an unconditional bonus or advance royalty of fixed amount. The lessee was ready, able and willing to pay the entire amount on execution, but at petitioner's request the contract provided for a small payment on execution with one-half the balance due on January 5th of each of the next two years. About one month before each due date the contract rights were discounted at a bank of which petitioner was a director. The lessee remained ready, able and willing to …

Taxation - Federal Income Tax - Commission Received By Life Insurance Agent On Policies Purchased By Him Held To Be Taxable Income, Roger W. Findley S.Ed.

Michigan Law Review

Taxpayer was agent for eleven life insurance companies. From two of them he purchased policies on the lives of his business partner, three key employees, and his children. He paid the regular premiums and subsequently received standard first-year and renewal commissions. When taxpayer did not include these in his gross income, the Commissioner assessed deficiencies and was sustained by the district court, On appeal, held, affirmed. A commission received by a life insurance agent on a policy purchased by him is taxable income. Ostheimer v. United States, (3d Cir. 1959) 264 F. (2d) 789, cert. den. 80 S.Ct. …