Taxation-Federal Commons^™

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-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 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 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 …

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-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 …

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 - 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-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. …

Taxation - Federal Income Tax - Lessor's Right To Depreciation Allowances Under Long Term-Lease, E. Roger Frisch S.Ed.

Michigan Law Review

Plaintiff corporation leased its entire railroad property under a long-term lease subject to termination at the election of either party, or by breach of die lessee. The lessee agreed to preserve, replace, renew and maintain the property during the term and to return it upon termination "in at least as good condition as at the beginning of the term." Plaintiff, on the other hand, agreed to reimburse the lessee for all additions and betterments to the property which passed to him upon termination. The government disallowed plaintiff's claim for a tax refund based on its right to allow for depreciation, …

Taxation - Federal Income Tax - Involuntary Conversion Treatment Afforded Sale Of Remaining Property After Partial Condemnation, Stevan Uzelac

Michigan Law Review

Petitioner owned two parcels of real estate across the street from each other which were used as one "economic unit" for purposes of a trucking terminal. One parcel was improved with a terminal building from which trucks would pick up and deliver their shipments, while the other was used as a parking lot for trucks not in use. Petitioner was forced to sell the parking lot under threat of condemnation. Since it was economically unfeasible to operate his business without a nearby parking lot, petitioner subsequently sold the terminal facilities and reinvested the proceeds from the sales of both properties …

Federal Taxation - Tax Aspects Of Corporate Buy And Sell Agreement, Joel D. Tauber S.Ed.

Michigan Law Review

It is the purpose of this comment to consider the tax problems connected with both types of "conventional" corporate buy and sell agreements. It should be recognized, however, that there are many questions of local law and business necessity that also exert influence on the use of such agreements.

Federal Taxation - Transferee Liability Of Insurance Beneficiary, John Gelder S.Ed.

Michigan Law Review

Nearly six years after taxpayer died income tax deficiencies were determined against his estate. Since his estate was insolvent the Commissioner sought to impose transferee liability under section 311 of the 1939 code (now I.R.C. section 6901) on plaintiff, taxpayer's widow, as beneficiary of" her husband's life insurance. The Tax Court, applying federal law, held plaintiff liable for the entire deficiency since the proceeds received by her exceeded that amount. The court of appeals, applying state law, reversed and ruled that the beneficiary was not a "transferee" within the meaning of section 311 even to the extent of the cash …

Taxation - Federal Income Tax - Proceeds From Cancellation Of Contract Treated As Ordinary Income, Jerome B. Libin S.Ed.

Michigan Law Review

Taxpayer had the exclusive right for a period of ten years to purchase all the coal mined by the operator of certain mines. In 1949 the operator paid taxpayer $500,000 as consideration for the complete acquisition of taxpayer's right and interest in the purchase agreement. Taxpayer reported this sum as a long-term capital gain. The Commissioner claimed that the amount received was ordinary income. The Tax Court upheld taxpayer's contention, indicating that the transaction had resulted in the sale or exchange of a capital asset. On appeal by the Commissioner, held, reversed, one justice dissenting. This transaction was more …

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 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 …

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 …

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, …