INDEX.

ACCOUNTING:

I. Methods of Accounting:

(1) Generally, p. 1239.

(2) Accrual or Cash, p. 1239,

II. Periods of Accounting, p. 1240.

Accrual of compensation. See COMPENSATION, 3.
Charging off bad debts. See BAD DEBTS, II.
Constructive receipt. See DIVIDENDS, III, 3.
See INTEREST, 1, 3.

I. METHODS OF ACCOUNTING.

(1) Generally.

1. Railroad Corporations. A railroad which has consistently used the
retirement method of accounting for depreciation of property, in accord-
ance with the regulations of the Interstate Commerce Commission, can not
for a single tax year obtain the benefit of a deduction for annual depreciation
in respect of a part of its properties. Central Railroad Co. of New Jersey----
(2) Accrual or Cash.

2. Accrual Basis. Taxpayer is entitled to deduct, as an accrued liability
incurred during the taxable year, a "Reserve for Patronage Contracts", set
up to provide for supplemental payments under such contracts, for cotton
bought and sold during the taxable year, notwithstanding fact that amount
of the liability was not definitely ascertained at end of year. Anderson-
Clayton Securities Corp--

3. Id. Where the right to receive rentals under a lease was in litigation
until subsequent to tax year, both lessor and lessee claiming breach of the
lease by the other, held, rental accrued on books of lessor for part of tax
year was not a proper accrual and should not be included in taxable income

for such year. A. M. Campau Realty Co..

4. Id. Capital Stock Tax Paid by Successor Corporation. A corporation
on accrual basis should accrue capital stock tax on its books for the period
tax is assessable, even though tax was not then paid. T. H. Symington &
Son, Inc...

5. Id. Fact that ultimate payment was made in a later year and by cor-
poration's transferee does not affect its legal right to accrue the liability
when it arose. Id.

6. Id. Taxpayer was engaged in the business of drilling oil wells for
others for specified amounts payable out of the proceeds derived from the
sale of a proportion of the first oil produced and saved from the property.
The rights thus acquired to future income are contingent and the fair
market value thereof is not accruable as income for year well is completed
although payment has been earned. Edwards Drilling Co...

7. Id. Bonuses accrued as of July 31, 1931, not payable under the agree-
ments with its employees until profits at end of calendar year were determin-
able, held not deductible on return filed for a fiscal year ending July 31,
where facts of record were not sufficient to make an accurate computation.
East Coast Motors, Inc.--.

8. Id. State Taxes. Year when county taxes became due not being
shown, deduction is disallowed where taxpayer is on the accrual basis.
Hecla Mining Co..

Page.

501

795

687

711

341

212

454

1239

ACCOUNTING-Continued.

9. Cash Basis. Fee received in tax year by an attorney on cash basis,
representing payment for services rendered over a period of years is taxable
in its entirety for year received, and may not be prorated over the period.
W. W. Sutton_.

10. Id. Contingent Income; When Taxable. Two attorneys, who had
received a check in payment for services payable to the order of both, could
not agree as to amount to which each was entitled and check was deposited
in a bank to their joint account; there was drawn from the joint account
during tax year such amount as each conceded the other entitled to, the
balance to be drawn only upon settlement of the differences between them.'
Both attorneys were on cash basis. Held, only amount of cash withdrawn
during the tax period should be returned as income. Sara R. Preston - - - - -
11. Id. Taxpayer operating on cash basis may not deduct salary checks
given to employee which were not cashed within tax period covered by
return. Mark D. Eagleton/_DLMO_LSUB_-

12. Id. Date of Tax Incidence; Washington Statutes. Real estate taxes
under the statutes of Washington dól not become a lien and a liability
until tax is levied, and where assessment period closed before taxpayer
inherited the property but tax was not levied until subsequent to the passing
of title to her, liability for the tax attached to taxpayer and being on cash
basis is an allowable deduction for year in which paid. Theodore Plestcheeff-
II. PERIODS OF ACCOUNTING.

1. Change in Period; Permission of Commissioner. Taxpayer failed to
comply with the provisions of art. 361 of Reg. 74, regarding Commissioner's
permission to change its accounting period. Held, Commissioner did not
err in denying permission requested after due date for filing on its regular
basis had passed. East Coast Motors, Inc....

2. Deficiency Computed for Wrong Period. Taxpayer was affiliated during
entire tax year with Corporation B. In succeeding year taxpayer trans-
ferred its assets and liabilities to Corporation C which had been organized
in July of tax year, but which opened no books of account or records in
tax year. Commissioner determined that taxpayer was affiliated with B
for the first half of tax year and with C for the latter half and the disputed
deficiency was computed on a separate basis for one of these periods. Held,
taxpayer's accounting period was the entire calendar year, and the deficiency
determined for a fractional period was unauthorized by statute or regulation
and both deficiency and penalty for delinquency are illegal. Oklahoma
Contracting Corp.

ACCRUAL. See ACCOUNTING, 2-8; INTEREST, 1, 3.

ADMINISTRATIVE DECISIONS:

Commissioner's Regulations. Although the statute gives the Commis-
sioner authority and discretion in regard to the use of inventories, having
promulgated a regulation of general application, he can not deny its effect
as to a taxpayer which comes within its provisions. Claude Neon Electrical
Products Corp,, Ltd-

ADMINISTRATORS. See ESTAte Tax, I.

AFFILIATIONS: P

Consolidated or separate returns. See RETURNS, 2-4.

See ACCOUNTING, II, 2; AMORTIZATION; BAD DEBTS, II, 5, 6; EXPENSES,
I, 1; LOSSES, II, 5-7; NET LOSSES, 4.

1. Validity of Deficiency. Taxpayer was affiliated during entire tax year
with Corporation B. In succeeding year taxpayer transferred its assets and
liabilities to Corporation C which had been organized in July of tax year,
but which opened no books of account or records until year following
tax year.
Commissioner determined that taxpayer was affiliated with B
for the first half of tax year and with C for the latter half and the disputed
deficiency was computed on a separate basis for one of these periods. Held,
taxpayer's accounting period was the entire calendar year, and the deficiency
determined for a fractional period was unauthorized by statute or regulation
and both deficiency and penalty for delinquency are illegal. Oklahoma
Contracting Corp_-

AFFILIATIONS-Continued.

2. Ownership or Control by Corporations; Percentage of Stock Ownership.
An affiliate of taxpayer owned 100% of the preferred stock and 64% of the
common stock of each of six companies. The preferred stock of the six
companies had a voting power of 50 votes per share and a par value of $100
per share. The common stock of the six companies had a voting power of
one vote per share and a par value of $2 per share. Held, the six companies
were affiliated, within the meaning of sec. 141 (d), Act 1928. Anderson-
Clayton Securities Corp----

3. Id. Right to file consolidated return allowed two corporations where
parent owned more than 95% of the voting stock of subsidiary, except for
an agreement by subsidiary to permit one of its employees to purchase its
stock, payment to be conditioned upon the declaration by it of dividends.
No dividends having been declared, and employee's purchase right having
ceased through his leaving the employment, the percentage owned by
parent maintains the affiliated status. Edward Hines Lumber Co------

4. Voting Stock; Status of Preferred Shares. Preferred stock of a cor-
poration was entitled at all times to full voting power, except that it could
not be voted at any election for directors unless the dividends on the pre-
ferred stock remained unpaid for two quarterly periods, whether consecu-..
tive or not. In case of such default, then the preferred stock could be voted
even in election of officers. No default in dividends on the preferred stock
had existed for two quarterly periods during the taxable years in question.
It shared equally with the common in dividend distributions, and carried no
right of redemption upon liquidation. Held, such preferred stock was not
"nonvoting stock which is limited and preferred as to dividends", but was
voting stock, preferred, but not limited as to dividends; and affiliation,
where owner of common did not own preferred, was properly denied. Erie.
Lighting Co..

ALIMONY. See BAD DEBTS, I, 1.

AMENDED PETITION. See LIMITATIONS, III.

AMORTIZATION:

1. Bond Discount; Successor Corporation Resulting from Mergers A-t
corporation resulting from a merger of other corporations succeeds to the
rights and liabilities of its predecessors and may deduct unamortized!! 777
discount on bonds issued by the merged corporations. Connecticut Electric
Service Co---
PINION (444

Metropolitan Edison Co.---

2. Id. Pennsylvania Law. A merger under the "short form of merger" I
provided by Pennsylvania statutes held to result in the liquidation of !I
subsidiary. Id.

3. Id. Unamortized discount on bonds of subsidiaries outstanding at
time of liquidation, is not deductible by parent. Id.

4. Id. Parent corporation redeemed outstanding bonds issued at a
discount with cash secured from a new bond issue; its subsidiaries redeemed
their outstanding bonds, also issued at a discount, with cash advanced by
parent, to which the subsidiaries transferred their assets in tax year. Held,
parent corporation, on consolidated return filed, is entitled to a deduction'
for unamortized discount on both bond issues. Id.

5. Id. Claim by Commissioner that in both cases discount on redeemed
bonds should be prorated annually over the life of the second issue of
bonds, rejected. Id.

ANNUITIES. See ESTATES AND TRUSTS, II, 1.

ANTENUPTIAL AGREEMENT. See ESTATE TAX, III, 1.

APPOINTMENT, POWER OF. See ESTATE TAX, II (5).

ASSESSMENT. See LIMITATIONS, I.

ASSIGNMENT. See COMMUNITY PROPERTY, 1; CONTRACTS; DEPLE-
TION, 2; DEPRECIATION, II; ESTATE TAX, II, 8; ESTATES AND TRUSTS,
I, 6; INCOME, 1.

1110

ASSOCIATIONS:

1. Stock Trading Syndicate. A syndicate formed in 1929 for the purpose
of protecting the market value of a particular stock during the period of
violent market fluctuations and dissolved the following year, which was
not essentially like a corporation in form or functions held, not to be an
association taxable as a corporation. N. B. Whitcomb Coca-Cola
Syndicate.

2. Id. A syndicate which was formed to acquire, develop, manage, and
sell real estate and was by agreement of the subscribing members operated
and controlled by taxpayer and another as managers, with full power to
buy and sell and handle its moneys and other assets as their own and to make
distributions of profits in their discretion, held, to be an association taxable
as a corporation. Bing & Bing, Inc

3. Id. Taxability of Members. The income of a syndicate, qualifying
as a statutory association, is not taxable to its members until distribution
has been made or accrued similar to the declaration of a dividend. Id.

4. Id. Losses. No part of a loss sustained by a syndicate, qualifying as
a statutory association, is deductible by the syndicate members. Id.

5. Cooperative Organization. An organization of pilots engaged in the
business of piloting boats for fees and distributing the fees among its mem-
bers, which possessed the attributes of a corporation, viz., continuity of
existence, equal ownership of shares in the property, which shares were
purchased by members, and limited liability of members, held, to be an
association taxable as a corporation. Mobile Bar Pilots Assn.

6. Cemetery Associations. An association organized and operated ex-
clusively for the benefit of members, the lot owners, not engaged in any
business not necessary to that purpose is exempt from income tax. Kensico
Cemetery...

7. Id. Fact that it had no capital with which to buy the land and issued
land certificates to property owners obligating the association to pay
such owners one-half of sale price of lots does not convert it into an
association being operated for the benefit of the holders of the certificates.
Certificates held to be promises to pay money, not profit-sharing certifi-
cates. Id.

ASSUMPTION OF LIABILITY. See LOSSES, III, 1.

AWARDS. See DAMAGES.

BAD DEBTS:

I. Generally, p. 1242.

II. Ascertainment of Worthlessness and Charging Off, p. 1242.
III. Partial Worthlessness, p. 1243.

See COMMUNITY PROPERTY, 6.

I. GENERALLY.

1. Alimony not an Account Receivable. The worthless obligation of a
divorced husband to pay alimony will not support a deduction as a bad debt
of amounts due and unpaid under the divorce settlement. Pearl A. Long-
2. Advances to Association Organized to Influence Legislation held to be
donations, rather than loans, and may not be deducted as bad debts.
Lelia S. Kirby-----

II. ASCERTAINMENT OF WORTHLESSNESS AND CHARGING OFF.

1. Ascertainment within Tax Year. Claimed deduction disallowed upon
failure to establish worthlessness of debt and ascertainment thereof in the
taxable year. Easton Tractor & Equipment Co...

2. Id. On evidence that company which issued debenture certificates
became bankrupt in tax year, amount invested by taxpayer may be de-
ducted as a bad debt. Robert Ridgway_.

3. Id. Note. Evidence indicates that note was known to be worthless
prior to tax year.
Commissioner's disallowance of deduction is sustained.
Lelia S. Kirby--

Page.

1031

1170

12

498

479

578

189

122

578

BAD DEBTS-Continued.

4. Id. Taxpayer made advances to a mining corporation operating in
Mexico; several years before tax year Mexican insurrectos destroyed the
properties and the Americans left Mexico, after filing a claim for damages
with the Mexican Government. The prosecution of the claim was aban-
doned in tax year. Held, amount advanced constitutes a bad debt ascer-
tained in, and deductible for, tax year: Commissioner's determination
that debt became worthless when property was destroyed and before
prosecution of claim was abandoned, reversed. Id.

5. Year of Charge Off. Taxpayer and its subsidiary filed a consolidated
return for tax year. Subsidiary was a creditor of a corporation which by
final judicial determination in tax year lost all claim to property previously
owned by it and subsidiary transferred the debt to taxpayer without con-
sideration. Taxpayer, thereupon, credited subsidiary's account with the
amount of the debt and charged off the amount as a bad debt on con-
solidated return filed. Held, debt was ascertained to be worthless by
subsidiary and charge off on consolidated return in tax year was proper.
Macdonald Engineering Co...

6. Id. Commissioner's claim that debt was an intercompany transaction
rejected: The intercompany transfer of the debt was a transfer of nothing,
debt having been previously ascertained to be worthless. Id.
III. PARTIAL WORTHLESSNESS.

Evidence of Worthlessness. Taxpayer's claim for greater deduction of
debts recoverable only in part, held, not sustained by the evidence. Bing &
Bing, Inc....

BEQUESTS. See ESTATE TAX, III (2); GAIN OR Loss, III (3); IN-
СОМЕ, 6.

BID PRICE, EVIDENCE OF VALUE. See DEPRECIATION, III, 2.
BONA FIDES. See ESTATE TAX, III, 7, 8.

BONDS. See AMORTIZATION; EXPENSES, I, 1.

BONUSES. See EXPENSES, III, 2.

BUSINESS OR PERSONAL EXPENSE. See EXPENSES, II.

CAPITAL. See DAMAGES, 2.

CAPITAL ASSETS. See CAPITAL GAINS AND LOSSES.

CAPITAL EXPENDITURES:

Page.

3

1170

1. Cost of Subdividing Tract of Land is a capital expenditure, not deducti-
ble as expense. Mellie Esperson Stewart...

2. Development Expense; Patents. Cost of conducting experiments di-
rected to creating patentable inventions held to be capital expenditures and
not deductible expenses. Claude Neon Lights, Inc.......

3. Commissions paid to brokers for buying and selling securities are not
deductible either as ordinary and necessary business expenses or as losses
sustained, but serve to reduce the ultimate profit from the transaction.
Robert C. Winmill__

CAPITAL GAINS AND LOSSES:

1. Capital or Ordinary Los8. On facts presented in evidence stock was
worthless in tax year, but taxpayer in December of such year sold the
shares at auction and claimed the loss. Commissioner allowed the deduc-
tion but treated it as a capital loss. Held, evidence is sufficient to prove
that stock was worthless before sale was made; the sale was an unnecessary
gesture and loss is deductible as an ordinary loss. Walter W. Moyer.----
2. Right to Use Capital Gain Rate. Taxpayers, as trustees, had been for
more than two years owners of bonds which matured on February 1st of
tax year. They knew that the bonds were to be redeemed at par at
maturity, but to insure taxability of the resulting gain under the capital
net gain clause of the statute, they on January 31st sold the bonds at par.
Held, profit realized from the sale is taxable as capital gain under sec. 101,
Act 1928. John D. McKee__

3. Id. Claim by Commissioner that sale was not bona fide because
purchaser of the bonds was an affiliate of the trust company which acted
as a trustee for the redemption of the bonds, rejected. Id.