149 C. Cls.

TAXES Continued

INCOME TAX-Continued

CORPORATIONS-Continued

Associations taxable as corporations—Continued

Trusts as associations-Continued

the association was not a corporation for tax purposes. Cebrian,
357.

Internal Revenue 815

Exemption from taxation.

In general.

A claim for exemption from Federal taxation must be clearly made
out. New Jersey Automobile Club, 344.

Section 101 of the Internal Revenue Code of 1939 provides for
exemption from taxation for a number of specified types of organi-
zations, and in subsection (10) it mentions three specific types of
organizations and provides that those three and other "like organi-
zations" shall be exempt from taxation. This means that organi-
zations like the three mentioned will be exempt and not organiza-
tions which are like a distilled essence of the three relative
noncomparable organizations. Specifically, if Congress had intended
to include as exempt such a well known organization as an auto-
mobile club within the coverage of section 101 (10), it would surely
have done so specifically. New Jersey Automobile Club, 344.
Internal Revenue 183

DEDUCTIONS.

Expenses-trade or business.

Attorney or adjuster fees.

Where the taxpayer incurs attorney and adjuster fees in collecting
claims arising from an involuntary conversion by fire of a capital
asset, such fees are deductible from the capital gain and are not
deductible as ordinary and necessary business expenses. See, to
the contrary, United States v. Pate, 254 F. 2d 480, and Ticket Office
Equipment Co. v. Commissioner, 20 T.C. 272, affirmed on other
grounds, 213 F. 2d 318. Where the gain is not taxable, the deduc-
tion would be of no tax consequence.
Towanda Textiles, 123.
Internal Revenue 457, 543

Bonuses to employees.

The value of treasury stock which a corporation gives to its em-
ployees as a bonus is deductible as an ordinary and necessary
business expense representing salary or other compensation. Her-
cules Powder Co., 77.

Expenses-trade or business-Continued

Expenditures in connection with illegal activities.

Ordinarily expenditures made by a business in connection with
illegal activities will not be allowed as a business expense deduction
where such allowance would frustrate sharply defined national or
state policy; but where the expenditure does not constitute an ille-
gal act in itself or a penalty for the commission of an illegal act,
the expenditure, if otherwise allowable, will be allowed as a deduc-
tion from gross income. Thus, where the taxpayer was engaged
in the message business and instituted a flower purchase and deliv-
ery service without proper authority and in violation of military
currency regulations, the payment by the taxpayer of dollars to
New York florists were not direct violations of any law or regula-
tion and if the expenditure was a business expense or a loss, it is
deductible from gross income. Commissioner v. Sullivan, 356 U.S.

27. RCA Communications, 784.
Internal Revenue 568.1

Ordinary and necessary.

Where the taxpayer, engaged in the business of sending radio mes-
sages, institutes a flower order business not for the purpose of
earning a profit on the flower business but rather to stimulate its
primary business of radio messages, the amounts paid to the florists
were ordinary and necessary business expenses incurred in con-
nection with the taxpayer's message business within the meaning
of section 23 (a)(1)(A) of the Internal Revenue Code of 1939.
RCA Communications, 784.

Internal Revenue 566.1

Where the income received from a sale or exchange is ordinary
income to the taxpayer, expenses incurred in realizing such gain
are deductible as ordinary and necessary business expenses. Where
the expenses were incurred in the realization of a capital gain,
they are deductible to reduce that gain. Towanda Textiles, 123.
Internal Revenue 457, 558

Year in which allowed.

Where the taxpayer's obligation to make an expenditure in con-
nection with its message business became due and was actually
carried out in 1945, that is the year in which the business expense
deduction should be taken. The taxpayer's subsequent attempts
to gain conversion of marks which it had received in Germany for
the flowers it purchased for its customers in New York, will not
bar the deduction in 1945 since the taxpayer was not on the
accrual basis of accounting and the deduction relates to amounts
actually paid out in 1945. RCA Communications, 784.
Internal Revenue 574

TAXES Continued

149 C. Cls.

INCOME TAX-Continued

DEDUCTIONS-Continued

Interest on indebtedness.

What constitutes.

Whether payments made with respect to a certain type of security
constitute interest paid on an indebtedness which can be deducted
by the taxpayer in computing its income taxes, or constitute divi-
dends, depends on the true nature of the security as an indebtedness
rather than a contribution to capital. The true nature of the secu-
rity may be determined from all of the terms and provisions of the
security, the purpose for which it was issued, the circumstances and
the intention of the parties. Thus, where debentures of a corpora-
tion were issued to the partners of the partnership acquired by the
corporation in the same proportion as the partners' interests had
been in the partnership, where no money was loaned to the corpora-
tion by the recipients of the debentures, nothing was paid for the
debentures, no preferred stock was issued by the corporation, the
debentures were made subject and secondary to all other indebted-
ness of the corporation, the holders had voting rights to change the
provisions of the debentures, and where, although the company
prospered, no dividends were paid on the common stock, the deben-
tures were contributions to capital rather than an indebtedness and
interest paid to the partners was a dividend and not deductible
interest. R. C. Owen Co., 96.
Internal Revenue

517.1

Losses.

Bad debts-nonbusiness.

Where the taxpayer advances money to a borrower on the security
of mortgages on the borrower's property and later the parties agree
that the borrower cannot pay the sums owed and the mortgaged
property is transferred to the taxpayer in full satisfaction of the
borrower's indebtedness although a sale of the property later brings
less than the debt, the loss to the taxpayer is a nonbusiness bad
debt subject to the $1,000 limitation on deductions for capital losses
and was deductible for the year in which the debt became worth-
less, i.e., when the parties agreed that the debtor was unable to
repay the debt. Bowles Lunch, Inc. v. United States, 91 C. Cls. 292,
overruled. 26 U.S.C. § 23 (k) (4) (1952). Henry, 113.

Where the plaintiff had made a claim for war loss deduction with
with respect to property located in Rumania and Hungary in 1941
and the examining officer for Internal Revenue Service allowed the
amount of loss but for the year 1942, plaintiff in bringing suit for
the refund of taxes paid in 1941 based on his contention that the

149 C. Cls.

TAXES Continued

INCOME TAX-Continued

DEDUCTIONS—Continued

Losses-Continued

War losses-Continued

loss deduction should have been allowed for that year instead of
1942 was not required to produce other evidence as to the amount
of loss. Pasternak, 306.

Internal Revenue 2128

A taxpayer owning property in Rumania and Hungary in December
1941, when those countries were under the control of Germany, was
entitled to a war loss deduction for the year 1941 which was the
year the United States declared war on Germany. 26 U.S.C. (I.R.C.
1939) § 127(a)(2). Pasternak, 306.

Internal Revenue 663

GROSS INCOME.

Gains from sales and exchanges.

Corporation dealing in its own tsock.

Where a corporation distributes its treasury stock as bonuses to
employees and the market value of the stock at the time of dis-
tribution exceeds the basis of such stock, there is no resulting tax-
able gain to the corporation since the corporation is not dealing
in its own shares as it would in the shares of another corporation.
Treasury Regulations 111, sec. 29.22(a)-15. Hercules Powder Co.,
77.

Internal Revenue 546

INSURANCE COMPANIES.

Gross income.

Prepayment or penalty charges.

Prepayment charges received by a life insurance company on prom-
issory notes and mortgages constitute interest within the meaning
of section 201(c)(1) of the Internal Revenue Code of 1939 and
section 803 (a) (2) of the 1954 Code and are includible in the insur-
ance company's gross income. Equitable Life Assurance Society,

316.

Internal Revenue 321

NET INCOME-COMPUTATION OF.

Accounting periods and methods of accounting.

Section 41 of the Internal Revenue Code of 1939 and section 446 of
the Internal Revenue Code of 1954 provide that the Commissioner
of Internal Revenue may compute a taxpayer's net income in a
manner which will clearly reflect the taxpayer's income. Where
a national motor club, an accrual basis taxpayer, treats its prepaid
annual dues as income ratably over the 12-month period of member-
ship whether or not such period extends beyond the close of the

149 C. Cls.

TAXES-Continued

INCOME TAX-Continued

NET INCOME-COMPUTATION OF-Continued

Accounting periods and methods of accounting-Continued
taxpayer's taxable year and where the expenses which were con-
sidered to fall within the category of prepaid membership costs were
not deducted entirely in the taxpayer's taxable year in which paid
or incurred but instead were deducted ratably over the same periods
of time that the dues were recognized as income, this method of
accounting was purely artificial and the Commissioner's disallow-
ance of taxpayer's deferral of income was proper. American Auto-

mobile Assn., 324.

Internal Revenue 1330

Section 41 of the Internal Revenue Code of 1939 provides that the
Commissioner of Internal Revenue may compute a taxpayer's net
income in a manner which will clearly reflect the taxpayer's income.
Where an automobile club on the accrual method of accounting made
a pro rata allocation of the yearly membership dues in monthly
amounts and reported for tax purposes only that portion of the
yearly dues received as having been allegedly earned in the tax
year, such method of accounting did not clearly reflect plaintiff's
income and the Commissioner did not abuse his discretion under
section 41 in refusing to permit such deferral of income and in
computing the plaintiff's net income for tax purposes on the basis
of the whole membership dues received in the tax year. New Jersey
Automobile Club, 344.

Internal Revenue 1333

Gain or loss.

Property transmitted at death.

In determining the gain from the sale of property acquired by
inheritance, the basis for such determination shall be the fair market
value of the property at the time of acquisition (death of the tes-
tator). (26 U.S.C. § 113 (a) (5)) While the appraisal of the prop-
erty for the purposes of Federal estate taxes may be prima facie
evidence of actual or fair market value as of the date of the
testator's death (Treasury Regulations 111, § 29.113 (a) (5)−1(c)),
there may be circumstances in which a different value may be
shown upon a subsequent sale of the property; and the application
of the regulation, the doctrine of estoppel and related equitable doc-
trines, must be applied with a careful regard to the circumstances
of the particular case. Thus, where the beneficiaries of the estate
were minors at the time of their testator's death, resided out of
the country, had no knowledge of what was in their father's estate
tax return in the United States, and where, despite an unrealistically
low appraisal reported by the executors, there was furnished to the
Internal Revenue Service a balance sheet of the company issuing