ACCOUNTING METHODS
See also DEPRECIATION.
Change Of─Erroneous Unpaid Commissions Deduction-Sec.
481 Adjustment.-Court, having determined herein that petitioner fire
and casualty company erroneously included unpaid commissions on
deferred premium installments in its computation of "expenses incurred"
under sec. 832(b)(6), which concededly constituted change in treatment
of material item requiring sec. 481 adjustment, sustained Commissioner's
inclusion in petitioner's 1967 income of entire accumulated reserve for
unpaid commissions as of close of 1966 less amount applicable to pre-1954
years and rejected petitioner's contentions (1) that Commissioner erred
in including in income some amounts of unpaid commission reserve
which would never be required to be paid in 1967 or subsequent years and
which would never be duplicated in future years because some deferred
premium installments would never be paid, since inclusion was required
to prevent omissions from income, and (2) that sec. 481 requires only
adjustment in year of change equal to amounts which would be duplicated
or omitted in that year, since under case law and statutory intent purpose
of sec. 481 was to prevent duplication or omission of tax without specific
limitation as to adjustment for subsequent years. Western Casualty &
Surety Co
Depreciation-Adoption of Acceptable Method in Lieu of
Unacceptable Method-Used Airplane.-Petitioner corporation
engaged in development, manufacture, and sale of various products for
outdoorsmen, which purchased used airplane in 1964 and improperly used
double declining balance method of depreciation, was entitled to
recompute its allowable depreciation on basis of 150-percent declining
balance method of depreciation and was not limited to straight line
method even though change in accounting method was involved. Silver
Queen Motel, followed. Buddy Schoellkopf Products, Inc.
ADDITIONS TO TAX
See also DEDUCTIONS and RETURNS.
Fraud-Fraudulent H's Liability-Community Property of
Innocent W.-Where petitioners H and W lived in community property
State and filed joint Federal income tax returns for years 1967-70 for
which H fraudulently underpaid tax, and parties stipulated that W was
not guilty of fraud, contrary to petitioners' contention that 1⁄2 of
deficiency agreed upon was attributable to W's share of unreported
community income and constituted "tax of a spouse" within meaning of
sec. 6653(b) to which fraud penalty did not apply and that penalty applied
only in respect of deficiency in tax attributable to H's share of community
income, Court determined, considering legislative history and
congressional intent, that, while innocent W was not liable for penalty
with respect to her tax liability under sec. 6653(b) as amended in 1971, H
was jointly and severally liable for penalty with respect to entire amount
of deficiency in tax for which he was jointly and severally liable under sec.
6013(d)(3); moreover, sec. 6653(b) only relieved W of legal liability for
penalty, not economic detriment which will result from H's payment of
penalty from community funds. Joseph D. Kwong --
See also CAPITAL EXPENDITURES and DEPRECIATION.
Film Rights-Basis for Computation-Cost-Recovery or Income
Forecast Method. Where petitioners reported capital gain tax on dif-
ference between cost basis in corporate stock and value of assets received
in liquidation of corporation, and reported no income received under
corporation's film and television distribution contract rights, contending
that bases in contract rights must be recovered before income was realized
since nature of investment was highly speculative, Court determined that
"income forecast method" of amortizing part of basis which bears same
ratio to total basis as payments received in year bear to total estimated
payments was reasonable allowance for amortization of film contract
rights under sec. 167 on evidence showing petitioners were virtually
certain to recover their bases in contracts. Judith Schneider_
BAD DEBTS
Account Receivable and Book Value of Automobile-
Worthlessness-Burden of Proof.-Petitioner's subsidiary was not
entitled to sec. 166(a)(1) bad debt deduction in fiscal 1966 for account
receivable from major shareholder or for book value of automobile owned
by it and used by shareholder, since, other than unsupported allegations in
petitioner's brief that debt was uncollectible, there was not evidence
regarding existence or worthlessness of debt, so that petitioner failed to
carry burden of proof and Commissioner's determination was sustained.
Covil Insulation Co__
Loans and Accounts Receivable-Subsidiary Corporation-
Debt or Equity.-Where corporation X, which organized corporation Y
in 1961 and acquired 72% of its stock with predominant motive of having
captive customer for its processed wool, in 1964 in order to satisfy Y's
operating capital needs began making loans to Y, evidenced by interest-
bearing promissory notes and later secured by security interest in all Y's
assets, and sold inventory to Y on credit basis, recording accounts
receivable as income in year of sale, Court applied tests outlined in case
law and determined that under circumstances on Y's liquidation in 1970
loans and accounts receivable were debt, not equity, for which X was
entitled to business bad debt loss. W. W. Windle Co..
Shareholder Loans to Corporation-Primary Motive to Protect
Subsidiary or Own Employment and Reputation-Business or
Nonbusiness.-Where petitioner, as founder, president, and former sole
shareholder of X corporation, sold his X shares to Y corporation, in which
he owned large block of stock, and later made loans to Y to avert Y's
financial difficulties and proposed sale of X's assets to Y's controlled
corporation Z, Court disallowed petitioner's subsequent business bad debt
deduction of loss resulting from discharge of loans at less than face value,
since under facts, petitioner's primary motive in making such loans was to
protect X's business and not to preserve or enhance his own employment
or business reputation, so that loss resulted from nonbusiness debts and
was deductible only as provided in sec. 166(d). David Shinefeld __.
BASIS
See also AMORTIZATION and CORPORATIONS.
Adjustment for Depreciation "Allowed" in Prior Year-
Reallocation of Purchase Price Among Assets-Commissioner's
Computation. Where 1965 depreciation deduction for credit informa-
tion file purchased in 1964 was based on petitioners' use of $1,715,000 as
basis for file and resulted in tax benefit of $276,768, and in 64 T.C. 223
Court recomputed basis as $1 million with annual depreciation
deductions of $166,666 allowable, Commissioner properly reduced peti-
tioners' basis for credit file by $276,768 and not $166,666, since Commis-
sioner had not disallowed claimed deduction for 1965; sec. 1016(a)(2)(B)
requires basis to be adjusted by greater of depreciation allowed or
allowable; and, contrary to petitioners' contention, error in 1965
depreciation deduction was not in permitting deduction for depreciation
of goodwill, a nondepreciable asset, but was in allocating too much of
purchase price to credit file, the depreciable asset. Computing &
Software, Inc
Condemnation Award-Allocation Between Rental and Per-
sonal Portions of Property-Capital Gain.-Where petitioners, who
subsequently reinvested part of condemnation award for which they
claimed nonrecognition of gain, allocated 80% of recovery to rental
portion and 20% to personal portion of condemned property based on fair
market value in computing gain on award, Court sustained
Commissioner's calculation based on same formula allocating 93% to
rental portion and 7% to personal portion of property, since petitioners
did not carry burden of proving Commissioner's calculation was incorrect,
and stipulation contained no evidence of fair market values. Frank
Hudock__
Stock Purchased on Margin-Capitalization of Interest-Sound
Accounting Principles. Where petitioner included in adjusted basis
of stock sold interest paid on margin loans incurred in stock purchase in
reliance on sec. 266 and reg. 1.266-1(b), Court determined that factual
question was whether under "sound accounting principles," as generally
accepted by accounting profession, interest may properly be charged to
capital account, as to which petitioner put on no evidence and hence failed
to carry his burden of proof, and in addition Court's independent review
of accounting texts, literature, and principles, as well as case law, was
consistent with testimony of Commissioner's expert witness that under
sound accounting principles cost of stock investment does not include
interest paid on borrowed funds to acquire stock. Mitigation provisions of
secs. 1311-1315 were not applicable to grant petitioner relief, since
statute of limitations was not invoked. Ralph E. Purvis
CAPITAL EXPENDITURES
Ampules Distributed Free of Charge-Capital Expenditure or
Expense-Nonamortizable.-On remand for redetermination of tax
treatment for expenditures attributable to free distribution of 63,903
ampules, Court determined that (1) free distributions were not
advertising expenses but constituted capital expenditures in nature of
goodwill related to research, development, and distribution of drug, and
(2) no amortization was allowable, since to extent expenditures were for
goodwill, they were nonamortizable as matter of law, and to extent
expenditures were for research and experimentation, they were
nonamortizable because no "reasonably" ascertainable useful life could be
ascribed to them. Marko Durovic_.
Legal Fees in Acquisition of Assets-Portion Attributable to
Intangibles-Capital Expenditure or Expense.-Where petitioner
corporation X engaged in development, manufacture, and sale of various
products for outdoorsmen, paid attorney fees in connection with
acquisition of certain assets from corporation Y, including goodwill and
trade names for which no part of purchase price was allocated, Court was
not bound by allocation of values made in purchase contract, and on
evidence, petitioner was required to capitalize 10% of attorney fees as
portion attributable to goodwill and trade names, and remainder was
currently deductible. Buddy Schoellkopf Products, Inc
Legal Fees in Insider Stock Purchase Dispute-Capital
Expenditure or Expense-Sec. 1341 Applicability.-Contrary to
petitioner's contentions, legal fees, incurred in successful defense of action
under SEC rule 10b-5 to recover damages from sale of stock to petitioner,
were not deductible under sec. 162 either as expenses incurred in his trade
or business as corporate executive, since, even though petitioner was
"insider," he was not officer or director of corporation, his stock
ownership was nominal, he gave no advice as corporate executive, and he
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