CAPITAL EXPENDITURES-Continued.

5. Leases. Cost of a lease, original term of which was for a fixed
period with option to renew for three like additional periods at ad-
justed rentals, is recoverable over original term of lease. 353 Lexing-
ton Ave. Corp_-

6. Id. Cancellation. Payment to secure cancellation of a lease prior
to expiration of term is a capital expenditure, recoverable through
deductions spread over unexpired term, and is not deductible in full in
year of payment. Harriet B. Borland_

7. Id. Commission paid for negotiating a long-term lease is a capital
expenditure and not deductible in full in year of payment but should be
prorated over term of lease, regardless whether books are kept on cash
or accrual basis. Id.

8. Id. Attorney Fees. Attorney fees, and other expenditures made
by a lessor in connection with litigation involving a lease, are not de-
ductible as ordinary and necessary business expense, but are recoverable
ratably over life of lease. Richard G. Babbage---.
Watson P. Davidson_-_-

9. Id. Where evidence disclosed that contract was one of sale, not of
lease, initial payment was not a bonus paid for the execution of a lease
and is therefore not recoverable by payee over life of alleged lease.
Robert A. Taft‒‒‒‒‒

10. Licenses. Expenses incurred in investigating a process of use to
taxpayer's business and eventually acquired under a license are de-
ductible ratably over life of license. Forest Products Chemical Co_-_-
11. Nature and Business Purpose. Payments to a corporation by two
of its stockholders to reimburse corporation for alleged loss sustained
through repurchase of treasury stock, for less than price at which sold
to a former manager, in order to terminate his employment, held, not
made to protect stockholders' interests in the corporation, but are in the
nature of additional investment, and as such not deductible. Walter
E. Kramer__.

12. Id. Acquisition of Stock of Predecessor. Fees paid attorneys prior
to taxpayer's incorporation, in connection with acquisition of all the
stock of a predecessor, are not deductible as business expense but consti-
tute part of purchase price paid for the stock. Pidgeon-Thomas Iron Co-
III. IMPROVEMENTS, REPLACEMENTS AND REPAIRS.

1. Buildings; Alterations. Cost of permanent partitions installed in
an office building, although not increasing the value of the building as a
whole, constitute capital expenditures recoverable ratably over remaining
life of building. Harriet B. Borland___.

2. Id. Removal. Cost of moving a dwelling house from business dis-
trict to a residential district is not deductible as a business expense
but constitutes a permanent improvement which increases the value of
the property. John G. Bullock__.

CAPITAL GAINS AND LOSSES. See CONTRIBUTIONS, 2, 3.

1. Capital Assets; Standing Timber; 1921 Act. Where under the law
of the particular jurisdiction title to standing timber, the subject of a
contract of sale requiring payment from vendee as and when cut, re-
mains in vendor until cut and removed, timber constitutes a part of the
realty; is not subject to inclusion in inventory of stock in trade, and
under the 1921 Act represents a capital asset, gain upon the sale of which
may be computed under the capital gain provisions of that act. J. J.
Carroll.

2. Id. 1924 and 1926 Acts. Held, that the business of wholesale lum-
ber manufacturers is not to sell standing timber but to cut it themselves
and manufacture it into lumber for sale, and this being so a sale of
standing timber in a year controlled by the 1924 and 1926 Acts is not
the sale of property held primarily for sale in the course of taxpayer's
business, and gain resulting may be computed under the capital gain
provisions of those acts. Id.

CAPITAL GAINS AND LOSSES-Continued.

3. Bonus Payments received as consideration for oil leases may not
be taxed as capital gain under provisions of sec. 208 (a), Act 1926.
(Burnet v. Harmel, 287 U. S. 103, followed.) Lizzie H. Glide..

4. Tenure. The two-year tenure provision of sec. 206 (a), Act 1921,
means ownership by same person, or entity, of same property: Hence
where a lease with option to purchase owned more than two years is
merged into a fee estate through exercising the option, a sale of the fee
in same year option is exercised is not a sale of property owned more
than two years and is without the capital gain provisions. M. Ernest
Greenebaum, Jr‒‒‒‒‒

5. Id. Stock acquired less than two years before, through exercising
an option acquired more than two years before, is not a capital asset
within the meaning of the statute. D. C. Bothwell___

6. Id. Donees are not entitled to increase their length of tenure by
donor's period of ownership, and if property is sold before expiration
of two years from date received, it is without the capital gain provisions.
New York Trust Co-----

7. Redemption of Securities. Redemption of bonds, either at maturity
or pursuant to an authorized call prior to maturity, is the payment of
an obligation, not a "sale or exchange within the meaning of the
statute, entitling taxpayers to a computation of profit or loss under the
capital gain or loss provisions. (Henry P. Werner, 15 B. T. A. 452,
overruled.) John H. Watson, Jr.

8. Retirement of Stock. The retirement of its stock by issuing cor-
poration is not à sale of capital assets by stockholder and gain realized
is not taxable at capital gain rate. Henry B. Babson‒‒‒‒

9. Id. Stock Dividends. Gain realized on retirement of preferred
stock received as a dividend, more than two years after receipt, is tax-
able at capital gain rate. Robert R. Meyer.......
Louis Rorimer_---

CAPITAL TRANSACTIONS:

1. Commissions; Sale of Capital Stock. Expenses incurred by issuing
corporation incident to selling its stock are applicable to capital transac-
tions and not deductible. Surety Finance Co. of Tacoma____

2. Bond Issue. Expenses in connection with floating a bond issue
including brokerage fees and commissions, should be amortized and
recovered ratably over life of issue. Bonded Mortgage Co. of Baltimore_
3. Id. Fact that income received in the form of commissions on mort-
gage loans is held to be taxable in its entirety when received is no basis
for allowing the cost of floating the issue, sold to raise the cash used
to make the loans, to be deducted in its entirety. Id.

4. Id. Discount; Retirement. Where a new issue of bonds is sold and
with part of the proceeds an earlier issue is retired, any unamortized bond
discount on account of the earlier issue is recoverable by a deduction from
income for year in which issue is retired. East Ninth Euclid Co-------- 1289
5. Id. Affiliated Corporations. Sales of its bonds at a discount by
parent to affiliated company are intercompany transactions and amortiza-
tion of the discount is not an allowable deduction in computing consol-
idated income. Southern Ry. Co___

6. Id. Taxpayer exchanged its bonds for other bonds of an affiliated
company of an equal par value, but of a market value less than par.
Held, no deduction in respect of alleged bond discount may be allowed,
in computing consolidated net income, in absence of evidence establishing
that bonds had been issued at a discount. Id.

7. Id. Issued by Predecessor Corporation. Amortization of discount on
bonds issued by predecessor, liability for which was assumed by taxpayer
upon acquisition of predecessor's properties, is not deductible from
successor corporation's income.

Id.

CARRIERS. See GAIN OR LOSS, II, 22.

1. Income; Sec. 209, Transportation Act. Guarantee payments made to
carriers under provisions of the Transportation Act of 1920 constitute
operating income taxable in year of receipt. Southern Ry. Co‒‒‒‒‒

673

673

CARRIERS-Continued.

2. Id. No change will result in net income whether an item repre-
senting profit on sale of rail be treated as an offset against operating
expense, as Commissioner has treated it, or as an item of income, as
taxpayers contend it should be treated. Id.

3. Id. Accrual. Compensation for use of properties during period of
Federal control is income for accounting period for which compensa-
tion was allowed, where carrier is on accrual basis, although amount of
compensation was neither determined nor received until a subsequent
year. Id.

4. Id. Contributions received from industries for the construction of
facilities with which to handle their commodities subject to be refunded
under certain conditions and which became the absolute property of the
carrier upon failure of the condition do not lose their character as con-
tributions and are not taxable as income. Id.

5. Deductions; Period Following Federal Control; Maintenance. Where
expenditures for maintenance during tax year admittedly included ex-
penditures to overcome undermaintenance during period of Federal
control for which reimbursement was later received, Commissioner's
reduction of the deduction by an amount equivalent to the reimburse-
ment is approved. (Missouri Pac. R. R. Co., 22 B. T. A. 267, over-
ruled.) Id.

6. Id. On evidence that taxpayer did not claim entire amount of mate-
rials and supplies inventory among deductions claimed on return for tax
year, held, Commissioner erred in reducing inventory deduction by differ-
ence between cost of inventory turned over to Director General at
beginning of period and value of inventory received at end of period:
the correct amount by which the inventory deduction should be reduced
determined. Id.

CASH:

Accrual or cash. See ACCOUNTING, I (2); CREDITS, I; INTEREST, 5, 7.
CEMETERY ASSOCIATIONS. See GAIN OR LOSS, II, 23; INCOME, 15.
CHARTERS:

Forfeiture. See LOSSES, II, 6.

CITIZENSHIP. See ALIENS, 1.

CLOSED TRANSACTIONS. See GAIN OR LOSS, I, 21, 22; LOSSES, III, 7.
CLOSING AGREEMENTS:

Scope of Agreement. A taxpayer may prove a net loss with respect to
a year for which tax liability has already been determined and for which
parties have entered into a closing agreement under the provisions of
sec. 606. Act 1928, for the purpose of reducing tax liability for a subse-
quent year. W. C. Mitchell Co‒‒‒‒‒

COLLECTION OF TAX. See CONSTITUTIONAL LAW; LIMITATIONS, II.
COMMISSIONS. See ACCOUNTING, I, 5; CAPITAL EXPENDITURES, II, 7;
CAPITAL TRANSACTIONS, 1-3; COMPENSATION, II, 2, 3; INSURANCE COM-
PANIES, 7.

COMMUNITY PROPERTY. See ESTATES AND TRUSTS, I, 3, 4; GIFT
TAX, 2; HUSBAND AND WIFE, 3–6.

COMPENSATION:

I. Generally, p. 1438.

II. Receipt of Income, p. 1438.

III. Payment in Property, p. 1438.
IV. Exemptions, p. 1438.

See EXPENSES, I, 1; III.

Page

645

COMPENSATION-Continued.

I. GENERALLY,

1. Gift or Compensation. Payment to taxpayer by a corporation
through its president, who stated that it was a gift, but which corporate
resolution and other evidence indicated was compensation, held not a
gift and therefore taxable. C. B. Wilcox_.

2. Id. Payment received from a holding corporation by an employee
of one of its subsidiaries, in recognition of long and faithful services,
constitutes income and is not exempt as a gift. (Schumacher v. United
States, 74 Ct. Cls. 720; 55 Fed. (2d) 1007 and Bass v. Hawley, 62 Fed.
(2d) 721, followed, and William C. Barnes, 17 B. T. A. 1002, overruled.)
Thomas M. Schumacher__

II. RECEIPT OF INCOME.

1. Constructive Receipt. Amount credited in tax year to its president
on corporation's books held to constitute income constructively received
by him in that year, where taxpayer failed to prove that he did not
receive the amount or that because of impending insolvency corporation
could not have made payment in that year. James Klein Bowen___.

2. Service Charge. Taxpayer on accrual basis made loans on real
estate, with interest at a stipulated rate, for which service a commission
was charged and deducted from face of loan at time made. Held,
commissions on notes issued in any one year constitute taxable income
for same year. (Columbia State Savings Bank, 15 B. T. A. 219, fol-
lowed.) Bonded Mortgage Co. of Baltimore....

3. Id. Fact that income received in the form of commissions on mort-
gage loans is held taxable when received is no basis for allowing the cost
of floating bonds, issued to raise funds with which to make loans, to be
deducted in its entirety for year incurred or paid. Id.

III. PAYMENT IN PROPERTY.

Insurance Premiums paid by corporations to insure life of their presi-
dent, corporations not being beneficiaries, constitute taxable income
to the insured. Frank D. Yuengling‒‒‒‒‒
IV. EXEMPTIONS.

1. State and Municipal Employees; Attorneys. Attorneys performing
legal services for municipalities but free to engage in the general prac-
tice of their profession held not officers or employees of political sub-
divisions, but independent contractors whose compensation is not exempt.
Walter G. Winne---

2. Id. Taxpayer was appointed by the Attorney General of a state
as special deputy attorney general under a state statute authorizing such
appointment and establishing the duties of the office; compensation was
fixed by attorney general and payable by municipality. Held, taxpayer
was a state officer and compensation is exempt from Federal taxation.
Rosalie C. Rand....

3. Id. It is immaterial in the instant case that taxpayer retained
membership in a law partnership and shared in its profits. Id.

4. Id. Director of Port. Neither the position held by taxpayer as
director of a port, the duties performed by him, nor the salary received
were shown to be prescribed by law, but duties were performed under
contract with a municipal board, created, not by law but by the mayor
of the city, and none of his activities were shown to be essential govern-
mental functions of the state or any subdivision. Held, compensation
paid him is not exempt. Shelby Wiggins....

5. Id. Manager of Water Works. The sale of water to a city for its
own use, or to its inhabitants, by a municipally owned water works sys-
tem is not an essential governmental function and salary paid manager of
water works is not exempt from Federal income tax. C. S. Denman__---
6. Id. Master in Chancery. Compensation received by an attorney as
master in chancery, a statutory office of the State of New Jersey, held
exempt from Federal taxation. (David K. Cochrane, 26 B. T. A. 1167,
followed.) Id.

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369

182

576

256

COMPENSATION-Continued.

7. Id. Superintendent of Parks. Maintenance of parks by a city for the
sole benefit of the public and not for profit to the city is a governmental
function and salary received by taxpayer as superintendent of parks in
a Massachusetts city is exempt from taxation. Everett B. Sherman---.
See GAIN OR Loss, II, 46, 47.

CONDEMNATION AWARDS.

CONSOLIDATION OF ACCOUNTS. See AFFILIATIONS, III, 5.
CONSTITUTIONAL LAW. See ESTATE TAX, I, 8; TRANSFEREES, 1.

1. Due Process. Liability for additional income and profits taxes was
incurred by taxpayer for two years during which all of its capital stock
was owned by another corporation. Subsequently parent corporation's
charter expired and taxpayer's stock was acquired by new stockholders.
Commissioner asserted deficiencies against taxpayer for the two prior
years under the terms of valid waivers. Held, collection of these defici-
encies from taxpayer does not constitute a taking of the property of
its present stockholders without due process of law, in violation of the
Fifth Amendment to the Constitution. North Side Lumber & Timber
Co

2. Id. The assets of a corporation are generally subject to the payment
of its debts prior to the right of the stockholders to any portion thereof,
and this principle is not affected by changes in the personnel of the
stockholders. Id.

CONSTRUCTIVE RECEIPT. See ACCOUNTING, I, 10, 11; COMPENSATION,
II, 1; DIVIDENDS, II; ESTATES AND TRUSTS, I, 5; INCOME, 12.
CONTEMPLATION OF DEATH. See ESTATE TAX, I (3).
CONTRACTS. See DEPRECIATION, I, 1, 2; GAIN OR Loss, II, 33, 37.
CONTRIBUTIONS. See CARRIERS, 4; EXPENSES, IV; GAIN OR LOSS, I, 7.
In property. See PARTNERS, II, 2, 3.

1. Corporations Within Statute; Educational. Contribution to an or-
ganization which made researches and investigations with respect to
civic, social and economic problems, held not deductible where the activ-
ity of the organizations went beyond the exclusively educational pur-
pose contemplated by the taxing statute and included the advocacy of,
or opposition to, candidates, and proposed changes in existing laws.
John H. Watson, Jr----‒‒.

66

2. Basis for Computation; Act 1928. In computing ordinary net
income" to be used as a basis for application of percentage of charitable
contributions allowable as a deduction, items of capital gain, capital loss,
and capital deductions should be excluded. Susan Dwight Bliss---
Mary Colgate__

3. Id. The deduction for contributions to which a taxpayer is entitled
under sec. 23 (n) of the Act of 1928 is the same amount whether or not
be elects to be taxed under the capital gain provisions of sec. 101 (a),
of the same act, with respect to a part of his income. (Ralph W.
Harbison, 23 B. T. A. 896; Susan D. Bliss, 27 B. T. A. 205; Mary Col-
gate, 27 B. T. A. 506 overruled.) Aaron Straus---

CONTROL. See DEPRECIATION, II, 9-11.

CORPORATIONS. See ASSOCIATIONS; CREDITS, I; DIVIDENDS, I, 5; IV,
7, 8; EXEMPTIONS, 1-6; GAIN OF Loss, I, 17, 18; LOSSES, II.

Consolidation of accounts. See AFFILIATIONS, III, 5.

Contributions. See EXPENSES, IV.

Educational corporations. See CONTRIBUTIONS, 1.
Foreign corporations. See FOREIGN CORPORATIONS.

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