Taxation - Federal Income Tax - Consequences to Seller and Buyer of Covenant Not to Compete

The owners of the entire capital stock of a newspaper business received an offer of $1,000,000 for their stock and a covenant not to compete with buyers for ten years. After the offer was accepted and the contract of sale drawn up, buyer asked for a clause in the contract evaluating the covenant not to compete at$50 a share and the stock at $150 a share in order to help him taxwise. The clause was accepted with little discussion. The sellers reported the entire proceeds of the sale on their income tax returns as long term capital gain, but the Commissioner ruled that$50 per share of the proceeds constituted consideration for the covenant not to compete and was taxable as ordinary income. The Tax Court held that since the covenant was treated as a separate item in the negotiations, the amount received for it was ordinary income. Clarence Clark Hamlin Trust, 19 T.C. 718 (1953). The buyer treated $50 per share of the amount paid as a capital expenditure for the covenant and deducted an amount representing amortization of the cost. In this case the Commissioner argued that the agreement not to compete was no more than an incident to the transfer of the good will of the business and had no separable value. The Tax Court held that the covenant had a separable value and was a depreciable capital asset. Gazette Telegraph Co., 19 T.C. 692 (1953)

ADMIRALTY-UNSEAWORTHINESS OF VESSEL IN HAVING VICIOUS CREW MEMBER ABOARD

Plaintiff, a seaman on board defendant\u27s ship, went ashore on leave with the second cook. After returning to the ship, the two quarrelled and plaintiff knocked the cook down. The cook went to the galley and obtained a meat cleaver with which he struck plaintiff on the head, causing serious injury. Plaintiff brought suit against the ship owner for damages on the theory that in allowing a man of the cook\u27s vicious proclivities to become a member of the crew, defendant failed to provide a seaworthy ship and that plaintiff had suffered injury as a result. Plaintiff appealed a verdict for the defendant on the grounds that the trial judge had erred in instructing the jury that defendant was under no duty to inquire or examine into the physical or mental condition of a prospective employee, that there could be no recovery unless the facts of the cook\u27s temperament were known or should have been known to the defendant, and that the shipowner was not an insurer of the cook\u27s disposition. On appeal, held, judgment reversed and new trial ordered. The warranty of seaworthiness to the crew of a ship includes a warranty in favor of each that the other crew members are equal in disposition and seamanship to the ordinary men in the calling and that the owner will be liable where a seaman is injured because of the unfitness of a fellow crewman. Keen v. Overseas Tankship Corp., (2d Cir. 1952) 194 F. (2d) 515

TAXATION-FEDERAL INCOME TAX-DEDUCTIBILITY OF LEGAL FEES INCURRED IN CONTESTING GIFT TAX DEFICIENCY

Petitioner gave shares of stock in a closely held family corporation to his wife and children. After paying the federal gift tax, he was notified by the Commissioner of a deficiency of $145,276. The case was eventually settled by payment of$15,612. In this controversy petitioner incurred legal expenses which he sought to deduct on his income tax return under section 23(a)(2) of the Internal Revenue Code. When his claim was disallowed by the Commissioner, this suit was brought for refund. Held, on certiorari, this expenditure was not for the production or collection of income\u27\u27 nor incurred in the management, conservation or maintenance of property held for the production of income, and hence was not deductible. Lykes v. United States, (U.S. 1952) 72 S.Ct. 585

Admiralty - Right to Jury Trial in Certain Cases on Great Lakes - Maintenance and Cure Not Contract or Tort Matter

Libelant brought an action for maintenance and cure on the admiralty side of a federal district court in Illinois. He requested a jury trial, relying on the Act of February 20, 1845, which provides that in certain admiralty and maritime cases arising on the Great Lakes relating to any matter of contract or tort, trial shall be by jury on the demand of either party. The trial court heard the case without a jury and dismissed the libel on the merits. The court of appeals held, on appeal, that maintenance and cure was a matter of ancient and established maritime law, and not a matter of contract or tort for which the libelant would be entitled by the statute to a jury trial. Miller v. Standard Oil Co., (7th Cir. 1952) 199 F. (2d) 457, cert. den. 345 U.S. 945, 73 S.Ct. 836 (1953)

Taxation - Federal Income Tax - Deductibility by an Employee of Sum Paid in Settlement of Claim Arising from His Operation of Automobile Used in Company\u27s Business

Petitioner and one Elkins were employed by a corporation which they had organized to engage in the electrical contracting business. They furnished their own automobiles to transport men and material from job to job, and were reimbursed by the corporation for operating expenses. The corporation also paid for insurance and repairs of the automobiles. While Elkins was using petitioner\u27s car to drive two employees to a job in progress, a collision occurred causing personal injuries to the two employees, who recovered a judgment against petitioner which he finally settled by payment of $4,000 in excess of the amount of the insurance coverage. The corporation was not made a party to the suit, nor was any demand ever made against it for reimbursement of the amount paid by petitioner. He sought to deduct the$4,000 on his personal income tax return as a trade or business expense. Upon hearing, the Tax Court held that, at the time of the accident, the automobile was being used in the business of the corporation, not that of petitioner, and the deduction was disallowed. Emanuel O. Diamond, 19 T.C. 737 (1953)

ADMIRALTY-VALIDITY OF BORN-TO-BLAME CLAUSE IN BILL OF LADING

Petitioner is owner of the S.S. Nathaniel Bacon which collided with the Esso Belgium damaging both ships. The cargo of the Bacon, owned by respondents, was also damaged. The collision was caused by the negligent navigation of employees of both ships. The bill of lading issued to respondents contained a both-to-blame clause requiring the cargo owners to indemnify the carrier for any cargo loss indirectly borne by the carrier. This action was brought to determine liability for the damages suffered in the collision. Held, on appeal, the \u27\u27both-to-blame clause is invalid because of public policy prohibiting carriers from stipulating against their own negligence, and hence the cargo loss must be borne by the carrier as well as the ship with which it collides. United States v. Atlantic Mutual Insurance Co., 343 U.S. 236, 72 S.Ct. 666 (1952)

Admiralty - Exclusive Coverage by Longshoremen\u27s and Harbor Workers\u27 Act of Railway Employer\u27s Liability to Employee for Accident on Car Float

Respondent, a freight brakeman employed by petitioning railroad at its Jersey City yards, was injured while releasing the hand brakes on a freight car which was being pulled off a car float docked in navigable waters. He brought suit under the Federal Employers\u27 Liability Act, alleging that his injury was caused by a faulty brake mechanism maintained in violation of the Safety Appliance Acts. The suit was dismissed in the district court on the ground that the Longshoremen\u27s and Harbor Workers\u27 Act applied exclusively, because the injury occurred on navigable waters. The court of appeals reversed, holding that this act did not apply, since respondent\u27s employment was not maritime in nature. Held, on certiorari, such a case is within the exclusive coverage of the Harbor Workers\u27 Act. Four justices dissented. Pennsylvania R. Co. v. O\u27Rourke, 344 U.S. 334, 73 S.Ct. 302 (1953)

Admiralty - Exclusive Coverage by Longshoremen\u27s and Harbor Workers\u27 Act of Railway Employer\u27s Liability to Employee for Accident on Car Float

Respondent, a freight brakeman employed by petitioning railroad at its Jersey City yards, was injured while releasing the hand brakes on a freight car which was being pulled off a car float docked in navigable waters. He brought suit under the Federal Employers\u27 Liability Act, alleging that his injury was caused by a faulty brake mechanism maintained in violation of the Safety Appliance Acts. The suit was dismissed in the district court on the ground that the Longshoremen\u27s and Harbor Workers\u27 Act applied exclusively, because the injury occurred on navigable waters. The court of appeals reversed, holding that this act did not apply, since respondent\u27s employment was not maritime in nature. Held, on certiorari, such a case is within the exclusive coverage of the Harbor Workers\u27 Act. Four justices dissented. Pennsylvania R. Co. v. O\u27Rourke, 344 U.S. 334, 73 S.Ct. 302 (1953)

TAXATION-FEDERAL INCOME TAX-DEDUCTIBILITY OF LEGAL FEES INCURRED IN CONTESTING GIFT TAX DEFICIENCY

Petitioner gave shares of stock in a closely held family corporation to his wife and children. After paying the federal gift tax, he was notified by the Commissioner of a deficiency of $145,276. The case was eventually settled by payment of$15,612. In this controversy petitioner incurred legal expenses which he sought to deduct on his income tax return under section 23(a)(2) of the Internal Revenue Code. When his claim was disallowed by the Commissioner, this suit was brought for refund. Held, on certiorari, this expenditure was not for the production or collection of income\u27\u27 nor incurred in the management, conservation or maintenance of property held for the production of income, and hence was not deductible. Lykes v. United States, (U.S. 1952) 72 S.Ct. 585

Taxation - Federal Income Tax - Deductibility by an Employee of Sum Paid in Settlement of Claim Arising from His Operation of Automobile Used in Company\u27s Business

Petitioner and one Elkins were employed by a corporation which they had organized to engage in the electrical contracting business. They furnished their own automobiles to transport men and material from job to job, and were reimbursed by the corporation for operating expenses. The corporation also paid for insurance and repairs of the automobiles. While Elkins was using petitioner\u27s car to drive two employees to a job in progress, a collision occurred causing personal injuries to the two employees, who recovered a judgment against petitioner which he finally settled by payment of $4,000 in excess of the amount of the insurance coverage. The corporation was not made a party to the suit, nor was any demand ever made against it for reimbursement of the amount paid by petitioner. He sought to deduct the$4,000 on his personal income tax return as a trade or business expense. Upon hearing, the Tax Court held that, at the time of the accident, the automobile was being used in the business of the corporation, not that of petitioner, and the deduction was disallowed. Emanuel O. Diamond, 19 T.C. 737 (1953)