INTRODUCTION

The Internal Revenue Bulletin is the authoritative instrument of the Commissioner of Internal Revenue for the announcement of official rulings and procedures of the Internal Revenue Service, and for the publication of Treasury Decisions, Executive Orders, tax conventions, legislation, and court decisions pertaining to internal revenue matters. Other items considered to be of general interest are also published in the Bulletin, such as announcements relating to proposed regulations published with notice of proposed rulemaking, announcements relating to decisions of the Tax Court of the United States, announcements of the disbarment and suspension of attorneys and agents from practice before the Treasury Department, Delegation Orders, etc.

It is the policy of the Service to publish in the Bulletin all substantive and procedural rulings of importance or of general interest, the publication of which is considered necessary to promote a uniform application of the laws administered by the Service. It is also the policy to publish all rulings and statements of procedures which supersede, revoke, modify, or amend any published ruling or procedure. Except where otherwise indicated, published rulings and procedures apply retroactively. Rulings and statements of procedures relating solely to matters of internal management are not published. However, statements of internal practices and procedures affecting rights or duties of taxpayers, or industry regulation, which appear in internal management documents, are published. Revenue Rulings and Revenue Procedures are based upon rulings and internal management documents prepared in the various divisions of the National Office, including the Office of the Chief Counsel for the Internal Revenue Service. In the preparation of these, caution is exercised to conceal the identity of the taxpayer, as well as any confidential personal and business information. All Revenue Rulings published in the Bulletin have received the consideration and concurrence of the Chief Counsel.

Revenue Rulings and Revenue Procedures reported in the Bulletin do not have the force and effect of Treasury Department Regulations (including Treasury Decisions), but are published to provide precedents to be used in the disposition of other cases, and may be cited and relied upon for that purpose. Since each published ruling represents the conclusion of the Service as to the application of the law to the entire state of facts involved, Service personnel and others concerned are cautioned against reaching the same conclusions in other cases unless the facts and circumstances are substantially the same. (Continued on page 3)

DEPOSITED BY THE

UNITED STATES OF AMERICA

3

HIGHLIGHTS OF THIS ISSUE-(Continued from page 1)

EXCISE TAXES Continued

page 12.

The manufacturers tax on sporting goods does not apply Rev. Rul. 59-136, to sales of fishing rod "blanks"; however, the tax does apply when such blanks are sold with handles and reel seats, regardless of whether assembled or in knockdown condition.

The manufacturers tax on sporting goods does not apply to separate sales of stakes for use with badminton standards; however, where such stakes are sold on or in connection with the sale of badminton standards, they are subject to the tax.

A manually operated card punch device which has no mechanical parts is not subject to the manufacturers tax on business machines.

An importer's separate charges to a customer to cover import duties, customs handling fees, ocean freight, and other expenses incurred in the purchase and importation of phonograph records must be included in the tax base in computing the manufacturers tax upon the sale of the records.

EMPLOYMENT TAXES:

A punch card type return, Form 941-T, has been prepared for use by employers in 15 Internal Revenue Districts in filing their quarterly return of taxes under the Federal Insurance Contributions Act and income tax withheld from wages paid for the first quarter of 1959 and thereafter.

Rev. Rul. 59–137, page 13.

Rev. Rul. 59-138, page 14.

Rev. Rul. 59-139,

page 14.

Announcement, 59-42, page 15.

INTRODUCTION-(Continued from page 2)

In applying rulings and procedures published in the Bulletin, personnel of the Service and others concerned must consider the effect of subsequent legislation, regulations, court decisions, rulings and procedures.

Each published ruling is designated as a "Revenue Ruling," and each published procedure is designated as a "Revenue Procedure." These should be cited by reference to the year of issuance and the Bulletin and page where reported. Thus, Revenue Ruling No. 11 for 1959, which is reported on page 18 of Bulletin No. 2 for 1959, should be cited as "Rev. Rul. 59-11, I.R.B. 1959-2, 18," until it appears in the Cumulative Bulletin, when it should be cited as "Rev. Rul. 59-11, C.B. 1959-1, -" Similarly, Revenue Procedure No. 1 for 1959, which is reported on page 61 of Bulletin No. 6 for 1959, should be cited as "Rev. Proc. 59-1, I.R.B. 1959-6, 61," until such time as it appears in the Cumulative Bulletin. Revenue Rulings are keyed to the applicable sections of the Internal Revenue Code and regulations. The Bulletin is published weekly and may be obtained on a subscription basis from the Superintendent of Documents, as indicated below. The contents of the Bulletin are consolidated at least semiannually into a permanent, indexed, Cumulative Bulletin. These are sold on a single-copy basis. Subscribers to the weekly Bulletin will be notified when copies of the Cumulative Bulletins are available.

For sale by the Superintendent of Documents, U.S. Government Printing Office, Washington 25, D.C. Price 20 cents (single copy). Subscription price: $6.00 a year; $2.75 additional for foreign mailing.

ANNOUNCEMENT RELATING TO PROPOSED REGULATIONS PUBLISHED WITH NOTICE OF PROPOSED RULEMAKING

Under the Administrative Procedure Act, changes in regulations are (with certain exceptions described in such act) published in the Federal Register in tentative or proposed form to provide interested parties with an opportunity to file their objections or suggestions for consideration prior to final adoption of such regulations. The Internal Revenue Service will announce in the Internal Revenue Bulletin the issuance of tentative or proposed regulations relating to internal revenue matters which have been published in the Federal Register with notice of proposed rulemaking. These announcements will appear in the Bulletin during the period which has been prescribed for the submission and consideration of any views, arguments, or suggestions pertaining to the proposed regulations so published. Statement of such views, arguments or suggestions should be submitted in writing in duplicate to the Commissioner of Internal Revenue, Washington, D.C.

PART I

RULINGS AND DECISIONS UNDER THE INTERNAL REVENUE CODE OF 1954

Rulings and decisions published in Part I of the Internal Revenue Bulletin are based on the application of provisions of the Internal Revenue Code of 1954 and, unless otherwise stated in the rulings or decisions, are published without consideration as to any application of the provisions of the Internal Revenue Code of 1939 or related public laws.

SECTION 71.-ALIMONY AND SEPARATE MAINTENANCE PAYMENTS

26 CFR 1.71-1: Alimony and separate

maintenance payments; income to

wife or former wife.

Care and maintenance payments pursuant to annulment decree under section 7(5) of the Domestic Relations Law of New York. See Rev. 59-130, page 7.

SECTION 162.-TRADE OR BUSINESS EXPENSES

26 CFR 1.162-1: Business expenses.

Rev. Rul. 59-110

Reasonable wages paid by a father to his children, two of whom are minors and the third a university student, for services rendered in his trade or business may be deductible as ordinary and necessary expenses for Federal income tax purposes, even though the children use the wages for part of their own support.

I.T. 3812, C.B. 1946-2, modified.

Advice has been requested whether reasonable wages paid by a father to his children are deductible as ordinary and necessary expenses for Federal income tax purposes where the children use the money for part of their own support.

The taxpayer owns and operates a "Drive Inn" restaurant. During the summer months of 1958, he employed his three children to work in the restaurant. Each child worked an average of seven and onehalf hours per day. Each child was paid approximately $.75 per hour. Two of the children were minors and the third, who was 21, was a full-time university student during the regular college sessions. All the money earned by the children was expended for clothing, education and miscellaneous personal expenditures.

Section 162 of the Internal Revenue Code of 1954 provides, in part, as follows:

(a) IN GENERAL.-There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including

(1) a reasonable allowance for salaries or other compensation for personal services actually rendered. ***

Section 1.162-1 of the Income Tax Regulations provides that business expenses which are deductible from gross income include the ordinary and necessary expenditures directly connected with or pertaining to the taxpayer's trade or business and lists as an example labor costs.

Reasonable wages paid by a father to his child for personal services actually rendered as a bona fide employee in the conduct of a trade or business have been held deductible as ordinary and necessary expenses. See I.T. 3767, C.B. 1945, 101; Estate of K. Threefoot v. Commissioner, 9 BTA 499, acquiescence, C.B. VII-1, 31 (1928). The fact that there may be a legal obligation to support the person to whom the wages are paid and that such person utilizes the wages for his own support is not determinative of their deductibility as a business expense by the employer. These circumstances merely subject the relationship to a closer scrutiny to determine whether there is in fact a bona fide employment situation. It is the nature of the wages as an ordinary and necessary expense in the operation of a business, as well as the character of the relationship between the parties as that of employer and employee, which are controlling for purposes of the deduction of wages paid as a business expense.

The facts in this case show that actual services were rendered by each of the taxpayer's children as a bona fide employee in the operation of the taxpayer's business, and that the compensation paid each child for such service was reasonable and constituted an ordinary and necessary expense of carrying on such business. Hence, such wage payments are deductible from gross income as provided in section 162 of the Code. To hold otherwise would be tantamount to penalizing the father for employing his own children inasmuch as the deduction would be allowable if he had employed someone else's children under the same circumstances.

Accordingly, it is held that reasonable wages paid by a father to his children for services rendered by them as his employees in his trade or business are deductible as ordinary and necessary business expenses for Federal income tax purposes even though the children use the wages for part of their own support. For the circumstances under which a parent may also claim a dependency exception by reason of his contribution to the support of such children, see sections 151 and 152 of the Code.

I.T. 3812, C.B. 1946-2, 29, held that the value of meals and lodging furnished by a father to his unemancipated minor child is not includible, for Federal income tax purposes, in the gross income of the child and is not deductible as wages in computing the net income of the father, even though an employer-employee relationship exists between them. It also held that if the father takes the child's earnings and utilizes them for his own purposes, or if the father requires the child