FOREWORD The Internal Revenue Bulletin is prepared in six parts as follows: I. Part I includes rulings and decisions which are based on the application of provisions of the Internal Revenue Code of 1954 and, unless otherwise stated in the ruling or decision, are published without consideration as to any application of the provisions of the Internal Revenue Code of 1939 or other related public laws. II. Part II includes rulings and decisions which are based on the application of the Internal Revenue Code of 1939, the Federal Firearms Act, and other public laws except those pertaining to the various alcohol taxes; and, unless otherwise noted therein, they are published without consideration as to any application of the provisions of the Internal Revenue Code of 1954. Part II is subdivided into three subparts according to matters issued under the Internal Revenue Code of 1939 (Subpart A), the Federal Firearms Act (Subpart B), and other public laws (Subpart C). III. Part III contains rulings and decisions pertaining to the various alcohol taxes. This part is subdivided into four subparts according to matters issued under the Internal Revenue Code of 1954 (Subpart A), the Internal Revenue Code of 1939 (Subpart B), the Federal Alcohol Administration Act (Subpart C), and other public laws (Subpart D). IV. Part IV contains treaties and tax legislation, including related committee and Conference Reports. This part is subdivided into three subparts according to tax conventions, Treasury Decisions and Revenue Rulings issued with respect thereto (Subpart A), legislation (Subpart B), and Committee Reports (Subpart C). House, Senate and Conference Committee Reports printed in the Bulletin do not include the portion entitled "Changes in Existing Law." V. Part V is devoted to administrative, procedural and miscellaneous matters. VI. Part VI includes general announcements which are deemed to be of interest to the general public. With the exception of the disbarment list included in this part, none of the other announcements will be consolidated in the Cumulative Bulletin. The Highlights of this Bulletin include a reference to each item published in the Bulletin. Because these are grouped according to the type of tax involved, the Highlights for a particular issue serve as an index to matters published therein. The Bulletin service carries a cumulative index on a monthly basis. That index appears in the first Bulletin for each month and indexes matters published during the preceding month. These monthly indexes are cumulated on a quarterly and semiannual basis, and the indexes so cumulated are published in the first Bulletin of the succeeding quarterly period, respectively. 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. ANNOUNCEMENT RELATING TO DECISIONS OF THE TAX COURT OF THE UNITED STATES It is the policy of the Internal Revenue Service to announce in the Internal Revenue Bulletin at the earliest practicable date the determination of the Commissioner to acquiesce or not acquiesce in a decision of The Tax Court of the United States which disallows a deficiency in tax determined by the Commissioner to be due. Notice that the Commissioner has acquiesced or nonacquiesced in a decision of The Tax Court relates only to the issue or issues decided adversely to the Government. Actions of the acquiescences in adverse decisions should be relied on by Revenue officers and others concerned as conclusions of the Service only to the application of the law to the facts in the particular case. Caution should be exercised in extending the application of the decision to a similar case unless the facts and circumstances are substantially the same, and consideration should be given to the effect of new legislation, regulations, and rulings as well as subsequent court decisions and actions thereon. Acquiescence in a decision means acceptance by the Service of the conclusion reached, and does not necessarily mean acceptance and approval of any or all of the reasons assigned by the Court for its conclusions. No announcements are made in the Bulletin with respect to memorandum opinions of The Tax Court. The announcements published in the weekly Internal Revenue Bulletins are consolidated semiannually and annually. The semiannual consolidation appears in the first Bulletins for July and January and in the Cumulative Bulletin for the first half of the year, and the annual in the Cumulative Bulletin for the last half of the year. The Commissioner ACQUIESCES in the following decisions: Arnett, Thomas E., estate of. Crawford, Thomas H., Jr., administrator C.T.A., of estate of Thomas E. Arnett; and administrator DBN, of estate of Clara Belle Arnett.. So Relle, A. W., estate of. So Relle, A. W., Jr., et al., executors of estate of A. W. SoRelle.. 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 61.-GROSS INCOME DEFINED 26 CFR 1.61-1: Gross income. Rev. Rul. 59-1411 The Internal Revenue Service will not follow the decision in the case of William F. Perry et ux. v. United States, 160 Fed. Supp. 270, as a precedent in the disposition of similar cases. In this case, the United States Court of Claims held that the return to the grantor of the corpus of a charitable trust constituted a nontaxable return of capital even though the grantor had realized full tax benefits from charitable deductions allowed for transfers to the trust in prior tax years. The court stated that the taxpayer should only add to the tax otherwise due in the year of repayment the amount of the taxes which had been saved as a result of the deductions previously taken. This approach is contrary in principal to a long line of judicial authority holding that recovery of previously deducted items constitutes taxable income in full in the year of recovery if the taxpayer had realized a full tax benefit from deductions taken in prior tax years. See Rothensies v. Electric Storage Battery Co., 329 U. S. 296, Ct. D. 1679, C.B. 1947-1,109, and Estate of William H. Block, 39 BTA 338. It is also contrary to the Internal Revenue Service's published position on the matter. See Revenue Ruling 54-566, C.B. 1954-2, 96. Accordingly, similar cases will be disposed of in conformity with established judicial doctrine and the prior published ruling, pending further judicial development of the issue. 1 Based on Technical Information Release 128, dated February 2, 1959. 500395-59 -2 (9) SECTION 421.-EMPLOYEE STOCK OPTIONS 26 CFR 1.421-3: Exercise of restricted stock Rev. Rul. 59-140 The employer-employee relationship required in respect of restricted stock options under section 421 of the Internal Revenue Code of 1954 is affected by active military service, as follows: (1) an option granted while the optionee is on extended active military duty does not qualify as a restricted stock option; (2) an option granted before the optionee enters active military service but exercised while he is on leave of absence on active military duty, or by his estate following his death while on such duty, may be a restricted stock option, and the optionee may qualify for the beneficial tax treatment provided for in section 421, provided other statutory tests are met; and (3) the benefits of section 421 treatment extend equally to a restricted stock option granted before the optionee enters active military service and exercised after return to civilian employment with the optionor corporation, if the employment relationship is unbroken by virtue of a statutory right of reemployment or under a leave of absence. The foregoing principles are equally applicable in cases involving bona fide leaves of absence for reasons other than military service. Advice has been requested concerning the effect that active military service has upon the employer-employee relationship for purposes of a restricted stock option. For the purpose of section 421 of the Internal Revenue Code of 1954, the effect that active military service of an optionee has upon the employer-employee relationship varies according to the following situations: The first situation involves an option which is granted while the optionee is on extended active military duty. Section 1.421-2(a) (3) of the Income Tax Regulations provides, in general, that at the time the option is granted the relationship between the optionor corporation (or its parent or subsidiary corporation) and the optionee must be the legal and bona fide relationship of employer and employee and that whether the employer-employee relationship exists is to be determined in accordance with section 3401 (c) of the Code and the regulations thereunder. The regulations under section 3401 (c) of the Code make the right of direction and control by the employer the primary test in determining whether the employer-employee relationship exists. See section 31.3401 (c)-1(b). Since it cannot be said that an individual in active military service is subject to the direction and control of a former employer, an option granted while the individual is in such service for an extended period does not qualify as a restricted stock option because the optionee is not then an employee for the purposes of section 421. In the second situation the option is granted before the optionee enters active military service and is exercised by him (or his estate, in case of his death) at a time when the optionee is (or at his death was) on leave of absence from the optionor corporation while on active duty in the Armed Forces of the United States. Section 1.421-3(c)(1) of the regulations provides that an option which is a |