Jacobson v. Comm'r of Internal Revenue, Docket No. 59219.
| Decision Date | 31 May 1957 |
| Docket Number | Docket No. 59219. |
| Parties | BERNARD H. AND BLANCHE E. JACOBSON, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Edgar J. Goodrich, Esq., for the petitioners.
Lyman G. Friedman, Esq., for the respondent.
Held, taxpayers who made bank loans on the security of common stock and deposited the proceeds in their separate bank accounts and on the same day or in some instances a few days later purchased tax-exempt securities in amounts that were for the most part the same as the amount of the indebtedness incurred, had incurred indebtedness to purchase or carry tax-exempt obligations within the provisions of section 23(b), I.R.C. 1939, and the interest on such indebtedness was not deductible. Held, further, there is no merit in taxpayers' contention that only a portion of the indebtedness was used to purchase tax-exempts because of available funds in the bank accounts at the time of the loans.
Respondent determined a deficiency in petitioners, income tax for the year 1952 in the amount of $18,097.85. Certain adjustments made by the respondent are not contested by the petitioners. Respondent disallowed a deduction of $25,777.75, claimed by the petitioners for interest paid on certain bank loans, on the ground that such indebtedness was incurred to purchase tax-exempt obligations within the meaning of section 23(b) of the 1939 Internal Revenue Code.1 The correctness of this disallowance is the sole issue in this case.
Petitioners, Bernard H. and Blanche E. Jacobson, husband and wife, reside in Dunbar, West Virginia. They filed a joint Federal income tax return for 1952 with the district director of internal revenue at Parkersburg, West Virginia. Petitioners' return was filed on the cash receipts and disbursements method.
Bernard has been engaged for many years in the chemical business. In April 1936, he acquired control of Ohio-Apex, Inc., a bankrupt chemical manufacturing company, and he served as president of Ohio-Apex, Inc., from 1936 to 1951, when the corporation was merged with the Food Machinery and Chemical Corporation in a transaction in which the petitioners exchanged all their common stock of Ohio-Apex, Inc., for 44,000 shares of the common stock of Food Machinery and Chemical Corporation. Bernard has been an executive of Food Machinery and Chemical Corporation since the merger in 1951.
Blanche has been the owner and operator of a retail ladies' apparel shop in Charleston, West Virginia, for many years. Both Bernard and Blanche have obtained loans over the years from various banks, and, beginning late in 1951, they used their stock in the Food Machinery and Chemical Corporation to establish a line of bank credit.
On December 15, 1951, Bernard borrowed $400,000 from the Kanawha Valley Bank against collateral of 15,000 shares of Food Machinery and Chemical Corporation common stock, and on the same date he purchased $400,000-par-value 2 1/2 per cent West Virginia Veterans Bonus Bonds for $400,642.52. Interest from these bonds was wholly exempt from Federal income tax. This loan was repaid as follows:
+-----------------------+
¦May 9, 1952 ¦$50,000 ¦
+--------------+--------¦
¦Aug. 29, 1952 ¦20,000 ¦
+--------------+--------¦
¦Oct. 1, 1952 ¦10,000 ¦
+--------------+--------¦
¦Oct. 28, 1952 ¦120,000 ¦
+--------------+--------¦
¦Dec. 8, 1952 ¦68,000 ¦
+--------------+--------¦
¦Dec. 11, 1952 ¦12,000 ¦
+--------------+--------¦
¦Dec. 31, 1952 ¦44,000 ¦
+--------------+--------¦
¦Feb. 9, 1953 ¦15,000 ¦
+--------------+--------¦
¦June 12, 1953 ¦30,000 ¦
+--------------+--------¦
¦July 11, 1953 ¦31,000 ¦
+--------------+--------¦
¦ ¦$400,000¦
+-----------------------+
On June 16, 1952, Bernard borrowed $50,000 from the Kanawha Valley Bank against the same collateral of 15,000 shares of Food Machinery and Chemical Corporation common stock and on June 17, 1952, he paid $50,000 as 10 per cent on the subscription to $500,000-par 2 3/8 per cent United States Treasury Bonds. He repaid this loan of $50,000 on July 1, 1952. On July 14, 1952, he borrowed $10,000 from Kanawha Valley Bank, again with the same collateral, and on July 15, 1952, he paid the balance of the purchase price of property in Baltimore, Maryland, in the amount of $12,555. This loan was repaid on October 1, 1952. On November 10, 1952, Bernard borrowed $100,000 from the Kanawha Valley Bank, using the same collateral, and on November 18, 1952, he purchased $50,000-par 3 3/4 per cent West Virginia Turnpike Bonds, which were wholly exempt from Federal income tax, for $48,000. He repaid this loan as follows:
+------------------------+
¦Nov. 20, 1952 ¦$50,000 ¦
+---------------+--------¦
¦Aug. 29, 1953 ¦25,000 ¦
+---------------+--------¦
¦Sept. 10, 1953 ¦25,000 ¦
+---------------+--------¦
¦ ¦$100,000¦
+------------------------+
On December 15, 1951, Bernard borrowed $100,000 from the Charleston National Bank against collateral of 5,000 shares of Food Machinery and Chemical Corporation common stock and on the same date purchased $100,000-par 2 1/2 per cent West Virginia Veterans Bonus Bonds, the interest from which was wholly exempt from Federal income tax, for $100,755.90. He repaid this loan as follows:
+------------------------+
¦Sept. 12, 1952 ¦$30,000 ¦
+---------------+--------¦
¦Sept. 25, 1952 ¦50,000 ¦
+---------------+--------¦
¦Oct. 1, 1952 ¦20,000 ¦
+---------------+--------¦
¦ ¦$100,000¦
+------------------------+
Bernard sold the $100,000-par 2 1/2 per cent West Virginia Veterans Bonus Bonds on October 28, 1952. On December 17, 1951, Bernard borrowed $30,000 from the First National Bank, South Charleston, against collateral of 1,250 shares of Food Machinery and Chemical Corporation common stock and on the same date purchased $30,000-par 2 1/2 per cent West Virginia Veterans Bonus Bonds, the interest from which was wholly exempt from Federal income tax, for $30,271.26. He repaid this loan on December 27, 1951. These particular bonds were sold by Bernard on December 30, 1952. On March 13, 1952, Bernard borrowed $25,000 from the First National Bank, depositing collateral of 1,000 shares of Food Machinery and Chemical Corporation stock, and on March 14, 1952, paid the balance of his 1951 income tax, amounting to $16,882.74, and made a payment of $19,700 on his 1952 estimated income tax. He repaid this loan of $25,000 on October 1, 1952.
On December 15, 1951, Blanche borrowed $400,000 from the Kanawha Valley Bank, against collateral of 15,000 shares of Food Machinery and Chemical Corporation common stock, and on the same date purchased $400,000-par 2 1/2 percent West Virginia Veterans Bonus Bonds, the interest from which was wholly exempt from Federal income tax, for $400,642.52. This loan was repaid by Blanche as follows:
+------------------------+
¦May 9, 1952 ¦$20,000 ¦
+---------------+--------¦
¦Sept. 11, 1952 ¦50,000 ¦
+---------------+--------¦
¦Oct.1, 1952 ¦20,000 ¦
+---------------+--------¦
¦Oct. 28, 1952 ¦135,000 ¦
+---------------+--------¦
¦Dec. 8, 1952 ¦65,000 ¦
+---------------+--------¦
¦Dec. 31, 1952 ¦24,000 ¦
+---------------+--------¦
¦Jan. 21, 1953 ¦8,000 ¦
+---------------+--------¦
¦July 11, 1953 ¦28,000 ¦
+---------------+--------¦
¦Aug. 29, 1953 ¦25,000 ¦
+---------------+--------¦
¦Sept. 10, 1953 ¦25,000 ¦
+---------------+--------¦
¦ ¦$400,000¦
+------------------------+
None of the ‘tax-exempt’ bonds purchased by Bernard and Blanche and involved here were deposited with any bank as collateral for any loans obtained by them. The common stock of Food Machinery and Chemical Corporation which was deposited by Bernard and Blanche as collateral for the loans here involved was at all times listed on the New York Stock Exchange.
No restrictions were placed by the banks upon the use or disposition of the proceeds by any of the loans obtained by Bernard or Blanche. The proceeds of the loans obtained by Bernard and Blanche were deposited by them in their respective custodian accounts at the Kanawha Valley Bank, and the purchases of the tax-exempt bonds by them were accomplished through these custodian accounts. The custodian accounts were used by the respective parties to transact a part of their personal affairs and all of their business affairs, with the exception of Blanche's apparel shop, for which a separate account was maintained. A great number of variety of transactions, both personal and business in nature, were handled through these custodian accounts from December 15, 1951, after the deposit of the loan proceeds from the Kanawha Valley Bank, to December 31, 1952. On December 15, 1951, immediately prior to the deposit of the loan proceeds from the Kanawha Valley Bank, there was a cash balance of $53,857.94 in Bernard's custodian account. During the period from December 15, 1951, to December 31, 1952, deposits...
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