Mariorenzi v. Commissioner, Docket No. 3708-71.
| Decision Date | 28 June 1973 |
| Docket Number | Docket No. 3708-71. |
| Citation | 32 TCM (CCH) 681,1973 TC Memo 141 |
| Parties | Amedeo Louis Mariorenzi and Grace Mary Mariorenzi v. Commissioner. |
| Court | U.S. Tax Court |
Louis J. Vallone, 1911 Industrial Bank Bldg., Providence, R.I., for the petitioners. Peter J. Panuthos, for the respondent.
Memorandum Findings of Fact and Opinion
The Commissioner determined a $1,372.66 deficiency in petitioners' 1968 income tax. The only issue remaining in controversy is whether interest paid by petitioners on a mortgage loan was nondeductible pursuant to section 265(2), I.R.C. 1954, because the indebtedness was incurred or continued by them to purchase or carry tax-exempt securities.
Findings of Fact
The parties have filed a stipulation of facts which, together with accompanying exhibits, is incorporated herein by this reference.
Petitioners, Amedeo L. Mariorenzi and his wife Grace, resided in Cranston, Rhode Island, at the time they filed their petition herein.
The husband ("petitioner" or "Dr. Mariorenzi") was an orthopedic surgeon in the United States Air Force for four years, until the end of 1964 when he entered into private practice. His wife was not gainfully employed nor did she have any separate income during any of the years relevant herein. Dr. Mariorenzi's income rose sharply during his years in private practice. Petitioners' "taxable income" for 1964-68 total gross income minus all business and other deductions (including depreciation) and minus personal exemptions, as shown in Income Averaging schedules of their 1967 and 1968 returns, was as follows:
1964 ................ $ 3,155.67
1965 ................ 89,922.81
1966 ................ 135,176.94
1967 ................ 160,783.19
1968 ................ 204,757.89
Petitioners had been living in a modest house which they owned, but which was becoming too small for them and their growing family. (The record shows that they had five children in 1967.) In the summer of 1966 petitioners purchased land upon which they intended to build a new home. The purchase price for the land was $10,000, which was paid from petitioners' savings.
In September, 1966, after plans for the house were drawn, petitioners discussed the possibility of a mortgage loan with representatives of the Industrial National Bank of Rhode Island, at which they maintained a checking account. At some undisclosed time they filed an application for such loan, and were given to understand that a mortgage construction loan at a 6¼ percent rate of interest would be available to them, and that the proceeds of the loan would be released to them from time to time during the course of construction. The record does not show that the bank made any binding commitment to that effect, or that any contract or agreement pertaining to any such arrangement was ever entered into between petitioners and the bank. In any event, petitioners did not in fact enter into any such arrangement with the bank, and the construction of the house was paid for in full out of Dr. Mariorenzi's current earnings.
Petitioners did not have an architect, but a Mr. De Angelis (a cousin of Dr. Mariorenzi), who owned or controlled the contracting company that built the new house, drew up the plans himself. The foundation was laid in November, 1966; construction of the building itself was begun in the spring of 1967 and was completed before the end of the year. By December of 1967 petitioners had moved into their new home, which was then fully paid for. The total cost of construction was $41,912.75, which petitioners paid to Mr. De Angelis or his company in four installments, as follows:
May 30, 1967 ....... $10,300.00
August 1, 1967 ..... 13,450.00
October 27, 1967 ... 13,450.00
December 15, 1967 .. 4,712.75
__________
$41,912.75
No mortgage loan had been made in respect of petitioners' home by the end of 1967, nor does the record show that there was any binding commitment, or agreement, or contract outstanding at that time calling for the making of any such loan. The record does show that the matter of a mortgage loan was reactivated at around that time and that such loan was in fact made in January, 1968, at a 5¾ percent rate of interest, as hereinafter more fully set forth.
Petitioners, at or about the time their new house was built, sold their old home for $18,000. It was subject to a mortgage loan in an undisclosed amount, which was paid off at the time of the sale. The record does not disclose the net amount of proceeds which petitioners derived from that sale, or what disposition was made of such proceeds.
Around June of 1967, petitioners consulted with their attorney concerning their financial affairs, and, upon his recommendation, they decided to open an "agency account" with the Rhode Island Hospital Trust Company, which would help them manage their investments. Accordingly, on June 7, 1967, petitioners transferred to the Rhode Island Hospital Trust Company three savings bank passbooks showing a balance in the total amount of $35,334.38, to open a Supervisory Agency Account in petitioner's name. By a letter to petitioner dated August 7, 1967, it made certain recommendations concerning the investment of the funds in the account, including the following:
Finally, what with the bond markets being at their lowest levels in a number of years, we feel that you should invest $20,000 in tax exempt bonds. These certainly are far more advantageous to you than corporate bonds because of your very high tax bracket and what with the almost certain enactment of a surtax, they will benefit you even more. Our usual objective for a growth account such as yours is to have approximately 20 percent of the funds invested in tax-exempt bonds and the remaining 80 percent in high-quality growth stocks. With the stock market being at what we consider a fairly high level now and the tax-exempt bond market being at a quite attractive level, however, we feel that most of the funds should be committed to this latter area now. As you make additional funds available to us, we will build up the common stock portion of the portfolio on market dips.
During the period from August, 1967, through June, 1968, petitioner had other communications with Rhode Island Hospital Trust Company. He always accepted its investment advice, and from time to time he deposited additional funds in the account to cover the investments which were made in his name, including both common stock of various companies and tax-exempt securities. In January, 1968, the Rhode Island Hospital Trust Company continued to favor tax-exempt bonds for petitioner, and in a letter to petitioner dated January 17, 1968, in respect of certain additional funds which petitioner had transmitted, it stated:
In view of the current conditions in both the bond and the stock markets, we feel that approximately 60 percent of the funds in question should be invested in high-quality tax-exempt bonds which would be beneficial to you as a resident of Rhode Island. We ask your authority to select such an issue. We feel the remaining 40 percent of the funds should be invested in good-quality growth stocks which seem reasonably priced at current levels.
The following table reflects the deposits petitioner made in the foregoing "agency" account and the purchases which were made with those deposits:
RHODE ISLAND HOSPITAL TRUST COMPANY ACCOUNT
Purchases
Account
Date Deposits Common Stock Tax-Exempt Securities Balance
June 7, 1967 $35,334.38 ___ ___ $35,334.38
August 24, 1967 ___ $10,193.93 ___ 25,140.45
August 28, 1967 ___ 2,350.00 ___ 22,790.45
October 24 and $20,000.00 *
November 2, 1967 ___ ___ (approximately) 2,790.45
January 10, 1968 15,000.00
(approximately) ___ ___ 17,790.45
January 31, 1968 ___ 7,091.27 ___ 10,699.18
February 7, 1968 16,000.00
(approximately) ___ ___ 26,699.18
February 9, 1968 ___ 1,851.67 ___ 24,847.51
March 1, 1968 ___ ___ 10,000.00
(approximately) 14,847.51
June 6, 1968 ___ ___ 15,000.00
(approximately) $(152.49)
__________ __________ __________ __________
TOTALS $66,334.38 $21,486.87 $45,000.00 $(152.49)
========== ========== ========== ==========
* All subsequent balance figures are approximate
Petitioners' liquid assets during 1967 and 1968 included their checking account, as well as certain savings accounts. Their checking account usually had a balance of about $30,000, and the extent of their savings accounts is indicated by the aggregate amount of interest which they reported as having been received from such accounts in 1967 and 1968, namely, $4,453.02 and $4,506.76, respectively. During 1967 and 1968 the balances in these savings accounts were approximately $80,000 to $100,000 in the aggregate. A minor portion of the total interest received from those...
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