Norton v. Commissioner
| Decision Date | 30 September 1970 |
| Docket Number | Docket No. 67854,91362,77098,94829.,74913,74914 |
| Citation | 29 TCM (CCH) 1257,1970 TC Memo 279 |
| Parties | Samuel P. Norton and Estate of Beatrice Norton, Deceased, Samuel P. Norton, Administrator v. Commissioner. |
| Court | U.S. Tax Court |
Samuel P. Norton, 242 N. Canon Dr., Beverly Hills, Calif., for the petitioners. Eli Blumenfeld and Myron Weiss, for the respondent.
Memorandum Findings of Fact and Opinion
Respondent determined deficiencies in income tax for the years of 1953 through 1959, and additions to tax for 1954 under section 294(d)(2), 1939 Code, as follows:
Year Docket No. Deficiency Sec. 294(d)(2)
1953 67854 $ 30,582.59
1954 74913 10,991.98 $ 701.31
1954 74914 11,159.99 723.63
1955 77098 30,763.42
1956 77098 $ 21,546.05
1957 91362 16,407.79
1958 94829 5,098.82
1959 94829 1,893.85
___________ _________
$128,444.49 $1,424.94
The issues are:
(1) Whether payments in each of the 7 taxable years, in the following amounts, totaling $224,449.11, were payments of interest on indebtedness within section 23(b), 1939 Code, and section 163(a), 1954 Code, so as to be deductible; and if not, whether they are deductible as losses. This issue involves purported loans to make alleged purchases of Federal Land Bank bonds, United States Treasury bonds, and United States Treasury notes.
Year Docket No. Payments
1953 .......... 67854 $ 43,999.89
1954 .......... 74913 20,108.78
1954 .......... 74914 20,108.78
1955 .......... 77098 52,456.31
1956 .......... 77098 32,021.82
1957 .......... 91362 32,313.61
1958 .......... 94829 15,939.92
1959 .......... 94829 7,500.00
___________
Total ..... $224,449.11
The deductions taken as "interest" related to payments made by the petitioner, Samuel P. Norton, pursuant to 4 transactions which purportedly involved Government securities of different types. The following schedule provides explanations of the deductions taken on the tax returns for each of the taxable years with respect to each transaction:
Per Tax Returns
Year Transaction Payments Total Deduction
1953 A ..... $43,999.89 $43,999.89
__________
1954 A ..... $31,777.71
B ..... 4,222.22
C ..... 4,217.63 $40,217.56
__________
1955 A ..... $21,999.96
B ..... 4,222.24
C ..... 4,217.64
D ..... 16,867.41
D ..... 5,149.11
__________
$52,456.36* $52,456.31
__________
1956 A ..... $17,782.76
B ..... 4,222.24
C ..... 4,217.64
D ..... 5,799.18 $32,021.82
__________
1957 A ..... $16,373.73
B ..... 4,222.24
C ..... 4,217.64
D ..... 7,500.00 $32,313.61
__________
1958 B ..... $ 4,222.17
C ..... 4,217.60
D ..... 7,500.00
__________
$15,939.77** $15,939.92
__________
1959 D ..... $ 7,500.00 $ 7,500.00
* 1955: Payments appear to be 5 cents more
than deducted
** 1958: Payments appear to be 15 cents less
than deducted
(2) Whether the petitioner, Samuel P. Norton, realized additional income in 1953 from a law partnership in the amount of $9,876.59.
(3) Whether each one of the petitioners is liable for the addition to the tax for 1954 for a substantial under-estimation of the estimated income tax for 1954 as provided by section 294(d)(2), 1939 Code, and section 6554(h), 1954 Code.
In Docket No. 77098, with respect to the year 1956, the respondent concedes that deductions are allowable, totaling $1,275, for amortization of bond premium on Republic of Cuba bonds due June 30, 1967. Effect will be given under Rule 50 to respondent's agreement.
Samuel P. Norton and his wife, Beatrice Norton, were residents of Beverly Hills, California, at the time the petitions in these cases were filed. Their joint and individual tax returns were filed for calendar years, on the cash basis. Individual returns were filed for 1954; joint returns were filed for each of the other taxable years. All of the returns were filed with the district director of internal revenue at Los Angeles, California.
After the trial of these cases, Beatrice Norton died.
Since all of the issues relate to Samuel P. Norton, he is referred to hereinafter as the petitioner, or, for convenience, as Norton. The late Beatrice Norton was involved in these cases, for 1954, only because an election was made to file separate returns for that year. Also, because separate returns were filed, certain items of income and claimed deductions on the 1954 return of Beatrice Norton relate to transactions, here in issue, of Samuel P. Norton.
Issue 1: Federal Land Bank Bonds; U. S. Treasury Bonds and Notes; Deductions for Payments of Alleged Interest on Purported Loans
Norton is a lawyer who is duly licensed to practice law in California. He was engaged in the practice of law at all times material. During the taxable years, he was a partner in the law firm of Brand, Rosenthal, Norton & Miller, which was dissolved on February 23, 1953, and thereafter he was a partner in the law firm of Rosenthal & Norton having its offices at first at 242 North Canon Drive, Beverly Hills, and later at 250 North Canon Drive. At the time of the trial of these cases and before, Norton was not a partner of Rosenthal, and he maintained his own law office. James B. Rosenthal2 was Norton's former law partner. Rosenthal and Norton were business advisers to, as well as attorneys for, during 1952-1959, several individuals employed in the motion picture industry, among whom were Martin Melcher and Doris Day Melcher,3 and Gordon MacRae.4
In December 1952 Norton and Rosenthal discussed with certain individuals, their clients, the possibility of entering into a certain type of transaction involving the "purchase", or purported purchase, of substantial amounts of securities issued by the Government or its departments, such as United States Treasury bonds or notes and Federal Land Bank bonds, in which type of transaction the client purportedly would utilize "borrowed" funds and pay "interest" thereon. Gordon MacRae was a client of the Rosenthal and Norton law firm. That kind of transaction could be, and was, handled by Cantor, Fitzgerald Co. (C-F), brokers and dealers in securities in Beverly Hills.
Norton was a close friend of B. Gerald Cantor, the president of Cantor, Fitzgerald during the taxable years. During the years 1959-1964, Norton was a vice president of Cantor, Fitzgerald (during which time he may not have engaged in the private practice of law, as he discontinued his private law practice on March 1, 1959).
The Gibraltar Financial Corporation, in New York City, was incorporated under the laws of New York on about December 24, 1952, with invested capital of $2,000, and with initial borrowed working capital of $1,500. During the years involved here, no additional working capital was invested in Gibraltar. Gibraltar was not subject to regulations of the Securities and Exchange Commission. Gibraltar was the correspondent in New York City of Cantor, Fitzgerald, and the latter was Gibraltar's correspondent in California. The principal business of Gibraltar during the taxable years was trading in securities, including municipal bonds, U. S. Treasury obligations, and Government bonds, and it engaged in transactions such as are in issue in these cases.
Jack Bernstein was an employee of Cantor, Fitzgerald from April 1946 until November 1952. He was the sole shareholder of Gibraltar from January or February 1953 until April 10, 1956, and during that period he was a director, a vice president, and an employee of Gibraltar, except for a few months, November 1952 until January 1953. Bernstein is now employed by C-F, having become an employee, again, on May 1, 1963.
The books and records of Gibraltar reflect that during its first week of business, December 24 to 31, 1952, it entered on its books "loans" to customers totaling 17 million dollars; that its first "loan", according to its bookkeeping entries, was $1,220,000 on December 26, 1952; and that entries were made on its books in January, 1953, of more than 17 million dollars of additional "loans".
Cantor, Fitzgerald and Gibraltar were involved in the four transactions of Norton which are in issue here.
There are in issue in these cases, four transactions which are attributed to the petitioner, Norton. In connection with these transactions, Norton reported income, and he took deductions for payments which purportedly represented "interest".
In making the determinations set forth in the statutory deficiency notices, respondent disallowed the claimed deductions for alleged interest. He did not determine, also, that there should be excluded from taxable income in the various years the items of income which Norton reported (in the joint returns, and in the separate returns for 1954), as income received or realized from the transactions in issue. Respondent's disallowance of the claimed deductions for "interest", and his failure to eliminate certain items from taxable income, were seemingly inconsistent, but the seeming inconsistency was a matter of policy, to protect the revenues pending the outcome of these cases; and at the trial of these cases, the respondent took the position that if this Court...
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