Rosenthal v. C.I.R., 113070 FEDTAX, 67848

Docket Nº:67848, 77923, 77924, 77925, 93832, 1986-62, 1392-64, 1393-64.
Opinion Judge:HARRON, Judge:
Party Name:JEROME B. ROSENTHAL AND RUTH ROSENTHAL, Petitioners[1] v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Attorney:Eli Blumenfeld and Myron Weiss, for the respondent.
Case Date:November 30, 1970
Court:United States Tax Court
 
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29 T.C.M. (CCH) 1521

JEROME B. ROSENTHAL AND RUTH ROSENTHAL, Petitioners[1]

v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Nos. 67848, 77923, 77924, 77925, 93832, 1986-62, 1392-64, 1393-64.

United States Tax Court

November 30, 1970

Issue 1: Government Bonds Transactions.

(a) Held, upon the facts: That in each one of the four transactions involving $1,000,000 Federal Land Bank bonds, $100,000 U.S. Treasury bonds, $100,000 Treasury bonds, and $750,000 Treasury notes, respectively, the petitioner, Jerome B. Rosenthal, did not enter into a bona fide transaction in each instance on February 17, 1953, February 26, 1954, March 1, 1954, and December 23, 1955, respectively, for the purchase of the securities which purportedly were involved; that each transaction was without substance and reality and was a sham transaction; that none of the transactions can be recognized for tax purposes; that in reality petitioner did not purchase the securities referred to in each transaction; that petitioner did not borrow and was not indebted for, in the respective transactions, $1,052,000, $105,000, $105,000, $712,500 (note to Gibraltar), and $37,500 (note to CHK); and that the amounts paid by petitioner during the years involved in each transaction, pursuant to his several ‘ notes', were not interest paid on indebtedness and, therefore, the payments were not deductible under section 23(b), 1939 Code, and section 163(a), 1954 Code.

(b) Held: That since each transaction was a sham, there shall be excluded from taxable income, under Rule 50, for the taxable years before the Court, the respective amounts included in income as ‘ interest received’ on the Government securities, and the so-called ‘ capital gains' from the purported sales of the securities.

(c) Held, upon the facts: That, in the alternative, deductions are not allowable for petitioner's out-of-pocket costs as losses from transactions entered into for profit under section 117(g)(2), or as losses from failures to exercise options under section 1234, 1954 Code.

Issue 2: Income in 1953 from B R N M Law Partnership.

Held, upon the facts: That Rosenthal did not realize unreported income in 1953 from the B R N M law partnership in the amount of $4,134.81, and that his share thereof did not exceed $25,222.29; respondent's determinations were incorrect.

Issue 3: Deductions for Legal Expenses.

Held: That deductions are not allowable under section 212 for legal fees and costs paid in 1960 and 1961; held, further, that the expenditures were personal expenses of Jerome B. Rosenthal and are not deductible under section 262.

Issue 4: Docket Nos. 77923, 77925, Increased Deficiencies for 1955.

Held: That the assessment and collection of increases in the deficiencies for 1955, claimed by the respondent, are not barred by the statute of limitations, section 6214(a).

Jerome B. Rosenthal, pro se.*

Eli Blumenfeld and Myron Weiss, for the respondent.

INDEX
Page
Numbers
1. Preliminary Matters 3-5
2. Findings of Fact 5-91
Issue 1 - Interest deductions 6-70
(a) Transaction 1 8-26
(b) Transaction 2 27-42
(c) Transaction 3 43-54
(d) Transaction 4 55-70
Issue 2 - Income, B R N M Law Partnership 71-78
Issue 3 - Expenditures, 1960, 1961, Divorce 78-81
Issue 4 - Statute of Limitations 81-82
3. Ultimate Findings of Fact 83-91
4. Opinion
Issue 1 - Interest Deductions 92-135
Issue 1 - Alternative Deductions 135-148
Issue 2 - Income, B R N M Law Partnership 149-151
Issue 3 - Deductions, Legal Expenses, Divorce 152-172
General Matters 173
Issue 4 - Statute of Limitations 174-175
MEMORANDUM FINDINGS OF FACT AND OPINION HARRON, Judge: Respondent determined deficiencies in income taxes in the total amount of $122,896.84 for the years of 1953, 1955-1958, 1960, and 1961; (the years 1954 and 1959 are not before the Court). For 1955, in his amended pleading (the amended answers), he made a determination denying a deduction of $7,723.67 claimed as an interest deduction, and he made claims for increased deficiencies under section 6214(a). For 1960, with respect to the separate return in the name of Ruth Rosenthal, he determined a 25 percent penalty, an addition to tax, of $866.38 under section 6651(a). The determinations are as follows (J.R. refers to the petitioner, Jerome B. Rosenthal, and R.R. refers to Ruth Rosenthal):
Section
Year Docket No. Deficiency 6651(a)
1953 67848 $ 26,385.43
1955 77923 R.R. 17,434.80
Increase 2,780.52
77925 J.R. 17,302.80
Increase 2,780.52
1956 77924 21,795.89
1957 93832 18,527.07
1958 1986-62 3,759.04
1960 1392-64 R.R. 3,309.57 $866.38
1393-64 J.R. 3,273.58
1961 1392-64 R.R. 2,782,80
1393-64 J.R. 2,764.82
$122,896.84 $866.38
The taxable years 1954 and 1959 are not before the Court. The issues are: 1. Whether there was a real and bona fide indebtedness owed by the petitioner, Jerome B. Rosenthal, in each one of four transactions involving Government bonds; or whether each transaction lacked substance or was a sham, so that payments in each of the taxable years were not interest on indebtedness within the meaning of section 23(b), 1939 Code, and section 163(a), 1954 Code. The petitioner made payments, ostensibly as interest, in the taxable years in the following total amounts, for which he took deductions, which were disallowed by respondent:
Sum Paid and De-
Year ducted as Interest
1953 $ 39,111.01
1955 63,464.62
1956 34,921.41
1957 36,063.61
1958 19,689.77
1960 5,625.00
Total $198,875.42
Because separate returns were filed for 1955 and 1960, deductions of one-half of the payments made in each of those years were deducted on the returns of the petitioner, Ruth B. Rosenthal. Whether, in the alternative, deductions are allowable for the cost or net out-of-pocket expense, if any, spent in connection with each transaction (a) as losses from transactions entered into for profit, under section 23(e)(2), 1939 Code, or section 117(g)(2), 1954 Code; or (b) as losses resulting from the failure to exercise privileges or options to buy or sell property, under section 165(c), 1939 Code, or section 1234, 1954 Code. 2. Whether Rosenthal's income for 1953 from a former law partnership was more than $25,222.29, as reported in his return. 3. Whether deductions for 1960 and 1961 are allowable under section 212 for legal fees and costs paid in connection with the divorce in 1964 of the petitioners. 4. Whether respondent's claim for increased deficiencies for 1955 is barred by the statute of limitations. In Docket No. 1392-64, the respondent has conceded that there should not be a 25 percent addition to the tax for 1960 under section 6651(a). Recomputations of the amounts of the deficiencies for all or some of the taxable years, under Rule 50, are required. FINDINGS OF FACT Petitioners were residents of Los Angeles and Beverly Hills, California, when their tax returns were filed and their petitions in these cases were filed. All of the returns were filed with the district director of internal revenue at Los Angeles. They were prepared on the cash basis, for calendar years. Joint returns were filed for 1953, 1956, 1957, and 1958; separate returns were filed for 1955, 1960, and 1961. Jerome B. Rosenthal is referred to herein as the petitioner because all of the income reported in the tax returns resulted from his activities, and the issues involve his transactions. Ruth B. Rosenthal, petitioner's spouse during the taxable years, is a petitioner only because joint returns and separate returns in her name were filed. Petitioner has practiced law since 1946, and he also engaged in various business activities. He is a member of the Bar of California. In connection with his law practice he advised some of his clients about their business matters and investments. Petitioner, in the taxable years, did not regularly engage in purchasing and selling securities, on his own account or as an occupation or business. Issue 1: Federal Land Bank Bonds and Treasury Bonds and Notes: Deductions for Payments of Alleged Interest During the period of years involved in these cases, petitioner entered into four separate transactions and arrangements. The ostensible purpose of each transaction was the purchase and sale of Government bonds or notes. Petitioner claims that in each transaction he borrowed a large amount of money to finance his claimed purchase of securities. He executed an interest-bearing note in each transaction, which purportedly was security for the claimed borrowing of money, and he made payments of money ostensibly as interest on each note. A schedule of the total sums paid each year, of the alleged interest payments, the deductions of which are in issue, have been set forth in the above statement of the issues to be decided. That schedule is incorporated here instead of repeating it. Resenthal's law firm, Rosenthal and Norton, was located at 242 North Canon Drive, Beverly Hills, during the earlier years involved, and later at 250 North Canon Drive. That law firm no longer exists. Cantor, Fitzgerald Co., referred to herein as Cantor-F, or as C-F, is a firm in Beverly Hills which was engaged in the taxable years as a broker and dealer in securities. Its president was B. Gerald Cantor. John Fitzgerald was a vice-president of C-F from 1947 to 1953. Jack Bernstein was employed by C-F prior to January 1953 when he...

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