Rosenthal v. Commissioner
| Decision Date | 30 November 1970 |
| Docket Number | 1986-62,1393-64.,77923-77925,Docket No. 67848,1392-64,93832 |
| Parties | Jerome B. Rosenthal and Ruth Rosenthal v. Commissioner. |
| Court | U.S. Tax Court |
Jerome B. Rosenthal, pro se,* Los Angeles, Calif. Eli Blumenfeld and Myron Weiss, for the respondent.
INDEX
Page
Numbers
1. Preliminary Matters .............................. 1522-1523
2. Findings of Fact ................................. 1523-1555
Issue 1â Interest Deductions ..................... 1523-1550
(a) Transaction 1 ............................. 1525-1534
(b) Transaction 2 ............................. 1534-1540
(c) Transaction 3 ............................. 1540-1544
(d) Transaction 4 ............................. 1544-1550
Issue 2â Income, B R N M
Law Partnership ............................... 1550-1553
Issue 3â Expenditures, 1960
1961, Divorce ................................. 1553-1554
Issue 4â Statute of Limitations ................ 1554-1555
3. Ultimate Findings of Fact ........................ 1555-1558
4. Opinion
Issue 1â Interest Deductions ..................... 1558-1580
Issue 1â Alternative Deductions .................. 1558-1580
Issue 2â Income, B R N M
Law Partnership ..................................... 1580-1581
Issue 3â Deductions, Legal
Expenses, Divorce ................................... 1581-1589
General Matters ....................................... 1589
Issue 4â Statute of Limitations .................. 1589-1590
Memorandum Findings of Fact and Opinion
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):
Docket Section
Year 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 Deducted
Year 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.
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.
Rosenthal'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 became employed by Gibraltar Financial Corporation located in New York City. Petitioner, Jerome Rosenthal, was acquainted with B. Gerald Cantor.
Gibraltar was incorporated in New York State in about December 1952. The initial capital invested in Gibraltar was $2,000. From the time of its organization up to 1956, no additional funds were invested in Gibraltar. Jack Bernstein received the capital stock of Gibraltar in exchange for $2,000. He was an employee of Gibraltar from January 1953 to April 1956; he was a director and vice president of Gibraltar; and he directed its operations. Having been employed by Cantor-F before going to Gibraltar, he was re-employed by C-F in Beverly Hills after leaving Gibraltar in about April 1956. Later he became a vice president of Cantor-F, and he was in charge of its New York office when it was opened.
John Fitzgerald became the vice president of Gibraltar in 1953, and he held that office until the business of Gibraltar was terminated, which was at some time in 1959 or 1960. Thereupon, Fitzgerald returned to Cantor-F as a vice president.
Gibraltar had only three or four employees during the period 1952-1956. Included in its business were the type of transactions involved in these cases. It was not subject to any regulatory control. During the years of at least 1953-1956, Cantor-F was Gibraltar's correspondent, and as such C-F was Gibraltar's agent. B. Gerald Cantor discussed the organization of Gibraltar with Bernstein. A major part of Gibraltar's transactions were referred to it by Cantor-F, and B. Gerald Cantor arranged or referred the transactions to Gibraltar.
All of the transactions of Rosenthal with Gibraltar which are in issue in these cases were arranged and referred by B. Gerald Cantor. Gerald Cantor arranged numerous transactions of other individuals which were referred to Gibraltar. Gibraltar received more business...
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