Stanton v. Comm'r of Internal Revenue, Docket No. 68914.
| Decision Date | 07 April 1960 |
| Docket Number | Docket No. 68914. |
| Citation | 34 T.C. 1 |
| Parties | L. LEE STANTON AND HELEN LA FETRA STANTON, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Hugh Satterlee, Esq., and Rollin Browne, Esq., for the petitioners.
Emil Sebetic, Esq., for the respondent.
1. INTEREST OR CAPITAL GAIN— PROFIT ON SALE OF NON-INTEREST-BEARING NOTES.—Commissioner did not err in holding that a profit on the sale of non-interest-bearing notes is taxable as interest and was not a part of sales proceeds of the notes for income tax purposes. F. Rodney Paine, 23 T.C. 391, followed.
2. INTEREST— Sec. 23(b).— Interest on genuine indebtedness incurred to buy short-term obligations non-interesting-bearing with interest at a lower rate than that being paid on the indebtedness is deductible under section 23(b) regardless of whether the taxpayer anticipated that the transactions would be beneficial before taxes or whether he anticipated that they would be beneficial only after taxes.
The Commissioner determined income tax deficiencies against the petitioners of $117,054.16 for 1952 and $232,678.86 for 1953. The principal issues for decision are whether the Commissioner erred in disallowing deductions for each year for interest paid on indebtedness and whether interest income was received when non-interest-bearing notes were sold. Alternative errors were alleged.
The petitioners, husband and wife, filed their income tax returns for 1952 and 1953 with the director for the second district of New York. They kept their books and filed their returns on a calendar year cash basis.
Lee has been a member of the New York Stock Exchange for 36 years and is a partner in the brokerage firm of Carlisle & Jacquelin. He reported ‘Adjusted Gross Income’ of $254,507.79 for 1952 and of $376,281.30 for 1953. His income, at least since 1950, has been subject to very high tax rates. He took this into account in making his personal investments and sought transactions which would give him the greatest net income after taxes. One such type investment was the purchase of large amounts of short-term Government notes or commercial paper at a substantial discount, financing the purchase through ordinary bank loans secured by the purchased notes and selling them at a profit before maturity but after holding them 6 months. The excess of the amount realized over cost would be reported as a long-term capital gain and the interest on the borrowed funds would be claimed as a deduction. The net interest received on the obligations would be taxable as ordinary income. The excess of the interest paid on the borrowed funds over the interest, if any, on the obligations would thus be offset in whole or in part by capital gain and in any event there would be a tax benefit because the interest deduction would wipe out high-rate taxable income and the capital gain would be taxed at only 25 per cent.
Lee purchased $9 million principal amount of non-interest-bearing financial notes of Commercial Investment Trust, Inc., at market from Saloman Bros. & Hutzler as shown in the following table:
Lee borrowed money from three New York banks and gave his own 3 per cent promissory notes in the full amounts as security for the loans. Three per cent was the current rate on such loans. The following table shows the dates of the loans and personal notes, the amounts of each, the maturity, and the lender:
The C.I.T. notes which Lee purchased were delivered to the banks for Lee's account against payment by the banks for his account of the purchase prices of those notes. The loans were secured solely by the C.I.T. notes and Lee's personal notes.
Lee anticipated that the interest he would have to pay on the loans would exceed the gain he would have on the notes but he would have a net gain after taxes from the transaction.
Lee paid $144,032.37 interest on his four notes to maturity in December 1952, as required by the lenders, and claimed that amount on his 1952 return as a deduction for interest paid. The Commissioner, in determining the deficiency for 1952, disallowed that deduction and merely stated that it was not deductible under section 23 of the Internal Revenue Code of 1939.
Lee sold the $9 million of C.I.T. notes at market before their maturity, as shown in the following table:
Each lending bank received from the purchaser the sales price of the C.I.T. notes held by it, applied part of it to pay off Lee's notes held by the bank, and paid the balance to Lee. Lee paid the Hanover bank in June 1953 additional interest of $411.42 on his promissory notes for the 1 day past maturity which they were held by that bank, and in that same month he received $493.66 from Marine Midland Trust and $988.19 from Guaranty Trust, representing refunds or rebates of interest to maturity which he had prepaid on his promissory notes held by those banks for the period from the date of payment of the principal of those notes to the date of maturity of each. The additional interest paid was claimed as a deduction and the refunds reported as income on the petitioners' 1953 return. The Commissioner made no adjustment with respect to those amounts.
The excess of the amount received from the sale over the cost of the C.I.T. notes, was reported on the petitioners' income tax return for 1953 as a long-term capital gain. The Commissioner, in determining the deficiency for 1953, added to the reported income $107,805.94, with the explanation that it was interest income from the C.I.T. notes and was not includible in the sales proceeds of the notes. He eliminated $107,801.73 from long-term gain and showed the transaction to have resulted in a net long-term capital loss of $4.21.
Lee purchased at market $5 million principal amount of United States Treasury notes bearing interest at 1 1/2 per cent, maturing on March 15, 1955, and having accrued interest thereon at the date of purchase, as shown in the following table:
Lee borrowed $5 million from four banks and gave his own 3 1/2 per cent promissory notes in like amounts as security for the loans. The loans were to become due on March 15, 1955. Three and one-half per cent was the current rate on such loans. The following table shows the lender, the dates of the loans and notes, and the amounts of each:
To continue reading
Request your trial
-
Melcher v. Commissioner
...assertions, contentions, and arguments in their lengthy briefs. All of the cases cited by petitioners have been considered. L. Lee Stanton Dec. 24,122, 34 T. C. 1, is distinguishable from these cases. In Stanton the Commissioner conceded that the transactions in issue were bona fide and rea......
-
Barnett v. Comm'r of Internal Revenue, Docket No. 92538.
...does not concede in this case that the transaction between Gibraltar and petitioner was real, valid, and bona fide, cf. L. Lee Stanton, 34 T.C. 1, 7, 11, and argues that Stanton on its facts is distinguishable. Petitioner relies on the form of the transaction and contends that the same resu......
-
Rosenthal v. Commissioner
...assertions, contentions, and arguments in their lengthy briefs. All of the cases cited by petitioners have been considered. L. Lee Stanton Dec. 24,122, 34 T. C. 1, is distinguishable from these cases. In Stanton the Commissioner conceded that the transactions in issue were bona fide and rea......
-
Dixon v. Commissioner
...Rose v. Commissioner [Dec. 43,687], 88 T.C. 386, 423 (1987), [89-1 USTC ¶ 9191] affd. 868 F.2d 851 (6th Cir. 1989); Stanton v. Commissioner [Dec. 24,122], 34 T.C. 1, 7 (1960). If there is actual payment of interest attributable to the use or forbearance of amounts due on genuine indebtednes......