Opinion
Docket No. 90671.
1963-04-12
CARL SHAPIRO AND RUTH SHAPIRO, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
Jack H. Calechman, and John M. Doukas, for the petitioners. Alexander L. Ross, Jr., for the respondent.
Jack H. Calechman, and John M. Doukas, for the petitioners. Alexander L. Ross, Jr., for the respondent.
Held, T's purported short sale of large amount of Government notes coupled with purported purchase of like amount of Government bonds which he allegedly deposited as collateral for his obligation with respect to the short sale were a sham, and he was not entitled to deductions in respect of bookkeeping entries attempting to establish that he ‘paid’ to the ‘lender’ of the notes the amounts of the interest coupons thereon as they became due. Sec. 212(1), I.R.C. 1954.
The Commissioner determined a deficiency in petitioners' 1957 income tax in the amount of $39,548.40. That determination raises the question whether interest due on U.S. Government obligations allegedly borrowed from Livingstone & Co. in order to cover a purported short sale was paid to the alleged lender and was deductible by petitioners. Another question raised by the Commissioner's determination of an increased deficiency in the amount of $2,858.83 in an amended answer is no longer in issue.
FINDINGS OF FACT
The facts stipulated by the parties and exhibits introduced in evidence are incorporated herein by this reference.
The petitioners, husband and wife residing in Newton, Mass., filed their joint Federal income tax return for 1957, on the cash basis, with the district director of internal revenue in Boston. The husband will hereinafter be referred to as petitioner.
Petitioner is a corporate executive. His compensation from his various corporate enterprises in 1957 was $100,000, and the total adjusted gross income reported on his 1957 joint return was $142,975.56. On that return a deduction was claimed in the amount of $57,500 as ‘interest’ allegedly paid to Livingstone & Co. The disallowance of that deduction by the Commissioner presents the principal issue raised by this case, but petitioners now claim the deduction only under section 212(1), I.R.C. 1954, as ‘ordinary and necessary expenses paid * * * (1) for the production or collection of income.’
Livingstone & Co. is a securities dealer in Boston. It is a sole proprietorship, owned by M. Eli Livingstone. His brother, Samuel Livingstone, an attorney, is ‘house counsel’ and officer manager of Livingstone & Co.
During the spring of 1956 petitioner and his accountant had a number of conferences with the two Livingstones at the office of Livingstone & Co., with a view to effecting a reduction of his Federal income taxes. As a consequence of these discussions, petitioner entered into the following preplanned and integrated transactions:
On June 18, 1956, petitioner purported to sell $2 million principal amount of U.S. Government 2 7/8-percent notes due June 15, 1958, to Salomon Bros. & Hutzler, a securities dealer in New York, hereinafter referred to as Salomon. The sale was at par plus accrued interest of $628.42, resulting in a total purchase price of $2,000,628.42; delivery and payment were to be effected the following day, June 19, 1956, at Chemical Corn Exchange Bank in New York. Petitioner in fact owned no such notes, and the transaction was purportedly to be handled as a ‘short sale,‘ with Livingstone & Co. lending the notes to petitioner. It does not appear that Livingstone & Co. owned any such notes, but it theoretically obtained them for this purpose through a purported purchase from Salomon on June 18, 1956, at par plus one-sixty fourth, plus accrued interest, delivery and payment to be made the following day in New York at Chemical Corn Exchange Bank.
OPINION
RAUM, Judge:
Petitioner's claim to the $57,500 deduction in 1957 rests upon the well-established rule that one who borrows securities in order to make a short sale may deduct interest or dividends payable with respect to such securities during the period of the loan where the borrower in fact pays such amounts to the lender. I.T. 3989, 1950-1 C.B. 34. That rule, however, is inapplicable here because petitioner has failed to show that there was in fact any such bona fide short sale or that he in fact made any such payments to the purported lender, Livingstone & Co.
The burden of proof is, of course, upon the petitioner, and if there should be a gap in the record, it may not be presumed that any missing facts are favorable to him. But we need not rely here upon any failure of proof, for the record strongly shows that there was no bona fide short sale by petitioner and that the complex interrelated transactions that he purportedly entered into were nothing more than an elaborate sham. There were in fact no purchases, short sales, or other transactions relating to the large blocks of Government obligations purportedly involved herein. The various matching buy and sell orders and the meticulously detailed bookkeeping entries merely gave a misleading appearance of reality to that which in fact did not exist. Petitioner's position is utterly without merit. Eli D. Goodstein, 30 T.C. 1178, affirmed 267 F.2d 127 (C.A. 1); Broome v. United States, 170 F.Supp. 613 (Ct. Cl.); Sonnabend v. Commissioner, 267 F.2d 319 (C.A. 1), affirming per curiam a Memorandum Opinion of this Court; Lynch v. Commissioner, 273 F.2d 867 (C.A. 2), affirming 31 T.C. 990 and Leslie Julian, 31 T.C. 998; Egbert J. Miles, 31 T.C. 1001; Becker v. Commissioner, 277 F.2d 146 (C.A. 2), affirming a Memorandum Opinion of this Court; Morris R. DeWoskin, 35 T.C. 356, appeal dismissed (C.A. 7); Perry A. Nichols, 37 T.C. 772, affirmed 314 F.2d 337 (C.A. 5); Empire Press, Inc., 35 T.C. 136. Cf. Knetsch v. United States, 364 U.S. 361; Amor F. Pierce, 37 T.C. 1039, affirmed 311 F.2d 894 (C.A. 9); A. A. Helwig, 37 T.C. 1046; United States v. Roderick, 290 F.2d 823 (C.A. 5); MacRae v. Commissioner, 294 F.2d 56 (C.A. 9), affirming in part and remanding in part 34 T.C. 20, certiorari denied 368 U.S. 955; Kaye v. Commissioner, 287 F.2d 40 (C.A. 9), affirming per curiam 33 T.C. 511; Weller v. Commissioner, 270 F.2d 294 (C.A. 3), affirming 31 T.C. 33 and W. Stuart Emmons, 31 T.C. 26, certiorari denied 364 U.S. 908; William R. Lovett, 37 T.C. 317.
The deduction sought by petitioner does not qualify under section 212(1) of the 1954 code as ‘ordinary and necessary expenses paid * * * (1) for the production or collection of income.’ Not only were no such expenses in fact ‘paid’ by reason of the sham character of the transactions, but in any event they were not related to the ‘production or collection’ of income. Notwithstanding some euphemistically phrased testimony by petitioner we do not believe that he ever expected to make any profit out of these transactions. It is all too clear to us that he contemplated merely a net expenditure of funds (somewhat under $16,000) as a fee to Livingstone & Co. for which he hoped to obtain net tax advantages that were substantially in excess of that fee. But the avoidance of taxes hardly qualifies as ‘the production or collection of income’ under the statute, either literally or by any implication that is supported by any relevant legislative history.
Our conclusion is in accord with two recent memorandum opinions involving factual situations closely parallel to the present case. James A. Dooley and Virginia P. Dooley, T.C. Memo. 1962-305; Louis H. Lewis and Annette Lewis, T.C. Memo. 1962-306.
Petitioners raise an alternative issue that if the disallowance of the $57,500 deduction is approved they are entitled to exclude from income the $23,750 interest which they reported in respect of the 2 3/8-percent bonds in 1957. The Commissioner has not dealt with this matter in his brief, and we assume that the parties will agree upon the proper treatment of this item under the
Decision to be entered under Rule 50.