Opinion
Docket No. 64826.
1960-06-8
SADIE S. FRIEDMAN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
John P. Allison, Esq., Stanley W. Herzfeld, Esq., and Burton L. Williams, Esq., for the petitioner. John M. Doukas, Esq., and Raymond T. Mahon, Esq., for the respondent.
John P. Allison, Esq., Stanley W. Herzfeld, Esq., and Burton L. Williams, Esq., for the petitioner. John M. Doukas, Esq., and Raymond T. Mahon, Esq., for the respondent.
1. Claimed deduction for interest on loans to finance purchase of bonds, held, allowable. L. Lee Stanton, 34 T.C. 1, and Fabreeka Products Co., 34 T.C. 290, followed.
2. Claimed deductions for amortization of bond premium, held, properly disallowed. Maysteel Products, inc., 33 T.C. 1021, followed.
3. Amount contributed to a qualified charitable organization, held, on the facts, allowed as a deduction under section 170, I.R.C. 1954. Maysteel Products, Inc., supra.
Respondent determined a deficiency of $13,749.42 in petitioner's income tax for 1954. The issues to be decided are whether petitioner is entitled to deductions in 1954 for (1) interest in the amount of $1,348.17 under section 163 I.R.C. 1954, (2) a charitable contribution in the amount of $8,740.63 under section 170, I.R.C. 1954, and (3) amortization of bond premium in the amount of $8,712.50 under section 171, I.R.C. 1954. In her brief, petitioner concedes that the interest issue involves an amount of only $563.85.
FINDINGS OF FACT.
The stipulated facts are found.
Petitioner, a widow residing in Brookline, Massachusetts, filed her income tax return for 1954 on the cash basis with the director of internal revenue for the district of Massachusetts. Whenever such terms as ‘acquire,’ ‘purchase,’ ‘buy,’ ‘loan,’ ‘borrow,’ ‘lien,’ ‘security,’ ‘account,’ ‘donate,’ ‘sell’ or ‘sale,’ ‘amortize,‘ and ‘interest’ are used, they are adopted as the terms used by the parties and not necessarily as our conclusions of fact regarding the respective transactions.
In 1954 petitioner was president, treasurer, and a trustee of the Sadie S. and Nathan H. Friedman Fund, Inc., hereafter called the Friedman Fund, an organization of the type specified in section 501(c)(3), I.R.C. 1954, and qualified for exemption from taxation under section 501(a), I.R.C.1954. She was also treasurer of the Harodite Finishing Company, and received a salary of $28,000. Her brother, Dewey D. Stone, was president of this company and a director of several other businesses. In 1954 he was a trustee of 3 or 4 universities and chairman of a scientific research institute. Petitioner and other members of Stone's family were interested in charitable endeavors.
In 1952 Stone purchased corporate bonds selling at a premium, which were subject to call prior to maturity. He had read in a tax journal that the after-tax cost of contributing such bonds to a charity was less than a gift of cash. Several members of Stone's family, and a corporation controlled by the family, bought bonds of this type and then gave them to charity. On a few occasions the purchasers sold the bonds instead of using them to make contributions, after realizing that they had overestimated the amount of charitable contribution that their income would permit them to make.
In 1954 Stone contemplated the purchase of additional callable bonds selling at a premium. He sought the advice of M. Eli Livingstone, with whom he had previously done business, with respect to which bonds should be acquired. He inquired about quality and marketability of bonds and about the financing of a purchase. Livingstone recommended piedmont & Northern Railway Co. 3 3/4 per cent first mortgage bonds maturing in 1966, hereafter called the Piedmont bonds, which were rated AA, and Jacksonville Terminal Co. 3 3/8 per cent first mortgage series A bonds maturing in 1977, hereafter called Jacksonville bonds, which were rated A. Both of these bonds were issued by their obligors prior to January 22, 1951, and were in bearer form. Livingstone notified Stone that funds would be made available for the purchase of bonds by the Lake View Trust and Savings Bank, hereafter called Lake View, the seventh largest bank in Chicago, Illinois.
Stone explained the bond purchase plan to petitioner and she agreed that he should arrange through Livingstone to buy the Piedmont and Jacksonville bonds for her and to finance the purchase by a loan from Lake View.
On July 1, 1954, the Crosby Steam Gage & Valve Company, hereafter called Crosby, a corporation owned by Stone's family, purchased $60,000 face value Piedmont bonds from Livingstone. This purchase was made with the proceeds of a $60,000 loan arranged by Livingstone for Crosby at Lake View on July 1, 1954. The $60,000 Piedmont bonds were the security for this loan and were held in safekeeping by the Chase National Bank in New York City for Lake View for the account of Crosby.
On July 26, 1954, Crosby assigned its interest in the $60,000 Piedmont bonds to the Stone Charitable Foundation subject to the lien against these bonds in favor of Lake View. On July 27, 1954, the Foundation instructed Lake View to instruct the Chase National Bank to deliver the bonds to Livingstone or his order against payment to Lake View of $60,000 and to apply the proceeds to discharge the loan in the name of Crosby.
On July 8, 1954, Willy Nordwind, an employee of a corporation owned by Stone, purchased from Livingstone $45,000-face-value Piedmont bonds. This purchase was made with the proceeds of a $45,000 loan arranged by Livingstone for Nordwind at Lake View on July 8, 1954. The $45,000 Piedmont bonds were the security for this loan and were held in safekeeping by the Chase National Bank for Lake View for the account of Nordwind.
On August 2, 1954, Nordwind assigned his interest in the $45,000 Piedmont bonds to the Willy Nordwind Foundation subject to the lien against these bounds in favor of Lake View. On August 3, 1954, the Foundation instructed Lake View to instruct the Chase National Bank to deliver the bonds to Livingstone or his order against payment to Lake View of $45,000 and to apply the proceeds to discharge the loan in the name of Nordwind.
On July 27, 1954, Livingstone purchased the $60,000 Piedmont bonds from the Stone Charitable Foundation. On August 3, 1954, Livingstone purchased the $45,000 Piedmont bonds from the Willy Nordwind Foundation.
On July 27, 1954, petitioner purchased from Livingstone $80,000 face value Piedmont bonds at a price of 108 and $50,000-face-value Jacksonville bonds at a price of 106, for a total purchase price of $86,925 including accrued interest in the amount of $525, and $53,295.32 including accrued interest in the amount of $295.32, respectively.
The Piedmont bonds sold by Livingstone were acquired by him from the Stone Charitable Foundation on July 27, 1954, and from the Willy Nordwind Foundation on August 3, 1954.
Livingstone arranged a 45-day loan of $130,687.50 with interest at 3 1/2 per cent per annum for petitioner at Lake View on August 6, 1954. Her indebtedness to Lake View was evidenced by her full recourse promissory note dated August 6, 1954, to the order of Lake View in the amount of $130,687.50, payable 45 days after said date with interest at 3 1/2 per cent per annum, which she executed and caused to be delivered to Lake View on or about Agusut 6, 1954. Petitioner furnished the balance of the purchase price in the amount of $9,532.82. The Piedmont and Jacksonville bonds were held in safekeeping by the Chase National Bank for Lake View to secure petitioner's loan.
Petitioner's banking is normally done at the Machinists' National Bank in Taunton, Massachusetts.
On July 30, 1954, Livingstone instructed Lake View to pay $20,000 of the proceeds of petitioner's loan to discharge $20,000 of Nordwind's $45,000 loan than outstanding at Lake View. Livingstone also instructed Lake View that part of the security for petitioner's loan was to be the $20,000 face value Piedmont bonds formerly held as partial security for Nordwind's loan at Lake View. On August 9, 1954, the Chase National Bank Notified Lake View that it had received $20,000 Piedmont bonds from itself from the account of the Willy Nordwind Foundation for the account of petitioner. Nordwind's loan at Lake View was discharged on August 13,1954.
On July 30, 1954, Livingstone directed Lake View to instruct the Chase National Bank to deliver $60,000 Piedmont bonds to petitioner's account from the Stone Charitable Foundation's account. He further directed Lake View to pay $60,000 of the proceeds of petitioner's loan to discharge the $60,000 loan of Crosby outstanding at Lake View.
On July 21,1954, Livingstone purchased from Salomon Bros. and Hutzler $400,000-face-value Jacksonville bonds at 103.697 and $250,000 at 104. On July 30, 1954, he instructed Lake View to pay $50,687.50 of the proceeds of petitioner's loan to Salomon Bros. and Hutzler against receipt of $50,000-face-value Jacksonville bonds which were to be held by the Chase National Bank as security for Lake View's loan to petitioner.
On August 20,1954, Stone's wife pledged 2,000 shares of Loew's Inc., stock with Lake View as additional security for the loans made to Stone and other members of his family. On August 27, 1954, Stone made a similar pledge of 1,000 shares of Statler Company stock. These shares were delivered to and held by the Chase National Bank as custodian for Lake View and had an aggregate fair market value of approximately $90,000.
On September 13, 1954, petitioner notified Lake View that she had that day assigned her interest in the $50,000 Jacksonville bonds and the $80,000 Piedmont bonds to the Friedman Fund, subject to the lien against these bonds in favor of Lake View.
On September 14, 1954, Livingstone purchased from the Friedman Fund the $80,000 Piedmont bonds at a price of 107, plus accrued interest, and the $50,000 Jacksonville bonds at a price of 105, plus accrued interest, the total purchase price after payment of documentary stamp taxes being $86,468.34 and $52,985.94, respectively. On October 26, 1954, Livingstone drew a check payable to the Friedman Fund for $8,766.78, being the difference between the purchase price and the amount of the lien. Petitioner claimed a deduction of price and the amount of the lien. Petitioner claimed a deduction of $8,740.63 in her 1954 return as a contribution to the ‘Sadie S. & Nathan H. Friedman Trust.’ Respondent disallowed this deduction.
On September 14, 1954, petitioner, as trustee of the Friedman Fund, instructed Lake View to instruct the Chase National Bank to deliver the $50,000 Jacksonville bonds and the $80,000 Piedmont bonds to Livingstone or his order against payment to Lake View of $50,687.50 and $80,000, respectively, and to apply the proceeds to discharge the loan in her name.
The Jacksonville and Piedmont bonds had remained in the possession of the Chase National Bank up until this time.
On October 21, 1954, Livingstone directed Lake View to instruct the Chase National Bank to deliver to the Cleveland Trust Company for the account of Livingstone, against payment of $80,000, the $80,000 Piedmont bonds which were being held in safekeeping for the account of the Friedman Fund. The $80,000 proceeds received from the Cleveland Trust Company were applied to discharge $80,000 of petitioner's loan at Lake View.
On November 1, 1954, Livingstone sold to Gerald D'Agostino the $50,000-face-value Jacksonville bonds formerly purchased by petitioner. This was part of a larger sale of bonds made by Livingstone to D'Agostino on that same day in the approximate total amount of $303,173.75. Livingstone arranged a loan for D'Agostino at the Philadelphia National Bank on November 10, 1954, in the amount of $303,173.75.
On November 1, 1954, Livingstone instructed the Philadelphia National Bank to pay $50,687.50 of the proceeds of D'Agostino's loan to Lake View in return for the $50,000-face-value Jacksonville bonds being held at the Chase National Bank in safekeeping for Lake View for the account of the Friedman Fund. These bonds then became part of the security for D'Agostino's loan at the Philadelphia National Bank, and $50,687.50 of the proceeds of D'Agostino's loan were paid, on Livingstone's instructions, to discharge part of the petitioner's loan at Lake View.
On November 1, 1954, Livingstone directed Lake View to instruct the Chase National Bank to deliver to the Philadelphia National Bank, against payment of $50,687.50, the $50,000 Jacksonville bonds which were being held in safekeeping for the account of the Friedman Fund.
By the terms of D'Agostino's loan at the Philadelphia National Bank on November 10,1954, approximately $75,000 of the loan was due to be repaid on December 13, 1954, and the balance was due to be repaid on May 9, 1955. When D'Agostino decided to close out his transaction, his loan at the Philadelphia National Bank was paid off with the proceeds of the loan of still another customer of Livingstone.
Lake View's records reflect a part payment of $80,000 on petitioner's loan on October 29, 1954, and a final payment of $50,687.50 on November 12, 1954.
On November 29, 1954, petitioner sent a check to Lake View in the amount of $563.85 in payment for the interest due on her loan of August 6. 1954. According to the records of Lake View the amount of interest due on petitioner's note was $1,128.49. On her 1954 income tax return petitioner claimed an interest deduction arising out of this transaction in the amount of $1,384.17 and described the payment as being made to ‘Livingstone & Co., Brokers, Boston, Massachusetts.’ Respondent disallowed this deduction.
In several instances when members of the Stone family, including petitioner, purchased these callable bonds, the bonds would be held through a ‘call’ date and then assigned to a charity. Petitioner knew nothing about the details of the purchase, on July 27, 1954, of the Jacksonville and Piedmont bonds. She merely signed whatever papers and documents were presented to her by Stone for her signature.
Petitioner knew nothing about the condition of the bond market or its did she know anything about the condition of the bond market or its prospects at the time she donated these bonds to the Friedman Fund and when that fund sold these bonds to Livingstone. Petitioner knew nothing about the financial backgrounds or soundness of the Jacksonville Terminal Company and the Piedmont & Northern Railway Company at the time she purchased their bonds on July 17, 1954.
Livingstone prepared written memoranda for clients setting forth the various steps in the transactions he recommended and projecting the ultimate income tax benefit that the client could expect to derive from his plan. The tax savings aspect of the transaction was paramount to the client.
Livingstone has approximately 100 to 150 clients who entered into bond transactions like the one involved in this proceeding. Livingstone usually arranged the loans for his clients who entered into these bond transactions. He usually purchased the bonds from the charities to which his clients donated them and, in many cases, the purchase occurred within 6 weeks of the original sale. All the instructions to the various banks which were signed by the clients were form letters prepared by Livingstone.
Livingstone assumed the obligation to pay for the litigation costs in this proceeding and the attorney representing petitioner in this proceeding is Livingstone's attorney.
According to the National Monthly Bond Summary, and the National Daily Quotation Services, the following schedule shows the bid and asked prices on the dates indicated for Jacksonville bonds:
+------------------------------+ ¦Date ¦Bid ¦Asked ¦ +--------------+-------+-------¦ ¦July 26, 1954 ¦ ¦104 ¦ +--------------+-------+-------¦ ¦July 27, 1954 ¦102 1/4¦ ¦ +--------------+-------+-------¦ ¦July 28, 1954 ¦102 ¦104 ¦ +--------------+-------+-------¦ ¦July 29, 1954 ¦102 1/4¦ ¦ +------------------------------+
According to the National Monthly Bond Summary, and the National Daily Quotation Services, the following schedule shows the bid and asked prices on the dates indicated for Piedmont bonds:
+----------------------------+ ¦Date ¦Bid ¦Asked ¦ +--------------+-----+-------¦ ¦July 19, 1954 ¦104 ¦ ¦ +--------------+-----+-------¦ ¦July 30, 1954 ¦104 ¦105 1/2¦ +----------------------------+
The Jacksonville bonds were redeemable, otherwise than for sinking fund purposes, by the obligor in whole or in part at 103 3/8 at any time up to December 1, 1957, on 45 days' notice. They were also redeemable for sinking fund purposes on December 1 of each year to and including 1957 on 45 days' notice at 101 3/8. The Piedmont bonds were redeemable by the obligor in whole or in part at any time on 30 days' notice at 105. They were also redeemable for sinking fund purposes on 30 days' notice on December 1 of any year at 100.
The par value of Jacksonville bonds outstanding prior to call for sinking fund purposes, the par value of bonds called for the sinking fund, the amounts paid by the obligor to the trustee for said redemption, and the redemption dates for each of the years 1951 through 1954 were:
+-----------------------------------------------------------------+ ¦ ¦Par value of ¦ ¦Amount ¦ +-----------------------+-------------+------------+--------------¦ ¦Redemption date Dec. 1—¦bonds ¦Par value of¦paid by ¦ +-----------------------+-------------+------------+--------------¦ ¦ ¦outstanding ¦bonds called¦Jacksonville ¦ +-----------------------+-------------+------------+--------------¦ ¦ ¦prior to call¦ ¦to the trustee¦ +-----------------------+-------------+------------+--------------¦ ¦1951 ¦$3,941,000 ¦$19,000 ¦$20,320.53 ¦ +-----------------------+-------------+------------+--------------¦ ¦1952 ¦3,922,000 ¦20,000 ¦20,337.40 ¦ +-----------------------+-------------+------------+--------------¦ ¦1953 ¦3,902,000 ¦20,000 ¦20,337.40 ¦ +-----------------------+-------------+------------+--------------¦ ¦1954 ¦3,882,000 ¦20,000 ¦20,337.40 ¦ +-----------------------------------------------------------------+
The amount deposited in the sinking fund of the Piedmont bonds, the allocation of the deposits to principal and interest, the face amounts of bonds acquired by the fund, and the total amounts expended on account of principal and interest for each of the years 1951 through 1954 were:
+---------------------------------------------------------------+ ¦Year¦Amount ¦Allocated to¦Allocated to¦Bonds ¦Total amount¦ +----+----------+------------+------------+--------+------------¦ ¦ ¦deposited ¦principal ¦interest ¦acquired¦expended ¦ +----+----------+------------+------------+--------+------------¦ ¦1951¦$36,875.00¦$36,200.00 ¦$675.00 ¦$36,000 ¦$36,675.00 ¦ +----+----------+------------+------------+--------+------------¦ ¦1952¦38,243.75 ¦37,550.00 ¦693.75 ¦37,000 ¦37,693.75 ¦ +----+----------+------------+------------+--------+------------¦ ¦1953¦39,668.75 ¦38,937.50 ¦731.25 ¦39,000 ¦39,731.25 ¦ +----+----------+------------+------------+--------+------------¦ ¦1954¦41,168.75 ¦40,400.00 ¦768.75 ¦41,000 ¦41,768.75 ¦ +---------------------------------------------------------------+
The first year in which petitioner owned bonds with respect to which she had the privilege of claiming amortization of premium was 1952. In her return for that year she elected to amortize bond premiums to the earliest call date. In her income tax return for 1954, petitioner elected to amortize the premiums with respect to the Jacksonville and Piedmont bonds to the prices at which they were redeemable for sinking fund purposes and to their respective earliest call dates. She deducted on her return amortization with respect to the Jacksonville and Piedmont bonds in the amount of $8,712.50. Respondent disallowed this deduction.
Petitioner never received physical possession of the $130,687.50 which she borrowed from Lake View on August 6, 1954, and she never received physical possession of the Jacksonville and Piedmont bonds purchased on July 27, 1954, with the proceeds of the loan.
OPINION.
OPPER, Judge:
Of the three issues presented, two— the propriety of deductions for interest paid and contributions to charity— are disposed of in petitioner's favor on the authority first, of L. Lee Stanton, 34 T.C. 1, and Fabreeka Products Co., 34 T.C. 290, and second, of Maysteel Products, Inc., 33 T.C. 1021. The third deduction claimed, that for amortization of bond premium, is disallowed on the authority of Maysteel Products, Inc., supra.
Reviewed by the Court.
Decision will be entered under Rule 50.
FISHER, Jr., concurs in the result.
BRUCE, J., dissents.
MURDOCK, J., concurring: The findings of fact are inadequate unless the words used therein have their usual meaning. Otherwise no one knows what the facts are. Therefore, I disregard the last sentence of the second paragraph of those findings and concur on the basis of the findings with that sentence omitted.
WITHEY, J., agrees with this concurring opinion.
TURNER, J., dissenting: Since according to the third sentence under the heading Findings of Fact we have specifically declared that the terms ‘purchase,’ ‘buy,’ ‘loan,’ ‘donate,’ ‘sell’ or ‘sale,’ ‘amortize,’ ‘interest,’ and certain other words as used in the said ‘findings' do not ‘necessarily’ represent ‘our conclusions of fact regarding the respective transactions,‘ we are left, it would seem to me, without a factual basis for decision of the case and in such circumstances I do not see how it may properly be said that the cases cited are or are not controlling. I accordingly note my dissent.