Opinion
Docket No. 72087.
1960-05-24
FABREEKA PRODUCTS COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Kenneth W. Bergen, Esq., Josiah A. Spaulding, Esq., and M. Gordon Ehrlich, Esq., for the petitioner. Raymond T. Mahon, Esq., and John M. Doukas, Esq., for the respondent.
Kenneth W. Bergen, Esq., Josiah A. Spaulding, Esq., and M. Gordon Ehrlich, Esq., for the petitioner. Raymond T. Mahon, Esq., and John M. Doukas, Esq., for the respondent.
1. Deductions for amortization of bond premium held properly disallowed. Cf. Maysteel Products, Inc., 33 T.C. 1021.
2. Deductions for interest, stamp taxes, and legal and accounting fee actually paid held allowable.
The Commissioner determined a deficiency in petitioner's income tax in the amount of $16,407.82 for the year 1954.
The principal question presented is whether petitioner is entitled to a deduction for amortization of bond premium under section 171 of the 1954 Code in respect of a transaction involving the acquisition and disposition of certain bonds. Other questions relating to that transaction involve the deductibility of interest, stamp taxes, and a fee paid to petitioner's tax adviser.
FINDINGS OF FACT.
The stipulation of facts filed by the parties is incorporated herein by reference.
Petitioner, a Massachusetts corporation having a principal place of business in Boston, filed its income tax return for the calendar year 1954 with the director of internal revenue for the district of Massachusetts. Since its incorporation on October 8, 1918, petitioner had been engaged in the business of manufacturing and distributing mechanical rubber goods such as insulating pads and transmission and conveyor belting. Its books and records are kept on an accrual basis.
James D. Glunts & Co., an accounting partnership doing business in Boston, has been the accounting and auditing firm for petitioner since the latter's incorporation. Gerald I. Glunts is a partner in that firm; he is also a certified public accountant registered in Massachusetts, an attorney at law admitted to practice before the Supreme Judicial Court of Massachusetts, and a member of the American Institute and the Massachusetts Society of Certified Public Accountants. James D. Glunts, Gerald's uncle, is the senior partner in James D. Glunts & Co. and a stockholder in petitioner.
In November and December 1954, petitioner's stock was held as follows:
+-------------------------------+ ¦Stockholder ¦Shares ¦ +----------------------+--------¦ ¦John S. Codman ¦2,000 ¦ +----------------------+--------¦ ¦Philip W. Wrenn Trust ¦2,000 ¦ +----------------------+--------¦ ¦William B. Rogers ¦2,000 ¦ +----------------------+--------¦ ¦James D. Glunts ¦2,000 ¦ +----------------------+--------¦ ¦Lucy Norris ¦470 ¦ +----------------------+--------¦ ¦Esther Hodges ¦470 ¦ +----------------------+--------¦ ¦Total ¦8,940 ¦ +-------------------------------+
Lucy Norris and Esther Hodges were nieces of John S. Codman. These were the only family relationships among the stockholders. William B. Rogers was the father of William B. Rogers, Jr., president of petitioner.
During 1952, Gerald I. Glunts (hereinafter referred to as Glunts) became interested in the ‘tax-saving’ possibilities of transactions utilizing ‘amortizable’ corporate bonds which were callable on not less than 30 days' notice. Realization of the contemplated ‘tax savings' depended upon the following principal factors: (1) Payment of an abnormally large premium by a taxpayer upon purchase of such bonds; (2) the deductibility of the premium, after a holding period of 30 days, on the theory that the applicable sections of the Internal Revenue Code and regulations permitted ‘amortization’ of the premium down to the earliest call date on the bonds; and (3) the existence of a ready market for the bonds when the taxpayer sought to dispose of them. These elements were basic to at least three different types of transactions ultimately entered into by Glunts' clients, as follows:
(1) A corporation might purchase bonds of the type described above by furnishing from its own funds that portion of the purchase price equivalent to the ‘amortizable’ premium, borrowing the remainder, and pledging the bonds as collateral for the loan. After 30 days, the corporation would declare the bonds as a dividend in kind to shareholders, subject to the loan, and claim a deduction for the premium. The shareholders would then assume the indebtedness against the bonds, sell them, and pay off the loan with part of the proceeds, distributing the remainder of the proceeds to themselves. This form of transaction was geared to produce a tax deduction to the corporation for an otherwise nondeductible dividend distribution.
(2) A ‘high-bracket’ individual taxpayer might purchase these bonds, also by putting up cash in an amount equivalent to the premium and borrowing the remainder of the purchase price. After 30 days, the taxpayer would claim a deduction for the premium. He would then contribute the bonds to a charity, subject to the indebtedness against them, and claim a charitable deduction for the value of his equity in the bonds. The charity would sell the bonds, pay off the loan with a portion of the sales proceeds, and keep the remainder. This form of transaction was intended to produce two deductions the ‘tax savings' from which, in the case of a ‘high-bracket’ taxpayer, would exceed the amount paid by him towards the purchase price of the bonds.
(3) After taking the amortization deduction, the same ‘high-bracket’ taxpayer might decide to hold the bonds until 6 months had elapsed from the date of purchase at which time he would sell the bonds and report a capital gain in the amount by which his sales proceeds exceeded his basis in the bonds as adjusted for the amortization deduction. Part of the sales proceeds would be used to pay off the loan, the remainder being gain to the taxpayer on the sale. The capital gains tax incurred upon sale of the bonds would, in the case of a ‘high-bracket’ taxpayer, be more than offset by ‘tax savings' from the amortization deduction.
In response to a request from Glunts, J. Benn Keizer of Keizer & Co., Inc., compiled a list of bonds of the type required for the contemplated transactions. Keizer & Co., Inc. (hereinafter referred to as Keizer), is a corporate brokerage firm doing business in Boston; it is registered with the Securities and Exchange Commission as a trader-dealer, but is not a member of the New York Stock Exchange. J. Benn Keizer is a director and 20 per cent stockholder of Keizer. Together, Glunts and J. Benn Keizer investigated the indenture provisions of those bonds which appeared to fit their requirements. Among the bonds discussed by Keizer and Glunts were Illinois Power Company 1978 series 3 1/8 per cent first mortgage bonds (hereinafter sometimes referred to as Illinois bonds). These bonds had been issued in the face amount of $15 million on February 1, 1948, by the Illinois Power Company, an Illinois utilities corporation with principal offices in Decatur, Illinois. They are callable in whole or in part on not less than 30 nor more than 60 days' published notice for general as well as sinking, property, maintenance, and renewal fund purposes. The general call price to February 1, 1955, was 103 and the sinking fund call price to February 1, 1955, was 100.43.
On October 29, 1952, Glunts wrote a letter to the Treasury Department requesting a ruling as to (1) the amortization of premiums on specified bonds callable on at least 30 days' notice; and (2) an assumed situation involving the contribution of such bonds to an organized charity. However, the Rulings Division refused to issue a ruling until Glunts identified the taxpayer on whose behalf the ruling was requested. A subsequent letter from Glunts, dated January 27, 1953, indicated that the ruling was being requested on behalf of several of his clients, but did not identify them by name. Finally, by letter dated February 10, 1953, Glunts changed his request to state that he was the taxpayer interested in the purchase of the bond issues described. On March 4, 1953, the following ruling was issued to Glunts as the interested taxpayer:
Based on the information furnished, it is the opinion of this office that, since each of the bonds may be called on at least 30 days' notice, at either the general redemption price or the special redemption price, you may, under the provisions of section 125 of the Internal Revenue Code, amortize the premium on such bonds to the lowest price at which the bonds may be legally redeemed on the earliest call date, which would be either the date specified in any notice of redemption properly issued by any of the companies or, if no notice has been received at the time the decision to amortize bond premium with respect to such bonds is made, the thirty-first day following the date on which such decision is made. * * *
The ‘information furnished’ included the identification and description of the bonds with respect to which the ruling was requested and both the general and special redemption prices applicable thereto, but it did not include the amount (nor any estimate of the amount) of the premium to be paid for the bonds. Nor did such information include a description of the transactions in which Glunts planned to utilize the bonds. As to the assumed situation involving the contribution of the bonds to charity, the Rulings Division deemed it ‘inadvisable to rule without a complete statement of facts regarding the proposed arrangements, understandings, or contracts involved, the business purposes of the proposed transaction, and all other relevant details.’
After receipt of the ruling, Glunts began contacting his clients for purposes of recommending to them that they enter into transactions such as those previously described. He usually showed them the ruling which he had obtained, in order to interest them in the ‘tax-saving’ possibilities of the transactions he was recommending. Of those clients contacted and shown the ruling, approximately 30 or 35 agreed to enter into some variation of the recommended transactions.
Petitioner was one of the clients contacted by Glunts. In October 1954, Glunts approached William B. Rogers, Jr., petitioner's president, and told him that he had a plan involving amortizable bonds whereby petitioner could obtain a deduction from income taxes approximately equal to the amount of its intended yearend dividend. The plan, as outlined to Rogers, Jr., and subsequently repeated by Glunts to petitioner's board of directors at a special meeting on November 16, 1954, was as follows:
(a) Petitioner would buy some bonds from Keizer, making a downpayment from its own funds in an amount approximately equal to the premium on the bonds and borrowing the remainder of the purchase price from a bank; the bonds would be pledged as collateral for the loan.
(b) Petitioner would hold the bonds for 30 days after which it would elect to amortize the premium on the bonds to the earliest call date.
(c) Petitioner would then declare a dividend to its stockholders payable in the bonds subject to the bank obligation.
(d) After 30 days from purchase, the bonds would be assigned to one stockholder who would act as agent for all the stockholders in reselling the bonds.
(e) Petitioner's loan at the bank would be paid from the proceeds of the resale and the remainder of the sales price would be distributed to petitioner's stockholders as the dividend.
(f) Petitioner would claim an amortization deduction on its income tax return which would approximately equal the dividend received by the stockholders.
At the close of the meeting, petitioner's board of directors voted:
To authorize the President
(a) To purchase up to $300,000 to Public Utility Bonds rated not less than Grade A with a maturity not later than 1979 and when bought to amortize the premium, if any, to the lowest call price and within the shortest time legally permissible, and
(b) To borrow such moneys as are necessary pledging the bonds as collateral.
The minutes of this meeting were prepared by Glunts.
In authorizing the purchase of ‘Public Utility Bonds,‘ petitioner's directors relied completely on Glunts' advice. They were interested solely in the ‘tax saving’ to be derived from the transaction. Petitioner had never purchased bonds before, except for certain Government securities, and there is no indication that petitioner's directors knew even the name of the bonds that Glunts had in mind. No discussion was had with respect to the price at which the purchase was to be consummated, or as to the state of the bond market at the time. Glunts did inform the directors that redemption during the 30-day holding period was ‘extremely improbable,‘ and that the bonds to be purchased were ‘double A’ in quality.
It was assumed without discussion that the bonds were readily marketable and that a drop in market price sufficient to offset the ‘tax saving’ from the amortization deduction would not occur during the holding period. Glunts never attempted to check the price of Illinois bonds with any source other than Keizer. Although Keizer did not enter into a written agreement with petitioner or Glunts to repurchase the bonds after 30 days, both Glunts and Keizer expected that Keizer would repurchase. With one or two exceptions, Keizer had sold bonds to, and repurchased them from, all of Glunts' clients involved in similar transactions, and Keizer anticipated repurchasing petitioner's bonds in order to sell them again.
On November 16, 1954, the same day as the directors meeting, petitioner purchased from Keizer $170,000 face value of the Illinois bonds at a price of 118 for each $100 of face value. Settlement date for the purchase was November 22, 1954. Total purchase price of the bonds was $202,238.02 (principal purchase price of $200,600 plus accrued interest of $1,638.02). Interest paid on these bonds was and is fully taxable for Federal income tax purposes.
The Illinois bonds purchased by petitioner came from Keizer's inventory which was in effect an open account maintained by Keizer with the firm of Josephthal & Co. (hereinafter referred to as Josephthal), a New York brokerage house with an office in Boston and memberships in the New York and other stock exchanges. Josephthal customarily served as clearing agent for Keizer, acting upon Keizer's instructions to receive or deliver securities and to make or receive payments for Keizer's account.
According to the National Monthly Bond Summary and the National Daily Quotation Service, the following schedule quotes the bid and asked prices on Illinois bonds from October 20, 1954, through November 29, 1954:
+----------------------------------------------------------------+ ¦Bond house ¦Date ¦Bid ¦Asked ¦ +-----------------------------+--------+------------+------------¦ ¦Spencer Trask & Co., New York¦10-20-54¦(1 ) ¦20 @ 111 1/2¦ +-----------------------------+--------+------------+------------¦ ¦White Weld & Co., New York ¦10-25-54¦1 @ 112 ¦(1 ) ¦ +-----------------------------+--------+------------+------------¦ ¦Bache & Co., New York ¦10-28-54¦112 3/4 ¦(1 ) ¦ +-----------------------------+--------+------------+------------¦ ¦Lee Rand & Co., New York ¦11-29-54¦50 @ 106 1/2¦50 @ 107 1/2¦ +----------------------------------------------------------------+ FN1 None.
According to Moody's Public Utility Manual, the high and low bid prices during the year 1954 for the Illinois bonds were 112 3/4 high and 96 low. Standard ) Poor's Corporation records Manual reported the range of bid prices during the year 1954 on the Illinois bonds to be between a high of 106 3/4 and a low of 96 1/2. Asked prices were not quoted in either Moody's or Standard & Poor's.
The Illinois bonds were not listed on any securities exchange and were sold only over the counter; the bid and asked prices quoted above do not necessarily encompass the price range within which all purchases and sales of Illinois bonds took place during the periods noted.
On November 4, 1954, Keizer purchased $69,000 face value of the Illinois bonds at a price of 114 1/2. On November 30, 1954, Keizer was able to purchase $200,000 face value of the Illinois bonds at a price of 105 7/8. Both purchases were accomplished through Josephthal.
On November 26, 1954, the First Boston Corporation purchased $20,000 face value of the Illinois bonds at a price of 107 1/2, and on the same day sold them at a price of 108. First Boston Corporation had handled the original sale of the Illinois bonds when they were first issued in 1948, but the above transaction was its only purchase and sale of those bonds in 1954.
Prior to purchasing the Illinois bonds, it was arranged through Simmons, Bourne & Co., a note brokerage firm in Boston, that petitioner would borrow $170,731 for 35 days from the Harvard Trust Company, Arlington, Massachusetts (hereinafter referred to as Harvard Trust). The amount of the loan corresponded to the lowest call price on the bonds as of the 31st day after purchase, that is, 100.43 for each $100 face value of the bonds.
On November 22, 1954, petitioner borrowed $170,731 from Harvard Trust and delivered to Harvard Trust its negotiable, recourse promissory note for the amount of the loan. The note, executed on a standard form used by Harvard Trust entitled ‘Non-Purpose ‘Stock’ Collateral Time Loan,‘ was due on December 27, 1954, and bore interest at 3 1/4 per cent. The commission charged by the note broker for placing the loan was 1/4 of 1 per cent. Petitioner, therefore, incurred an overall charge of 3 1/2 per cent on the loan. On November 17, 1954, petitioner sent a check to Simmons, Bourne & Co., in the amount of $580.96 representing advance payment of the overall charge. This amount was deducted from petitioner's gross income on its 1954 return as interest.
On or before November 22, 1954, petitioner delivered to Keizer its check for $31,507.02, representing that part of the purchase price which petitioner furnished from its own funds.
On November 24, 1954, after appropriate instructions relayed from petitioner to Keizer and thence to Josephthal and Harvard Trust, the $170,000 face value of Illinois bonds were delivered to Harvard Trust for petitioner's account by Josephthal, and Harvard Trust paid Josephthal $170,731. The serial numbers of the bonds so delivered were numbers 12001 through 12100, 13101 through 13150, and 13181 through 13200. On the same date Josephthal notified Keizer that it had delivered the bonds as instructed and received payment.
Petitioner's loan at Harvard Trust was under the supervision of Ira M. Jones, a vice president of Harvard Trust. Sometime between November 24 and November 29, 1954, Jones called upon petitioner to deposit additional collateral of $4,131 in order to satisfy the minimum margin requirements of Harvard Trust. In its loan arrangement with petitioner, Harvard Trust required a minimum margin of 10 points; that is, the bid price on the bonds pledged as collateral had to exceed the amount of the loan by 10 points at all times during the term of the loan. Subsequent to November 22, 1954, when the loan was made, Jones telephoned either Keizer or Simmons, Bourne & Co., and determined that the bid price on the Illinois bonds was approximately 108 whereas the bid price ascertained by him when the loan was made was ‘111 or better.’ Petitioner delivered its check for $4,131 to Harvard Trust on November 29, 1954.
On December 20, 1954, petitioner's board of directors held another special meeting and voted to declare the Illinois bonds as ‘a dividend in property, distributable on December 27, 1954’ to the several shareholders of petitioner, subject, however, to the indebtedness to Harvard Trust. Petitioner reserved the right to ‘all interest accrued on such bonds through the close of business on December 27, 1954.’ The minutes of the meeting were prepared by Glunts. James D. Glunts was appointed agent for the stockholders to receive the bonds, sell them, discharge the indebtedness to Harvard Trust, and distribute the remaining proceeds ratably to the stockholders. Petitioner's stockholders assented to these arrangements and agreed to assume their ratable share of petitioner's obligation to Harvard Trust.
On December 21, 1954, James D. Glunts instructed Harvard Trust to deliver the Illinois bonds to Keizer or its order and to receive payment of $170,731. On December 23, 1954, Keizer instructed Harvard Trust to deliver the Illinois bonds to Josephthal and to receive payment of $170,731.
On December 27, 1954, the following events took place:
(a) Petitioner assigned the Illinois bonds to James D. Glunts and notified Harvard Trust of the assignment, instructing it to deliver the bonds to James D. Glunts or his nominee upon payment of $170,731.
(b) The Illinois bonds were resold by James D. Glunts to Keizer at a price of 115; the settlement date on the resale was also December 27, 1954. Net proceeds of the resale were $197,569.51, computed as follows: Principal proceeds ($195,500) plus accrued interest to settlement date ($2,154.51) less Federal documentary stamp taxes on the resale ($85). James D. Glunts issued his personal check to petitioner for $2,154.51, the amount of accrued interest on the bonds.
(c) Pursuant to appropriate instructions relayed from James D. Glunts to Keizer, and thence to Harvard Trust and Josephthal, Josephthal paid $170,731 to Harvard Trust to discharge petitioner's loan, and received the Illinois bonds out of the account of James D. Glunts. The delivery to Josephthal was accomplished by the physical transfer of the bonds to Josephthal's messenger who, after holding them for about 5 minutes, redelivered $120,000 face value thereof (serial numbers 12001 through 12100 and 13101 through 13120) to Harvard Trust as security for the so-called ‘Sherman and Artenstein loans.’ (Jack L. Sherman and Maurice Artenstein were other clients to Glunts' who, on Glunts' recommendation, had purchased $120,000-face-value Illinois bonds from Keizer on November 23, 1954, approximately 1 week after petitioner's purchase. Loans with characteristics identical to that made to petitioner had been arranged for Sherman and Artenstein at Harvard Trust and the settlement date had been set for November 30, 1954. However, on November 30, 1954, Keizer's inventory was short the required number of Illinois bonds; consequently, the actual making of the loans by Harvard Trust was postponed until December 27,1954, when the bonds theretofore held as collateral for petitioner's loan became available as collateral for the Sherman and Artenstein loans. A detailed account of the Sherman and Artenstein transactions is set forth in Jack L. Sherman, Docket No. 74212, decided this day, the record in which has been incorporated herein by agreement of the parties.)
(d) Harvard Trust notified petitioner that it had delivered the bonds to Josephthal and received payment discharging petitioner's note; the canceled note was returned to petitioner together with a Harvard Trust treasurer's check for $4,131 representing the additional cash collateral theretofore deposited by petitioner.
(e) Keizer sent a check to James D. Glunts in the amount of $26,838.51 representing the net proceeds of the resale of the Illinois bonds ($197,569.51) less the $170,731 paid to Harvard Trust on account of petitioner's note.
On December 28, 1954, Josephthal sent a letter to Keizer confirming receipt of the Illinois bonds and payment of petitioner's note.
On December 29, 1954, James D. Glunts & Co., submitted a bill to petitioner for $1,000 for ‘services rendered re purchase of amortizable bonds, dividends in kind, etc.’ On January 12, 1955, petitioner issued its check to James D. Glunts & Co. in payment of this bill. Petitioner deducted this amount as a business expense on its 1954 return.
On its 1954 return, petitioner also deducted the amount of $29,869 as representing amortizable bond premium on the Illinois bonds. This amount was computed as the difference between the principal purchase price of the bonds ($200,600) less the lowest call price on the bonds as of the 31st day after purchase ($170,731).
The petitioner entered into the above-described bond transaction solely for the purpose of reducing its income tax liability.
Respondent in his deficiency notice disallowed the deductions taken by petitioner for bond amortization ($29,869), interest paid ($580.96), the service fee paid to James D. Glunts & Co. ($1,000), and documentary stamp taxes ($85).
OPINION.
RAUM, Judge:
1. The so-called amortization issue must be decided against petitioner on the authority of Maysteel Products, Inc., 33 T.C. 1021. Indeed, the record in the present case peculiarly calls for the denial of the claimed deduction, since the substance of the transaction was merely the declaration of a dividend to petitioner's stockholders, a transaction that cannot produce a deduction to the corporation. The elaborate and devious steps taken to achieve that result should not and do not alter the tax consequences that would flow therefrom if the transaction were carried out directly. This has been recognized in many cases and in a wide variety of situations over a long period of years. It is a matter of familiar learning, and we do not feel impelled to review the numerous decisions reaffirming the rule. The point was stated succinctly and clearly in Minnesota Tea Co. v. Helvering, 302 U.S. 600, where the Court said (p. 613): ‘A given result at the end of a straight path is not made a different result by following a devious path.’ The ‘given result’ here was the declaration and payment of a yearend cash dividend to petitioner's stockholders that is nondeductible, and it cannot be converted into a deductible item by ‘following a devious path.’
2. The remaining items in controversy stand on a different footing. In the course of following the ‘devious path,‘ petitioner actually borrowed money, paid interest thereon, paid stamp taxes, and paid a fee to its tax counselor. We hold that these items are deductible. Our decision in this respect is not inconsistent with our disposition of the first issue.
The substance versus form rule requires us to treat the totality of the steps as the declaration and payment of a nondeductible dividend; but in the course of unsuccessfully attempting to convert it into deductible amortization petitioner did actually incur expenses which, standing alone, must be allowed as deductions. Thus, it seems clear that the taxpayer in Gregory v. Helvering, 293 U.S. 465, would not have been denied a deduction for legal fees merely because the course of action advised by the lawyer backfired. True, the transaction in the Gregory case failed to qualify as a ‘reorganization’ because of lack of business purpose, but this does not mean that the component steps are to be completely ignored for all purposes. Real corporations were involved in the Gregory case, and surely, to the extent that securities were transferred from one to another, applicable stamp taxes were required to be paid and deductions therefor would plainly be allowable. Petitioner in the instant case actually borrowed money and is entitled to deduct the interest paid thereon. Cf. L. Lee Stanton, 34 T.C. 1. Similarly, the $85 paid as stamp taxes is deductible. And the $1,000 fee actually paid for Glunts' services is likewise deductible even though such services failed to produce the desired results. We know of no rule of law applicable here that is comparable to the ‘public policy’ rule in the case of expenses relating to illegal acts, cf. Tank Truck Rentals v. Commissioner, 356 U.S. 30; and certain expenses, even in the case of illegal businesses, may be deductible, cf. Commissioner v. Sullivan, 356 U.S. 27.
Reviewed by the Court.
Decision will be entered under Rule 50.
OPPER and DRENNEN, JJ., concur in the result only.
MURDOCK, J., concurring: Numerous cases have come before this Court in which taxpayers have entered into transactions intended to given them a substantial deduction for amortization of bond premiums. They have dealt in bonds containing a provision for call at a stated amount on notice of 30 days, although it is well known in the market that there is no likelihood of the debtor calling them. Such dealings in these bonds have apparently created a market price for the bonds far in excess of what it would be except for this 30-day call provision and its attraction to taxpayers looking for a tax benefit. The higher the price, the greater the premium subject to amortization. Taxpayers buy the bonds at the inflated price, hold them 30 days, deduct the difference between cost and the 30-day call price, and then find some way to dispose of them which also may be beneficial taxwise. The artificially sustained market price is helpful in the beneficial disposition. The taxpayers do not sustain a loss during the 30 days equal to the difference between cost and the 30-day call price. They may sustain no loss whatsoever. They take no real risk of any such loss from a possible call because, as has appeared, the issuer of the bonds, expanding and borrowing additional amounts, has no intention of calling these bonds on 30 days' notice or indeed of calling them at all in the near future. Cf. Estate of A. Gourielli, 33 T.C. 357; Jacob A. Goldfarb, 33 T.C. 568; Maysteel Products, Inc., 33 T.C. 1021. One desiring a real income-producing investment would not be likely to pay the premium price for bonds like these. I cannot believe that Congress had such a situation in mind and intended taxpayers to take a deduction under any such circumstances.
BRUCE and MULRONEY, JJ., agree with this concurring opinion.
PIERCE, J., concurring in part and dissenting in part:
I would have disallowed all the claimed deductions here involved, on the basis of the reasons and the judicial authorities set forth in my dissenting opinion in L. Lee Stanton, 34 T.C. 1. While I agree with the result reached by the Court on the first issue, I believe that such result should have been attained through application of principles which are more fundamental and cogent than those noted in the Court's opinion. As to the second issue, I feel impelled to disagree with the Court's holding.
The basic question here involved is, in my view, substantially the same as that involved in the Stanton case and in a multiplicity of other cases which have recently come before this and other courts (several of which cases are cited in my dissenting opinion in the Stanton case)— notwithstanding that there are variations of detail from case to case, as might be expected. Such basic question is: Whether a taxpayer may successfully contrive to reduce his potential income tax liabilities, at such times and by such amounts as he may elect, through employment of preconceived step-by-step transactions which are not entered into for any business purposes or personal purpose whatsoever, other than to avoid income taxes; which have no ‘economic reality’; which distort a true reflection of taxable income; and which, in substance, amount to nothing more than a ‘purchase’ of tax deductions.
I cannot believe that Congress ever intended that the Internal Revenue Code which is designed to provide the Government with needed revenues, should be so construed as to bear within itself the means for frustrating such essential purpose— and thereby encourage what the above-mentioned cases have revealed to be a wide- spread practice of acquiring tax deductions at a relatively nominal price, through schemes and transactions which have no ‘economic reality.’ I believe that (adopting the words of the Supreme Court in Gregory v. Helvering, 293 U.S. 465) ‘(t)o hold otherwise would be to exalt artifice above reality and to deprive the statutory provision in question of all serious purpose.’ Also to hold otherwise might, in my view, seriously impair public confidence in our Federal income tax system, by giving implied approval to practices whereby particular taxpayers may practically ‘write their own tickets' as to income tax liabilities, through the adoption of artifice. The fundamental problem in all cases like the present is, not whether formalisms and labels have been meticulously, observed, but rather, whether allowance of the claimed deductions, in circumstances such as are disclosed in the instant case, would conform with the intent, the spirit, and the purpose of our income tax statutes.
2. As regards the second issue in the instant case, the Court allowed deduction for the miscellaneous expenses incident to carrying out the plan which Glunts proposed— apparently on the ground that such miscellaneous expenses actually were incurred and paid. But the deductibility of expenditures depends on more than the mere incurrence or payment thereof. What actually occurred here was this: Glunts told petitioner's president that he had a plan, whereby the corporation could obtain a deduction from income taxes which would be approximately equal to the amount of its intended yearend dividend. The substance of this plan was that such yearend dividend would be declared and paid in the form of an ‘interest in property’ (in the nature of an equity interest in certain bonds) to be acquired for such purpose, rather than in the form of cash. Petitioner's directors adopted such plan; and thereupon Glunts proceeded to handle all details pertaining to the acquisition and the distribution to such ‘property interest.’ The miscellaneous expenses involved in the second issue herein, are in reality separate items of the overall package-cost of acquiring such ‘property interest,‘ and of taking all the indispensable steps in following the devious path which Glunts prescribed.
But a corporation's ‘cost’ for property which it distributes in kind to its stockholders is not deductible. The situation is similar to that where a corporation purchases a parcel of real estate, and in connection therewith pays brokers' commissions, recording fees, transfer taxes, and other miscellaneous expenses, which enter into its cost bases for such property; and where it then distributes such property in kind to its stockholders as a dividend. Certainly none of the items making up the overall cost of the property so distributed, would be deductible by the corporation at the time such dividend-in-kind is distributed.
Also, there are other reasons why certain items of such miscellaneous expenses are not deductible. The largest item is the $1,000 fee paid to the Glunts company for ‘services rendered.’ It would seem that the only section of the Code under which this item could possibly be deductible is section 162, relating to ‘ordinary and necessary expenses' incurred in ‘carrying on’ the petitioner's business. But the services of the Glunts company had no relation whatsoever to the operation of petitioner's business of manufacturing rubber goods, or to the production of the income, or to any other phase of ‘carrying on’ that business. Also, part of the item for ‘interest’ is actually a broker's fee of one-fourth per cent, for services in placing the so-called ‘Non-Purpose ‘Stock’ Collateral Time Loan'; and it is not an ordinary and necessary expense of carrying on petitioner's business. And another item is the $85 expended for Federal documentary stamp taxes on the ‘resale’ of the bonds. But such resale was made by James D. Glunts as an agent for the distributee-stockholders, after the ‘property interests' in the bonds had been distributed as a dividend; and thus would appear to be an expenditure which was not even incurred for the benefit of the petitioner corporation.
The Court's reference to the Gregory case in connection with the second issue, seems inappropriate. The Gregory case did not involve any question relating to the deductibility of expenses; and what the Court has here attempted to do, is to hoist itself by its own bootstraps— first by conjecturing what the result would have been in the Gregory case if a deduction issue had there been involved, and then employing such conjectured result in arriving at a similar result in the instant case. Also the Court's reference to Tank Truck Rentals v. Commissioner, 356 U.S. 30, seems inappropriate. That case did not involve a ‘no economic reality’ tax avoidance scheme; and the facts and problems there presented are far afield from those presented in the instant case.