Source: http://openjurist.org/396/f2d/459/brown-v-united-states
Timestamp: 2017-05-25 14:57:55
Document Index: 696225750

Matched Legal Cases: ['§ 23', '§ 23', '§ 23', '§ 23', '§ 163', '§ 23', '§ 163', '§ 163', '§ 23', '§ 163', '§ 163', '§ 163', '§ 23', '§ 163', '§ 23', '§ 23', '§ 163', '§ 163', '§ 23', '§ 23']

396 F2d 459 Brown v. United States | OpenJurist
396 F. 2d 459 - Brown v. United States HomeFederal Reporter, Second Series 396 F.2d.
396 F2d 459 Brown v. United States 396 F.2d 459
Sumner E. and Barbara P. BROWNv.The UNITED STATES.
No. 35-65.
* Deductions for prepaid interest have been denied by an ever-increasing number of courts in a wide variety of Livingstone-type transactions that create simulated debts, paid for by personal notes and secured by the Treasury bonds or notes which have been purchased with the borrowed money. (Similar artificial debts have been created by the use of annuity contracts). The purported interest paid on these "debts" has been uniformly held non-deductible as interest expenses under section 163(a)6 because it was not paid on a genuine commercial indebtedness. First Circuit: Sonnabend v. Commissioner of Internal Revenue, 267 F.2d 319 (1st Cir. 1959), (Treasury notes — § 23(b))7; Goodstein v. Commissioner of Internal Revenue, 267 F.2d 127 (1st Cir. 1959), (Treasury notes — § 23 (b)). Second Circuit: Becker v. Commissioner of Internal Revenue, 277 F.2d 146 (2d Cir. 1960), (Treasury notes — § 23(b)); Lynch v. Commissioner of Internal Revenue, 273 F.2d 867 (2d Cir. 1959), (Treasury notes — § 23(b)); Jockmus v. United States, 335 F.2d 23 (2d Cir. 1964), (Treasury notes — § 163(a)); Minchin v. Commissioner of Internal Revenue, 335 F.2d 30 (2d Cir. 1964), (Annuity contract — §§ 23(b) and 163(a)); Goldstein v. Commissioner of Internal Revenue, 364 F.2d 734 (2d Cir. 1966), cert. denied, 385 U.S. 1005, 87 S.Ct. 708, 17 L.Ed.2d 543 (Treasury notes — § 163(a)); Barnett v. Commissioner of Internal Revenue, 364 F.2d 742 (2d Cir. 1966), cert. denied, 385 U.S. 1005, 87 S.Ct. 708, 17 L.Ed.2d 543 (Treasury obligations — § 163(a)). See: Benenson v. United States, 385 F.2d 26 (2d Cir. 1967). Third Circuit: Weller v. Commissioner of Internal Revenue, 270 F.2d 294 (3d Cir. 1959), cert. denied, 364 U.S. 908, 81 S.Ct. 269, 5 L.Ed.2d 223 (1960), (Annuity contract — § 23 (b)). Fourth Circuit: Bridges v. Commissioner of Internal Revenue, 325 F.2d 180 (4th Cir. 1963), (Treasury notes — § 163 (a)). Fifth Circuit: Nichols v. Commissioner of Internal Revenue, 314 F.2d 337 (5th Cir. 1963), (Treasury notes — § 163 (a)); United States v. Roderick, 290 F.2d 823 (5th Cir. 1961), reversing per curiam, 4 AFTR 2d 5569 (W.D.Tex. 1959). Sixth Circuit: Gheen v. Commissioner of Internal Revenue, 331 F.2d 470 (6th Cir. 1964), (Treasury notes — § 163(a)). Seventh Circuit: Lewis v. Commissioner of Internal Revenue, 328 F.2d 634 (7th Cir. 1964), cert. denied, 379 U.S. 821, 85 S.Ct. 43, 13 L.Ed.2d 32 (Treasury notes); Rubin v. United States, 304 F.2d 766 (7th Cir. 1962), (Treasury notes — § 23(b)); Dooley v. Commissioner of Internal Revenue, 332 F.2d 463 (7th Cir. 1964), (Treasury notes — § 163(a)); Knowles Electronics, Inc. v. United States, 365 F.2d 43 (7th Cir. 1966), (Treasury bonds). Ninth Circuit: Kaye v. Commissioner of Internal Revenue, 287 F.2d 40 (9th Cir. 1961), (Treasury bonds — § 23(b)); MacRae v. Commissioner of Internal Revenue, 294 F.2d 56 (9th Cir. 1961), cert denied, 368 U.S. 955, 82 S.Ct. 398, 7 L.Ed.2d 388 (1962), (Treasury notes and bonds — § 23(b)); Pierce v. Commissioner of Internal Revenue, 311 F.2d 894 (9th Cir. 1962), cert. denied, 373 U.S. 912, 83 S.Ct. 1302, 10 L.Ed.2d 413 (1963), (Annuity contract — § 163(a)); Cahn v. Commissioner of Internal Revenue, 358 F.2d 492 (9th Cir. 1966), (Treasury notes — § 163(a)); Williams v. Commissioner of Internal Revenue, 323 F.2d 656 (9th Cir. 1963). Court of Claims: Oritt v. United States, 357 F.2d 692, 174 Ct.Cl. 1136 (1966), (Treasury bonds — § 23(b)); Broome v. United States, 170 F.Supp. 613, 145 Ct.Cl. 298 (1959), (Treasury notes — § 23(b)). The Tax Court followed this trend and denied the interest deduction claimed by Brown. Consequently, the non-deductibility of plaintiff's "interest" deduction is no longer an issue in this case.
* * * To allow such out-of-pocket expenditure[s] as a loss incurred in a transaction entered into for profit would be inconsistent with our * * * holding that the transactions here involved were not in substance purchases of securities with borrowed money entered into for profit, but were in reality attempts to simulate such security transactions for the purpose of artificially creating tax deductions. [294 F.2d at 59-60].
In Knetsch v. United States, 348 F.2d 932, 172 Ct.Cl. 378 (1965), cert. denied, 383 U.S. 957, 86 S.Ct. 1221, 16 L.Ed.2d 300 (1966), a closely analogous case, we discussed the basic requirements for the deduction of a loss under section 165(c), i. e., a profit-seeking purpose for entering the transaction which gives rise to the loss. The taxpayer, when denied an interest deduction for "prepaid interest" by the Supreme Court (364 U.S. 361, 81 S.Ct. 132, 5 L.Ed.2d 128 (1960)), returned to claim a section 165(c) capital loss or, alternatively, a section 212 business expense deduction for the out-of-pocket costs of an annuity contract transaction designed to create artificial interest deductions. We reaffirm our discussion in Knetsch of section 165(c). We find that, in this case, as in Knetsch, plaintiff cannot deduct this loss under section 165(c).
The realization and recognition of a loss does not establish the requisite profit-seeking purpose essential for a capital loss deduction by an individual under section 165(c). Plaintiff has not proved that purpose. "[S]ection 165(c) (2) was not designed to be a catch-all provision allowing taxpayers to deduct any out-of-pocket expenditures." (Knetsch v. United States, supra, 348 F.2d at 937, 172 Ct.Cl. at 385).
* * * Thus taxpayers here are required to show that they intended, when they purchased their annuity contract, [or Treasury notes] to realize a profit through the increase in the cash value of the annuity contract [or notes] apart from the tax savings. [348 F.2d at 939, 172 Ct.Cl. at 388].
Bonds cost _____________________________________________________ $1,475,625.00
Interest on loan to purchase bonds disallowed by Tax Court _____     36,890.63
Total cost _____________________________________________  1,512,515.63
Sale (11/15/55) proceeds _______________________________________  1,503,750.00
Capital loss ___________________________________________________   (8,765.63)
Capital gain &#x2014; short term ______________________________________     78.45
Capital loss ___________________________________________________   (8,678.18)
Taxable income _____________________________________ $66,845.30
Less capital gain __________________________________  14,140.95
52,704.35
Less allowable loss ________________________________   1,000.00
51,704.35
Tax liability as adjusted (less exemptions and credits) _______  $17,257.40
Tax liability reported ________________________________________   24,761.99
Refund __________________________________________________    7,504.59
Taxable income _____________________________________ $48,652.80
Less net capital gain ______________________________   3,837.69
Less net capital loss:                                            44,815.11
L.T.C.G. _____________________________ $7,675.39
Capital loss carryover _______________  7,687.18
Net capital loss __________________________________     (11.79)
Taxable income (adjusted) _________________________   44,803.32
Tax liability _________________________________________________   15,842.17
Tax reported __________________________________________________   17,767.97
Refund _________________________________________________    1,925.80
The Second Circuit may have modified its original position as stated inBecker by its decision in Jockmus v. United States, supra, wherein the court, in discussing the applicability of section 165(c) (2) noted: