Sammy Cahn and Gloria Cahn v. Commissioner of Internal Revenue

358 F.2d 492 66-1 USTC P 9353 Sammy CAHN and Gloria Cahn, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. Nos. 19417, 19418. United States Court of Appeals Ninth Circuit. April 4, 1966. Hilbert P. Zarky, Irving I. Axelrad, Edward R. McHale, of Mitchell, Silberberg & Knupp, Los Angeles, Cal., for petitioners. Louis P. Oberdorfer, Asst. Atty. Gen., Lee A. Jackson, Robert N. Anderson, Jeanine Jacobs, Atty., Dept. of Justice, Washington, D.C., for respondent. Before CHAMBERS and BARNES, Circuit Judges, and FOLEY, Jr., District judge. BARNES, Circuit Judge: 1 These are petitions to review an opinion of the Tax Court which affirmed the determination of deficiencies in both of the taxpayers' returns for the year 1957. Involved is another variant of the oft-litigated plan for reducing income taxes by deductions for the alleged payment of interest on loans to finance security purchases. The plan, devised by the self-styled Boston financier, M. Eli Livingstone, has been consistently rejected by the courts because no genuine indebtedness was demonstrated to exist. In the absence of a showing that interest was paid for the use or forbearance of money, no interest expense…

These are petitions to review an opinion of the Tax Court which affirmed the determination of deficiencies in both of the taxpayers’ returns for the year 1957. Involved is another variant of the oft-litigated plan for reducing income taxes by deductions for the alleged payment of interest on loans to finance security purchases. The plan, devised by the self-styled Boston financier, M. Eli Livingstone, has been consistently rejected by the courts because no genuine indebtedness was demonstrated to exist. In the absence of a showing that interest was paid for the use or forbearance of money, no interest expense deduction has been permitted under Section 163 of the Internal Revenue Code of 1954. Rubin v. United States, 304 F.2d 766 (7th Cir. 1962); Becker v. C. I. R., 277 F.2d 146 (2d Cir. 1960); Lynch v. C.I.R., 273 F.2d 867 (2d Cir. 1959); Goodstein v. C.I.R., 267 F.2d 127 (1st Cir. 1959); Broome v. United States, 170 F.Supp. 613 , 145 Ct.Cl. 298 (1959). A plethora of other cases exist in which Mr. Livingstone was not directly involved, but which attempted to utilize plans comparable to Livingstone’s. See e. g., MacRae v. C.I.R., 294 F.2d 56 (9th Cir. 1961).

In light of the full…

(dissenting) :

The taxpayers seek through the device of adding corporate securities to a bundle of treasury notes 1 to get a deduction for the whole package of interest on the loan made for the purchase. Similarly the government goes for all or nothing. It has won completely in the tax court and here.

This case does raise, in a very cogent way, the question of whether the whole previous line of Livingstone cases is correctly decided or decided on the right theories. It may be that the courts did step in to fill a gap that should have been left for the Congress. But on the principle of stare decisis, and possibly on reason, I would accept the standing line of Livingstone cases and apply them to the proportionate part of the interest here allocable to the treasury notes. Then I would turn around, and allow the deduction for interest allocable to the purchase of the securities other than treasury notes.

I would have no trouble allowing all of the interest if the transaction were all corporate securities. Interest that was paid on a legal, bet (which so many business transactions are) ought to be deductible when a substantial risk was involved as it was on the corporate…