Lieb v. Commissioner

David L. Lieb and Sylvia Lieb, Petitioners, v. Commissioner of Internal Revenue, Respondent Lieb v. Commissioner Docket No. 91329 United States Tax Court 40 T.C. 161; 1963 U.S. Tax Ct. LEXIS 142; April 26, 1963, Filed *142 Decision will be entered under Rule 50. H purchased callable bonds at a premium on the open market. The amortization deduction of the excess of the purchase price over the special call price is not in issue. Six months and one day thereafter H "sold" the bonds to W, his wife, and forty-nine days after that W "sold" the bonds back to H. Held, the sales between H and W were lacking in bona fides and amortization deductions are not allowable in respect of such sales. Sec. 171, I.R.C. 1954. William L. Weiss, for the petitioners. Lee A. Kamp, for the respondent. Raum, Judge. RAUM *161 The Commissioner determined deficiencies in income tax against petitioners in the amounts of $ 5,603.94 and $ 592.57 for 1955 and 1956, *162 respectively. After certain concessions, the principal remaining issue is whether petitioners are entitled*143 to amortization deductions in 1955 in respect of sales of bonds to each other in 1955. FINDINGS OF FACT Most of the facts before the Court were stipulated and they are incorporated herein by reference. David L. and Sylvia Lieb, petitioners, were husband and wife at all times material. They filed their joint Federal income tax returns, on the cash basis, for 1955 and 1956 with the district director of internal revenue at New York. David is a certified public accountant and a partner in David L. Lieb & Co., an accounting firm. His practice includes much tax work. Sylvia is a housewife; she spends most of her time managing the Lieb household and in caring for her two children. On occasion she has bought and sold securities, but has not had "many bond transactions." On December 28, 1954, David purchased on the open market $ 125,000 face amount of Alabama Power Co. first mortgage bonds, 3 3/8 percent series, due 1978, for $ 131,562.50. These bonds were callable at any time, upon giving 30 days' notice, to the special call price of $ 128,125. They were put up by David with the Cleveland Trust Co. as collateral for his obligation on a note. On June 29, 1955, 6 months and 1 day after*144 the purchase of the bonds, David purported to sell them to Sylvia for $ 134,000. The "sale" was carried out in the following manner: Sylvia executed a 90-day promissory note dated July 5, 1955, bearing 3 3/8 percent interest, to the Cleveland Trust Co. for $ 115,000 and pledged the bonds as security for the loan. The Cleveland Trust Co. applied the proceeds from Sylvia's note against David's note. Sylvia paid David $ 4,000 which he deposited in his general account in the Chase Manhattan Bank, New York, N.Y.; David charged Sylvia's account on his books for $ 7,910.80, and Sylvia gave David her non-interest-bearing promissory note dated June 29, 1955, payable October 1, 1955, in the amount of $ 7,089.20. The account Sylvia had with David was an open account with no set time for repayment of any amounts purportedly owed. By letter dated June 29, 1955, David authorized the Cleveland Trust Co. to transfer the bonds to Sylvia. He enclosed checks in the amount of $ 62.50 and $ 2,098.41 to pay for transfer tax on the bonds and interest on his outstanding notes up to and including July 5, 1955. On August 17, 1955, Sylvia purported to sell the foregoing bonds to David for $ 130,875, which*145 was paid, (a) to the extent of $ 115,000 from the proceeds of a loan to David by the Cleveland Trust Co., (b) to the extent of $ 7,089.20 by return to Sylvia of her note to David, *163 referred to above, and (c) to the extent of $ 8,785.80 by check dated August 22, 1955, from David to Sylvia. By letter dated August 17, 1955, David authorized the Cleveland Trust Co. to receive the bonds from Sylvia and to pay itself for the account of Sylvia the proceeds of his enclosed $ 115,000 note. His note was dated August 26, 1955, to mature October 3, 1955, at 3 3/8 percent. By letter dated August 31, 1955, the Cleveland Trust Co. notified Sylvia that it had delivered the bonds for her account to David, that her July 5, 1955, note for $ 115,000 was paid in full, and that she owed interest in the amount of $ 560.63. That interest as well as a $ 62.50 transfer tax was paid by Sylvia to the Cleveland Trust Co. Neither spouse guaranteed the promissory notes of the other to the Cleveland Trust Co. in connection with the transactions herein. On July 3, 1956, David sold the foregoing bonds on the open market for $ 122,812.50. On petitioners' joint return for 1955 they claimed a deduction of*146 $ 12,062.50 for "Amortization of Bond Premiums." That deduction was composed of three separate items of amortization, each with respect to the foregoing $ 125,000 bonds and each computed as the difference between the purported purchase price and call price, as follows: Amortization Date acquired Purchaser Sale price Call price of bond premium Dec. 28, 1954 David $ 131,562.50 $ 128,125 $ 3,437.50 June 29, 1955 Sylvia 134,000.00 128,125 5,875.00 Aug. 17, 1955 David 130,875.00 128,125 2,750.00 Total 12,062.50 The Commissioner disallowed the entire deduction. The purported sales by David to Sylvia on June 29, 1955, and by Sylvia to David on August 17, 1955, were not bona fide and did not give rise to amortization deductions. OPINION The Commissioner originally disallowed the entire $ 12,062.50 amortization deduction, consisting of three components in the amounts of $ 3,437.50 $ 5,875, and $ 2,750. He now concedes that the $ 3,437.50 amortization in respect of David's original purchase is deductible under section 171, I.R.C. 1954 ( Hanover Bank v. Commissioner, 369 U.S. 672; Rev. Rul. 62-127, 1962-2 C.B. 84),*147 but he strenuously contests the further deductions of $ 5,875 and $ 2,750 in respect of Sylvia's purported purchase from David on *164 June 29, 1955, and David's purported repurchase from Sylvia less than 2 months thereafter. The issue is solely whether there were in fact bona fide sales between David and Sylvia. If these transactions were merely formal in character, accompanied by an understanding, tacit or otherwise, between the spouses that David would reacquire the bonds from Sylvia, then the purported sales between them could be regarded as shams and no amortization deduction in respect thereof would be allowable. The burden of proof is, of course, upon them, and we cannot find upon this record that the burden has been carried. Without doubt, there may be bona fide business transactions between husband and wife. But where, as here, there appear to be repetitive transfers of the same securities between them, without any convincing explanation therefor, other than the expectation of tax advantages on their joint return, the situation calls for special scrutiny to determine whether that which seems to meet the eye is real or whether it is merely a trompe de l'oeil. *148 In our opinion the bare outline of the transfers set forth in the stipulation of facts, as briefly supplemented by unsatisfying testimony at the trial, falls short of establishing the requisite bona fides of the transactions. To the contrary, the evidence convincingly suggests that these transfers were merely parts of a sham. Of course, it is not to be expected that proof of sham would be available through direct evidence. Cf. Frank Spingolo Warehouse Co., 37 T.C. 1, 5. Rather, in cases of transactions between spouses, indirect or circumstantial evidence is more frequently indicative of the true state of affairs. And the circumstantial evidence here is strong that there were no bona fide sales between petitioners. The fact that David purported to sell to Sylvia 6 months and 1 day after his original purchase makes suspect at once whether the transactions between them were not prearranged. Then, too, it does not appear that Sylvia had funds available with which to pay for these bonds or to liquidate her obligations on the note to the Cleveland Trust Co.1 The very fact that she and David reversed the transaction within 2 months is itself an indication*149 in the circumstances before us that the round-trip of these bonds had been planned from the beginning. Cf. Weyl-Zuckerman & Co., 23 T.C. 841, affirmed 232 F. 2d 214 (C.A. 9); Pierre S. Du Pont, 37 B.T.A. 1198, affirmed 118 F. 2d 544 (C.A. 3), certiorari denied *165 314 U.S. 623, rehearing denied 314 U.S. 709; Nicholson v. Commissioner, 90 F. 2d 979 (C.A. 8), affirming 32 B.T.A. 977; Hamlen v. United States, 31 F. Supp. 309 (D. Mass.). The evidence also discloses that all of the papers relating to these transactions, whether for Sylvia's or for David's signature, were prepared at David's office; and, although this circumstance could well be of no moment in other situations, it does take on meaning in the context of this case. *150 To be sure, Sylvia offered a purported reason for the resale of the bonds to David; we heard that testimony and observed her at the trial, but the short answer is that we do not believe her. The mere fact that husband and wife go through the motions of making a sale inter sese does not necessarily impart reality to the transaction and indeed may even constitute a fraud. Charles E. Mitchell, 32 B.T.A. 1093 (approved in Helvering v. Mitchell, 303 U.S. 391). The Commissioner has not determined any so-called fraud penalty here, and if he had, the burden of proof as to fraud would be upon him. Taking the case as we find it, involving a simple determination of deficiency, we hold that petitioners have not carried their burden of proof to show that there were genuine sales and purchases of the bonds in question in June and August 1955 so as to form the basis for amortization deductions. The transactions were a sham. 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;*151 United States v. Roderick, 290 F. 2d 823 (C.A. 5); McRae 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; Empire Press, Inc., 35 T.C. 136; Joseph H. Bridges, 39 T.C. 1064. Petitioners' reliance upon Fabreeka Products Co. v. Commissioner, 294 F. 2d 876 (C.A. 1), reversing 34 T.C. 290, is misplaced. That case has bearing upon whether David would be entitled to an amortization deduction in connection with his original*152 purchase of the bonds -- a matter that is no longer in issue in this case -- but it has no controlling relevance with respect to the bona fides of the subsequent sales inter sese of David and Sylvia and the availability of additional amortization deductions based upon such alleged sales. The pleadings raise a comparatively minor issue in respect of the deficiency determined for 1956. However, this point has not been argued by petitioners, and it must be deemed to have been abandoned by them. Decision will be entered under Rule 50. Footnotes 1. She did testify that her net worth was about $ 160,000. But the record is ambiguous as to whether she was estimating her net worth as of the time of trial rather than as of 1955. Moreover, the nature of her assets was not revealed, nor does it appear that she ever intended to or could readily have obtained cash from her assets with which to pay for the bonds. Indeed, she testified that if she had held the bonds after October 3, 1955, the maturity date of the note, she didn't think she could have paid it off, but asserted unpersuasively that she could have renewed the note or borrowed the funds elsewhere.↩