The opinion
Hoyt, J., dissenting: I must respectfully dissent from the majority opinion.
I cannot escape the conclusion that here the majority has adopted the general philosophy that we should not recognize a transaction which aside from any tax effects would produce an economic loss but which — because of the way the Internal Revenue Code is structured— produces a net economic gain solely as a result of decreased taxes. However, without plainly stating that it is adopting and applying this philosophy in deciding the instant case, the majority instead has made an effort to interpret the facts in such a way as to avoid a forthright statement of its position. By concluding that there was actually no bona fide indebtedness here, i.e., that the transaction was really a Livingstone-type sham, I sense that we are adopting the rationale sub silentio. This has led to conflicting findings of fact and a conclusion (that there was no real indebtedness) which I feel is clearly erroneous.
There appear to be distinct conflicts in certain of the Court’s findings. At one point there is a finding to the effect that Irving Trust, Gibraltar’s New York bank, received the certificates here involved, purchased by Gibraltar from First Boston Corp. Pursuant to Gibraltar’s instructions, Irving Trust, obviously acting as Gibraltar’s bank and agent, delivered the certificates to Chemical, the New York correspondent bank of Cleveland Trust, from which Gibraltar borrowed the funds on its promissory note with which to purchase the certificates.
Later on in the findings the majority opinion states flatly, however, that “all of the certificates were with Chemical for the account of Cleveland Trust during all of the .time involved in the whole transaction” and “Gibraltar never actually or physically had in its inventory or possession any of these certificates.” (Emphasis supplied.) I am unable to reconcile these findings and it appears to me to be an inescapable conclusion that there were existing certificates purchased by Gibraltar for petitioner’s account from First Boston and delivered to Gibraltar’s New York bank per Gibraltar’s instructions. It seems equally clear to me that there was a loan from Gibraltar to petitioner evidenced by petitioner’s note; there was in turn a loan from Cleveland Trust to Gibraltar, funds were transferred pursuant thereto and used to pay the purchase price of the certificates.
While it is true that the certificates were used in a round-robin fashion to secure the various loans which were made, this was permitted under the terms of the loan to petitioner and I can only conclude that the loans here were real, not mere bookkeeping entries or paper transactions of the Livingstone type, and in no sense shams. The Court’s findings make it evident that the transaction was real enough to result in receipts by petitioner of thousands of dollars in gains and interest, yet the majority would have it that petitioner never owned the certificates or never owed Gibraltar on his note, and therefore cannot deduct the interest he paid thereon, even, as I read the opinion, for the 1 month for which the loan was outstanding and in existence.
True, petitioner never personally received the certificates, which merely passed around among the various banks involved. But the banks and Gibraltar were acting on behalf of their respective principals throughout and once the conclusion is reached that there were existing certificates purchased, enforceable loans creating legal liabilities, and an actual transfer of funds, then it seems to me that we cannot label all that occurred “a sham” and we should allow the deduction for “interest” paid during the taxable year.
The facts disclosed by the record in this case distinguish it completely from Gordon MacRae, 34 T.C. 20 (1960), affd. 294 F. 2d 56 (C.A. 9, 1961), certiorari denied 368 U.S. 955 (1962), and the line of so-called Livingstone cases on which the majority relies. Also, I cannot silently swallow the majority’s casual brushoff of L. Lee Stanton, 34 T.C. 1 (1960). The distinction between the facts of Stanton and the facts here is not as apparent to me as it appears to be to my brothers. I also believe that Knetsch v. United States, 364 U.S. 361 (1960); W. Stuart Emmons, 31 T.C. 26 , and Weller v. Commissioner, 270 F. 2d 294 (C.A. 3,1959), affirming 31 T.C. 33 , are factually distinguishable. I would much prefer to see us follow the rationale of Stanton in deciding this case on the facts disclosed. As we pointed out there, the disputed payments involved in the Knetsch, Weller, and Emmons cases were made to the life insurance companies which sold the annuities, and the “interest on the bank loans was not in controversy.” L. Lee Stanton, supra at 10 . We distinguished those cases by pointing out that the payments in issue were not interest but were in fact the purchase price of a tax deduction. Certainly we can and should continue to be vigilant to strike down sham transactions of this sort or of the Livingstone paper-bag-full-of-hot-air variety and disallow interest deductions claimed as a result thereof. However, in my view this is not such a case.
The payments petitioner seeks to deduct here were of interest, as I see it, paid for the use or forbearance of money. I do not subscribe to the view that to permit an interest deduction there must be a “valid commercial reason for paying interest,” Joseph H. Bridges, 39 T.C. 1064 (1963), affd. 325 F. 2d 180 (C.A. 4, 1963); nor do I agree with the views of the majority here that such expense, to be deductible, must be incurred in a transaction entered into for profit, or in a transaction destined to produce an economic gain other than a substantial reduction in taxes. I would hold for the petitioner under the facts presented and leave corrective action to protect the revenue, if such is deemed desirable, to Congress. Meanwhile, I think we should permit a cash basis taxpayer to deduct interest paid in a taxable year where he incurs a bona fide enforceable indebtedness, whatever his motive or-purpose may have been. Even if a taxpayer is only seeking to save tax dollars by reducing his tax liability, and has no other economic purpose or profit motive in mind, he should be allowed all deductions which the law permits. Gregory v. Helvering, 293 U.S. 465 (1935); L. Lee Stanton, supra. See also my brother Fay’s dissenting opinion filed herein, quoting from Mr. Justice Harlan’s concurring opinion in Commissioner v. Brown, 380 U.S. 563 (1965).
Fay, J., agrees with this dissent.