Goldstein v. Commissioner
United States Court of Appeals for the Second Circuit
364 F.2d 734 (1966)
- Written by Rose VanHofwegen, JD
Facts
Tillie Goldstein (plaintiff) won over $140,000 in a sweepstakes. She and her husband (plaintiff) were a retired elderly couple with meager income and reported the winnings on their joint tax return. Their son Bernard, an accountant, developed a plan to reduce the taxes on Tillie’s winnings. With brokerages’ assistance, Tillie borrowed $1 million from two banks and bought Treasury notes pledged as collateral, then prepaid 12 to 22 years’ interest totaling over $81,000 and claimed it as an interest deduction. The tax commissioner disallowed the deduction based on a memo that Bernard prepared showing the investments would generate losses, but the deduction against the winnings would more than offset those losses. The Goldsteins petitioned the tax court for review, arguing Tillie intended to invest in the market for government securities, which Bernard believed was depressed and would profitably rebound. Bernard claimed he had prepared other memos showing profits under other market conditions but failed to produce the originals. The tax court affirmed disallowing the deduction primarily on the ground that the loans were sham transactions that created no genuine indebtedness. The tax court emphasized that the banks essentially owned the Treasury notes and conducted the transactions with the brokerages essentially without Tillie’s supervision or pledging any of her own funds. The Goldsteins appealed to the Second Circuit. Meanwhile, Tillie’s loss reached $25,000 as the market price for government securities declined more than expected, and the investments were sold to repay the notes.
Rule of Law
Issue
Holding and Reasoning (Waterman, J.)
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