The opinion of the court was delivered by: LEVET
Opinion, Findings of Fact and Conclusions of Law
Plaintiffs, Charles B. Benenson and Dorothy Cullman, seek a refund of tax deficiencies paid by plaintiffs on federal income tax returns for the taxable years 1955 and 1956.
This case was heard on a stipulation of facts. After examining the stipulation, the exhibits, the pleadings, the briefs and proposed findings of fact and conclusions of law submitted by counsel, this court makes the following Findings of Fact and Conclusions of Law:
1. Charles B. Benenson ("Benenson") and Dorothy Cullman (formerly Dorothy Benenson) filed joint returns as husband and wife for the taxable years 1955 and 1956.
2. Each of the aforementioned federal income tax returns was filed with the District Director of Internal Revenue for the Upper Manhattan District, New York.
3. In connection with the transaction described herein, the taxpayers reported in their federal income tax returns for the years 1955 and 1956 respectively the following:
(a) In their federal income tax return for the taxable year 1955 the taxpayers claimed an interest deduction in the amount of $67,550;
(b) In their federal income tax return for the taxable year 1956 the taxpayers reported a long-term capital gain in the amount of $60,000.
4. The aforementioned interest deduction in 1955 and capital gain in 1956 related to certain purported loan, purchase and sale transactions between and among Benenson, Corporate Finance and Loan Corporation of Boston, Massachusetts ("Corporate") and one M. Eli Livingstone, a Boston broker and securities dealer operating through Livingstone & Co., a sole proprietorship.
5. This purported loan, purchase and sale transaction was suggested, planned, promoted and directed by Mr. Livingstone. It consisted of the purported financing of Benenson's purchase of $2,000,000 of U.S. Treasury 1 7/8% Notes due February 15, 1959 with 8/15/55 and 2/15/56 interest coupons detached.
6. The purchase price of these notes was $1,930,000, and Benenson, through Mr. Livingstone, agreed to borrow from Corporate and Corporate agreed to lend to Benenson this entire amount on May 12, 1955.
7. Interest on this purported loan in the amount of $67,550 was prepaid by Benenson with $17,500 of his own funds and $50,000 through cash obtained by him from another loan, also dated May 12, 1955, from the Court Finance and Loan Corporation ("Court"), a loan which was also obtained by Mr. Livingstone for Benenson, and which was repaid by him to Court as follows: $15,000 on July 11, 1955 and $35,000 on February 16, 1956.
8. Concurrently, Livingstone prepared promissory notes to the order of Corporate and Court which were to be executed by Benenson as security for the aforementioned loans.
9. The promissory notes were received by Benenson from Livingstone, were executed by Benenson and sent back to Livingstone for delivery to Corporate and Court.
10. As additional security for the above loans, Benenson purported to assign the entire amount of U.S. Treasury Notes, which presumably were to be purchased by Livingstone for Benenson's account, to Corporate, along with the right to hypothecate and use the securities pledged for any purpose while so pledged, but such right was not to be inconsistent with the ownership by Benenson of such collateral or with his right to obtain the return of the collateral at any time upon tender of payment of the amount due to Corporate.
11. In addition to all of the above purported transactions, Livingstone granted to Benenson a "put," to sell to Livingstone, if Benenson so desired, the U.S. Treasury Notes on February 15, 1956, at a price of $1,990,000.
12. In point of fact, the essential elements of the above dealing took place on May 12, 1955 as follows:
(a) Livingstone received a commitment from Benenson to purchase the Treasury Notes; Benenson received a commitment from Corporate to lend him the entire purchase price, and Benenson agreed to pledge the Notes to be purchased to Corporate as collateral along with the right to hypothecate and use the Treasury Notes for any purpose while they were so pledged provided that such right was not to be inconsistent with the ownership by Benenson of such collateral or with Benenson's right to obtain the return of the collateral at any time upon tender of payment of the amount due to Corporate.
(b) Livingstone then purportedly purchased the Treasury Notes from a listed securities dealer against his account. Livingstone ostensibly purchased these Notes for the account of Benenson, but in view of his prior loan and pledge commitment, Benenson never actually received the U.S. Treasury Notes.
(c) Subsequent to the alleged purchase of the Notes by Livingstone, but prior to their delivery to Corporate, the latter sold the Notes "short" to Livingstone, purportedly pursuant to the authority contained in the pledge agreement and its right to hypothecate and use the Notes during the pledge period.
(d) Livingstone then purportedly sold the Notes back to the dealer from whom he had purportedly purchased them earlier in the day, having his account credited accordingly.
13. No U.S. Treasury Notes were actually delivered by Livingstone to Benenson, or to any finance company, for the benefit of Benenson.
14. Except for bookkeeping entries no funds were actually transferred between Livingstone and Corporate for Benenson's benefit in purchasing the U.S. Treasury Notes. In point of fact, Corporate never had funds sufficient to make the loan purportedly made by it to Benenson.
15. The transactions set forth in paragraphs 12(b)-(d) were essentially book transactions.
16. Insofar as Benenson was concerned, however, he assumed and believed that the transactions involved would be genuine.
17. On February 15, 1956, Benenson purportedly sold the Treasury Notes to Livingstone for $1,990,000, receiving a check for $60,000 which represented the excess of the sales price of $1,990,000 over the loan due Corporate.
18. In connection with the aspect of the transaction described in Finding 17, Benenson was informed by Livingstone that he had paid $1,930,000 to Corporate to obtain Benenson's promissory notes, thus purportedly extinguishing the loan from Corporate to Benenson.
19. In their federal income tax returns for the taxable year 1956 the taxpayers recognized a long-term capital gain in the amount of $60,000 arrived at by deducting from the $1,990,000 sales price of the Notes, the sum of $1,930,000, the original cost of the Notes.
20. Benenson's economic loss with respect to the entire transaction, which terminated in February ...