(s) Walter H. Beckham, Jr.

Walter 1965 U.S. Tax Ct. LEXIS 111">*131 H. Beckham, Jr.

This Note and all of the terms and conditions hereof accepted this eighteenth day of July, 1956.

Court Finance and Loan Corp.

The approximate dates of petitioners' checks to Court Finance and Loan Corp. in repayment of such amounts were as follows:

43 T.C. 842">*853 At the inception of the "second transaction," petitioners issued their personal checks payable to the order of Livingstone & Co. on the approximate dates, and in amounts as follows, for "premium":

Upon receipt of these checks from petitioners, Livingstone & Co. deposited such checks in its account at the Pilgrim Trust Co., Boston, Mass. On the books of Livingstone & Co., these amounts 1965 U.S. Tax Ct. LEXIS 111">*132 were shown as commissions earned.

As part of the foregoing transaction, each of the petitioners theoretically purchased, about July 17, 1956, from Livingstone & Co. U.S. Government 2 3/8 percent bonds due June 15, 1958, in face amounts as set forth below. Each petitioner received a confirmation slip from Livingstone & Co. showing a contract date of July 17, 1956, and payable date of July 18, 1956, reciting that as principal and for its own account Livingstone & Co. had sold, to each of the petitioners, U.S. Treasury 2 3/8 percent bonds of June 15, 1958, with December 15, 1956, and June 15, 1957, coupons detached at a price of 96 5/8. The face amount of such bonds and the amount of the transaction as shown in these confirmation slips were as follows:

On 1965 U.S. Tax Ct. LEXIS 111">*133 July 17, 1956, Salomon Brothers issued confirmation slips to each petitioner showing the purchase by it as principal of U.S. Treasury 2 7/8 percent notes due June 15, 1958, at par, or 100, plus accrued interest. The face amount shown was as follows:

43 T.C. 842">*854 Delivery and payment were to be effected the following day, July 18, 1956, at Chemical Corn Exchange Bank in New York. Petitioners, in fact, owned no such notes, and the transaction was purportedly to be handled as a "short sale" with Livingstone & Co. loaning the notes to petitioners. Livingstone & Co. did not own any such notes, but it purportedly obtained them for this purpose through a purported purchase from Salomon Bros. on July 17, 1956, at par plus 1/64 plus accrued interest, delivery and payment to be made the following day in New York at Chemical Corn Exchange Bank.

The records of Salomon Bros. contain additional confirmation slips dated July 16 and 17, 1956, reciting the sale of U.S. Treasury 2 3/8 percent bonds due June 15, 1958, to Livingstone & Co. With respect to the confirmation slips dated July 16, 1956, the price shown 1965 U.S. Tax Ct. LEXIS 111">*134 was 99 2/32 plus 1/64 plus accrued interest, with no coupons detached, and with respect to the confirmation slip dated July 17, 1956, the price shown was 99 2/32, plus accrued interest, with no coupons detached. The records of Salomon Bros. also contain confirmation slips dated July 16, and July 17, 1956, reciting the purchase of U.S. Treasury 2 3/8 percent bonds due June 15, 1958, from Livingstone & Co., at the same prices of 99 2/3 plus 1/64 and 99 2/32, for the slips dated July 16, 1956, and July 17, 1956, respectively. The delivery terms shown on the July 16, 1956, confirmation slips were in New York at the Chemical Corn Exchange Bank on July 17, 1956. The delivery terms shown on the July 17, 1956, confirmation slips were in New York at the Chemical Corn Exchange Bank, on July 18, 1956.

The account of Livingstone & Co. at Salomon Bros. in respect of the transactions referred to in the two previous paragraphs shows as follows: 43 T.C. 842">*855

1965 U.S. Tax Ct. LEXIS 111">*135 43 T.C. 842">*856 Livingstone & Co. maintained a broker's clearance account in New York at the Chemical Corn Exchange Bank. Under date of July 17, 1956, Chemical issued advice memoranda to Livingstone & Co. reciting that, pursuant to the instructions of Livingstone, it had:

(a) Delivered, against payment, to Salomon Bros. & Hutzler $ 8,500,000 face amount U.S. Treasury 2 3/8 percent (bonds) due June 15, 1958;

(b) Received, against payment, from Salomon Bros. & Hutzler $ 8,500,000 face amount U.S. Treasury 2 3/8 percent bonds due June 15, 1958;

(c) Delivered, against payment, to Salomon Bros. & Hutzler $ 3,500,000 face amount U.S. Treasury 2 7/8 percent notes due June 15, 1958;

(d) Delivered, against payment, to Salomon Bros. & Hutzler $ 2,500,000 face amount U.S. Treasury 2 7/8 percent notes due June 15, 1958;

(e) Delivered, against payment, to Salomon Bros. & Hutzler $ 2,500,000 face amount U.S. Treasury 2 7/8 percent notes due June 15, 1958;

(f) Received, against payment, from Salomon Bros. & Hutzler $ 8,500,000 face amount U.S. Treasury 2 7/8 percent notes due June 15, 1958.

For its services, Chemical Bank showed service charges on such advice memoranda of $ 170; $ 70; $ 50; and $ 50.

Under date of July 1965 U.S. Tax Ct. LEXIS 111">*136 18, 1956, Chemical Bank issued advice memoranda to Livingstone & Co. reciting that, pursuant to the instructions of Livingstone, it had:

(a) Delivered, against payment, to Salomon Bros. & Hutzler $ 3 million face amount U.S. Treasury bonds due June 15, 1958;

(b) Received, against payment, from Salomon Bros. & Hutzler, $ 3 million face amount U.S. Treasury bonds due June 15, 1958;

(c) Delivered, against payment, to Salomon Bros. & Hutzler $ 3 million face amount U.S. Treasury 2 7/8 percent notes due June 15, 1958;

(d) Received, against payment, from Salomon Bros. & Hutzler $ 3 million face amount U.S. Treasury 2 7/8 percent notes due June 15, 1958.

For its services, Chemical Bank received fees from Livingstone & Co. of $ 75 and $ 75.

In fact, neither the 2 3/8 percent Treasury bonds nor the 2 7/8 percent Treasury notes were delivered at Chemical Bank on July 17 or 18. 43 T.C. 842">*857 1956, or at any other time in consummation of the foregoing short sale by Livingstone & Co. The notes involved in the short sale by petitioners to Salomon Bros. and the notes purportedly purchased by Livingstone & Co. from Salomon Bros. to be lent by Livingstone & Co. to petitioners, in order to enable them to make the short 1965 U.S. Tax Ct. LEXIS 111">*137 sale, were paired off between Salomon Bros. and Chemical Bank. As the delivery and receipt instructions to Salomon Bros. and Chemical Bank matched each other in face amount, the orders, in effect, canceled each other. The securities described above never left the offices of Salomon Bros., nor were they ever in the physical possession of petitioners, Livingstone & Co., Livingstone, nor Chemical Bank. There was no moment of time when Livingstone & Co. had any control over these securities which it purported to purchase from Salomon, when it could have lent such securities to petitioners for the purpose of making a short sale, nor when it was free to deal with them in any other manner. Livingstone & Co. made entries purporting to show that petitioners had sold the 2 7/8 percent Treasury notes due June 15, 1958, to Salomon Bros., for which Livingstone showed a credit in its books, and that Livingstone & Co. had loaned such securities to petitioners. About the same date, the entries in the books of Livingstone & Co. purported to show that petitioners had purchased 2 3/8 percent bonds due June 15, 1958, with 12/15/56 and 6/15/57 interest coupons detached. Thus, at the beginning of 1965 U.S. Tax Ct. LEXIS 111">*138 the transaction, after considering the debits to petitioners' accounts for the purchase of the 2 3/8 percent bonds of June 15, 1958, with coupons detached, sale of the 2 7/8 percent notes of June 15, 1958, and "loans" from Livingstone, each petitioner theoretically had a balance in his favor at Livingstone & Co., in the following amounts:

Entries were made in petitioners' accounts at Livingstone & Co. during the period ending December 15, 1958, theoretically charging petitioners for the coupons due to Livingstone & Co. on the "borrowed" 2 7/8 percent notes and crediting petitioners with the interest on the 2 3/8 percent bonds, reducing petitioners' accounts with Livingstone & Co., as follows: 43 T.C. 842">*858

1965 U.S. Tax Ct. LEXIS 111">*139 Under date of August 23, 1956, Livingstone & Co. addressed a letter to Beckham, which provided as follows:

Dear Sir:

We wish to advise that the securities purchased for your account, $ 1,500,000 U.S. Treasury 2 3/8% Bonds of June 15, 1958, with 12/15/56 and 6/15/57 coupons detached, bear the following numbers:

Very truly yours,

Livingstone & Company

(s) M. Eli Livingstone

Similar letters were addressed to Nichols, Gaither, Green, and Frates.

Under date of February 12, 1957, Livingstone & Co. addressed the following letter to Beckham:

Dear Sir:

For your 1956 income tax purposes, we submit the following:

Our records indicate that on July 18, 1956, you borrowed from us $ 1,500,000. U.S. Treasury 2 7/8% Notes of June 15, 1958. [n1]

43 T.C. 842">*859 On December 15, 1956, there was due us a coupon of $ 21,562.50[n2] against which you had been credited with accrued interest of $ 3,888.32,[n3] the net charge to your account which is deductible is $ 17,674.18.[n4]

In addition, you paid us a premium for borrowing these Notes in the amount of $ 15,750.00. ⁵ This is also deductible on your 1965 U.S. Tax Ct. LEXIS 111">*140 Federal Income Tax.

Yours very truly,

Livingstone & Company

(s) Helen Sundhauss

Helen Sundhauss

Similar letters were addressed to Nichols, Gaither, Green, and Frates. As to these other petitioners, the amounts were as follows:

Under date of January 15, 1958, Livingstone & Co. addressed the following letter to Beckham:

Dear Mr. Beckham:

For your 1957 Income Tax Return, we submit the following:

On the $ 1,500,000[n1] U.S. Treasury 2 7/8% Notes of June 15, 1958, borrowed from us on July 18, 1956, you had the following expense:

On the $ 1,500,000 [4] U.S. Treasury 2 3/8 Bonds of 6/15/58, being held as collateral by us, you had the following income:

We trust this information will be of assistance to you.

Yours very truly,

Livingstone & Company

(s) Frances L. Harpel

Frances L. Harpel

Similar letters were addressed to Nichols, 1965 U.S. Tax Ct. LEXIS 111">*141 Gaither, Green, and Frates. As to these other petitioners, the amounts shown were as follows:

43 T.C. 842">*860 Under date of June 16, 1958, Beckham addressed the following letter to Livingstone & Co.:

Gentlemen:

Please deliver from my account to Livingstone Securities Corporation, or their order, the following:

$ 1,500,000. U.S. Treasury 2 3/8%

Bonds due June 15, 1958

Very truly yours,

Walter H. Beckham, Jr.

Under date of June 16, 1958, Beckham addressed the following letter to Livingstone Securities Corp., an entity controlled by M. Eli Livingstone:

Gentlemen:

Please receive from my account at Livingstone & Company, 10 Post Office Square, Boston, Massachusetts, the following:

$ 1,500,000. U. S. Treasury 2 3/8% Bonds

due June 15, 1958

Very truly yours,

Walter H. Beckham, Jr.

Under date of June 16, 1958, Beckham addressed the following letter to Livingstone 1965 U.S. Tax Ct. LEXIS 111">*142 Securities Corp.:

Gentlemen:

Please deliver for my account to Livingstone & Company, the following:

$ 1,500,000.00 U.S. Treasury 2 7/8% Notes

due June 15, 1958

Very truly yours,

Walter H. Beckham, Jr.

Under date of June 16, 1958, petitioner addressed the following letter to Livingstone & Co.:

Gentlemen:

Please receive for my account from Livingstone Securities Corporation, the following:

$ 1,500,000.00 U.S. Treasury 2 7/8% Notes

due June 15, 1958

Very truly yours,

Walter H. Beckham, Jr.

Nichols, Gaither, Green, and Frates addressed letters identical to the letters set forth above to Livingstone Securities Corp. and to Livingstone & Co., except for the amounts involved. For these petitioners, the amounts shown were as follows: 43 T.C. 842">*861

Each petitioner received two confirmation slips from Livingstone Securities Corp., each showing contract dates of June 16, 1958, one confirmation slip reciting a sale as agent to each petitioner of U.S. Treasury 2 7/8 percent notes 1965 U.S. Tax Ct. LEXIS 111">*143 due June 15, 1958, at a price of 100, and the other confirmation slip reciting the purchase as agent of another from each petitioner of U.S. Treasury 2 3/8 percent bonds due June 15, 1958, at a price of 100. For each petitioner, the face amounts and sales amounts shown were $ 3,500,000 (Nichols), $ 2,500,000 (Gaither and Green), and $ 1,500,000 (Frates and Beckham).

At the conclusion of the "second transaction" the 2 3/8 percent and 2 7/8 percent notes were closed out on the accounts of petitioners at Livingstone & Co. and Livingstone Securities Corp. by book entry. At that time, the balances remaining in Nichols', Gaither's, Frates', and Beckham's accounts at Livingstone & Co. were remitted to them, by check on Livingstone & Co. in the respective amounts of $ 8,797.81, $ 6,284.15, $ 3,888.32, and $ 3,888.32. The balance of $ 6,284.15 in the account of Green was credited by book entry to his account at Court Finance & Loan Corp.

Under date of June 16, 1958, each petitioner received a statement from Livingstone & Co.

On their Federal income tax returns for the years 1956, 1957, and 1958, petitioners claimed the following deductions in respect of the "second transaction":

1965 U.S. Tax Ct. LEXIS 111">*144 In their Federal income tax returns for the years 1957 and 1958, petitioners reported interest income and long-term capital gain, using 43 T.C. 842">*862 the alternative tax computation, in respect of the "second transaction," as follows:

In the fall of 1957, petitioners entered the "third transaction," in which M. Eli Livingstone and Gerald Bolotin were also involved in essentially the same manner as in the first and second transactions. Prior to such "third transaction," Livingstone addressed the following letter to Gaither:

May 14, 1957

(Dictated by phone)

Mr. William C. Gaither

Pan American Bank Building

Miami, Florida

Dear Bill:

It was nice talking to you this morning. In layman's language, what we propose is this: Based on $ 1,000,000.00 units, if you go to a broker and 1965 U.S. Tax Ct. LEXIS 111">*145 offer him $ 1,000,000 of U.S. Treasury 2 3/4% Bonds due September 15, 1961 and he pays you 97 1/8, he will owe you $ 971,250.00. This money is your money.

The above would come about as follows:

1. You borrow the bonds from me and deliver them to the broker. Upon delivery, you are entitled to receive from him $ 971,250.00, or the proceeds of the sale you made to him. This money belongs to you. At this point, you have cash in your possession which is yours.

2. The broker and you have squared your account because you have delivered to him the bonds you sold him, and he has paid you the money he owes you.

3. Your obligation to me is that you owe me $ 1,000,000.00 in bonds; you do not owe me any money.

You are obliged under the law to now compensate me for the coupons which would run in my favor, that is, $ 27,500.00 a year on the 2 3/4% Bonds of September 15, 1961. This, however, constitutes a deduction from your taxable income based upon Section 212 of the Internal Revenue Code, and passed upon and adjudicated by the courts in the case of Norbert H. Wiesler v. Commissioner (6 T.C. 1148">6 T.C. 1148) Affirmed 161 Federal 2nd Series 997), and F. A. Wilson v. Commissioner (Tax Court Memo Opinion, decision 1965 U.S. Tax Ct. LEXIS 111">*146 entered into July 24, 1946, Affirmed 163 Federal 2nd Series 680, certiorari denied in each case 332 U.S. 842">332 U.S. 842). Subsequent to this, the Commissioner acquiesced and issued 1 T 3989, 1950-1-13268. For your convenience I am enclosing a copy.

The commissioner ruled that the same principle applies to interest as to dividends. This is so obvious that I regard it as completely superfluous, however, it does no harm.

Now, you have in your possession, $ 971,250.00 in cash and with that cash you buy $ 1,000,000.00 U.S. Treasury 1 1/2% Notes due October 1, 1961.

43 T.C. 842">*863 This will leave you a credit balance of approximately $ 53,750.00 which you will deposit with us as collateral for the loan of the 2 3/4% bonds due September 15, 1961.

You will pay us a premium in the amount of $ 12,500.00 per million. This is also deductible.

Having loaned you $ 1,000,000.00 in U.S. Treasury 2 3/4% Bonds, I request from you collateral to secure me. You therefore deposit the 1 1/2% of October 1, 1961 which you purchased plus the credit balance of $ 53,750.00. Adding the two together, you have merely given me security now for the bonds which I have loaned to you, and which you have delivered to cover your short sale.

Each 1965 U.S. Tax Ct. LEXIS 111">*147 year, the income of $ 15,000.00 which you receive on the 1 1/2% Notes is taxable to you, and you have to report it.

Each year you have to pay me $ 27,500.00 which represents the coupons on the loaned bonds. Thus, there is a difference of $ 12,500.00 between the income you receive, and the expenses you incur. This, of course, reduces your taxable income to that extent.

At the end of the four years and four months that have to run, the $ 53,750.00 or approximately that amount has been exhausted by paying me the difference between the amount you receive as income, and the amount that you pay as expense.

We now come to September 15, 1961. You return to me $ 1,000,000.00 U.S. Treasury 2 3/4% Bonds or I buy them in for your account. You have sustained a short term loss of $ 28,750.00. The short term gain can be cancelled out with this loss. If you have no short term gain, you can apply it against long term gain.

At this point, the October 1, 1961's will be almost matured. They will be worth approximately 100, maybe one or two thirty-seconds under or over. You now liquidate these and realize $ 1,000,000.00. The $ 1,000,000.00 that you realized from these will pay for the bonds that you 1965 U.S. Tax Ct. LEXIS 111">*148 have borrowed from me, so that dollar wise it should be even, give or take a few pennies. Inasmuch as you paid 91 3/4 for these, you will have a long term capital gain at that time of $ 82,500.00.

If you have short term gains, it is advisable to cancel them out at that time against a short term loss. You pick up the difference in any event as a long term capital gain. The memorandum which we previously sent, and which we are now bringing up to date, will indicate how you will come out dollar wise on this transaction at that time.

I have put this into very simple language. I recognize that to those who don't deal with this all the time, it may be easier to follow in this manner. In any event, all of the steps are included in the memorandums which are enclosed.

I look forward to hearing from you in the near future. In the meantime with my very best wishes, I remain

As ever,

MEL:hs

Encs.

c.c. Mr. Arthur Henning

Mr. Gerald Bolotin

PS -- For your convenience we are enclosing an extra copy.

43 T.C. 842">*864 Under date of August 26, 1957, Livingstone addressed the following letter, with attachment, to Gaither:

[letterhead]

LIVINGSTONE & COMPANY

10 Post Office Square

Boston 9, Massachusetts

August 1965 U.S. Tax Ct. LEXIS 111">*149 26, 1957

Mr. William C. Gaither

Pan American Building

Miami, Florida

Dear Mr. Gaither:

I just sold this deal to one of the most prominent tax attorneys, personally. The program is as follows:

1. As of now, you can buy $ 1,000,000.00 U.S. Treasury 1 1/2% Notes due April 1, 1962, at 88 7/8.

2. We can arrange a loan of 88. There is no interest prepayment required, but you can pay interest on this loan as you wish at any time either in arrears or in advance at 4 5/8%.

3. You will have a margin requirement of $ 8,750.00. No additional call for margin will be made.

4. You are only paying 4 5/8% interest on 88% of the face, and it is deductible.

Thus, in a short period of time, your $ 8,750.00 grows to $ 120,000.00.

This is made to order for you and your group, and I am therefore submitting it to you for your consideration. I am enclosing a copy of the proposal which I had submitted to the tax attorney and upon which he acted.

With my very best wishes, I remain

Cordially yours,

Signed -- M. Eli Livingstone

H.S.

MEL:hs

Enc.

[Enclosure to above:]

August 20, 1957

Dear Mr.    

As of now, you can buy $ 1,000,000.00 U.S. Treasury 1 1/2% Notes due April 1, 1962 at 88 7/8.

We can arrange a loan 1965 U.S. Tax Ct. LEXIS 111">*150 of 88. There is no interest prepayment requirement, but you can pay interest on this loan as you wish at any time either in arrears or in advance at 4 5/8%.

You will have a margin requirement of $ 8,750.00. No additional call for margin will be made.

43 T.C. 842">*865 You are only paying 4 5/8% interest on 88% of the face and it is deductible.

Thus, in a short period of time, your $ 8,750.00 grows to $ 120,000.00.

With warmest personal regards, I am

Very truly yours,

MEL:jr

Under date of October 11, 1957, Samuel Livingstone, brother of M. Eli Livingstone, on behalf of Livingstone & Co., addressed a letter to Gaither, which provided as follows:

Livingstone & Company

Investments

10 Post Office Square

Boston 9

October 11, 1957

Mr. William C. Gaither

Pan American Bank Building

Miami, Florida

Dear Mr. Gaither:

At this time we recommend the purchase of U.S. Treasury 1 1/2% Notes due April 1, 1962 which are currently selling at 90 1/2.

We can finance these at 89 1/2 to April 1, 1962 at 4 5/8%. After credit for the coupons, the balance of interest can be paid in three equal annual installments.

I have worked out the figures for you and your associates taking into consideration the deduction that you will 1965 U.S. Tax Ct. LEXIS 111">*151 have this year and next year, as a result of the program you entered into last year.

At this time, there would be a small amount of interest to be paid when you purchase these bonds. This will actually be deductible on your 1958 return. Accordingly, your deduction for 1958 will be slightly larger than those of 1957 and 1959.

If you have any question with regard to these figures, please do not hesitate to call me.

Very truly yours,

(s) Samuel Livingstone

SL:hs

Encs.

c.c. Mr. G. Bolotin

As enclosures to such letter, Livingstone enclosed three schedules describing the results of the purchase of 1 1/2 percent U.S. Treasury notes due April 1, 1962, at 90 1/2, borrowing of 89 1/2 to April 1, 1962, with a 1 point margin. Such schedules were prepared on the basis of the purchase of face amount Treasury notes of $ 1,750,000 for an individual with $ 200,000 income; $ 1 million face amount Treasury notes for an individual with $ 135,000 income; and $ 650,000 face amount Treasury notes for an individual with $ 90,000 income. The three 43 T.C. 842">*866 schedules were essentially similar, except as to amounts. The first such schedule provided as follows:

1965 U.S. Tax Ct. LEXIS 111">*152 43 T.C. 842">*867 Under date of November 6, 1957, Livingstone addressed the following letter to Gaither; with the enclosure as shown below:

[letterhead]

LIVINGSTONE & COMPANY

10 Post Office Square

Boston 9, Massachusetts

November 6, 1957

Mr. William Gaither

Pan American Bank Building

Miami, Florida

Dear Mr. Gaither:

I believe that this is the time to take advantage of the market insofar as Treasury Bonds are concerned.

We can arrange financing on the following terms:

1. You will deposit one point of margin.

2. Interest will be at the rate of 4 5/8%.

3. The coupons on the Treasury Notes will be applied toward the payment of interest and any balance due will be payable on liquidation.

4. You would have the right to anticipate at any time payment of any or all of the interest to be due.

5. You would not be subject to any calls for additional collateral during the term of this loan.

This would enable you to arrange your deductions to suit your convenience. If you have a big year in 1958, you could make a substantial payment of interest and thus minimize your tax.

For those of you who have the higher incomes, we would suggest a purchase of $ 3,000,000 bonds. This would give you a total interest deduction of $ 347,709.99 1965 U.S. Tax Ct. LEXIS 111">*153 which could be apportioned over the years 1958 through 1962 so as to obtain the optimum result.

For those whose incomes are normally smaller, they would probably be able to use $ 1,500,000. or $ 2,000,000. bonds.

The margin requirement would be $ 10,000. on each million bonds. If any of you need any assistance on this score, please do not hesitate to call us. We will be more than happy to co-operate.

The main objective is to purchase as many of these bonds as possible while the present deep discounts prevail.

We are enclosing figures for each million bonds purchased.

If you have any questions, please do not hesitate to call me.

Yours very truly,

Livingstone & Company

(s) Samuel Livingstone

Samuel Livingstone

SL/H

Enclosure

[Enclosure to above:]

43 T.C. 842">*868 Under 1965 U.S. Tax Ct. LEXIS 111">*154 date of November 19, 1957, Samuel Livingstone addressed the following letter to Gaither:

November 19, 1957

Mr. William Gaither

Pan American Bank Building

Miami, Florida

Dear Mr. Gaither:

I am enclosing a computation for you and your associates, based on current market conditions. Undoubtedly you know that these bonds have had a phenomenal rise in the past week and are currently selling at 92. However, this still leaves $ 80,000.00 of capital gain on each million dollars of bonds, and we have been able to reduce the interest rate to 4 1/8%.

The financing will be on the following terms:

1. One point of margin will be required.

2. Interest will be at the rate of 4 1/8%.

3. The coupons on the Treasury Notes will be applied to the payment of interest and any balance due will be payable on liquidation.

4. You would have the right to anticipate at any time any or all of the interest to be due.

5. You would not be subject to any calls for additional collateral during the term of this loan.

Under the proposed arrangement you would be in a position to pay interest at your convenience so as to obtain the maximum benefit.

I am enclosing computations based on incomes of $ 100,000.00, $ 150,000.00, and $ 200,000.00. 1965 U.S. Tax Ct. LEXIS 111">*155 For illustrative purposes, I have assumed that (a) interest would be paid equally in 1958 and 1959 and (b), that it is paid equally in 1958, 1959, and 1960.

I have not shown any interest payment in 1957 as you already have deductions for this year, however, in the event that you would like to further reduce your income for 1957, you could make a payment at any time before the end of the year.

If any of your group need assistance in meeting the margin requirements, or in the payment of interest, we will be more than happy to co-operate.

43 T.C. 842">*869 If you have any questions, please do not hesitate to call me.

Very truly yours,

Livingstone & Company

(s) Samuel Livingstone

SL:hs

cc. Mr. Hemmings

Under date of December 4, 1957, Samuel Livingstone addressed the following letter to petitioners, with enclosures as shown:

[letterhead]

LIVINGSTONE & COMPANY

Investments

10 Post Office Square

Boston 9

December 4, 1957

Mr. Walter Beckham

Nichols, Gaither, Green, Frates & Beckham

448 Pan American Bank Building

Miami 32, Florida

Dear Mr. Beckham:

Since I wrote to you last, the market has had a further rise, and we now feel it advisable to use the U.S. Treasury 1 1/2% Notes due October 1, 1962, which are currently selling at 1965 U.S. Tax Ct. LEXIS 111">*156 93 1/4. We can arrange a loan against these at 3 1/2% interest, which will give you approximately the same benefits as previously shown.

The financing will be on the following terms:

1. One (1) point of margin will be required.

2. Interest will be at the rate of 3 5/8%.

3. The coupons on the Treasury Notes will be applied to payment of interest, and the balance due will be payable in four (4) equal annual payments. Payments will begin in 1958.

4. You would have the right to anticipate at any time any or all of the interest to be due.

5. You would not be subject to any calls for additional collateral during the term of this loan.

6. It will be agreed that in the event that your income in any year should decline by $ 25,000.00 or more, then the interest for the unexpired term shall be reduced by 1/2 of 1%.

I am enclosing a computation based on incomes of $ 85,000.00 and $ 125,000.00.

In the event that any of your associates need assistance in meeting the margin requirements at this time, or the interest payments when they are due, we will be more than happy to cooperate.

If you have any question, please do not hesitate to call me.

Very truly yours,

Livingstone & Company

Samuel Livingstone

SL/cw

Enclosures

43 T.C. 842">*870 1965 U.S. Tax Ct. LEXIS 111">*157 [1st enclosure to above:]

[2d enclosure to above:]

1965 U.S. Tax Ct. LEXIS 111">*158 43 T.C. 842">*871 On December 6, 1957, petitioners entered the "third transaction." The program called for face amount of the 1 1/2 percent U.S. Treasury notes due April 1, 1962, to be as follows:

The stated interest rate was to be 3 1/2 percent per annum; the "interest" payments were arranged on a quarterly basis; and the price of the securities was to be 93 1/4, with a "loan" at 92 1/4.

The form of the third transaction, as arranged by Livingstone, Corporate Finance Corp., and Livingstone Securities Corp. (paper corporations dominated and controlled by M. Eli Livingstone, essentially similar to Corporate Finance & Loan Corp., described in the Findings of Fact in Perry A. Nichols, 37 T.C. 772">37 T.C. 772 (1962)), was as follows:

Petitioners were theoretically to purchase 1 1/2 percent U.S. Treasury notes due April 1, 1962, at 93 1/4 in face amounts as set forth below. About December 9, 1957, for such purpose, Corporate Finance Corp. was to loan petitioners amounts computed on the basis of 92 1/4, or on 43 T.C. 842">*872 the basis of a margin of 1 point. These Treasury notes, theoretically, had interest coupons due April 1 and 1965 U.S. Tax Ct. LEXIS 111">*159 October 1, as follows:

Under the plan, petitioner Nichols was to "sell" the notes at par at their maturity for $ 3,600,000. The purchase price having been $ 3,357,000, he was theoretically to have realized a long-term capital gain of $ 243,000 in 1962. As for the other petitioners, they, too, were to sell their notes at par, at maturity, for $ 2 million. The purchase price each having been $ 1,865,000, they were to have realized long-term capital gain in the amount of $ 135,000 in 1962.

Under date of December 6, 1957, each petitioner addressed a letter to Livingstone Securities Corp. similar to the following letter from Beckham:

Pan American Bank Building

Miami, Florida

December 6, 1957

Livingstone Securities Corporation

10 Post Office Square

Boston, Massachusetts

Gentlemen:

Please deliver to my account at the Corporate Finance Corporation, 70 State Street, Boston, Massachusetts, the following:

$ 2,000,000. U.S. Treasury 1 1/2% 1965 U.S. Tax Ct. LEXIS 111">*160 Notes due October 1, 1962 against payment of $ 1,850,686.81.

Very truly yours,

(s)       

Walter H. Beckham, Jr.

Delivery Date: December 9, 1957.

Also, under date of December 6, 1957, each petitioner addressed a letter to Corporate Finance Corp. similar to the following letter from Beckham:

Pan American Bank Building

Miami, Florida

December 6, 1957

Corporate Finance Corporation

70 State Street

Boston, Mass.

Gentlemen:

Please receive from Livingstone Securities Corporation the following for my account:

$ 2,000,000.00 U.S. Treasury 1 1/2% Notes due October 1, 1962

43 T.C. 842">*873 against payment to them of $ 1,850,686.81.

Very truly yours,

(s)       

Walter H. Beckham, Jr.

With respect to the letters referred to above addressed by Nichols, the face amount of Treasury notes was shown as $ 3,600,000, with a payment specified of $ 3,331,236.67.

Also, under date of December 6, 1957, Harry N. Cushing, treasurer of Corporate Finance Corp., addressed the following letter to Livingstone Securities Corp., in respect of the "third transaction":

December 6, 1957

Livingstone Securities Corporation

10 Post Office Square

Boston, Mass.

Gentlemen:

Will you kindly deliver from our account the following:

$ 11,600,000. U.S. Treasury 1 1/2% Notes 1965 U.S. Tax Ct. LEXIS 111">*161 due October 1, 1962

against payment of $ 10,849,983.51.

Yours very truly,

Corporate Finance Corporation

(s) Harry N. Cushing, Treasurer.

Delivery Date:

December 9, 1957

Each petitioner received a confirmation slip from Livingstone Securities Corp. showing a contract date of December 6, 1957, and a payable date of December 9, 1957, reciting that as agent of another, it had sold to them U.S. Treasury 1 1/2% notes due October 1, 1962, at a price of 93 1/4. The face amount of such notes and the amounts of the transaction as shown in these confirmation slips were as follows:

About December 9, 1957, Gaither, Green, Frates, and Beckham executed a document which provided as follows:

December 9, 1957

$ 1,845,000.00

On October 1, 1962, I promise to pay to the Corporate Finance Corporation, a Massachusetts corporation, at its principal office in Boston, Massachusetts, (hereinafter referred to as the obligee) the sum of:

One Million Eight Hundred Forty-Five Thousand and No/100 Dollars

subject 1965 U.S. Tax Ct. LEXIS 111">*162 to the following rights and conditions, having deposited with the said obligee the following securities as collateral:

$ 2,000,000. U.S. Treasury 1 1/2% Notes due October 1, 1962

43 T.C. 842">*874 Interest at the rate of 3 1/2% per annum, in the amount of $ 310,677.51 is to be paid as follows:

and income accruing on the collateral deposited is to be applied in payment of the balance due. The undersigned shall have the right at any time to anticipate payment of any or all of the interest to be due.

The undersigned gives to the obligee a lien against the securities pledged for the amount 1965 U.S. Tax Ct. LEXIS 111">*163 of the obligation set forth herein and gives to the obligee the right to hypothecate and use the securities pledged for any purpose while so pledged. Said right is not to be inconsistent in any manner with the ownership by the undersigned of the said collateral, and with the right to the undersigned to obtain the return of the collateral at any time upon tender of payment of the amount due hereunder.

The undersigned shall not be called upon to furnish additional collateral during the term of this Note.

No demand for payment shall be made until the collateral deposited shall be tendered.

This Note shall be non-negotiable and any transferee thereof shall be subject to the same restrictions as the named obligee.

In the event of the death of the undersigned prior to the maturity of the obligation, his executor or personal representative shall have the right, at his election, to demand the return of the collateral and simultaneously therewith to prepay the obligation, with interest to the date of such prepayment, without penalty.

This Note has been entered into in the City of Miami, and shall be construed and interpreted in accordance with the laws of the State of Florida.

(s) William Clinton 1965 U.S. Tax Ct. LEXIS 111">*164 Green [seal]

This Note and all of the terms and conditions hereof accepted this ninth day of December, 1957.

Corporate Finance Corporation

(s) Harry N. Cushing, Treasurer

In the case of Nichols, a similar document was executed. In his case, however, the face amount of the Treasury notes was shown to be $ 3,600,000, the amount theoretically loaned was $ 3,321,000; the total amount of interest shown was $ 559,219.53, and each installment of interest was shown to be $ 18,715.99, with the exception of the December 43 T.C. 842">*875 15, 1958, and December 15, 1961, installments, which were shown as $ 18,715.98, each.

Also, about December 9, 1957, each petitioner executed a document which provided in part as follows:

December 9, 1957

$ 20,000

On or before October 1, 1962, I promise to pay to the order of Livingstone & Company at 10 Post Office Square, Boston 9, Massachusetts, the sum of Twenty Thousand and No/100 Dollars,

together with interest at the rate of 3 1/2% per annum.

(s)       

Walter H. Beckham, Jr.

In the case of Nichols, only, these amounts were shown as $ 36,000. As noted above, the transaction was arranged with a margin of 1 point between the amount theoretically loaned and the "purchase price" of 1965 U.S. Tax Ct. LEXIS 111">*165 the 1 1/2 percent U.S. Treasury notes. The amounts shown in the "loan" from Livingstone & Co. of $ 20,000, as to petitioners Gaither, Green, Frates, and Beckham, and $ 36,000 as to Nichols, theoretically covered this margin. These amounts were not disbursed by Livingstone & Co. to petitioners, but were credited, by book entry, to Livingstone Securities Corp., by Livingstone & Co.

On its books, on December 9, 1957, Corporate Finance Corp. made entries under headings of notes receivable and accounts receivable from each petitioner, as follows:

The note referred to above recited that the petitioners had deposited the 1 1/2 percent U.S. Treasury notes due April 1, 1962, with Corporate Finance Corp. However, neither Corporate Finance Corp., Livingstone, Livingstone & Co., nor Livingstone Securities Corp., in their own behalf, nor on behalf of petitioners, actually purchased or deposited such U.S. Treasury notes with Corporate Finance 1965 U.S. Tax Ct. LEXIS 111">*166 Corp.

Actually, neither Livingstone & Co., Livingstone, Corporate Finance Corp., or Livingstone Securities Corp. had any funds of consequence to loan petitioners, nor did they purchase the 1 1/2 percent U.S. Treasury notes due April 1, 1962. On the books and records of Livingstone & Co., Corporate Finance Corp., and Livingstone Securities Corp., the purported transactions were only reflected by book entries.

43 T.C. 842">*876 Livingstone arranged simultaneous transactions involving Crittenden, Podesta & Co., Chicago, Ill.; C. F. Childs & Co., One Wall Street, New York; and R. W. Pressprich & Co., 48 Wall Street, New York, legitimate securities dealers, and other banking institutions. These simultaneous transactions were arranged to merely "pair off" the 1 1/2 percent U.S. Treasury notes due April 1, 1962, theoretically involved in the "third transaction," with matching receipt and delivery instructions from Livingstone and his paper corporations, Corporate Finance Corp. and Livingstone Securities Corp. This "pair off" was similar to the method employed in the "first transaction," as described in the Findings of Fact in Perry A. Nichols, 37 T.C. 772">37 T.C. 772 (1962). The dates transactions were arranged were 1965 U.S. Tax Ct. LEXIS 111">*167 as follows:

Under date of December 9, 1957, Livingstone addressed the following letter to Beckham:

[letterhead]

LIVINGSTONE & COMPANY

10 Post Office Square

Boston 9, Massachusetts

December 9, 1957

Mr. Walter H. Beckham, Jr.

Pan American Bank Building

Miami, Florida

Dear Mr. Beckham:

For good and valuable consideration, I hereby agree to deposit with you quarter-annually, upon request by you, on or before each March 15, June 15, September 15, and December 15, through September 15, 1961, the sum of $ 5,000.00, interest free, to be held by you until October 1, 1962.

Very truly yours,

Livingstone & Company

(s) M. Eli Livingstone

Identical letters were addressed to the other petitioners by Livingstone, except that in the case of Nichols, the amount designated was $ 9,000.

In March, June, September, and December of 1958 and March 1959, each petitioner received a statement from Corporate Finance Corp. similar to the following statement:

43 T.C. 842">*877 1965 U.S. Tax Ct. LEXIS 111">*168 Statement

CORPORATE FINANCE CORPORATION

70 State Street

Boston 9, Mass.

March 10, 1958

Mr. Walter H. Beckham, Jr.

Pan American Bank Building

Miami, Florida

Interest due March 15, 1958, on Note in the amount of $ 1,845,000.00 dated

In March, June, September, and December of 1958, and March of 1959, petitioners drew their personal checks to Corporate Finance Corp., on the following approximate dates, and from the following accounts:

Immediately prior to the drawing of the preceding checks by petitioners for forwarding to Corporate Finance Corp., each petitioner received advances from Livingstone in amounts on the approximate dates, as follows:

And 1965 U.S. Tax Ct. LEXIS 111">*169 at each of the above dates, upon receipt of the foregoing advances, each petitioner executed a note to Livingstone similar to the following, except that in the case of Nichols the amounts shown were $ 9,000, for each advance:

March 12, 1958

$ 5,000.00

On or before October 1, 1962, I promise to pay to

Livingstone & Company

at 10 Post Office Square, Boston 9, Massachusetts, the sum of Five Thousand and No/100 Dollars

without interest.

(s)       

Walter H. Beckham, Jr.

43 T.C. 842">*878 Such funds were, in effect, returned immediately to Livingstone through remission of the "interest" checks to Corporate Finance Corp., which company immediately, in turn, disbursed such funds either to or for the benefit of Livingstone, or one of his enterprises.

As set forth herein, these 1 1/2 percent U.S. Treasury notes had interest coupons due April 1 and October 1, each year. The "note" executed by each petitioner referred to above provided that Corporate Finance Corp. was to apply income accruing on the Treasury notes in payment of the interest due, other than the specific quarterly "interest" payments called for in the note. For the interest theoretically accruing to the 1 1/2 percent U.S. Treasury notes due April 1, 1965 U.S. Tax Ct. LEXIS 111">*170 1962, Corporate Finance Corp. made the following entries on its books, for the coupons maturing on April 1, 1958, October 1, 1958, and April 1, 1959:

Application of Interest Accruing by Corporate Finance Corp.

With respect to the April 1, 1958, coupon, $ 10,236.27 of the amount attributable to Nichols, and $ 5,686.81 of such amount attributable to the other petitioners, was credited to the account receivable due from each petitioner. The balance of the April 1, 1958, coupon, and the October 1, 1958, and April 1, 1959, coupon amounts were credited to petitioners' accounts, and to "interest" income accounts, by book entry, theoretically reducing the interest due from petitioners to Corporate Finance Corp. in like amounts.

The last check drawn by petitioners for the quarterly "interest" payments was the March 15, 1959, installment. Thereafter, no further interest payments were made by petitioners in connection with this transaction. On the books of Corporate Finance Corp., book entries were made to close out the transaction, 1965 U.S. Tax Ct. LEXIS 111">*171 as follows:

1. On October 29, 1959, Corporate Finance Corp., by book entry, theoretically had Livingstone Securities Corp. "sell" the 1 1/2 percent U.S. Treasury notes due April 1, 1962, at 92 28/32 for a "sales price" of $ 1,859,795.08.

2. This amount was used to offset the "loans" dated December 9, 1957, in the amount of $ 1,845,000 each, leaving a balance of $ 14,795.08 to the credit of the accounts of Gaither, Green, Frates, and Beckham.

43 T.C. 842">*879 3. Corporate Finance Corp. sent a statement to Gaither, Green, Frates, and Beckham, under date of October 29, 1959, which provided as follows:

1. On October 29, 1959, Corporate Finance Corp., by book entry, theoretically had Livingstone Securities Corp. "sell" the 1 1/2 percent U.S. Treasury notes due April 1, 1962, at 98 28/32 for a "sales price" of $ 3,347,631.15.

2. This amount was used to offset the "loan" dated December 9, 1957, in the amount of 1965 U.S. Tax Ct. LEXIS 111">*172 $ 3,321,000, leaving a balance of $ 26,631.15 as credit to the account of Nichols.

3. Corporate Finance Corp. sent a statement to Nichols under date of October 29, 1959, which provided as follows:

For these petitioners, with respect to the "interest" received through October 29, 1959, as shown in such statements, such amounts were computed as follows:

43 T.C. 842">*880 In their Federal income tax returns, for the years 1958 and 1959, petitioners claimed the following deductions in 1965 U.S. Tax Ct. LEXIS 111">*173 respect of the "third transaction":

The amounts described as "economic loss on liquidation of bond transaction" were equal to petitioners' net out-of-pocket expenditures on the "third transaction" for both the years 1958 and 1959.

In their Federal income tax returns for the year 1958, petitioners reported interest income on the "third transaction" in the amounts set forth below:

For these petitioners, their net "out-of-pocket" expenditures on the "first transaction" were as follows:

For these petitioners, their net "out-of-pocket" expenditures 1965 U.S. Tax Ct. LEXIS 111">*174 on the "second transaction" were as follows:

43 T.C. 842">*881 For petitioners, their "out-of-pocket" expenditures on the "third transaction" were as follows:

With respect to the foregoing transaction, the petitioners make the following concessions:

Petitioners concede that the following items are not 1965 U.S. Tax Ct. LEXIS 111">*175 deductible, either as interest or as premium paid:

1959

For the year 1959, each petitioner concedes that the amounts claimed on his 1965 U.S. Tax Ct. LEXIS 111">*176 return as an "economic loss on liquidation of bond transaction" are not deductible as "interest." The net amounts disbursed by petitioners in 1959 were as follows:

With respect to the foregoing transactions, the respondent makes the following concessions:

Respondent concedes that the following items returned by petitioners are not taxable income:

43 T.C. 842">*882 1965 U.S. Tax Ct. LEXIS 111">*177 The foregoing findings are taken largely from the stipulations filed by the parties. To the extent that any stipulated facts are not set forth above they are incorporated herein by this reference. In addition to the stipulated facts the following facts are found on the evidence presented:

Prior to entering into the first transaction petitioners were concerned about the actual acquisition and retention of the Government obligations involved. They were aware of Rev. Rul. 54-94, 1954-1 C.B. 53, which indicated that the desired interest deduction would not be allowed where the obligations had been disposed of or "sold short" by the lending institution. Although petitioners entered into the first transaction primarily, if not solely, for the purpose of reducing their Federal income taxes, they did so only after obtaining explicit assurances from M. Eli Livingstone that there would be no "short sale," i.e., that there would be a genuine acquisition of bonds or notes that would be retained as collateral for their loans. They would not have entered into this transaction otherwise. Livingstone's assurances were false. He had no intention of carrying out the transaction in accordance with 1965 U.S. Tax Ct. LEXIS 111">*178 those assurances.

Petitioners entered into the second and third transactions primarily, if not solely, for the purpose of reducing their Federal income taxes. However, when they did so, they similarly assumed that there would be genuine acquisitions of the Government obligations involved, relying upon Livingstone's assurances given at the inception of the first transaction. The various communications, confirmation slips, and the like which Livingstone caused to be sent to petitioners in each of the three transactions falsely indicated that there had been genuine acquisitions of Government obligations.

Petitioners were unaware until the spring of 1959 that Livingstone's representations were false. Upon receiving deficiency notices for the year 1955 (subsequently litigated in 37 T.C. 772">Perry A. Nichols, supra), petitioner Beckham, in behalf of all petitioners, went to Boston in April 1959 to ascertain just what Livingstone had actually done. Beckham 43 T.C. 842">*883 learned that Livingstone had not only violated his representations that there would be no "short sale" of the pledged collateral, but that all Treasury bonds and notes supposed to have been acquired in the various transactions had been "purchased" 1965 U.S. Tax Ct. LEXIS 111">*179 and "sold" simultaneously. Livingstone expressed the opinion that the Tax Court's decision in the "test" case then in litigation, Eli D. Goodstein, 30 T.C. 1178">30 T.C. 1178, would be reversed on appeal, and he also made vague promises to take steps to rectify the situation. Petitioners never obtained any restitution from Livingstone; they reasonably believed that he was judgment-proof and did not bring suit against him although they were advised by their Boston counsel that they had a valid cause of action against him for fraud.

OPINION

This case in its present posture represents the latest and, it may be hoped, the final episode in the serial involving M. Eli Livingstone and these petitioners. The story began in 1955 when petitioners, tempted by the prospect of large reductions in their Federal income taxes, allowed themselves to be persuaded by Livingstone to enter into what has been described in our findings as the first transaction. Thereafter, in 1956 and 1957, still lured by expectations of large tax benefits, they again yielded to Livingstone's sales pitch and entered into the second and third transactions. That everything was not quite well in this tax paradise finally became apparent 1965 U.S. Tax Ct. LEXIS 111">*180 when petitioners in 1959 received deficiency notices as to the year 1955. The matter was litigated before us, and we held that the transaction was a sham with the consequence that the hoped-for tax benefits did not materialize. Perry A. Nichols, 37 T.C. 772">37 T.C. 772. Our decision was affirmed by the Court of Appeals for the Fifth Circuit, 314 F.2d 337.

Meanwhile, deficiency notices were sent to petitioners for the years 1956, 1957, 1958, and 1959. The three transactions covered more than the years in which they were initiated and thus the tax liabilities for all of the years 1956-59 were involved. Petitioners sought review in this Court in the dockets now before us. In their petitions they again claimed the tax benefits which Livingstone had promised them. However, by the time this case was called for trial they took a more realistic view of the matter and have totally abandoned all claim to the enticing deductions that they had previously sought for each of the 4 years 1956-59. By amendment to their pleadings they now claim an entirely different and far more modest deduction, and that one only for the year 1959. The deduction which they now seek is simply for their out-of-pocket expenses 1965 U.S. Tax Ct. LEXIS 111">*181 in respect of which they contend they were swindled by Livingstone. In short, they urge that 43 T.C. 842">*884 they are entitled to a deduction on account of "theft." ² And, of course, if there was a "theft" within the meaning of the statute, the deduction is allowable in the year of discovery, ³ which in this case was 1959. The entire trial before us was focused on this issue, and we are satisfied on this record that petitioners were in fact swindled and are therefore entitled to this consolation prize.

Theft, as used in section 165 of the Internal Revenue Code of 1954, 1965 U.S. Tax Ct. LEXIS 111">*182 is "a word of general and broad connotation, intended to cover and covering any criminal appropriation of another's property to the use of the taker, particularly including theft by swindling, false pretenses, and any other form of guile." Edwards v. Bromberg, 232 F.2d 107, 110 (C.A. 5). Thus, the statute is satisfied where a contractor who was building a swimming pool for the taxpayer obtained payment from the latter on the strength of false representations that he in turn had paid the subcontractors and materialmen. Evelyn Nell Norton, 40 T.C. 500, 504-505, affirmed 333 F.2d 1005 (C.A. 9).

We set forth in the margin petitioners' specifications of Livingstone's numerous fraudulent representations, as stated in their brief, 4 and we are convinced that they are amply supported by this record. Indeed, the Court of Appeals in its review of our decision involving the first transaction and the year 1955 characterized one of the representations by Livingstone as being "as false and fraudulent as the balance of the scheme." 314 F.2d 337, 338. And the record before us establishes that Livingstone's fraud in obtaining money from petitioners brings this case within the applicable Florida1965 U.S. Tax Ct. LEXIS 111">*183 criminal statute in respect of obtaining money by "false representations or pretense," Fla. Stat., sec. 811.021(1)(a), as well as within the provisions of the United States Code which make it a Federal crime to use the 43 T.C. 842">*885 mails to defraud, 518 U.S.C., sec. 1341. The crime under either Florida or Federal law was a "theft" within section 165 of the Internal Revenue Code.

43 T.C. 842">*886 In our opinion following the first trial we expressed skepticism that petitioners were innocent of Livingstone's actual doings. 37 T.C. 772">37 T.C. 789, 790. However, the record made in the trial of the present case removes all doubt and persuades us that petitioners were indeed deceived by Livingstone, and that they parted with their money only because they relied upon his false representations.

The Government argues that petitioners sustained no loss arising out of theft, that they paid their money for a tax-avoidance scheme, that they never intended to get their money back, that they got what they bargained for, namely, a tax-avoidance scheme, and that their only loss was that the scheme didn't work. The argument takes 1965 U.S. Tax Ct. LEXIS 111">*188 too narrow a view of the matter. Petitioners do not deny that they bargained for a tax-avoidance device, but it is their contention that the crucial element in the scheme that they bargained for was the bona fide acquisition and retention of the various Government bonds or notes, that they never would have parted with their money were it not for the false representations of Livingstone in this respect, and that they made the payments in issue only because they were deceived by Livingstone. We think this contention more accurately reflects the situation before us.

In allowing a deduction for "theft" losses Congress did not distinguish between losses sustained by the naive or greedy from those suffered by others. Indeed gullibility or cupidity of the victim is often the crucial factor that enables the swindler to succeed in his fraud. But no such criteria are relevant under the Internal Revenue Code in determining whether the victim of a swindle is entitled to the deduction. Petitioners in this case entered the transaction before us with the expectation of realizing a tax bonanza, and they were cheated by Livingstone in the process. It is a matter of no moment that even if actual 1965 U.S. Tax Ct. LEXIS 111">*189 bonds had been purchased and retained it might still be held ultimately that they would not be entitled to the desired tax benefits because of lack of substance of the transaction as a whole (cf. Knetsch v. United States, 364 U.S. 361">364 U.S. 361; Bridges v. Commissioner, 325 F.2d 180 (C.A. 4), affirming 39 T.C. 1064">39 T.C. 1064). The point is that petitioners bargained for a transaction in which there would be real purchases of bonds or notes, so that they would be entitled to argue for their claimed tax benefit on the basis of a record involving real bonds or notes. Thus, instead of getting what they now refer to as a "quality facade," they obtained from Livingstone what they quite properly characterize as a thoroughly useless "fake, counterfeit facade." And they paid their money for this "fake, counterfeit facade" only because they were taken in by Livingstone's false representations. We hold that they were the victims of a swindle, and are entitled, as the statute is now written, to a deduction in respect of the moneys that they paid out in reliance upon Livingstone's false representations.

43 T.C. 842">*887 The Government also argues that Livingstone believed that his tax-savings schemes would ultimately be sustained 1965 U.S. Tax Ct. LEXIS 111">*190 and that he therefore had no intent to commit a theft. The argument misses the point. Livingstone's fraud consisted in his false representations to petitioners as to the character of the transactions in which he persuaded them to participate. They parted with money on the strength of those false representations and were thus swindled by him within the meaning of the criminal statutes. Cf. Finlay v. State, 152 Fla. 396">152 Fla. 396, 12 So. 2d 112">12 So. 2d 112.

We are aware that this Court has disapproved claimed theft losses in a seemingly comparable situation. James A. Dooley, T.C. Memo. 1962-305, 21 T.C.M. 1633, 1646; cf. Louis H. Lewis, T.C. Memo. 1962-306, 21 T.C.M. 1647, 1659. In both of those cases the Court cited Miles v. Livingstone, 301 F.2d 99 (C.A. 1), involving a suit against Livingstone by a disappointed customer who had entered into similar transactions with him. But the Court of Appeals in Miles v. Livingstone made it clear that, in its opinion, Miles was not deceived and that it did "not appear that the specific physical form in which the transactions were to be cast was of particular moment to him." 301 F. 2d at 101. And this Court's decisions in Dooley and Lewis were based upon the 1965 U.S. Tax Ct. LEXIS 111">*191 records before it, where it was similarly able to conclude, as had the Court of Appeals in Miles v. Livingstone, that those taxpayers had not been deceived by Livingstone. The situation in the present case is in sharp contrast. Here, we have credible evidence that the form of the transaction was of critical importance to petitioners, and that they entered into it only after having been deceived by Livingstone as to its nature. Dooley and Lewis^{61965 U.S. Tax Ct. LEXIS 111">*192} are thus distinguishable not only by reason of the foregoing considerations, but also because the losses were there claimed in the years in which they occurred rather than in the year in which the theft was discovered, as required by section 165(e), fn. 3, supra.

A somewhat unusual situation exists in respect of petitioner Green. By reason of the Commissioner's error in mailing the statutory notice of deficiency for 1955 and the consequent running of the statute of limitations, Green has succeeded in obtaining the benefit of the deductions promised by Livingstone for that year. This fortuitous circumstance, however, does not detract from the fact that he was swindled by Livingstone in respect of the various payments made by him in 1955 as well as in later years.

Decisions will be entered under Rule 50.