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WYNN v. UNITED STATES

UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA


July 5, 1968

John S. Wynn, Jr., and Margaret R. Wynn, his wife
v.
The United States of America

Higginbotham, District Judge.

The opinion of the court was delivered by: HIGGINBOTHAM

HIGGINBOTHAM, District Judge:

This case is before me on the cross motions of the taxpayer and the Government for summary judgment. The question on which the grant or denial of these motions turns is whether the interest for which taxpayer seeks a deduction, pursuant to § 212 of the Internal Revenue Code of 1954, 26 U.S.C. § 212 *fn1" was, within the meaning of § 265(2) of the Code, *fn2"

 

"Interest on indebtedness incurred or continued to purchase or carry obligations . . . the interest on which is wholly exempt from the taxes imposed by this subtitle."

 Findings of Fact

 1. Plaintiffs in this action are John S. Wynn, Jr., and his wife, Margaret R. Wynn (hereinafter called "taxpayers").

 2. For the tax years 1960 and 1961, the years for which the taxpayers' tax liability is in question, the taxpayers filed joint returns.

 3. During the tax years in question, taxpayer, John S. Wynn, Jr., (hereinafter called "taxpayer") was a partner in the firm of J. W. Sparks & Co., (hereinafter called "firm") a partnership engaged in the securities brokerage business.

 4. As part of its business, the firm maintained an account with the First Pennsylvania Banking and Trust Company, designated "Municipal Bond Account ", through which it purchased and sold all of its municipal bonds. All purchases were paid for by the bank through this account, and all proceeds from sales were deposited in this account. During any period in which purchases exceeded receipts from sales, the firm incurred an indebtedness to the bank. Between the time of acquisition and sale, the bonds were held by the bank as security for the outstanding indebtedness of the firm. The firm made monthly interest payments to the bank. It is this interest paid by the firm to the bank that is in question here.

 5. The bond purchases for which the indebtedness was incurred were for the firm's own account, rather than on the order of, and for immediate delivery to, a customer.

 6. During the tax years in question, taxpayer had an eight per cent interest in the firm as a result of which he was entitled to eight per cent of its profits and responsible for eight per cent of its debts. 7. Based on his eight per cent interest, taxpayer claimed a deduction for eight per cent of the interest paid by the firm on the Municipal Bond Account, while declaring eight per cent of the profits from the tradings in that account as ordinary income. The Internal Revenue Service disallowed the deduction. The following table shows the amounts of money attributable to the various aspects of this trading and the tax consequences for the tax years 1960 and 1961: ITEM 1960 1961 Total receipts from Municipal Bond Acct. $7,226,000.00 $8,832,000.00 Profits on trading from Municipal Bond Acct. 57,323.90 51,648.28 Interest expense on Municipal Bond Acct. incurred by firm. 19,711.60 23,044.03 Tax exempt income earned by firm on securities held in Municipal Bond Acct. 7,967.51 7,608.70 Interest on Municipal Bond Acct. claimed by taxpayer and disallowed by Internal Revenue Service. 1,576.93 1,843.52 Additional tax assessed against, and paid by, taxpayer. 1,389.41 1,473.17 Taxpayer's tax exempt interest income from firm's dealings through Municipal Bond Acct. 637.40 608.69

19680705

© 1992-2004 VersusLaw Inc.



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