The opinion of the court was delivered by: HIGGINBOTHAM
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
was, within the meaning of § 265(2) of the Code,
"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."
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.
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
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