Before DUFFY, KILEY, and SWYGERT, Circuit Judges.
Taxpayer, Maxwell Rubin, brought this action in the District Court to recover an alleged overpayment of federal income taxes, plus interest, in the amount of $21,232.22, arising from a disallowance by the Commissioner of Internal Revenue of a deduction for interest*fn1 claimed by taxpayer in 1953. The court found that the transaction in question did not in substance create an indebtedness and that no interest was paid by taxpayer. Accordingly, the court entered judgment dismissing taxpayer's complaint. Taxpayer appeals from this judgment.
The facts found by the District Court are substantially as follows:
On May 27, 1953 taxpayer placed a purchase order with Livingstone and Company of Boston, Massachusetts*fn2 for $5,000,000 face amount United States Treasury 1 3/8% notes maturing March 15, 1954. Subsequently, taxpayer received a confirmation slip from Livingstone purporting to show the purchase by Livingstone for taxpayer's account of the ordered securities at a principal purchase price of $4,960,937.50, plus accrued interest of $14,011.55, or a total purchase price of $4,974,949.05.
On May 28, 1953 taxpayer executed a check for $7,500 to the order of Livingstone as part payment for the securities. To finance the remainder of the purchase price he executed a non-recourse promissory note on May 29, 1953 to Seaboard Investment Associates, Inc. of Boston, Massachusetts.*fn3 The note was in the amount of $4,967,449.05 and the maturity date was March 15, 1954. It recited an interest rate of 2 9/16% per annum, further that $5,000,000 United States Treasury 1 3/8% notes due March 15, 1954 had been deposited as collateral, and it gave Seaboard a lien on the securities for the face amount of the note. The note also gave Seaboard "the right to hypothecate and use the securities pledged for any purpose while so pledged," and provided that taxpayer was not to "be called upon nor be liable to furnish additional collateral." Under the terms of the note, taxpayer had the right to pay the note before maturity, and in that event, he was to be charged interest at the rate of 1/4% per annum from date of payment to maturity.
On May 29, 1953 taxpayer forwarded his $7,500 check to Livingstone together with a letter requesting Livingstone to deliver to Seaboard $5,000,000 face amount United States Treasury 1 3/8% notes as security for the loan. On the same day taxpayer sent Seaboard the promissory note together with a letter requesting Seaboard to receive $5,000,000 face amount United States Treasury 1 3/8% notes from Livingstone and requesting it to disburse the proceeds to Livingstone to complete payment for the securities.
On May 27, 1953 Seaboard, for the ostensible purpose of obtaining the funds to make the loan to taxpayer, placed a short sale order with Livingstone for $5,000,000 face amount United States Treasury 1 3/8% notes maturing March 15, 1954.
Livingstone executed taxpayer's purchase order by a purchase from C.J. Devine and Company. Livingstone executed Seaboard's short sale order by a sale to Devine. On May 29, 1953 delivery on taxpayer's purchase order and on Seaboard's short sale order was made at the Guaranty Trust Company of New York. On the same day Guaranty charged the account of Livingstone in the amount of the purchase price on receipt of the securities, and Livingstone satisfied Seaboard's delivery commitment on the short sale by redelivering to Devine the same securities. Guaranty then credited Livingstone's account with the identical amount it had charged his account.
No securities were actually delivered by Livingstone to Seaboard for taxpayer's account, nor did Livingstone actually pay to Seaboard any money on Seaboard's short sale. Moreover, Seaboard did not furnish Livingstone any money to cover taxpayer's purchase order. Seaboard had a running account with Livingstone and the transaction was handled by debits and credits to this account.
On December 7, 1953 taxpayer placed a sale order with Livingstone for $5,000,000 face amount United States Treasury 1 3/8% notes maturing March 15, 1954. Livingstone sent taxpayer a confirmation of sale at a principal price of $5,001,562.50, plus accrued interest of $15,763.12, or a total sale price of $5,017,325.62. On the same date, taxpayer sent a letter to Livingstone, requesting Livingstone to receive from Seaboard $5,000,000 United States Treasury 1 3/8% notes upon Livingstone's payment to Seaboard of $5,017,325.62. He also sent a letter to Seaboard, requesting Seaboard to deliver to Livingstone $5,000,000 United States Treasury notes upon Livingstone's payment of the $5,017,325.62, and requesting that Seaboard apply this amount "against my loan and remit to me the excess proceeds." On the same date, Seaboard, in order to cover its short position, placed a purchase order with Livingstone for $5,000,000 United States Treasury 1 3/8% notes maturing March 15, 1954. The purchase price was the same amount that taxpayer received for his sale of the securities.
No securities were actually delivered by Livingstone on the execution of either the sale or purchase order; instead Livingstone balanced the orders by debits and credits to Seaboard's account with him.
Subsequently taxpayer received a settlement statement from Seaboard showing the following computation: