Document: 364 U.S. 361 81 S.Ct. 132 5 L.Ed.2d 128 Karl F. KNETSCH and Eva Fay Knetsch, Petitioners,v.UNITED STATES. No. 23. Argued Oct. 17, 18, 1960. Decided Nov. 14, Mr. W. Lee McLane, Jr., Phoenix, Ariz., for petitioners. Grant Wiprud, Washington, D.C., respondent. Justice BRENNAN delivered the opinion of Court. 1 This case presents question whether deductions from gross income claimed on petitioners' 1953 1954 joint federal tax returns, § 143,465 in $147,105 1954, payments made by petitioner, to Sam Houston Life Insurance Company, constituted 'interest paid . indebtedness' within meaning 23(b) Internal Revenue Code 1939, 26 U.S.C.A. 23(b), 163(a) 163(a).1 The Commissioner disallowed determined a deficiency each year. petitioners deficiencies brought this action refund District Court Southern California. rendered judgment United States, Appeals Ninth Circuit affirmed, 272 F.2d 200. Because suggested conflict with decision Fifth States v. Bond, 258 577, we granted certiorari 958, 80 589, 4 541. 2 On December 11, 1953, insurance company sold Knetsch ten 30-year maturity deferred annuity savings bonds, face amount $400,000 bearing interest at 1/2% compounded annually. purchase price was $4,004,000. gave Company his check $4,000, signed $4,000,000 nonrecourse loan notes balance. bore 3 were secured bonds. payable advance, same day prepaid first year's interest, which $140,000. Under Table Cash Loan Values part their cash or value end contract year, be $4,100,000. terms, however, permitted borrow any excess above indebtedness without waiting until 1954. took advantage provision only five dats after purchase. 16, he received $99,000 $100,000 over indebtedness, interest. also advance $3,465. In return deducted sum two payments, that is $143,465, as * taxable year indebtedness,' under 1939 Code. second began when $143,465 aggregate $4,099,000. 27, Three days later, 30, $104,000, difference less $1,000 between then $4,099,000 bonds $4,204,000 1955. He appropriate thereon $3,640. $147,105, years 1955 1956 are not involved proceeding, but recital events those necessary complete story transaction. 1955, start third became obligated pay an now totalled $4,203,000. 28, date $104,000 company. than $4,308,000 1956. Again upon Petitioners deduction $150,745. did go transaction fourth beginning 1956, terminated it His time $4,307,000. had been basis 'loan' surrendered canceled. cash. 6 called monthly $90,171 (when would 90 age) such smaller produced existing indebtedness. It stipulated if held continued annually net $1,000, available ($8,388,000 $8,387,000 indebtedness), enough provide $43 per month. 7 trial judge findings '(t)here no commercial economic substance transaction,' parties intend 'become indebted Houston,' '(n)o (Knetsch) created transactions,' gain could achieved these regard consequences *.' conclusion law, based Court's Deputy du Pont, 308 488, 60 363, 84 L.Ed. 416, '(w)hile form compensation use forbearance money, they substance. As payment sham.' 8 We examine determine 'indebtedness' Code, whether, court found, sham. put aside finding Knetsch's 'only motive purchasing 10 attempt secure deduction.'2 said Gregory Helvering, 293 465, 469, 55 266, 267, 79 596: 'The legal right taxpayer decrease what otherwise taxes, altogether avoid them, means law permits, cannot doubted. But determination done, apart motive, thing statute intended.' 9 When 'what done' here, see $294,570 during $203,000 back 'loans.' What get out-of-pocket $91,570? so-called guaranteed $8,388,000, produce $90,171, substantial life proceeds event death before maturity. This, have seen, fiction, because annual borrowings kept value, depend, relative pittance $1,000.3 Plainly, therefore, Kentsch's 'not appreciably affect beneficial except reduce Gilbert Commissioner, Cir., 248 399, 411 (dissenting opinion). For patent there nothing realized beyond deduction. ostensibly 'lent' reality rebate 'interest' payments. $91,570 retained its fee providing facade 'loans' whereby sought taxes total $233,297.68. There may well single premium arrangements nontax create purposes one sham.4 contend, Congress enacting 264 264, authorized deductions. They point out 264(a)(2) denies amounts incurred carry single-premium contract, contracts purchased March 1, 1954.5 thus attribute purpose allow pre-1954 transactions kind carried true obligation Unless plainly appears will Congress. 'To hold exalt artifice deprive statutory all serious purpose.' supra, page 470, 268. We, look materials relevant construction evidence meant authorize sham entered into vain. 11 Provisions denying new revenue acts. A applicable annuities, endowment contracts, 1932 1934, 47 Stat. 179. added developing policy deny allocable tax-exempt income;6 annuities excluded up consideration annuitant. See H.R.Rep. 708, 72d Cong., 1st Sess., p. 11. repealed Act 48 688, method taken changed way more included. 687. S.Rep. 558, 73d 2d 24. 12 1942 denied contracts. enacted amendment 56 827, 'to close loophole' respect partially exempt income. Hearings Senate Finance Committee H.R. 7378, 77th 54; 22(b)(1) (now 101(a) (1) 101(a)(1)). 13 extending denial us simply expand application proofs perhaps strong absence contrary expression Congress, import clear enough. fact incorporated section covering unquestionably adopted further policy. Congress' attention directed 1954; again taking 72(b) 72(b). These signs long-standing concern problem income, transactions, explains provision. 14 Moreover, itself negates suggestion congressional concern, certain actual 'indebtedness.' And House Ways Means Reports 1337, 83d 31; 1622, 38, suggest exempting intended protect transactions.7 15 Some amicus curiae brief entering agreements relied individual ruling letters issued other taxpayers. argument has never advanced case. Accordingly, reason pass it. 16 affirmed. 17 Affirmed. 18 DOUGLAS, whom WHITTAKER STEWART concur, dissenting. 19 I agree views expressed Judge Moore Diggs 281 326, 330—332, Brown, writing himself Hutcheson, 577. 20 bound lose itself. At least showed conduct come ahead investment Yet where borrows money 5% 6% securities nominal interest; where, bank earning 3%, self higher rate. aim there, paid. long hocus-pocus, charges incident completing seem deductible respects prior selected terminating class U.S.C. U.S.C.A 264. existed; operated Texas law; issue policies make loans. While rate annum, increased annum. company's profit 1-point spread. 21 Tax avoidance dominating behind scores transactions. present here. Will Service calls 'sham' today press collection taxes* arising surrender contract? think should, do believe 'sham.' To disallow device devoid draw line host situations which, deference, can maintain cases reach remedy legislative. Evils abuses particularized deal commonly understood used across board myriad Since real legitimate world consummated limits allowed policies, recognize them tax-wise. words sections same, namely shall 'All accrued likewise that, ordinary suffered loss even contested allowed, therefore avoidance. argue exceeded 'interest.' contention, predicated wholly unlikely assumption off original 'loan.' Every considered similar agreed our conclusion, Bond decision, Roderick 59—2 U.S.T.C. 9650. 908, 271, 224; Weller Emmons 270 294, 347 269, 223; Haggard 59—1 9299; Oliver L Williams, T.C.M. 205. Rev.Rul. 54—94, 1954—1 Cum.Bull. 53, dissenting Wisdom Bond. Section provides: '(a) General rule—No for— '(2) Any insurance, endowment, contract. 'Paragraph (2) apply 1954.' (Emphasis supplied.) italicized language 1942. 827. 1932, 179, provided: '(b) Interest—All obligations (other September 24, 1917, originally subscribed taxpayer) imposed title, connection carrying annuity.' follows: 'Under incurred, continued, life-insurance 'Existing does extend your committee's few companies promoted plan selling derived omission treatment accorded cover balance cost annuity. Interest (which loan) purchaser resulting saving reduces below increment 'Your bill allowing cancelled receiving $1,000. termination reflected might noted reported

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