Court Opinion

ID: 9461515
Source: CourtListenerOpinion
Date Created: 2023-08-04 22:16:10.945394+00
Date Added: 2024-06-11T17:37:05.907193
License: Public Domain

THORNBERRY, Circuit Judge
(concurring):
Although the district court insisted on utilizing “economic substance” analysis found in earlier ease law to decide this matter, instead of utilizing the statute which Congress enacted partially to supplant the earlier case law, I believe the judgment for the government is correct and therefore must be affirmed. I concur in the judgment of this court and in its opinion with respect to the facts of this appeal, but I feel it necessary to add a few remarks concerning my apprehension of what we do and do not decide for the future.
It seems to me that the appellant’s real problem in this refund suit is a failure to prove its case. As the taxpayer, the appellant had the burden of proof on all material issues. Appellant relies on § 264(c)(4) of the Internal Revenue Code, the so-called “trade or business exception” to the general disallowance expressed in § 264(a)(3). Added to the Code by the 1964 Revenue Act, these provisions read together say that a taxpayer may not deduct interest on money borrowed, directly or indirectly, against a life insurance policy pursuant to a plan of systematic borrowing whose purpose is to finance the cost of insurance, i. e., the premium(s). The “exception,” however, goes on to say that the interest may be deducted, if the borrowing was done “in connection with [the taxpayer’s] trade or business.” A close reading of the legislative history and applicable Treasury Regulations persuades me that this “exception” is not really that at all, but rather a different rule.
I suspect that what Congress and the Treasury had in mind with § 264(c)(4) was a situation in which the purpose of the borrowing is the financing of business obligations other than the purchase of life insurance. If the latter is the thing that the taxpayer has done, then I read § 264(a)(3) as saying that interest on the borrowing may not be deducted under any label.
The examples of “business obligations” given in the legislative history1 and in the Regulations2 are expansion of inventory and purchase of capital improvements. I seriously question whether *650§ 264(c)(4), as written, may be limited so narrowly. If it were, then the Regulation might be unreasonable. For example, if I ran a business and needed cash to meet my payroll; I went to the bank and borrowed $10,000 at 10% per annum; I paid my employees; then I repaid the bank a total of $11,000; I assume that I ■ would be entitled to deduct $10,000 under § 162 (the trade or business deduction) and $1,000 under § 163 (the interest deduction). Yet I have neither expanded my inventory nor made a capital improvement to my business.
It seems that the appellant would show the court that its activity resembled the hypothetical, only the appellant borrowed the principal amount from the insurance company instead of the bank. Its problem, however, is twofold. First, appellant failed to keep a separate accounting of how the borrowed funds were spent. Second, it failed t.o prove that the accumulated borrowings represented a genuine indebtedness in the sense of a factually genuine expectation of repayment on the part of the lender, the insurance company. The first failure is explicit in the trial court’s findings of fact. The second is implicit in the trial court’s conclusion that “the indebtedness was not real.” These findings, in light of the record, are not clearly erroneous, and indeed the testimony of Mr. Clay, appellant’s president whose life was insured, supports the conclusion that the “debt” was not genuine.
Under these circumstances, the appeal does not present an appropriate occasion to consider the scope of the “trade or business exception,” the interpretative value of the legislative history and Regulations, or the question whether in fact appellant used the borrowed sums to finance the cost of life insurance. Before any of these issues could become germane, it was necessary that appellant present evidence of a genuine indebtedness- — so that the premium thereon could constitute “interest” within the meaning of § 1633 — and evidence that the borrowed principal was spent in furtherance of trade or business activity other than the purchase of life insurance. Appellant did neither. The district court, despite the unclear language about shams in its opinion, found that appellant failed to meet its burden. That finding is not erroneous; therefore I concur.

. See the citations in note 2 of Judge Bell’s opinion, supra.

. Treas.Reg. § 1.264^(d)(4).

. Cf. Knetsch v. United States, 364 U.S. 361, 81 S.Ct. 132-, 5 L.Ed.2d 128 (1960).