Court Opinion

ID: 9447482
Source: CourtListenerOpinion
Date Created: 2023-08-03 22:36:16.826885+00
Date Added: 2024-06-11T17:31:04.070827
License: Public Domain

MOORE, Circuit Judge
(dissenting).
My difficulty with the decision is that the Commissioner and the Tax Court add together a series of perfectly legal acts and come out with illegality as their sum. To me this is not only bad mathematics but unsound legal reasoning. They arrive at this result because they do not regard the purchase of the annuities as a commercially meaningful transaction; to them it"was merely a tax scheme. At the same time, they concede that where interest is paid on true annuity indebtedness, the interest is deductible. Despite the fact that the transaction had been carefully planned under the law to take advantage of permissible deductions, governmental taxing authorities by calling it a “scheme” (a word of evil connotation) assume a paternalistic role to decide whether a taxpayer should, in his particular circumstances, have handled his financial affairs as he did. Such a paternal attitude comes dangerously close to that envisioned (facetiously, I hope) in “1984” (George Orwell) — a date at the time of writing undoubtedly imaginative but now rapidly approaching.
Review for a moment the position of this taxpayer in 1951. The Standard Life Insurance Company of Indiana offered to sell to the public annuity contracts. The company was legal; the annuity contract was legal. Interest deductions were legal and Congress by its actions in 1932 and 1934 had shown a definite awareness of the annuity indebtedness interest problem by excluding single premium life insurance or endowment contracts but repealing the brief two-year exception as to annuity contracts (see the review of legislative history, United States v. Bond, 5 Cir., 1958, 258 F.2d 577, 582-584). The taxpayer bought two annuities. Payment of a single premium was legal. The Insurance Company could legally loan up to the cash value of the annuities. Thus, when the loans were made, all steps were legal, actual annuity contracts had been- issued, real indebtedness obligations secured by the contracts recorded on the insurance company’s books and interest thereon was payable by the taxpayer. How then do the Commissioner and the Tax Court inject lack of reality into a situation which thus far was very real. They find that the taxpayer borrowed the full cash value to pay the premiums. But such a borrowing was legal. If this practice was not wise it was a subject for the various states to consider in revising .their insurance laws. They next point to pre-payments of interest for three years at.a time when the taxpayer was desirous of offsetting deductions against large capital gains which he had taken. But again this practice is permitted by law *331Lastly, they comment on the taxpayer’s additional borrowing up to the cash value —a procedure as legal as the original loan.
Of course, it is most obvious that the insurance company in selling, and the taxpayer in buying under the plan for borrowing to pay the premiums, were mindful of the tax advantages resulting from interest deductions. Assume that they had this motive. Tax saving as a motive does not change a “plan” into a “scheme” to fraudulently deprive the government of taxes otherwise due. The Commissioner argues that the interest for 19 years would exceed the contract increment. If wisdom of business judgment is to be the test, then the Commissioner will have to examine into interest paid at 6% on a loan to buy securities paying only 1% or 2% or in many cases nothing at all. Or should interest be disallowed on a large mortgage when the homeowner is shown to. have adequate assets to own his home mortgage free. Therefore, to impose on a taxpayer, as does the majority, the burden of showing, that the transaction would have occurred “absent the motive of tax avoidance”' imputes to Congress an' intent which Con-' gress has not yet disclosed. .
Congress, however, has in this cáse disclosed a clear intent that interest , on annuity indebtedness now is not to be excepted because in finally reversing its policy of 1934 in 1954, it enacted Section 264 of the Internal Revenue Code of 1954, providing:
“(a) General rule. — No deduction shall be allowed for— ******
“Any amount paid or accrued on indebtedness incurred or continued to purchase or carry a single premium life insurance, endowment, or annuity contract. Paragraph (2) shall apply in respect of annuity contracts only as to contracts purchased after March 1, 1954.”
Using only the plain meaning of the words as a guide, the prohibition does not apply to contracts purchased before March 1, 1954, as here. The Commissioner is forced to avoid this obvious conclusion by arguing that even though annuity indebtedness interest was deductible, the transaction lacked reality. At this stage, the argument is back to the point of beginning. The Commissioner is not construing the law but rather imposing his views as to the method of harir dling the annuity purchase.
I recognize that in Weller v. C. I. R., 3, Cir., 1959, 270 F.2d 294, the Commissioner prevailed on a similar policy, the court, rejecting the decision of the Fifth Circuit in United States v. Bond, 5 Cir., 1958, 258 F.2d 577. The Ninth Circuit has recently affirmed the Commissioner’s position in Knetsch v. United States, 9. Cir., 1959, 272 F.2d 200, certiorari granted 1960, 361 U.S. 958, 80 S.Ct. 589, 4 L.Ed.2d 541. The rationale of these decisions appears to be based upon the assumption in the dissenting opinion of Judge Wisdom in the Bond case that “since no money or other economic benefits were advanced to the taxpayer by the company, the payments were not interest.” (258 F.2d 577, 584-585.)1
But in our present-day commercial system, money is not “advanced” in the sense of delivery. A bank will buy securities for a customer and make a loan against the securities as collateral. The customer usually never sees money or securities. The margin account taxpayer does not take his interest each month and hand -it to his broker. His account is debited; his loan thus increased. Here Standard was no different than a lending bank. Its books were subject to audit undoubtedly by one or more governmental agencies. Its premium account *332was credited when the payment was made just as if the taxpayer had borrowed from a neighboring bank and handed the money through a cashier’s window. Under such circumstances the interest would have' been deductible. Surely application of the tax laws does not depend upon the source of the borrowing. Here the taxpayer and the Insurance Company were not taking advantage of a statutory loophole. “Loophole” connotes an inadvertent omission or oversight. Congressional action clearly indicates that between 1934 and 1954 interest on annuity indebtedness was intentionally not excluded. Taxpayers should be able to rely on the law. Because the law as to estoppel is apparently well settled in Automobile Club of Michigan v. Commissioner, 1957, 353 U.S. 180, 77 S.Ct. 707, 1 L.Ed.2d 746 and in Helvering v. New York Trust Co., 1934, 292 U.S. 455, 54 S.Ct. 806, 78 L.Ed. 1361, I cannot add that upon such non-legal grounds as ordinary fair play they should also be able to place reliance upon the Treasury Department’s statements and rulings.
I would reverse as to the interest payments.

. I am not unmindful of such cases as Gilbert v. C. I. R. 2 Cir., 1957, 248 F.2d 399; Goodstein v. C. I. R., 1 Cir., 1959, 267 F.2d 127; Sonnabend v. C. I. R., 1 Cir., 1959, 267 F.2d 319; Lynch v. C. I. R., 2 Cir., 1959, 273 F.2d 867; and Becker v. C. I. R., 2 Cir., 1960, 277 F.2d 146, but the factual differences in these cases are such as to eliminate them from having persuasive or precedent force here.