KNETSCH V. UNITED STATES, 364 U. S. 361 (1960)

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U.S. Supreme Court

Knetsch v. United States, 364 U.S. 361 (1960)

Knetsch v. United States

No. 23

Argued October 17-18, 1960

Decided November 14, 1960

364 U.S. 361


In 1953, a 60-year-old taxpayer purchased single-premium 30-year maturity deferred annuity savings bonds with an aggregate face value of $4,000,000 from a life insurance company, paying only a nominal sum in cash, giving nonrecourse notes secured by the bonds for the balance, and paying a substantial amount as "interest" in advance on that "indebtedness." A few days later, he borrowed from the company nearly all of the excess of the cash surrender value which the bonds would have at the end of the first contract year over the amount of the existing "indebtedness," and again paid in advance the "interest" on such additional "indebtedness." These borrowings and "interest" payments were repeated in 1954 and 1955, and the bonds were surrendered and the indebtedness was cancelled in 1956.

Held: the amounts paid as "interest" in 1953 and 1954 were not deductible from the gross income of the taxpayer and his wife in their joint income tax returns for those years as "interest paid . . . on indebtedness," within the meaning of § 23(b) of the Internal Revenue Code of 1939 and §163(a) of the Internal Revenue Code of 1954. Pp. 364 U. S. 362-370.

(a) On the record in this case, it is patent that the transaction between the taxpayer and the insurance company was a sham which created no "indebtedness" within the meaning of those sections of the Codes. Pp. 364 U. S. 362-366.

(b) Congress did not authorize deduction of such payments by enacting § 264(a)(2) of the Internal Revenue Code of 1954, which expressly denies a deduction for amounts paid on indebtedness incurred to purchase or carry a single premium annuity contract, but only as to contracts purchased after March 1, 1954. Pp. 364 U. S. 367-370.

272 F.2d 200 affirmed.

Page 364 U. S. 362

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