Goldstein v. Commissioner - 364 F.2d 734 (2d Cir. 1966)

Rule:

Section 163(a) of the Internal Revenue Code of 1954, 26 U.S.C.S. § 163, does not permit a deduction for interest paid or accrued in loan arrangements that cannot with reason be said to have purpose, substance, or utility apart from their anticipated tax consequences.

Facts:

Petitioner taxpayers Tillie and Kapel Goldstein were husband and wife. In 1958, petitioner wife won a lottery, thereafter, she sought to lessen her tax burden after winning. Petitioner took out loans to purchase securities at interest rates higher than the return on the investments. She then made a large interest payments in advance and deducted the interest payments under § 163(a) of the Internal Revenue Act of 1954, 26 U.S.C.S. § 163(a). Respondent Commissioner of Internal Revenue disallowed the deductions, after finding that the loans were a sham. The U.S. Tax Court disallowed a federal income tax deductions for payments that petitioners alleged were made for interest on an indebtedness under § 163(a) of the Internal Revenue Code of 1954. Petitioners sought review of said decision. 

Issue:

Did the tax court err in disallowing the federal income tax deductions?

Answer:

No.

Conclusion:

On appeal, the court affirmed. The court determined that § 163(a) did not permit an interest deduction for indebtedness on loans that did not have a purpose apart from their anticipated tax consequences. In this case, the court found that petitioner's loan arrangements were not made in anticipation of any economic gain from the transactions, but rather were made only for the purpose of obtaining an interest deduction on taxes. Thus, the court held that the Tax Court was justified in concluding that petitioner entered into said bank transactions without any realistic expectation of economic profit and solely in order to secure a large interest deduction in 1958 which could be deducted from her sweepstakes winnings in that year. Moreover, the court found that petitioner wife's exhibits failed to demonstrate her expectation of gain from the transactions.