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Weller v. Commissioner - 270 F.2d 294 (3d Cir. 1959)

Rule:

The incidence of taxation depends upon the substance of a transaction, which must be viewed as a whole, and each step, from the commencement of negotiations to the consummation of the sale, is relevant.

Facts:

Cash basis taxpayers purchased an annual premium annuity policy. The taxpayers' pattern of conduct involved prepayments of interest which accelerated the cash or loan value of the policy, with concurrent borrowing of the accelerated increase in the cash or loan value, thus immediately recouping a major portion of the purported prepayments of interest. The taxpayers claimed deductions on their returns of the entire amounts of each prepayment of interest, although the actual outlays were much less. The United States Tax Court held that transactions involving prepayment of interest on annuity contract loans lacked substance so as not to be deductible as interest payments under the Internal Revenue Code of 1939 §23(b)26 U.S.C.S. § 23(b).

Issue:

Do transactions involving prepayment of interest on annuity contract loans lack substance, and thus, must not be deductible as interest payments?

Answer:

Yes

Conclusion:

The Court agreed with the tax court that although in form the payments appeared to constitute interest within the meaning of 26 U.S.C.S. § 23(b), no independent economic purpose for the transactions was present; the entire transaction lacked substance and was to be ignored for tax purposes. The government's reliance upon a revenue ruling issued after the taxable years in question was upheld by the Court on the grounds that no rulings had been issued to these taxpayers, and that they had been treated in the same manner as all other taxpayers without rulings. The judgment disallowing interest deduction under § 23(b) was affirmed.

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