# Knetsch v. United States > Supreme Court of the United States · November 14, 1960 · 364 U.S. 361 URL: https://www.frixlaw.com/law-library/cases/9422075 ## Case - **Full name:** KNETSCH Et Ux. v. UNITED STATES - **Court:** Supreme Court of the United States - **Decided:** November 14, 1960 - **Citations:** 364 U.S. 361; 1 C.B. 34; 6 A.F.T.R.2d (RIA) 5851; 81 S. Ct. 132; 5 L. Ed. 2d 128; 1960 U.S. LEXIS 1980 - **Precedential status:** Published - **Opinion:** Dissent by Douglas - **Judges:** Brennan, Douglas, Whit-Taker, Stewart - **Cited by:** 670 later opinions in the Frix Law Library ## Citator (automated) - No negative treatment found by the automated citator. That is not the same as a confirmation that the case is good law; read the citing cases. - Full citator and citing cases: https://www.frixlaw.com/law-library/cases/9422075 ## How later opinions describe it (automated extraction) - holding that the purchase of several annuity bonds was substantively a sham, and should therefore be disregarded in determining the validity of claimed income tax deductions, where the premiums were paid by loans secured by the bonds and additional borrowing reduced the annuit… - concluding that a transaction was a sham because it “did not appreciably affect [the taxpayer’s] beneficial interest except to reduce his tax” (internal quotation marks omitted) (citation omitted) - rejecting taxpayer's annuity arrangements with insurance company as giving rise to indebtedness and, thus, interest deductions, since "it is patent that there was nothing of substance to be realized by Knetsch from this transaction beyond a tax deduction", and finding arrangem… - finding transaction involving leveraged annuities to be a “sham” because possible $1,000 cash value of annuities at maturity was “relative pittance” compared to purported value of annuities ## Opinion text Mr. Justice Douglas, with whom Mr. Justice Whit-taker and Mr. Justice Stewart concur, dissenting. I agree with the views expressed by Judge Moore in Diggs v. Commissioner, 281 F. 2d 326, 330-332 , and by Judge Brown, writing for himself and Judge Hutcheson, in United States v. Bond, 258 F. 2d 577 . It is true that in this transaction the taxpayer was bound to lose if the annuity contract is taken by itself. At least the taxpayer showed by his conduct that he never intended to come out ahead on that investment apart from this income tax deduction. Yet the same may be true where a taxpayer borrows money at 5% or 6% interest to purchase securities that pay only nominal interest; or where, with money in the bank earning 3%, he borrows from the selfsame bank at a higher rate. His aim there, as here, may only be to get a tax deduction for interest paid. Yet as long as the transaction itself is not hocus-pocus, the interest charges incident to completing it would seem to be deductible under the Internal Revenue Code as respects annuity contracts made prior to March 1, 1954, the date Congress selected for terminating this class of deductions. 26 U. S. C. § 264 . The insurance company existed; it operated under Texas law; it was authorized to issue these policies and to make these annuity loans. While the taxpayer was obligated to pay interest at the rate of 3%% per annum, the annuity bonds increased *371 in cash value at the rate of only 2y2% per annum. The insurance company’s profit was in that 1-point spread. Tax avoidance is a dominating motive behind scores of transactions. It is plainly present here. Will the Service that calls this transaction a “sham” today not press for collection of taxes * arising out of the surrender of the annuity contract? I think it should, for I do not believe any part of the transaction was a “sham.” To disallow the “interest” deduction because the annuity device was devoid of commercial substance is to draw a line which will affect a host of situations not now before us and which, with all deference, I do not think we can maintain when other cases reach here. The remedy is legislative. Evils or abuses can be particularized by Congress. We deal only with “interest” as commonly understood and as used across the board in myriad transactions. Since these transactions were real and legitimate in the insurance world and were consummated within the limits allowed by insurance policies, I would recognize them tax-wise. Petitioners terminated this transaction in 1956 by allowing the bonds to be cancelled and receiving a check for $1,000. The termination was reflected in their tax return for 1956. It might also be noted that the insurance company reported as gross income the interest payments which it received from petitioners in 1953 and 1954. --- Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/9422075. Public record. Not legal advice.