United States Supreme Court
364 U.S. 361 (1960)
Karl Knetsch (plaintiff) bought deferred annuity bonds from an insurance company to serve as tax shelters. The insurance company loaned Knetsch the funds to purchase the bonds. The insurance company also permitted Knetsch to borrow additional amounts against the bonds as their value increased. Knetsch borrowed substantial funds against the annuity bonds and deducted the interest payments on the loans on his federal tax returns. Because Knetsch borrowed significantly against the annuity bonds’ value, their expected payout upon maturity, when Knetsch would be 90 years old, was negligible. The net result of the annuity bonds on Knetsch’s federal tax liability was that the bonds yielded interest deductions well in excess of Knetsch’s investments in the bonds and had no meaningful financial value beyond the tax deductions. The federal tax commissioner (commissioner) (defendant) disallowed Knetsch’s interest deductions. Knetsch brought an action against the United States government (defendant) in federal district court, seeking a tax refund. The district court determined that Knetsch’s interest payments were a sham, as the annuity-bond transaction had no economic substance, and entered judgment for the commissioner. The court of appeals affirmed. The United States Supreme Court granted certiorari.
Rule of Law
Holding and Reasoning (Brennan, J.)
Dissent (Douglas, J.)
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