Knetsch v. United States/Dissent Douglas

Mr. Justice DOUGLAS, with whom Mr. Justice WHITTAKER and Mr. Justice STEWART concur, dissenting.

I agree with the views expressed by Judge Moore in Diggs v. Commissioner, 2 Cir., 281 F.2d 326, 330-332, and by Judge Brown, writing for himself and Judge Hutcheson, in United States v. Bond, 5 Cir., 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 self same bank at a higher rate. His aim there, as here, may only to be 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, 26 U.S.C.A § 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 1/2% per annum, the annuity bonds increased in cash value at the rate of only 2 1/2% 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 now 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.