Knetsch v. United States

Knetsch v. United States, 364 U.S. 361 (1960), was a decision by the United States Supreme Court concerning taxation law.

Knetsch v. United States
Argued October 17–18, 1960
Decided November 14, 1960
Full case nameKnetsch v. United States
Citations364 U.S. 361 (more)
81 S. Ct. 132; 5 L. Ed. 2d 128; 1960 U.S. LEXIS 1980; 60-2 U.S. Tax Cas. (CCH) ¶ 9785; 6 A.F.T.R.2d (RIA) 5851; 1961-1 C.B. 34
Holding
The amounts paid as "interest" in 1953 and 1954 were not deductible from the gross income of the taxpayer and his wife in their joint income tax returns for those years as "interest paid … on indebtedness," within the meaning of 23 (b) of the IRC of 1939 and 163 (a) of the IRC of 1954.
Court membership
Chief Justice
Earl Warren
Associate Justices
Hugo Black · Felix Frankfurter
William O. Douglas · Tom C. Clark
John M. Harlan II · William J. Brennan Jr.
Charles E. Whittaker · Potter Stewart
Case opinions
MajorityBrennan, joined by Warren, Black, Frankfurter, Clark, Harlan
DissentDouglas, joined by Whittaker, Stewart
Laws applied
Internal Revenue Code

The taxpayer was a saver who was convinced to buy a deferred annuity because the inside buildup on such policies is tax-deferred. However, he wanted to claim a deduction on the money he borrowed that he used to buy the annuity. The IRS won and the taxpayer was denied the deduction. An understanding of the economics would immediately reveal that the only reason the transaction had any chance of making sense for the taxpayer was the asymmetric way the-then current tax code allowed a current deduction on the loan liability at the same time allowed tax deferral on the purchased asset. Success would have legitimated tax arbitrage.

See also

Further reading
  • Shaviro, Daniel N. (2002). "The Story of Knetsch: Judicial Doctrines Combating Tax Avoidance". In Caron, Paul L. (ed.). Tax stories: An in-depth look at ten leading federal income tax cases. New York: Foundation Press. pp. 313–370. ISBN 1-58778-403-3.


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