dissenting: I do not agree with the conclusions of the majority respecting the transactions herein involving the C.I.T. notes, and accordingly dissent.
In my opinion the Internal Revenue Code was, and is, intended to apply to transactions founded upon economic reality. Transactions which, standing alone and without regard for tax considerations, are not economically sound and are engaged in solely for the purpose of creating tax deductions which by means of the interplay between various sections of the Code will result in “tax-free income,” are lacking in economic reality and, in my opinion, are not within the intendment of the taxing statute. Consequently such transactions should be ignored for tax purposes.
It has long been recognized that transactions which may be valid and enforcible between the contracting parties from a commercial or property law standpoint may, nevertheless, be so lacking in economic reality as to be entitled to no recognition for income tax purposes. Cf. Gregory v. Helvering, 293 U.S. 465; Helvering v. Clifford, 309 U.S. 331; Higgins v. Smith, 308 U.S. 473.
In Commissioner v. Transport Trad. & Term. Corp., 176 F. 2d 570, 572, reversing 9 T.C. 247, certiorari denied 338 U.S. 955, the Second Circuit Court of Appeals stated that the doctrine of Gregory v. Helvering was not limited to consideration of corporate reorganizations but had a much wider scope:
it means that in construing words of a tax statute which describe commercial or industrial transactions we are to understand them to refer to transactions entered upon for commercial or industrial purposes and not to include transactions entered upon for no other motive but to escape taxation. * * *
In Gilbert v. Commissioner, 248 F. 2d 399, 411 (C.A. 2), Judge Learned Hand stated:
If, however, the taxpayer enters into a transaction that does not appreciably affect his beneficial interest except to reduce his tax, the law will disregard it; for we cannot suppose that it was part of the purpose of the act to provide an escape from the liabilities that it sought to impose. * * *
These principles have recently been applied in a number of cases strikingly similar to the instant case. In WeTler v. Commissioner, 270 F. 2d 294 (C.A. 3), affirming 31 T.C. 33 and W. Stuart Emmons, 31 T.C. 26, and Knetsoh v. United States, 272 F. 2d 200 (C.A. 9), certiorari granted 361 U.S. 958, deductions for amounts paid to insurance companies as interest on loans on annuity policies were held lacking in commercial substance and therefore not allowable. But cf. United States v. Bond, 258 F. 2d 577 (C.A. 5). In Eli D. Goodstein, 30 T.C. 1178, affd. 267 F. 2d 127 (C.A. 1); George G. Lynch, 31 T.C. 990, and Leslie Julian, 31 T.C. 998, both affirmed sub nom. Lynch v. Commissioner, 273 F. 2d 867 (C.A. 2); Egbert J. Miles, 31 T.C. 1001 (on appeal); Danny Kaye, 33 T.C. 511; and Broome v. United States, 170 F. Supp. 613 (Ct. Cl., 1959), the purchases of notes with borrowed funds for which they were posted as collateral, where the evident purpose was merely to create tax deductions, were ignored as transactions devoid of substance and interest on the loans was held not to be deductible.
In my opinion, the purchase of the C.I.T. notes in December 1952 is nothing but a dressed-up Goodstein transaction, the only difference being (1) that a “gimmick man” like Livingstone was not involved, and (2) that petitioner borrowed money from legitimate lending institutions instead of a Livingstone finance company. Although the “collusive sham” of the Goodstein, Lynch, and Julian cases is not present in the instant case, the transaction was no less a “sham” for income tax purposes. There is no doubt that petitioner would not have purchased the C.I.T. notes in 1952 had he not been able to create a tax benefit as a result of the interplay between the capital gain and interest deduction provisions of the Code. This conclusion is inescapable from the majority’s finding of fact that “Lee anticipated that the interest he would have to pay on the loans would exceed the gain he would have on the notes but he would have a net gain after taxes from the transaction.” It is quite clear that without the favorable tax impact the purchase of the C.I.T. notes could have resulted in nothing but a loss. Accordingly the transactions involving the C.I.T. notes which gave rise to petitioner’s interest expenditures are obviously lacking in economic reality and are not, in my opinion, within the intendment of the statute.
Needless to say, contrary to the views expressed by the majority herein, I do not regard anything that was said in the Miles case, supra, as being either inappropriate or unnecessary. In that case the evidence was insufficient to establish whether or not the transactions really occurred, and our opinion was based in part upon the assumption that they did occur and that legally enforcible rights were created. Accordingly, the language criticized was not mere dictum. In Woods v. Interstate Realty Co., 337 U.S. 535, the Supreme Court stated that “where a decision rests on two or more grounds, none can be relegated to the category of obiter dictum.”
For the reasons discussed above, I respectfully dissent from the opinion of the majority herein, particularly with respect to the C.I.T. note transactions.
Harrow, J., agrees with this dissent.