dissenting: I respectfully dissent from the opinion of the majority with respect to the second issue. In my opinion the present case is not distinguishable in principle from such cases as Paulina duPont Dean, 9 T.C. 256; Chandler v. Commissioner, 119 F. 2d 623 (C.A. 3), affirming 41 B.T.A. 165, and other cases cited by the majority, wherein it was held that the rent-free use of corporate property by a stockholder or officer resulted in the realization of income. “Interest” in the sense that it represents compensation paid for the use, forbearance, or detention of money, may be likened to “rent” which is paid for the use of property.
I agree with Judge Opper in his concurring opinion that “the statement that ‘an interest-free loan results in no taxable gain to the borrower’ is much too broad a generalization to make here.” I do not wish to infer that the interest-free loan of money should be construed as resulting in taxable income to the borrower in every instance. However, it is difficult to believe tbat the interest-free loan of in excess of $2 million ($2,563,098.07 throughout 1956) by a personal holding company to its majority stockholders (its only stockholders prior to December 17, 1954) did not result in any economic benefit to the borrower.
In my opinion, the statement that “had petitioners borrowed the funds in question on interest-bearing notes, their payment of interest would have been fully deductible by them under section 163, I.R.C. 1954,” is likewise too broad a generalization to make here.
Section 163(a) states the “General Rule” to be that “There shall be allowed as a deduction all interest paid or accrued within the taxable year on indebtedness.” Section 265 (2) provides, however, that—
No deduction shall be allowed for—
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(2) Interest. — Interest on indebtedness incurred or continued to purchase or carry obligations * * * the interest on which is wholly exempt from the taxes imposed by this subtitle.
Section 265(2) is specifically included in the cross references contained in subsection (c) of section 163 and is therefore clearly intended as an exception to, or limitation upon, section 163(a). For obligations, the interest on which is wholly exempt from taxes, see section 103 of the Internal Revenue Code of 1954.
It is recognized that the burden with respect to the issue here presented by his amended answer is upon the respondent. This burden, however, was, in my opinion, discharged by the stipulated facts presented. It was incumbent upon the petitioners, if such were the facts, to plead and establish that had they been required to pay interest on the loans in question they would have been entitled to deduct such interest from their gross income. They have done neither. It is well established that deductions are matters of legislative grace and must be clearly established.
On the record presented herein, I do not agree that “had petitioners borrowed the funds in question on interest-bearing notes, their payment of interest would have been fully deductible by them under section 163,” and that the inclusion in the gross income of the petitioners of an amount representing a reasonable rate of interest on the loans in question would therefore result in no deficiency.