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indebtedness". The deductibility of interest, however, is
subject to an important exception. Interest is not deductible
where the underlying indebtedness lacks economic substance beyond
the taxpayer's desire to obtain an interest deduction. Goldstein
v. Commissioner, 364 F.2d 734, 741-742 (2d Cir. 1966), affg. 44
T.C. 284 (1965).
In Goldstein, the taxpayer sought to reduce the income taxes
that she would owe on sweepstakes winnings. Accordingly, in
prearranged transactions, she borrowed $945,000 from commercial
banks at 4 percent interest and purchased $1,000,000 in Treasury
notes paying 1-1/2 percent interest. The Treasury notes secured
her loans. She then prepaid the interest on the bank loans and
sought to deduct the amount of the interest as an offset against
the sweepstakes income. The net effect of these transactions was
to produce an economic loss that was more than offset by tax
savings from the deduction of the prepaid interest. We sustained
the Commissioner's disallowance of the deduction, and the Court
of Appeals for the Second Circuit affirmed. The Court of Appeals
for the Second Circuit explained that section 163(a) "does not
permit a deduction for interest paid or accrued in loan
arrangements * * * that cannot with reason be said to have
purpose, substance, or utility apart from their anticipated tax
consequences". Goldstein v. Commissioner, 364 F.2d at 740.
We applied the reasoning of Goldstein in Julien v.
Commissioner, 82 T.C. 492 (1984). In Julien, we denied most of
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