- 41 -
Section 163(a) provides that "There shall be allowed as a
deduction all interest paid or accrued within the taxable year on
indebtedness." Court opinions have clearly established that a
lack of economic substance may operate to bar interest deductions
arising under section 163. See Knetsch v. United States, 364
U.S. 361 (1960);36 United States v. Wexler, supra; Goldstein v.
Commissioner, 364 F.2d 734 (2d Cir. 1966), affg. 44 T.C. 284
(1965). Interest payments are not deductible if they arise from
transactions "that can not with reason be said to have purpose,
substance, or utility apart from their anticipated tax
consequences." Goldstein v. Commissioner, supra at 740; see also
Sheldon v. Commissioner, 94 T.C. 738 (1990). "Such transactions
are said to lack 'economic substance.'" Lee v. Commissioner, 155
F.3d 584, 586 (2d Cir. 1998) (quoting Jacobson v. Commissioner,
915 F.2d 832, 837 (2d Cir. 1990), affg. in part and revg. in part
T.C. Memo. 1988-341), affg. in part and remanding in part on
another ground T.C. Memo. 1997-172.
The fact that an enforceable debt exists between the
substance their form represents. * * *
36In Knetsch v. United States, 364 U.S. 361 (1960), the
Court applied sec. 163(a) of the 1954 Code. The language of sec.
163(a) of the 1954 Code remained unchanged in the 1986 Code. See
sec. 163(a); see also United States v. Wexler, 31 F.3d 117, 123
(3d Cir. 1994).
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