- 63 -
as to whether satisfaction of the requirements of section 264(a)
and (c) authorizes a deduction of the interest expenses arising
out of a transaction that otherwise is without substance.
An argument similar to petitioner's was made in Knetsch v.
United States, 364 U.S. 361 (1960). In Knetsch, the Court found
that the taxpayer's purchase of annuity contracts and
simultaneous loans from an insurance company was a sham that did
not give rise to deductible interest. Nevertheless, like
petitioner, the taxpayer in Knetsch contended that by enacting
section 264 as part of the 1954 Code, Congress "authorized" the
interest deductions for transactions prior to the effective date
of the 1954 Code. See id. at 367. Section 264(a)(2), as enacted
in 1954, denied a deduction for amounts paid on indebtedness
incurred to purchase or carry a single premium annuity contract,
but only as to contracts purchased after March 1, 1954, the date
of enactment. See id. From this the taxpayers reasoned that
Congress intended to allow interest deductions for such
transactions occurring prior to March 1, 1954, regardless of
their substance. The Supreme Court disagreed, concluding that
unless such meaning plainly appeared from the statute and its
legislative history, the Court would not attribute such an intent
to Congress, for "'To hold otherwise would be to exalt artifice
above reality and to deprive the statutory provision in question
sec. 7702.
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