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sham transactions involved in this case. A similar argument was
advanced in McLane v. Commissioner, 46 T.C. 140 (1966), affd. 377
F.2d 557 (9th Cir. 1967), where the taxpayers had engaged in a
series of transactions similar to those in the instant case. In
the Revenue Act of 1964, Pub. L. 88-272, sec. 215(a), 78 Stat.
55, Congress added subsection (a)(3) of section 264 to address
problems associated with amounts paid or accrued on indebtedness
incurred with respect to several types of insurance contracts
pursuant to a plan of systematic borrowing. In McLane v.
Commissioner, supra at 144-145, we considered the same passage
from the Senate Finance Committee report that petitioner cites
and stated:
Based upon the foregoing, petitioner by a tour de
force concludes that: (a) The 1958 transaction herein
is the type of abuse meant to be curbed by subsection
(a)(3), but only prospectively; (b) the legislative
history expressly confirms his assertion that the
deduction flowing from this abuse was allowable under
prior law; and (c) the 'interest' involved herein is
therefore deductible.
We agree with petitioners that the 1958
transaction in form fell within the class of
transactions at which subsection (a)(3) was aimed. But
we do not agree with his assertion that the legislative
history should be turned into an open-ended license
applicable without regard to the substance of the
transaction. Nor do we agree with the assertion that,
if Knetsch and Pierce, were controlling with respect to
post-1958 multiple-premium annuities, there would have
been no need for further legislation in 1964. Knetsch
and Pierce involved transactions without substance.
Congress, in enacting section 264(a)(3), struck at
transactions with substance. It is a reductio ad
absurdum to reason, as petitioner does, that Congress
simultaneously struck down a warm body and breathed
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