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Commissioner, 364 F.2d 734 (2d Cir. 1966), affg. 44 T.C. 284
(1965).
In the Goldstein case, the taxpayer (Mrs. Goldstein, the
wife in a joint return filing) won over $140,000 in the Irish
Sweepstakes. In an effort to mitigate the tax impact of having
to report all her winnings in the year of receipt, her advisers
constructed a plan pursuant to which, before the end of that
year, she borrowed $945,000 from two banks, purchased $1 million
face amount Treasury 1.5-percent notes, and prepaid 4 percent
interest for 1.5 years on one bank loan and for approximately
2.75 years on the other. The total interest prepayment was over
$81,000, which the Goldsteins claimed as a deduction in the year
of payment under section 163(a). We denied the deduction on the
ground that “there was no genuine indebtedness established
between * * * [Mrs. Goldstein] and * * * [the banks].” Goldstein
v. Commissioner, 44 T.C. at 298. The Court of Appeals for the
Second Circuit affirmed, but on a different basis. It agreed
with the dissenting opinion in this Court that the bank loans
were “‘indistinguishable from any other legitimate loan
transaction contracted for the purchase of Government
securities’”, Goldstein v. Commissioner, 364 F.2d at 737 (quoting
Goldstein v. Commissioner, 44 T.C. at 301 (Fay, J., dissenting)),
and it found that we were in error in concluding that those loans
“were ‘shams’ which created no genuine indebtedness”, id. at 738.
It agreed, however, with our finding that Mrs. Goldstein entered
into the two bank loans “without any realistic expectation of
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