## Facts

- James S. Darrow and Priscilla G. Darrow were individual taxpayers who filed a petition in the United States Tax Court after the Commissioner issued a notice of deficiency for the 1968 tax year.
- The Darrows entered a “Leisure Plan” program that offered members rights to use vacation accommodations, including a Florida condominium unit, for specified periods each year.
- Under the arrangement, the Darrows received the right to occupy the condominium for a set number of weeks annually and to use or exchange time at other resort properties made available through the program.
- The plan documents and marketing materials described the program primarily in recreational terms, emphasizing vacation use rather than investment or ownership.
- The Darrows made payments to Leisure Plan, Inc., which they characterized on their return as “interest” paid on indebtedness secured by real property.
- The Commissioner determined the payments were not interest on bona fide indebtedness and instead were nondeductible personal expenditures associated with obtaining vacation privileges.
- The Darrows challenged the deficiency, arguing that the payments qualified as deductible interest under I.R.C. § 163(a).

## Issues

1. Whether amounts paid under the Leisure Plan time-sharing arrangement were deductible as “interest on indebtedness” under I.R.C. § 163(a), or were nondeductible personal expenses.

## Decision

- The Tax Court held that the Darrows’ payments were not deductible as interest under I.R.C. § 163(a).
- The court found the payments were, in substance, membership assessments or dues for the privilege of using resort properties, not interest on a genuine debt.
- The court sustained the Commissioner’s deficiency determination.

## Legal Principles

- Interest is deductible under I.R.C. § 163(a) only if it is paid on a valid, bona fide indebtedness that reflects a real debtor-creditor relationship.
- Courts look to the substance of a transaction rather than the labels used in documents; calling a payment “interest” does not make it interest for tax purposes.
- Payments made to obtain personal vacation use and similar recreational benefits are generally nondeductible personal expenses under the Code.
- A taxpayer’s lack of legal or equitable ownership interests and the absence of meaningful debt rights and obligations weigh against treating payments as mortgage interest.

## Conclusion

Because the Leisure Plan arrangement functioned as a vacation club granting use rights rather than a financing transaction creating a true debtor-creditor relationship, the Darrows’ payments were treated as nondeductible membership-type expenses, not deductible interest under § 163(a), and the Tax Court upheld the Commissioner’s deficiency.


Darrow v. Commissioner, 64 T.C. 217 (1975)