## Facts

- J. Simpson Dean and Paulina duPont Dean were husband and wife and the controlling shareholders of Nemours Corporation, a closely held family holding company.
- The Commissioner determined income tax deficiencies for 1955 and 1956 based initially on a dispute over the deductibility of interest paid on loans against life insurance policies after the policies were irrevocably assigned to trusts for the Deans’ children.
- In an amended answer, the Commissioner sought increased deficiencies, alleging the Deans realized taxable income from the economic benefit of using funds borrowed interest-free from Nemours.
- The Deans had borrowed more than $2 million from Nemours on non-interest-bearing notes.
- The Commissioner asserted that if the Deans had borrowed from other sources they would have paid interest of $65,648.79 (1955) and $97,931.71 (1956), and treated those avoided interest amounts as taxable income.
- The case was submitted to the Tax Court on stipulated facts.

## Issues

1. Whether the Deans could deduct as “interest” amounts paid on loans against life insurance policies after the policies had been irrevocably assigned to trusts for their children.
2. Whether the Deans realized gross income under I.R.C. § 61 from the economic benefit of interest-free loans from a corporation they controlled, measured by imputed market interest.

## Decision

- The Tax Court rejected the Commissioner’s attempt to increase deficiencies based on imputed interest from the interest-free Nemours loans.
- The court held that an interest-free loan, without more, produces no taxable income to the borrower.
- The court entered decision under Rule 50.
- A concurrence agreed with the result but warned against reading the holding as a universal rule for all interest-free loan arrangements.
- A dissent would have treated the interest-free borrowing as a taxable economic benefit, particularly given the borrowers’ control of the corporate lender.

## Legal Principles

- Gross income under I.R.C. § 61 does not include an imputed interest amount attributable solely to a bona fide interest-free loan absent a statutory basis for taxing avoided interest.
- Taxing borrowers on hypothetical interest while interest paid would ordinarily be deductible highlights the mismatch created by an imputed-interest inclusion theory on these facts.
- The rent-free use of tangible property can be taxable, but the interest-free use of borrowed money is not treated the same way under the court’s analysis.
- The “economic benefit” concept alone was insufficient to justify including avoided interest in gross income in the absence of specific Code authorization.

## Conclusion

The Tax Court held that the Deans did not realize taxable income from interest-free loans from their controlled corporation because the Code did not authorize taxing the borrower on avoided interest, and the Commissioner’s imputed-interest theory was rejected on the stipulated facts.


Dean v. Commissioner, 35 T.C. 1083 (1961)