## Facts

- Tillie Goldstein received Irish Sweepstakes winnings of $140,218.75 in 1958, creating a large one-time increase in taxable income on a cash-basis joint return filed with her husband.
- Apart from the sweepstakes winnings, the couple had minimal income in 1958 (a small pension and nominal bank-account interest).
- Petitioners’ son, a CPA, arranged a late-December plan intended to invest the winnings while reducing 1958 tax liability.
- Under the plan, Goldstein borrowed $465,000 from a bank through a broker-assisted collateral-loan arrangement.
- The borrowed funds were used to acquire securities that were pledged as collateral, with steps structured as a prearranged, integrated series of transactions producing large interest charges over a short period.
- Petitioners claimed $81,396.61 as “interest paid ... on indebtedness” deductible under I.R.C. § 163(a).
- The Commissioner disallowed the deduction; the Tax Court sustained the disallowance, and petitioners appealed.

## Issues

1. Whether payments labeled “interest” were deductible under I.R.C. § 163(a) when the borrowing and related transactions were designed primarily to generate a tax deduction rather than a realistic pre-tax profit.
2. Whether the purported loan created “indebtedness” for § 163(a) purposes when the transaction, viewed as a whole, lacked economic substance.

## Decision

- The Second Circuit affirmed the Tax Court’s decision disallowing the $81,396.61 interest deduction.
- The court held that the borrowing arrangement, considered as an integrated plan, lacked economic substance and had no meaningful purpose apart from producing a tax benefit.
- Because the transaction did not create genuine indebtedness in a substantive sense, the related payments were not deductible “interest” within § 163(a).

## Legal Principles

- A deduction under I.R.C. § 163(a) requires interest paid on bona fide indebtedness arising from a transaction with real economic substance.
- Courts may disregard the form of a prearranged, integrated set of steps when “any realistic view” shows the arrangement is economically insubstantial and tax-driven.
- Literal compliance with labels and documents (e.g., “loan” and “interest”) does not control when the transaction’s only practical effect is to manufacture deductions without a realistic expectation of pre-tax economic gain.

## Conclusion

The court denied the claimed interest deduction because the borrowing-and-investment plan was an integrated, artificial arrangement lacking economic substance; therefore, the payments were not “interest on indebtedness” deductible under § 163(a).


Goldstein v. Comm’r, 364 F.2d 734 (2d Cir. 1966)