## Facts

- Jack E. Golsen and Sylvia H. Golsen filed a joint federal income tax return for 1962 and resided in Oklahoma City, Oklahoma.
- Jack Golsen was president of related corporations that had approximately $1.75 million in bank debt, all personally guaranteed by him, and he also owed $15,000 personally to a bank.
- To protect his family given these obligations and limited liquidity, Golsen sought substantial life insurance on his life naming Mrs. Golsen as beneficiary.
- Western Security Life Insurance Co. issued $1,000,000 of insurance consisting of twenty “executive special” policies, effective December 28, 1961.
- The program used coordinated steps in which Golsen purported to “borrow” policy cash values to fund most of the first-year premium and also “borrow” a larger amount to create a prepaid premium fund for several years of future premiums, while simultaneously paying stated “interest” in advance.
- On their 1962 return, the Golsens deducted $12,441.40 as interest paid to Western.
- The Commissioner disallowed the deduction and determined a $2,918.15 deficiency for 1962; the Golsens petitioned the Tax Court.

## Issues

1. Whether the $12,441.40 payment was deductible as “interest” under I.R.C. § 163(a) given the structure of the life-insurance “loan” and prepaid-premium arrangement.
2. Whether the Tax Court should follow the precedent of the court of appeals to which the case is appealable when that court has already decided the controlling legal issue (the “Golsen rule”).

## Decision

- The Tax Court sustained the deficiency and held the $12,441.40 payment was not deductible interest under § 163(a).
- The court treated the arrangement’s circular “borrowing” and premium funding as lacking genuine indebtedness and recharacterized the purported interest as part of the cost of insurance rather than a deductible interest expense.
- The Tax Court announced that, where the court of appeals that would review the case has established controlling precedent on the issue, the Tax Court will follow that precedent in deciding the case.

## Legal Principles

- For § 163(a), a payment labeled “interest” is deductible only if it is interest on bona fide indebtedness; courts may disregard form and evaluate economic substance.
- Where a life-insurance financing program uses circular loan-premium transactions that do not create real debtor-creditor substance, purported “interest” payments may be treated as nondeductible premium or insurance cost.
- In a Tax Court case, if the court of appeals to which an appeal would lie has established a controlling rule on the relevant issue, the Tax Court will apply that circuit’s precedent in that case, even if the Tax Court would otherwise reach a different result.

## Conclusion

The Tax Court denied the taxpayers’ claimed interest deduction arising from a structured life-insurance loan and prepaid-premium program, concluding the payment was not interest on genuine indebtedness under § 163(a), and it established the principle that the Tax Court will follow controlling precedent of the reviewing court of appeals in cases appealable to that circuit.


Golsen v. Commissioner, 54 T.C. 742 (1970)