## Facts

- Winn-Dixie implemented a corporate-owned life insurance (COLI) program in 1993 covering nearly all full-time employees (over 36,000) and named itself the sole beneficiary.
- The company purchased whole-life policies and borrowed heavily against the policies’ cash values at interest rates exceeding 11%, incurring significant loan interest and administrative fees.
- In pre-tax terms, the program generated losses because interest and fees outweighed the policies’ net cash surrender value and benefits paid.
- Internal projections showed the arrangement was expected to be profitable only through tax savings from interest and fee deductions, with projected tax benefits reaching billions over decades.
- Internal documents described the program’s aim as satisfying the company’s “appetite” for interest deductions.
- Winn-Dixie claimed deductions for 1993 for interest and related fees on the policy loans; the IRS disallowed the deductions and determined a deficiency.
- Winn-Dixie exited the program after subsequent federal tax-law changes reduced the expected tax benefits.

## Issues

1. Whether interest and fee payments on loans against COLI policies were deductible under the Internal Revenue Code.
2. Whether the COLI program had sufficient economic substance and business purpose to be respected for tax purposes, or instead constituted a sham transaction.

## Decision

- The Eleventh Circuit affirmed the Tax Court’s judgment sustaining the IRS deficiency.
- The court held the COLI policy-loan arrangement lacked economic substance and constituted a sham.
- Because the underlying loans were substantive shams, Winn-Dixie could not deduct the related interest and administrative fees for 1993.

## Legal Principles

- Deductions for interest under I.R.C. § 163 may be denied when the purported indebtedness is part of a transaction lacking economic substance and business purpose.
- A transaction that predictably produces pre-tax losses and is expected to yield gains only through tax deductions can be disregarded as a sham.
- Formal compliance with statutory text does not protect deductions when the transaction’s only meaningful effect is tax reduction.
- General statutory provisions, and even provisions addressing policy-loan interest limitations, do not amount to congressional authorization for deductions arising from sham arrangements.

## Conclusion

The Eleventh Circuit treated Winn-Dixie’s broad-based COLI policy-loan program as a sham because it was designed to lose money before taxes and generate value only through interest and fee deductions, so the claimed deductions were properly disallowed.


Winn-Dixie Stores, Inc. v. Commissioner, 254 F.3d 1313 (11th Cir. 2001)