Knetsch v. United States

Holding

Interest paid on a sham annuity-loan arrangement that lacks economic substance is not deductible.

Facts

Knetsch borrowed against deferred-annuity contracts in a circular arrangement intended primarily to generate interest deductions without any meaningful economic effect.

Reasoning

Justice Brennan held that interest paid in a transaction lacking economic substance is not deductible regardless of the literal interest character. The case is a foundational economic-substance doctrine precedent.