The Story of Knetsch: Judicial Doctrines Combating Tax Avoidance
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Description
“I shall not attempt further today to define [it] . . . . and perhaps I should never succeed in intelligibly doing so. But I know it when I see it.” Perhaps inevitably, Justice Stewart’s famous statement about pornography has indeed been cited in the context of defining impermissible tax avoidance—and with approval notwithstanding its requiring the exercise of “intuitive judicial judgment” that may be unpredictable in advance. No case looms larger as a cornerstone of the doctrine defining impermissible tax avoidance than Knetsch v. United States. In this case, an individual, with the help (and at the solicitation) of the Sam Houston Life Insurance Company, set up a circle of cash on December 11, 1953, whereby he purported to borrow $4 million from the company at 3.5% interest rate so that he could invest this money, with the same company, in deferred annuity bonds that offered only a 2.5% return. He thereby arranged to earn about $100,000 per year at a cost of about $140,000 per year. On balance, therefore, he could expect to pay Sam Houston about $40,000 per year while the transaction lasted, along with a $4,000 upfront fee, for the privilege of getting it to pay all that money.
Source Publication
Tax Stories: An In-Depth Look at Ten Leading Federal Income Tax Cases
Source Editors/Authors
Paul L. Caron
Publication Date
2003
Recommended Citation
Shaviro, Daniel N., "The Story of Knetsch: Judicial Doctrines Combating Tax Avoidance" (2003). Faculty Chapters. 1757.
https://gretchen.law.nyu.edu/fac-chapt/1757
