Alan B. Karme and Laila M. Karme v. Commissioner of Internal Revenue

This is an appeal from a decision of the tax court that a $60,000 payment by the Appellants, Alan B. and Laila M. Karme, was not deductible under I.R.C. § 163, 26 U.S.C. § 163 , as interest paid on an indebtedness because there was no genuine indebtedness. The transactions out of which the claimed interest deduction arose involved the movement of funds through a number of domestic and foreign corporations whose operations had come under scrutiny by the IRS in a series of investigations known as the “Bahamas Project.” We affirm.

I. Discriminatory Investigation

The initial issue raised by the Karmes is whether the tax court properly granted the government’s motion to strike a post-trial amendment to the taxpayers’ petition. The amendment alleged that the deficiency assessment against the Karmes arose out of an investigation of their attorney, and that the government had therefore unconstitutionally “singled out” the Karmes for audit solely because of their connection with the tax planning of that attorney. As the special trial judge below noted, the attorney, Mr. Margolis, had “masterminded the tax planning” in each of the several cases then pending in which a similar defense was…