Cecil H. Shirar and Jessie May Shirar v. Commissioner Internal Revenue Service

Cecil H. Shirar (“Shirar”) purchased a life insurance policy to obtain liquidity in the event of his wife’s death. Part of the coverage was financed with funds loaned by the insurer against the cash value of the policy. Shirar sought to deduct the interest on these loans under 26 U.S.C. § 163 (a). The Commissioner of Internal Revenue (“Commissioner”) disallowed the deductions and assessed a deficiency. The Tax Court agreed with the Commissioner and upheld the deficiency. We reverse.

FACTS AND PROCEEDINGS -

In 1978, Shirar and his wife, Jessie May, consulted with their accountant who estimated that at the death of the first to die, the Shirars’ estate tax liability would be approximately $700,000. Although the Shi-rars had sufficient assets to pay the estate taxes, they did not want their estates to be forced to liquidate these assets. Therefore, the Shirars decided to purchase life insurance policies to provide a ready source of cash.

In December 1978, Shirar. purchased a policy from the John Adams Life Insurance Company on the life of his wife, who was then 56 years old, and designated himself as the beneficiary. The policy consisted of two components: the “Initial Face…