consider the rationale of the decided cases represented by Knetsch v. United States, 364 U.S. 361 (1960), and its progeny. See, e.g., Salley v. Commissioner, 55 T.C. 896 (1971), affd. 464 F.2d 479 (5th Cir. 1972); Golsen v. Commissioner, 54 T.C. 742 (1970), affd. 445 F.2d 985 (10th Cir. 1971). In point of fact, there is no indication that Mary F. Minnis was borrowing against the annuity contract as a means of receiving tax-free cash compensation from her employer. Rather, the evidence shows that she borrowed from the insurance company rather than from a bank because such borrowing carried a lower interest rate and that she intended to, and did, pay back the loan within a short period of time.

Section 72(e) provides:

(e) AMOUNTS Not Received as ANNUITIES.—

(1) General ruLE.-If any amount is received under an annuity, endowment, or life insurance contract, if such amount is not received as an annuity, and if no other provision of this subtitle applies, then such amount

(A) if received on or after the annuity starting date,(3) shall be included in gross income; or

(B) if subparagraph (A) does not apply, shall be included in gross income, but only to the extent that it (when added to amounts previously received under the contract which were excludable from gross income under this subtitle or prior income tax laws) exceeds the aggregate premiums or other consideration paid.[4]

For purposes of this section, any amount received which is in the nature of a dividend or similar distribution shall be treated as an amount not received as an annuity.

(2) Special rules for applicaTION OF PARAGRAPH (1).—For purposes of paragraph (1), the following shall be treated as amounts not received as an annuity:

(A) any amount received, whether in a single sum or otherwise, under a contract in full discharge of the obligation under the contract which is in the nature of a refund of the consideration paid for the contract; and (B) any amount received under a contract on its surrender, redemption, or maturity.

Since the loan was received before the annuity starting date, sec. 72(e)(1)(A) is not applicable. "The "consideration paid" is defined by sec. 72(f), which provides, in relevant part:

(f) SPECIAL RULES FOR COMPUTING EMPLOYEES' CONTRIBUTIONS.-In computing for purposes of subsection (e)(1)(B), the aggregate premiums or other consideration paid, amounts contributed by the employer shall be included, but only to the extent that—

(1) such amounts were includible in the gross income of the employee under this subtitle or prior income tax laws; or

(2) if such amounts had been paid directly to the employee at the time they were contributed, they would not have been includible in the gross income of the employee under the law applicable at the time of such contribution.

In the case of any amount to which the preceding sentence applies, the rule of paragraph (1)(B) shall apply (and the rule of paragraph (1)(A) shall not apply).

It is true that a policy loan differs in some respects from an ordinary loan. The issuer of the policy generally has no discretion as to whether to grant a policy loan and the policyholder has no obligation to repay the loan by a set date. If the policyholder fails to repay the loan, the proceeds payable upon maturity of the policy are reduced accordingly. In this sense, the loan is actually an advance payment and, in some contexts, courts have held that a policy loan does not create a debtor-creditor relationship. See, e.g., Orleans Parish v. N.Y. Life Ins. Co., 216 U.S. 517 (1910) (existence of "property" for purposes of State taxation of the insurance company); United States v. Miroff, 353 F.2d 481 (7th Cir. 1965), and United States v. Sullivan, 333 F.2d 100 (3d Cir. 1964) (both involving the existence of a sufficient interest for purposes of a tax lien).5

However, for the purposes of determining a taxpayer's Federal income tax liability, policy loans have generally been regarded as a valid form of indebtedness. Despite the insurance company's lack of recourse against the borrower, this Court has repeatedly recognized that interest paid on a policy loan is deductible as interest on indebtedness under section 163. Salley v. Commissioner, 55 T.C. at 903; Kay v. Commissioner, 44 T.C. 660, 672 (1965); Dean v. Commissioner, 35 T.C. 1083, 1085 (1961); Emmons v. Commissioner, 31 T.C. 26, 30 (1958), affd. sub nom. Weller v. Commissioner, 270 F.2d 294 (3d Cir. 1959). See also Coors v. United States, 215 Ct. Cl. 840, 572 F.2d 826 (1978). But see Carpenter v. Commissioner, 322 F.2d 733, 735 (3d Cir. 1963), affg. a Memorandum Opinion of this Court, a case which involved a transaction considered to be without economic substance under the rationale of Knetsch v. United States, supra.

Furthermore, the legislative history of section 264, which disallows under certain limited conditions an interest deduction for indebtedness incurred to carry life insurance policies, endowment contracts, or annuity contracts, contains explicit acknowl

"It is interesting to note that in both United States v. Miroff, 353 F.2d 481 (7th Cir. 1965), and United States v. Sullivan, 333 F.2d 100 (3d Cir. 1964), the Government took the position, diametrically opposed to that taken by respondent herein, that a debtor-creditor relationship existed between the policyholder and the insurance company with the policy simply collateral for the loan from the cash surrender value.

edgement that, in general, policy loans are debts for purposes of the interest deduction. H. Rept. 749, 88th Cong., 1st Sess. 61-62 (1963), 1964-1 C.B. (Part 2) 125, 185-186; S. Rept. 830, 88th Cong., 2d Sess. 77-79 (1964), 1964-1 C.B. (Part 2) 505, 581–583.6 To be sure, the policy loan herein falls within the literal language of section 72(e)(1) as an “amount * * * received under an annuity *** contract, if such amount is not received as annuity." See p. 1053 supra. But against this literal language stand the provisions of section 72(e)(2), which define "amounts not received as an annuity" in terms of situations where the annuity contract is terminated through a "refund of the consideration paid" and "on its surrender, redemption, or maturity." See p. 1053 supra. Clearly, a loan from the cash surrender value does not constitute a termination of the annuity contract or otherwise fall within these definitional terms.

Nor has respondent indicated any statutory language, either in subsection 72(e)(1)(B), section 264, or any other section, from which a distinction can be drawn between policy loans against employee annuity contracts and other policy loans. Yet, we are convinced that Congress considered policy loans to be a valid form of borrowing, except under the circumstances described in section 264, and not a form of income. See H. Rept. 749, supra; S. Rept. 830, supra.?

Finally, we think it appropriate for us to recognize that the transaction involved herein constituted a loan in ordinary par

"In enacting sec. 264, Congress did not consider the possible advantages to an employee of receiving an annuity contract purchased by his employer without being taxed on the premiums and then borrowing against that contract. Congress was concerned with loans used to create interest deductions while maintaining policies which increase in value without being currently taxed. See H. Rept. 749, 88th Cong., 1st Sess. 61-62 (1963), 1964–1 C.B. (Part 2) 125, 185-186; S. Rept. 830, 88th Cong., 2d Sess. 77-79 (1964), 1964-1 C.B. (Part 2) 505, 581-583; H. Rept. 1337, 83d Cong., 2d Sess. 31-32 (1954); S. Rept. 1622, 83d Cong., 2d Sess. 38 (1954); H. Rept. 2332, 77th Cong., 2d Sess. 47 (1942), 1942–2 C.B. 372, 410. However, Congress' general view of policy loans, revealed in the legislative history of sec. 264, is relevant herein.

"H. Rept. 749, 88th Cong., 1st Sess. 61-62 (1963), 1964-1 C.B. (Part 2) 125, 185–186 states:

"Your committee recognizes, however, the importance of being able to borrow on insurance policies; and, therefore, while adopting a provision designed at minimizing the sale of insurance as a taxsaving device, it has been careful in this provision to provide for the retention of rights to borrow on insurance for other than tax-saving purposes without the loss of the interest deduction."

"Your committee desired to be sure that the value of insurance generally would not be decreased by reducing the rights of the individual to borrow on the insurance, as he can in the case of other forms of assets.

(Emphasis added.)

See also S. Rept. 830, n. 6 supra.

lance. In this context, the comment of the Supreme Court that "Common understanding and experience are the touchstones for the interpretation of the revenue laws" (see Helvering v. Horst, 311 U.S. 112, 117–118 (1940)) is highly relevant. See Primuth v. Commissioner, 54 T.C. 374, 381-382 (1970) (concurring opinion). This is particularly true when one recognizes that loans have traditionally not been considered taxable income, even when the source of repayment is limited to particular property and involves no personal liability. See Falkoff v. Commissioner, 62 T.C. 200, 206 (1974); 1 J. Mertens, Law of Federal Income Taxation, sec. 5.12 (1974), and cases collected therein.

We recognize that there is some potential for abuse of policy loans, under section 403(b) employee annuity contracts, by an employee attempting to obtain indirectly, through the interposition of an annuity contract, funds provided as compensation by his employer, without being taxed thereon. Where Congress has considered the risk of abuse to be sufficiently great, it has, by amendment to the same general Code section herein involved (sec. 72), distinguished particular types of policy loans which are to be considered as amounts constructively received under an annuity contract. See section 72(m)(4)(B) (Pub. L. 87-792, sec. 4, effective Jan. 1, 1963), relating to receipt of policy loans by owner-employees under contracts purchased by a trust described in section 401(a) or as part of a plan described in section 403(a). But, in the absence of a similar provision relating to loans against section 403(b) employee annuity contracts, we can find no basis in the statute or its legislative history which would enable us to isolate those policy loans and to tax them in a unique manner. See and compare Jarecki v. G. D. Searle & Co., 367 U.S. 303, 310-311 (1961).

Moreover, in respect of respondent's concern that the proceeds of such a policy loan will escape tax if the receipt of the loan is not the taxable event, we note that there may be another point of time at which a tax might properly be imposed. Any policy loan which is unpaid when the annuity contract matures is charged against the available proceeds at that time (see Rev. Rul. 67-258, supra). Such a satisfaction of the loan would in effect be a pro tanto payment of the proceeds of the policy to the policyholder and could well be considered as taxable income at that time to the extent that it exceeds the "consideration paid." See n. 4 supra. The question of such treatment is not before us in

this case and, consequently, we leave the actual disposition of such an issue to another day.

We recognize that our reasoning and the conclusion which flows therefrom are contrary to Rev. Rul. 67-258, supra. But it has long been held that the courts are not bound by revenue rulings since, as we stated in Estate of Lang v. Commissioner, 64 T.C. 404, 407 (1975), on appeal (9th Cir., Jan. 6, 1976), they are "simply the contention of one of the parties to the litigation, and *** entitled to no greater weight." See Stubbs, Overbeck & Associates v. United States, 445 F.2d 1142, 1146-1147 (5th Cir. 1971).8

Although the issue is not free from doubt, we hold that a policy loan is not "an amount received under the contract" within the meaning of section 72(e)(1)(B) and that there is no statutory basis for distinguishing policy loans against employee annuity contracts qualified under section 403(b) from other policy loans for the purpose of applying section 72(e)(1)(B).

Decision will be entered for the petitioners.

TEOFILO AND FRANCES EVANGELISTA, PETITIONERS V.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Teofilo Evangelista (petitioner) in July 1972 borrowed $106,000 and used $102,670 of the proceeds to purchase 33 vehicles which were under lease to the Government. Petitioner was personally liable on the indebtedness which was secured by the 33 vehicles. Petitioner deducted depreciation totaling $68,466.66 on the vehicles on a double declining balance method for the period July 1972 to July 3, 1973, which left him a basis of $28,400.02 in the 33 vehicles on July 3, 1973. On that date, the balance due on petitioner's indebtedness which was secured by the 33 vehicles was

"It is not without significance that Rev. Rul. 67-258 was not issued until several years after Congress had enacted sec. 72(m) specifically making taxable loans received by owner-employees. See p. 1055 supra. In this context, it appears that respondent has sought to expand a limited statutory provision into one of general application. See also Rev. Rul. 69-421, 1969-2 C.B. 59, 77–78 (applying principle of Rev. Rul. 67-258 to loans from employee pension, annuity, profit-sharing, and stock bonus plans). If Rev. Rul. 67-258 is a correct interpretation of the law, it presumably would have been so since sec. 72(e) was enacted in the original Internal Revenue Code of 1954. Under such circumstances, the subsequent enactment of sec. 72(m) was unnecessary, i.e., mere surplusage. Compare Julia R. & Estelle L. Foundation v. Commissioner, 70 T.C. 1, 9 (1978), on appeal (2d Cir., Sept. 22, 1978).