Petitioners claim that their payment of certain interest expenses entitles them to income tax deductions. The United States Tax Court (Howard A. Dawson, Jr., J.) disallowed the deductions and sustained the Commissioner’s claim of a deficiency in petitioners’ tax payments. We affirm the decision of the Tax Court as to the issues that were before it. We remand the case to the Tax Court for the limited purpose of altering the amount of the petitioners’ deficiency, as agreed to by the Commissioner.
BACKGROUND
The deductions at issue in this case arise out of an illegitimate tax shelter that has been the subject of previous tax litigation.
See Seykota v. Commissioner,
An “investor” seeking to participate in the tax shelter would borrow a sum of money and use it to buy gold. He would simultaneously enter into a futures contract to sell the gold at a specified later time for a slightly higher price. The price difference was to reflect the costs to the investor of acquiring and holding the gold, including the costs of storage, insurance, and, most importantly, interest on the initial loan. Thus, in real terms, the contract tried to guarantee that the investor would recoup exactly what he paid for the gold, neither more nor less. In the year that the investor borrowed the money, he would deduct the cost of interest and the other “carrying charges.” Those deductions were used to offset ordinary income from other sources. Later, when he sold the gold, the investor would report his profit as a capital gain. Between the deferral of income afforded by the deductions for interest and the lower rates of taxation applicable to capital gains, the investor could thus convert tax liabilities at rates of up to 70% payable in a given year to tax liabilities at rates as low as 28% payable in some later year.
The shelter was operated by an entity called Futures Trading, Inc. (“FTI”). Petitioner Dwight Lee was a partner in a group called Peng Partners, which participated in FTI’s shelter. The issue before us is whether that participation entitles petitioners to *586 the investment interest expense deductions they claimed.
DISCUSSION
Petitioners’ interest expenses derive from economically empty transactions for which interest expense deductions are not allowed.
See Knetsch v. United States,
“In determining whether an activity is engaged in for profit, greater weight is given to objective facts than to the taxpayer’s mere statement of intent.” 26 C.F.R. § l.lSS-^a).
1
See also Jacobson,
Whether a transaction lacks economic substance is a question of fact. Accordingly, we review the Tax Court’s finding on that question for clear error.
Jacobson,
Petitioners argue, however, that a recent development in the law of this circuit justifies the deductions they took. They rely on our statement, toward the end of the opinion in
Jacobson,
that “Even if the motive for a transaction is to avoid taxes, interest incurred therein may still be deductible if it relates to economically substantive indebtedness.”
Jacobson,
The strongest support for petitioner’s view comes from the Fourth Circuit’s opinion in
Rice’s Toyota World, Inc., v. Commissioner,
Rice’s Toyota
was cited by
Jacobson
for the well-established proposition that the presence of a tax-related motive for a transaction does not prevent interest expenses arising from that transaction from being deductible, so long as the debt is “economically substantive.”
Jacobson,
There is, however, a much more straightforward way of reading
Jacobson.
Most of the opinion in that case was dedicated to rejecting the Tax Court’s finding that, on the facts of the case, the underlying transactions lacked economic substance.
Jacobson,
In contrast, the statement in Jacobson upon which petitioner relies says nothing about situations where the underlying transaction is found to be empty. And, had the Jacobson court concluded that the underlying transaction in the case before it was devoid of economic substance, the question of whether the interest expenses at issue were deductible would have been answered in the negative without any need to inquire into the reality of the debt itself. So it is in the case before us.
There are compelling reasons to prefer this straightforward reading of Jacobson to the departure petitioner proposes. To adopt petitioner’s reading would be to permit every shelter, no matter how transparently sham, to qualify for an interest expense deduction as long as the money used to finance the not-for-profit transactions involved were borrowed from a lender — any commercial bank would do — that demanded repayment. That result, soundly criticized by the Third Circuit in
United States v. Wexler,
By letter dated August 11, 1998, however, counsel for the Commissioner of Internal Revenue admits to an error in the computation of petitioners’ tax liability. In the proceedings below, that liability was assessed at $17,420.00. The Commissioner now acknowledges that the actual amount of deficiency arising from these transactions should be only half that amount, namely, $8,710.00. We accept this correction.
We therefore affirm the decision of the Tax Court in all respects except as to the amount of petitioners’ deficiency, and we remand to the Tax Court for the limited purpose of correcting the amount of deficiency as agreed by the Commissioner.
Notes
. This rule, promulgated as a regulation under § 183, applies under § 163 as well.
See United States v. Wexler,