364 U.S. 361 (1960)
Knetsch v. United States is a cornerstone of the federal income tax law's economic substance and sham-transaction doctrines.
Are payments labeled as interest on loans incurred to fund an annuity transaction deductible under the Internal Revenue Code when the overall arrangement lacks economic substance and produces no realistic non-tax benefit to the taxpayer?
Interest is deductible only if paid on genuine indebtedness arising from a transaction with economic substance. Transactions that are shams—i.e., that do not appreciably affect the taxpayer's beneficial economic interests except to generate tax deductions—are disregarded for federal tax purposes. Labels and formal compliance do not control; the substance and practical effect of the arrangement govern. See generally the substance-over-form principle exemplified by Gregory v. Helvering and applied here to interest deductions under §23(b) (now §163(a)).
No. The Supreme Court held that the arrangement was a sham lacking economic substance, and therefore the payments labeled as interest were not deductible as interest on indebtedness.
Knetsch is a foundational case for the economic substance and sham-transaction doctrines, especially as applied to interest deductions. It teaches that courts will collapse formal steps and deny tax benefits where transactions lack real economic effect or profit potential. For law students, Knetsch illustrates how substance-over-form analysis operates: identify the taxpayer's actual economic position before and after, assess whether there is genuine indebtedness, and determine whether any meaningful non-tax consequences exist. The case also frames the analytical path used in modern anti-abuse cases and informs contemporary application of §163(a) (interest deductions) and the later codified economic substance doctrine in §7701(o).