Tax Facts

6 / Can the rules that disallow a deduction for interest paid on a loan to purchase or carry a life insurance, endowment or annuity contract be avoided by having one spouse use funds borrowed by the other spouse?

Updated: October 20, 2026 at 02:54 PM
These disallowance rules cannot be avoided by having one spouse use funds borrowed by the other. When a husband borrowed money and transferred it to his wife, who used it to buy tax-exempt securities, the interest deduction was denied on the basis that the transfer of the borrowed funds was without economic substance because the purpose of the husband's borrowing was to enable the wife to buy tax-exempt securities.1





1.     Rev. Rul. 79-272, 1979-2 CB 124 (citing Drybrough v. Commissioner, 42 TC 1029 (1964)).

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