Opinion ID: 403845
Heading Depth: 3
Heading Rank: 2

Heading: Tax Court's Reliance On Franklin

Text: 10 Taxpayers contend that since there is no disparity between fair market value and purchase price, the tax court erred in applying Franklin, 544 F.2d at 1045. As discussed above, the evidence showed that a disparity existed. 11 In Franklin, id. at 1046, a limited partnership purchased a hotel and related property. The purchase was combined with a complicated sale and leaseback transaction where no cash would change hands between the vendor and the purchaser until balloon payments became due ten years after the sale, with the exception of a $75,000 prepaid interest payment. There was no personal liability on the debt and, at trial, the purchaser failed to demonstrate that the purchase price was at least approximately equivalent to the fair market value of the property. Id. at 1048-49. Thus, the transaction lacked economic substance and the limited partner was not entitled to his derivative share of depreciation and interest deductions. 12 It is of no consequence that Franklin denied deductions solely for prepaid interest while taxpayers here claimed deductions for both points and other prepaid interest; nor is it important that Franklin concerned a sale and leaseback while in the present case the transaction took the form of an outright sale. What is important for tax purposes is the economic substance, or lack thereof, of the challenged transaction. See id. at 1048 (failure to demonstrate that purchase price was at least approximately equivalent to fair market value of property is a fatal defect). We do not purport to rule on the validity of the transactions here with respect to areas other than tax law. We affirm the tax court's holding that these transactions had no substance under Franklin.