Law School Case Brief
Estate of Franklin v. Commissioner - 544 F.2d 1045 (9th Cir. 1976)
Taxpayers bear the burden of presenting evidence that the purchase price of property did not exceed its fair market value.
Petitioners challenged a decision of the United States Tax Court disallowing deductions for their distributive share of partnership losses with respect to the acquisition of property because the transaction amounted to the acquisition of an option to buy exercisable in the future. Petitioners argued that they were entitled to their share of interest and depreciation deductions for property acquired by their partnership. Respondent argued that the deductions should not be allowed because the transaction in question was not a sale and that, at best, it constituted an option to buy.
Did the Commissioner err in disallowing the tax deductions for the taxpayers' distributive share of losses reported by a limited partnership?
The court found that petitioners did not show that their purchase price was approximately equivalent to the property's fair market value and also found it irrelevant that petitioners in good faith believed the values were equivalent. The court found that the purchase price was so much greater than the fair market value that the debt had no significance unless the property appreciated in value before the final payment was due. It is fundamental that depreciation is not predicated upon ownership of property but rather upon an investment in property. No such investment exists when payments of the purchase price in accordance with the design of the parties yield no equity to the purchaser. In the transaction in this case and during the taxable years in question the purchase price payments were not shown to constitute an investment in the property. Depreciation was properly disallowed. The court noted that the mere chance of a genuine debt obligation was not enough to justify interest and depreciation deductions.
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