- 138 -
you to testify to the true facts that you knew that you were at
risk for $137,500.00 and that you expected to earn 13% on your
investment which would be more than enough to pay your note".
The entire record shows that any such hopes and expectations
were without foundation.38
II. The Pettisanis Are Not Entitled to Deductions for Interest
Claimed on Their Long-Term Notes
In order for interest to be deductible under section 163(a),
the underlying indebtedness must be genuine. Knetsch v. United
States, 364 U.S. 361 (1960). The presence of deferred debt that
is not likely to be paid is an indication of a lack of economic
substance. Id.; Waddell v. Commissioner, 86 T.C. 848, 902
(1986), affd. per curiam 841 F.2d 264 (9th Cir. 1988); Estate of
Baron v. Commissioner, 83 T.C. 542, 552-553 (1984), affd. 798
F.2d 65 (2d Cir. 1986). Therefore, where a debt transaction is
not conducted at arm's length by two economically self-interested
parties, or where a debt is incurred in "peculiar circumstances"
indicating that it will not be paid, we have disregarded that
38The nonexclusive list of nine factors for determining the
presence or absence of a profit motive listed in sec. 1.183-2(b),
Income Tax Regs., has often been used for determining the
presence or absence of a business purpose in an alleged sham.
Hildebrand v. Commissioner, 28 F.3d 1024, 1027 (10th Cir. 1994),
affg. Krause v. Commissioner, 99 T.C. 132 (1992); Smith v.
Commissioner, 937 F.2d 1089, 1093 (6th Cir. 1991), revg. and
remanding 91 T.C. 733 (1988); Campbell v. Commissioner, 868 F.2d
833, 836 (6th Cir. 1989), affg. in part, revg. in part, and
remanding T.C. Memo. 1986-569. A detailed examination of these
factors would result in a decision against petitioners. Factor
(1) (manner in which taxpayer carries on the activity) in
particular weighs heavily against petitioners.
Page: Previous 128 129 130 131 132 133 134 135 136 137 138 139 140 141 142 143 144 145 146 147 NextLast modified: May 25, 2011