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Partnership of the Rule-of-78's to calculate the accrual of
interest with respect to the Partnership's indebtedness on the
promissory note. We concluded that the Partnership was required
to calculate the accrual of interest using the economic accrual
of interest.
In Levy v. Commissioner, T.C. Memo. 1991-646, we concluded
further that only $2,370,000, or approximately 50 percent, of the
$4,770,000 stated principal amount of the above-referred-to
promissory note reflected genuine indebtedness that would be
recognized for Federal income tax purposes. We explained as
follows:
Accordingly, after the cash downpayment paid by
* * * [the Partnership] in the amount of $530,000 is
recognized, the mortgage note indebtedness of * * *
[the Partnership] is treated as having economic
substance only to the extent of $2,370,000 ($2.9
million less $530,000). Interest deductions are
allowed to * * * [the Partnership] only to the extent
they relate to the portion of the mortgage note
indebtedness that is recognized herein and only on the
basis of the economic accrual of interest.
In light of the above holding and conclusion, respondent
allowed as an interest deduction only that portion of each
$43,725 monthly payment that properly represents interest
relating to the $2,370,000 principal portion of the $4,770,000
stated indebtedness on the promissory note that was recognized
for Federal income tax purposes. Because the monthly payments of
$43,725 actually exceed the allowable interest deduction
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