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the respondent has rewritten the mortgage obligation to
suit her convenience. It is axiomatic that state law
is to be applied in determining whether an obligation
is legally enforceable between the parties to the
contract. This doesn't mean, of course, that state law
will control the federal income tax consequences of a
particular obligation, but what it does mean is that
the federal tax laws cannot change that obligation.
Respondent apparently believes that, because 50% of the
interest payments are deductible, the remaining 50% of
the interest payments made to the mortgagee are really
principal payments.
There is no suggestion that the partnership's
mortgage note was unenforceable under state law. It
was a valid mortgage in which interest payments were
due according to its terms -- a 37 year period, 11%
interest and interest only for the first 17-year
period. The mortgage also provided for amortization of
principal, but beginning after the 17th year of the
mortgage term.
* * * * * * *
In the instant case, * * * the payments of
interest to the mortgagee cannot be transformed into a
payment of principal. [Citations omitted.]
In summary, under petitioner’s calculation, the $2,370,000
principal indebtedness on the Partnership’s promissory note that
is to be recognized herein would not be amortized. That
$2,370,000 principal indebtedness would remain the same
throughout 1983 and 1984, and throughout the entire 17-year
initial term of the indebtedness. Therefore, under petitioner’s
calculation, the proper interest deduction allowable for 1983 and
1984 (and for each of the other 17 years of the initial term of
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