- 11 -
applying to the amount of interest originally claimed the
percentage of the stated principal amount of the indebtedness
that was to be recognized for tax purposes. This is essentially
the same percentage-formula argument that petitioner herein makes
with regard to the calculation of the economic accrual of
interest on the principal portion of the Partnership’s
indebtedness that is to be recognized.
In Prussin v. Commissioner, supra, we rejected the
taxpayers’ use of a simple percentage formula to calculate the
proper interest deduction on the portion of the taxpayers’
indebtedness that was to be recognized. Instead, disregarding
the terms of various loan documents, which required lump-sum
payments of interest only, we looked to the economic reality of
the transaction and applied an “effective economic interest rate”
of 9 percent.
Having considered the arguments of the parties and the above
authorities, we agree with respondent. The schedule in Levy v.
Commissioner, 92 T.C. at 1360, setting forth the economic accrual
of interest was intended as illustrative and was based on the
total stated purchase price for the buildings involved in this
case and the $4,770,000 total stated principal indebtedness on
the Partnership’s promissory note. That opinion only involved
the use of the Rule-of-78's method of accruing interest versus
the economic accrual method of accruing interest on long-term
indebtedness. The value of the buildings and the genuineness of
Page: Previous 1 2 3 4 5 6 7 8 9 10 11 12 13 Next
Last modified: May 25, 2011