National Industrial Investors, Inc. - Page 22

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            recalculated under Rule 155.  Section 1016(a)(2)(A), which                                 
            requires basis to be adjusted for the depreciation "allowed",                              
            creates a problem in this case for the years in which petitioner                           
            has a net operating loss.  For those years, the other deductions                           
            modified herein and affecting petitioner's losses are to be                                
            deducted first, and then the amount of the depreciation allowed                            
            is to be determined.  Sec. 1.1016-3(e), Income Tax Regs.                                   
                  Except as regards the McMahon Note, respondent argues that                           
            petitioner failed to substantiate its interest expense.                                    
            Petitioner, however, has proven the beginning balances, the                                
            ending balances, and with a reasonable degree of certainty the                             
            interest rates of the TIAA Loan and the San Francisco Loan.  For                           
            purposes of the Rule 155 calculation, amortization tables,                                 
            showing payments made and the amount of allocable interest, can                            
            be derived from these numbers.                                                             
                  Unlike the TIAA Loan, however, the San Francisco Loan had a                          
            variable interest rate.  The interest on this loan is only in                              
            issue from March 4, 1988, through December 31, 1988.  The                                  
            interest rate was fixed at 9.5 percent until September 1, 1988.                            
            The monthly payments on the loan for the entire period were fixed                          
            at $3,994.06.  A San Francisco Federal Savings loan statement of                           
            December 12, 1988, reflects a loan balance as of that date of                              
            $473,573.08.  If the parties are unable to compute the interest                            
            on the San Francisco loan for the March 4 to December 31, 1988,                            

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