- 6 -
signed, the partnership renegotiated the provisions of the sale
with the Institution of Mercy. The purchase price remained at $9
million but cash to be paid at closing was reduced from $2
million to $400,000, and the $6 million note and mortgage were
correspondingly increased to $7.6 million. On December 30, 1985,
the Institution of Mercy conveyed the property to the partnership
for $9 million under the following terms: $80,000 deposit paid
December 1985; $10,000 additional deposit paid December 1985;
$310,000 paid December 30, 1985; $1 million note and mortgage
secured by the convent property; and $7.6 million note secured by
the remaining unimproved property. The $7.6 million note and
mortgage was nonrecourse and had an interest rate equal to the
greater of 10 percent or 2 percent plus the prime commercial rate
of the Bank of New York. The $1 million note and mortgage was
nonrecourse, had no stated interest rate, and was subordinate to
all mortgages which existed at the closing or arose thereafter.
Payment of the $1 million note was due December 30, 1988.
As of the date of trial in Mount Mercy Associates v.
Commissioner, supra, the mortgage note secured by the covenant
property was not paid, even though all other obligations
concerning the transactions were fully executed.
This Court found that the donation to the Institution of
Mercy lacked economic substance and held that the partnership was
not entitled to charitable deductions for 1985 and 1986. Mount
Mercy Associates v. Commissioner, supra. We found that the
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