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OPINION
I. Inclusion of the Note in the Property's Basis
It is well established that the economic substance of a
transaction, rather than its form, controls for Federal tax
purposes. Gregory v. Helvering, 293 U.S. 465 (1935). Respondent
argues that the note lacks economic substance; therefore, Corbin
West cannot include the note in the property's basis for purposes
of computing depreciation deductions or low-income housing
credits.
Generally, the basis for computing depreciation and the low-
income housing credit is the cost of the underlying property.
See secs. 42, 167(c), 1011, 1012. "Cost" is the amount paid for
the property in cash or other property. Sec. 1.1012-1(a), Income
Tax Regs. A promissory note is generally included in that cost.
Crane v. Commissioner, 331 U.S. 1 (1947); see Commissioner v.
Tufts, 461 U.S. 300 (1983); Estate of Franklin v. Commissioner,
544 F.2d 1045 (9th Cir. 1976), affg. 64 T.C. 752 (1975). To be
included in the cost of the property, the promissory note must
reflect a genuine debt. See Estate of Franklin v. Commissioner,
supra at 1049; Odend'hal v. Commissioner, 80 T.C. 588, 604-605
(1983), affd. on this issue and remanded 748 F.2d 908 (4th Cir.
1984).
Recourse notes are normally included in basis because the
taxpayer has a fixed, unconditional obligation to pay, with
interest, a specified sum of money. See Waddell v. Commissioner,
86 T.C. 848, 898 (1986), affd. per curiam 841 F.2d 264 (9th Cir.
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Last modified: May 25, 2011