- 10 -
would have the financial ability to pay off the note and the
interest thereon when due.2
In determining the likelihood of repayment of the note, we
also focus on the nature of the dealings between the parties.
See Rose v. Commissioner, supra at 415-416, 423. The NBHA was
chosen by Corbin West to execute its bargain sale plan. The NBHA
was not a negotiating party in the transaction. There is no
evidence that the NBHA made any independent analysis concerning
the fair market value of the property or the likelihood of
repayment of the note by Corbin West. The NBHA had nothing at
risk in the transaction because Financial gave the NBHA a hold
harmless agreement. The NBHA received the note for allowing
itself to be used by Corbin West and Norman in their attempt to
ensure advantageous tax positions.
Although the subjective intent of the parties to create a
genuine debt is not controlling, we note that the NBHA did not
treat the note as genuine debt. See Graf v. Commissioner, 80
T.C. 944, 952 (1983); Bridges v. Commissioner, supra at 1077; Roe
2 Petitioner provided expert testimony that the note could
be paid off at the end of its term (22 years) because it
anticipated 6-percent annual appreciation on the property. Barry
J. Cunningham, petitioner's expert, testified that at the end of
the note's term the property would be worth approximately $11
million. He also testified that at that time the first and
second mortgages and the note could be paid off with
approximately $9 million.
Mr. Cunningham, however, did not consider the loans from the
general partner or the loans and capital contributions from the
limited partners. Petitioner has not shown that the amount
remaining after satisfaction of the first and second mortgages
and the obligations to the partners would be sufficient to pay
off the note.
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