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II. Deductibility of Accrued Interest on the Note
In general, section 163(a) allows a deduction for interest
paid or accrued. For the interest to be deductible, however, the
underlying debt must be genuine. Elliott v. Commissioner, 84
T.C. 227, 244-246 (1985), affd. without published opinion 782
F.2d 1027 (3d Cir. 1986). When a debt lacks economic reality and
is incurred solely to create an income tax deduction, it does not
support an interest deduction. Goldstein v. Commissioner, 364
F.2d 734, 740 (2d Cir. 1966), affg. 44 T.C. 284 (1965).
We have already found that the note lacks economic substance
and is not genuine indebtedness. We therefore conclude that
Corbin West is not entitled to interest deductions associated
with the note.3
III. The Fees Capitalized Into the Property's Basis
Corbin West paid CDC substantial fees related to the
property. These fees included the following: (1) An
"acquisition fee" of $157,500, (2) a "developer's fee" of
$87,213, and (3) a "tax credit guarantee fee" of $90,000. Corbin
West capitalized these fees into the basis of the property for
purposes of computing depreciation deductions and low-income
housing credits. In the FPAA's, respondent disallowed the
inclusion of these various fees in the property's basis.
Petitioner argues that (1) these fees are properly includable in
3 The interest deductions claimed by Corbin West were for
accrued interest on the note; no interest was ever paid on the
note during the years in issue.
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