91 T.C. 1101 (1988), 8389-87, Prabel v. C.I.R.
|Citation:||91 T.C. 1101|
|Opinion Judge:||SWIFT, JUDGE:|
|Party Name:||BRUCE A. PRABEL AND MARIANNE S. PRABEL, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent|
|Attorney:||John A. Craig and Robert D. Whoriskey, for the petitioners. Alan E. Cobb, for the respondent.|
|Case Date:||December 29, 1988|
|Court:||United States Tax Court|
Petitioners invested in a real estate investment partnership that calculated accrued interest deductions relating to a long-term partnership loan on the basis of the ‘ Rule of 78's.‘
Held: (1) On the undisputed facts of this case, the use of the Rule-of-78's method of calculating accrued interest deductions relating to the long-term partnership loan does not result in a clear reflection of partnership income; (2) respondent's determination under sec. 446(b), I.R.C. of 1954, as amended, is sustained, and the partnership must calculate its accrued interest deductions relating to the long-term loan on the basis of the economic accrual of interest; (3) respondent's determination does not constitute an improper retroactive application of Rev. Rul. 83-84, 1983-1 C.B. 97. Respondent's motion for summary judgment will be granted, and petitioners' cross motion for summary judgment will be denied.
This matter is before the Court on the parties' cross motions for summary judgment filed under Rule 121.  Each party objects to the other party's motion on the merits. Petitioners further object to respondent's motion for summary judgment on the ground that there remain unresolved material issues of fact that would have to be decided before respondent's motion for summary judgment can be granted.
The cross motions for summary judgment raise the following primary issues: (1) Whether a partnership's use of the Rule-of-78's method of accruing interest deductions relating to a long-term real estate loan does not clearly reflect income; and (2) whether respondent may exercise his authority under section 446(b) to change the partnership's method of accruing interest on the loan.
This is a test case concerning the use of the Rule-of-78's method of accruing interest deductions for tax purposes. Petitioners believe that this method is permissible under the all-events test of section 461. Respondent believes that such method, when applied to long-term loans, results in a material distortion of income and that he has authority under section 446 to require the use of the economic-accrual method of accruing interest deductions relating to such loans. The factual matter set forth in this case is based on undisputed facts and exhibits submitted to us in support of the parties' cross motions for summary judgment.
Petitioners Bruce A. Prabel and Marianne S. Prabel are individuals who resided in Chadds Ford, Pennsylvania, at the time they filed their petition. Petitioners are cash basis taxpayers who report their income for tax purposes on a calendar year basis. They filed their Federal income tax returns for 1980, 1981, and 1982 with respondent at Philadelphia, Pennsylvania. Marianne S. Prabel is a party to this action by virtue of having filed joint returns for the years at issue. References to ‘ petitioner‘ in the singular are to Bruce A. Prabel.
In late 1980, a partnership named Quincy Associates, Ltd. (‘ Quincy Associates ‘ ), purchased a shopping center from First Delaware Equity Corporation (‘ FDEC ‘ ) for $2,471,000. The shopping center was located in Quincy, Florida. The purchase price for the shopping center was payable by a cash downpayment of $192,000 and the balance of $2,279,000 by a nonrecourse, 23-year and two-month purchase-money note (hereinafter referred to as the ‘ Note‘ or the ‘ 23-year Note ‘ ). The Note was issued in the total amount of $7,268,249, reflecting the $2,279,000 deferred purchase price and $4,989,249 of stated, precomputed interest. The Note matures on December 31, 2003, and is secured by a mortgage and security agreement issued by Quincy Associates.
The terms of the transaction and of the related Note were the result of dealings between related entities and were not the result of arm's-length negotiations.
Under the terms of the Note, in November and December of 1980, and during the following 23 years, Quincy Associates is obligated to make monthly payments to FDEC of
principal and interest in the amount of $17,166.67. In 1980, 1981, 1982, and 1983, additional lump-sum payments also were due. The total payments each year (including the lump-sum payments due in years 1980, 1981, 1982, and 1983) that Quincy Associates is obligated to make are as follows:
|Year||due each year|
|1984 through 2003||206,000|
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