"the partnership is an independently recognizable entity apart from its partners for the purposes of the calculation of its taxable income under section 703"
How later courts described this case
- "the partnership is an independently recognizable entity apart from its partners for the purposes of the calculation of its taxable income under section 703"
Written by the judges who cited it.
The opinion
Chabot, </., concurring: The opinion of the Court states that, in determining whether the partnership had an actual investment in the movie to the extent of the nonrecourse note, the question is whether "the stated purchase price of the property securing the note unreasonably exceeded its fair market value.”
In my opinion, the test should be whether the principal amount of the note (not necessarily the purchase price) unreasonably exceeds the fair market value of the property. The test and the concept underlying it were explained as follows in Hager v. Commissioner, 76 T.C. 759, 773-774 (1981):
In the usual sale of property, if part or all of the purchase price is deferred, the obligation to pay the deferred amount represents genuine indebtedness and an investment in property. Even if such an obligation is secured only by the transferred property or other property and the buyer has no personal liability for its payment, the obligation still represents genuine indebtedness and an investment in property. Mayerson v. Commissioner, supra at 351-352 ; see Crane v. Commissioner, 331 U.S. 1 (1946). However, such conclusions do not follow when the principal amount of such nonrecourse indebtedness unreasonably exceeds the value of the security therefor because, under such circumstances, it is patent that the purchaser has no incentive to pay off the obligation. [Emphasis supplied.]
It is true that the headnote of the Court of Appeals in Estate of Franklin v. Commissioner, 544 F.2d 1045 (9th Cir. 1976), affg. 64 T.C. 752 (1975), states the same test as the opinion of the Court in the instant case. However, in Estate of Franklin, there was no difference between the purchase price and the principal amount of the nonrecourse indebtedness. See Estate of Franklin v. Commissioner, 544 F.2d at 1049 ("Our focus on the relationship of the fair market value of the property to the unpaid purchase price” (emphasis supplied)); Hager v. Commissioner, 76 T.C. at 774 ("the court [in Estate of Franklin] found that the taxpayers had failed to demonstrate that the purchase price of the motel — the principal amount of the nonrec-ourse indebtedness — was approximately equal to the value of the motel” (emphasis supplied)).
If we are to give recognition to unpaid portions of nonrec-ourse notes, whether for purposes of interest or of basis for depreciation, then it seems to me that the value comparisons should be as stated in Hager and as implied in Estate of Franklin — i.e., that fair market value should be compared to the amount of the note.
In the instant case the answer is the same, whether we compare the movie’s fair market value to the amount of the note ($1,400,000) or to the purchase price ($1,730,000). Accordingly, I concur.
Simpson and Nims, JJ., agree with this concurring opinion.