Estate of Charles T. Franklin, Deceased v. Commissioner of Internal Revenue

This case involves another effort on the part of the Commissioner to curb the use of real estate tax shelters. In this instance he seeks to disallow deductions for the taxpayers’ distributive share of losses reported by a limited partnership with respect to its acquisition of a motel and related property. These “losses” have their origin in deductions for depreciation and interest claimed with respect to the motel and related property. These deductions were disallowed by the Commissioner on the ground either that the acquisition was a sham or that the entire acquisition transaction was in substance the purchase by the partnership of an option to acquire the motel and related property on January 15, 1979. The Tax Court held that the transaction constituted an option exercisable in 1979 and disallowed the taxpayers’ deductions. Estate of Charles T. Franklin, 64 T.C. 752 (1975). We affirm this disallowance although our approach differs somewhat from that of the Tax Court.

The interest and depreciation deductions were taken by Twenty-Fourth Property Associates (hereinafter referred to as Associates), a California limited partnership of which Charles T. Franklin and seven other…