Barton Beek and Dorothy M. Beek v. Commissioner of Internal Revenue, Gerald T. And Anne Sparling v. Commissioner of Internal Revenue

Petitioners were limited partners of a calendar year, cash-basis partnership. The partnership bought real property in 1976 under a contract calling for installment payments, and prepaid one year’s worth of interest. The partners deducted that prepaid interest in full in 1976, and the Commissioner disallowed the portion of the deduction allocable to 1977. The Tax Court, 80 T.C. 1024 , upheld the Commissioner, and the partners appeal. We affirm.

FACTS

All of the petitioners were limited partners of Crystal, a California cash-basis, calendar year partnership formed in August 1976. On August 31, 1976, Crystal contracted to buy real property from Crystal Wells Apartments, Ltd. (CWL). CWL was at the time paying off a deed of trust note to its bank at an interest rate of 6.75% per year. Crystal’s land sale installment contract with CWL called for a $2 million total purchase price payable as follows:

CWL agreed to continue to make the payments on its deed of trust to its bank (thus the new contract was a “wraparound mortgage”). Crystal made the required monthly payments, and then on December 15, 1976, made the first annual payment to CWL in the form of two checks, one to CWL, and one…