Estate of Franklin v. Commissioner

Charles Franklin (plaintiff) and his partners bought a motel from the Romneys for $1,224,000 - far exceeding its actual value, which the partners knew or should have known - with only a $75,000 down payment; under the deal's structure, the Romneys kept operating the motel, collecting all revenue, paying all costs, and remaining legally liable for the motel's debts, while no purchase deed was recorded until a 10-year nonrecourse mortgage matured, and the partners bore no personal liability on that mortgage. Leaseback payments from the Romneys effectively offset the partners' own mortgage payments over the decade, meaning the partners invested nothing beyond their initial down payment. When the mortgage was paid off in 1979 (still exceeding the motel's actual value), the partners claimed depreciation deductions for their share of the resulting loss; the Commissioner (defendant) disallowed Franklin's deduction, the Tax Court agreed, and Franklin appealed.