Lukens v. Commissioner of Internal Revenue

Lukens (plaintiff) held a 4.6 percent interest in the Univestors partnership, which bought 27 timeshare units for $3,600 each with a small down payment and small annual interest payments, structured so that after 30 years the nonrecourse debt would require either forfeiture or an $86,700 balloon payment; Lukens claimed a $7,179.54 tax deduction representing his share of the partnership's loss on his $993 down-payment contribution. The tax court found each unit was actually worth only $919 and would never appreciate enough to justify the eventual balloon payment, meaning forfeiture rather than payment was the inevitable outcome, and concluded the underlying debt was not genuine, disallowing the deduction as a sham transaction; Lukens appealed.