Muserlian v. CIR, 932 F. 2d 109 - Court of Appeals, 2nd Circuit 1991

Petitioners-appellants, Peter Muserlian ( the taxpayer ), his wife Theodora Muserlian and their son, Peter E.C. Muserlian, appeal from a decision entered in the United States Tax Court (Goffe, J.) affirming the disallowance by respondent-appellee, the Commissioner of Internal Revenue ( Commissioner ), of certain deductions taken by appellants on their tax returns for the years 1981 and 1982. The Commissioner had issued a notice of deficiency disallowing interest payment deductions taken by Peter Muserlian on various purported loans made to him by his five children. A notice of deficiency also had been issued against Theodora and Peter E.C. Muserlian (the Muserlians ) disallowing certain depreciation deductions relating to their interests in the assets of a partnership, Upper New York Realty Company ( UNYR ). The Muserlians held their interests in UNYR by virtue of their status as partners in T.E. Associates ( Associates ), which was composed of Theodora, Peter E.C., and the other four Muserlian children and to which the taxpayer had sold an interest in UNYR.[1] On appellants\u27 petition for review of the Commissioner\u27s determinations, Judge Goffe found that the loans made to the taxpayer had not represented bona fide indebtedness and that the interest payment deductions properly were disallowed. Judge Goffe also found that, contrary to the Commissioner\u27s contention, the sale of 111*111 an interest in UNYR by the taxpayer to Associates was not a sham transaction. However, the tax court agreed with the Commissioner\u27s alternative contention that Associates\u27 stepped-up basis in UNYR\u27s depreciable assets, pursuant to 26 U.S.C. § 743(b), had been allocated to partnership assets improperly and that the depreciation deductions should be restricted to the extent provided in the notice of deficiency. On appeal, appellants contend that the evidence at trial established that the loans were not merely givebacks of money that the taxpayer earlier had presented to his children as gifts because, in making the gifts, the taxpayer possessed genuine donative intent. Secondly, appellants argue that the amount of overvaluation in the stepped-up basis claimed by Associates was characterized improperly by the tax court as a nondepreciable, intangible asset, because no evidence in the record supported this characterization. We agree with the tax court\u27s finding that the taxpayer lacked the requisite donative intent in making the gifts that preceded the loans from his children, and affirm the disallowance of interest payment deductions. We also agree with the tax court\u27s restriction of Associates\u27 stepped-up basis in the depreciable assets of UNYR because we find insufficient evidence in the record to conclude that the excess of the purchase price over the value of UNYR\u27s tangible assets was allocable to a depreciable asset