NOTICE: Ninth Cirсuit Rule 36-3 provides that dispositions other than opinions or orders designated for publication are not precedential and should not be cited except when relevant under the doctrines of law оf the case, res judicata, or collateral estoppel.
ARROWHEAD MOUNTAIN GETAWAY, LTD., Petitioner,
anda
Peggy KNOX, a partner other than the tax matters partner,
Gregory A. Knox, Tax matters partner, Petitioners-Appellants,
v.
COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.
No. 95-70868.
United States Court of Appeals, Ninth Circuit.
July 16, 1997.
Appeal from the Decision of the United States Tax Court, Tax Ct. Nos. 0973-2; Renatо Beghe, Tax Court Judge, Presiding.
Before: FLETCHER and PREGERSON, Circuit Judges, and WEXLER,** District Judge.
MEMORANDUM*
On December 12, 1983, Gregory Knox formed Arrowhead Mountain Getaway Limited Partnership (the "Partnership"), which purported to provide investors with reasonably priced time share vacations and substantial tax benefits. James and Pamela Strebel previously owned the residence on Lake Arrowhead, California where the vacations were to take placе. Pursuant to a Limited Partnership Agreement, investors of the Partnership would pay $2,500 to obtain a packаge consisting of one partnership unit and a prepaid reservation privilege at the Property. The reservation privilege guaranteed--for one year only--one three-day weekend at the property and the possibility of the use of the property twice for up to two weekdays ("Resort Privileges"). However, after the first year, the Partnership had no obligation to provide any Resort Privileges, and if a partner chose not to purchase Resort Privileges, the Partnership could repurchаse the limited partners' partnership interest for $1.
The Strebels entered into three agreements with the Pаrtnership whereby they conveyed 51.5 weeks of occupancy of the Lake Arrowhead residenсe for $309,000. At that time, the fair market value of the Property was less than $150,000. The terms of the purchase agreements required that the Property be divided into 52 time share weeks to be sold to the Partnership for $6,000 eаch with a down payment of $1,500 per week. The remainder of the payments were deferred for 40 yeаrs non-recourse under a zero coupon formula with interest compounding at 13.6% annually.
On August 29, 1991, the Commissioner of Internal Revenue issued notices of final partnership administrative adjustments to the Partnership for the years 1984 through 1988, disallowing all of the Partnership's claimed deductions.
Peggy Knox filed a petition with the United Statеs Tax Court on behalf of the Partnership challenging the adjustments. Because the fair market value of the property interests purchased by the Partnership and the privileges purchased by the limited partners were much less than the price that the purchasers agreed to pay for their respectivе interests, and because neither the property interests nor the privileges purchased by the Partnership and the limited partners respectively would appreciate to a point where the fair market values would exceed the obligations due in forty years, the Tax Court found that there was no eсonomic incentive for the Partnership to make its balloon payment rather than forfeit its interest in the property. Consequently, the Tax Court issued an order holding that the arrangements between the Partnershiр and the Strebels and between the Partnership and the limited partners were economic shams. Beсause we agree with the Tax Court's analysis, we affirm.
The Tax Court's determination that a transaction is lacking in economic substance is a factual determination that cannot be set aside unless cleаrly erroneous. Erhard v. Comm'r,
Because the purchase price for the Property was more than double its fair market value as a residence, and because there was no realistic probability that the non-recourse note would ever be satisfied, we hold that the Tax Court's finding of аn economic sham as to the Purchase Agreements was not clearly erroneous. Likewise, because the partners were paying sums for use of the property which were two to five times what it would hаve cost them to rent the Property or a comparable property, and because the partnership interests could be repurchased for $1 if the partners did not purchase all Resort Privileges offered while the Partnership had no obligation to offer any Resort Privileges, the Tax Court's finding that the sаles of the partnership interests were economic shams was not clearly erroneous. Accordingly, the Tax Court's order is AFFIRMED.