Lukens v. Commissioner of Internal Revenue

Lukens (plaintiff) possessed a 4.6-percent interest in the Univestors partnership, which purchased timeshare units in vacation homes. In 1981, the Univestors purchased 27 units at $3,600 each. The Univestors made a total down payment of $21,600, and agreed to pay $570 per unit per year for 10 years toward the payment of interest. After 30 years, because the debt was nonrecourse, the partnership would have the option of either forfeiting its interest in the units or making a balloon payment of $86,700 to complete the purchase. In 1981, Lukens claimed a $7,179.54 deduction on his federal income-tax return, representing his proportional share of the partnership’s loss for his $993 contribution to the total down payment. The Commissioner of Internal Revenue (defendant) issued a deficiency notice on Lukens’s taxes and disallowing the deduction. Lukens appealed the commissioner’s decision. The tax court concluded that each unit had a market value of only $919, and that the units would never appreciate in value to equal the balloon payment due after 30 years. The court found that Lukens would therefore inevitably forfeit his interest rather than make the balloon payment. On this basis, the court concluded that the debt incurred by Univestors was not a genuine debt, and thus did not give rise to interest deductions for tax purposes. It was clear that Lukens would have received no benefit from purchasing the timeshares unless he was able to claim the tax write-offs. For this reason, the court held that the timeshare unit purchase constituted a sham. Lukens appealed.