## Facts

- Pleasant Summit Land Corporation (PSLC) owned and sold the Summit House apartment complex in West Orange, New Jersey.
- The Commissioner asserted PSLC was a personal holding company (PHC), a determination affected by whether gain on the Summit House sale was capital gain or ordinary income.
- George Prussin, a limited partner in Pleasant & Summit Associates (PSA), indirectly acquired Summit House from PSLC through PSA.
- PSA financed the acquisition with nonrecourse debt.
- The Tax Court found the nonrecourse financing exceeded Summit House’s fair market value and, on that basis, disallowed depreciation and interest deductions claimed by the Prussins through PSA.
- In consolidated Tax Court proceedings, the Tax Court ruled against PSLC and the Prussins; both appealed.

## Issues

1. Whether PSLC’s sale of Summit House produced capital gain (capital asset) or ordinary income (property held primarily for sale to customers in the ordinary course of business), affecting PHC status.
2. Whether the Tax Court clearly erred in finding PSA’s nonrecourse debt exceeded Summit House’s fair market value.
3. Whether nonrecourse debt exceeding fair market value supports depreciation and interest deductions, and if so, whether deductions must be disallowed in full or only to the extent of the excess.
4. Whether complete disallowance of the Prussins’ deductions violated due process.

## Decision

- The court affirmed the Tax Court’s determination that PSLC’s Summit House gain was capital gain and that PSLC was a PHC.
- The court affirmed the finding that the nonrecourse financing exceeded Summit House’s fair market value.
- The court reversed the Tax Court’s complete disallowance of depreciation and interest deductions and remanded to allow deductions supported by the portion of nonrecourse debt up to fair market value.
- The court rejected the Prussins’ due process challenge.

## Legal Principles

- Property is excluded from “capital asset” treatment if held primarily for sale to customers in the ordinary course of the taxpayer’s trade or business; the taxpayer bears the burden to show the exclusion applies.
- Appellate review of valuation and similar fact findings from the Tax Court applies the clearly erroneous standard.
- Nonrecourse indebtedness can support basis and related depreciation and interest deductions only to the extent the debt does not exceed the property’s fair market value; the excess portion is not treated as value-supported debt for these purposes.
- Disallowance of tax benefits under established nonrecourse-debt and valuation rules, as applied to the transaction, does not violate due process.

## Conclusion

The Third Circuit sustained capital-gain treatment of PSLC’s Summit House sale and resulting PHC status, upheld the finding that PSA’s nonrecourse debt exceeded fair market value, and held that depreciation and interest deductions must be limited to the fair-market-value-supported portion of the nonrecourse debt rather than denied in full, while rejecting a due process challenge.


Pleasant Summit Land Corp. v. Commissioner, 863 F.2d 263 (3d Cir. 1988), cert. denied sub nom. Commissioner v. Prussin, 493 U.S. 901 (1989)