Under a non-recourse loan owing by the taxpayer and other tenants of an office building to the non-resident landlord, 90% of the cash flow was applied first to the payment of interest and then designated and paid as rent. If the interest expense (which had been reduced to a 10% rate in the taxation years in question) exceeded the cash flow, the taxpayer could request in writing that the landlord advance the excess to him as an addition to principal, with such excess interest also being added to the principal if no such request was made. By the taxation years in question, the principal had accumulated to well over twice the value of the property.
Miller T.C.J. found that under the terms of the mortgage, the mortgagee could sue for excess interest (i.e., the difference between cash flow and the stipulated interest for the year), and the existence of the taxpayer's liability to pay the excess interest was not contingent on any future event. Accordingly, the excess interest was not contingent.
Furthermore, the payment of accumulated interest in December 1995 with such payment being advanced to the taxpayer as required under the mortgage did not result in any portion of the 1996 and 1997 excess interest being compound interest.